Puerto Rico’s Debt Is Out Of Control
Puerto Rico’s Debt Is Out Of Control
Alexis ChapmanWednesday,20 January 2016
Secretary of the Treasury Jack Lew will be in San Juan today meeting with Governor Alejandro Garcia Padilla and other lawmakers to talk about Puerto Rico’s financial crisis. The extremely short version of what’s going on is that the Government of Puerto Rico borrowed tens of billions of dollars from mainland hedge funds in anticipation of an economic resurgence. Because Puerto Rico is a Commonwealth but not a state, bankruptcy is not an option for any municipality or government agency. And because of the way its constitution is set up, Puerto Rico’s government is obliged to pay back lenders before expending money on almost anything else, so it seemed like a pretty safe bet for the hedge fund managers.
Now these debts are due but unfortunately Puerto Rico’s economy did not grow as expected and the Government does not have the money to pay the debts and things have been steadily progressing from bad to extremely bad over the past several months. Negotiations, defaults on payments, claw backs from lower priority bonds to pay off higher priority bonds, and at least one lawsuit are ongoing. In order to make some urgent payments the Government recently resorted to withholding Puerto Ricans’ state tax return money, and stopped paying vendors for some goods and services, among other measures. Stealing people’s tax returns and shortchanging vendors is not a sustainable long-term fiscal strategy and the latest estimates are showing that Puerto Rico will be over twenty billion dollars short on its debts over the next ten years. So when Lew and Padilla meet they’ll be dealing with an urgent issue that is having big negative impacts on Puerto Ricans right now, and is also a serious long term problem that will need to be addressed in order to stop the economic crisis from going on for the next decade.
In anticipation of today’s meeting Secretary Lew has already called for legislation to allow Puerto Rico to restructure its debts, and a bill was introduced in December that could do that. H.R. 4199 would create a Financial Stability Council to oversee Puerto Rico’s budget and financial plans, and its members would be appointed by the President. This bill would also change the definition of “State” in Chapter 9 of the U.S. code to include Puerto Rico and enable cities and agencies in Puerto Rico to declare bankruptcy, which they currently can’t (states themselves also can’t declare bankruptcy). H.R. 4199 is off to a decent start. It was introduced by Rep. Sean Duffy, a Republican from Wisconsin, and has some qualified support from Puerto Rico’s only elected federal representative, Resident Commissioner Pedro Pierluisi, a Democrat. Since it’s not a state, residents of Puerto Rico don’t get to vote for president and the Resident Commissioner is what they have instead of Senators or Representatives; he can do everything other members of Congress can except cast floor votes (also there’s only one of him), so he won’t get to vote on the bill if it makes to the floor, which seems kind of wrong.
What seems even worse is that Pierluisi also won’t get to cast a floor vote on his own bills, like H.R. 3725. He introduced it in December and it would authorize the U.S. treasury to guarantee bonds issued by Puerto Rico’s government. It’s an idea that has some merit but I think it’s unlikely to get traction in the current Congress. There’s also S.2381 which would cut some employees and payroll taxes in Puerto Rico and create a Financial Responsibility and Management Assistance Authority, similar to the Council in H.R.4199. But it wouldn’t reclassify Puerto Rico as a state under Chapter 9. S.2381 was introduced by three Republicans and may end up being the one that goes the distance. H.R.870, another bill from Pierluisi, would just change Chapter 9 to classify Puerto Rico as a state. And finally there’s H.R.727, also introduced by Pierluisi, to allow residents of Puerto Rico to vote on whether or not it should become an actual, for real state, not just a state for bankruptcy purposes.
Puerto Rico’s current status as a non-state commonwealth means that the Federal Government is supposed to be in charge of commerce, among other things. The magnitude and scope of the current financial fiasco would suggest that in addition to bad decisions at the Commonwealth level, there was also some pretty big ball droppage on the part of the U.S. Federal Government. But regardless of whose fault this is it’s clear that things need to change. Millions of Puerto Ricans have already left the island for the mainland so that they can have the same opportunities and rights as other U.S. citizens. And Puerto Rico itself is still home to over 3.5 million Americans — that’s more than Vermont, New Hampshire, and Hawaii. Combined. Hopefully this crisis will be an opportunity for our elected officials to give Puerto Rico the tools it needs to achieve some economic stability. But it’s also an opportunity for us to think about why an American living in San Juan (or Guam, or American Samoa, or the U.S. Virgin Islands) doesn’t have the same rights as an American living in New York. Because frankly the current setup seems kind of un-American.