House Natural Resources Hearing on the Puerto Rico Relief Bill
House Natural Resources Committee
The Puerto Rico Oversight, Management, and Economic Stability Act
Wednesday, April 13, 2016
Key Topics & Takeaways
- Administration Proposal: Weiss recalled the Administration’s proposal from November that included four key elements: 1) broad restructuring authority; 2) independent oversight; 3) adequate funding of healthcare services; and 4) incentives to drive economic growth. He said the draft legislation only addresses the first two elements.
- Bailout: ChairmanBishop (R-Utah) asked if a lack of congressional action would increase liability for taxpayers. Weiss answered that the alternative to congressional action would be a taxpayer-funded bailout.
- Municipal Bond Markets: Rep. Labrador (R-Idaho) asked whether municipalities would have more difficult issuing bonds if the bill were enacted due to fears that the bill would hurt confidence in the terms of bond agreements. Miller answered that it would not, and that the bill would not set any precedent allowing states to go through bankruptcy.
Witnesses
- Antonio Weiss, Counselor to the Secretary, Treasury Department
- Anthony Williams, Senior Advisory, Dentons US LLP; former Mayor of Washington, DC
- John Miller, Nuveen Asset Management
- Andrew Kent, Fordham University School of Law
- Susheel Kirpalani, Quinn Emanuel Urquahart & Sullivan
- Simon Johnson, MIT School of Management
Opening Statements
In his opening statement, Chairman Rob Bishop (R-Utah) stated that Puerto Rico’s debt crisis has been decades in the making and noted that the island is already in default on some of its debts. He said the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) includes reforms that can begin the island’s transition from cronyism, boost economic activity, and give it the tools needed for long-term revitalization. Bishop noted that there have been calls for bailouts or to prioritize some creditors over others, but he said these were “non-starters.”
Ranking Member Raul Grijalva (D-Ariz.) stressed the urgency of the humanitarian crisis in Puerto Rico, with the people losing access to basic services. He juxtaposed this with the “wealthy Wall Street hedge funds” that are “spending millions” to spread false information and block congressional action because they are “more interested in padding their profits” than ensuring the wellbeing of families. Grijalva stated his concerns with the bill, namely that it lacks any provisions to increase Medicaid support or protect pensions, and that it lowers the minimum wage. However, he expressed hope that the bill can be fixed and passed by the Committee in its coming markup.
In his opening statement, Resident Commissioner Pedro Pierluisi (D-P.R.) thanked Bishop for conducting an open and fair process in the development of the discussion draft, and warned of great consequences for creditors and the people of Puerto Rico if a balanced bill is not passed. He said his constituents would accept an oversight board provided they also receive a meaningful debt restructuring mechanism that would provide necessary relief to the island.
Testimony
Antonio Weiss, Counselor to the Secretary, Treasury Department
In his testimony, Weiss noted significant progress made on the draft legislation but commented that more work is necessary. He recalled the Administration’s proposal from November that included four key elements: 1) broad restructuring authority; 2) independent oversight; 3) adequate funding of healthcare services; and 4) incentives to drive economic growth. He said the draft legislation only addresses the first two elements.
Weiss raised concerns about the workability of the draft bill, explaining that the collective action clause is an “unworkable” process that would only delay a comprehensive solution, that any stay on litigation must allow for a smooth transition from voluntary negotiations to the restructuring period, and that restructuring should not require supermajority support from the oversight board. He added that legislation should protect Puerto Ricans’ pensions and retirement security and avoid provisions that would harm economic growth, such as the currently included minimum wage and overtime rules.
Anthony Williams, Senior Advisory, Dentons US LLP; former Mayor of Washington, DC
Williams, in his testimony, applauded the Committee’s work and said the bill does well in installing an oversight board of competent officials. He said an important part of the board’s work would be to work with the island’s government to establish a long-term fiscal plan and that he hopes it would use its influence to appoint a strong financial authority, such as a chief financial officer, who would have some degree of autonomy. He then added that it will be crucial to follow the bill with economic incentives to move Puerto Rico’s economic renewal forward.
John Miller, Nuveen Asset Management
In his testimony, Miller discussed the impact the draft legislation would have on municipal bond markets. He said he believes the bill has the potential to create a framework for a fair, orderly and transparent resolution of the debt crisis and that it would have no negative consequences for markets because the marketplace is already anticipating some form of restructuring. He also pointed out that much of the investor base in Puerto Rican securities have shifted from mutual funds to “opportunistic” hedge funds, which mitigates any risks to individual long-term investors.
