Congress Must Act on Puerto Rico Fiscal Crisis Before Next Default
Puerto Rico’s Government Development Bank (GDB) will default after today failing to make almost $400 million in debt payments. If Congress does not act soon, multiple Puerto Rican government entities will soon join the GDB and default on billions that they owe over the next year.
While this may be seem like a problem for Puerto Rico alone, Congress has a duty to address this crisis. Under the Constitution, the federal government has authority over Puerto Rico and all territories. If nothing is done, the islands 3.5 million residents who are all U.S. citizens can simply move to other parts of the country as the island's economy collapses.
In all, Puerto Rico is $72 billion in debt and has no realistic way to pay it back following years of mismanagement and a decade long recession. In announcing that the GDB would default, Puerto Rico Governor Alejandro García Padilla said the island was forced to prioritize basic services over debt payments. As a result, another default is imminent as the island must make payments in July totaling nearly $2 billion including $800 million in constitutionally guaranteed general obligation bonds.
Congress should address the Puerto Rico crisis by passing H.R. 4900, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) introduced by House Natural Resources Committee Chairman Rob Bishop (R-Utah) and Congressman Sean Duffy (R-Wis.). This legislation is undoubtedly the most realistic, pro-taxpayer solution to Puerto Rico’s fiscal woes and a third draft of the legislation will be released later this month further clarifying the concerns of many.
PROMESA creates an Oversight Board modeled off the success of the fiscal control board created for the District of Columbia in 1995. This independent board, of which a majority is appointed by Republican leaders in Congress, will force Puerto Rico to produce much needed financial statements, fiscal reforms, and ultimately stabilize the economy.
While some have characterized this legislation as a bailout, nothing could be further from the truth. PROMESA does not provide any federal expenditures so does not impact taxpayers at all. In fact, even expenses for setting up and operating the Oversight Board will come from Puerto Rico, not federal taxpayers. Conversely, if nothing is done soon and PROMESA is not passed, Congress may be left with no other option but a taxpayer funded bailout.
Another criticism leveled at PROMESA is that it retroactively grants the island “super chapter 9 bankruptcy” which will set a precedent allowing states to be given a bailout or restructure their debts after the fact. This concern is also without merit.
The legislation does not modify federal bankruptcy law, instead placing any Puerto Rican debt restructuring under the section of federal law that relates to territories. PROMESA facilitates a process where restructuring occurs voluntarily between debtors and creditors. If restructuring cannot be reached voluntarily and is still deemed necessary, the Oversight Board has the authority to evaluate and resolve problems on a case-by-case basis. Importantly, this process ensures that the rights of bondholders are protected while preventing a small subgroup of bondholders from holding the entire process hostage.
Admittedly, PROMESA is not the perfect bill. While the current draft contains some pro-growth provisions like minor minimum wage relief, more would be welcome to ensure Puerto Rico receives the regulatory relief it needs. Fortunately, the Oversight Board also provides an opportunity to ensure common-sense reforms are implemented.
Regardless, Puerto Rico is a problem that Congress has a duty to address. PROMESA balances the need to respect property rights and safeguard bondholders, addresses Puerto Rico’s fiscal crisis in a responsible way, does not set a precedent for states, and avoids a taxpayer bailout.