Puerto Rico’s economic woes have been decades in the making – and a large part of it was due to well-intentioned – but ultimately, misguided – policy made by the U.S. federal government. Now, the legislative branch of that government is abandoning the territory, despite pleas from the executive branch – and leaving the island’s economic fate in the hands of the judicial branch. If nothing is done, Puerto Rico will default on a nearly $1 billion debt payment. Not only will this create incredible misery for those living there, it will hurt individuals and institutions who are invested in Puerto Rican securities and who will be stuck holding the proverbial bag.
Of course, Republican lawmakers could care less about the people, but one would think they’d have at least a little concern about those financial institutions – many of which exacerbated the problem and have even profited by it.
Here’s the background: after the end of the Second World War, the U.S. federal government began a program called “Operation Bootstrap,” with the intention of diversifying the Puerto Rican economy. Tax breaks and incentives for industry encouraged companies to set up shop on the island, thus creating jobs and growing the tax base. However, those tax incentives were eventually phased out.
Between that and ill-considered “free trade” deals, industries began fleeing Puerto Rico. On top of that, the island is highly dependent on imported oil to meet its energy needs. Add to all of this corruption in Puerto Rico’s public agencies and it’s a recipe for economic disaster. It’s a disaster that has been feeding on itself; as economic conditions worsen, there has been a wholesale exodus of Puerto Rico’s best and brightest as they seek career opportunities in the U.S., causing the tax base to erode. At the same time, a thriving “underground economy” has been robbing the Puerto Rican treasury of revenue. Small wonder that Puerto Rico has been in a full-blown depression for the past decade.
Now, the island has a debt of approximately $73 billion, which governor Alejandro Garcia has said is “not payable.” If Puerto Rico was a state, its municipalities and state institutions might have sought bankruptcy protection under Chapter 9. Indeed, a plan like this was attempted earlier this year. Last summer, the Puerto Rican legislature passed the Debt Enforcement and Recovery Act, which would have allowed certain publicly-owned corporations (such as the Puerto Rico Electric Power Authority, or PREPA) to continue providing much-needed public services while restructuring its debts. However, several corporate bondholders – including Oppenheimer Funds and Blue Mountain Capital – filed a lawsuit, arguing that bankruptcy law was the province of the U.S. federal government, and that a territory could not make its own bankruptcy legislation. The lower court sided with the bondholders, as did the U.S. Court of Appeals for the First Circuit. However, although the appellate court upheld the lower court ruling, it made a case that Puerto Rico should be able to file under Chapter 9. Unfortunately, the U.S. bankruptcy code specifically excludes territories.
A bill was introduced in Congress that would have treated the Commonwealth of Puerto Rico like a state under federal bankruptcy statutes. The Obama Administration urged Congress to come up with legislation that would even allow the Commonwealth’s government to file for Chapter 9 – something that state governments cannot do (Chapter 9 applies only to municipalities and public corporations, such as publicly-owned utilities). The Administration’s proposal would have provided additional oversight of the island’s finances while providing some relief to residents by expanding Medicaid and extending the Earned Income and Child Tax Credits.
To the GOP congress, allowing Puerto Rico to seek bankruptcy protection was tantamount to another “bailout” – which they had no problem providing to Wall Street in 2008.
Congress willfully threw away another chance to provide relief to the beleaguered Commonwealth by including a provision in the recent spending bill. That $1.1 trillion bill included $680 billion in tax cuts for business and individuals – but not one dime to assist Puerto Rico. Democratic Representative Nydia Velázquez of New York’s 7th District, herself Puerto Rican, said,
It is unconscionable that Congressional Republicans refused to include in the year-end spending bill meaningful provisions to allow Puerto Rico to restructure its debt…This would not have cost the taxpayer a dime, but could have helped solve what is rapidly disintegrating into a humanitarian crisis.
But again, consider who controls Congress and what their priorities are.
The case involving Puerto Rico’s Debt Enforcement and Recovery Act is now scheduled to come before the U.S. Supreme Court. If the Roberts court overturns the lower court rulings and allows the Puerto Rican law to stand, institutional bondholders would have to accept some losses (which would ultimately come off of corporate tax returns). It would nonetheless provide the island’s government with some leverage as it seeks to restructure its debt with various financial institutions involved.
The case is scheduled to come up sometime before next June. However, while a SCOTUS ruling might clarify some of the legal aspects of Puerto Rico’s attempt to restructure its debt, it won’t do much to solve the problem, nor prevent the massive human suffering that will surely result. As things now stand, it’s a lose-lose situation for everyone involved: Puerto Rico itself, financial institutions, individual investors and U.S. taxpayers, who will have to clean up the inevitable mess. The best chance for the Commonwealth to avoid that scenario would be to extend bankruptcy protection. The GOP Congress has made it abundantly clear that such protection is not an option – human costs be damned.
Winston Churchill once said that “Americans will always do the right thing – once they’ve tried everything else.” When it comes to its impoverished step-child in the Caribbean, America is determined to try everything else before it gets around to doing the right thing – and it is the people of Puerto Rico, fellow U.S. citizens, who will suffer the most before it is all over.