Andrew Kent, Fordham University School of Law
Kent, in his testimony, defended the constitutionality of the proposal by explaining that Congress is able to address geographically isolated cases without violating the uniformity requirements of the Bankruptcy Code. Further, he said the legality of the legislation is bolstered by the territorial clause of the Constitution, which allows Congress to make specific laws for U.S. territories and to treat them different from states and even from one another.
Susheel Kirpalani, Quinn Emanuel Urquahart & Sullivan
In his testimony, Kirpalani dispelled what he called two “myths” about the proposal. First, he said the bill would not be a bailout and stressed that it involves no taxpayer money. Second, he dismissed criticisms that it creates a “super Chapter 9” because the local government would not have full control over what debts it pays. He said the bill would encourage voluntary agreements with creditors and called it “the right bill.”
Simon Johnson, MIT School of Management
Johnson, in his testimony, said the oversight board provision is a good balance of effective oversight and preservation of sovereignty. However, he said the restructuring authority is not “sufficiently streamlined” and that the process should encourage voluntary negotiations and push holdouts to negotiate in good faith. He compared the process to financial institution bankruptcies, where the House of Representatives has worked to avoid any deadlocks or impasses with creditors, and urged that the Committee move in this direction.
Questions
Oversight Board
Rep. Doug Lamborn (R-Colo.) asked about the powers of the oversight board and whether its decisions can be overridden. Weiss answered that the proposed board respects the principles laid out by the administration, in that it preserves self-governance while putting in safeguards to ensure that budgets that are agreed are carried out. He explained that access to restructuring authorities or to the collective action clause can only be obtained through a process certified by the oversight board.
Pierluisi responded to Lamborn’s concerns by explaining that the oversight board would have ultimate authority because it must approve the fiscal plan and budgets of the Puerto Rican government, though it still defers to the island’s government the right to develop the budgets itself.
Rep. Madeleine Bordallo (D-Guam) noted that the bill clearly prohibits elected officials from serving on the board, but was concerned about conflicts of interest from people with ties to bondholders being members. Weiss said he is working with the Committee on this provision to prevent any conflicts of interest.
Rep. Norma Torres (D-Calif.) commented that while the bill is very prescriptive for who appoints the members of the oversight board, it is not clear enough on who can be appointed. She expressed concern that all seven board members might come from the same background.
Rep. Nydia Velazquez (D-N.Y) was critical of the oversight board’s powers, saying it makes Puerto Rico a U.S. colony in the Caribbean.
Rep. Jody Hice (R-Ga.) asked if it is problematic that no one representing the bond market is on the oversight board. Weiss answered that the board’s composition is yet to be determined.
Collective Action and Voluntary Negotiations
Lamborn asked how holdout creditors would be treated. Kirpalani answered that the bill requires that a simple majority of the total number of creditors, along with two thirds of the total debt, must agree in order for restructuring to bind similarly situated creditors.
Hedge Fund Criticism
Grijalva was critical of hedge funds and insisted that they chose to buy risky bonds as an investment strategy. He said they are now spending heavily in campaigning against any congressional action.
Bishop asked about advertisements that are critical of legislation to address the crisis in Puerto Rico. Kirpalani answered that hedge funds made a gamble that Congress would never act, and are now “spinning absolute fiction” by calling the legislation a bailout.
Prioritization of Debt
Rep. Rob Wittman (R-Va.) asked whether the draft bill would set priorities for creditor claims that would otherwise be decided by courts. Weiss responded that litigation has already begun in courts, but that this is not contributing to a constructive environment for the resolution of the crisis. He warned that without any framework from Congress, the island will face a “lost decade” as various claims are contested.
Minimum Wage, Medicaid, EITC and Pensions
Bordallo stated that the debt crisis would not be resolved through debt restructuring alone, and that other territories such as Guam could be “down the same road.” She stated her regret that the bill does not address issues such as pensions of Medicaid support. Weiss reminded her that this was included in the Administration’s proposal.
Rep. John Fleming (R-La.) asked if the bill makes it possible for holders of full faith and credit debt to be put at a lower priority than unions or pensions. Weiss said the only way this could happen is if all other measures are exhausted.
Rep. Dan Benishek (R-Mich.) asked if the bill would fix the island’s immediate cash flow problems. Weiss answered that it would stabilize the crisis, but that further actions would be needed to promote the recovery and incentivize growth, such as giving Puerto Ricans access to the earned income tax credit (EITC).
Rep. Don Beyer (D-Va.) said he is concerned about the bill’s minimum wage provisions and that they might encourage emigration from the island. Johnson agreed, saying it would be “Puerto Rico’s tax base getting on a plan” and leaving the island.
