Bankruptcy | paulhunterjones

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Updated December 30, 2015-4:00 pm

Gov. Garcia Padilla just informed the press that Puerto Rico would default on a 37.3 million debt payment due January 4, 2016. Not surprising anyone, Gov. Padilla went on to say that Puerto Rico would not make any further payments to the fund devoted for future payments. In his USA Today post, Nathan Bomey reports on this development and specifically quotes part of an email of Matt Fabian of Municipal Analytics:

“The governor appears not to know, week to week, how much cash flow the commonwealth will have and which debts will and won’t be paid…Puerto Rico does not have any kind of plan for fixing the mess it has gotten itself into. That, after complaining to Congress about imminent defaults, the commonwealth could find the money to pay almost a billion dollars in debt service while also paying Christmas bonuses will not advance Puerto Rico’s demands for bankruptcy protection.”

On November 30 the Governor issued an executive to “clawback” funds pledged to the payment of specific bonds. These “clawback” funds will be used by Puerto Rico to pay part of the debt coming due on January 4, 2015. Not only was the executive order unconstitutional, it exacerbated the debt problem.

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Christmas arrived early for President Barack Obama. The U.S. Congress passed the Omnibus Spending Bill of 2016. The 1.8 trillion dollars spending bill averts a shutdown and funds the government for the next year. Most observers credit newly elected House Speaker, Paul Ryan, with convincing restive Republican colleagues to go along with the legislation. The bill met smooth sailing in the Senate. In a surprising procedural move, Senators relaxed certain rules which permitted them to quickly consider and adopt the legislation. Both houses passed the legislation by wide bipartisan margins. President Obama, upon the signing the bill into law, praised Congress for coming together and passing an important piece of legislation.

Both Democrats and Republicans claimed a political victory in the passage of the spending bill. Republicans finally lifted the ban on oil experts that the oil industry desperately wanted. Democrats received funding for refugees and other programs dear to them. The bill has something for every legislators’ Christmas Stocking. Yet, some House and Senate democrats were upset that the legislation failed to offer financial help to Puerto Rico. The Caribbean island is unable to pay its sovereign debt and is in dire need of an injection of cash. The Hispanic and Black Congressional Caucasus threatened to derail passage of the legislation if it did contain some relief for Puerto Rico.

New York State’s representatives cheered the bill’s extension of the Zadroga law for 9/11 responders. At the same time, they are unhappy that the legislation’s failed to address Puerto Rico’s debt problems. Many of the state’s politicians (D) are supported by large Puerto Rican constituencies. Almost all of New York City’s elected politicians lobbied Congress to come to Puerto Rico’s aid. Unfortunately, advocates for Puerto Rican debt relief failed to make out their case on an intellectual level.

None-the-less House Democratic Leader, Nancy Pelosi, on December 18, introduced H.R. 4290, the Puerto Rico Emergency Financial Stability Act. The bill, if signed into law, would stay legal actions filed by Puerto Rico’s creditors who have not been paid on their debt holdings. The proposed stay would remain in effect until March 31, 2016. Rep. Pelosi believed that by that time Congress would have passed comprehensive legislation dealing the Puerto Rico’s debt crisis. By submitting the bill, Rep. Pelosi indirectly acknowledged that Puerto Rico was likely to default on making the Jan.1 2016 debt payment. Regardless of Puerto Rico’s imminent default, House members reacted with little enthusiasm towards the Pelosi bill. I believe that she knew this but had introduced the bill to further her own ambitions. Soon after introducing her bill, Rep. Pelosi was in Puerto Rico receiving political donations from local Democrats.

On November 6, 2012, Puerto Rico’s residents elected Alejandro Garcia-Padilla as governor of the island. Consequently, he has served in that capacity as the Island’s public debt grew into a crisis. In the first days of August 2015, the Governor began publicly acknowledging that Puerto Rico could not and would not pay its outstanding sovereign debt of more than 70 billion dollars. Gov. Garcia-Padilla made it clear that Puerto Rico’s only course of action was to default. What he avoiding saying was that Puerto Rico’s economy was in dire straits for years. While its economy was shrinking, Puerto Rico continued to borrow billions for ill-advised projects and ventures. Most recently, government officials borrowed billions just to meet expenses.

In fairness to the Governor, there has always been a nationalistic segment of the local electorate that believed the government should use public debt financing to support a socialist agenda. Though the crisis in Puerto Rico is real and its ramifications could have serious consequences for the average resident of the island, I do not believe that Puerto Rico deserves to be bailed out with U.S. taxpayers’ money.

What has not been sufficiently reported by the press is Congress’ efforts to address the Island’s financial problems. Under pressure from the Obama Administration, Governor Gracia Padilla and Puerto Rico’s non-voting representative in the U.S. House of Representatives, Garcia Padilla, both legislative bodies proposed differing bills to deal with the crisis. For many legitimate reasons, the Democrats’ proposals for sweeping help failed to gain meaningful support from either party. The lawmakers wrestled with the benefits and drawbacks of two forms of assistance, a financial bailout package and granting the Island the right to declare bankruptcy.

