The Puerto Rico Legislation-Bad Facts Make for Bad Law

Prepared Floor Statement of Senator Chuck Grassley of Iowa
Chairman, Senate Committee on the Judiciary
Puerto Rico Legislation
Wednesday, June 29, 2016

Mr. President,

I want to take a few minutes to share my concerns about the Puerto Rico legislation we’re considering.  

I’ve been involved with this issue for a while now.  This past December I chaired a hearing in the Judiciary Committee to examine the root cause of Puerto Rico’s fiscal problems.  At the hearing we learned that even when Puerto Rico’s economy took a downturn, government spending did not.  Instead of making difficult decisions to cut spending and balance its budget, the government kept borrowing to finance its operations, using tax-exempt bonds to roll over debt.   As a result, Puerto Rico now has one of the largest government deficits in the United States, and debt we’re told isn’t payable and must be restructured.

As many of you know, a wide array of investors own Puerto Rican bonds, which are issued by roughly 17 different entities. According to Bloomberg, Puerto Ricans themselves hold $20 billion of the debt.  And nearly 60 percent of Puerto Rico’s debt is held largely in the individual retirement accounts and 401(k)’s of regular folks throughout the U.S.  In fact, over 17,000 Iowans are invested in mutual funds containing at least one type of Puerto Rican bonds. These folks aren’t vultures. They’re middle-class taxpayers who invested their hard earned money into one of the many tax-exempt municipal bond fund’s containing Puerto Rico’s bonds.  Why should they be forced by Congress to bailout Puerto Rico’s government and pension obligations?  The answer is they shouldn’t.  But unfortunately, there’s no guarantee that these hard working folks’ investments, whether in Iowa or elsewhere, won’t be haircut in order to fund pension obligations or Christmas bonuses for public workers in Puerto Rico.  

This didn’t have to be the case. At our December hearing I stated two principles that have guided me as this issue has progressed.  First, any inclusion of debt restructuring or bankruptcy should occur only at the end of the line, as a tool of last resort.  Otherwise the control board will face too great of a temptation to use bankruptcy to balance the budget, as opposed to implementing all available means to increase and collect revenues, while reducing expenses within government.  Second, it would be a bad idea for Congress to permit Puerto Rico to walk away from its constitutional debt obligations through what some call an unprecedented “super chapter 9” bankruptcy.  In fact, I received a letter from Governor Branstad of Iowa stating that granting Puerto Rico such authority “would set a dangerous precedent and likely raise the borrowing costs for states and municipalities across the nation, which would reduce our ability to invest in vital services and erode investor confidence in the whole notion of ‘full faith and credit’ debt.”  

Unfortunately, the House bill fails to meet the two principles I’ve outlined above.  First, the bill operates under the presumption that the only way to balance the budget is to restructure debt.  This means that the oversight board will have more flexibility to avoid making difficult fiscal reforms to balance the budget, because the debt can simply be restructured.  In fact, one of the oversight board’s first responsibilities is to create a fiscal plan that “provides adequate funding for public pension systems” and includes a “debt sustainability analysis.”  Neither of these terms are defined. 
The oversight board may very well read these terms as permitting full funding of pensions, while only funding “sustainable levels of debt service.”  Not surprisingly, this is exactly what the Obama Administration seeks to accomplish: protecting pensions at the expense of other retirees.  The effect this bill has for retirees in Iowa and elsewhere is that they must place their trust in an oversight board to act courageously and make hard decisions, lest they find themselves bailing out Puerto Rico’s government.    

Second, no matter what the House bill calls it, Title III’s debt restructuring authority, which allows for the restructuring of debt that is issued or guaranteed by Puerto Rico, is “super chapter 9.”  Investors and the municipal bond market have treated Puerto Rico like a State.  Granting Puerto Rico the authority to restructure “state-like” obligations will be viewed as precedent for giving a State similar authority.  Of course, no State is going to ask to be covered by the House bill.  Rather, they’ll say if a territory can receive unprecedented authority from Congress, then why shouldn’t a State?  

Moreover, by creating this new authority Congress has invited material litigation risk.  Worst case, should the law be found unconstitutional under the Takings Clause, then the federal government would be liable for money damages—the very definition of a bailout.   And increased litigation will cause uncertainty, which is the last thing needed in Puerto Rico, making it impossible for Puerto Rico to access the capital market for years.  If that occurs, then mark my words, sooner or later we’ll be considering whether to provide direct federal financial assistance to Puerto Rico, despite the claims that this bill doesn’t result in a taxpayer bailout.  And given that Puerto Rico has failed to provide Congress with accurate financial information regarding their fiscal crisis, this unprecedented and risky authority appears both unnecessary and unjustified.  

Given the bill’s failure to satisfy the two requirements I’ve laid out, which unduly harm retirees in my state, while also setting bad precedent, I can’t support this bill.  Perhaps my concerns will be proven wrong and the bill will work perfectly.  But it’s been my experience that bad facts make for bad law.  Unfortunately, I fear we’re simply pushing this problem down the road and have failed to address the root cause of Puerto Rico’s fiscal crisis at the expense of uncalled for risks and precedent.
 

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