Puerto Rico crisis needs more than bankruptcy tweak
Alarming headlines about Puerto Rico’s deepening debt crisis have been appearing for months, but Congress only recently began more formally turning its attention to the maladies afflicting this U.S. territory.
During a hearing of the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Administrative Law, panel members considered legislation (H.R. 870) to make Puerto Rico’s public corporations and municipalities eligible for debtor status under Chapter 9 of the Bankruptcy Code. Yet, given the gravity of the situation, Congress ought to give serious consideration to a more long-term, comprehensive approach to Puerto Rico’s debt.
It now appears that the Commonwealth of Puerto Rico may be insolvent for all intents and purposes, or on the brink of being so. Decades of spending too much, promising even more, dysfunctional (occasionally corrupt) governance, arbitrary tax collection procedures, and other factors made Puerto Rico particularly vulnerable to the headwinds of the Great Recession. Even with the exodus of over 200,000 of its 3.7 million people, the unemployment rate is above 13 percent.
The roughly $70 billion in debt Puerto Rico has floated now approaches 70 percent of its Gross Domestic Product, and shows few signs of receding. The unfunded liabilities in pension and health care benefits, along with projected budget deficits, makes this picture even worse.
Amid growing uncertainty on how to pay bondholders, major credit rating agencies last year downgraded to junk status Puerto Rico’s general obligation bonds, intended for a variety of public projects. Though the U.S. federal government – and some state governments – have been rightly criticized for poor stewardship over their debts and have suffered downgrades, Puerto Rico is in a more dangerous condition. By some estimates, the current amount owed is four times that incurred by Detroit in its landmark municipal bankruptcy in 2013.
But just as Detroit’s demise prompted some (largely muted) calls for a federal bailout, Congress’s immediate problem today is that the looming prospect of whether U.S. taxpayers will be asked to shoulder some of the debt burden. An added pressure is the broader political and economic effect that insolvency could have in the Caribbean and the Americas.
However, we also urge lawmakers to keep in mind another factor: major U.S. firms have invested in Puerto Rican bonds because of their exemption from federal, state, and local income taxes. This triple tax exemption has made them a popular option for mutual fund managers, who have invested the retirement savings of millions of Americans in Puerto Rican bonds.
The downward spiral has to be stopped now to protect American taxpayers and investors.
That will mean thinking beyond simply allowing Puerto Rico’s public corporations and municipalities to use Chapter 9’s debt-restructuring procedures. A variety of steps ought to be taken, among them:
* Reconsider the Jones Act, which effectively requires only U.S. ships to carry goods between U.S. ports despite Puerto Rico’s proximity to other Caribbean countries. The result has been higher costs for Puerto Rico’s already-beleaguered businesses.
* A wider and deeper probe could identify ways to reduce high regulatory costs and introduce greater uniformity in the administration of sales and use taxes. Currently, more than 40 percent of such taxes are not collected, leading to a lack of confidence and predictability in the tax system itself.
* The Commonwealth should also consider strengthening some of the advantages of its constitutional balanced budget requirement, which is too dependent on gubernatorial discretion; as well as touting its investor-friendly policy toward taxation of capital gains.
* Federal oversight is another option. Some 20 years ago Congress created the District of Columbia’s financial control board to contain the city’s debt, ensure pensions were sustained and bond payments were made. This enabled the city to once again attract bond financing and private investment. The action taken to introduce reform to the District of Columbia, with its unique political status, provides a useful precedent of how Congress may be able to assist territories in financial peril.
Taxpayer-funded bailouts or bankruptcy proceedings that shortchange bondholders and citizen investors alike cannot be regarded as “easy outs” for Puerto Rico. If Congress takes the significant step of extending Chapter 9 to Puerto Rico’s public entities, but ignores the need for reforms like those listed above, it will be sending the wrong kind of message: that governments can spend recklessly and abuse the public trust without risk.
Sepp is president of National Taxpayers Union (ntu.org), a nonpartisan citizen group founded in 1969 to work for lower taxes, limited government, and economic freedom at all levels.
