What’s the Matter with Kansas and the National Voter Registration Form?

What’s the Matter with Kansas and the National Voter Registration Form?

by Carmen Hicks, TurboVote Research Lead, Democracy Works

Federalism allows states to have agency in many aspects of policy creation, implementation, and regulation separate from that created by the federal government. It is this constitutionally managed balance that allows individual states to establish their own unique ways of administering elections. Voter registration is one of the more contentious aspects of a state’s election administration responsibilities, as it affects a voter’s ability to participate in both state and federal elections.

Recently, the issue of proof of citizenship requirements—which requires eligible voters to provide citizenship documentation with their state registration form in order to be eligible to vote in state and local elections—has made its way to the national stage. Current battles in Alabama, Georgia, and Kansas over adding these requirements to the National Voter Registration form (“national form”) illustrate the complicated relationship between state and federal election administration in relation to voter registration.

This relationship began when President Clinton signed into law the National Voter Registration Act of 1993 (NVRA), which was the first federally mandated voter registration system reform applicable to all citizens.[1] The NVRA, or the Motor Voter bill, requires state governments to offer voter registration to eligible applicants at Departments of Motor Vehicles and public assistance agencies.[2] Additionally, Section 6 of this act establishes national standards for mail-in voter registration forms and requires states to accept a federal mail-in registration form, known as the National Voter Registration form.[3] Before the establishment of the federal mail-in form, eligible citizens in many states had to register in person.[4] In addition, registration requirements varied between states, creating confusion among voters and leading many to decide not to register.[5] Because of the NVRA, eligible voters could use either the national form or a state mail-in form and expect a standardized and simplified voter registration process.

Initially, national form development and maintenance fell to the Federal Election Commission’s National Clearinghouse for Information on the Administration of Elections (“the Clearinghouse”). Then, in 2002, in response to the voting systems and voter access problems identified in the 2000 presidential election, Congress passed the Help America Vote Act (HAVA) to reform the nation’s voting process.[6] HAVA transferred the Clearinghouse’s functions, including those related to the national form, to the newly established Election Assistance Commission (EAC).[7] The EAC is an independent entity that serves as a repository for federal election administration information and procedural review. The EAC consists of four commissioners appointed by the President and confirmed by the Senate.

On September 15, 2008, the EAC commissioners unanimously adopted the Roles and Responsibilities policy, which delegated national form maintenance to the EAC Executive Director.[8] As a result, the executive director could make changes to the general and state-specific instructions on the national form, as long as they made these changes in a manner that was consistent with the NVRA and EAC regulations and policies.[9] General instructions include information such as who can use the national form and exceptions, how to fill out the form, how to submit the form, and requirements for first time voters who chose to use the national form. State-specific instructions cover every state’s laws regarding eligibility, registration deadlines, identification requirements, choice of party, race or ethnic group disclosure, and the state’s mailing address.

Even though the executive director had the power to maintain the national form, the commissioners maintained sole discretion to approve, deny, and defer state requests to change the form. Between 2008 and 2011, the EAC voted on each state request, with deliberations properly noticed and conducted in public, and approval requiring at least three commissioners. Then in December 2010, the EAC lost its quorum of commissioners, which led to a November 2011 EAC memorandum establishing an interim procedure on processing state requests for changes to the national form.[10]

This interim procedure delegates the ability to process state requests to the Division of Research, Policy and Programs (RPP). The procedure allows the RPP to take action if the request is 1) to update the mailing address at which the state accepts forms or 2) a change in the state-specific instructions if and only if the update is required by a change in state law.[11] The RPP, upon review and consultation with the Office of General Counsel, can then make recommendations to the Executive Director, with the Executive Director making the final determination.[12] The interim procedure did stipulate that the RPP and Executive Director should defer state requests that pose broader policy implications until a quorum of commissioners was re-established.[13] This procedure, coupled with the 2008 policy, functionally delegated state request processing and form maintenance duties to the EAC Executive Director.

The first request to include proof of citizenship documentation came from Arizona in December 2005.[14] A year prior, Arizona passed Proposition 200, which required voters to provide proof of citizenship with the state’s registration form.[15] Arizona asked the EAC to include these requirements in the national form’s general instructions, which are required of voters from every state. The commissioners denied Arizona’s request in March 2006 under the grounds that the national form already required applicants, under penalty of perjury, to affirm their citizenship with their signature and to complete a mandatory checkbox indicating that they are citizens of the United States.[16] Furthermore, after reviewing the NVRA’s legislative history, the EAC found that Congress itself did not believe that documentary proof of citizenship was necessary or consistent with the purpose of the statute—to provide a simple and easy way to register to vote across states.[17] Arizona, in response to the EAC’s decision, refused to register national form applicants who did not provide proof of citizenship with their forms, thereby creating a two-tiered voter registration system in the state.

