Just one day before the July 1 deadline for an expected major default by the Government of Puerto Rico, President Barack Obama signed into law the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), a sweeping new law designed to bring stability to the Puerto Rican economy and establish oversight of the Island’s budget and fiscal policies for at least the next five years.
PROMESA is by almost any standard the broadest economic rescue package ever enacted by Congress for any American jurisdiction and will affect virtually every contract, transaction, and governmental decision in Puerto Rico for the foreseeable future.
The key aspects of PROMESA are as follows:
Automatic stay upon enactment.Starting immediately upon enactment, PROMESA imposes an automatic stay on all litigation against Puerto Rico and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the government. This stay, which is unique in its breath and scope, will remain in effect until February 15, 2017 and can be extended for an additional 75 days by the Oversight Board that PROMESA creates to oversee the Puerto Rican economy, or for 60 days by the US District Court for Puerto Rico.
The intent behind the stay is to block a rush by creditors to sue the Government of Puerto Rico while the Oversight Board comes into being and gains a fuller understanding of the scope of the Island’s debt and the structures needed to address it. The intent is not to discharge the Government of Puerto Rico from its obligations under the stay, but to provide a better mechanism for the management of its debt.
Oversight board.The President shall select the seven-member Oversight Board from lists presented to him by the Speaker of the House and the majority and minority leaders of the senate, as well as by the minority leader of the House of Representatives. The Governor of Puerto Rico will be designated an ex-officio member without voting rights. It is expected that the selection of the Oversight Board will be completed by the end of August. The Board will hire an executive director and staff.
Virtually every fiscal decision by the Government of Puerto Rico will be made or approved by the Oversight Board. While the Governor will work with the Oversight Board to develop fiscal plans for the Island’s recovery, the Board may impose its own plans if it concludes that the Governor’s plan is unacceptable. The Board also has the power to approve restructuring agreements with creditors, file petitions for restructuring, set up a more efficient electronic system for the collection of taxes, and enforce existing laws to prevent strikes by public employees. The Board has subpoena powers and access to the courts to enforce its actions.
The Board also will have ultimate authority with respect to the preparation of Puerto Rico’s budgets and the issuance of future debt by the Government of Puerto Rico and its instrumentalities, and may intervene in any litigation filed against the government.
In effect, while it is in existence, the Board will control the fiscal future of the Government of Puerto Rico, the restructuring of its debt, the relationship between Puerto Rico and its creditors, and the potential enactment of local measures to grow the economy.
Adjustment of debts.Because the Government of Puerto Rico could not avail itself of federal bankruptcy protection and the Supreme Court ruled that Puerto Rico does not have the authority to enact its own bankruptcy law, Congress in PROMESA set up a system to allow the adjustment of the Government of Puerto Rico’s debts using concepts from the federal bankruptcy code. The Oversight Board will have the primary role in applying these rules and proposing restructuring agreements.
Economic recovery measures. Congress concluded that these measures are needed to bring stability to Puerto Rico’s economy and to reopen the credit window for future government debt. Congress also created a Task Force to propose growth measures, possibly in the form of changes to the US Internal Revenue Code, that will help the economy grow by attracting greater investment, jobs, and a more robust flow of revenue to the Island. The Task Force will report to Congress on the most urgently needed of these measures by mid-September.