Puerto Rico’s fiscal woes are approaching a boiling point. With more than $70 billion in outstanding debt, the territory has come to Congress, hat in hand, asking for help.
There are prudent ways to address the problem, and there are short-term patches that will only make the problem worse in the long run. A bailout, like those we saw for Wall Street and the auto companies in the wake of the financial crisis, is a non-starter. Throwing good money at bad behavior would only entrench the poor financial management that led to the mess in the first place, while making everyone worse off down the road.
Make no buts about it: The island’s problems are getting worse by the day, and congressional action now seems inevitable. The good news is that we have seen this movie before and know how to fix it without putting taxpayers on the hook for the wayward behavior of a territory that pays no federal income tax but is a recipient of generous federal subsidies.
To solve this situation, we need only look back in time to how Congress addressed the financial woes of Washington, D.C., in the 1990s. The D.C. model worked because its cornerstone was a strong independent control board. In this case, Congress created an oversight board that supervised the city’s budgeting and spending practices, which stayed in place for six years until D.C. was able to get back on sound financial footing and had its fourth consecutive balanced budget.
We could make this same practice work in Puerto Rico — a strong independent control board would provide oversight of the island’s finances and help them regain control of their bloated budget. Republican proposals in Congress have called for such a board to help the island reassess its financial situation and make structural changes that will get Puerto Rico’s fiscal affairs back on track. Such a move would be an essential first step to remedying this crisis.
The island’s creditors — seniors, savers, and investors from all across the world — need to have a say in how the government debt is restructured.
But an independent control board alone is not enough. The island’s creditors – seniors, savers, and investors from all across the world — need to have a say in how the government debt is restructured. Remember, two-thirds of U.S. pension and retirement funds are invested, at least partially, in Puerto Rico municipal bonds. Seniors, retirees, and families would lose billions if these bonds aren’t repaid; they’d get only pennies on the dollar back for what was supposed to be an essentially risk-free investment.
Many individuals specifically sought out these bonds because they saw the stock market as too risky. Puerto Rican bonds provided what was supposed to be a much safer haven for their nest eggs. The bonds benefited from a triple tax exemption: exempt from federal, state, and local taxes in all 50 states, while the Puerto Rican government backed the bonds with the full faith and credit of the island. Furthermore, it’s constitution guaranteed that its bond holders would be repaid first before any other creditors should the island become insolvent.
#share#Allowing Puerto Rico access to bankruptcy court could erase that guarantee, returning only pennies on the dollar to its investors by allowing the island to repay other creditors ahead of its bond holders.
It would also extend a benefit to the island that currently isn’t provided to any of the 50 states. Under current U.S. law, cities can declare bankruptcy. States, however, cannot. With access to the nation’s federal bankruptcy courts, states would be further emboldened to make bad financial decisions. After all, the federal bankruptcy courts would just bail them out no matter how bad a hole they had dug themselves into; this is one of the key reasons that states and other subsidiary governments haven’t had access to bankruptcy courts in the past.
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Puerto Rico’s problems are symptomatic of irresponsible budgeting and careless overspending, and the only remedy is long-term financial reforms. These reforms must rein in the excessive spending that plagued the Commonwealth for several decades and must get the island off the addictive promise of easy money.
As history proves, nobody learns much from a bailout other than that it is permissible to one day return to the same adverse financial situation. We can’t afford to keep learning these lessons. Any action with regard to Puerto Rico must involve a strong control board that has the independence to make the tough choices necessary to get the island back on strong footing.
— Darrell Issa represents California’s 49th congressional district.