To escape its fiscal crisis, Puerto Rico’s insolvent government is asking Congress to grant it the protections of U.S. bankruptcy law. That won’t be enough.
To help set the island on the road to financial recovery, Congress must also appoint a financial control board to take over and stabilize Puerto Rico’s budget.
You can debate why Puerto Rico’s economy has contracted every year but one since 2006. What’s beyond debate is its government’s record of epic fiscal mismanagement. Since 2000, public debt has risen from 60 percent of gross domestic product to more than 100 percent, a ratio far outstripping that of any U.S. state. Puerto Rico also faces what the New York Federal Reserve Bank has called “one of the largest actuarial deficits of all municipal governments in the United States,” with huge unfunded pension liabilities.
Rather than trying to balance its budget, Puerto Rico just kept borrowing, using tax-exempt bonds to roll over debt coming due. Finally, the game is up: Governor Alejandro Garcia Padilla has said the island can’t pay. He proposes that it stop servicing debt for “a number of years” and swap existing obligations for new debt with longer maturities and lower payments.
Puerto Rico is bankrupt in the ordinary meaning of the word, yet it can’t declare bankruptcy as Detroit and other municipalities have.
A U.S. court just affirmed that it also can’t pass a debt-restructuring law on its own. Hence the appeal to Congress, which is considering legislation that would allow Puerto Rico’s municipalities to file for Chapter 9 bankruptcy protection.
An orderly bankruptcy procedure is necessary to prevent a chaotic financial breakdown, not to mention even greater hardship for many ordinary Puerto Ricans, who hold $20 billion of the debt.
But it ought to be supplemented with new constraints on the island’s systematic and persistent mismanagement.
Padilla has made some progress in this regard, but not nearly enough. Puerto Rico’s most recent budget, passed on party lines, relied on rosy assumptions and gimmicks to balance the books. For much of the past decade, revenue forecasts have exceeded collections by $1.5 billion.
The real fiscal deficit is much larger than official figures say, according to an independent report commissioned by Padilla.
A congressionally imposed financial control board is the answer.
This should be part of a comprehensive package that includes bankruptcy protection — and, by the way, liberation from federal rules such as the minimum wage that have hurt competitiveness.
Federal agencies could also do more to help Puerto Rico cut its high energy costs, tailor mainland welfare benefits to local conditions, and make it easier to start businesses.
Everybody will lose from a disorderly default, a landslide of lawsuits, and a shutdown of credit and investment — but breaking the spiral of poverty, stagnation and fiscal incontinence that has driven Puerto Rico’s best and brightest to pull up stakes requires more than a pause. It demands drastic therapy.
A financial control board is drastic, to be sure, but it’s no less than the people of Puerto Rico need.
— Bloomberg View
