A bill that would allow the U.S. territorial government of Puerto Rico to restructure its debts has passed in the U.S. House of Representatives, where it now needs Senate and Presidential approval to become law. The Wall Street Journal describes the main goals of the bill that passed in the House with bipartisan majorities.

Officials hope the bill accomplishes two things. First, they want to avoid a messy courtroom brawl between different creditors and the government that could curtail public services and further chill investment in Puerto Rico, which has been in recession for most of the last decade. Second, they want to reduce a debt burden that currently absorbs around 30% of the commonwealth’s revenue, far more than any U.S. state….

The island has defaulted on three classes of bonds, including last month when it missed most of a $422 million payment, and faces $2 billion in payments on July 1 that the island’s governor said can’t be paid.

“Come July 1, if nothing is done, Puerto Rico will technically be bankrupt,” said Anne Krueger, a former IMF economist who led a detailed review of the island’s economy. “Assets will be tied up in courts. It is very likely that essential services will have to be suspended.”

Puerto Rico’s government and public agencies owe over $70 billion to the U.S. territory’s creditors, which for Puerto Rico’s estimated population of 3.2 million, represents a burden of $21,875 per resident. Since Puerto Rico’s average per capita income is $11,241, the government debt burden upon Puerto Rico’s residents is especially heavy, weighing in at nearly double their incomes.

The most important aspect of the bill that passed the House is that it takes any restructuring of Puerto Rico’s debt out of the hands of the territory’s governor and puts in the hands of a federal oversight board, who will be appointed by the U.S. Congress and the President.

That is a very important development given the shenanigans that Puerto Rico’s officials have been engaging in with respect to their obligations. CBS Marketwatch reports on how Puerto Rico’s governor, Alejandro Garcia Padilla, is trying to weasel out of paying back money that Puerto Rico’s government received and spent after borrowing it, claiming that because the government had no authority under its constitution to borrow the money, it cannot be required to pay it back:

An audit report published on Thursday suggests that debt-laden Puerto Rico may be able to void some of its borrowing because politicians exceeded constitutional debt limits and their own authority.

The report, shared with MarketWatch, states that some of Puerto Rico’s debt may have been issued illegally, allowing the government to potentially declare the bonds invalid and courts to then decide that creditors’ claims are unenforceable. The scope of the audit report, issued by the island’s Public Credit Comprehensive Audit Commission, covers the two most recent full-faith-and-credit debt issues of the commonwealth: Puerto Rico’s 2014 $3.5 billion general-obligation bond offering and a $900 million issuance in 2015 of Tax Refund Anticipation Notes to a syndicate of banks led by J.P Morgan.

Warren Meyer had perhaps the best reaction to the territory’s highly questionable legal arguments:

So government officials break the law by taking out a loan they shouldn’t have taken out, and the punishment is that they get to keep the money and not pay it back? This is absolutely absurd. That means that completely innocent third parties are essentially being fined $4.4 billion for the malfeasance of Puerto Rico’s government officials.

Given the problems that many states have with respect to their public employee pension benefits, it will probably be just a matter of time before states like Kentucky, Illinois, New Jersey, Massachusetts, and Connecticut attempt similar maneuvers given their fiscal situations.