The Presidential election and related issues have drowned out a lot of nuanced policy debate over the last several months. An issue raised in one of the debates but largely ignored due to the personal back and forth between the candidates was the Puerto Rico bailout situation. In this author’s opinion, Senator Rubio was correct in his stance opposing the bailout.
There is currently legislation being drafted that would bailout Puerto Rico and frivolously allow it to restructure its debt. The proposal that the House Natural Resources Committee is considering, is favored by Obama’s Treasury Department and the Governor of Puerto Rico, Alejandro Garcia Padilla. Unfortunately, what is being discussed is a full “Super Chapter 9” bailout and debt restructuring in Puerto Rico. It would grant an unelected control board the authority to enact a broad, unprecedented restructuring regime for Puerto Rico. This would create a dangerous precedent for states and territories when it comes to municipal debt. This legislation would open up the possibility that the federal government would have to enact similar legislation bailing out states like California, which, simply given our national debt, is something our country cannot afford.
This “Super Restructuring” goes far beyond the authority that states have under Chapter 9 to authorize their municipalities and public corporations to declare bankruptcy. If enacted, the Super Restructuring would allow Puerto Rico to restructure the entirety of its debt load, including “general obligation” debts backed by the full faith and credit of the island’s Constitution. As an aside, this tranche of debt is relatively small, comprising only 25% of Puerto Rico’s debt burden, and has a constitutionally-backed seniority over all other government obligations.
The enactment of an unelected restructuring regime for Puerto Rico that would allow it to wipe out constitutionally-backed bondholders would have a far reaching domino effect across the nation’s municipal lending markets. In approving Super Restructuring, Congress would be establishing a clear precedent for a state like California or perhaps Michigan in debt crisis to ask Congress for the same authority – which would essentially render “full faith and credit” guarantees meaningless. This precedent will dramatically raise borrowing costs for states, who rely on “full faith and credit” debt as an inexpensive financing tool for needed infrastructure projects and essential services. This would also potentially cause fee in tax increases as the states have yet another financial burden thrust upon them.
This plan has attracted the opposition of Senator Marco Rubio, who could have simply pandered on this issue to gain votes in the Puerto Rico Republican Presidential Primary. He wound up winning Puerto Rico anyway. It has also attracted the opposition of many state Governors, including Arizona Governor Doug Ducey, Iowa Governor Terry Branstad, Maine Governor Paul LePage, Nebraska Governor Pete Ricketts, New Mexico Governor Susana Martinez, South Dakota Governor Doug Daugaard, and Alabama Governor Robert Bentley. They’ve spoken out in opposition to plan and wrote a joint opposition letter to Congressional Leadership and the House Natural Resources Committee.
In the letter they say, “Of most concern to us as governors, granting Puerto Rico such unprecedented bankruptcy authority would likely raise the borrowing costs of our states, reducing our ability to invest in vital services and eroding investor confidence in the whole notion of full faith and credit debt. Indeed, the National Governors Association has already warned against this in 2011, noting that states should not be given the right to declare bankruptcy themselves because the resultant market volatility would raise the cost of state governance precipitously.”
Also, the Cato Institute maintains that the Super Restructuring plan would amount to a politically motivated redistribution of retirement funds by placing constitutionally guaranteed general obligation bondholders behind public sector pensioners in the priority of payments.
The National Review also has a good article detailing the problems with a Puerto Rico bailout.
I’m specifically directing this post at Congressman Rob Wittman, as he sits on the committee that is currently reviewing the measure. Speaker Ryan has asked that the committee is take action on this issue by March 30th. I would ask that you call Congressman Wittman’s DC office and tell him that you oppose this measure, both for the dangerous precedent and it’s fiscal implications. You can reach the DC office at the following phone number, (202) 225-4261. Congressman Wittman needs to hear the informed voice of Virginia on this. Please tell Congressman Wittman that the states and the taxpayer cannot afford this burden.