The House considered a bill that would have allowed the Island to declare bankruptcy without imposing an oversight authority to put Puerto Rico’s finances in order. The Senate bill contained no provision for granting Puerto Rico bankruptcy protection. However, the bill did offer 3 billion in immediate bailout funds and required the establishment an oversight authority. Had both bills been passed by their respective bodies, a Senate-House Conference Committee would have met to resolve the bills’ differences. U.S. law makers seem to agree that Puerto Rico’s financial crisis had been brought about by risky financial policies, an unwillingness to enact correcting austerity measures and a failure to respond appropriately to the shrinking economy.

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This is a brief update to my earlier post that dealt with the city of Detroit’s Bankruptcy filing. In the earlier post entitled “A New Beginning or End for Detroit” I discussed the political and economic ramifications of the once proud city’s fall into the financial abyss known as a bankruptcy court. I have not wavered in my belief that the filing for bankruptcy was in Detroit’s best interests.

I was not surprised when Detroit filed for bankruptcy protection. The news outlets had reported the city’s financial problems for months. The economic situation in the Motor City was not only desperate, it was dire. On July 18, 2013 the city’s Emergency Manager, Kevyn Orr, filed the petition with the court on behalf of Detroit. Since his appointment Mr. Orr had engaged in long and arduous negotiations with the city’s largest and most powerful unions and pensioners. Retirees who had long served the City of Detroit were sweating the negotiations. They worried that a bankruptcy filing could result in a drastic cut in the pensions and other vested benefits. About 38% of Detroit’s annual budget was being spend on “legacy costs such as pensions and debt service. Orr’s cost cutting strategy was no secret; Detroit would cut 11.5 billion in municipal debt down to about 2 billion. Consequently if this cut was spread evenly across all the creditors, each would receive about 17% of what was owed them. Yet, not all the creditors stood on equally footing. Many of the creditors were people who made up the very fabric of the city. It might not be too easy (or politically expedite) to blow off their claims. We cannot ignore the fact some creditors had sacrificed more than 20 years of their lives into securing their investments.

Today, after a protracted and bitterly contested preliminary proceedings, Federal Judge Stephen Rhodes ruled that Detroit could move forward with its bankruptcy petition. Judge Rhodes denied the applications of pensioners, public unions, and other large impacted creditors to derail the filing. The court was keenly aware of Detroit’s deep financial problems. In addressing the magnitude of the problem Judge Rhodes stated that “This once proud and prosperous city can’t pay its debts. It’s insolvent…At the same time, it also has an opportunity for a fresh start.” In announcing his decision to a packed court, Judge Rhodes spoke for more than an hour and dwelled on Detroit’s illustrious past. Now Detroit must prepare a reorganization plan that the court will sign off on. Because of the more than 500 lawsuits against it, the city was forgiven for not negotiating in good faith prior to the filing.

The political landscape in Detroit has changed drastically since the filing of the bankruptcy petition. In my opinion it only made sense that the leaders and the political party that ran Detroit’s finances into the ground should be held accountable for the debacle.

The question that every seems to be asking is if racial considerations played a factor in Detriot’s fall from grace. Once the brash and politically savvy Coleman Young took over the mayor’s office, Detroit’s disenchanted Black community had their man in office. When the 1967 riots razed much of the inner city, Whites decided it was time to move to the suburbs. Soon they were followed by middle class Blacks who wanted safer neighborhoods and better public schools. As Detroit’s tax base dwindled, its revenues began to dry up. Detroit politicians kept borrowing money to keep up public spending. It was only a matter of time before the bad economics caught up with the politicians and city. In my opinion the filing of the bankruptcy also spelled the end to Detroit’s political élite.

On November 5, 2013 Detroit voters in record low numbers cast their votes in the mayoral election. They elected Mike Duggan by a margin of about 10%. When he takes office in January 2014 he will become the first White mayor of the Detroit in the last four decades. Exit poll surveys and post-elections interviews revealed that Blacks did not vote along racial lines. Most Blacks voted for the candidate irrespective of his skin color that offered the best chance of restoring Detroit to respectability. Mayor Elect Duggan will assume office of a Detroit that is in bankruptcy, has a soaring crime rate, and who citizens are suffering from low morale. He will also have to deal with the thousands of pensioners who lost a substantial amount of their investments due to the bankruptcy proceeding. Perhaps Mayor Elect Duggan’s biggest challenge will be repairing the City’s relationship with the State Legislature in East Lansing. Some commentators say that Duggan is in a no-win situation; I disagree with this assessment. In my opinion Duggan takes over a city that cannot not sink any lower. The fact that he was elected mayor is the first step in the reclamation of Detroit.