Res­cu­ing Puerto Rico

U.S. pro­pos­als to help the is­land could be costly to tax­pay­ers.

The Washington Post Sunday - - SUNDAY OPINION -

THERE WAS long-over­due drama at a Capi­tol Hill hear­ing Thurs­day. We are re­fer­ring, of­course, to Trea­sury Depart­ment coun­selor An­to­nio Weiss’s tes­ti­mony be­fore the Sen­ate Com­mit­tee on En­ergy and Nat­u­ral Resources, in which he warned of a loom­ing “hu­man­i­tar­ian cri­sis” in the fi­nan­cially distressed com­mon­wealth of Puerto Rico. Mr. Weiss’s words marked a break with the Obama ad­min­is­tra­tion’s pre­vi­ous low-key ap­proach to the is­land’s debt cri­sis, and if he re­sorted to hy­per­bole to com­pen­sate for that, it was only slightly. Hav­ing al­ready cut spend­ing, jacked up taxes and post­poned var­i­ous bill pay­ments, Puerto Rico is out of cash and fac­ing a year-end liq­uid­ity crunch that could lead to a breakdown in pub­lic ser­vices, or even pub­lic or­der.

Mr. Weiss backed up his words with the ad­min­is­tra­tion’s most com­pre­hen­sive pol­icy pro­pos­als yet, the most im­por­tant of which would re­quire con­gres­sional ac­tion. Specif­i­cally, he ad­vo­cated not only per­mit­ting Puerto Rico’s mu­nic­i­pal­i­ties and pub­lic cor­po­ra­tions to file for bank­ruptcy, which would af­fect about a third of its $73 bil­lion debt, but also ex­tend­ing the bank­ruptcy op­tion to the com­mon wealth gov­ern­ment it­self. He called for a per­ma­nent fix to the is­land’s Med­i­caid pro­gram, which faces crip­pling un­cer­tainty be­cause of lim­its on fed­eral as­sis­tance un­like those of the 50 states. And to ad­dress its lag­ging la­bor force par­tic­i­pa­tion – a huge drag on eco­nomic growth – he pro­posed cre­at­ing an Earned In­come Tax Credit to en­cour­age low-wage work­ers’ re­turn to the job mar­ket.

In short, for the first time the ex­ec­u­tive branch has put its weight be­hind so­lu­tions that would cost money, bil­lions of dol­lars of it. A good bench­mark would be Gov. Ale­jan­dro Gar­cia-Padilla’s pro­jec­tion of a $14 bil­lion hole in the is­land’s fi­nances over the next five years. The ad­min­is­tra­tion’s plans for Med­i­caid and an EITC would put U.S. tax­pay­ers on the hook. Bank­ruptcy would be the mech­a­nism through which cred­i­tors chip in; an av­er­age 40 per­cent “hair­cut” on their bonds is prob­a­bly in or­der, ac­cord­ing to a re­cent study by Black Rock. As the ex­am­ple of Detroit shows, let­ting an im­par­tial bank­ruptcy judge sort out the com­pet­ing claims on a failed pub­lic en­tity is the fairest, most ef­fi­cient ap­proach; with­out that op­tion, Puerto Rico has no lever­age in debt ne­go­ti­a­tions, and lit­i­ga­tion could en­sue.

Which brings us to what can fairly be ex­pected of the com­mon­wealth it­self. Its predica­ment is due to many forces be­yond its con­trol, start­ing with the anoma­lous semi-sov­er­eign po­lit­i­cal sta­tus that traps it – like Greece in the Euro­pean Union — in a mone­tary union with the far larger and more com­pet­i­tive United States. Still, Puerto Rico has squan­dered vast resources on mis­man­age­ment and anti-growth poli­cies. There­fore, it may ap­pro­pri­ately be­held to a struc­tural ad­just­ment pro­gram that en­sures it uses fresh cash ef­fi­ciently. For that pro­gram, in turn, to have cred­i­bil­ity, it must be sub­ject to over­sight by a truly in­de­pen­dent body; in­deed, if over­sight doesn’t work, noth­ing in Mr. Weiss’s plan can work, either eco­nom­i­cally or po­lit­i­cally, since buy-in from Repub­li­can fis­cal hawks is needed. De­sign­ing that in­sti­tu­tion is the task to which Congress, Puerto Rico and the ad­min­is­tra­tion must now turn in a spirit of co­op­er­a­tion, but also ur­gency.

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