Shortly after Proposition 200 passed, several groups filed suit against the state and proponents of the law in May 2006, just before the first general election the law would affect. These groups argued that the law violated the Voting Rights Act of 1965, was unconstitutional under the 14th and 24th Amendments, and was inconsistent with the purpose of the NVRA.[18] The case eventually made its way to the U.S. Supreme Court in Arizona v. Inter Tribal Council of Arizona, Inc.[19]

The Court ruled in June 2013 that the NVRA preempted Arizona from requiring an individual registering to vote using the national form to provide documentation beyond that indicated on the Form.[20] Writing for the majority, Justice Antonin Scalia stated that “the Federal Form provides a backstop: No matter what procedural hurdles a State’s own form imposes, the Federal Form guarantees that a simple means of registering to vote in federal elections will be available.”[21] As such, states could not require applicants to provide additional documentation when using the federal form, unless the EAC approved the state’s proposed changes to the instructions.[22]

Softening the overall ruling, the Court stipulated that the EAC must allow Arizona to make changes to the national form if Arizona can prove that it cannot properly exercise its constitutional authority to assess the eligibility of the voter by using the form alone.[23] Furthermore, the Court also suggested that a refusal by the EAC could be subject to judicial review under the Administrative Procedures Act.[24]

Following the U.S. Supreme Court’s decision, Arizona asked the EAC to add citizenship requirements to Arizona’s state-specific instructions instead of to the national form’s general instructions.[25] In 2013, having passed proof of citizenship laws in their state legislatures in 2009 and 2011 respectively, Georgia[26] and Kansas[27] filed comparable requests with the EAC.[28] In August 2013, the commission deferred all three requests, stating that the matters required the reestablishment of a quorum in the EAC and a vote.[29]

In response to these deferments, Kansas and Arizona filed a lawsuit against the EAC in August 2013.[30] The states argued that they have a constitutional right to establish voting qualifications, including proof of citizenship requirements.[31] Furthermore, they argued that the EAC’s lack of a quorum and refusal to modify state-specific instructions, due to their interpretation of the NVRA and HAVA, unconstitutionally prevented them from exercising this right in their section of the national form’s state-specific instructions.[32] Moreover, the states argued that their suit was supported by the Supreme Court’s ruling in Arizona v. Inter Tribal Council, Inc., which provided states with the opportunity to provide evidence in support of citizenship documentation in a reviewing court.[33] In December 2013, the court found that the EAC had not yet taken a final action, and so remanded the matter to the EAC for a final decision.[34]

At that time, the EAC did not have the quorum to stage a vote in order to comply with the court’s order. However, as was previously mentioned in the article, the commissioners had already delegated national form maintenance responsibilities to the executive director. After a round of public comments and a review of EAC precedent, the 2013 U.S. Supreme Court decision, and NVRA and HAVA language with respect to the national form, then-Acting Executive Director Alice P. Miller outright denied the states’ requests in January 2014.[35]

In February 2014, Kansas and Arizona filed a motion asking the District Court of Kansas to review the EAC’s decision.[36] In March 2014, the District Court found that the EAC acted unlawfully and in excess of its statutory authority when it denied the requests.[37] As a result, the court ruled that the EAC must update the national form to allow states to require proof of citizenship.[38]

However, the EAC, along with several other groups, appealed the District Court’s decision, leading the U.S. Court of Appeals for the Tenth Circuit to stay the order.[39] In its subsequent decision, released in November 2014, the Tenth Circuit ruled that Kansas and Arizona could not force applicants using the NVRF to provide proof of citizenship when they registered to vote in federal races.[40] The appeals court found that the states failed to prove that an applicant needed to provide additional citizenship documentation to protect against voter fraud.[41] Based on this finding, the court reversed the district court’s ruling requiring the EAC to add these state-specific instructions for Kansas and Arizona registrants.[42]

Following the November ruling, Kansas and Arizona petitioned the Supreme Court to hear their challenge to the EAC’s decision.[43] In June 2015, the Court denied the petition for certiorari.[44] This allowing the November decision to stand and legitimized the EAC’s decision to reject the requests.

