STUMP » Articles » More Puerto Rico: Round Up of Current Commentary and Followups » 4 May 2017, 22:24

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More Puerto Rico: Round Up of Current Commentary and Followups  


4 May 2017, 22:24

First, this is not normal bankruptcy proceedings.

The Chief Justice of the Supreme Court will be involved:

Puerto Rico’s bankruptcy fate is now up to Chief Justice John Roberts

A little-noticed provision in a bill signed into law in 2016 places the fate of Puerto Rico in the hands of the Supreme Court’s chief justice.

After Puerto Rico filed for the equivalent of bankruptcy protection Wednesday, the immediate question was which judge would be appointed to oversee the case.

Turns out that’s up to Chief Justice John Roberts.

The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) signed by President Obama gives Roberts the power to appoint a District Court judge to oversee the bankruptcy-like case involving a U.S. territory.

That was a “jarring break” from traditional municipal bankruptcies, which are overseen by bankruptcy judges, said Melissa Jacoby, a University of North Carolina law professor, in a recent paper studying the topic.

One significant difference is that District Court judges, unlike bankruptcy judges, are political appointees.

….The fierce legal battle that’s about to ensue will involve a fight over which creditors deserve to be paid the most.

That may ultimately require the judge in control of the case to make tough decisions, distinguish between creditors, referee disputes with little legal precedent and possibly decide whether retirees will endure cuts to their pensions and health care.

Previous municipal bankruptcies have demonstrated that judges exert considerable influence over the outcome, even though the law prevents them from ordering municipal debtors to sell assets or spend money in a certain way, Jacoby said.

Puerto Rico’s case could even result in a debt-cutting plan implemented over the objection of creditors, known legally as a “cram down,” Jacoby said. The judge would decide whether that’s fair.

So that should be fun.


First up: Mish points out the parallel:

Puerto Rico Placed in Bankruptcy Protection: Illinois Needs Similar Deal

There is no provision for state bankruptcies under Chapter 9 law.

Instead, the governor of Puerto Rico, Ricardo Rosselló, petitioned for relief under Title III of a new federal law for insolvent territorial governments, called Promesa.

States like Illinois sure could use a similar deal.

Exactly What Illinois Needs

The Chicago public school system is bankrupt in all but name. So are Illinois pension plans in general, and so are numerous cities that cannot repair their books because Illinois is a state that does not allow municipal bankruptcies.

Instead, public unions and public pensions demand higher and higher taxes which does nothing but drive businesses and individuals who are able to move out of the state.

Still No Budget

Illinois is the only state in the union to have gone more than a year without a full operating budget.

In July, Illinois will hit two full years.That’s how long this game of chicken between House Speaker Michael Madigan and Governor Bruce Rauner has gone on.

GARS Only 13.52% Funded

In March, I reported Illinois General Assembly Retirement System Only 13.52% Funded

Oh Mish, jeez.

You should know better than point to GARS. Here is an old post I did on GARS, but the main thing is this number:

232 Total Membership

That was in 2015, but I doubt it ballooned from 232 to ~400K like the teachers plan or the municipal plan.

More to the point, most of the GARS people have credit in one of the other Illinois pensions (and end there), so they never ultimately draw on GARS. Because all these people are career government officials.

Tsk tsk, Mish. Bringing up GARS when there are so many more deserving funds in Illinois.

Back to Mish:

Illinois has accrued a combined net pension liability of roughly $130 billion on which it assumes a 7% return. Effectively, that is an interest liability of $9.1 billion a year even though that liability technically does not bear interest.

Required Pension Contributions to Double or Triple

Inquiring minds will also wish to consider Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely.

The same fate or worse faces Illinois.

Illinois is in a worse place because some of those pension funds (=cough= MEABF =cough=) are going to run out of cash, because they’re not going to ever be able to cover the “required” contributions.

Another Illinois player: Mark Glennon comments on the parallels between Puerto Rico and Illinois

Aside from the humanitarian crisis now gripping Puerto Rico, a personal account of which is below, the major significance of its bankruptcy will be whether it sets some form of precedent for Illinois, Chicago and other broke governments. Technically, Puerto Rico isn’t in a bankruptcy proceeding. Instead, it’s in a very similar proceeding under PROMESA, the law passed last year by Congress to specifically address Puerto Rico. Wall Street will watch “closely to see how other indebted municipal governments, including Chicago and Illinois, may fare in confrontations with investors,” as one report put it.

In other words, Congress could similarly act to create a specialized form of insolvency proceeding for troubled states like Illinois, whether under the Bankruptcy Code or not. For now, states are not authorized to file bankruptcy. Congress could also create a more specialized proceeding for very large cities like Chicago.

