Senate Judiciary Hearing on Puerto Rico
Senate Judiciary Committee
“Puerto Rico’s Fiscal Problems: Examining the Source and Exploring the Solution”
Tuesday, December 1, 2015
Key Topics & Takeaways
- Pierluisi Tradeoff for Fiscal Control Board: Resident Commissioner Pierluisi said Congress should pass legislation that would allow Puerto Rico to restructure a “meaningful portion” of its debt, which he argued would cost the federal government nothing. If this is done, he said, he would not oppose a fiscal oversight board that ensures the island’s government has appropriate budgetary standards and metrics.
- Need for Restructuring: Governor Padilla said Puerto Rico has never asked for a bailout and is not seeking one today, but that it needs access to a legal framework to restructure its liabilities. He stressed the need for an orderly restructuring process, cautioning that without one the “effects will be catastrophic.”
- Chapter 9 Issues: Houlihan Lokey’s Spencer said the extension of Chapter 9 to Puerto Rico would present a “fundamental investor protection issue” in that investors bought debt with the explicit knowledge that Puerto Rico was exempted from Chapter 9 protection, but that this came along with the bond’s triple tax-exempt status. He said he also has a fundamental problem with the process of Chapter 9, saying it is not a fair forum and that it “guts creditor protections.”
Speakers
- Alejandro Javier Garcia Padilla, Governor, Commonwealth of Puerto Rico
- Pedro Pierluisi, Resident Commissioner for Puerto Rico, House of Representatives
- Stephen Spencer, Houlihan Lokey
- Carlos Colon De Armas, University of Puerto Rico
- Alex Pollock, American Enterprise Institute
- Richard Carrion, Banco Popular
- Richard Ravitch, Former Lieutenant Governor, New York
Opening Statements
In his opening statement, Chairman Chuck Grassley (R-Iowa) said the starting point for any solution to Puerto Rico’s fiscal crisis is an understanding of the origins and scope of the problem, but he lamented that the island’s government has failed to provide audited financial statements for the past two years. He noted that Puerto Rican bonds are held by a wide array of investors in the individual retirement accounts (IRAs) and 401k accounts of “regular Americans,” not “vultures.”
Acknowledging calls for Puerto Rico to be given access to an orderly restructuring process such as Chapter 9 bankruptcy, Grassley pointed out that Congress has previously solved a similar problem, with Washington, DC facing a fiscal crisis of its own in the 1990s. He added that while Congress considered extending Chapter 9 protections to Washington, it decided there was “little advantage” to doing so. He stressed the Chapter 9 cannot bring about economic rehabilitation or solve the root causes of fiscal problems, and would only “push it off to future generations.” Grassley further questioned whether it is fair to retroactively change the rules for bonds already issued, and said this should be the last option considered.
Sen. Richard Blumenthal (D-Conn.) stressed that Puerto Ricans are American citizens and that they must be “saved from financial and humanitarian catastrophe.” He said Congress’ action, or inaction, will send a “profoundly significant message about the federal government’s moral responsibility to look out for fellow Americans.” Blumenthal argued that the crisis demands immediate action and called for Chapter 9 access for the island, commenting that it only lacks this authority “by a quirk of history.” He said the only two options are either an orderly restructuring through courts that will serve the public interest, or a “chaotic and messy default” where “no one wins but the attorneys.”
Sen. Charles Schumer (D-N.Y.) also highlighted the “basic American responsibility” to provide help to Puerto Rico’s 3.5 million American citizens, and added that the situation “grows more dire each month.” He said S. 1774, the Puerto Rico Chapter 9 Uniformity Act, would provide Puerto Rico authority to access Chapter 9 bankruptcy and would be a “significant step in the right direction.” However, he warned that the bill is not a “silver bullet” and that other actions in the tax and healthcare spaces are needed.
Panel One Testimony
Alejandro Javier Garcia Padilla, Governor, Commonwealth of Puerto Rico
In his testimony, Padilla warned that inaction in Washington will only aggravate the crisis, and asked Congress to give Puerto Rico the tools it needs to “finish the job” and solve the crisis. He denied accusations by some that Puerto Rico has not been doing enough to solve the crisis on its own, citing “significant sacrifices” made over the past ten years to shore up public finances, such as austerity measures and increased taxes. However, he stated that the problem is “simply too large” for Puerto Rico to solve on its own.
Padilla stated that the government has “no cash left” and that emergency measures are unsustainable. He said Puerto Rico has never asked for a bailout and is not seeking one today, but that it needs access to a legal framework to restructure its liabilities. He stressed the need for an orderly restructuring process, cautioning that without one the “effects will be catastrophic.”
