Cooperativas are financial institutions that are insured by a territory government agency, the Corporation for the Supervision and Insurance of Cooperatives. There are more than 100 cooperativas in Puerto Rico in addition to 11 credit unions that are insured by the NCUA.

The cooperativas currently have more than 966,000 members and total assets of $8.47 billion.

The House Natural Resources Committee – which has jurisdiction over Puerto Rico – considered legislation last week that would create a fiscal oversight board to supervise efforts to help the island solve its debt problem.

"This is the constitutionally-sound solution that will provide real, long-lasting reform to the Commonwealth while respecting the rights of all parties and creditors," Committee Chairman Rob Bishop (R-Utah) said.

In a staff memo prepared for the hearing, the committee outlined the Puerto Rico problem in stark terms.

"The island has managed to accumulate $72 billion of unsustainable debt and a pension liability of more than $40 billion," the committee said.

In addition, the island's legislature passed a bill authorizing the governor to declare a moratorium on debt.

The legislation would place the cooperativas under a fiscal oversight board. The board would supervise the development of budgets and fiscal plans, and require the island's government to balance its budgets. The board would remain in existence until the government is able to produce audited financial statements and balanced budgets for four years.

The law would also allow the government to restructure its debt, but not through bankruptcy proceedings.

Creditors would be given several opportunities to negotiate voluntary agreements before any debt is allowed to be restructured.

However, that won't solve the cooperativas' problems, according to Sosa-Llorens, who was also a former commissioner for Financial Institutions of the Commonwealth of Puerto Rico.

Sosa-Llorens told CU Times he believes Congress should consider granting Treasury and the NCUA the authority to guarantee the cooperativas' insurance fund.

"We were informed that [Congress] was discussing various scenarios," he said.

Sosa-Llorens said he and others have suggested that Congress provide federal backing, which should be included in any debt restructuring legislation that is considered on Capitol Hill.

He cited the crisis that corporate credit unions faced several years ago as the type of intervention the NCUA might provide.

"A similar active role was played by the National Credit Union Administration in 2009 to safeguard the corporate credit union system, whose distressed asset exposure was between $50 [billion] and $65 billion," Sosa-Llorens and Fernando Vinas-Miranda, who is serving as the cooperativas' financial adviser, wrote in a memo to the House Natural Resources Committee.

An NCUA spokesman said NCUA officials are not involved in discussions to guarantee Puerto Rico's cooperativas.

"That is an idea of a private sector lawyer and a matter for Congress to decide," NCUA Communications Specialist Ben Hardaway said. "[The] NCUA is not involved in conversations about insuring Puerto Rico's COSSEC-insured cooperativas."

Mudd predicted Congress may not step in until a cooperativa is in serious financial trouble. He said that even then, some cooperativas could object to the NCUA stepping in, adding that the institutions are deeply rooted in the Puerto Rican independence movement.

The memo stated the cooperativas constitute one of the main institutional investors in commonwealth bonds – investments that could be worth little as the island government teeters on the brink of insolvency.

In addition, Sosa-Llorens said the COSSEC coerced cooperativas to buy government bonds, accusing government regulators of threatening punitive taxation if the cooperativas did not purchase government bonds.

Sosa-Llorens' group proposed that investors voluntarily accept payment on the bonds based on the entry point – the price at which each bondholder purchased the bond.

The memo from the two men also outlined the role the cooperativas play in Puerto Rican society. "The role of credit unions has become even more important in light of the contraction of Puerto Rico's commercial banking sector and the ensuing reduction of bank credit during the last decade," the memo stated.

The cooperativa system is safe and sound, with the exception of the risk associated with the government's bonds, Sosa-Llorens and Ramirez wrote.

"In this sense, the government's obligations to protect Puerto Rico's credit union system is in the nature of reparations and not of a bailout or preferential treatment," they said.

In the past, all receiverships and liquidations of any cooperativas have been handled and financed by the institutions themselves. The same could not be said for banks that have failed, the memo noted.