Fleming stated that Puerto Rico’s crisis is the result of progressive social policies, and warned that while the draft legislation itself is not a bailout, it will eventually lead to a bailout because there would still be cash flow problems.
Bishop asked if a lack of congressional action would increase liability for taxpayers. Weiss answered that the alternative to congressional action would be a taxpayer-funded bailout.
Impact on Municipal Markets
Pierluisi asked about the reaction of municipal markets to the bill. Miller explained that the marketplace is welcoming the bill because new audits of Puerto Rico and greater transparency will be a positive development, and that the alternative is litigation and defaults.
Rep. Tom McClintock (R-Calif.) warned that if Congress can alter bankruptcy laws for Puerto Rico, then this sets a “very dangerous precedent in public borrowing and creditors will no longer trust the terms of their loans to states. On the other hand, he continued, honoring the rule of law and the terms of the bonds would be a signal to bond markets that the U.S. stands by its promises even when it is not convenient. Weiss responded that there is a clear constitutional path for Congress to change the law for territories in Article 4 of the Constitution, but that the 10th Amendment makes this impossible for the states.
Benishek asked what will happen to bond markets if Congress does not act. Miller answered that Puerto Rican bonds have moved heavily into distressed debt territory and that the broader municipal bond markets would continue to be healthy.
Rep. Raul Labrador (R-Idaho) asked whether municipalities would have more difficult issuing bonds if the bill were enacted due to fears that the bill would hurt confidence in the terms of bond agreements. Miller answered that it would not, and that the bill would not set any precedent allowing states to go through bankruptcy.
Hice said municipal bondholders with interests in Puerto Rico are probably found in every district, with senior citizens standing to be most affected by the legislation. He said the bill “clearly” has Congress changing rules after investors made a purchase, and questioned whether Congress has the authority to “change the rules after the fact.” Kent reiterated that the Constitution prevents changes for the states, but not with territories.
Need for Congressional Action
Rep. Bruce Westerman (R-Ark.) questioned why the federal government should interject into Puerto Rico’s problems, noting that the U.S. government has its own debt issues. Weiss answered that the safety and economic wellbeing of 3.5 million Americans in Puerto Rico are at stake and that the extent and complexity of their situation requires congressional action.
For more information on this hearing, please click here.
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House Natural Resources Committee
The Puerto Rico Oversight, Management, and Economic Stability Act
Wednesday, April 13, 2016
Key Topics & Takeaways
- Administration Proposal: Weiss recalled the Administration’s proposal from November that included four key elements: 1) broad restructuring authority; 2) independent oversight; 3) adequate funding of healthcare services; and 4) incentives to drive economic growth. He said the draft legislation only addresses the first two elements.
- Bailout: ChairmanBishop (R-Utah) asked if a lack of congressional action would increase liability for taxpayers. Weiss answered that the alternative to congressional action would be a taxpayer-funded bailout.
- Municipal Bond Markets: Rep. Labrador (R-Idaho) asked whether municipalities would have more difficult issuing bonds if the bill were enacted due to fears that the bill would hurt confidence in the terms of bond agreements. Miller answered that it would not, and that the bill would not set any precedent allowing states to go through bankruptcy.
Witnesses
- Antonio Weiss, Counselor to the Secretary, Treasury Department
- Anthony Williams, Senior Advisory, Dentons US LLP; former Mayor of Washington, DC
- John Miller, Nuveen Asset Management
- Andrew Kent, Fordham University School of Law
- Susheel Kirpalani, Quinn Emanuel Urquahart & Sullivan
- Simon Johnson, MIT School of Management
Opening Statements
In his opening statement, Chairman Rob Bishop (R-Utah) stated that Puerto Rico’s debt crisis has been decades in the making and noted that the island is already in default on some of its debts. He said the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) includes reforms that can begin the island’s transition from cronyism, boost economic activity, and give it the tools needed for long-term revitalization. Bishop noted that there have been calls for bailouts or to prioritize some creditors over others, but he said these were “non-starters.”
Ranking Member Raul Grijalva (D-Ariz.) stressed the urgency of the humanitarian crisis in Puerto Rico, with the people losing access to basic services. He juxtaposed this with the “wealthy Wall Street hedge funds” that are “spending millions” to spread false information and block congressional action because they are “more interested in padding their profits” than ensuring the wellbeing of families. Grijalva stated his concerns with the bill, namely that it lacks any provisions to increase Medicaid support or protect pensions, and that it lowers the minimum wage. However, he expressed hope that the bill can be fixed and passed by the Committee in its coming markup.
