OP-ED- The HIll
Federal oversight of Puerto Rico is necessary (and legal)
By John E. Mudd – 06/24/15 01:00 PM EDT
The relationship between the United States and Puerto Rico is long, complicated and emotionally charged. In the nearly 120 years since Spain surrendered the island to the U.S. at the conclusion of the Spanish American War, Puerto Rico has been trapped in a political limbo – neither a state in the American union nor an independent nation.
Now, Congress is set to begin debate on redefining the political status of Puerto Rico, a U.S. commonwealth. To millions of Puerto Ricans like me, it is a discussion that is long overdue. But, sadly, this discussion is coming at a time when Puerto Rico’s deteriorating economic situation greatly complicates any efforts to resolve its political status.
Indeed, Congress is already grappling with the question of how to prevent the debt-laden island from going over the financial cliff, with proposals ranging from a multi-billion-dollar bailout to the institution of a financial control board for the island.
Puerto Rico’s debt obligations are staggering indeed – ranging from a minimum of $73 billion to as much as $164 billion, if you count unfunded liabilities like health-care costs. But that does not begin to provide a true picture of the island’s dire situation. The island is also grappling with unemployment that is at an unshakeable 13 percent; soaring debt among its towns and cities; a retirement system has less than a penny for every dollar owed; and insolvency at the Government Development Bank, an unregulated entity that finances the island’s operations.
Sensing an opportunity to cash in on the island’s travails, a parade of high-priced consultants and lawyers have made their way to the island to offer the government ideas on how to get out of this terrible bind. But in truth, many of these ideas are impractical, undermine creditors and have failed to attract the political support they need in Washington.
Watching the island’s leaders and outside advisor try to resolve this mess has been a troubling spectacle.
First, acting on the advice of Jim Millstein, who advised the UAW during the restructurings of GM and Chrysler, and Cleary Gottlieb, who have counseled their client Argentina to default rather than negotiate with its creditors,, Governor Alejandro Garcia Padilla signed into law last year bankruptcy legislation for municipalities and public corporations. This law, commonly known in Puerto Rico as the debt-avoidance law, was struck down by a federal court earlier this year that said it violated the U.S. Constitution.
Second, Puerto Rico’s non-voting representative in Congress, Pedro Pierluisi, introduced a bill (H.R. 870) that would grant special protection to the island under Chapter 9 of the U.S. bankruptcy code. The bill has no co-sponsors and has been widely panned as a bailout by Conservatives. Its future looks as bright as Puerto Rico’s.
Third, Governor Garcia Padilla and his Party asked Treasury Secretary Lew to provide the island a bailout and to commit to buying Puerto Rican junk bonds at the expense of U.S. taxpayers. Lew’s response was blunt and swift, reportedly telling the governor to get his fiscal house in order. Each of these moves has led to downgrades in Puerto Rican creditworthiness and sparked concern about whether Puerto Rico was heading down the path of becoming a deadbeat like Argentina.
More than that, when the governor and his team talk about restructuring the island’s debt, it sends chills through the investment community and makes it difficult for the island to secure additional financing.
So where does Puerto Rico go from here?
With out of touch leaders in Puerto Rico and no support to for bankruptcy in Washington, the time has come for real solutions.
Many policymakers in Washington will remember the control board established for the nation’s capital 20 years ago to remedy problems created by the mismanagement of several administrations in the 1980s and 1990s. The Board of five members, appointed by the president, had sweeping powers. It ushered in four balanced budgets in a row and restored the city’s access to credit in the short and long-term at reasonable rates.
The District of Columbia is not a U.S. territory but the Constitutional language used to refer to it is similar to that used to refer to territories and hence its experience may be applicable to Puerto Rico. The so-called Territorial Clause of the U.S. Constitution clearly provides Congress with a legal remedy to create a way to not only address Puerto Rico’s existing debt but also to design and impose a comprehensive plan for remedying management, governance and budgetary failures that gave rise to the crisis in the first place.
A control board would be a prudent, legally sound and politically practical way to address Puerto Rico’s current debt and implement sound financial management and governance for the future.
And it would leave the island in a stronger position to embark on the next chapter of its history once the question of its future political status is resolved once and for all.
Mudd is an attorney and legal analyst admitted to the practice of law in Puerto Rico, the P.R. Federal District Court, the First and Fourth Circuit Court of Appeals.