On Thursday, there will be another congressional hearing about 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 Gov. 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,” Sen. 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, and its negotiations with creditors over voluntary restructuring have hit a wall.
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 and unemployment is rising.
The Obama administration rightly has rejected any federal bailout of Puerto Rico while advising its officials on steps they can take to streamline government, increase revenue and stimulate growth. 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 also can help Puerto Rico in other ways, such as suspending 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.
— Bloomberg View
