The Supreme Court said on Monday that Puerto Rico lacks the authority to restructure its municipal debt.
Justices ruled 5-2 that a law passed in 2014 by the territory is preempted by the federal bankruptcy code. The legislation had sought to modify debt held by the island’s municipal utilities—believed to be worth about $20 billion.
As Clarence Thomas noted in the majority opinion, Congress in 1984 specifically excluded Puerto Rico from the federal bankruptcy code.
The court said parts of the Puerto Rican law being challenged “mirror” Chapters 9 and 11 of those statutes. Rules under Chapter 9 allow US municipalities in actual states to declare bankruptcy, with the permission of a state government.
“The Code’s pre-emption provision has prohibited States and Territories defined as ‘States’ from enacting their own municipal bankruptcy schemes for 70 years,” Thomas wrote.
Dissenting, Justice Sonia Sotomayor wrote that Puerto Rico took “the only existing legal option…to restructure debts that could cripple its citizens.” She was joined in her opinion by Ruth Bader Ginsberg. Samuel Alito recused himself from the case.
“Congress could step in to resolve Puerto Rico’s crisis,” Sotomayor remarked. “But, in the interim, the government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation, and safe water—consequences that members of the Executive and Legislature have described as a looming ‘humanitarian crisis.’”
Puerto Rico currently has public debts totaling more than $72 billion, with another $43 billion in unfunded pension liabilities on top of that. Last month, it defaulted on $370 million in debt payments. The island’s government is scheduled to face another $1.9 billion payment on July 1.
Because of the exemption to the bankruptcy code cited by Thomas, Puerto Rico will also likely default on the payment due next month, unless Congress passes a law before then allowing the territory to restructure its debt.
The House of Representatives has for months been working on and fiercely debating legislation that would do just that. The proposal last week passed a full House vote 297-127. It is now waiting to be considered by the Senate.
There, it will likely face prominent opposition from at least one lawmaker. Echoing criticism delivered by many House Democrats, Sen. Bernie Sanders (I-Vt.) has decried the bill for its minimum wage exemptions and for its proposed establishment of an independent oversight board—one that would have direct control over the island’s fiscal outlays.
“We must never give an unelected control board the power to balance Puerto Rico’s budget on the backs of children, senior citizens, the sick and the most vulnerable people in Puerto Rico while giving the people of Puerto Rico absolutely no say at all in the process,” Sanders said last month.
Blooomberg noted last week that top Dems in the Senate, including Harry Reid (D-Nev.), Ron Wyden (D-Ore.), and Patrick Leahy (D-Vt.) have expressed skepticism of the deal. Reid is the Senate Minority Leader, Wyden and Leahy are the top Democrats on the Senate finance and judiciary committees.
“I want to make sure it’s actually helpful to Puerto Rico and not a payoff to speculators,” Leahy remarked.
Sen. Bob Menendez (D-N.J.) has also leveled criticism at the legislation, saying: “I hope we can get to a better place.” Dick Durbin (D-Ill.), the Senate Minority Whip, conceded that he doesn’t “like this bill, but I may not have any alternatives.”
