The Hunger Game
Imagine a Puerto Rico where small children—bellies bloated from malnutrition—line the streets begging for pennies with which to obtain their next meal; a Puerto Rico where hundreds of people are jammed inside emergency rooms because they are part of the Zika virus epidemic.
This is the Puerto Rico that Gov. Alejandro García Padilla is being advised to portray, despite the fact that there are really no children who need go hungry, thanks to more than $1.8 billion in federal funds for the Nutritional Assistance Program that Puerto Ricans receive every year, and there is no real Zika epidemic.
Yes, there are harrowing statistics such as the mass outmigration of some 1,000 people leaving the island every week and a labor-force participation rate that is at a hemispheric low of 40%, but the “overblowing” of a humanitarian crisis—the “zombification” of Puerto Rico, if you will—is a tactic to force the U.S. Congress to act by passing the Puerto Rico Oversight Management & Economic Stability Act (Promesa), according to some insiders.
The Promesa measure being co-sponsored by Rep. Rob Bishop (R-Utah) and Rep. Sean Duffy (R-Wis.) would enable a federal fiscal-control board to oversee Puerto Rico’s financial and economic affairs. However, many observers say the commitment to the bill is being influenced more by politics than any humanitarian concerns.
Following the Hastert Rule
Although House Speaker Paul Ryan has promised he will present the measure for markup by May 16, he has been unable to comply because he is following the Hastert Rule, an unofficial parliamentary guideline that mandates votes by a majority of the Republican majority to pass legislation once it goes to the floor.
“Let me make it abundantly clear that this bill will not be presented
if it does not have the Republican votes,” said one Republican staffer who chose anonymity. “There are some 60 representatives who belong to the ultraconservative Freedom Caucus that have been lobbied by Speaker Ryan. It has been like pulling teeth.”
The math is simple; the politics are not—the Republican majority comprises 247 seats, the speaker needs at least 124 votes from his GOP brethren in the total composition of 218 votes required to meet the threshold of the Hastert Rule. Without the majority, Speaker Ryan would be passing legislation on the coattails of Democratic votes, which would be fatal for him, particularly during an election year.
“Ryan has only been in the speaker’s post for less than a year; he will not even consider bringing [Promesa] to the floor if he does not have the votes from our party,” said the Republican aide. “He considers this to be his measure, and he needs to pass this with our party’s representatives in Congress.”
The last speaker to repeatedly ignore that rule, John Boehner, passed several bills using minority support. One vote in January 2013 led to the passing of the American Taxpayer Relief Act of 2012 with only 35% (85 of the 241 votes) Republican support. Hastert is on the record deriding Boehner’s indifference to the principle, explaining, “when you start making deals with Democrats to pass legislation, you are not in power anymore.”
Boehner’s repeated overlooking of the Hastert Rule led to a backlash by the conservative Freedom Caucus, representatives of the Tea Party ilk who made it impossible to pass legislation and ultimately led to Speaker Boehner’s resignation.
Ryan is reportedly intent on not committing the same mistakes and is therefore insistent on adhering to the Hastert Rule.
The majority of the GOP majority has been a difficult threshold to achieve because there are many competing interests. “There is going to have to be some give and take; Republicans are saying you have to consent to the control board and then you get some restructuring,” said an aide tied to the Democratic Party.
“We like the idea of restructuring, but we don’t like the way the control board is set up—you can’t condition the one thing to the other. And, by the way, you are going to have to throw in parity in Medicare and Medicaid [funds], and add some economic development measures,” the Democratic staffer added.
Promesa’s Title V, which includes measures for economic development such as expediting the permitting process and revitalizing Puerto Rico’s physical and energy infrastructure, was being eyed to include Section 243 tax incentives once the bill makes it to the Senate.
On the economic development front, there could be some traction developing behind Section 243 of the Internal Revenue Code, which grants 70% to 100% tax deductions to domestic corporations, based on the amount received in dividends to a domestic firm. To qualify, the corporation must be domestic, meaning “created or organized” in the U.S. or under the laws of the U.S. and/or any state within the U.S. The corporation must also be a “taxable entity” under Section 243, according to the U.S. Government Publishing Office.
Basically, the 70% deduction rate is allowed for all dividends that meet the preliminary qualifications; the 80% deduction is allowed if the corporation owns at least 20% of the firm’s stock when it received the dividends; and the 100% deduction rate applies for “qualified dividends,” meaning those received from a corporation that is a “member of the same affiliated group” on the day the dividend was received, according to the aforementioned source.
“The inclusion of Section 243 could prove difficult because there is resistance from lawmakers to go outside the jurisdiction of the committee,” said one GOP lobbyist who chose to remain nameless. “Different committees have different jurisdiction over different issues. Sometimes you have shared jurisdiction, in the case of this committee. We know there is intent to add tax breaks, but I don’t know if that would fly just because of the jurisdictional issues involved.”
