It is truly dismaying that a Republican-controlled Congress is entertaining the idea of a financial bailout of Puerto Rico. Doing so would fly in the face of conservative principles and betray the taxpayers who elected candidates who were supposedly committed to standing up to government excess and incompetence.
A House Judiciary subcommittee – under the direction of Reps. Bob Goodlatte, R-VA and Tom Marino, R-PA – is moving to extend Chapter 9 bankruptcy protection to Puerto Rico. Chapter 9 allows U.S. states and municipalities to void the responsibility of the debts it legally and knowingly incurred. The most glaring example of Chapter 9 is Detroit, which waited too long to make the meaningful reforms it obviously needed.
As a U.S. territory, Puerto Rico cannot currently invoke Chapter 9. The bill before Congress would change that, and would set in motion a process that would enable Puerto Rico to walk away from its failures, leaving U.S, taxpayers and pensioners holding the bag.
Puerto Rico has a mind-boggling $73 billion in debt that has no chance of being repaid because there is no political will to undertake the budget cuts, pension reform, and tax policy overhaul that is necessary. If anything, Puerto Rican Governor Alejandro Garcia Padilla is a leader in the mold of Argentina’s Christina Kirchner when it comes to debt obligations. He is more skilled in contortions to avoid paying debts and in keeping cronies in place than making the tough calls to right the island’s financial and political health.
Over the past year, Governor Garcia Padilla has undertaken a series of decisions that call into question his commitment to the rule of law and freedom of contracts. First, he signed into a law in the dark of night a debt-avoidance bill (the Debt Enforcement and Recovery Act), which was designed to allow the government to repudiate the billions in bonds they took out from unwitting U.S. investors, from large creditors to family savings and retirements (i.e. – 401(k)s). The act was found to be illegal by a U.S. federal judge. Signaling this was not enough, Garcia Padilla’s party introduced legislation recently that would authorize the government to rip up previously agreed-to bond contracts.
It is fitting that all of the ratings agencies have downgraded the island, and is considered the second-most likely place in the world to default on its debts. Puerto Rico beats out only Argentina, a country long in the throes of financial turmoil, and for similar reasons
As a U.S. territory, Puerto Rico’s problems are ultimately the problems of the United States. Expanding Chapter 9, however is not the solution, at least not the solution that principled conservatives should embrace. Members of Congress who stand for sound governance and fiscal responsibility should not be fooled. If Puerto Rico is given the Chapter 9 option, thousands of Americans whose 401(k)s and mutual funds are invested in Puerto Rico’s bonds and would suffer losses and taxpayers would have to pay for a bailout.
To make matters worse, proponents want Chapter 9 applied retroactively. During the Judiciary subcommittee hearing Rep. Darrel Issa, R-CA, took a principled view of this idea, and should be commended by conservatives. Hopefully other Republicans, including Reps. Goodlatte and Marino, will stand with Rep. Issa, and reject Chapter 9.