Republicans Near Agreement With Treasury Department on Puerto Rico Bill

Disagreements remain over appointing oversight board, priorities over bond, pension payments

THE WALL STREET JOURNAL – Por NICK TIMIRAOS

An American flag and a Puerto Rican flag fly outside the Capitol of Puerto Rico in San Juan. PHOTO: ERIKA P. RODRIGUEZ/BLOOMBERG NEWS

An American flag and a Puerto Rican flag fly outside the Capitol of Puerto Rico in San Juan. PHOTO: ERIKA P. RODRIGUEZ/BLOOMBERG NEWS

WASHINGTON—House Republicans and the Obama administration neared an agreement Wednesday to provide Puerto Rico a path to restructure its $70 billion debt load, the first step toward ending its decadelong recession.

With nearly all other details ironed out, disagreements remained over how to handle appointments to a seven-member board designed to oversee the island’s finances. Lawmakers appeared to have reached a

Rico, but the bill wouldn’t provide new incentives for businesses or federal subsidies designed to shore up population loss.

The bill is being strenuously opposed by some bondholders because it could force them to book losses sooner. Opponents have focused their fire on conservative lawmakers, such as Rep. Raul Labrador (R., Idaho), one of the founders of the House Freedom Caucus. But they may face an uphill battle.

“I am supportive of most of” the legislation, said Mr. Labrador on Wednesday.

Earlier this week, former Republican congressman Connie Mack IV, who is lobbying on behalf of bondholders, had included Mr. Labrador on a list of organizations and individuals that oppose the bill. Those groups “are getting a lot of pressure,” Mr. Mack said Wednesday.

Separately, the legislation would also exempt Puerto Rico from new Labor Department regulation finalized by the White House on Wednesday expanding who is eligible for overtime pay.

Opposition groups have been warning that the bill might set a precedent for distressed U.S. states.

House Speaker Paul Ryan (R., Wis.) has tried to beat back those arguments while leading delicate bipartisan negotiations with the Treasury Department and White House. Conservatives are leery of interfering with bondholders’ contracts while Democrats have called for broader latitude in restructuring debts.

Last month, House Republicans pulled an earlier iteration of the legislation from committee consideration after objections surfaced from both parties. Treasury officials had called that version of proposed debt restructuring unworkable, while a muscular advertising campaign from some bondholders characterized the legislation as a bailout, making conservatives uneasy.

The reintroduction of the legislation was repeatedly delayed last week as aides to Mr. Ryan sought to iron out differences with top officials in the Obama administration.

Those setbacks underscore the fluid state of play on legislation that has generally enjoyed an unusually bipartisan process. A bill isn’t likely to be introduced without assurances that the administration won’t oppose it.

House Natural Resources Committee Chairman Rob Bishop (R., Utah) said last week he expects that once Republicans reached agreement with the Treasury Department on the legislation, it would move “very quickly” through Congress. House Republicans said they planned to introduce the latest version of the bill as soon as this week.

Treasury Secretary Jacob Lew and Mr. Bishop separately warned last week, that failing to provide effective debt-restructuring relief now would lead to louder calls later for a bailout of the island and its bondholders. “If Puerto Rico spins out into economic chaos, you may never have a chance of recovering again,” Mr. Bishop said last week.

Puerto Rico’s economic crisis has led to a nearly 10% drop in its population over the last 10 years, a decline that rivals the worst of any U.S. state since the Great Depression. Population loss is squeezing businesses, forcing hospitals to close down floors, and depleting the island’s tax base.

“The reality is if the economy of Puerto Rico doesn’t come back, the bondholders are not going to do well,” Mr. Lew said during a visit to San Juan last week.

To avoid defaults last year, the central government withheld tax refunds and payments to suppliers, further straining private businesses. “There is an extremely high level of uncertainty, which makes it impossible to attract new investment,” said José Vázquez Barquet, who owns 18 Subway restaurants on the island and is currently president of the Puerto Rico Chamber of Commerce.

Pensions emerged as a complicating factor because in addition to Puerto Rico’s $70 billion debt, the island has an unfunded pension liability of some $40 billion. Puerto Rico has been in a recession for most of the past decade, and it is steadily losing population to the mainland, depleting its tax base.

Some bondholders have argued legislation should require pensions to be reduced before their bonds are restructured, while some Democrats have said pensions should be made senior to those bonds. The bill does neither, and instead says the control board must ensure pensions are adequately funded while respecting existing law.

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