Puerto Rico received court approval to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, ending years of conflict with creditors as the U.S. territory confronts other stubborn economic problems.
Tuesday’s court ruling approved a write-down of $30.5 billion in public debts built up during an economic decline marked by high joblessness, outward migration and unsustainable borrowing that tipped Puerto Rico into bankruptcy in 2017. The restructuring plan calms tension between Puerto Rico and its Wall Street creditors dating to its debt default, the largest ever on bonds backed by the full faith and credit of a U.S. municipality.
The territory entered bankruptcy with $74 billion in bond debt and a $55 billion gap between the pension benefits promised to employees and retirees and the funding set aside to pay for them. Public agencies were beset by cronyism and failed for years to draw up accurate budgets or account for expenses, according to a 2018 investigation commissioned by the board.
Sprawling bureaucracy and a high cost of doing business discouraged investment, especially after the expiration of some corporate tax breaks in 2006 pushed some pharmaceutical and other manufacturers to depart. To make up for a shrinking tax base, officials borrowed to paper over deficits and skimped on pension contributions.
Many residents of Puerto Rico, political leaders, and some investors have called for an independent audit of how the huge debt was built up, according to Judge Swain’s decision.
The high vaccination rate stands in contrast to Puerto Rico’s initial vulnerability to the coronavirus. Four years after Hurricane Maria destroyed the electricity grid, power outages still occur regularly. Many municipalities face a shortage of health care facilities and workers.
The U.S. territory responded with some of the strictest pandemic measures in the country, including nonessential-business closures, stay-at-home orders and mask mandates.
Its successes aside, Feliú-Mójer noted that COVID-19 has still killed over 3,200 people in Puerto Rico. And she remains concerned about vaccine equity — particularly in rural communities or among older adults who can’t get out of their homes or don’t know how to make an appointment. She says the high overall vaccination rate can hide gaps in coverage.
“You have to look beyond that big number,” she said in a separate interview with NPR. “But then you look at certain municipalities like Loíza, a town in coastal northern Puerto Rico that’s predominantly Black and [a] very poor municipality. Their vaccination rate is about 55%. And so when you look at some of the social determinants that impact communities like Loíza, then they’re not doing as well.”
Author(s): PATRICK JARENWATTANANON, AYEN BIOR, SARAH HANDEL
The invocation of ultra vires to escape bond obligations is nothing new, though. In the second half of the nineteenth century, municipal debtors frequently welched on their debts. In the 1850s and 1860s, cities, towns, and counties across the Midwest and West issued bonds to finance the construction of railroads and other infrastructure. Many ultimately defaulted. Rather than simply announce that they couldn’t or wouldn’t pay, however, they often contended that they needn’t pay: for one or another reason, the relevant bonds had been issued ultra vires and so were no obligation of the municipality at all. Litigation in the federal courts was common. Several hundred repudiation disputes made their way to the Supreme Court in the forty years starting 1859.
With an eye to the modern cases, we set out to understand how the Court reckoned with repudiation. We read every one of the 196 cases in which the Justices opined on bond validity (i.e. the enforceability of a bond in the hands of innocent purchasers). In a recently published article, we correct received wisdom about the cases and remark on the logical structure of the Court’s reasoning.
To the extent the municipal bond cases are remembered, modern scholars usually think of them as exemplary instances of a political model of judging. The caricature has the Court siding with bondholders even when the law called on them to rule for the repudiating municipalities. The Justices—or a majority of them—are imagined as staunch political allies of the capitalist class, set against the institutions of state government and their regard for agricultural interests. We find that this picture is inconsistent with reality. In fact, the Court ruled for the repudiating municipality in a third of all the validity cases. As importantly, the Court’s decisions reflected a readily articulable formal logic, a logic the Justices seem, to our eyes, to have applied soundly.
Citation: Buccola, Allison and Buccola, Vincent S.J., The Municipal Bond Cases Revisited (September 25, 2020). 94 American Bankruptcy Law Journal 591 (2020), Available at SSRN: https://ssrn.com/abstract=3699633
Recent high-profile attempts to repudiate municipal bonds break from what had become a stable American norm of honoring public debt. In the nineteenth century, though, hundreds of cities, towns, and counties walked away from their bonds. The Supreme Court’s handling of repudiation in the so-called municipal bond cases conjured intense animus at the time. But the years as well as the archaic prose and sheer volume of the opinions have obscured the cases’ significance.
This article reconstructs the bond cases with an eye to modern disputes. It reports the results of our reading all 203 cases, decided 1859–1899, in which the Justices opined on bond validity. At a high level, our findings correct a stock narrative in the literature. The standard account paints the Court as a reliable champion of northeastern capitalists in what resembled regional or class politics more than law. That story does not withstand scrutiny, however. We find, for example, that the Court ruled for the repudiating municipality about a third of the time. Moreover, the decisions had a readily articulable logic at the heart of which lay a familiar law/fact distinction. Estoppel barred issuers in most instances from denying factual predicates of bond validity, but it did not prevent scrutiny of legal predicates. The Justices were willing to hold bonds void on even highly technical legal grounds.