In January 2013, Kansas Secretary of State Kris Kobach had begun instructing county election officials to implement a two-tiered registration system.[45] This system allowed applicants to register using the national form; however, national form registrants’ votes would only count in federal elections, since they did not provide the proof of citizenship documentation needed to be eligible to vote in state and local elections.[46] In September 2013, while Kobach was undergoing proceedings in Kobach v. EAC, the American Civil Liberties Union and the ACLU of Kansas filed a lawsuit against the state challenging its two-tiered voter registration system.[47] The suit argued that Kansas’s system divides eligible voters into two classes, with different rights and privileges, which violates the state’s equal protection guarantees.[48]

Due to subsequent rulings in Kobach v. EAC and the Supreme Court’s decision not to hear the same, a Kansas state judge ruled that Kobach could not enforce proof of citizenship requirements for applicants that use the national form in January 2016.[49] In his ruling, the judge found that whether a voter had registered by state or by federal form should not determine a person’s registration status in the state.[50] This ruling seemed to solidify the principle that the national form should remain simple and without barriers, as it was conceived under the NVRA.

Despite ongoing legal battles and rulings against proof of citizenship requirements, states continued to pass legislation and issue requests to the EAC to include them on the national form. After passing its citizenship requirement in 2012, Alabama[51] issued a request to the EAC in December 2014,[52] and Kansas issued another request in November 2015.[53] The EAC was still reviewing both requests by the EAC at the time of the January 2016 ruling in Belenky v. Kobach.

Just days after the Belenky v. Kobach ruling in January 2016, newly appointed EAC Executive Director Brian Newby notified Alabama, Georgia, and Kansas that their requests were approved. Thomas Hicks, one of the three EAC commissioners and the only Democrat, immediately criticized Newby’s decision, stating that the action “contradicts policy and precedent previously established by this commission.”[54] In fact, Georgia’s request, made in August 2013, had already been denied by then-Acting Executive Director Alice Miller in 2014, and the state had made no attempt to re-issue their request since then.

Newby, however, considered himself well within his rights as the executive director to send the approval letters.[55] This perspective notwithstanding, Newby also stated that “any interested party” could ask the EAC to review his decision and that the decision “was not final.”[56] He went on to say that his actions only “started the process.”[57]

Then on February 12, 2016, the League of Women Voters of the United States filed a federal suit against the EAC.[58] In its complaint, the League alleges that Executive Director Brian Newby’s actions violated HAVA and the EAC’s own established policy and precedent requiring a vote by the EAC on changes to the national form.[59] Furthermore, the League asserts that Executive Director Newby ignored the EAC’s administrative procedures, which require formal notice and a comment period, as well as a presentation of the requests to the commissioners.[60] Finally, the suit claims that his actions exceeded the EAC’s statutory authority, as the states failed to prove the necessity of proof of citizenship requirements to prevent voter fraud.[61] In an attempt to prevent the citizenship requirements from taking effect, the League requested a temporary restraining order against the EAC and Executive Director Brian Newby in February. A DC District Court judge denied that request on February 23, 2016.[62]

Less than a week after the League of Women Voters’s complaint, the American Civil Liberties Union filed a class-action suit on behalf of six Kansans denied the right to register at the state’s Department of Motor Vehicles.[63] The ACLU alleges that Kansas’s proof of citizenship law violates the section of the NVRA that allows voters to register to vote when they get a driver’s license after attesting to their citizenship under threat of perjury.[64]

The ACLU believes that Kansas’s claimed basis for requiring proof of citizenship documentation, to protect against voter fraud on the part of non-citizens, is unfounded, and that Kansas’s policy is highly restrictive.[65] According to the suit, since Kansas implemented its proof of citizenship law in early 2013, more than 35,000 voter registrations have been in suspense, accounting for about 14 percent of all voter registrations filed during that period.[66] In response, Secretary of State Kobach claimed that less than 11,000 applications are now in suspense, as some applicants later provided the required documentation.[67]

The ACLU saw its first big win in this case on May 17, 2016. The Court ordered Kansas to register thousands of eligible voters who have been in “suspense” since 2013. Kansas officials must start registering approximately 18,000 otherwise qualified motor voter applicants by June 1, 2016.[68] This will give voters a chance to participate in the upcoming Kansas Statewide Primary Election in August and the November Presidential Election.

