Keep­ing Puerto Rico hon­est

Congress must in­sist the com­mon­wealth stick to its fis­cal over­sight deal

The Washington Times Daily - - OPINION - By An­drew F. Quin­lan An­drew F. Quin­lan is the co-founder and pres­i­dent of the Cen­ter for Free­dom and Pros­per­ity.

Congress wisely de­clined to bail out Puerto Rico when its lead­ers turned to Wash­ing­ton with hat in hand for help with its $70 bil­lion debt. In­stead, they cre­ated an over­sight board to com­pel the is­land com­mon­wealth to solve its self-in­flicted fis­cal mess. Un­for­tu­nately, both the over­sight board and the ter­ri­tory’s gov­ern­ment have failed to ad­here to con­gres­sional re­quire­ments and are not tak­ing the bold steps nec­es­sary to spur eco­nomic growth and fix Puerto Rico’s fi­nances.

The Puerto Rico Over­sight, Man­age­ment and Eco­nomic Sta­bil­ity Act (PROMESA) was passed by Congress last year and aimed to re­store fis­cal re­spon­si­bil­ity to the com­mon­wealth. In ad­di­tion to cre­at­ing the over­sight board and task­ing it with over­see­ing the is­land’s fi­nances, the act pro­vided a stay on lit­i­ga­tion in or­der to give the gov­ern­ment time to ne­go­ti­ate with bond­hold­ers. Cru­cially, it also man­dated that any fis­cal plan would “re­spect the law­ful pri­or­i­ties or law­ful liens, as may be ap­pli­ca­ble in the con­sti­tu­tion, other laws, or agreements of a cov­ered ter­ri­tory.”

Some debt re­struc­tur­ing is a nec­es­sary com­po­nent of any re­al­is­tic so­lu­tion for Puerto Rico. How ex­actly that is ac­com­plished makes a big dif­fer­ence, how­ever. The is­land will even­tu­ally need ac­cess to bond mar­kets again, which means ex­ces­sive hair­cuts aren’t go­ing to work. Nor can it play fa­vorites and ad­van­tage cer­tain debthold­ers over oth­ers or ig­nore the legally es­tab­lished pri­or­i­ties. There won’t be many will­ing to lend to Puerto Rico in the fu­ture if rules are ig­nored.

Un­for­tu­nately, the gov­ern­ment and the over­sight board have not at­tempted to work with debthold­ers in good faith. In­stead, they’ve put for­ward a plan that ig­nores PROMESA’s re­quire­ment of re­spect for law­ful pri­or­i­ties by ad­van­tag­ing cer­tain in­ter­ests over the gen­eral obli­ga­tion debt that is guar­an­teed by the is­land’s con­sti­tu­tion. The plan also only pro­vides $800 mil­lion in debt ser­vice per year while keep­ing nearly 94 per­cent of rev­enue for other ex­pen­di­tures. There is vir­tu­ally no fis­cal re­form — in fact, the bud­get plan calls for sig­nif­i­cant in­creases in pay­roll and op­er­a­tional ex­penses over the next decade — and no sig­nif­i­cant changes to the is­land’s pen­sion sys­tem with its whop­ping $48 bil­lion debt.

The plan does not rep­re­sent the se­ri­ous re­forms that PROMESA was de­signed to bring about.

To make mat­ters worse, the plan pro­poses a side deal to cred­i­tors of the Puerto Rico Electric Power Author­ity (PREPA), that would limit its bond­hold­ers to a 15 per­cent hair­cut while other debthold­ers are likely to face hair­cuts of 77 per­cent un­der the cur­rent plan. A re­cent agree­ment reached be­tween PREPA and its cred­i­tors im­pos­ing the 15 per­cent hair­cut and a new charge on con­sumers should like­wise be re­jected by the over­sight board. It would send a bad sig­nal to credit mar­kets if the com­mon­wealth is able to re­nege on its con­sti­tu­tional pledge to pri­or­i­tize gen­eral obli­ga­tion bond­hold­ers. It shouldn’t be too much to ask that negotiations pro­ceed fairly with all of the dif­fer­ent cred­i­tor groups. They also must look at real spend­ing re­form and not try to bal­ance on the backs of cred­i­tors alone. Un­for­tu­nately, the gov­ern­ment has sought to game the sys­tem by defin­ing the vast ma­jor­ity of its bud­get as “es­sen­tial ser­vices.” When it likely later in­vokes Ti­tle III of PROMESA, a court­su­per­vised debt re­struc­tur­ing mech­a­nism in­tended to be used only af­ter negotiations with cred­i­tors fail to reach a sat­is­fac­tory agree­ment, this des­ig­na­tion will al­low most spend­ing to re­main in­tact and un­fairly put the bulk of the cuts on cred­i­tors. It would be bankruptcy by an­other name that Congress specif­i­cally sought to avoid.

And de­spite not at­tempt­ing to ne­go­ti­ate with cred­i­tors, Puerto Rico has asked for the stay on lit­i­ga­tion to be ex­tended past its May 1 ex­pi­ra­tion. It’s not that costly lit­i­ga­tion is de­sir­able, of course, but an ex­ten­sion would only en­cour­age the con­tin­ued dis­re­gard of PROMESA’s re­quire­ments. In­stead, Puerto Rico should be pres­sured to bring all bond­hold­ers to the ta­ble and ne­go­ti­ate hon­estly, and to make hard choices about spend­ing cuts.

Ul­ti­mately, what the com­mon­wealth needs is eco­nomic growth. With a stronger econ­omy there will be more for ev­ery­one, and with com­mon-sense fis­cal re­straint, the is­land will have a chance to grow out of its debt. There are ac­tions Congress can and should take to make that growth more likely, but in the mean­time, it must in­sist that the com­mon­wealth’s gov­ern­ment and the over­sight board fol­low the re­quire­ments of PROMESA and re­spect the rule of law. Puerto Rico can’t af­ford to sav­age cred­i­tors to the point that in­vestors lose con­fi­dence and jeop­ar­dize its abil­ity to bor­row, hope­fully at more rea­son­able lev­els, in the fu­ture.


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