What the Left Gets Wrong about PROMESA
History is already being re-written about the 2016 law.
PROMESA, or the Puerto Rico Oversight, Management, and Economic Stabilization Act is 2016 legislation that continues to be highly controversial in Puerto Rican politics and policy discussions. Facing insolvency and the inability to pay its debts, and lacking a legal mechanism to restructure them, Congress passed PROMESA on a bipartisan basis. It had the support of Puerto Rico’s then Resident Commissioner1 Pedro Pierluisi, and of prominent Puerto Rican members of Congress such as Nydia Velazquez. It was then signed by President Obama. However, almost immediately, history began to be rewritten. This essay seeks to set the record straight on what PROMESA actually does, why it was passed, and what it has accomplished.
The Passage of PROMESA
After years of unsustainable borrowing and overly optimistic budget projections, Puerto Rico entered a fiscal crisis in 2015. The island and its instrumentalities had accrued 72 billion in debt in the form of various types of securities. In comparison, the value of the entire island economy was at the time roughly 70 billion dollars annually. On June 28th of that year, then Governor Alejandro Garcia declared Puerto Rico’s debts “unpayable.” On May 1st 2016, Puerto Rico unilaterally suspended debt service payments. On June 9th 2016, Congress passed the Puerto Rico Oversight Management and Economic Stabilization Act (PROMESA) which among other things, 1) Provided a legal mechanism by which Puerto Rico could suspend debt payments and enter a bankruptcy process. 2) By virtue of (1) shielded Puerto Rico from litigation stemming from non-payment 3) Established an oversight board to approve Puerto RIco’s annual budget and negotiate on its behalf with creditors.
The last of these provisions is by far the most controversial, but before diving into the now infamous board, it is crucial to examine the legislative history of PROMESA. PROMESA was passed on a broad bipartisan basis and after extensive lobbying efforts by elected officials from Puerto Rico who were members of both major island political parties. These officials included both the Governor and the Resident Commissioner, the island’s non-voting member of the House of Representatives. Both men are members of different political parties and represent opposing sectors of the Puerto Rican electorate. Therefore, broad consensus existed both in Congress and among Puerto Rico’s elected officials that a bill along the lines of PROMESA needed to be passed.
The Original Opposition to PROMESA
Opposition to the bill came from two places. First, conservative Republicans opposed any legislation that would allow the Puerto Rican government to discharge debt via bankruptcy. This was exactly the reasoning of Jenniffer Gonzalez, then president of the Puerto Rico Senate and now Governor when she voiced her opposition to the bill in an OP ED. Although mainland party affiliations and right/left divides are not important in Puerto Rican party politics, Gonzalez is a Republican, is deeply economically conservative in her personal capacity and caucused with Republicans in Congress when she was Resident Commissioner from 2016 to 2024.
Opposition also came from the progressive wing of the Democratic party who favored direct cash transfers to the Puerto Rican government in order to avoid cuts to government spending at the local level. A direct cash bailout for Puerto Rico, while perhaps desirable given the economic chaos on the island, was a non-starter for the Republican controlled Congress at the time. Thus a bipartisan, centrist compromise emerged which was ultimately passed by Congress and signed into law by President Obama.
The Rewriting of History
Since 2016, many have tried to rewrite the legislative history of PROMESA. A highly vocal revisionist school has emerged, claiming that PROMESA was extremist, anti-Puerto Rico legislation passed over the voices of Puerto Ricans. This school also claims that the central purpose of PROMESA was to protect Puerto Rico’s creditors rather than to provide a mechanism for Puerto Rico to seek bankruptcy protection and debt restructuring. But this is convincingly disproven by both the lobbying activity of Puerto Rican elected officials from both major parties, and by the votes of Members of Congress themselves. Indeed, the most extreme pro-creditor position, that Puerto Rico ought not to be able to discharge any of its debt, came not from the bill’s proponents but from its detractors. Indeed, of the 127 “no” votes, there were 24 progressive Democrats and 103 pro-creditor Republicans.
Others contend that the ability of the oversight board to veto local laws is rank colonialism. This claim ignores key context. In practice, virtually all of the laws vetoed by the board have been cases where the government passed laws which spent money without raising equivalent revenue. While it some may contend that enforced budget discipline is paternalistic colonialism at its worse, the reality is that Puerto Rico lacked and lacks access to willing lenders to finance deficit spending AND such spending would run afoul of the procedure of federal bankruptcy courts. Allowing debtors to incur more debt while the resolution of existing claims of previous creditors are still being negotiated would create chaos and it is thus no surprise that bankruptcy courts prohibit it. In sum, the power the board exercised over Puerto Rico’s budget is largely redundant to what any bankruptcy court would have exercised, and necessarily so to ensure an orderly restructuring of Puerto Rico’s debts.