Pedro Pierluisi, Resident Commissioner for Puerto Rico, House of Representatives
Pierluisi, in his testimony, was very critical of the federal government’s treatment of Puerto Rico, calling it a “shameful arrangement” for both the island and Congress and stating that it calls into question whether the American commitment to democracy is “rhetorical.”
Puerto Rico’s crisis, Pierluisi explained, is the result of two factors: 1) the island’s government’s lack of transparency and common sense in its economic and fiscal policies; and 2) the federal government’s inequitable treatment of the island’s citizens that “make it impossible for the island to prosper.” He said the lack of federal support is what drove Puerto Rico’s government to “unwisely but understandably” overspend and finance the fiscal gap through bond markets. He said Congress should act swiftly to enact legislation giving Puerto Rico more equitable treatment for “moral and practical reasons.”
Pierluisi said Congress should pass legislation that would allow Puerto Rico to restructure a “meaningful portion” of its debt, which would cost the federal government nothing. If this is done, he said, he would not oppose a fiscal oversight board that ensures the island’s government has appropriate budgetary standards and metrics.
Panel Two Testimony
Carlos Colon De Armas, University of Puerto Rico
Colon De Armas, in his testimony, stated that available evidence indicates that the fiscal crisis in Puerto Rico was not caused by a weakening economy, noting that public expenses started to “get out of line” at the same time that general fund revenues were increasing at a healthy pace. He said spending cuts are needed to address the fiscal crisis, while increased public and private investment and an improved business climate are needed to fix the economy. Colon De Armas said expense reductions are feasible without firing public employees, and he argued that the government has the resources to honor its debt payments. He said it would be best for the island to avoid any solution that does not lead to all debts being paid, because that would be key to maintain access to capital markets. He said it would be unreasonable to force bondholders to suffer losses for problems caused not by bonds, but by unfunded loans from the island’s development bank.
On proposals for a fiscal control board, Colon De Aermas said has mixed feelings. While such a control board can be effective in putting Puerto Rico’s budget in order, he worried that it might cut “indiscriminately” and make hard decisions rather than smart decisions. He suggested instead that specific goals be established and that a certified public accountant be hired instead.
Stephen Spencer, Houlihan Lokey
In his testimony, Spencer countered claims that extending access to Chapter 9 is an issue of fairness that would provide a simple and effective fix; and instead argued that “nothing can be further from the truth.” He stated that Chapter 9 extension would “impose a bailout on the backs of millions of retail investors, violate the sanctity of contract, undermine the rule of law, and harm the Commonwealth and municipal debt markets throughout the country.”
Spencer said extending Chapter 9 would be poor policy for three reasons: 1) it would not allow Puerto Rico to solve its problems, and would only allow the island to avoid necessary fiscal reforms even longer; 2) it would hurt individual retail investors, who bought debt with the understanding that Chapter 9 was not an option, as well as the broader municipal market; and 3) Puerto Rico does not need Chapter 9 to recover because it can repay its debts by further reducing its costs and reforming its tax code.
Alex Pollock, American Enterprise Institute
In his testimony, Pollock recommended that Congress promptly create an emergency financial control board to assume oversight and control of Puerto Rico’s financial operations, just as Congress did successfully with Washington, DC in the 1995. He said Congress has the authority and the responsibility to do this as a first step to establish an independent and credible authority over the island’s books and information. He commented that the board could then be instructed to analyze and report to Congress on the need for a bankruptcy regime.
Richard Carrion, Banco Popular
Carrion testified that Puerto Rico’s future is in jeopardy without “prompt, decisive and coordinated actions by local and federal authorities.” He said the island’s government will run out of money very soon, with debt service costs amounting to 40 percent of the island’s revenues, and has been using unsustainable emergency liquidity measures to continue providing services. He said any effective long-term solution must include three components: 1) a legal framework to restructure all public debt in an orderly fashion; 2) an effective fiscal oversight and control mechanism; and 3) economic stimulus measures to induce new investment and promote employment. He added that failure to act now will only make the situation on the island worse and solutions more costly.
