Thanks to decades of financial mismanagement, numerous state and local governments throughout the U.S. are facing imminent fiscal collapse. On a debt-to-GDP ratio, none is in worse shape than Puerto Rico. Unfortunately, the oversight board created by Congress to help get the island’s finances in order has not lived up to its promise. President Trump should use his appointment power to help get it back on track.
Puerto Rico is struggling to deal with its $122 billion debt, $74 billion in bonds and $48 billion in unfunded pension liabilities. Congress passed the bipartisan Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) last year as an alternative to a bailout, and with the hopes that the island would negotiate fairly with its creditors and get its spending under control.
Sadly, things have not worked out that way.
Both current governor Ricardo Rosselló and the previous governor, Alejandro Garcia Padilla, have done everything in their power to avoid the politically difficult but necessary decisions that would lead to fiscal belt-tightening. The Oversight Board created by PROMESA even rubber stamped the government’s plan to unlawfully reprioritize pension payments out of the general fund ahead of general obligation debts, despite the latter being constitutionally guaranteed. The plan also lacked needed fiscal reforms, instead calling for increases in payroll and operational expenses over the next decade.
In addition to forestalling Puerto Rico’s resurgence, the Oversight Board has cost U.S. taxpayers a lot of money. In the 12 months following the passage of PROMESA, the board has spent $31 million, with no meaningful progress toward a reasonable solution to Puerto Rico’s debt problem.
The Puerto Rico Center for Investigative Journalism filed suit against the Oversight Board, citing its lack of transparency and refusal to release financial disclosures and other relevant documents, such as its communications with the Puerto Rican government. This is clearly not the orderly and fiscally responsible process that Congress was hoping for.
Six of the PROMESA board members were selected by Congress, but one, Judge Anthony Gonzalez of New York, was put in place by President Obama. President Trump has the right to replace this appointment with one of his own, which he should exercise.
Replacing Judge Gonzalez with an expert in municipal finance, and a strong statement that the administration expects lawful priorities and liens to be respected would send a powerful message to the board that its current direction is not acceptable. Otherwise, Puerto Rico risks losing its ability to access credit markets in the future, which will be needed again once the island is on stable footing and hopefully better focused on achieving economic growth.
Altogether, state and local governments have $5.6 trillion in unfunded pension liabilities. The dangers presented by Puerto Rico’s current trajectory thus extend well beyond the commonwealth. Allowing it to renege on constitutional obligations to creditors, and to do so with the approval of the federally appointed Oversight Board, would send a terrible signal to credit markets at a time when many other jurisdictions are facing their own looming debt crises.
Puerto Rico’s self-inflicted debt load is just one of many challenges, like high unemployment, that the island faces. But it can’t begin to address those problems until its fiscal house is put in order. President Trump can help get it on the right path by replacing Obama’s appointee with one of his own and demanding a return to transparency and accountability.