How Congress Scuttled a Plan to Save Puerto Rico From Default

AP Photo/Ricardo Arduengo, File

In this Wednesday, July 29, 2015 photo, the Puerto Rican flag flies in front of Puerto Rico’s Capitol as in San Juan, Puerto Rico. 

It’s now become almost a cliché to emulate the famous 1975 front-page headline of the New York Daily News (FORD TO CITY: DROP DEAD) any time Washington leaves some entity to suffer misfortune without relief or aid. But when the Daily News’ Juan Gonzalez resurrected the headline on Wednesday to refer to Congress’ neglect of Puerto Rico, it was hard to argue with its appropriateness. Congress really is telling the island, and its 3.5 million American citizens, to drop dead.

As I detailed in a long-form piece for the Prospect’s winter edition, Puerto Rico is facing a rolling humanitarian crisis. Its debt has swelled to $73 billion, and compelling the government to enact punishing austerity measures that have exacerbated unemployment and poverty. A January 1 debt payment of almost $1 billion is almost certain to not get paid in full, and Puerto Rico’s creditors—including a collection of predatory hedge funds known as vultures—could react by suing for payment and forcing even more suffering.

With this backdrop, many in Congress, including such New York Democrats as Representative Nydia Velazquez and Senator Chuck Schumer, who represent large numbers of transplanted Puerto Ricans, have pleaded for help for the island. Their chief request was for Congress to extend Chapter 9 bankruptcy protections to Puerto Rican municipalities and public corporations, something that is currently forbidden under U.S. law.

Hopes for a deal rose when three prominent Republican Senators—Orrin Hatch, Chuck Grassley, and Lisa Murkowski—introduced a bill to address the crisis. It stopped short of bankruptcy protection, but it would have authorized $3 billion in “transitional relief” to the island, preventing a near-term default. It would also have given Puerto Rican workers a substantial payroll tax holiday, boosting their take-home pay. In exchange for this relief, the Hatch bill would have instituted a “Financial Responsibility and Management Assistance Authority” to assist the Puerto Rican government in its budget and debt planning.

This fiscal oversight board could have actually stripped a lot of independent authority from the commonwealth. Technical assistance would have been provided by the Federal Reserve Bank of New York, which has already recommended damaging austerity and fiscal straitjackets to cripple the island. But this was portrayed as the price for preventing a debt default.

However, while the high-profile Republican bill to deal with Puerto Rico was seen as something that could get plugged into the omnibus spending bill, in the end, not a single one of the bill’s provisions made it into the deal. Now there’s no chance for Congress to do anything else before the January 1 due date for the next debt payment.

As Gonzalez reports, a proposed compromise was scuttled. Gonzalez’s sources claim that Grassley wouldn’t budge on bankruptcy protection. Democratic Senator Maria Cantwell, another key player in the talks, offered a less severe version of a fiscal oversight board, similar to the structure in the White House’s road map for Puerto Rico. Grassley rejected that as well.

The only thing that did make the omnibus was a fix to longstanding health-care inequities for the island. Under current law, Puerto Rico hospitals get a reimbursement rate for Medicare that is sharply lower than the 50 states. According to the House Rules Committee summary of the omnibus, hospitals will now get the same rate as the mainland, creating parity in Medicare reimbursement. The bill also makes Puerto Rico eligible for the Medicare Electronic Health Record incentive program, payments to encourage adoption of electronic records.

But while laudable, this will do little to satisfy Puerto Rico’s immediate needs. Puerto Rican newspaper El Nuevo Dia puts the benefit from the Medicare changes at only around $90 million a year. That’s decent news for doctors, but the government remains a couple weeks away from a major default, potentially on constitutionally guaranteed bonds. That will likely trigger protracted lawsuits and make it difficult for the commonwealth to re-enter international debt markets on any reasonable schedule. It will also imperil any debt restructuring talks with creditors. And if Puerto Rico submits to cutting its budget further to meet its debt burden, its 3.5 million citizens, more of them fleeing the economically depressed island every day, will continue to either suffer or leave. The former is a human disaster; the latter creates a death spiral that ensures the disaster will continue.

Creditors, and particularly the vulture funds, lobbied Congress hard to stop Puerto Rico from getting bankruptcy access. As former New York lieutenant governor and advisor to Puerto Rico Richard Ravitch told Gonzalez, “the hedge funds won, they got their way in Congress.”

Democrats are hoping that Speaker Paul Ryan will take up Puerto Rico’s debt crisis early next year. But the omnibus was the last bill Congress needs to pass for several months. The Hatch-Grassley-Murkowski proposal remains alive as an option, but Democrats don’t support its more stringent fiscal oversight board. Reaching a compromise between the parties on this contentious issue seems like a long shot.

At the National Press Club on Wednesday, Puerto Rico Governor Alejandro Garcia Padilla, who announced this week he will not seek re-election, said, “I just hope that Congress remembers the faces of the people when there is a humanitarian crisis.” But those people don’t make campaign contributions; financial institutions do. And unless a critical mass of island expats-turned-constituents force the issue, Congress will have little problem further ignoring the needs of the Puerto Rican people.

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