In his opening statement, Resident Commissioner Pedro Pierluisi (D-P.R.) thanked Bishop for conducting an open and fair process in the development of the discussion draft, and warned of great consequences for creditors and the people of Puerto Rico if a balanced bill is not passed. He said his constituents would accept an oversight board provided they also receive a meaningful debt restructuring mechanism that would provide necessary relief to the island.
Testimony
Antonio Weiss, Counselor to the Secretary, Treasury Department
In his testimony, Weiss noted significant progress made on the draft legislation but commented that more work is necessary. He recalled the Administration’s proposal from November that included four key elements: 1) broad restructuring authority; 2) independent oversight; 3) adequate funding of healthcare services; and 4) incentives to drive economic growth. He said the draft legislation only addresses the first two elements.
Weiss raised concerns about the workability of the draft bill, explaining that the collective action clause is an “unworkable” process that would only delay a comprehensive solution, that any stay on litigation must allow for a smooth transition from voluntary negotiations to the restructuring period, and that restructuring should not require supermajority support from the oversight board. He added that legislation should protect Puerto Ricans’ pensions and retirement security and avoid provisions that would harm economic growth, such as the currently included minimum wage and overtime rules.
Anthony Williams, Senior Advisory, Dentons US LLP; former Mayor of Washington, DC
Williams, in his testimony, applauded the Committee’s work and said the bill does well in installing an oversight board of competent officials. He said an important part of the board’s work would be to work with the island’s government to establish a long-term fiscal plan and that he hopes it would use its influence to appoint a strong financial authority, such as a chief financial officer, who would have some degree of autonomy. He then added that it will be crucial to follow the bill with economic incentives to move Puerto Rico’s economic renewal forward.
John Miller, Nuveen Asset Management
In his testimony, Miller discussed the impact the draft legislation would have on municipal bond markets. He said he believes the bill has the potential to create a framework for a fair, orderly and transparent resolution of the debt crisis and that it would have no negative consequences for markets because the marketplace is already anticipating some form of restructuring. He also pointed out that much of the investor base in Puerto Rican securities have shifted from mutual funds to “opportunistic” hedge funds, which mitigates any risks to individual long-term investors.
Andrew Kent, Fordham University School of Law
Kent, in his testimony, defended the constitutionality of the proposal by explaining that Congress is able to address geographically isolated cases without violating the uniformity requirements of the Bankruptcy Code. Further, he said the legality of the legislation is bolstered by the territorial clause of the Constitution, which allows Congress to make specific laws for U.S. territories and to treat them different from states and even from one another.
Susheel Kirpalani, Quinn Emanuel Urquahart & Sullivan
In his testimony, Kirpalani dispelled what he called two “myths” about the proposal. First, he said the bill would not be a bailout and stressed that it involves no taxpayer money. Second, he dismissed criticisms that it creates a “super Chapter 9” because the local government would not have full control over what debts it pays. He said the bill would encourage voluntary agreements with creditors and called it “the right bill.”
Simon Johnson, MIT School of Management
Johnson, in his testimony, said the oversight board provision is a good balance of effective oversight and preservation of sovereignty. However, he said the restructuring authority is not “sufficiently streamlined” and that the process should encourage voluntary negotiations and push holdouts to negotiate in good faith. He compared the process to financial institution bankruptcies, where the House of Representatives has worked to avoid any deadlocks or impasses with creditors, and urged that the Committee move in this direction.
Questions
Oversight Board
Rep. Doug Lamborn (R-Colo.) asked about the powers of the oversight board and whether its decisions can be overridden. Weiss answered that the proposed board respects the principles laid out by the administration, in that it preserves self-governance while putting in safeguards to ensure that budgets that are agreed are carried out. He explained that access to restructuring authorities or to the collective action clause can only be obtained through a process certified by the oversight board.
Pierluisi responded to Lamborn’s concerns by explaining that the oversight board would have ultimate authority because it must approve the fiscal plan and budgets of the Puerto Rican government, though it still defers to the island’s government the right to develop the budgets itself.
Rep. Madeleine Bordallo (D-Guam) noted that the bill clearly prohibits elected officials from serving on the board, but was concerned about conflicts of interest from people with ties to bondholders being members. Weiss said he is working with the Committee on this provision to prevent any conflicts of interest.
Rep. Norma Torres (D-Calif.) commented that while the bill is very prescriptive for who appoints the members of the oversight board, it is not clear enough on who can be appointed. She expressed concern that all seven board members might come from the same background.