Richard Ravitch, Former Lieutenant Governor, New York
In his testimony, Ravitch noted his involvement with New York City’s fiscal crisis in 1975 and commented that Puerto Rico is facing some of the same basic issues. He stated that it is his conclusion that restructuring of all of Puerto Rico’s debt is necessary to assure social stability on the island and to give it a chance to recover economically. Ravitch insisted that such restructuring is not constitutionally questionable because Congress has the power to make laws for U.S. territories, and the only reason states do not have the ability to file for bankruptcy is because the 11th Amendment specifically bars federal courts from having jurisdiction in disputes between a state and another state’s citizens.
Ravitch recalled Carrion’s comment that debt servicing costs are equal to 40 percent of the Puerto Rican government’s revenues and commented that the average percentage in other jurisdictions is about 5-6 percent. He said the total debt service costs in the short-term must be significantly reduced if the island is to continue providing social services and operating the government. While bankruptcy is “painful and carries risks,” Ravitch said, an orderly restructuring under such a legal framework is preferable to a “creditor brawl” that would follow default.
Questions
Sen. Orrin Hatch (R-Utah) asked how much Chapter 9 could actually improve the situation on the island and whether it would reach enough debt to make a difference. Pollock answered that a control board must be the first step to clarify the island’s situation.
Hatch noted that some have expressed concern about the fairness of retroactively extending Chapter 9 access for Puerto Rican bonds. Spencer answered that this is a “fundamental investor protection issue” in that buyers of the debt bought with the explicit knowledge that Puerto Rico was exempted from Chapter 9 protection, but that this came along with the bond’s triple tax-exempt status. He said he also has a fundamental problem with the process of Chapter 9, saying it is not a fair forum and that it “guts creditor protections.” Colon De Armas added that he does not believe Chapter 9 will help Puerto Rico, and that it is most important to restore access to financial markets.
Blumenthal asked why Puerto Rico should be denied the same access to Chapter 9 that municipalities in the states have. Spencer answered that Chapter 9 solves nothing and hurts retail investors while keeping Puerto Rico on a path to an eventual federal bailout.
Sen. Mike Lee (R-Utah) asked about the constitutional impediments to extending Chapter 9 access to Puerto Rico. Ravitch repeated his statement from his testimony that only the states are prohibited from Chapter 9 access. Spencer explained that his issue with Chapter 9 is not its constitutionality, but his fundamental issues with the statute and that it “guts” investor protections while creating a “tremendous moral hazard” for the municipalities that use it.
Lee asked how extending Chapter 9 access to Puerto Rico would impact negotiations between bondholders and public corporations like the Puerto Rico Electric Power Authority (PREPA). Spencer replied that the agreement creditors reached with PREPA only happened because of the lack of Chapter 9 access, but that extending access now would jeopardize the closing of the deal. He insisted that if the island continues to negotiate in good faith with creditors, then a better result for all parties can be reached than through bankruptcy. He added that the case of Detroit was a “stickup” because creditor protections were lost in bankruptcy.
Sen. Dick Durbin (D-Ill.) asked Carrion if he sees a combination of a control board and access to bankruptcy as a potential avenue. Carrion reiterated that both are needed, as well as economic stimulus, to solve Puerto Rico’s long-term economic and fiscal problems.
Durbin noted that some have expressed concern that there should be a prohibition on subsequent Chapter 9 filings from Puerto Rico. Carrion answered that he would have to problem with a subsequent bar from further filings.
Puerto Rico Solvency
Blumenthal asked if Pollock agrees with Spencer’s testimony that Puerto Rico is capable of paying back its debts. Pollock answered that the government is broke, and that under its current operations it cannot pay. Blumenthal then turned to Spencer and commented that the first judgment a bankruptcy court must make is whether the petitioner is insolvent.
Carrion commented that everyone should bear in mind that Puerto Rico will soon run out of money, and that while he would support a voluntary restructuring, “there is not enough time.” He stressed the need for a legal forum to balance the interests of all stakeholders.
Fiscal Control Board
Blumenthal commented that Puerto Rico can overcome this crisis and be prosperous again, just as New York City is now, but that it has to avoid the chaos that would come from it not being able to pay debts or operate as a society. Carrion agreed, and added that the island needs to ensure that such a crisis never happens again. For this reason, he continued, a control board is needed in addition to Chapter 9 access.
Bondholder Negotiations
Durbin asked if bondholders would try to negotiate more quickly if there were prospect of a Chapter 9 filing. Spencer responded by warning that Puerto Rico would become a “financial pariah” if it were to use Chapter 9. He added that one of the “overlooked ironies” of negotiations is that the long-term interests of creditors and Puerto Rico’s residents are linked. Ravitch retorted that the only question is whether Puerto Rico’s situation will end in default or through an orderly court process.