Despite the preliminary injunction, Secretary Kobach received administrative approval on July 12 to enact K.A.R. 7-23-16, a temporary regulation that seeks to formalize his two-tiered voter registration system. [69] In response, the ACLU filed yet another suit against Kobach on July 19.[70] This suit relies heavily on the arguments and ruling in Belenky v. Kobach: it reiterates that this system violates the equal protection clause of the state constitution by treating voters unequally based on their registration method.[71] The ACLU furthermore alleges that Kobach’s enforcement of this system and the adoption of the temporary regulation “exceeded his authority [as Secretary of State] and improperly trespassed on the domain of the legislature,” violating the separation of powers doctrine enshrined in Kansas Constitution.[72]

In addition to the preliminary injunction, the EAC advisory board, a 20-member body composed of election officials from around the country, approved a resolution requiring these types of changes be decided and voted on by the commissioners in a 13-7 vote at its May gathering.[73] Although this decision is purely advisory, it upholds existing EAC precedent on this matter and demonstrates widespread disapproval of Executive Director Newby’s actions. It is now up to the commissioners to consider the advisory board’s recommendation and decide how to proceed.[74]

At this point, the EAC is unable to move forward on the advisory board’s recommendation, since it does not have the members needed to conduct a vote. Although President Obama recently nominated former Nevada Treasurer Kate Marshall to fill the fourth seat needed for a quorum,[75] it is highly unlikely that the Senate will confirm her. Marshall, a Democrat nominated by President Obama, faces an uphill climb going before a Republican majority in the Senate during a presidential election year.

Considering this, it looks like it will be up to the courts, not the EAC, to resolve the battle over proof of citizenship requirements on the national form. It is likely that these rulings, which may come at any time, will be appealed by the losing parties, and could make their way to the Supreme Court. The rulings, whatever they are, will have long-lasting impacts. These decisions will affect future interpretations of the purpose of the NVRA with respect to the national form, the role of the EAC and its staff in these matters, the balance between state and federal election administration, and, ultimately, how eligible voters who do not provide proof of citizenship vote in state and local elections.

 


[1] See J. Mijin Cha, Demos, Registering Millions: The Success and Potential of the National Voter Registration Act 201 (2013).

[2] See 52 U.S.C. §§ 20504(a)(1), 20506(2)(a) (2012).

[3] See id. § 20505(a)(1).

[4] Cha, supra note 1 at 1.

[5] Id. at 3–4.

[6] See H.R. 3295, 107th Cong. (2002) (enacted).

[7] See 52 U.S.C. § 20922 (2012).

[8] See U.S. Election Assistance Comm’n, EAC000064-72, The Roles and Responsibilities of the Commissioners and Executive Director of the U.S. Election Assistance Commission 8 (2008) http://www.eac.gov/assets/1/workflow_staging/Page/348.PDF  [https://perma.cc/QBH7-2EWG].

[9] Id.

[10] See Exec. Dir., U.S. Election Assistance Comm’n, Memorandum: State Requests to Change their State-Specific Instructions on the National Mail Voter Registration Form 1 (2011).

[11] Id.

[12] Id. at 2.

[13] Id.

[14] See U.S. Election Assistance Comm’n, EAC-2013-0004, Memorandum of Decision Concerning State Requests to Include Additional Proof-Of-Citizenship Instructions on the National Mail Voter Registration Form 2 (2014) [hereinafter Memorandum of Decision] http://www.eac.gov/assets/1/Documents/20140117%20EAC%20Final%20Decision%20on%20Proof%20of%20Citizenship%20Requests%20-%20FINAL.pdf [https://perma.cc/DH2X-LDRU].

[15] Ariz., Proposition 200: Arizona Taxpayer and Citizen Protection Act § 4 (2004), http://apps.azsos.gov/election/2004/general/initiative_petition.pdf [https://perma.cc/CF9U-X8W4].

[16] See Memorandum of Decision, supra note 14 at 2.

[17] See id. at 20–21.

[18] See ITCA Plaintiffs’ Memorandum in Support of Motion for Attorneys’ Fees and Costs at 2–3, Gonzalez v. Arizona, No. 2:06-cv-01268 (D. Ariz. Nov. 12, 2013).

[19] Arizona v. Inter Tribal Council of Ariz., Inc., 133 S. Ct. 2247 (2013).

[20] See id. at 2260.

[21] Id. at 2255.

[22] See id. at 2260.

[23] See id.

[24] See id.