The House Natural Resources Committee has jurisdiction over all federal lands, the territories and Native American affairs. Some lawmakers would resist including tax-policy issues in a bill that comes from the Natural Resources Committee, which would make the case for it to go to the Ways & Means Committee for Section 243 to be added, the source indicated.
A few of the issues that have to be ironed out include, first, whether there is going to be a requirement for a negotiated collective-action process (specifically, collective-action clauses) before the oversight board can entertain restructuring applications. The bill addresses the collective-action process in Title VI, which stipulates there is a binding effect.
“For each Pool, a Qualifying Modification will be conclusive and binding on all holders of the relevant series of Bonds or all holders of all series of Bonds whether or not they have given such consent, and on all future holders of those Bonds whether or not notation of such Qualifying Modification is made upon the Bonds,” according to the bill.
The collective-action clauses, which are essential to bring holdouts into the fold of agreements that are reached, have been a bone of contention. The U.S. Treasury reportedly wants the collective-action mechanism put in place at the outset, while the creditors would like to leave it up to the control board to assess the need to employ them.
The second issue being discussed is the requirement of insolvency for entities to qualify for restructuring. A third issue centers on resistance to having everyone’s assets intermingled in one huge structure, as each entity wants to be viewed on its own.
Raúl Labrador, a conservative representative from Idaho who is of Puerto Rican descent, is said to wield considerable power in the draft of amendments that are being made to the bill.
“He is a rule of law type of guy and he is saying if we are going to restore the rule of law, any constitutional or statutory provision with respect to bonds—priorities and liens, should not be tossed in the trash,” said the GOP staffer. “That doesn’t mean you have 100% payment on the dollar, but you have 18 different types of credits, and if you are No. 1 or No. 3, you shouldn’t have the one that is No. 18 coming before you. And if you have a lien on an asset, you can’t undo the lien to pay someone else.”
At this writing, Bishop was fine-tuning some of those sticking points in the bill in hopes that the Hastert Rule’s threshold could be met. It is an essential benchmark made all the more important given the politics underpinning this bill.
Several sources on Capitol Hill have told Caribbean Business that changes will be made, but none will be earth shattering because there is very little time. The plan, as this newspaper was going to press, was to circulate a new draft by the middle of the week that could be voted on next week. Labrador will have a huge say in determining whether the Hastert Rule is met.
Although there is general consensus among creditors that Puerto Rico must have a control board, the bondholders holding general-obligation (GO) debt do not want a board if it means their bonds are subject to restructuring because those credits are backed by a constitutional guarantee.
Most creditor groups are of the thinking that the board should have the powers to step in if the government is not balancing its budgets within the timeframes provided in the Bishop-Duffy bill, and must be able to negotiate with creditors and “have the power to demand financials from the different entities and keep the different entities from intermingling their assets and their revenues.”
GO creditor groups, which include hedge funds, have reportedly taken a confrontational stance with monoline bond insurers, principally Ambac Assurance for its lead role in backing Promesa.
“There is a general skepticism in the creditor community about possibilities and probabilities because we don’t even have financial statements for these entities. How do we agree to anything until we get a sense of what is really needed,” Ambac Financial Group President & CEO Nader Tavakoli told Caribbean Business during an exclusive interview two weeks ago.
“We are not going to subscribe to anything without a federal oversight board. We want the oversight board to get down there and assess the situation. And, not presume that there is all of this debt restructuring that needs to happen. We are happy to look at anything that is constructive, but our focus right now is on the congressional bill,” he added.
Tavakoli’s vocal stance on Promesa has some GO creditor groups taking aim at monocline bond insurers such as Ambac. “They are seen as taking a lead role in pushing for the measure; hedge funds have been rather vocal against the bill in meetings that we have held because they see it as a sort of Super Chapter 9 because it would include GO debt,” the GOP staffer said.
To date, several meetings have been held attended by representatives of various creditor groups and Congressman Bishop and his staffers, which have been characterized as being somewhat heated, as lobbyists push for the hierarchy of their clients’ credits. The GO bondholders are adamant in resisting haircuts to their principal because, they say, their debt is guaranteed by the Puerto Rico Constitution, and senior Cofina bondholders want equal treatment because their paper is backed by the island’s Sales & Use Tax (IVU by its Spanish acronym).
Although the monolines have tried to portray themselves as middlemen, they are looked upon by GO creditors as having the ulterior motive of avoiding coverage when the big defaults start coming down the pike. The big monoline bond insurance companies, which are on the hook for $16 billion in commonwealth debt, welcome the oversight bill because it would help them to avoid footing the bill for $780 million if the commonwealth defaults on $1.5 billion due on July 1.
