Capitol Hill conservatives are trying to regroup after Speaker Paul D. Ryan (R.-Wis.) agreed to a plan with President Barack Obama and Minority Leader Nancy Pelosi (D.-Calif.) to put the severely debt-addled territory Puerto Rico into a congressionally-managed receivership.
The speaker said in a May 19, 2016 statement that the Puerto Rico Oversight, Management and Economic Stability Act was enough to fix a problem that already has the territory defaulting on more than $400 million in bond payments, with a $2 billion payment due July 1 that it has no intention of paying.
“Right now, the stability of the U.S. territory is in danger, as the Puerto Rican government continues to default on major loan payments. We have insisted that our response meet basic principles, and first among them is protecting taxpayers from a bailout,” the Speaker said.
“Today, Republicans and Democrats came together to fulfill Congress’s constitutional and fiscal responsibility to address the crisis with the introduction of PROMESA, the House’s bipartisan legislation,” Ryan said.
“PROMESA is the most responsible solution to the crisis because it gives Puerto Rico a path to real reform while protecting taxpayers,” he said.
The bill, House Resolution 5278, was drafted by the House Natural Resources Committee, with a heavy, heavy assist from Ryan—who caught the behind-the-back-cross-court pass from Rep. Raul Labrador (R.-Idaho).
Labrador is a member of Natural Resources, but he is also a member of the House Freedom Caucus and was the conservative opponent to House Majority Leader Kevin McCarthy (R.-Calif.) during that 2014 run-off. He was born in Puerto Rico in 1967, and although he left the island at age 13, and he has taken a leading role in the federal resolution of his homeland’s $72 billion debt crisis.
As the same time that Ryan was working with Democrats to create the current bill, the central solution of which is to muscle bondholders into “voluntarily” accepting severely reduced settlements, the Freedom Caucus was gearing up to fight the bill.
The Freedom Caucus, the critical group of 30 to 40 House conservatives, was going to hold back its support from the bill until it bargained for actual reforms that hurt the Puerto Rican institutions and elites that ran up the debt, then handed the bill to the people—and by extension handing the problem to Congress.
But, it was a battle that never happened. Before the first shots were fired, Labrador started working the halls and cloak rooms, lining up enough “conservatives” to support the Ryan deal so that Freedom Caucus had to stand down.
Not all conservatives have given up.
“The bill still contains an unprecedented legal stay, suspending creditors’ rights to access the courts and allowing President Obama’s allies to govern the island free from legal challenges and oversight,” said Rachel Greszler, a senior policy analyst at the Washington-based Heritage Foundation.
“While the draft theoretically prioritizes bondholders’ rights to payment, it ultimately leaves it up to the Oversight Board and bankruptcy judge’s interpretation to make sure those rights are honored—and that’s far from a sure thing,” she said.
Heritage Research Fellow Salim Furth called it a cruel bit of irony.
“Congress has thus far proved itself unwilling to address the mainland’s mounting debt and after months of deliberation were not brave enough to put serious economic reforms into this bill to help Puerto Rico solve theirs,” he said.
Furth said this is the time to free the island from the shackles of federal policies, such as the New Deal-era Jones Act that only allows a second port call to ships built, owned, crewed by Americans that are also American registered.
The Jones Act drives up prices for everything carried by ship to the island, especially fossil fuels for electrical plants, food, and construction materials. One example is that a Ford Focus in Miami retails for $6,000 less than in San Juan.
Furth said, “Congress has helped weaken the island’s economy by protecting the crony capitalists who profit from the maritime Jones Act and refusing to liberate the island from a job-killing minimum wage.” The $7.25 federal minimum wage has hamstrung the island’s tourism industry, which competes with neighboring islands with minimum wages of $2 or even fifty cents.
The Ryan plan does allow for a special minimum wage for Puerto Ricans below the age of 20 at a rate not yet determined.
Bondholders holding the $72 billion are cautiously happy with the Ryan bill.
What the bondholders feared was the spectacle of a special bankruptcy court. States cannot restructure debt through bankruptcy, like a city, such as Detroit. Puerto Rico is not a state but acts like one. The actual reason it cannot go into bankruptcy is that it is a wholly-owned property of Congress.
Puerto Rico has no real sovereignty, which is what makes the control board nothing more than an artful dodge.
The control board is a seven-man panel that assumes sovereignty from Congress until the island is back in the good graces of the capital markets again. The president appoints two board members from Ryan’s list and one each from lists sent in by Senate Republicans, Senate Democrats, House Democrats, and from the White House.
Cate Long, from Puerto Rico Clearinghouse and a former financial reporter, said the Ryan bill was the best solution that anyone could hope for and that, given the situation, it is impossible to make everyone happy.
Long said she has hope that the Jones Act may yet be addressed.
“Jones Act is very important. In the bill there is a commission between the House and Senate to review the effects of federal laws on Puerto Rico,” she said. “The Jones Act is supported by very powerful families up and down the coast and they are very well organized and influential with Congress.”
The control board and its subpoena power are key, and for Long that means going after the sweetheart tax abatement deals given out to what island politicians call “soul friends” and the consulting contracts that have flowed from the pen of Gov. Alejandro Padilla.
Padilla, despite protestations of his people’s poverty, has spent more than $700 million on consulting contracts since he took office in 2013, she said.
Some bondholders worry that the subpeona power is really the hammer the control board will use to pressure them into taking massive reduction settlements. But, Long said it would not happen. “No way. That is 10,000 percent wrong. The markets would blow up.”
Ike Brannon, a visiting fellow at the Washington-based Cato Institution, said the most important flaw in the Ryan plan is that there is a plan at all.
Brannon said Ryan has helped the Democrats create the template for future bailouts of states.
“One or two years ago, investors in Puerto Rican bonds started to realize they weren’t going to get all of their money,” he said. “Soon, bondholders in Illinois and Kentucky and other heavily indebted states will realize their bonds are not worth nearly as much as they originally thought.”