[25] See Memorandum of Decision, supra note 14 at 3.

[26] See Ga. Code. Ann. § 21-2-216(g) (2015).

[27] See Kan. Stat. Ann. § 25-2309(l) (2016).

[28] See Memorandum of Decision, supra note 14 at 3–4.

[29] See id.

[30] Complaint, Kobach v. U.S. Election Assistance Comm’n, No. 5:13-cv-04095 (D. Kan. Aug. 21, 2013).

[31] See id. at 3.

[32] See id.

[33] See id. at 4.

[34] See Kobach v. Election Assistance Comm’n, No. 5:13-cv-04095 (D. Kan. Dec. 12, 2013) (order remanding to EAC).

[35] Memorandum of Decision, supra note 14 at 45.

[36] See Kobach v. U.S. Election Assistance Comm’n, 6 F. Supp. 3d 1252, 1257 (D. Kan. 2014), rev’d, 772 F. 3d 1183 (10th Cir. 2014).

[37] See id. at 1255.

[38] See id. at 1271.

[39] See Kobach v. U.S. Election Assistance Comm’n, 772 F.3d 1183, 1189 (10th Cir. 2014).

[40] See id. at 1197–98.

[41] See id. at 1188.

[42] Id.

[43] See Kobach v. U.S. Election Assistance Comm’n, 135 S. Ct. 2891, 2891 (2015).

[44] Id.

[45] See Roxana Hegeman, ‘Chaos’ In Kansas: ACLU Says Two-Thirds Voter Registrations On Hold, Talking Points Memo (Apr. 26, 2016), http://talkingpointsmemo.com/news/kris-kobach-voter-registration-aclu-lawsuit [http://perma.cc/BG6U-KZAM].

[46] See Edward M. Eveld, Judge rules Kris Kobach can’t operate two-tier election system in Kansas, Kan. City Star (Jan. 15, 2016), http://www.kansascity.com/news/politics-government/article54933870.html [https://perma.cc/T45S-P9S6].

[47] See Petition Pursuant to K.S.A. Chapter 60 for Declaratory and Injunctive Relief at 18, Belenky v. Kobach, No. 2013cv1331 (Kan. Dist. Ct., Nov. 21, 2013).

[48] See id.

[49] See Belenky v. Kobach, No. 2013cv1331 at *26 (Kan. Dist. Ct. Jan. 15, 2016).

[50] See id. at *17–18.

[51] See H.B. 658, Ala. State Leg., Reg. Sess. 2012 (Ala. 2012).

[52] See Letter from Jim Bennett, Ala. Sec’y of State, to Comm’rs, U.S. Election Assistance Comm’n (Dec. 22, 2014), http://www.eac.gov/assets/1/Documents/State%20of%20Alabama%20NVRA%20for%20instruction%20request%20Dec%2018%202014.pdf [https://perma.cc/FBL7-JBF8].

[53] See Letter from Bryan Caskey, Election Dir., Kan. Sec’y of State’s Office, to Brian Newby, Exec. Dir., U.S. Election Assistance Comm’n (Nov. 17, 2015), http://www.eac.gov/assets/1/Documents/Newby%20Ltr%2011-19-2015.pdf [https://perma.cc/ZJ62-QVDE].

[54] Pam Fessler, Change At Federal Election Agency Muddles Kansas Voter Registration Laws, NPR: the two-way (Feb. 2, 2016) http://www.npr.org/sections/thetwo-way/2016/02/02/465353108/as-voting-begins-several-states-voter-id-laws-remain-in-flux [https://perma.cc/TD2E-VE4K].

[55] See id.

[56] Id.

[57] Id.

[58] See Complaint for Declaratory and Injunctive Relief at 2, League of Women Voters of the U.S. v. Election Assistance Comm’n, No. 1:16-cv-00236 (D.D.C. Feb. 12, 2016).

[59] See id.

[60] See id. at 1–2.

[61] See id. at 2.

[62] See League of Women Voters v. Newby, 2016 WL 3636604 at *4 (D.D.C. June 29, 2016) (No. 1:16-cv-00236).

[63] See Complaint for Injunctive and Declaratory Relief at 1–2, Fish v. Kobach, No. 2:16-cv-02105 (D. Kan. Feb. 18, 2016).

[64] See id. at 28–29.