Author(s): Allison Buccola (Independent) and Vince Buccola (Assistant Professor, The Wharton School)
Publication Date: 1 June 2021
Publication Site: Harvard Law School, Bankruptcy Roundtable
Restructuring Puerto Rico’s finances has involved complex disputes among bondholders invested in different types of Puerto Rico’s public debt. This section outlines the structure of the island’s public debts. Since Puerto Rico lost access to credit markets in late 2014, its current debt structure has been largely unchanged, aside from the runoff of short-term notes, the 2018 wind-down of the GDB, and the 2019 restructuring of sales-tax-backed COFINA bonds (COFINA—an acronym for the Corporación del Fondo de Interés Apremiante—is also known as the Puerto Rico Sales Tax Financing Corporation). Figure 2 and Table A-1 show debt levels as of the end of July 2016.
The Puerto Rico Oversight Board voted to overrule the territory’s House of Representatives on spending for the privatization of the Puerto Rico Electric Power Authority transmission and distribution system.
On Wednesday the House voted 43 to 0 with 2 abstentions against authorizing a revision to this year?s General Fund budget allocating $750 million for the privatization.
On Thursday the board said it had used its budgetary powers in the Puerto Rico, Oversight, Management, and Economic Stability Act to overrule the House vote. On Saturday the board had sent a letter to the leadership of the Puerto Rico House of Representatives and Senate asking them to approve the funding and saying that if it did not the board would act without their approval.
The board said the monetary allocation was ?to ensure the necessary levels of working capital to operate PREPA?s electrical grid and comply with the agreement between LUMA Energy, PREPA and the P3 Authority, by which LUMA is to assume the operation and management of PREPA?s transmission and distribution system on June 1.?
A federal control board created by Congress to address Puerto Rico’s debt on Monday filed a restructure plan that threatens a 10-percent cut to public pensions without any deal with retirees.
The board presented a 233-page plan that would reshuffle at least $35 billion in public debt and more than $50 billion in public pension liabilities, The Associated Press reported.
The proposal, which was filed in U.S. court, includes an up to 8.5 percent cut to monthly pensions of at least $1,500 to help the territory deal with the biggest U.S. municipal bankruptcy filing in history. The board said it received “substantial” support for the plan from creditors, specifically those who have more than $13 billion worth of bonds.
Puerto Rico Gov. Pedro Pierluisi reiterated his stance against the pension cuts outlined in the government’s Plan of Adjustment (POA), presented last night by the Financial Oversight and Management Board (FOMB) before the Title III Court.
“My administration has been emphatic that this cut to pensions is not reasonable and it is not necessary to confirm the Adjustment Plan, so we will leave it established in the confirmation process before the Title III Court,” Pierluisi said in written statements.
The POA is based on the agreements previously reached by FOMB with the Official Committee of Retirees (ORC) and other unions, for which it envisions a reduction of 8.5 percent in the pensions of government retirees who earn more than $1,500 per month, as stipulated by the past POA. This represents between 26 percent and 27 percent of all pensioners.
A framework that outlines how Puerto Rico will restructure at least $35 billion in public debt and more than $50 billion in public pension liabilities threatens a 10% cut to public pensions if no agreement is reached with retirees.
The amended plan of adjustment of 233 pages was filed late Monday in U.S. court by a federal control board that oversees Puerto Rico’s finances and was created by Congress to lift the U.S. territory’s government out of bankruptcy.
The plan includes a proposed cut of up to 8.5% to monthly pensions of at least $1,500. That has long been a point of contention between the board and the governor, who has repeatedly said he would not approve such cuts.
Puerto Rico would substantially reduce its core government debt load under a new deal announced on Tuesday, but obstacles remain for the U.S. territory’s exit from bankruptcy. The island’s federally created financial oversight board said its agreement with certain bondholders was a major step toward resolving the bankruptcy, which began in 2017 in an effort to restructure about $120 billion of debt and other liabilities, including unfunded pensions.
“I’m hopeful that people over time will understand this is likely to be the most fair and confirmable resolution to exit bankruptcy,” Natalie Jaresko, the board’s executive director, told reporters.
The deal will be included in a plan of adjustment the board expects to file in March in federal court, with the hope of court approval in the fall.
The impasse between the governor and a board that oversees Puerto Rico’s finances threatens to throw into limbo attempts to end a bankruptcy-like process for a government that six years ago declared unpayable its more than $70 billion public debt load.
The deal was reached with creditors who hold general obligation bonds and Public Building Authority bonds sold by Puerto Rico’s government and would resolve $35 billion worth of debt and non-debt claims, according to the board. It also would reduce debt held by those creditors from $18.8 billion to $7.4 billion, a 61 percent reduction, and would provide them with $7.4 billion in bonds and $7 billion in cash, among other things.
The board said the deal would free up more than $300 million a year for government services, and that instead of 30 cents for every dollar in taxes and fees that Puerto Rico’s government collects going to creditors, it would be less than 8 cents.
A settlement between creditors in Puerto Rico’s bankruptcy case lifted prices of the commonwealth’s municipal bonds and shares of insurance companies that guaranteed payments on the bonds.
Traders have driven up prices of the island’s benchmark $3.5 billion general obligation bond due 2035 by 3.3% to around 78 cents on the dollar after the Tuesday deal removed one of the last logjams in Puerto Rico’s nearly four-year journey through bankruptcy court. Roughly $400 million face amount of the bond changed hands Tuesday and Wednesday, making it one of the most actively traded securities in the municipal-bond market, according to data from Electronic Municipal Market Access.
Shares of the insurers that guaranteed payments on billions of dollars of Puerto Rico’s defaulted bonds also rose as the settlement removed some uncertainty about the amount of claims they would need to pay. MBIA Inc.’s stock has jumped around 13% this week, while Ambac Financial Group Inc.’s shares have gained about 7.2%.