Puerto Rico recently defaulted on $400 million in debt and will soon default on another $2 billion. The island is $72 billion in the red, and has no realistic way to pay this back following a decade long recession and years of mismanagement.
This fiscal crisis will only get worse, and while this may seem like Puerto Rico’s problem alone, the island is a territory of the United States. That means that Congress has an obligation under Article IV, Section 3 of the constitution to act. Even absent this constitutional duty, the island’s 3.5 million residents are all U.S. citizens who can (and will) move to other parts of the country if the island’s economy is left to collapse.
The way to address Puerto Rico’s fiscal crisis is by passing the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Yesterday, Congressman Sean Duffy (R-Wis.) introduced H.R. 5278, an updated version of the bill that ensures obligations under the Puerto Rican constitution are respected and makes certain that the oversight board has the authority necessary to enact comprehensive fiscal plans to address the years of mismanagement. Importantly, PROMESA addresses the fiscal crisis in a way that prevents a taxpayer bailout and does not retroactively grant the island super chapter 9 bankruptcy.
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 make sure financial statements are produced, fiscal reforms are implemented, and budgets balanced to ensure Puerto Rico regains access to capital markets, and the island’s economy is stabilized for decades to come.
PROMESA does not provide for a taxpayer-funded bailout. The legislation has ZERO budgetary impact. Even expenses associated with setting up and operating the Oversight Board are paid by Puerto Rico, not the federal government. If Congress fails to pass PROMESA they will be forced into a taxpayer funded bailout because the situation will become so unmanageable.
PROMESA does not grant Puerto Rico chapter 9 bankruptcy or “super-chapter 9.” The legislation does not amend federal bankruptcy law, and under this bill, it would not be possible for any state to claim this creates a precedent allowing a state to declare bankruptcy on their obligations.
Instead, PROMESA borrows several restructuring concepts from more than 100 years of bankruptcy precedent and law including an explicit “best interest of creditors” test that ensures private property rights are protected.
While this legislation addresses Puerto Rico’s immediate fiscal crisis in a responsible way, some have called for the need for pro-growth provisions to ensure strong, long-term economic growth. PROMESA contains some pro-growth provisions like minor minimum wage relief, more reforms in the future would be welcome to help encourage economic growth.
One impediment to economic growth is that Puerto Rico is treated as a foreign country for federal tax purposes. As a result, American companies face double taxation in Puerto Rico, yet foreign competitors operating in Puerto Rico do not. Allowing free flow of capital between Puerto Rico and the rest of the U.S. would spur investment, create more jobs, and increase wages for the territory. While the legislation does not directly address this, PROMESA does establish a Congressional growth task force that will recommend long-term, fiscal reforms.
The bottom line is that PROMESA addresses the Puerto Rico debt crisis in a responsible, pro-taxpayer way by avoiding a federal bailout, ensuring property rights are protected, and forcing San Juan to get its fiscal house back in order. Members of Congress should have no hesitation supporting this important legislation.