Particularly interesting to watch will be the performance of the seven-member oversight board created by PROMESA that now will have a dominant role in shaping a reorganization plan for Puerto Rico. That’s key because real control has to be taken away from the incumbent politicians who otherwise have authority to act on behalf of the government. Michigan overcame that problem with the Detroit bankruptcy by giving broad authority to an emergency manager.

While Puerto Rico indeed may set precedent, make no mistake that its very different from Illinois. A humanitarian collapse indeed is underway on the island. For that, I’ll add some direct observations by Jack Skagerberg, an old friend from Chicago’s south suburbs who went on to a big career in reorganizations and bankruptcies of all sorts. His wife is Puerto Rican and they have a home there.

On the face of the numbers, Illinois might not seem terribly far behind Puerto Rico. The island has debts of about $70 billion plus unfunded pension liabilities of another $40 billion. That’s about $34,000 per person. Illinois’ per person debts are about $18,000 per person if you include bonds, unfunded pensions, retiree healthcare and our bill backlog.

But Puerto Rico has lost almost all its ability to deal with its debt, Jack says. “Nothing is manufactured here since tax subsidies for pharmaceutical production ended some years ago. Tourism has collapsed. Sales and income taxes have skyrocketed so everybody wants cash payments to avoid paying. There’s a 20-year supply of condominiums for sale. There’s little farming because of poor soil — only tree-grown products are produced domestically.”

That’s not Illinois. Puerto Rico’s population loss of 1.6 million is particularly striking and makes Illinois’ loss of 37 thousand seem trivial.

No, Illinois isn’t Puerto Rico. Nor is Chicago. But Stockton and San Bernadino, California weren’t either. Not being Puerto Rico doesn’t mean you can’t run out of money. And it doesn’t mean Puerto Rico won’t frame the debate about how to resolve government fiscal crises.

Yes, money can run out. Pretending that some magic money tree will sprout and start paying off past overspending and over-promising is not a strategy for public fiscal stability.


Via Cate Long, I get this lovely document.

Let me excerpt the filing:


APPEARS NOW Plaintiff, ASOCIACIÓN PUERTORRIQUEÑA DE LA JUDICATURA, INC. (hereinafter “APJ”), through the undersigned attorneys, and hereby states, alleges and respectfully requests as follows in support of the issuance of declaratory relief:

In a republican form of government, the Judicial Branch must be independent, and all attacks on that independence – the boisterous, the subtle and the inane – must be vigorously opposed. The recent directive by the Oversight Board (“OB”) instituted by PROMESA for the Puerto Rico territory to cut the pensions of sitting and retired judges in Puerto Rico is such a frontal attack on judicial independence. For centuries, both federal and state case law have confirmed that such actions violate the essential element of judicial independence attributed to the Judiciary by the United States Constitution itself, as postulated by the Nation’s Founding Fathers. This cannot be seriously questioned.

Oh, I can seriously question something. Because it’s something I’ve pointed out before.

How the hell can judges, public employees with public pensions, adjudicate on any adjustments to their benefits without a clear conflict of interest?

I’m tired, so let me quote myself:

I do agree that the motives of some in the public pension debate are questionable — specifically, all politicians. I saw someone recently recommending that elected officials not get pensions at all which I fully agree with.

I’d include judges. Mainly because they’re the ones who keep having to rule on the constitutionality of pension changes. If they have these pensions, too, then they may think that their own pensions will be next on the chopping block. Yes, I know, conflict of interest, but it’s not like they can draft any judges from other states to rule on a different state’s constitution.

Great work, judges. Great work pointing out you guys have an unresolveable conflict of interest. All of y’all need to recuse yourselves on all the public finances, because your salaries and benefits are dependent on those rulings.

Oh here is how they address that:

While arguably in a different context, James Madison stated the obvious in Federalist Paper No. 10: “No man is allowed to judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” 6

Armed with the unassailable positions of Hamilton and Madison that the judiciary should be a separate and co-equal branch of government, truly independent from the others, the U.S. Constitution included what has come to be known as the “No-Diminution Clause.” 7 As explained in multiple cases, this Clause’s proscription applies regardless of the motives of the Legislature or Executive, thus avoiding suspicion between the branches. 8 “The Clause places judge’s remuneration, once established, beyond the power of the other two branches to diminish. This guarantees that the judicial power will not be exercised for the purpose of seeking favor or avoiding retribution from the other branches.” 9


Oh you were serious.

Well, good luck with that. Funny how judges can’t just proclaim money into being.

You guys are screwed, judges or no.

I’m obviously not a lawyer. But I do know that the law is a ass (to quote Dickens… or rather Bumble in Dickens), and the law can redistribute resources between parties… but cannot call new resources into being.

That’s reality.

You can issue all the PDFs you want, but it won’t change the essential revenue problem of Puerto Rico.

Compilation of Puerto Rico posts

The State of the States: a Compilation

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