Puerto Rico's Agencies Don't Need Chapter 9 Bankruptcy

Puerto Rico is sending waves of concern through Wall Street and Capitol Hill, perhaps even more than Detroit did in 2013. This U.S. territory is likely headed toward insolvency and the main debt-restructuring proposal before Congress would shortchange investors and ignore badly needed governmental and fiscal reforms that would help place the island on a fiscally responsible path.

The gravity of the issue was underscored late last month when the U.S. House Judiciary Committee held a hearing on a bill to extend Chapter 9 protection to some of Puerto Rico’s public corporations and municipalities. But while some on the island may want a quick fix that frees it from its current debt obligations, it is worth pausing for a moment to ask some critically important questions.

Rather than dispensing with Puerto Rico’s current debt through Chapter 9 bankruptcy protection, wouldn’t it be better to put in place mechanisms that seek to ensure that such fiscal disarray is avoided in the future? Wouldn’t it also be better to find a solution that doesn’t undermine investor confidence in the island at a time when investment is a big part of what will help lift the island’s fortunes?

The answer to these questions, simply put, is yes.

[SEE: Political Cartoons on the Economy]

But even before going down the path of federal intervention, Puerto Rico should be exploring an option that millions of sensible Americans pursue when they find themselves under crushing debt: negotiating a fair agreement with creditors.

So how bad is the debt situation in Puerto Rico? Total debt is about $72 billion. But the tab grows to $167.46 billion – or $168,471 for each person in the workforce – when you add interest, pension obligations, the budget deficit, as well as shortfalls in the health care program on the island.

To compound the U.S. territory’s economic woes, many Puerto Ricans are not working. The unemployment rate is over 14 percent, while the daily departure of more than 100 Puerto Ricans has taken thousands out of the island’s productive workforce in the last few years.

The reason they have been leaving is that the government has less money to spend on services, schools, infrastructure improvement and other items that define the quality of life. In this spiral of bad fortune, it is not an understatement to say the survival of the island is at stake.

But allowing Puerto Rico’s debt-ridden public corporations and municipalities to declare bankruptcy under Chapter 9 of the U.S. bankruptcy code, something the island cannot currently grant because it is not a state, is not the answer. For one thing, it abruptly and unfairly changes the rules on creditors who invested in the island in good faith. More than that, a default by way of Chapter 9 is unnecessary when stakeholders have alternative options that can bring about financial sustainability for public corporations such as the electric utility.

In testimony before Congress, Thomas Moers Mayer, a bankruptcy expert, pointed out that if Congress grants Chapter 9 protection to Puerto Rico, it could materially impact the ability for the island’s public corporations to raise money from bond sales in the near future – funds it desperately needs to keep the water running and the highways open.

[READ: Detroit on the Road to Transit Ruin]

Fortunately, it appears Congress is proceeding cautiously. For example, House Judiciary Committee Chairman Robert Goodlatte, R-Va, voiced objections to applying Chapter 9 protections retroactively since these protections did not exist when investors purchased Puerto Rico’s bonds.

If Congress does find the need to intervene, there is at least one option that protects investors and would foster good governance on the island. Congress ought to consider establishing some form of federal oversight to nurse the ailing island back to health. There is precedent for this fiscal remedy. In the mid-1990s, the federal government established a financial control board to resurrect Washington, D.C., a federal district that is now flourishing.

This way, the federal government could initiate a long-term strategy that would end the current cycle of economic imprudence in a way that debt restructuring under Chapter 9 will not. Such a strategy should include tax reform, bureaucratic restructuring and consolidations, reductions or elimination of wasteful spending, a balanced budget, anti-fraud measures and the like.

But before Congress does anything, Puerto Rico and its creditors should hammer out a settlement that prevents the island plunging into the fiscal abyss while protecting investors, who will be more likely to help in the island’s recovery if they do not feel shortchanged.

By

This Jan. 28, 2015 photo shows an aerial view of beachfront houses in the exclusive neighborhood of Ocean Park in San Juan, Puerto Rico.

In trouble.
Giving Puerto Rican agencies access to Chapter 9 bankruptcy would undermine investors' faith forever.

Puerto Rico's Agencies Don't Need Chapter 9 Bankruptcy

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