Sitting in the U.S. Senate is a Puerto Rico rescue bill that would allow the territory to restructure its debts, and to cease making payments to its bondholders for now.
Details are still vague; but if the bill passes, does it mean anything for pensioners living in distressed states like Illinois?
Ike Brannon of the Cato Institute, writing in the Hill, thinks it might:
Right now, states cannot declare bankruptcy, which is one reason why states have traditionally been able to borrow at such low rates of interest. However, financial markets have come to realize, belatedly, that Illinois (along with other states) is making promises to its lenders that it will have trouble keeping.
Puerto Rico was not supposed to be eligible for bankruptcy either, but the legislation before Congress will allow the territory to reduce its debt, both general-obligation and non-general-obligation debt.
If the bill does become law, the island will promptly cease making payments to its bondholders for the indefinite future: The proposed 2017 Puerto Rican budget — which assumes as much — sets aside no money to pay general obligation bondholders. Since the legislation also stays creditor lawsuits, the island can proceed to use the funds freed up by stiffing the creditors to hire more workers, build infrastructure and put money into its nearly bankrupt pension fund.
Any money that does gets stashed in the pension fund will be well-nigh impossible to disgorge when the stay is lifted. The Puerto Rican government can pull out its pockets and plead poverty and any creditor that lost money during the stay will likely be out of luck.
This is the blueprint Illinois will almost surely follow. It will request that Congress extend it some sort of bankruptcy protection and it will present Congress with a facile choice: Does it want to protect the evil vulture funds from Wall Street that lent it money or the hardworking state employees who just want the pension promised to them? Congress may want to pretend otherwise, but the current legislation before it favors one set of pensioners ahead of other pensioners whose money happens to be invested in Puerto Rican debt.
Read the full piece here.