As reported by this newspaper two weeks ago, a protracted fight is being waged in the hallowed halls of Congress by lobbyists for GO bondholders who are trying to brand the oversight bill as a bailout. Those bondholders are behind the Super PAC that is funding the advertising campaign running on U.S. TV networks with the slogan, “No Bailouts for Puerto Rico.”
One lobbyist tied to the Democratic Party, who has been part of meetings with Ryan and Bishop, told this newspaper that “a lot of the Republicans who are being affected by the ad campaign are much more understanding that Promesa isn’t a bailout and that it is headed toward being a responsible bill.” That was the case two weeks ago.
As this newspaper was going to press, the Council for Citizens Against Government Waste (CCAWG) launched a radio ad campaign in favor of Promesa that targeted five GOP representatives—Paul Gosar (Ariz.), Cresent Hardy (Nev.), Labrador (Idaho), Alex Mooney (W. Va.) and Ryan Zinke (Mont.)—who have been vocal in their repudiation of Promesa. The ad campaign counters the claims that Promesa is a bailout, pointing to the measure as an essential restructuring mechanism that will help avoid a bailout down the road.
The counteroffensives being waged through media campaigns point to continued rifts among various creditor groups. GO credits continue to be at odds with senior Cofinas and monolines.
The ire of GO creditors against Ambac also traces to the run-up to the passage of the Omnibus Appropriation bill, a $1.8 trillion tax and spending package that was to have included a restructuring mechanism for Puerto Rico. Resident Commissioner Pedro Pierluisi filed the bill that was to have been included, with the blessing of then-Speaker of the House Boehner.
“The bill was referred to committee and it had bipartisan support; the measure included a control board and stipulations to extend Chapter 9 protections to Puerto Rico,” said the Democratic lobbyist on Capitol Hill who chose to remain nameless. “But it became a contested political issue when Republican leadership took over. Bondholders got organized and the tug-of-war started.”
Democrats were largely for restructuring under a state-like federal law, be it Chapter 9 or a territorial restructuring law, but former Lieutenant Governor of New York Dick Ravitch, who is advising the Puerto Rico government pro bono, started talking about a Super Chapter 9 that would include the GO credits—without the commonwealth’s authorization.
Ravitch was lobbying on Puerto Rico’s behalf because he had helped to restructure New York City’s debt in the 1970s, when the Big Apple was nearly bankrupt as a result of fiscal mismanagement. Then-New York Gov. Hugh Carey created the Municipal Assistance Corp. to provide financing assistance, a state Financial Control Board was put in charge of fiscal oversight and, in exchange for financial assistance, the city agreed to reforms.
The corporation refinanced $6 billion of the city’s debt and the federal government loaned $2.3 billion. Among the reforms enacted included cutting expenses, increasing the city sales and income taxes, and laying off about 60,000 city employees.
During that time, Ravitch—a developer and former chairman of the Urban Development Corp. and Metropolitan Transportation Authority—was a key negotiator with unions, according to the New York Times.
Today, Ravitch’s detractors insist he has a clear conflict of interest in restructuring Puerto Rico’s debt, as he sits on the board of directors of Build America Mutual (BAM), a bond insurance company that would benefit greatly if Puerto Rico defaults on the $1.5 billion payment due on July 1.
Bond insurance companies Assured Guaranty, Syncora and Ambac Assurance are on the hook for some $780 million of that debt and their credit rating would take a hit, thus benefiting BAM—by default, literally.
“That got the ball rolling and word spread in the halls of Congress, and Republicans were saying look, Chapter 9 is one thing, but Super Chapter 9 is taking it too far,” said the Democratic lobbyist. At the time, Pierluisi came out against a Super Chapter 9 because it would have weakened the constitutional guarantees backing Puerto Rico’s GO debt.
Antonio Weiss, the U.S. Treasury’s lead adviser on Puerto Rico issues, was reportedly on the Super Chapter 9 bandwagon as well, “but the initiative failed to pick up traction,” said the Democratic lobbyist. The Capitol source said the Super Chapter 9 option was taken off the table. Republicans remained adamant that the measure had to have a very aggressive control board, which was rejected by Democrats, who insisted that it be a supervisory board with less control.
Sources have told Caribbean Business that the weekend during which the Omnibus bill was being negotiated, it looked as though the measure for Puerto Rico would be included.
At first it seemed possible that the measure would include both a control board and Chapter 9. Then in the stretch run, it seemed likely that only the control board would prevail. At the last minute, they agreed to leave the Puerto Rico debt measure out, which led to Ryan’s commitment to Nancy Pelosi, the Minority Leader in the House, that the Republicans would act by the end of March 2016.
As it stands today, the GO bondholders remain adamant in their repudiation of Promesa because the oversight board would force them to restructure their credits—no matter what. The alleged Zika epidemic has not surfaced as a factor in their support.
—Editor Rosario Fajardo and Reporter Luis J. Valentín contributed to this story.