Chapter 9 Does Not Resolve Puerto Rico’s Problems

For the ruling party and Resident Commissioner Pierluisi, Chapter 9 of the Bankruptcy Code is the solution to PR’s economic woes. Commissioner Pierluisi presented el H.R. 870 to allow PR’s municipalities and public corporations to file for Cap. 9. The probabilities of it being approved are minimal since the Chairman of the House Judiciary Committee, Robert Goodlatte, admitted the votes for its approval were lacking .

Even if the votes where there, Chapter 9 does not solve PR’s problems. According to the latest Government Development Bank Quarterly Report dated May 7, 2015, PR’s GO debts total $23,804 billion. PR’s GO’s have the protection of the island’s constitution which requires that in case of a lack of funds in the budget, they be paid before anything else. See, Article VI, section 8 of the Constitution. That leaves us with $48,400 billion as potentially subject to Chapter 9. However, 11 U.S.C. § 109(c) requires that state law specifically allow a municipality or public corporation to file for Chapter 9 protection. If Law 71-2014, the Recovery Act, is any indication of the legislature’s intent, municipalities, the GBD and its subsidiaries, the Fideicomiso de Niños, the Commonwealth’s Retirement System and its instrumentalities, the Judicial Retirement Fund, the Agency for Municipal Financing, AFI, COFINA, the Teacher’s Retirement Fund, and others were excluded from filing for its protection. Therefore, one can conclude that the legislature would not allow them to file for Chapter 9 protection. If one excludes these parties bonds, one is left with only $24,914 billion that could file for Chapter 9 protection, leaving $47,290 unprotected. See pages 56 and 64 of Government Development Bank Quarterly Report dated May 7, 2015.

We must also remember what Chap. 9 was designed for. The website of the US Courts tells us the following of Chapter 9’s purpose:

The purpose of chapter 9 is to provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Changing the terms of the bond obligations will not make them happy but they would not be the only ones to suffer. We must remember that in Chap. 9 the Municipality may change the terms of executor contracts such as union contracts and leases. Also, since this is a federal process, pensions that are being paid may be altered as they were in Detroit. Be careful what you wish for, you may get it.

Finally, Chap. 9 does nothing to cure the practices that have brought us to the financial disaster we are living. We got to this black hole thanks to politicians that took out loans no to bring about economic growth but to maintain the level of expenditures necessary to keep the unions, the Gov. employees and contributors happy in order to be reelected again and again. If Chap. 9 existed for PR, this terrible “clientism” will force municipalities and public corporations to utilize again and again every time their expenses exceed their collections. Only a Financial Control Board, created by Congress with ample powers a la DC can make the necessary changes that PR so needs.

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