The Drastic Step to Save Puerto Rico
Puerto Rico's problems won't be solved here.
On Thursday, there will be another congressional hearing on Puerto Rico's fiscal travails. Yet Congress already knows what it needs to know in order to act: Puerto Rico can't dig itself out of its $73 billion hole, and it requires not just congressional help but federal control to fix its finances. In case Congress hasn't gotten that message, the White House on Wednesday released a helpful congressional to-do list.
Puerto Rican authorities haven't exactly been helping their case: Witness Governor Alejandro Garcia Padilla's ill-conceived move to create an "independent" fiscal control board consisting of five members chosen by him and approved by the Puerto Rico Senate. And Puerto Rico's budget and debt servicing numbers are notoriously murky. "If we don't get really well-audited figures," Senator Orrin Hatch told a government official at a hearing last month, "it's going to be pretty hard to help."
What's crystal-clear is that Puerto Rico's debt, which outstrips that of any U.S. state except California and New York, is unsustainable. The commonwealth had its first mini-default in August. It may be unable to make a $354 million payment on securities that include its general obligation bonds on Dec. 1. It will have only about $5 billion available to pay $18 billion in principal and interest payments due from 2016 to 2020. Its negotiations with creditors over voluntary restructuring have hit a wall. And then there's this: One of Puerto Rico's pension funds faces a $30 billion shortfall, with only 0.7 percent of the assets it needs to pay benefits.
Puerto Rico can't grow its way out of such problems. For one thing, its population is migrating to the mainland in unprecedented numbers, draining the tax base and skilled labor pool. Its economy has shrunk every year but one since 2006. The island's levels of unemployment and poverty make Mississippi look like Connecticut.
The Obama administration has rightly rejected any federal bailout of Puerto Rico while advising its officials on steps they can take to streamline government, increase revenue and stimulate growth. But it has exhausted the limits of administrative action and is now calling for Congress to do its job. First and foremost, as the administration and members of the U.S. Federal Reserve have argued, Congress must extend to Puerto Rico the protections of U.S. bankruptcy law. That would enable orderly debt renegotiations with Puerto Rico's bondholders. Continued congressional inaction on this front is inexcusable and, given the growing influence of Puerto Rican voters, it also seems politically unwise.
Congress can also help Puerto Rico in other ways. Some of these the administration calls for, such as extending the earned income tax credit and addressing the historical disparities in Medicaid reimbursements. Congress should also suspend the minimum wage and the requirement to use costly (and in some cases dangerously dilapidated) U.S.-flagged vessels for shipping to the mainland.
The most controversial and most essential measure, however, would be to appoint a federal control board for Puerto Rico's finances similar to what was imposed on Washington, D.C., in the 1990s. Puerto Rico has a dismal record of complying with its own legislated or mandated cost-cutting. Moreover, especially in an election year, the cuts and reforms it must make would be difficult for any government.
Such a control board -- even the kinder, gentler version recommended by the administration, which would leave the power to raise taxes and fees in the hands of democratically elected officials -- would be a drastic step. But better that than a failed U.S. territory with 3.5 million U.S. citizens struggling to survive or escape the equivalent of a tropical debtor's prison.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.