For more information on this event, please click here.
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Senate Judiciary Committee
“Puerto Rico’s Fiscal Problems: Examining the Source and Exploring the Solution”
Tuesday, December 1, 2015
Key Topics & Takeaways
- Pierluisi Tradeoff for Fiscal Control Board: Resident Commissioner Pierluisi said Congress should pass legislation that would allow Puerto Rico to restructure a “meaningful portion” of its debt, which he argued would cost the federal government nothing. If this is done, he said, he would not oppose a fiscal oversight board that ensures the island’s government has appropriate budgetary standards and metrics.
- Need for Restructuring: Governor Padilla said Puerto Rico has never asked for a bailout and is not seeking one today, but that it needs access to a legal framework to restructure its liabilities. He stressed the need for an orderly restructuring process, cautioning that without one the “effects will be catastrophic.”
- Chapter 9 Issues: Houlihan Lokey’s Spencer said the extension of Chapter 9 to Puerto Rico would present a “fundamental investor protection issue” in that investors bought debt with the explicit knowledge that Puerto Rico was exempted from Chapter 9 protection, but that this came along with the bond’s triple tax-exempt status. He said he also has a fundamental problem with the process of Chapter 9, saying it is not a fair forum and that it “guts creditor protections.”
Speakers
- Alejandro Javier Garcia Padilla, Governor, Commonwealth of Puerto Rico
- Pedro Pierluisi, Resident Commissioner for Puerto Rico, House of Representatives
- Stephen Spencer, Houlihan Lokey
- Carlos Colon De Armas, University of Puerto Rico
- Alex Pollock, American Enterprise Institute
- Richard Carrion, Banco Popular
- Richard Ravitch, Former Lieutenant Governor, New York
Opening Statements
In his opening statement, Chairman Chuck Grassley (R-Iowa) said the starting point for any solution to Puerto Rico’s fiscal crisis is an understanding of the origins and scope of the problem, but he lamented that the island’s government has failed to provide audited financial statements for the past two years. He noted that Puerto Rican bonds are held by a wide array of investors in the individual retirement accounts (IRAs) and 401k accounts of “regular Americans,” not “vultures.”
Acknowledging calls for Puerto Rico to be given access to an orderly restructuring process such as Chapter 9 bankruptcy, Grassley pointed out that Congress has previously solved a similar problem, with Washington, DC facing a fiscal crisis of its own in the 1990s. He added that while Congress considered extending Chapter 9 protections to Washington, it decided there was “little advantage” to doing so. He stressed the Chapter 9 cannot bring about economic rehabilitation or solve the root causes of fiscal problems, and would only “push it off to future generations.” Grassley further questioned whether it is fair to retroactively change the rules for bonds already issued, and said this should be the last option considered.
Sen. Richard Blumenthal (D-Conn.) stressed that Puerto Ricans are American citizens and that they must be “saved from financial and humanitarian catastrophe.” He said Congress’ action, or inaction, will send a “profoundly significant message about the federal government’s moral responsibility to look out for fellow Americans.” Blumenthal argued that the crisis demands immediate action and called for Chapter 9 access for the island, commenting that it only lacks this authority “by a quirk of history.” He said the only two options are either an orderly restructuring through courts that will serve the public interest, or a “chaotic and messy default” where “no one wins but the attorneys.”
Sen. Charles Schumer (D-N.Y.) also highlighted the “basic American responsibility” to provide help to Puerto Rico’s 3.5 million American citizens, and added that the situation “grows more dire each month.” He said S. 1774, the Puerto Rico Chapter 9 Uniformity Act, would provide Puerto Rico authority to access Chapter 9 bankruptcy and would be a “significant step in the right direction.” However, he warned that the bill is not a “silver bullet” and that other actions in the tax and healthcare spaces are needed.
Panel One Testimony
Alejandro Javier Garcia Padilla, Governor, Commonwealth of Puerto Rico
In his testimony, Padilla warned that inaction in Washington will only aggravate the crisis, and asked Congress to give Puerto Rico the tools it needs to “finish the job” and solve the crisis. He denied accusations by some that Puerto Rico has not been doing enough to solve the crisis on its own, citing “significant sacrifices” made over the past ten years to shore up public finances, such as austerity measures and increased taxes. However, he stated that the problem is “simply too large” for Puerto Rico to solve on its own.
Padilla stated that the government has “no cash left” and that emergency measures are unsustainable. He said Puerto Rico has never asked for a bailout and is not seeking one today, but that it needs access to a legal framework to restructure its liabilities. He stressed the need for an orderly restructuring process, cautioning that without one the “effects will be catastrophic.”
