As Congress gets back to work, they will have many important policy issues to confront, including, not least, what to do about Puerto Rico. After recent statements by Puerto Rico’s Governor, Alejandro Garcia Padilla, that his government would refuse to pay debts, even Puerto Rico’s own constitutional debt, the stakes for seniors and small investors in whatever process Washington pursues have gotten much higher.
There is a road map for fixing Puerto Rico that protects investors, helps the island make desperately needed fiscal reforms, and preserves the rule of law. If we can get past the fog of political rhetoric, the road map is pretty clear.
First, Puerto Rico can fix its problems. It can fix them by focusing on spending. Yes, it has debts, but more importantly, Puerto Rico has a spending problem. It desperately needs to enact financial reforms and to cut spending. Rather than doing so, Governor Garcia Padilla and his advisors have manufactured a crisis in order to extract concessions from creditors. The Governor claims that Puerto Rico cannot pay its debts, but pays millions to advisors like Cleary Gottlieb, which advises deadbeat sovereigns like Argentina to default. Congress shouldn’t be misled by any of this, and should insist that Puerto Rico get control of its finances.
Washington should be clear-headed about what Governor Garcia Padilla’s real plan is. Next week, he is expected to release a “Fiscal Adjustment Plan,” which is expected to call for a local control board that would make sure “tough reforms” are actually implemented. This is a farce. The plan has only two real goals, and they are both politically – rather than fiscally – motivated: the first is to pacify concerns by those in Congress that feel Puerto Rico is not making the hard decisions needed to reform and grow the economy. Congress should not be fooled. The real prize is the plan’s second goal: to lay the groundwork for defaulting on Puerto Rico’s debt – even its constitutional debt.
This restructuring constitutional debt, or so-called “Super Chapter Nine” restructuring, is the governor’s real plan for Puerto Rico. And it should concern every policy maker in Washington. That’s because if Puerto Rico is allowed to default on its constitutional debt, other states – like Illinois, California and New Jersey – would likely be next. No retirement account in America would be safe. Millions of American seniors have their retirement invested in municipal bond funds backed by the full faith and credit of states, territories and municipalities. To sanction a sweeping rewrite of constitutional bond obligations for Puerto Rico would undermine the security of all Americans’ retirement savings held in all constitutional government bonds. It would be reckless for Congress to undermine the financial security of millions of taxpayers.
Congress should not act as enabler as Puerto Rico’s leaders seek to wipe out all of their debts with “Super Chapter 9.” It can and should protect investors by insisting that any plan for Puerto Rico begins with fiscal reform, not creditor impairment. This will send a signal to taxpayers and capital markets that Congress takes the financial security of working Americans and the integrity of debt obligations seriously.
A better solution would be for Congress to appoint a federal control board that would impose discipline on taxing and spending and affirm the rule of law, free from the myriad political pressures on the island. A congressional control board created in the mid-1990s restored the finances of the District of Columbia in just five years, and that model provides a compelling example of what can work for Puerto Rico. Once a control board is in place, and Puerto Rico has addressed its spending problems, some debt restructuring may be necessary. But debt restructuring should not precede fiscal reform, and it cannot include Puerto Rico shirking constitutional debt.
60 Plus has launched the Main Street Bondholders Coalition to help return Puerto Rico to sound financial management and the protection of retirement savings. Our coalition will get behind proposals that address fiscal reform first, and keep restructuring constitutional bonds off the table. We could support legislation that adheres to these principles, should that legislation be introduced. We would not support giving more leeway to a governor whose real agenda is there for all to see.
