Declare Bankruptcy in Puerto Rico
In a rare show of bipartisan support, Congress passed a bill last June to save Puerto Rico from a debt spiral and certain economic collapse. Known as “Promesa,” the bill was a tough compromise based on hard facts about the state of the island’s finances. Unfortunately, an outbreak of wishful thinking on the part of the local government threatens to sabotage the hard-won gains the bill promises for the 3.5 million Americans who call Puerto Rico home.
Neither Democrats nor Republicans got all they asked for with Promesa. Critically, the law failed to provide Puerto Rico’s most vulnerable with Medicaid funding and an earned income tax credit – matters that Congress still needs urgently to address. But it did create two mechanisms essential to ending the island's fiscal crisis and building a foundation for growth.
First, it established a powerful independent Oversight Board that has been working intensively, without pay, to understand the island’s tangled financials and collaborate with the Puerto Rican government on a 10-year fiscal plan. The board is bipartisan, with Puerto Rican and Republican majorities. The members possess substantial legal and fiscal planning expertise. Every vote, thus far, has been unanimous.
Second, it gave Puerto Rico's governor and the board a powerful tool to reduce the island’s $70 billion in debt in a bankruptcy-like proceeding before a court of law. The tool is all-inclusive, with no carve-outs for special interests, despite millions of dollars spent by hedge funds to kill the bill (one of whom deemed Puerto Rico’s debt the “best investment idea of 2015”). Their hired guns sought to inflict a financial future on Puerto Rico akin to Argentina’s: a lost decade in litigation followed by a windfall victory for creditors.
That’s an outcome that Republicans and Democrats in Congress – where Puerto Rico does not have a voting representative – united to avert. As Republican House Speaker Paul Ryan observed, “Many big-money interest groups on Wall Street…have put a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico, putting U.S. taxpayers on the hook for their bad loans.” For Democratic congresswoman Nydia Velazquez, meanwhile, Promesa “is the only viable way for the island to reduce the billions it owes. Yes, billions. By doing so, you give the island the hope for a future where its budget is not consumed by interest payments, but instead provides funding for schools, hospitals and roads.”
Puerto Rico’s recently elected Governor Ricardo Rossello submitted a fiscal plan to the board for approval last week, reflecting his vision for the next decade. And by March 15th, the board is supposed to certify a plan, the critical next step in the process.
But two concerns loom large with the governor’s plan.
The first is delay. The governor calls for a change to Promesa to extend the initial phase of analysis and “consensual” discussions with creditors, explaining “I think it’s in the best interest of the people of Puerto Rico…It’s in the best interest of the bondholders, because they’ll have the chance to sit down and see all the data and evaluate it.” But the Oversight Board has already granted the maximum extension under the law (until May 1), and there have been dozens of negotiations over two years with creditors, who persist in suing Puerto Rico and each other. Further consensual discussions will likely fail. It’s time for the governor and the board to take the necessary steps to use the powerful tool Congress provided: bankruptcy before a court of law.
This crisis won’t get better with time. The Commonwealth’s Planning Board now projects a contraction of 2.3 percent in GNP for 2017, versus 1.7 percent in 2016. Young Puerto Rican families continue to abandon the island in search of opportunity on the mainland, leaving behind an aging population and a hived-out long-term revenue base. Meanwhile, creditors and their lobbyists are back in the halls of Congress, looking to weaken the restructuring tool and postpone the day of reckoning.
Second, the governor’s plan relies on false hopes for economic growth that risk an insufficient reduction in debt. The plan projects $13 billion in “revenue enhancements” over the next decade, relying on “revised macro assumptions,” unsettled matters of federal tax law and purported benefits of structural reforms, while understating the likely impact of cuts in spending and tax increases on the economy. This allows for debt payments of $1.4 billion annually by 2020 (and, perversely, $3 billion if Congress unexpectedly provides additional Medicaid funding).
But this brand of optimism asks the people of Puerto Rico, who will bear the brunt of austerity measures, to bear all of the risk. Revenue estimates are just that; debt obligations -- like death and taxes -- are certain. A fiscal plan predicated on a turnaround in the economy -- without a penny of additional federal funding -- is perilous and will only lead to another round of disappointment, another restructuring down the line and greater suffering for our fellow Americans in Puerto Rico. It’s time to face reality and reduce the debt accordingly.
Promesa is imperfect, but it affords a powerful means to avert a debt spiral in the Puerto Rican economy. Let’s stick to the timetable, not prolong the agony, and seek the necessary reduction in debt before a court of law. That’s not only the best, but the only, way to give Puerto Rico a real chance at recovery.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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James Gibney at email@example.com