Puerto Rico Breakthrough

Pssst. Don’t tell Ted Cruz or the media, but the Republican Congress is using conservative principles to solve an urgent problem caused by progressive government. With some fortitude and a little luck, the Commonwealth of Puerto Rico might even be able to grow again.
House Republicans this week plan to mark up a revised bill to let Puerto Rico restructure its $72 billion debt under the supervision of a federal oversight board. Puerto Rico needs Congress’s help to prevent a creditor brawl when the island’s debt issuers inevitably default, as well as to arrest a decades-long recession and population exodus. The urgency of the problem gave Republicans political leverage with the Obama Administration, and Speaker Paul Ryan has used it.
The bill offers debt relief to Puerto Rico in return for a mechanism to overrule the territory’s feckless current government and impose reform. The legislation explicitly pre-empts conflicting laws and regulations passed by the commonwealth. It also stipulates that legal challenges will be heard in federal rather than commonwealth court.
The key to the reform is a seven-person control board modeled after the board that pulled the District of Columbia out of a debt spiral in the 1990s. The President would select the board from nominations by the House Speaker (two), Senate Majority Leader (two), House Minority Leader (one) and Senate Minority Leader (one). The President has sole discretion to choose the seventh. The appointments must be made by Dec. 1, and the terms last three years, so the GOP majority’s choices will steer the board’s crucial early decisions.
The board can subpoena documents, conduct audits, hold hearings, veto overspending and impose reforms to, say, pensions, taxes and worker pay. It can compel the Puerto Rican government to privatize assets. Most importantly, the board can override laws, regulations, contracts and executive orders that conflict with its fiscal plans.
Creditors and the commonwealth’s 18 debt issuers would be encouraged to cut deals with terms that could be more favorable to both parties than those that might later be imposed by a judge. But the legislation also includes a collective-action mechanism that would allow two-thirds of the principal amount of each creditor pool to bind holdouts. If voluntary negotiations fail, a supermajority of the control board could authorize a federal court-supervised restructuring similar to Chapter 11 bankruptcy.
This process would extend the nine-month automatic stay on litigation imposed by the legislation. After ensuring that financial audits and a fiscal plan have been completed, the board would propose a plan of adjustment that is fair and equitable. The legislation explicitly requires that the plan respect creditor priorities and liens and be “in the best interest of creditors.” So if Democrats later control the board, they couldn’t subordinate general obligation bondholders to pensioners.
Pensions are Puerto Rico’s single biggest liability at $46 billion. In recent years the commonwealth has raised the retirement age, increased worker contributions and shifted employees to hybrid plans similar to cash-balance accounts. But because the pension funds are nearly broke, the control board will have to further modify benefits. The legislation also requires that the fiscal plans “provide adequate funding for public pension systems,” so Puerto Rico can’t short pensions as it has in the past.
The board would remain in effect until Puerto Rico’s government has access to short- and long-term credit markets and has produced four consecutive balanced budgets. We’d prefer a longer time horizon that would keep the board in abeyance similar to New York’s financial control board if the commonwealth returns to perdition. But Washington will need Puerto Rican support to implement reforms, and promising to return complete control will encourage cooperation.
Genuine reform will depend on the make-up of the control board, so Republicans will have to choose wisely. The bill’s main weakness is that it doesn’t include exemptions for Puerto Rico from such destructive U.S. laws as the minimum wage and the Jones Act that raises shipping costs. The Obama Administration resisted these reforms, and Republicans needed bipartisan support.

***

Yet the overall bill steers the commonwealth in the direction of free-market reforms and fiscal discipline after years of welfare-state politics. Credit goes to GOP Reps. Rob Bishop (Utah) and Sean Duffy(Wisconsin) for leading the effort and negotiating with the Treasury Department. The White House has backed the bill, though spokesman Josh Earnest couldn’t resist jabbing Republicans for “mean-spirited policy-making” by allowing employers to initially pay newly hired workers under the age of 25 a sub-minimum wage. Mr. Earnest’s partisan impulse is why Mr. Obama has accomplished so little with Congress.
But this bill deserves bipartisan support, and voters should see it as an example of conservative reform in action. Next up Chicago?
The GOP House applies market reform principles to an urgent problem.

Puerto Rico Breakthrough

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