I voted against the PROMESA Act, legislation to manage Puerto Rico’s $118 billion in debt and unfunded pension obligations. PROMESA (HR 5278) would establish a seven-member Oversight Board empowered to manage the island’s public finances, restructure its debt burden, and restore economic growth.
Rather than intervene, Congress should allow the creditor-debtor negotiation and litigation processes to move forward. Reliance on voluntary negotiation and the courts better protects property rights and U.S. taxpayers from future bailouts. Negotiation-and-litigation also avoids setting a dangerous precedent and incentivizing irresponsible lending and borrowing.
We should remember two important facts:
- Corrupt and incompetent Puerto Rican politicians largely created this financial mess through decades of mismanagement. For example, the island’s business environment is so rancid that it’s easier to get a construction permit in Bangladesh and Bulgaria. Politicians in Washington D.C. compounded the damage by distorting the Puerto Rican economy through special tax breaks and tax-exempt bonds, thus making its economy too dependent on tax shelters, corporate subsidiaries, and cheap loans.
- Congress has already provided plenty of assistance. For example, Puerto Ricans do not pay Federal income tax. More recently, the trillion-dollar “Omnibus” spending bill gave Puerto Rico an $850 million Medicare bailout.
Puerto Rico needs less “help” from Washington D.C., not more. Yet, PROMESA essentially provides Puerto Rico access to Chapter 9 bankruptcy, a tool currently only available to U.S. municipalities such as cities and counties. Chapter 9 includes a disturbing “cram down” mechanism which compels all creditors in a class (e.g., secured senior bondholders) to accept a single payment plan, which picks winners and losers and violates basic contract property rights.
Absent “help” from DC, Puerto Rico and its creditors are highly motivated to reach voluntary debt restructuring deals without jamming up the courts. Puerto Rico wants to avoid outright default and to regain access to capital markets. On the other side, most creditors understand they will get less than their bond’s value, but they don’t want to spend millions on lawyers and years in court.
We have seen this before. In 1995, Congress instituted a Control Board to manage the District of Columbia’s finances. In 1998, Congress passed new legislation which assumed DC’s entire $5 billion unfunded pension liability. It took three years, but eventually taxpayers were stuck with the bill. We don’t need to repeat that on a larger scale.