(Reuters) - Puerto Rico on Wednesday filed for a form of bankruptcy protection, bumping aside Detroit for the title of the largest municipal insolvency case in U.S. history.
While the Caribbean Island and MoTown share comparable histories of economic malaise, ballooning debt and fiscal mismanagement at the heart of their distress, several important differences distinguish the two proceedings.
Here are some key distinctions and similarities:
SIZE OF THE PROBLEM
Puerto Rico’s overall debt burden is nearly seven times larger than Detroit’s was when it entered bankruptcy.
The Motor City had $18 billion of debt, including outstanding bonds and unfunded liabilities for its worker pensions and retiree healthcare, when it filed for Chapter 9 municipal bankruptcy in July 2013.
By contrast, Puerto Rico is struggling with a public debt burden totaling $74 billion of outstanding bonds and $49 billion owed for pensions.
DIFFERENT KIND OF ‘BANKRUPTCY’
Detroit’s case occurred under Chapter 9 of the U.S. Bankruptcy Code, which is reserved for state and local governments.
Puerto Rico, as a U.S. territory, is barred from filing for the same kind of creditor protection, but Title III of the so-called PROMESA law, enacted by Congress last year, allowed it to pursue a court-supervised, bankruptcy-like proceeding to restructure its obligations.
Detroit exited Chapter 9 in December 2014 after a 17-month restructuring that allowed it to shed about $7 billion of debt. Bondholders and bond insurers reached agreements that resulted in recoveries of 74 percent for unlimited-tax general obligation bonds and 34 percent for limited-tax GO bonds.
It is unclear at this stage how much Puerto Rico’s creditors can expect to recover.
POVERTY AND FLIGHT
Heading into bankruptcy, both Detroit and Puerto Rico were plagued with population declines, high unemployment rates, sinking housing values and a large portion of local residents living below the poverty line. Chronically late financial audits were common for both, and severe budget problems adversely affected the delivery of government services.
LOSS OF LOCAL CONTROL
Both Puerto Rico and Detroit had been effectively stripped of local control over their finances by the time each sought protection from creditors.
Detroit’s finances had been turned over to an emergency manager tapped by Michigan Governor Rick Snyder. Kevyn Orr, a corporate bankruptcy attorney from Jones Day, retained day-to-day control over city operations until the city emerged from bankruptcy.
Under PROMESA, Congress imposed an oversight board charged with fixing Puerto Rico’s finances and devising an economic recovery plan. It also armed it with the use of a court-supervised process to restructure the territory’s debt.
Both bankruptcy filings followed bond defaults.
Detroit’s emergency manager skipped a payment on $1.43 billion of pension bonds in June 2013. As of Sept. 30, Puerto Rico and its various bond issuing authorities had missed nearly $1.5 billion in debt service payments.
WHERE’S THE ART?
Perhaps the most unique element of Detroit’s bankruptcy was the role played by its local art museum.
The Detroit Institute of Arts was home to city-owned works from masters such as Claude Monet, Henri Matisse and Pieter Bruegel that were at risk of being sold to help settle Detroit’s debt. A so-called grand bargain involving $816 million pledged by foundations, the institute and the state of Michigan saved the art from sale, while providing money for pensions.
Reporting By Karen Pierog, editing by Dan Burns
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