Finally, the authority the board has over Puerto Rico’s laws is not unlimited nor is it without precedent. PROMESA states in section 108, article A, that:
[Puerto Rico may not ] enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.
Which means that Puerto Rico is largely prohibited from passing legislation that would sabotage the restructuring process. This preemption of local law is not without precedent. In fact, section 1123 of the Federal Bankruptcy code states that bankruptcy courts can:
specify the treatment of any class of claims or interests that is impaired
provide adequate means for the implementation [of the restructuring of those claims]
And crucially do so:
Notwithstanding any otherwise applicable nonbankruptcy law
While US States currently do not have access to bankruptcy, it would simply be unfathomable for Congress to create any form of bankruptcy for states which did not include similar language. To do so would allow states to rewrite the rules immediately before entering bankruptcy, most likely by elevating claims of politically favored creditors, or to evade creditors altogether by simply passing budgets which did not appropriate funds to make payments toward the final plan of adjustment ratified by the bankruptcy court. That is, “provide adequate means” entails that the bankruptcy court could order the bankrupt state not to enact budgets which renders the final plan of adjustment of its debts financially nonviable, and crucially, the court can do so even over the objections of the elected government of the state. That said, neither the board or bankruptcy courts can veto laws which don’t affect the restructuring process or its financial viability. Again, their powers are not without limit.
None of this is to say that bankruptcies are not anti-democratic in nature when the debtor is a polity. However, the anti-democratic nature of public bankruptcies is a feature and not a bug. Bankruptcy courts have to examine the legal validity of claims against the debtor, and weigh fundamental rights of property against economic and financial realities. Such a task is wisely put in the hands of courts, not of elected officials. Such was the case in Puerto Rico, and it is not speculative to say that it would almost certainly be the case if a state were to be given access to bankruptcy.
The Results
But what did/has PROMESA accomplished? Before PROMESA was passed, roughly one fourth of Puerto Rico’s annual budget, or 4 billion dollars, was dedicated solely to debt service payments. For a brief time, Puerto Rico was able to cover these payments with even more borrowing, but in the years leading up to the crisis, the government inevitably had to cut back on essential services to keep its head above water. This dynamic was exacerbated by the Great Recession, which hit the island particularly hard. By initiating a bankruptcy process to restructure Puerto Rico’s debts, PROMESA allowed Puerto Rico to legally halt debt services payments while the bankruptcy case was being litigated. Since the final agreement was not ratified until 2022, Puerto Rico was able to legally evade its creditors for nearly six years! Contrary to popular the belief, most of the savings went back into essential services like schools, police, and salaries for chronically underpaid public employees.
When an agreement was finally reached with Puerto Rico’s creditors in 2022, roughly half of Puerto Rico’s 72 billion dollars in debt was erased, and crucially, debt service payments were capped a roughly one billion dollars a year to prevent them from crowding out essential services in the government’s budget. There is no way to spin it. This is a massive win for Puerto Rico and massive loss for bondholders.
PROMESA’s unfinished business continues to be the restructuring of roughly nine billion dollars of debt tied to Puerto Rico’s public power company, known as PREPA. Creditors have continued to resist a consensual agreement like the one reached with the government itself. However, the benefit of endless delay has largely accrued to Puerto Rico’s ratepayers, who would need to pay substantially more for electricity in PREPA still needed to service legacy debt. Just like the government’s debt, any payments to bondholders remain frozen until a final agreement is reached.
Conclusion
PROMESA was a bipartisan compromise to address Puerto Rico’s debt crisis. It is wrong to label the law as anti-democratic. The board’s powers are limited to budget matters. And more importantly, litigation to which the government is a party is inherently anti-democratic by design, because fundamental issues of law and rights must be adjudicated. It would be absurd to allow the government’s elected officials to simply pick and choose which debts to pay. That would make a mockery of property rights. But biggest indicator of PROMESA’s success is the results. Pensioners did not see a dime cut from their benefits, half of the island’s debt was wiped out, public services were maintained or in some cases expanded, and debt service payments are capped below a manageable level. Let’s not rewrite history. PROMESA worked.
Puerto Rico’s non-voting member of Congress