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Federal Reserve Bank of New York President William C. Dudley urged Congress to pass a bill that would allow some agencies of Puerto Rico to file for chapter 9 protection, Bloomberg News reported yesterday. “I think that would be helpful, because it could help facilitate an orderly restructuring of their debt,” something that is “probably going to turn out to be necessary,” Dudley, whose district includes Puerto Rico, said yesterday. While such restructuring might not be easy, the risk of Puerto Rico’s troubles spreading to the rest of the country is “pretty low,” because the problems are unique to the island and already reflected in the prices of the commonwealth’s securities, Dudley said. Puerto Rico’s non-voting member of Congress Pedro Pierluisi and Democratic Senators Chuck Schumer and Richard Blumenthal introduced bills extending chapter 9 bankruptcy protection to the commonwealth. The Republican leadership in control of both chambers of Congress didn’t advance the measure. Lawmakers won’t be able to act on the legislation until they return from recess on Sept. 8.

Up against a deadline to reveal its plan to restructure its staggering debt, Puerto Rico has decided not to move ahead with a controversial proposal to borrow an additional $750 million to pay for improvements to its water and sewer authority, the New York Times DealBook blog reported yesterday. It attributed the decision, made on Monday, to the turmoil in the global markets. But the government also appears to have decided it could not borrow the money — by issuing bonds — at an affordable interest rate. Just a few days earlier, Puerto Rico petitioned the U.S. Supreme Court asking for the right to restructure its debt — which has reached $72 billion — under its own quasi-bankruptcy law. Puerto Rico, a U.S. commonwealth, enacted the law last year because it has no access to the federal bankruptcy courts. But the law was later found unconstitutional and was voided by the courts. Taken together, the steps demonstrate some of the confusion within the government as it faces a Sept. 1 deadline to outline its restructuring plan. A working group, appointed by the governor, has been trying to put a proposal together for several months. But in a sign of the political conflicts to come, the island’s main opposition party has dropped out of the group.

The San Bernardino (Calif.) City Council voted 4-3 yesterday to move forward with transferring responsibility for fire and emergency protection to the County Fire Department, a move that would also mean a $142-per-year tax on every parcel in the city, the San Bernardino Sun reported today. The move follows the advice of several sets of consultants — those responsible for a post-bankruptcy plan that included outsourcing and new revenues that the council approved 6-1, and firefighting experts — but came against heavy opposition from residents. The financial impact was much-debated, with disparate numbers suggested, but was presented by Andy Belknap of Management Partners as “an $11 million contribution to solvency,” between savings and increased revenue options. Beyond that, the idea — outsourcing and raising revenues — was included in the recovery plan the city presented to bankruptcy court, and backing away from that commitment could lead to Bankruptcy Judge Meredith Jury to dismiss the city from bankruptcy court, said the city’s bankruptcy attorney, Paul Glassman.

A private sector coalition of over 20 trade associations is speaking with a single voice and asking Congress to grant Puerto Rico the right to allow its public corporations access to protections under chapter 9 of the U.S. Bankruptcy Code, according to a commentary on the Huffington Post on Friday. From a business perspective, the commentary says that chapter 9 is part of the solution to Puerto Rico's complicated debt and liquidity crisis. The alternative — doing nothing and watching bondholders subject Puerto Rico to years of litigation and chaos — would be a disaster for a business community that thrives on predictability and order. If subjected to a long and disorderly process, the commentary argues that this unsustainable burden would leave Puerto Rico with little chance to grow its own economy. Chapter 9 would provide an orderly legal process — guided by a federal judge — to restructure what its public corporations owe and give our island the chance to fight for its future.

Puerto Rico on Friday asked the U.S. Supreme Court to overturn a ruling that blocks the restructuring of the commonwealth's public agencies, as the island grapples with trying to restructure its huge debt load, Reuters reported on Friday. In a petition seeking the Court's review, Puerto Rico said that a lower court erred in concluding that U.S. bankruptcy law blocks the restructuring of the agencies' debts. Puerto Rico also said that the lower court decision leaves its public utilities in a legal "no man's land" because neither federal law nor the island's own law permits the needed restructuring. "That decision leaves Puerto Rico's public utilities, and the 3.5 million American citizens who depend on them, at the mercy of their creditors," the commonwealth said. "This court's review is warranted — and soon." Read more. 

In related news, Puerto Rico today sought to assure potential buyers of bonds being sold by the local water authority that the utility does not require restructuring at this time, Reuters reported. Víctor Suárez Meléndez, the top aide to Governor Alejandro García Padilla, said that the fact that the water authority, known as PRASA, is seeking to sell around $750 million in bonds at the same time that Puerto Rico is appealing a court ruling that struck down a local restructuring law does not mean that PRASA will seek to restructure its debt if the U.S. territory succeeds in the appeal. "Assuming PRASA's financial projections are met and the utility is able to access the market on reasonable terms and for sufficient amounts to cover its capital needs, we currently do not contemplate PRASA necessitating a restructuring of its debt or seeking protection under the Recovery Act or any similar law," Melendez said. Read more. 

Hillview, Ky., yesterday filed for chapter 9 protection, becoming the first city to file for bankruptcy since Detroit did two years ago, Bloomberg News reported yesterday. Hillview’s financial distress stemmed from a contract dispute with a local company, Truck America Training, over a land sale. In February, Standard & Poor’s lowered its rating to junk after the city unsuccessfully appealed a court ruling ordering it to pay $11.4 million in damages to the company. Hillview, which faced legal damages it couldn’t afford, is only the third chapter 9 filing this year, following an Oklahoma hospital and a special district in California.

Detroit is paying a high price in its return to the $3.6 trillion municipal-bond market for the first time since emerging from a record bankruptcy, Bloomberg News reported yesterday. The $245 million of bonds, to be sold today through the Michigan Finance Authority, have the top claim on city income taxes to ensure investors are repaid. Even so, 14-year debt is being offered at an initial yield of 4.75 percent. That’s 2.1 percentage points more than top-rated securities. Detroit filed for bankruptcy protection two years ago to escape from debts it couldn’t afford after the population tumbled, tax collections slid and the automobile industry’s decline left the economy reeling. That allowed the city to cut $7 billion from its obligations by the time it emerged from bankruptcy in December, an effort to steady the government’s finances and hasten its revival.