After months of debate, weeks of negotiations, millions of dollars spent on misleading attack ads, and three bond defaults, Congress is running out of time to prevent a taxpayer bailout of Puerto Rico. The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), H.R. 5278, is the fiscally responsible solution to the island’s debt crisis. This legislation installs an oversight board to fix the mess, protect bondholder rights, and, most important, prevent a taxpayer bailout.
Questions have arisen about why Congress even has to deal with Puerto Rico. The argument has been made that the territory’s financial mismanagement created $72 billion in debt, so the territory should take care of everything without any help from the federal government. If Puerto Rico were a foreign country, that would be a valid point. But under the Constitution, Congress has the sole responsibility for all U.S. territories.
As the island’s debt ballooned to record levels, rather than take the steps necessary to restore fiscal security, such as cutting unnecessary spending, in late June of 2015 Governor Alejandro Garcia Padilla simply declared that Puerto Rico could no longer meet its financial obligations. On May 1, 2016, the territory defaulted on $370 million worth of debt, the largest of three defaults to date. If nothing occurs before July 1, 2016, Governor Padilla has stated that Puerto Rico will default again, this time on $2 billion in debt.
Congress needs to step in now; otherwise, a huge taxpayer bailout is the likely outcome. PROMESA is the best, most fiscally responsible way to prevent a bailout from occurring. A fiscal-control board, similar to those that helped reverse the fiscal misfortunes of New York City and Washington, D.C., will be created under the legislation. The board’s responsibilities will include determining the depth of the fiscal situation, approving budgets, and producing financial statements. In short, it will ensure that the Puerto Rico fiscal crisis is addressed without spending a dime of taxpayer money.
The board will also be a forum for voluntary renegotiation of the terms of the Puerto Rican debt. There are no fewer than 18 classifications of creditors, with varying situations. This is good news for creditors, who are getting paid nothing right now thanks to the defaulted payments. Stretching out a repayment term or lowering an interest rate is clearly a better solution than getting nothing at all.
If debt cannot voluntarily be renegotiated, the board will be able to recommend a debt restructuring overseen by a federal court as a last resort. This is not to be confused with municipal bankruptcy: The process is not empowered by the Constitution’s bankruptcy clause, but by its grant to Congress of the authority to set all needful laws for territories. Ordinary federal courts rather than bankruptcy courts will be used.
This bill is not a bailout. Zero taxpayer dollars will be spent in helping Puerto Rico get out of its fiscal nightmare of debt.
Misleading claims are being made that this type of debt restructuring will spread like a contagion to basket-case states such as California and Illinois. But the Tenth Amendment prohibits Congress from setting up a control board for states along the lines envisioned for Puerto Rico, nor is it at all likely that a sovereign state would accept one even if Congress tried.
This bill is not a bailout. Zero taxpayer dollars will be spent in helping Puerto Rico get out of its fiscal nightmare of debt. Without PROMESA, defaults will continue, litigation will mount, and basic humanitarian services will start to break down. Creditors will demand payment anyway, and taxpayers will be left holding the bag.
While this bill will take care of one aspect of the economic crisis, it would have been even better if pro-growth tax reform and other provisions had been included to help create jobs and get the Puerto Rican economy moving again. For example, all U.S. companies doing business on the island have to pay Puerto Rican income tax and pay taxes again when they bring the money home, which is also the case for Americans doing business in foreign countries. This double tax should be permanently repealed as a down payment toward the territorial tax system that should be part of any comprehensive tax reform.
In any case, Congress has a duty to address the Puerto Rico fiscal disaster before every taxpayer around the country gets stuck with the bill.
— Grover Norquist is the president of Americans for Tax Reform. Tom Schatz is the president of Citizens Against Government Waste.