Unions Flex Muscle on Puerto Rico Relief Bill

The Puerto Rican flag flies near the Capitol building as the island's residents deal with the government's $72 billion debt on July 1, 2015 in San Juan, Puerto Rico.
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Unions are pushing Democrats on Capitol Hill to ensure that Puerto Rico pays its pension obligations before its bondholders in any restructuring of the territory’s debt.

Republicans in Congress are considering legislation to relieve Puerto Rico of some of its crushing debt, ahead of a possible default by the island territory.

The union lobbying shows the pitfalls of legislating a resolution to the island’s $73 billion debt crisis.

The Puerto Rican constitution provides that holders of the island’s debt, individuals and investors who loaned the territory money, are “first-in-line” to be repaid if the island is pushed into default. Unions are pushing Democrats to demand that any legislation considered by the Republican majority include language placing recipients of Puerto Rico’s government pensions ahead of any other creditors.

Puerto Rico’s pension obligations are not part of the island’s $73 billion debt facing default. The island’s pension obligations to current and former public employees are estimated to be somewhere around $40 billion. While that obligation is separate from the island’s $73 billion debt facing default, Congress is likely to include it in any legislated debt restructuring.

Puerto Rico is expected to miss a $422 million payment on its debt due May 1st. The island government passed an emergency measure earlier this month allowing the territory’s governor to stop the debt repayments, largely in anticipation of Congressional action.

The territory has been in negotiations with creditors over restructuring its debt. Some holders of Puerto Rican bonds have already accepted a reduction in the principal owed them while talks are continuing over extending the terms of the loans in exchange for payment relief.

Congressional action would supersede these talks and impose restructuring terms using US bankruptcy code as a guide, overseen by a politically appointed fiscal-control board. The union lobbying is an example of how Congressional action invites political influence on the restructuring.

Any Congressional action prioritizing some bondholders over others raises concerns about precedents at a time that many municipalities and states around the country struggle with heavy debt loads.

House Republican Speaker Paul Ryan had promised Democrats during negotiations over the end-of-the-year spending bill that Congress would act early this year on relief for Puerto Rico.

The critical deadline for backers of federal relief for Puerto Rico is July 1, when the island territory is due to make a $2 billion payment on its debt.