As previously reported, the U.S. Congress last year approved the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) to address the island’s financial crisis.
U.S. territories are barred from filing a traditional bankruptcy.
Under the PROMESA legislation signed by former President Barack Obama, an Oversight Board and the Title III process were created. Title III is like a Chapter 9 bankruptcy.
On May 3, 2017, the Oversight Board placed the Commonwealth of Puerto Rico into federal bankruptcy court in San Juan. The filing is the largest municipal bankruptcy in U.S. history.
Chief Justice John G. Roberts of the U.S. Supreme Court assigned Puerto Rico’s case to Judge Laura Taylor Swain, a federal judge in the Southern District of New York and a former bankruptcy judge with extensive experience.
Because of the complexity of Puerto Rico’s financial crisis, the bankruptcy case is expected to be long and contentious.1
Referendum for Statehood
On Sunday, June 12th, half a million Puerto Ricans voted in a special referendum election and overwhelmingly to become America’s 51st state, in an election most voters sat out. Of the ballots cast, 97% were in favor of statehood. However, only 23% of registered voters cast ballots. Those who preferred independence or remaining a territory boycotted the election.
Governor Ricardo A. Rossello of the pro-statehood New Progressive Party said he planned to take the victory to Washington and press Congress to admit Puerto Rico to the union. He said, “From today going forward, the federal government will no longer be able to ignore the voice of the majority of the American citizens in Puerto Rico.”2
Voters had three options: statehood, independence or a continuation of its current status as a territory.
The vote on June 12th was the fifth time since 1967 that the island’s residents have gone to the polls on the issue. In the 1967, 1993 and 1998 votes, statehood never won an outright majority. In the 2012 two-part referendum, voters rejected continuing the status quo in the first question, and then a majority opted for statehood over independence in the second question. However, about 500,000 voters left the second question blank as a form of protest.
Many island residents thought the June 12, 2017 vote “was a waste of money and was just an ideological statement.” With a low turnout, political foes to statehood feel the vote isn’t credible, which could further hurt Puerto Rico’s already daunting chances of getting Congress to grant the island full admission to the U.S.
Under the current status, Puerto Ricans are born U.S. citizens, but those living on the island cannot vote for president and have only one representative in Congress, a resident commissioner who cannot vote.
U.S. Rep. Stephanie Murphy (D., Fla.) declared her support for statehood. Ms. Murphy said, “Given their contributions to our nation in times of war and peace for well over a century, they deserve to have the same rights and responsibilities as their fellow citizens living in Florida and every other state.”3
Sale of Public Entities to Private Firms
Puerto Rico, faced with no cash, is looking to sell itself off in pieces. The island is preparing to seek bids in coming months from private companies willing to operate or improve seaports, regional airports, water meters, student housing, traffic-fine collections, parking spaces and a ferry, according to a government presentation.
The goal is to attract more than $500 million in investment starting this summer according to the Puerto Rico Public-Private Partnerships Authority. Future possibilities include the island’s power utility, water-and-sewer system and waste management, according to presentations made in April to private investors.
Puerto Rico officials haven’t disclosed exactly how they plan to use any proceeds. The government needs cash to pay down debt, run operations and services for its residents and for other purposes. Governor Rossello predicts public-private partnerships launched over the next three years will bring $5 billion in new investment and 100,000 new jobs.
In public-private partnerships, the government allows private firms to lease and operate public infrastructure for decades in exchange for upfront cash or a promise of long-term improvements. Some arrangements also involve building new infrastructure.
Unlike municipal bonds, public-private partnerships insulate investors from government’s financial distress. The money typically flows straight to the private operator without ever passing through government officials’ hands.
Proponents say privately run projects are typically more efficient and well run than public projects, creating savings that lower the overall cost.
However, critics of the partnerships say governments are pledging away revenues they need to fund core services in exchange for infrastructure improvements that could cost less if publicly financed.
It is uncertain at this time what the position of the island’s creditors will be in this matter or that of the bankruptcy court.
It is an ambitious goal which will face many challenges.4
- Peluso, Romano I., “Puerto Rico Files For Bankruptcy Protection,” Perkins Coie LLP, corporatetrustinsider.com, May 8, 2017.
- Robles, Frances, “23% of Puerto Ricans Vote in Referendum, 97% of Them for Statehood,” The New York Times, June 12, 2017.
- Levitz, Jennifer and Arian Campo-Flores, “Puerto Ricans Vote for Statehood,” The Wall Street Journal, June12, 2017.
- Gillers, Heather, “For Sale: Puerto Rico’s Parts,” The Wall Street Journal, June 27, 2017.