August 5, 2026<\/p>\n
Ten years ago, I got a call that changed my life. Congress had just enacted the Puerto Rico Oversight, Management, and Economic Stability Act\u2014PROMESA, or \u201cpromise\u201d in Spanish\u2014Congress\u2019s response to Puerto Rico\u2019s dire economic crisis. PROMESA created a seven-person oversight board with the power to restructure Puerto Rico\u2019s $74 billion of debt and to balance the island\u2019s budgets. The call came from Senate Majority Leader Mitch McConnell\u2019s office, inviting me to interview for one of McConnell\u2019s four nominations to the oversight board, from which President Barack Obama would pick two.<\/p>\n
When I interviewed for a different job thirty-seven years ago\u2014an appointment to the faculty of what was then known as Temple University School of Law\u2014one of the first questions I was asked was whether I intended to engage in public service after I started my teaching career. I said yes, but the question took me by surprise. It wasn\u2019t something I had really thought about. After joining the faculty, I quickly discovered that it hadn\u2019t been a random question. The Conwellian tradition of making higher education available to families who had never previously sent a child to college lay at the heart of the law school\u2019s mission, and a public-spiritedness pervaded everything we did. I believe this spirit helped to shape me as a law professor, making me much more alert than I otherwise would have been to opportunities for public service.<\/p>\n
I\u2019d had minor opportunities for public service over the years, but nothing remotely like this. If I were selected, I would be committing to thousands of hours of unpaid work on top of my regular job, and the board\u2014a group of unelected officials sent from Washington\u2014would be highly controversial in Puerto Rico. But this also might be a chance to use my bankruptcy expertise to help improve the lives of three million American citizens. I jumped at the opportunity. President Obama did appoint me, and I served on the oversight board for nearly eight years, the last three-and-a-half as chair. During this time, the Commonwealth of Puerto Rico completed the largest governmental debt restructuring in American history, and we restructured the debt of eleven other governmental entities as well.<\/p>\n
The Commonwealth bankruptcy\u2014which restructured $35 billion of the island\u2019s $74 billion of debt and shored up its radically underfunded pension system\u2014took five years. It was a wild, wild ride, punctuated both by natural disasters such as Hurricane Maria in 2017, earthquakes in 2020, and the COVID-19 pandemic in 2020; and by human obstacles such as creditors\u2019 attempts to have the board members\u2019 appointments declared unconstitutional and by the exploits of a rogue board member.<\/p>\n
In addition to $7.1 billion of cash and $7.4 billion of new bonds, Commonwealth bondholders (who were owed $18.7 billion) received an innovative \u201ccontingent value instrument,\u201d or CVI, in the Commonwealth restructuring. If Puerto Rico\u2019s sales tax revenues exceed expectations in a given year, the bondholders receive an additional payment; if not, they don\u2019t. Although this CVI bears a family resemblance to GDP-linked warrants that have been used in a few sovereign debt restructurings (including Argentina in 2005 and Ukraine in 2015), it has two enormous advantages: (1) sales tax revenues only go up if the economy has improved and the debtor can afford to make an extra payment, whereas a rise in GDP does not always reflect an increased ability to pay (as with Ukraine in 2015); and (2) sales tax revenues are much more difficult to manipulate than GDP. The CVI helped to bridge the gap between the bondholders\u2019 belief that the Commonwealth could afford to pay more, and the board\u2019s concern that it could not. It is an important new addition to the municipal restructuring toolkit.<\/p>\n
The Puerto Rico debt crisis isn\u2019t just about Puerto Rico; it\u2019s also about the United States. The Puerto Rico crisis is a case study of how governments at the city, state, or federal level become dysfunctional, what the options are when they do, and how well an option like state bankruptcy might work.<\/p>\n