Legislation to place debt-swamped Puerto Rico on a path to fiscal sustainability sailed through the U.S. Senate with solid bipartisan support Wednesday.
President Obama is expected to sign the bill into law before Friday, when Puerto Rico was expected to default on $2 billion in debt payments.
The legislation — called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA — establishes a board to oversee the U.S. territory's finances, including an orderly debt restructuring process and annual budgeting.
Puerto Rico has more than $70 billion in traditional bond debt. It defaulted on debt payments multiple times — including a failure May 2 to pay hundreds of millions of dollars to financial creditors.
A borrowing binge, population loss, sky-high taxes and burdensome bureaucracy have conspired to plunge Puerto Rico into an economic crisis. A failure to pay secured debts due Friday likely would have spawned a legal brawl between major financial creditors and the U.S. territory's government.
“The alternative to this bill was to throw this into the courts, where creditors would be seeking protections of their individual interests even if orders to pay creditors meant leaving no funds to pay for schools, hospital and police and fire,” Treasury Secretary Jacob Lew said in an interview.
Leaders from both parties in the House and Senate backed the bill, which the Senate passed in a 68 to 30 vote Wednesday night after the measure passed a key procedural hurdle earlier in the day.
“I am pleased that the Senate has passed PROMESA, the result of months of work by the House," House Speaker Paul Ryan, R-Wisconsin, said in a released statement. "This bipartisan legislation addresses the fiscal crisis in Puerto Rico while protecting American taxpayers from a bailout of the territory."
Ryan added: "The legislation creates an oversight board that will institute the necessary reforms so Puerto Rico can begin to turn its economy around and get on a path to fiscal health. Congress has fulfilled our constitutional obligation and I urge President Obama to sign PROMESA immediately.”
“Puerto Rico currently spends over a third of its budget on debt payments alone," U.S. Sen. Majority Leader Mitch McConnell, R-Kentucky, said on the Senate floor. "By restructuring Puerto Rico’s financial debt and helping reform its operations, this bill will allow the territory to instead invest more of its resources in growing the economy and creating more opportunities for its residents."
Sen. Minority Leader Harry Reid, D-Nevada, backed the bill because of the "humanitarian disaster" facing Puerto Rico, in which funds are drying up for public safety, hospitals and schools.
But Reid said the bill is "far from perfect" because of provisions such as one allowing employers to pay first-time workers below minimum wage. He also criticized McConnell for not allowing votes on proposed amendments.
By establishing an oversight board for Puerto Rico, Congress followed a well-worn path in the world of municipal debt crises. Following New York's brush with insolvency in the 1970s and Detroit's bankruptcy in 2013, oversight boards were installed to monitor those cities' finances.
What’s unclear is how much debt Puerto Rico needs to shed. Gov. Alejandro Garcia Padilla, who backed the bill, told USA TODAY in December that the island needs $14 billion in savings through debt cuts and economic reforms.
“We wouldn’t have been pursuing this restructuring authority if we didn’t think it was essential to have a substantial restructuring to have a sustainable path forward,” Lew told USA TODAY on Wednesday.
To be sure, the island’s own political leaders are expected to implement sweeping budgetary reforms and policy measures to jolt the economy and encourage more people to join the workforce.
One particularly vexing issue is the Puerto Rico's massive pension deficit, fueled by the government’s failure to devote enough money to pay the promises it has made to its employees and retirees.
The bill requires the oversight board to ensure that Puerto Rico’s fiscal turnaround plan provides “adequate funding for public pension systems.”
One of the bill’s opponents, Sen. Chuck Grassley, R-Iowa, blasted the bill for enabling Puerto Rico’s irresponsible spending and for preserving pensions at the expense of cuts to bonds held by other retirees.
“I fear we’re simply pushing this problem down the road and have failed to address the root cause of Puerto Rico’s fiscal crisis at the expense of uncalled for risks and precedent,” Grassley said.
Congressional leaders and the president will each be authorized to appoint members of the oversight board, who will serve 3-year terms.
Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.
Nathan BomeySenate passes Puerto Rico financial rescue bill
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