Detroit’s Bankruptcy Judge Advising Puerto Rico

Officials in Puerto Rico are hearing from Detroit’s former bankruptcy judge about how Chapter 9 works and how it allowed Detroit to restructure its debt, including its pensions.

Now-retired Judge Steven Rhodes is advising the Commonwealth about federal bankruptcy law. With its roughly $70 billion in bond debt and $35 billion in unfunded pension obligations, Puerto Rico has nearly five times the obligations Detroit did when the city filed for bankruptcy two years ago.

Speaking with WDET from the Caribbean island, Rhodes says many factors led to Puerto Rico’s current state of financial distress including a population that isn’t growing and a high unemployment rate.  Rhodes also cites the Commonwealth’s growing debt to pay off its bonds.

“It is a result of the same sort of phenomena we saw in Detroit, where it would continue to borrow money not just to refinance old bond debt but also to cover current budget deficits which continued year-in and year-out and resulted in the bond debt that it has,” Rhodes says.

Although Puerto Rico and Detroit may have reached the same point for similar reasons, they do not have the same options. Detroit, because it is a municipality, was able to file for Chapter 9, allowing the city to restructure its debt, largely by shedding it in court-approved reductions to creditors.

Puerto Rico, however, as a commonwealth, is not allowed by law to file for bankruptcy. Rhodes says he may work to change that by lobbying Congress to revisit the bankruptcy code and provide for Puerto Rico to use Chapter 9, allowing the courts to shed its debt and reduce payments to creditors.

“What Puerto Rico really needs in order to fix its balance sheet is access to Chapter 9 bankruptcy, just like Detroit had,” Rhodes says. “I may be asked by the Commonwealth to work with Congress to achieve that result.”

Click on the audio link above to hear the full conversation.