WASHINGTON -- If Congress doesn’t give Puerto Rico the power to restructure its stifling $73 billion in debt soon, a default could trigger a humanitarian crisis on the island, two Senate Democrats warned on Wednesday.
The 3.5 million American citizens who call Puerto Rico home could see a complete shutdown of their government, said Sen. Chuck Schumer (D-N.Y.).
"The fact of the matter is the $73 billion in debt that Puerto Rico can’t resolve could lead to a humanitarian crisis unlike any Puerto Rico has ever seen," Schumer told reporters. "We are talking about the potential loss of critical public services, schools shutting their doors, ultimately the shutting down of government across the island."
The answer, Schumer said, is to give Puerto Rican municipalities the ability to file for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code -- an option already open to cities and counties in all 50 states.
On Wednesday, he and Sen. Richard Blumenthal (D-Conn.) introduced legislation that would allow the island's municipalities and state-owned corporations to restructure their debt under Chapter 9.
Puerto Rico Gov. Alejandro Garcia Padilla quickly praised the bill, urging Congress to “propel” it to passage.
"Action by Congress on Chapter 9 is necessary so that together we can solve this crisis," Garcia Padilla said in an emailed statement. "Chapter 9 is an option that all states have at their disposal for their municipalities and public corporations and there is no reason why Puerto Rico, its creditors and its citizens should not be afforded the same protections."
Puerto Rico was able to make a July 1 payment on its debt, but still owes billions of dollars by Jan. 1. The total includes $9 billion owed by the island’s public utility, PREPA, and an array of mutual bond debts.
"Failure to pay that debt without an orderly workout would in effect begin a cascading series of chaos, and litigation would ensue all around the U.S., maybe around the world, in courts throughout the states here on the mainland, as well as in Puerto Rico," Blumenthal warned. "Seventy percent of Puerto Rican debt is owned by people who live on the mainland. ... The litigation costs alone would be substantial."
The cause of this looming disaster, Blumenthal admitted, likely rests with Congress.
The domino effect started when Congress granted corporate tax breaks for setting up shop in Puerto Rico and made the island’s municipal bonds "triple tax-exempt" -- that means bondholders don’t have to pay federal, state or local taxes on them. Backed by those benefits, Puerto Rican officials chose to invest money to further lure businesses to the island.
But in 1996, Congress decided to phase out the corporate tax breaks -- which cost the U.S. government a lot in lost revenue -- in order to help balance the U.S. budget, hurdling Puerto Rico into the current crisis. There is now $15 billion in Puerto Rican debt owned by hedge funds and about $11 billion held by mutual bond funds. Individuals own the rest.
"Congress really enabled, and perhaps encouraged, a lot of the debt that is now burdening Puerto Rico so heavily through the tax incentives that allowed businesses to move there and then move away," Blumenthal said. For that reasons, he said, Congress "has a responsibility" to make sure Puerto Rico resolves its debt.
The two Democrats said they are working to gather more support for their legislation, which serves as a companion bill to one proposed by Puerto Rico’s non-voting House member, Rep. Pedro Pierluisi. Schumer said they have talked to a number of Republican colleagues, including Sen. Marco Rubio (Fla.).
"Florida has a large [Puerto Rican] population, which might interest a few of the Republicans in the Senate right now," Schumer said.
So far, at least seven other Senate Democrats have signed on to the bill, including Senate Minority Leader Harry Reid (D-Nev.). But the bill sponsors are hoping they can get some Republicans, too, and sooner rather than later.
"Time is not on our side," said Blumenthal. "The longer uncertainty persists, the more unstable the result."
After the bill's release, a Treasury Department spokesman said the administration was "very pleased" about the proposal.
"Last week, a Federal appeals court reaffirmed that only Congress may provide bankruptcy protection for Puerto Rico's municipalities and public corporations," the Treasury spokesman said in an email. "Congress should quickly advance legislation that would provide such a process for Puerto Rico," he said.
This story has been updated with comment from the Treasury Department.