By David Skeel (University of Pennsylvania Carey Law School)
This summer marked the tenth anniversary of the Puerto Rico Oversight, Management, and Economic Stability Act—PROMESA, or “promise”—Congress’s response to the Puerto Rico’s dire economic crisis. Enacted on June 30, 2016, almost exactly a year after Puerto Rico’s governor had declared the island’s debts “not payable,” PROMESA created a seven-person oversight board and set the stage for the biggest governmental debt restructuring in American history.
Before PROMESA, Puerto Rico didn’t have any bankruptcy option at all, either for the Commonwealth itself or for its municipalities or government corporations. States can’t file for bankruptcy, so it’s not surprising that the Commonwealth of Puerto Rico—a U.S. territory since 1898— couldn’t either. But for reasons no one can explain, Congress took away Puerto Rico’s and Washington, DC’s access to Chapter 9, the code’s municipal bankruptcy provisions, in 1984. Title III of PROMESA plugged the hole, providing a bankruptcy framework that covered both the Commonwealth and its municipalities and government corporations, and giving the oversight board the power to represent the debtors in bankruptcy.
When Senator Mitch McConnell nominated me for the board, he warned me that we would be hated by Puerto Ricans, and we were, especially by advocates of independence for the island who chafed at our efforts to restore fiscal responsibility. “Wanted” posters with my name and picture on them appeared all over the campus where I teach in 2018, and our public meetings were repeatedly greeted with protests. Bondholders didn’t like the board either, once they realized that we believed the island’s debt needed to be significantly restructured.
The Commonwealth bankruptcy—which restructured $35 billion of the island’s $74 billion of debt and shored up its radically underfunded pension system—took five years. It was a wild, wild ride, punctuated both by natural disasters such as Hurricane Maria in 2017, earthquakes in 2020, and the COVID-19 Pandemic in 2020; and by human obstacles such as creditors’ attempt to have the board members’ appointments declared unconstitutional and by the exploits of a rogue board member. The debt of eleven other governmental entities also has been restructured, with one—the electricity company—still to go.
The Puerto Rico debt crisis isn’t just about Puerto Rico; it’s also about America. The Puerto Rico crisis is a case study of how governments like Chicago or Illinois or even the U.S. become dysfunctional, what the options are when they do, and how well an option like state bankruptcy might work.
I tell the story from my perspective as a key participant in a new book called Promise Land: The Inside Story of the Puerto Rico Debt Crisis. The book is intended to be fun to read, like Caesars Palace Coup, or The Smartest Guys in the Room, Bethany McLean’s book about the Enron scandal.
You can pick up your copy here: https://www.pauldrybooks.com/products/promise-land-the-inside-story-of-the-puerto-rico-debt-crisis
Editor’s Note: This will be the last post of the BRT for the summer. We look forward to resuming posts in September. We thank our readers for their continued support and engagement, and look forward to featuring more great work in the fall.