Pedro Pierluisi, Resident Commissioner for Puerto Rico, House of Representatives
Pierluisi, in his testimony, was very critical of the federal government’s treatment of Puerto Rico, calling it a “shameful arrangement” for both the island and Congress and stating that it calls into question whether the American commitment to democracy is “rhetorical.”
Puerto Rico’s crisis, Pierluisi explained, is the result of two factors: 1) the island’s government’s lack of transparency and common sense in its economic and fiscal policies; and 2) the federal government’s inequitable treatment of the island’s citizens that “make it impossible for the island to prosper.” He said the lack of federal support is what drove Puerto Rico’s government to “unwisely but understandably” overspend and finance the fiscal gap through bond markets. He said Congress should act swiftly to enact legislation giving Puerto Rico more equitable treatment for “moral and practical reasons.”
Pierluisi said Congress should pass legislation that would allow Puerto Rico to restructure a “meaningful portion” of its debt, which would cost the federal government nothing. If this is done, he said, he would not oppose a fiscal oversight board that ensures the island’s government has appropriate budgetary standards and metrics.
Panel Two Testimony
Carlos Colon De Armas, University of Puerto Rico
Colon De Armas, in his testimony, stated that available evidence indicates that the fiscal crisis in Puerto Rico was not caused by a weakening economy, noting that public expenses started to “get out of line” at the same time that general fund revenues were increasing at a healthy pace. He said spending cuts are needed to address the fiscal crisis, while increased public and private investment and an improved business climate are needed to fix the economy. Colon De Armas said expense reductions are feasible without firing public employees, and he argued that the government has the resources to honor its debt payments. He said it would be best for the island to avoid any solution that does not lead to all debts being paid, because that would be key to maintain access to capital markets. He said it would be unreasonable to force bondholders to suffer losses for problems caused not by bonds, but by unfunded loans from the island’s development bank.
On proposals for a fiscal control board, Colon De Aermas said has mixed feelings. While such a control board can be effective in putting Puerto Rico’s budget in order, he worried that it might cut “indiscriminately” and make hard decisions rather than smart decisions. He suggested instead that specific goals be established and that a certified public accountant be hired instead.
Stephen Spencer, Houlihan Lokey
In his testimony, Spencer countered claims that extending access to Chapter 9 is an issue of fairness that would provide a simple and effective fix; and instead argued that “nothing can be further from the truth.” He stated that Chapter 9 extension would “impose a bailout on the backs of millions of retail investors, violate the sanctity of contract, undermine the rule of law, and harm the Commonwealth and municipal debt markets throughout the country.”
Spencer said extending Chapter 9 would be poor policy for three reasons: 1) it would not allow Puerto Rico to solve its problems, and would only allow the island to avoid necessary fiscal reforms even longer; 2) it would hurt individual retail investors, who bought debt with the understanding that Chapter 9 was not an option, as well as the broader municipal market; and 3) Puerto Rico does not need Chapter 9 to recover because it can repay its debts by further reducing its costs and reforming its tax code.
Alex Pollock, American Enterprise Institute
In his testimony, Pollock recommended that Congress promptly create an emergency financial control board to assume oversight and control of Puerto Rico’s financial operations, just as Congress did successfully with Washington, DC in the 1995. He said Congress has the authority and the responsibility to do this as a first step to establish an independent and credible authority over the island’s books and information. He commented that the board could then be instructed to analyze and report to Congress on the need for a bankruptcy regime.
Richard Carrion, Banco Popular
Carrion testified that Puerto Rico’s future is in jeopardy without “prompt, decisive and coordinated actions by local and federal authorities.” He said the island’s government will run out of money very soon, with debt service costs amounting to 40 percent of the island’s revenues, and has been using unsustainable emergency liquidity measures to continue providing services. He said any effective long-term solution must include three components: 1) a legal framework to restructure all public debt in an orderly fashion; 2) an effective fiscal oversight and control mechanism; and 3) economic stimulus measures to induce new investment and promote employment. He added that failure to act now will only make the situation on the island worse and solutions more costly.
Richard Ravitch, Former Lieutenant Governor, New York
In his testimony, Ravitch noted his involvement with New York City’s fiscal crisis in 1975 and commented that Puerto Rico is facing some of the same basic issues. He stated that it is his conclusion that restructuring of all of Puerto Rico’s debt is necessary to assure social stability on the island and to give it a chance to recover economically. Ravitch insisted that such restructuring is not constitutionally questionable because Congress has the power to make laws for U.S. territories, and the only reason states do not have the ability to file for bankruptcy is because the 11th Amendment specifically bars federal courts from having jurisdiction in disputes between a state and another state’s citizens.
