Puerto Rico asked the U.S. Supreme Court on Tuesday for permission to restructure the debt of its financially struggling public utilities under a court-supervised regime similar to Chapter 9 bankruptcy laws used by U.S. cities such as Detroit and Stockton, California.
In addition to potentially giving the commonwealth a better chance at repaying some of its $70 billion debt, the case "tests, at a fundamental level, how much authority the island of more than 3.5 million people has to manage its own governmental affairs," Lyle Denniston wrote at SCOTUSblog last week.
"And lurking just beneath the surface," he continued, "is the broader question of whether it is unconstitutional to treat Puerto Rico differently than the fifty state governments on the mainland and in Alaska and Hawaii."
What's more, the case could chip away at hedge funds' stranglehold on the island. As journalist David Dayen wrote for the Winter 2016 issue of The American Prospect: "Puerto Rico is just the latest battlefield for a phalanx of hedge funds called 'vultures,' which pick at the withered sinews of troubled governments. In Greece, Argentina, Detroit, and now Puerto Rico, vultures have bought distressed debt on the cheap, and then used coercion, threats, and legal action to secure a massive windfall, compounding the effects on millions of citizens."
Reuters reports Tuesday:
Puerto Rico, which as a U.S. commonwealth is excluded from Chapter 9, passed the Recovery Act in 2014, a local restructuring law that lets it put public entities, such as power authority PREPA, into bankruptcy.
Two U.S. court decisions deemed the Recovery Act invalid after PREPA creditors sued, with the Supreme Court agreeing in December to hear an appeal.
Creditors say the act contradicts federal bankruptcy law, which prohibits states from making their own debt restructuring laws.
Puerto Rico argues that if it is exempt from Chapter 9, it must also be exempt from the limitation on states passing their own laws.
According to the Associated Press, "four liberal justices on a short-handed Supreme Court seemed sympathetic" to Puerto Rico's argument on Tuesday. Justice Samuel A. Alito, Jr. has recused himself from the case and the late Justice Antonin Scalia's seat remains vacant.
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Justice Sonia Sotomayor, whose parents moved to New York from Puerto Rico, emerged as the island’s strongest supporter.
Justice Ruth Bader Ginsburg also hinted she might back the commonwealth. She voiced doubt that Congress would have left Puerto Rico’s utilities unable to use either the federal bankruptcy system or a local restructuring law.
“Why would Congress put Puerto Rico in this never-never land?” Ginsburg asked.
If the outcome is favorable for Puerto Rico, "we'll have some additional tools to address some of the debt in an orderly way," said Eric LeCompte, a United Nations sovereign debt expert and executive director of the religious development group Jubilee USA, on Tuesday.
However, LeCompte added, "while this could be positive, it still doesn't offer a comprehensive solution" because it addresses only one portion of the island nation's ballooning financial obligations.
Jubilee USA has described the situation in Puerto Rico as a "humanitarian crisis" and opposes further austerity or cuts to help pay down the territory's debt. To that end, thousands of college students from the University of Puerto Rico approved a three-day, full-campus shutdown last week to protest recent austerity measures.
A solidarity protest against colonialism and capitalism took place Tuesday in New York City.
In testimony (pdf) to Congress last month, LeCompte appealed for lawmakers to support "reforms that ensure Puerto Rico's economy serves its people, debt restructuring to allows for economic growth, and accountability measures to stave off corruption."
Meanwhile, House Speaker Paul Ryan told reporters on Tuesday that the House Natural Resources Committee was "closing in" on a final Puerto Rico relief bill, according to The Hill. The committee is expected to hold a hearing on the draft legislation on April 13 with a markup the following day, according to a House Democratic leadership aide.