Puerto Rico - Markup Hearing on H.R. 5278 (PROMESA)
The House Natural Resources Committee held a hearing on Puerto Rico on May 24th and 25th to markup H.R. 5278 (PROMESA). The committee has jurisdiction over all U.S. territories, including Puerto Rico. The hearing examined the legislation as well as the financial issues confronting the territory. Congressman McClintock is a member of the committee and delivered the following opening statement and also offered an amendment.
Markup Hearing on H.R. 5278 – PROMESA
Congressman Tom McClintock
House Committee on Natural Resources
May 24, 2016
My central concern with this legislation continues to be that it potentially undermines the reliability of the constitutional full faith and credit guarantees of the states. These guarantees allow states to borrow at extremely low interest rates because debt repayment has first claim on revenues. PROMESA takes Chapter Nine bankruptcy provisions and applies them retroactively to the commonwealth’s constitutionally protected debt.
Supporters argue this couldn’t possibly affect state debt because the commonwealth is not a sovereign state but rather a territory over which the federal government has constitutional jurisdiction. This argument misses the point. The federal government has – until now – never threatened or considered undermining constitutional full faith and credit guarantees by allowing Chapter Nine provisions to be applied to sovereign debt – whether debt is issued by a territory or a state.
If Congress is willing to undermine a commonwealth’s constitutionally guaranteed bonds today, there is every reason to believe it would be willing to undermine state guarantees tomorrow.
This, in turn, invites credit markets to question any constitutional debt guarantee as no longer secured on constitutional bedrock but rather dependent on the shifting whims of Congress. If they do, the value of those bonds is devalued and interest rates paid by taxpayers on that debt will increase.
PROMESA could have respected the constitutionally-issued debt, while applying Chapter Nine to the municipal debt of Puerto Rico. After all, there is no reason to treat San Juan’s municipal debt any differently than San Jose’s. But constitutionally issued debt is fundamentally different, and its reliability must be maintained.
Supporters say they have addressed this concern by inserting instructions to the Oversight Board to “respect the relative lawful priorities in the constitution, other laws, or agreements.” I should point out that one of those “other laws” is the government’s unlawful repudiation of that debt.
Furthermore, the same section instructs the Oversight Board to “provide adequate funding for public pension systems,” and includes other contradictory instructions. Of even greater concern, this provision is completely absent from Title III, which actually provides for the debt restructuring. The only possible interpretation of these provisions is that the sanctity of the sovereign debt is subject to balancing – and therefore subordination to junior claims -- by the Oversight Board.
This concern is further amplified by provisions that prevent bond holders from enforcing their claims for a period of six months, but does not prevent the government from paying out other junior claims during this period.
Honoring the rule of law and maintaining the commonwealth’s full faith and credit guarantee would be a powerful signal to bond markets that the United States stands by its promises, even when it is inconvenient. Under current law, it is in the interest of both sides – debtor and creditor – to work out terms that both can live with to restructure and repay this debt. It is also in the interest of the people of Puerto Rico to uphold the full faith and credit clause in their constitution, which will be vitally important to re-enter the credit market once their affairs are put back in order. Indeed, until the prospect of a congressional bailout arose, Puerto Rico was negotiating terms of a debt restructuring with the mutual consent of its creditors.
If supporters are sincere when they say that their intent is to preserve the constitutional guarantee of sovereign debt, they should have no objection to the amendment I will offer tomorrow. That amendment will explicitly remove debt backed by the commonwealth’s full faith and credit pledge from this act altogether. I believe the amendment will put to the test the sincerity of the supporters’ claims that they do not seek to repudiate constitutionally guaranteed debt.
For myself, although I see many other flaws with this bill, I would support it with this amendment. I would vigorously oppose it without the amendment.
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