Help!

Puerto Rico had a bad habit of using government-issued bonds – normally a state vehicle used to finance long term projects and infrastructure – to cover deficits in their overall general operating costs. It was dumb politics, but like a heroin addiction, it was an easy button that quickly got out of control. Everyone, from sophisticated financial analysts to territorial auditors to even federal economics experts, knows that Puerto Rico (not so “rico”) has no shot to pay back the $72 billion of accrued debt without some very serious debt restructuring. Zip. But there’s another problem.

Under U.S. bankruptcy law (Title 11 of the United States Code), there is no legal provision for governmental bodies at the state or territorial level, to access that lovely Chapter 9 provision that is offered to “municipal” bodies like cities or special districts with in a state that are less than the state itself. There is no provision for territories of the United States to permit their “municipalities” to invoke Chapter 9. If a state itself (vs. municipalities) incurs debt, under a current interpretation of our bankruptcy laws, it is stuck with voluntary negotiations with creditors but no statutory power to force the issue. The same harsh result also applies to territories, but unlike states, “municipalities” within U.S. territories are also denied access to Chapter 9. What’s worse, the federal government has preempted the field, and states and territories cannot reverse federal limitations and mandates in this area. But is there a way out of the law is interpreted just a tad more leniently?

If not, what this means for Puerto Rico is that the territorial government gets treated as if it were an ordinary debtor that has not paid its bills… except Puerto Rico does not have the bankruptcy option. So creditors can foreclose, seize assets, divert funds from operations (presumably including police and fire), etc. Government buildings, roads, parks, utilities, etc., etc.  You can see how this really doesn’t work, but the U.S. Congress has so far been unwilling to create a new form of bankruptcy to relieve this anomaly. To date, the federal government also hasn’t offered any relief to this beleaguered Caribbean island American territory.

So on its own, in 2014, Puerto Rico passed its own “Recovery Act,” trying to walk a fine line between that lack of a federal escape valve for the territory and its subparts and the harsh reality of its de facto insolvency. The law allowed public utilities, owned directly by the territory itself, to create a forced restructuring against its creditors, making sure that the supply of water, gas and electricity to Puerto Rico’s residents was not subject to the mercy of those creditors. At stake was $20 billion in debt directly related to those utilities. The creditors filed suit immediately.

“The United States Court of Appeals for the First Circuit, in Boston, said the 2014 law, the Recovery Act, was at odds with the federal Bankruptcy Code, which bars states and lower units of government from enacting their own versions of bankruptcy law.

“Puerto Rican officials countered that the Recovery Act addressed a gap in the way its debts are treated. Under the Bankruptcy Code, states may authorize their cities, counties, public utilities and other branches of government to restructure their debts under Chapter 9 of the code. But that law excludes all branches of Puerto Rico’s government, including its public utilities. The Recovery Act, Puerto Rican officials said, merely filled the gap in the overall legal structure.

“Creditors of the utilities sued, arguing that the Bankruptcy Code displaced, or pre-empted, the local law. So far, the courts have agreed.” New York Times, December 4^th. The result has been yet another political football, pitting a merciless fiscal conservative GOP with not a lot of sympathy for issues near and dear to the hearts of its Hispanic citizens, against Democrats who think the current U.S. bankruptcy code should indeed apply to territories as well as states. Puerto Rico has petitioned the U.S. Supreme Court for full review even as it presses for a political solution.

“The Obama administration has proposed a much broader form of bankruptcy, to allow the island to restructure all $72 billion of its bond debt. The Republicans who control both houses have so far shown little support. They have said that such a ‘super bankruptcy’ regime could blaze a trail for distressed states, like Illinois, to follow, profoundly disrupting the credit markets where states and cities now raise their money.

“But that is not a reason for the Supreme Court to deny review, the island’s lawyers told the justices… ‘Precisely because the crisis facing Puerto Rico’s public utilities is so acute,’ they said, ‘it would be irresponsible for the commonwealth to respond to the vacuum left by the lower courts’ invalidation of the Recovery Act by simply kicking back and crossing its fingers pending this court’s consideration of this petition. Instead, the commonwealth and its public utilities have explored every potential avenue to fill that gap, including federal legislation and consensual deals with creditors.’” NY Times.

There’s a lot at stake here, particularly in a new era where climate change and terrorism can wreak devastation that exceeds local capacity to pay. And as we have seen in Congress with the GOP’s severe resistance to fund “blue state” devastation after Hurricane Sandy (37 Republicans voted against FEMA aid), not just territories but states themselves, could be left to twist in the wind should Congress prove unwilling to provide disaster relief.

While courts normally decide cases on the narrowest grounds possible, suggesting that the bigger picture of bankruptcy for entire states and territories will not necessarily be addressed, a Supreme Court decision to allow territorial municipalities the same rights accorded to state municipalities would be a good step in the right direction.

On December 4^th, the Supreme Court agree to hear the case. Time will tell whether there will be a solution, judicial or Congressional, to this rather massive sticky problem.

I’m Peter Dekom, and I am not sure exactly when the United States became such a mean-spirited, uncharitable country to its own people, but it does seem increasingly that we are living in an “everyone for him or herself” country these days.