Rep. Nydia Velazquez (D-N.Y) was critical of the oversight board’s powers, saying it makes Puerto Rico a U.S. colony in the Caribbean.
Rep. Jody Hice (R-Ga.) asked if it is problematic that no one representing the bond market is on the oversight board. Weiss answered that the board’s composition is yet to be determined.
Collective Action and Voluntary Negotiations
Lamborn asked how holdout creditors would be treated. Kirpalani answered that the bill requires that a simple majority of the total number of creditors, along with two thirds of the total debt, must agree in order for restructuring to bind similarly situated creditors.
Hedge Fund Criticism
Grijalva was critical of hedge funds and insisted that they chose to buy risky bonds as an investment strategy. He said they are now spending heavily in campaigning against any congressional action.
Bishop asked about advertisements that are critical of legislation to address the crisis in Puerto Rico. Kirpalani answered that hedge funds made a gamble that Congress would never act, and are now “spinning absolute fiction” by calling the legislation a bailout.
Prioritization of Debt
Rep. Rob Wittman (R-Va.) asked whether the draft bill would set priorities for creditor claims that would otherwise be decided by courts. Weiss responded that litigation has already begun in courts, but that this is not contributing to a constructive environment for the resolution of the crisis. He warned that without any framework from Congress, the island will face a “lost decade” as various claims are contested.
Minimum Wage, Medicaid, EITC and Pensions
Bordallo stated that the debt crisis would not be resolved through debt restructuring alone, and that other territories such as Guam could be “down the same road.” She stated her regret that the bill does not address issues such as pensions of Medicaid support. Weiss reminded her that this was included in the Administration’s proposal.
Rep. John Fleming (R-La.) asked if the bill makes it possible for holders of full faith and credit debt to be put at a lower priority than unions or pensions. Weiss said the only way this could happen is if all other measures are exhausted.
Rep. Dan Benishek (R-Mich.) asked if the bill would fix the island’s immediate cash flow problems. Weiss answered that it would stabilize the crisis, but that further actions would be needed to promote the recovery and incentivize growth, such as giving Puerto Ricans access to the earned income tax credit (EITC).
Rep. Don Beyer (D-Va.) said he is concerned about the bill’s minimum wage provisions and that they might encourage emigration from the island. Johnson agreed, saying it would be “Puerto Rico’s tax base getting on a plan” and leaving the island.
Fleming stated that Puerto Rico’s crisis is the result of progressive social policies, and warned that while the draft legislation itself is not a bailout, it will eventually lead to a bailout because there would still be cash flow problems.
Bishop asked if a lack of congressional action would increase liability for taxpayers. Weiss answered that the alternative to congressional action would be a taxpayer-funded bailout.
Impact on Municipal Markets
Pierluisi asked about the reaction of municipal markets to the bill. Miller explained that the marketplace is welcoming the bill because new audits of Puerto Rico and greater transparency will be a positive development, and that the alternative is litigation and defaults.
Rep. Tom McClintock (R-Calif.) warned that if Congress can alter bankruptcy laws for Puerto Rico, then this sets a “very dangerous precedent in public borrowing and creditors will no longer trust the terms of their loans to states. On the other hand, he continued, honoring the rule of law and the terms of the bonds would be a signal to bond markets that the U.S. stands by its promises even when it is not convenient. Weiss responded that there is a clear constitutional path for Congress to change the law for territories in Article 4 of the Constitution, but that the 10th Amendment makes this impossible for the states.
Benishek asked what will happen to bond markets if Congress does not act. Miller answered that Puerto Rican bonds have moved heavily into distressed debt territory and that the broader municipal bond markets would continue to be healthy.
Rep. Raul Labrador (R-Idaho) asked whether municipalities would have more difficult issuing bonds if the bill were enacted due to fears that the bill would hurt confidence in the terms of bond agreements. Miller answered that it would not, and that the bill would not set any precedent allowing states to go through bankruptcy.
Hice said municipal bondholders with interests in Puerto Rico are probably found in every district, with senior citizens standing to be most affected by the legislation. He said the bill “clearly” has Congress changing rules after investors made a purchase, and questioned whether Congress has the authority to “change the rules after the fact.” Kent reiterated that the Constitution prevents changes for the states, but not with territories.
Need for Congressional Action
Rep. Bruce Westerman (R-Ark.) questioned why the federal government should interject into Puerto Rico’s problems, noting that the U.S. government has its own debt issues. Weiss answered that the safety and economic wellbeing of 3.5 million Americans in Puerto Rico are at stake and that the extent and complexity of their situation requires congressional action.
For more information on this hearing, please click here.