Blog: Yesterday, the House voted on and passed H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act by a vote of 297 to 127

Statement

Yesterday, the House voted on and passed H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act by a vote of 297 to 127. I voted no on this bill along with 102 of my Republican colleagues.

Puerto Rico is in dire financial straits. The island is more than $118 billion in debt, an amount almost equal to its entire economy, and just this April, it declared an emergency stop to all payments on its debt. As a result, it missed one debt payment last month, and another - this time for $2 billion - is due on July 1st.

The bill passed yesterday would establish a financial Oversight Board and would create a mechanism that allows Puerto Rico to "restructure" its debt. Much of the money Puerto Rico owes is supposed to go to US taxpayers, making this legislation relevant nationally. Even though the bill passed, there were too many flaws in it for me to vote for it, and I'd like to explain what some of the bill's biggest problems are for me.

First, the bill doesn't contain enough pro-growth, economic reforms to prevent the island from finding itself in this same situation down the road - unable to pay its debt. It would give Puerto Rico a clean slate with respect to much of its debt by extending Chapter 9 bankruptcy to the island...which is how Detroit filed for bankruptcy. But here's the problem: what good does a clean slate do, when the island's economy is still too weak to support the debt that still remains? To me, this simply leaves open a path toward another financial crisis and maybe even a U.S. taxpayer-funded bailout. Yes, the bill does require balancing the island's budget. But that does little to change the root of the problem, like the perpetually sluggish economy and poor job prospects.

In that regard, a few months ago, I introduced H.R. 4637, the Puerto Rico Minimum Wage Improvement Act, a bill that would allow the government of Puerto Rico to set its own minimum wage instead of being bound to the federal standard. In turn, this would allow the island to better attract job-makers, reduce the unemployment rate, increase tax revenues, and counteract the outmigration that has plagued Puerto Rico in recent decades. While my bill was partially included in the larger Puerto Rico bill, I don't think enough was incorporated to reap its benefits. I offered my bill's full exemption language as an amendment to the larger Puerto Rico bill on Wednesday night - and posted about it yesterday, but the House Rules Committee didn't let it proceed to the House floor for a vote.

I also thought an amendment offered by Congressman Gary Palmer to exempt the island from the Jones Act was worthwhile, but it wasn't brought up for a vote either. In simple terms, the Jones Act requires imports to come on American-flagged and built vessels. Because Puerto Rico has to import so many of its goods as well as virtually all of its energy products, this Act drives up the costs of these goods. This price increase is ultimately shouldered by the Puerto Rican people...which burdens the island's economy as well.

Second, I don't think that letting Puerto Rico file bankruptcy sets a good precedent for other states facing similar financial troubles, like Illinois and California. Down the road, these states could ask for similar restructuring from Congress, using Puerto Rico as an example of why this would be allowed. While some argue that the U.S. Constitution would prohibit Congress from passing a law allowing states to file bankruptcy, my understanding is that this is a topic of debate that splits constitutional scholars. Accordingly, I am weary of changing U.S. law that could potentially have much broader and financially irresponsible repercussions.

Additionally, I have heard a lot of people argue that Puerto Rico is treated unfairly compared to the mainland U.S. from a financial standpoint. This argument doesn't hold much water to me when I hear about some of the subsidies the island receives that the 50 states do not. For instance, the island gets a run-excise tax to the tune of $400 million dollars a year. This tax benefit will expire in two years, and I find it hard to imagine that it won't be extended again. And, the bill was passed with an amendment that expanded the HUBZone program by creating a special exception for Puerto Rico. That program gives special preference for federal contracts to qualifying small businesses. Expanding this program in Puerto Rico gives them an advantage over qualifying small businesses on the mainland U.S.

Finally, my last, and perhaps greatest, concern with the bill is that it doesn't do enough to preserve the rule of law with respect to promises made to the island's bondholders. This is important because many of these bondholders are American retirees who purchased their bonds from Puerto Rico, based on the promise of U.S. law that Puerto Rico could not file for bankruptcy. This bill would pull the rug out from under these bondholders by changing that law after-the-fact.

On top of that, some bondholders purchased their bonds from Puerto Rico with the explicit promise that their payment is guaranteed by the Puerto Rican constitution. These bonds face the possibility of being snubbed in this bill's bankruptcy and financial planning process. While the bill does include some language that seems to ensure their just treatment, I think that it ultimately comes up short in this respect. For instance, it requires the island's fiscal plan to "respect" the legal priorities of creditors, but it doesn't require strict adherence. U.S. Representative John Fleming offered an amendment to fix this issue by changing "respect" to "comply," but again the Rules Committee decided not to let the House vote on the amendment.

The bill's financial plan is further weakened by the fact that it only has to include Oversight Board recommendations that are deemed "appropriate," and it provides no explanation of who should make this determination. And, perhaps most importantly, while the bill says that any bankruptcy plan should be "in the best interest of creditors," the bill still has a "cramdown" provision that would allows favoring one type of creditor, perhaps pensioners, and then forcing huge cuts on other creditors, like bondholders. This is not unprecedented; indeed, this is what happened in Detroit. At the end of the day, we can't forget that many of the people behind these bonds are seniors from states like South Carolina that rely on them for their retirement.

I didn't think that this bill went far enough to create a financially sound path forward or to protect the island's future and the interests of the U.S. taxpayer. Accordingly, I voted no.

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