By Pete Sepp
Puerto Rico crisis needs more than bankruptcy tweak
During a hearing of the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Administrative Law, panel members considered legislation (H.R. 870) to make Puerto Rico’s public corporations and municipalities eligible for debtor status under Chapter 9 of the Bankruptcy Code. Yet, given the gravity of the situation, Congress ought to give serious consideration to a more long-term, comprehensive approach to Puerto Rico’s debt.
It now appears that the Commonwealth of Puerto Rico may be insolvent for all intents and purposes, or on the brink of being so. Decades of spending too much, promising even more, dysfunctional (occasionally corrupt) governance, arbitrary tax collection procedures, and other factors made Puerto Rico particularly vulnerable to the headwinds of the Great Recession. Even with the exodus of over 200,000 of its 3.7 million people, the unemployment rate is above 13 percent.
The roughly $70 billion in debt Puerto Rico has floated now approaches 70 percent of its Gross Domestic Product, and shows few signs of receding. The unfunded liabilities in pension and health care benefits, along with projected budget deficits, makes this picture even worse.
Amid growing uncertainty on how to pay bondholders, major credit rating agencies last year downgraded to junk status Puerto Rico’s general obligation bonds, intended for a variety of public projects. Though the U.S. federal government – and some state governments – have been rightly criticized for poor stewardship over their debts and have suffered downgrades, Puerto Rico is in a more dangerous condition. By some estimates, the current amount owed is four times that incurred by Detroit in its landmark municipal bankruptcy in 2013.
But just as Detroit’s demise prompted some (largely muted) calls for a federal bailout, Congress’s immediate problem today is that the looming prospect of whether U.S. taxpayers will be asked to shoulder some of the debt burden. An added pressure is the broader political and economic effect that insolvency could have in the Caribbean and the Americas.
However, we also urge lawmakers to keep in mind another factor: major U.S. firms have invested in Puerto Rican bonds because of their exemption from federal, state, and local income taxes. This triple tax exemption has made them a popular option for mutual fund managers, who have invested the retirement savings of millions of Americans in Puerto Rican bonds.
The downward spiral has to be stopped now to protect American taxpayers and investors.
That will mean thinking beyond simply allowing Puerto Rico’s public corporations and municipalities to use Chapter 9’s debt-restructuring procedures. A variety of steps ought to be taken, among them:
* Reconsider the Jones Act, which effectively requires only U.S. ships to carry goods between U.S. ports despite Puerto Rico’s proximity to other Caribbean countries. The result has been higher costs for Puerto Rico’s already-beleaguered businesses.
* A wider and deeper probe could identify ways to reduce high regulatory costs and introduce greater uniformity in the administration of sales and use taxes. Currently, more than 40 percent of such taxes are not collected, leading to a lack of confidence and predictability in the tax system itself.
* The Commonwealth should also consider strengthening some of the advantages of its constitutional balanced budget requirement, which is too dependent on gubernatorial discretion; as well as touting its investor-friendly policy toward taxation of capital gains.
* Federal oversight is another option. Some 20 years ago Congress created the District of Columbia’s financial control board to contain the city’s debt, ensure pensions were sustained and bond payments were made. This enabled the city to once again attract bond financing and private investment. The action taken to introduce reform to the District of Columbia, with its unique political status, provides a useful precedent of how Congress may be able to assist territories in financial peril.
Taxpayer-funded bailouts or bankruptcy proceedings that shortchange bondholders and citizen investors alike cannot be regarded as “easy outs” for Puerto Rico. If Congress takes the significant step of extending Chapter 9 to Puerto Rico’s public entities, but ignores the need for reforms like those listed above, it will be sending the wrong kind of message: that governments can spend recklessly and abuse the public trust without risk.
Sepp is president of National Taxpayers Union (ntu.org), a nonpartisan citizen group founded in 1969 to work for lower taxes, limited government, and economic freedom at all levels.
By Pete Sepp
Puerto Rico crisis needs more than bankruptcy tweak
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