Ravitch recalled Carrion’s comment that debt servicing costs are equal to 40 percent of the Puerto Rican government’s revenues and commented that the average percentage in other jurisdictions is about 5-6 percent. He said the total debt service costs in the short-term must be significantly reduced if the island is to continue providing social services and operating the government. While bankruptcy is “painful and carries risks,” Ravitch said, an orderly restructuring under such a legal framework is preferable to a “creditor brawl” that would follow default.
Questions
Sen. Orrin Hatch (R-Utah) asked how much Chapter 9 could actually improve the situation on the island and whether it would reach enough debt to make a difference. Pollock answered that a control board must be the first step to clarify the island’s situation.
Hatch noted that some have expressed concern about the fairness of retroactively extending Chapter 9 access for Puerto Rican bonds. Spencer answered that this is a “fundamental investor protection issue” in that buyers of the debt bought with the explicit knowledge that Puerto Rico was exempted from Chapter 9 protection, but that this came along with the bond’s triple tax-exempt status. He said he also has a fundamental problem with the process of Chapter 9, saying it is not a fair forum and that it “guts creditor protections.” Colon De Armas added that he does not believe Chapter 9 will help Puerto Rico, and that it is most important to restore access to financial markets.
Blumenthal asked why Puerto Rico should be denied the same access to Chapter 9 that municipalities in the states have. Spencer answered that Chapter 9 solves nothing and hurts retail investors while keeping Puerto Rico on a path to an eventual federal bailout.
Sen. Mike Lee (R-Utah) asked about the constitutional impediments to extending Chapter 9 access to Puerto Rico. Ravitch repeated his statement from his testimony that only the states are prohibited from Chapter 9 access. Spencer explained that his issue with Chapter 9 is not its constitutionality, but his fundamental issues with the statute and that it “guts” investor protections while creating a “tremendous moral hazard” for the municipalities that use it.
Lee asked how extending Chapter 9 access to Puerto Rico would impact negotiations between bondholders and public corporations like the Puerto Rico Electric Power Authority (PREPA). Spencer replied that the agreement creditors reached with PREPA only happened because of the lack of Chapter 9 access, but that extending access now would jeopardize the closing of the deal. He insisted that if the island continues to negotiate in good faith with creditors, then a better result for all parties can be reached than through bankruptcy. He added that the case of Detroit was a “stickup” because creditor protections were lost in bankruptcy.
Sen. Dick Durbin (D-Ill.) asked Carrion if he sees a combination of a control board and access to bankruptcy as a potential avenue. Carrion reiterated that both are needed, as well as economic stimulus, to solve Puerto Rico’s long-term economic and fiscal problems.
Durbin noted that some have expressed concern that there should be a prohibition on subsequent Chapter 9 filings from Puerto Rico. Carrion answered that he would have to problem with a subsequent bar from further filings.
Puerto Rico Solvency
Blumenthal asked if Pollock agrees with Spencer’s testimony that Puerto Rico is capable of paying back its debts. Pollock answered that the government is broke, and that under its current operations it cannot pay. Blumenthal then turned to Spencer and commented that the first judgment a bankruptcy court must make is whether the petitioner is insolvent.
Carrion commented that everyone should bear in mind that Puerto Rico will soon run out of money, and that while he would support a voluntary restructuring, “there is not enough time.” He stressed the need for a legal forum to balance the interests of all stakeholders.
Fiscal Control Board
Blumenthal commented that Puerto Rico can overcome this crisis and be prosperous again, just as New York City is now, but that it has to avoid the chaos that would come from it not being able to pay debts or operate as a society. Carrion agreed, and added that the island needs to ensure that such a crisis never happens again. For this reason, he continued, a control board is needed in addition to Chapter 9 access.
Bondholder Negotiations
Durbin asked if bondholders would try to negotiate more quickly if there were prospect of a Chapter 9 filing. Spencer responded by warning that Puerto Rico would become a “financial pariah” if it were to use Chapter 9. He added that one of the “overlooked ironies” of negotiations is that the long-term interests of creditors and Puerto Rico’s residents are linked. Ravitch retorted that the only question is whether Puerto Rico’s situation will end in default or through an orderly court process.
For more information on this event, please click here.