An outline of federal legislation to help Puerto Rico got leaked yesterday. It’s linked here.
Before you laugh at me for seriously discussing a potential bill sponsored by Elizabeth Warren and Bernie Sanders, know this: Elizabeth Warren, despite what she has become, was a first rate-bankruptcy scholar. When I taught as an adjunct at the University of Texas Law School she was a full professor there. I read her stuff often. It was balanced, smart and showed none of the lefty stuff she’s now infamous for.
Forget about Title II in the summary, which is a cash bailout for Puerto Rico. Yes, Puerto Rico needs humanitarian help, but a cash bailout for Illinois or another broke state is a nonstarter. It won’t and shouldn’t happen.
But Title I is significant because it may be another step in the expanding discussion about bankruptcy-for-states. You’ll recall that Governor Rauner endorsed the concept in October, and went so far as to express hope that it would be tacked on to the recently passed federal tax overhaul. We wrote about that here.
Title I would single out unsecured “public” debt to be slashed to help Puerto Rico. That apparently means unsecured bonds. Secured debt unquestionably cannot be cut, constitutionally, because it is a property interest.
The muni bond community scoffed at the idea, as reported in a Bond Buyer article linked here. Even cutting unsecured bonds in this way is constitutionally dubious, as that article discusses. It seems to me that the only way it could be made constitutional is by bringing it under the federal bankruptcy power, which probably means all unsecured debt would have to be subject to cuts, not just bonds.
But Senator Warren surely knows that as well as anybody. That’s why it may be interesting to see how this plays out. Does she intend for the proposal to evolve into something broader, using the federal bankruptcy power?
Remember that one of the two primary ideas afoot in Washington about bankruptcy-for-states is the Manhattan Institute’s proposal that would single out pensions for cuts. We elaborated on that in our earlier article. It’s subject to one of the same problems as the Territorial Debt Relief Act: Why single out only certain creditors and would that be constitutional?
The bill may well never materialize or get traction. But if does, we should be hearing more on what Congress and legal scholars think about some issues that would pertain to bankruptcy-for-states. And if it or something similar ever passed we’d surely get court precedent.
–Mark Glennon is founder of Wirepoints. Opinions expressed are his own.