Resident Commissioner Pedro Pierluisi’s bill H.R. 870 would empower the government of the U.S. territory of Puerto Rico to authorize one or more of its municipal governments or government-owned corporations to have their debts restructured under Chapter 9 of the federal bankruptcy code if they become insolvent, as all state governments are already empowered to do under current federal law.

Because Chapter 9 currently is not applicable to Puerto Rico, the Commonwealth government attempted to construct its own law for dealing with its fiscal problems, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act for use by the Puerto Rico Electric Power Authority (PREPA) and a number of other public corporations.   The Recovery Act was viewed very negatively by the United States municipal bond market as being unfair to bondholders, and some bondholders sued, alleging the Recovery Act was “preempted by Section 903 of the federal bankruptcy code and therefore void pursuant to the supremacy clause of the United States Constitution.”   The United States District Court for the District of Puerto Rico agreed and held the law unconstitutional.

H.R. 870 is designed to provide a last resort solution for municipalities in Puerto Rico, assuming Puerto Rico authorizes its municipalities to file for bankruptcy.   The bill has a narrow, simple and straightforward purpose:   to permit Puerto Rico to authorize its municipalities to file for Chapter 9 as needed in the same way that the States are authorized.

History has shown that economies in financial distress at the local, state, or national level need a recovery plan that stimulates economic activity and improves appeal to investors in order to move once again toward prosperity.  H.R. 870 provides the American citizens of Puerto Rico with access to the beginning of such a recovery plan by offering a way to restructure the debt of PREPA and any other government corporation or struggling municipality in which United States bondholders are invested.