[65] See John Eligon, A.C.L.U. Challenges Kansas Voter Law Requiring Proof of Citizenship, The N.Y. Times (Feb. 18, 2016), http://www.nytimes.com/2016/02/19/us/aclu-challenges-kansas-voter-law-requiring-proof-of-citizenship.html?_r=0 [https://perma.cc/9HW7-EM7V].

[66] See Fish, No. 2:16-cv-02105 at 23.

[67] See id.

[68] See Fish v. Kobach, No. 16-2015-JAR-JPO, 2016 WL 2866195 at *31–32 (D. Kan. May 17, 2016).

[69] Kan. Admin. Regs. § 7-23-16 (temporary).

[70] See Petition Pursuant to K.S.A. Chapter 60 for Declaratory and Injunctive Relief, Brown v. Kobach, No. not yet assigned at 1 (Kan. Dist. Ct., Jul. 19, 2013), https://www.aclu.org/legal-document/brown-v-kobach-petition [https://perma.cc/T8FV-B4NJ].

[71] See id. at 13–14.

[72] See id. at 12.

[73] See Pam Fessler, Election Commission Advisory Board Disagrees With Director Over Citizenship Rule, NPR (May 5, 2016), http://www.npr.org/2016/05/05/476933327/election-commission-advisory-board-clashes-with-director-over-citizenship-rule [http://perma.cc/W3VT-VQYT].

[74] See id.

[75] Doug Chapin, President Obama Nominates Nevada’s Kate Marshall to EAC, Election Academy (May 3, 2016), http://editions.lib.umn.edu/electionacademy/2016/05/03/president-obama-nominates-nevadas-kate-marshall-to-eac/ [https://perma.cc/K9X2-JZCL].

“The Debt is Not Payable”

“The Debt Is Not Payable”

by James L. Tatum III, MPA ’17, Maxwell School of Citizenship and Public Affairs at Syracuse University

“The debt is not payable,” said Governor Alejandro Garcia Padilla of Puerto Rico to the New York Times on June 28th, 2015.[1] In fact, by most independent analysis, the island’s $117 billion in total liabilities is not payable.[2] Given this fact, the decision by elected officials not to provide Puerto Rico with access to Chapter 9 bankruptcy is cause for confusion.[3]

Puerto Rico has suffered dramatic population loss for a decade, loss of industry, and a decline that has mirrored the City of Detroit.[4] Puerto Rico has borrowed heavily in an effort to maintain the same quality of life, despite a diminished tax base. For decades, it has had uninhibited access to capital markets. In 1955, The Analysts Journal issued a report titled “A New Look at Puerto Rico and Puerto Rican Bonds” that was spurred by findings that the debt marketed by Puerto Rico was, and still is, triple tax exempt.[5] Despite the decline of the island’s economy since the boom period of 1950 to 2000, investors have continually been attracted to its bond issuance. The result of Puerto Rico’s attractive debt and fiscal policies has been an estimated $71 billion in bonded debt, and $46 billion in pension liabilities.[6]

Further discussion of Puerto Rico’s financial distress requires understanding three terms: insolvency, default, and bankruptcy. Insolvency is an inability to pay debts. Default is the failure to pay—either because of insolvency or by choice. Bankruptcy is the process by which defaults are resolved in an orderly manner.

Puerto Rico is insolvent. The island has had problems with cash flow for years, and is expected to run out of money in the near future. Debt service, or the amount of annual appropriations dedicated to interest and principal payments, exceeds 25 percent (far beyond the recommended 10 percent limit).[7] Puerto Rico has already defaulted on a portion of its debt. On January 4th, 2016 the territory declined to make $174 million in debt service payments.[8] Another payment of $1.9 billion scheduled for July 1st was suspended under powers to enact a debt moratorium passed by the Legislature.[9]

Ordinarily, bankruptcy would be the next step for a similarly distressed entity. However, neither Puerto Rico nor municipal units like the deeply indebted Puerto Rico Electric Power Authority (PREPA) are authorized to file for Chapter 9 bankruptcy.[10] This omission appears to be without reason. In the recent Supreme Court case, Puerto Rico v. Franklin Cal. Tax-Free Trust, the justices were perplexed as to why Congress would omit Puerto Rico from Chapter 9 and take away its power to adjust debt unilaterally.[11] A cursory read of the justices’ questions made it apparent that Puerto Rico would lose its case, and it did, but not because Puerto Rico should not be able to adjust its debts or because of constitutional conflict. Rather, as Justice Stephen Breyer joked, he cannot “say that an airplane means a horse,” and the text of Chapter 9 is clear—even if its justification is not.[12]

