Representative Sean Duffy introduced Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA—which means promise in Spanish; H.R. 5278) on May 18, 2016, which is a revised version of H.R. 4900, which Representative Duffy had introduced on April 12, 2016. The House Natural Resources Committee held a hearing on the bill's provisions and Puerto Rico's fiscal condition on May 19, 2016. The committee marked up H.R. 5278 on May 25, 2016, and agreed to amendments including those making technical corrections and extending the focus of certain studies on the Puerto Rico government, among others. Other amendments that would have altered debt restructuring processes were not agreed to. The committee approved H.R. 5278 on a 29-10 vote, with one abstention.

PROMESA would establish an Oversight Board that would exercise federal oversight over the fiscal affairs of Puerto Rico. Other territories, through normal political processes, could also request the establishment of a board. PROMESA also would create processes for adjusting debts accumulated by the Puerto Rican government and its subunits. Finally, PROMESA would expedite approvals of key energy projects and other "critical projects." Provisions of H.R. 5278 mostly resemble those of H.R. 4900, although the appointments process was modified, debt adjustment processes were altered in some ways, new studies were commissioned, and an option to transfer parts of Vieques Island was dropped, among other changes.

Oversight Board

Title I of PROMESA would set up a Financial Management and Oversight Board with broad fiscal oversight powers. The President would appoint six members from lists provided by congressional leaders along with one member appointed in his sole discretion. The governor of the territory would serve as an additional, but nonvoting, ex officio member of the board. Title II charges the Oversight Board with powers to approve or develop a fiscal plan, as well as to approve public sector budgets. Separate fiscal plans and budgets could also be developed for public corporations. The Oversight Board resembles the District of Columbia Financial Responsibility and Management Assistance Authority, more commonly known as the DC Control Board, which was set up by the District of Columbia Financial Responsibility and Management Assistance Act of 1995. The PROMESA Oversight Board, however, differs from the DC Control Board in many important aspects.

Adjustment of Debts

Title III of PROMESA sets up a process for adjustment of debts by a territorial government or an instrumentality, such as a public corporation or a municipal government. Eligibility for the restructuring process would require approval of at least five of the seven voting members of the Oversight Board to issue a "restructuring certificate." The Oversight Board, if it so chose, would file petitions to restructure debt on behalf of a territory government or instrumentality. Title VI creates a voluntary process for creditor collective actions, which resemble collective actions clauses (CACs) commonly used in sovereign debt contracts. CACs typically allow some subset of creditors holding a supermajority of the face value of a given debt category to enter into agreements that would bind remaining creditors within that category. Remaining creditors under PROMESA, however, would retain certain rights.

Other Provisions in H.R. 5278

Title IV of PROMESA includes several diverse provisions, including an affirmation of Puerto Rico's right to determine its future political status (Section 402) and an option for the governor to set a reduced minimum wage for most workers in Puerto Rico under the age of 25 for a four-year period (Section 403). Title IV would also put a stay on litigation (Section 405). A provision to allow a transfer of certain federally controlled parts of Vieques Island included in H.R. 4900 was omitted in H.R. 5278. Title V would accelerate processes for the review and permitting of infrastructure projects designated as "Critical Projects." A previous Puerto Rico governor invoked similar authorities in 2010 and 2011. Some contend that Puerto Rico has had difficulty in completing major infrastructure projects in the past. Others argued that environmental consequences of those projects were not evaluated with sufficient care.

Puerto Rican Government Declares Fiscal Emergency

Calls for congressional action have become more urgent as the capacity of Puerto Rico's public sector to meet its financial obligations weakens. In August 2015, Puerto Rico defaulted on debt service payments for "moral obligation" bonds issued by the Public Finance Corporation, an arm of the island's Government Development Bank (GDB), which has been the island government's fiscal agent. On May 1, 2016, Governor García Padilla declared a moratorium on certain debt payments, including debt service the GDB was due to pay the next day. Governor García Padilla stated that, "faced with the inability to meet the demands of our creditors and the needs of our people ... I decided that essential services for the 3.5 million American citizens in Puerto Rico came first." Whether the island government can pay $1.9 billion in debt service due on July 1, 2016, remains in doubt. The ratings agency Standard & Poors indicated that it considered government default as "virtually certain."

Figure 1. GDB and PRIFA Bond Prices Since 2011 (Par=100)

Source: Electronic Municipal Market Access, Municipal Securities Rulemaking Board.

Notes: GDB bond has CUSIP 745177FF7. PRIFA bond has CUSIP 745220EJ8. First vertical line indicates appearance of Barron's article (August 20, 2013); second vertical line at enactment of Act 71 (July 28, 2014). Third vertical line is at June 29, 2015, when Governor García Padilla stated that "the debt is not payable." Last vertical line is April 6, 2016, when Puerto Rico enacted a fiscal emergency measure (Act 21 of 2016).