On May 1, the pace of Puerto Rico’s financial and humanitarian crisis will pick up considerably, as a $423 million loan payment comes due to creditors. Puerto Rico’s Government Development Bank (GDB) — the island’s main financing vehicle — is expected to default rather than pay. This default will probably send shock waves through the island’s financial system and government and unleash a new wave of litigation against the GDB, as nervous creditors try to recoup their money.
The effects of this default will be severe for Puerto Rico’s citizens and its creditors. The government depends on the GDB and a constant stream of new loans to finance its daily operations. If the GDB is unable to go back to the debt markets, the government will have little choice but to slash essential services such as police, firefighters, and hospitals. An already desperate situation on the island will become that much worse.
Even after the May 1 default, there will be no clear path ahead for the island or its creditors. Because of Puerto Rico’s status as a commonwealth, it does not have the ability to put its municipalities or other debt-issuing entities (of which there are 18) into bankruptcy. Instead, all of the island’s creditors will exercise whatever remedies they have under the terms of their agreements. The unfolding litigation in Puerto Rico’s courts will be nothing less than chaos.
To its credit, under the leadership of Speaker Paul Ryan, Republican members of the Committee on Natural Resources in the House of Representatives have been working diligently to put new legislation in place before the crisis on May 1. It now seems highly unlikely that Congress will pass a law before then. The draft legislation released by the House Committee — H.R. 4900, or PROMESA (Puerto Rico Oversight, Management, and Economic Stabilization Act) — has met opposition from diverse groups including Senate Republicans, the White House, members of Congress from both parties, and certain financial institutions.
Some of the opposition to the bill is legitimate. For example, as Senator Orrin Hatch has argued, the bill must do more to protect the guarantees made to certain senior debtholders. The three most commonly heard objections to the bill are that it amounts to a “bailout,” that it is an unacceptable intrusion on Puerto Rico’s sovereignty, and that American voters on the mainland have little reason to care about events in Puerto Rico. Each of these is mistaken.
While imperfect, PROMESA largely fulfills what Ryan called Congress’s “constitutional and financial responsibility to bring order to the chaos unfolding in Puerto Rico.” Congress should revise the parts of PROMESA that need fixing but retain much of the bill’s fundamental character. And it must do so quickly, because time is running out.
1. First, this is not a bailout.
Opponents of PROMESA (the acronym means “promise” in Spanish) have attempted to label it a “bailout” of Puerto Rico. This is a dishonest characterization that could hardly be further from the truth. The bill commits zero taxpayer dollars to pay back Puerto Rico’s obligations or its creditors.
The House bill commits zero taxpayer dollars to pay back Puerto Rico’s obligations or its creditors.
What PROMESA will do is establish a new federal oversight board for Puerto Rico, loosely modeled on the board that Congress set up for Washington, D.C., in the 1990s, when that city was financially insolvent. The board’s key powers would be to 1) to impose fiscal discipline and transparency on spending decisions and 2) impose mandatory restructuring plans for Puerto Rico’s $72 billion of debt. Both of these are sorely needed.
As Ryan has argued, this legislation is likely our country’s best hope of avoiding an expensive bailout later on. If Congress does nothing now, and Puerto Rico is plunged into a full-blown crisis, the federal government will have little choice but to intervene. Our government will not stand by and watch as events on the island become much worse. Congress can either act now to bring some order to the chaos, or face a much more costly intervention down the road.
A related objection to these “bailout” concerns has been expressed by conservative lawmakers who worry that the legislation would serve as a precedent for other financially troubled states, such as California or Illinois. This argument ignores the crucial difference between Puerto Rico and U.S. states. States are protected from federal government interference by the Tenth and Eleventh Amendments. Puerto Rico, as a U.S. territory, enjoys no such protections. The federal oversight board applied to Puerto Rico would never pass constitutional muster if applied to a U.S. state.
2. Second, the bill strikes an appropriate balance between the need for oversight and concerns about Puerto Rico’s sovereignty.
Some members of Congress object to the plan because it interferes with Puerto Rico’s ability to govern itself. Congresswoman Nydia Velazquez called the bill “insulting,” saying it treats Puerto Rico as if it is “a colony in the Caribbean.”
Both practically and legally, this position is untenable. The bill has the tentative support of the two highest-ranking elected officials in Puerto Rico’s government: Governor Alejandro Garcia-Padilla and Resident Commissioner Pedro Pierluisi, Puerto Rico’s non-voting member of Congress. Both officials signaled that they generally supported the latest version of PROMESA, after rejecting an earlier draft that took too much power away from San Juan.
More fundamentally, these objections are out of touch with the reality of Puerto Rico’s legal status. For more than 100 years, beginning with the so-called Insular Cases, the Supreme Court has held that the Territory Clause of the U.S. Constitution gives Congress the right to legislate for Puerto Rico. Found in Article IV, Section 3, Clause 2 of the Constitution, the clause provides that “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.”
In lay terms, this means that Congress has power to govern Puerto Rico as essentially a territorial possession of the U.S., acquired in the Spanish-American War. (The technical word for Puerto Rico’s status is either a “commonwealth” or a “free associated state.”) Although Congress granted citizenship to Puerto Ricans and introduced a modicum of self-government in 1917 and 1953, the ultimate sovereign of Puerto Rico is still the U.S. Congress.
To be sure, this arrangement is both anachronistic and embarrassing. For the U.S. to govern Puerto Rico as essentially another modern-day colony in the year 2016 is almost incredible. But the only real solution to this problem is to redefine the political status of Puerto Rico. This is a long-term process that has vexed policymakers for years. One hopes that Congress takes up that process soon with renewed vigor and urgency. But that task should not deter Congress from addressing the immediate emergency before it.
3. Third, this bill reflects the solidarity and interconnectedness between Puerto Rico and the United States.
Many lawmakers might ask why their constituents should care about what happens in Puerto Rico. Here are just a few of the vital connections binding Puerto Rico and the United States.
The Centers for Disease Control calls Puerto Rico the front lines of the Zika virus in the U.S., estimating that infection levels on the island could hit 80 percent within the year. Puerto Rico’s high poverty rate, tropical climate, and deteriorating public services have all contributed to the virus’s rapid spread. Imagine how much worse the situation could become for both Puerto Rico and the U.S. if the island’s health-care system and economy were to collapse entirely. The U.S. should do all it can to shore up Puerto Rico’s essential services. Anything less would jeopardize the health of our citizens on the mainland and in Puerto Rico.
The CDC calls Puerto Rico the front lines of the Zika virus in the U.S., estimating that infection levels on the island could hit 80 percent within the year.
Fortunately, there are also tremendously positive ties linking Puerto Rico and the U.S. We had a powerful reminder of these earlier this month, when, after decades of being ignored, a regimen of Puerto Rican soldiers known as the Borinqueneers received the Congressional Gold Medal. (The regimen gets its name from “Borinquen,” the pre-Columbian indigenous word for the island.) The Borinqueneers showed incredible bravery and heroics in World War I and World War II and the Korean War, even as they faced brutal discrimination within their own country. We must always remember that Puerto Ricans are our fellow citizens, many of whom have fought and died in American wars, even before they enjoyed full equality.
Finally, it is worth pointing out that many of the holders of Puerto Rican bonds are retail investors like you and me. Because many Puerto Rico bonds have a triple tax advantage under U.S. law (they are subject to no local, state, or federal tax), they have been a favorite of mutual-fund managers for many years. An orderly restructuring would serve the interests not only of opportunistic hedge funds, but also the retirement accounts of thousands of Mom and Pop investors.
What happens in San Juan will not stay in San Juan. The time for Congress to act is now.