Here is Puerto Rico’s dilemma. The island cannot bind creditors under any other kind of deal, which is necessary to restructure debt under Chapter 9. Without such a rule, creditors have an incentive to “race to the courthouse,” where the quickest to sue have the best recovery, and the rest are left to pick over the diminished assets of the debtor. There is also an incentive for “vulture” funds to purchase the depreciated bonds and hold out for payment which exceeds the amount the bonds were purchased for. NML Capital, an investment firm, successfully employed this strategy against Argentina.[13] Note that because of Puerto Rico’s territorial status it does not appear to have the sovereign power to default or even attempt to bind creditors to a debt exchange like Argentina did (before those efforts were usurped by creditor holdouts).

The promise of bankruptcy, and the reason it is needed for Puerto Rico, is that bankruptcy determines who will be paid, how much they will be paid, and who will not be paid at all in a far more orderly manner than a “race to the courthouse.” Secondly, bankruptcy binds creditors to whatever deal comes out–and such a deal would be formally titled a plan of adjustment. The Secretary of the Treasury, whose office has been deeply involved with Puerto Rico, has insisted that the island be provided debt relief of the sort that only Chapter 9 can provide.[14]

Instead Congress has offered Puerto Rico a different system through PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act), which creates a bankruptcy-like process for the island.[15] Why has Congress decided to embark on the odd and unchartered course of creating a bankruptcy-like process that is not bankruptcy? The answers are uncertain. In part, the answer could be that bondholders have successfully lobbied lawmakers to prevent bankruptcy. A separate answer is that lawmakers are unsure Chapter 9 or a Bankruptcy Court could resolve Puerto Rico’s debts. But then, there is no reason to doubt that Chapter 9 could resolve Puerto Rico’s debts.

In 1988, Congress amended the Bankruptcy Code, including Chapter 9, to accommodate sizable jurisdictions with heavy debt burdens, in response to New York City’s fiscal crisis in the 1970s, and Cleveland, Ohio’s shortly thereafter.[16] Before New York and Cleveland teetered on the precipice of default, bankruptcy was rare, and when it was filed, it was by small municipal units, such as water and sewer districts, and transportation authorities. Chapter 9 was amended should another major city or county tumble into insolvency and default on its debt.

The most recent cases display how well bankruptcy can work as a last resort for municipal financial distress. Jefferson County, Alabama filed in 2011 with $4.2 billion in total liabilities—many of which were tied to the county’s use of exotic instruments known as interest rate swaps.[17] Detroit filed in 2013 with $18 billion in total liabilities, which also included interest rate swaps and another type of exotic instrument known as certificates of participation.[18] In both cases, the courts were able to unwind those debts (Jefferson County in two years, Detroit in one year) and successfully provide debt relief to those two entities. Puerto Rico’s debt burden far exceeds that of Detroit and Jefferson County, but its liabilities are not any more sophisticated.

Rather than create a bankruptcy-like structure, Congress would be better advised to use the architecture that already exists. To provide Puerto Rico with bankruptcy authority would not preclude the other measures insisted on by members of Congress or the Treasury Department. Senator Orrin Hatch of Utah has been said to be infuriated by the island’s inability to provide timely and accurate financial statements.[19] A bankruptcy by Puerto Rico would answer this frustration. Bankruptcy requires that debtors detail their assets and liabilities in a disclosure statement, which would provide absolute clarity to the island’s financial condition. There would finally be a detailed list of what is owed to whom, and under what terms.

The United States Treasury Department should also be authorized to loan money directly to Puerto Rico, and to underwrite a possible “super bond” or new debt to replace the old bonds the island has defaulted on. A loan from the Treasury Department would provide money to fund public services while the island restructures. The Treasury Department extended this kind of aid to New York City at the time of its fiscal crisis, and to General Motors and Chrysler LLC when the two automakers were in bankruptcy.[20] The new “super bond” would further entice bondholders to turn in their old debt for new debt that would carry a later maturity date, or a lower interest rate and reduced principal amount.

Treasury Department assistance is needed for bondholders who have either factually or perceptually better claims and security interests (i.e. claims on specific revenues) than others, who will need enhanced security in order to be incentivized to accept the new “super bond.” Bondholders will need security that only the Treasury Department can provide. In tandem, bankruptcy and a loan or debt guarantee provided by the Treasury Department can mend Puerto Rico’s balance sheet.

