Though Puerto Rico’s debt crisis may seem far afield for those of us who call the Evergreen State home, voters should pay close attention to how Congress crafts its legislative fix for the territory’s crippling debt and failing economy.
Puerto Rico is about half the size of Washington with its population of 3.5 million. Despite this, it is saddled with debt obligations of about $70 billion, and has a debt-to-GDP ratio of almost 70 percent.
How did it get this way? Decades of soaring government expenditures combined with falling revenues and complicated by an economy stuck in a now decade-long recession. Rather than instituting reforms that would have allowed the commonwealth to reign in its unwieldy budget, the island’s leaders have continued to heavily borrow to paper over the deficit.
Thankfully, Washington has mostly avoided these pitfalls, but other states have not, and that’s why the recent proposal for intervention in Puerto Rico put forth by Rep. Dan Newhouse’s Natural Resource Committee is so dangerous.
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The “Puerto Rican Oversight, Management, and Economic Stability Act” is, in essence, the retroactive bankruptcy bill for Puerto Rico that the Obama administration has sought for months. It empowers a federal “Oversight Board” to authorize Chapter 9 bankruptcy for the island, which is excluded from that part of the U.S. Bankruptcy Code.
Importantly, the board is empowered not only to authorize bankruptcy for Puerto Rico’s debt-laden public corporations and government agencies — which states across the country already have the power to do — but also to authorize bankruptcy for Puerto Rico itself.
Like Puerto Rico, states themselves do not have access to bankruptcy protection. While any retroactive application of bankruptcy law to the commonwealth amounts to “changing the rules” on bondholders, it’s not hard to see that granting Puerto Rico powers far beyond those available to any state is a precedent-setting moment.
In doing so, Congress would be allowing Puerto Rico to restructure debt backed by the “full faith and credit” of the Commonwealth under bankruptcy protection. Almost every state, including Washington, issues similar, supposedly foolproof “full faith and credit” backed bonds that investors bought at relatively low interest under the auspices that they could not be restructured in bankruptcy.
If Congress demonstrates a clear willingness to retroactively change the rules for Puerto Rico, then lenders will rightfully assign greater risk to the “full faith and credit” bonds issued by states. This will raise borrowing costs for Washington, increasing the bill for infrastructure projects and other spending that the state offsets with bond sales.
Of course, taxpayers will foot that bill.
There are other aspects of the bill that prove troubling for Washingtonians too. The bill incorporates a stay on creditor legal action that applies exclusively to bondholders. Under the protection of this mechanism, Puerto Rico can withhold payments from bondholders and use money that otherwise would have gone to them to pay off other creditors, including the government’s pension system.
In other words, the commonwealth can use money that would be going to Puerto Rico’s bondholders in Washington and elsewhere, who are in no small part retirement savers themselves, and use it to fund the Puerto Rican government pension fund. It can then force bondholders to accept harsh restructuring terms under court protection at the end of the stay.
While Congress is empowered to legislate as it sees fit, lawmakers should be careful not to trample on the rights of investors who played no role in Puerto Rico’s fiscal mismanagement by unduly favoring the Puerto Rican government.
Instead, Congress should consider ways to address the heart of the problem — a lack of economic growth primarily caused by reckless government spending and borrowing. Exempting the island from the Jones Act and the federal minimum wage are just two ways to increase economic growth in Puerto Rico.
This is a nation founded on a bedrock of laws and precedents. Congress has a duty to all Americans to facilitate a lawful solution to this crisis that treats all stakeholders fairly, but Newhouse should not forget that, first and foremost, he represents his constituents in Washington’s fourth district.
Vic Parrish is a retired Navy lieutenant commander, serving 22 years. After retiring from the Navy, he worked in the commercial nuclear industry until July 2010 when he retired from Energy Northwest, having served 14 years as chief executive officer. He and his wife Traci live in West Richland.