Puerto Rico Is Arriving At A Moment Of Truth On Fiscal Reforms

Last year, Congress passed a fiscal stability package for Puerto Rico known as "PROMESA." Among other things, it set up an oversight board and empowered a refinancing of Puerto Rico's crushing debt burden.
As reported today in Reuters, negotiations continue with one class of bondholders--those connected to the Puerto Rican electricity utility known as "PREPA." The outcome of those negotiations could have a big effect on the future of the island in general, not just on debts. Getting the island's fiscal and debt policies right is instrumental in avoiding a taxpayer bailout of the island and even has a relationship to the tax reform debate in Washington.
What's going on with PREPA?
The former governor of Puerto Rico negotiated a debt settlement with PREPA that is widely considered (by both current governor Ricardo Rosello and the oversight board) as too favorable to the utility. This in turn creates a bad atmosphere for renegotiating the rest of the debt categories, as the next debt group will want a sweetheart deal similar to the relatively light restructuring that PREPA got. PREPA is essentially trying to benefit by being at the front end of a game of musical chairs, with the pain of debt restructuring having to be borne to a greater degree by everyone else.
That does not augur well for the success of PROMESA or the necessary/not sufficient job of refinancing Puerto Rico's crushing debt burden. All bondholders should be in the soup here. The refinancing will be painful for everyone, and no one should get a "get of jail free" card. Governor Rossello and the oversight board are to be commended for continuing to insist that PREPA be treated fairly and like the other classes of bondholders.
There's a larger issue at stake here. For too long, Puerto Rico has been held back by a series of arbitrary, relationship based public policy rules which look a heck of a lot more like a banana republic than a potential fifty-first state. Whether it's island tax policy, spending programs, public employment, or deals like the PREPA one, everything is a one-off. If stability is a necessary precondition to economic flourishing in Puerto Rico--and it is--the lessons learned from the PREPA debt negotiation will set the tone for that stability or delay it.
If things do not go well in Puerto Rico, despite their having all the tools they need under PROMESA, the result will be a default of payment to creditors and a U.S. taxpayer bailout of the island. The oversight board and the governor know this, and they have to set a marker now that this nightmare scenario won't be allowed to happen.
Puerto Rico is also a subject for tax reform in Washington, and being serious about getting their fiscal house in order will be important to getting Puerto Rican interests at the table. Under current law, Puerto Rico has a confusing hodgepodge of tax policy--some U.S. companies are taxed domestically, and some are taxed as controlled foreign corporations. Island tax policy is all over the map. As Puerto Rico decides whether or not they want to petition to become a state, this has to be settled. There's no reason why Puerto Rico can't, under tax reform, be a big winner. A combination of rate-lowering enterprise zones, employment credits, and inducements to invest capital back and forth from the island to the mainland are all potential solutions here. But Puerto Rico won't be taken seriously by tax reformers unless there's a sense that San Juan has its fiscal house in order.
Puerto Rico is at a crossroads. Decisions made now will determine the direction of the island for a generation. Puerto Rico should choose the narrow gate of responsibility and fiscal prudence, not the wide road of sweetheart deals and cronyism.


Fans gather to watch the World Baseball Classic final match between Puerto Rico and the United States, in San Juan, Puerto Rico, Wednesday, March 22, 2017. Puerto Rico's team reached the final phase of the tournament undefeated. (AP Photo/Carlos Giusti) PUERTO RICO OUT-NO PUBLICAR EN PUERTO RICO
Ryan Ellis
Puerto Rico Is Arriving At A Moment Of Truth On Fiscal Reforms

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