The island is short on cash, debt service has crowded out other necessary expenditures, and it has been unable to normally fund its operations. Puerto Rico must be provided with the ability to adjust debts in Bankruptcy Court, because the island is past the point of more politically palatable options. The Federal Government’s policies toward Puerto Rico helped created this mess, and the island is owed forceful action, not a haphazard and untested process.

 


[1] Michael Corkery & Mary Williams Walsh, Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable, N.Y. Times: DealBook, (June 28, 2015), http://www.nytimes.com/2015/06/29/business/dealbook/puerto-ricos-governor-says-islands-debts-are-not-payable.html?_r=0 [https://perma.cc/8YZX-QLFZ].

[2] Clayton Gillette & David Skeel, How Congress Can Help Puerto Rico, N.Y. Times: DealBook (Sept. 14, 2015), http://www.nytimes.com/2015/09/14/opinion/how-congress-can-help-puerto-rico.html [https://perma.cc/5BK9-6CG5].

[3] Puerto Rico Oversight, Management, and Economic Stability Act, H.R. 4900, 114th Cong. (2016).

[4] See generally Puerto Rico’s Economic and Fiscal Crisis, U.S. Dep’t of the Treasury (2016), https://www.treasury.gov/connect/blog/Documents/Puerto_Ricos_fiscal_challenges.pdf [https://perma.cc/VS9F-7JTB].

[5] John P. Broderick, A New Look at Puerto Rico and Puerto Rican Bonds, 11 Analysts J. 107, 107–09 (1955).

[6] U.S. Dep’t of the Treasury, supra note 4 at 3.

[7] Id. at 4.

[8] Mary Williams Walsh, Puerto Rico Defaults on Debt Payments, N.Y. Times: DealBook (Jan. 4, 2016), http://www.nytimes.com/2016/01/05/business/dealbook/puerto-rico-defaults-on-debt-payments.html [https://perma.cc/Y8JV-WQYQ].

[9] Mary Williams Walsh, Puerto Rico Passes Bill Allowing Halt to Debt Payments, N.Y. Times: DealBook (Apr. 6, 2016), http://www.nytimes.com/2016/04/07/business/dealbook/puerto-rico-passes-bill-allowing-halt-to-debt-payments.html [https://perma.cc/V55B-QPAE0].

[10] 11 U.S.C. § 903 (2012).

[11] Puerto Rico v. Franklin Cal. Tax-Free Trust, Oyez (Mar. 22, 2016), https://www.oyez.org/cases/2015/15-233 (click the “Oral Argument” button; relevant portion begins at around 5:00).

[12] Id. (Relevant portion begins at around 18:50).

[13] Jonathan Gilbert & Alexandra Stevenson, Argentina Reaches Deal with Hedge Funds Over Debt, N.Y. Times: DealBook (Feb. 29, 2016), http://www.nytimes.com/2016/03/01/business/dealbook/argentina-reaches-deal-with-hedge-funds-over-debt.html [https://perma.cc/C5TN-FVAA].

[14] Letter from Jacob Lew, U.S. Sec’y of the Treasury, to Congress (Jan. 15, 2016), https://www.treasury.gov/connect/blog/Pages/Secretary-Lew-Sends-Letter-to-Congress-on-Puerto-Rico.aspx [https://perma.cc/4LU6-V5YZ].

[15] Id. at 3.

[16] Robert S. Amdursky, The 1988 Municipal Bankruptcy Amendments: History, Purposes and Effects, 22 Urb. Law. 1, 1–21 (1990).

[17] Kelly Nolan, Largest Municipal Bankruptcy Filed, Wall St. J. (Nov. 11, 2011), http://www.wsj.com/articles/SB10001424052970204224604577028491526654090 [https://perma.cc/3A6G-6RWV].

[18] Matthew Dolan, Record Bankruptcy for Detroit, Wall St. J. (July 19, 2013), http://www.wsj.com/articles/SB10001424127887323993804578614144173709204 [https://perma.cc/TA94-YTDD].

[19] Mary Williams Walsh, Senate Republicans Introduce Bill for Puerto Rico Relief, N.Y. Times: DealBook (Dec. 9, 2015), http://www.nytimes.com/2015/12/10/business/senate-republicans-introduce-bill-for-puerto-rico-relief.html [https://perma.cc/EWJ4-KDCP].

[20] David A. Skeel, From Chrysler and General Motors to Detroit, 24 Widener L. J. 121, 124–25 (2015).