This week Congress will consider legislation to help Puerto Rico restructure its staggering debts. This tiny island, only 100 miles across but with 3.5 million people, owes more than $115 billion ($71 billion in bond debt and another $44 billion in pension debt). That equates to a per person debt burden of nearly $33,000 for every man, woman and child on the island where the median family income is $19,000 per year. Puerto Rico can’t pay its debts, and has already defaulted on $400 million in bond payments.
As I wrote in this column last week, Congress is considering legislation to help Puerto Rico navigate through its debt crisis. This is uncharted territory, and the policies Congress adopts will have profound implications for our country, both now and in the future. The Puerto Rico debt restructuring process will set a precedent that will impact bond markets, retirement system structures, labor negotiations, political calculations and, by extension, the entire U.S. economy. Congress must proceed with great caution, but it must also proceed.
Up front, I will say that I am pleased to see that Congress has refused to bail out Puerto Rico. A bailout is not the answer. Transferring Puerto Rico’s liabilities to the federal balance sheet would set a dangerous precedent, opening the door for “too-big-to-fail” style expectations and potentially much larger state bailouts down the road. Some state governments will simply not make the tough financial choices today — like reforming outdated and expensive defined benefit pension systems — if they have a reasonable hope for a federal bailout down the road.
Now to the specifics of a plan. I am persuaded that there are several key elements that should be included in the Puerto Rico rescue legislation.
First, the rescue plan should reaffirm priority for constitutionally secured, general obligation bondholders, which, according to Article VI, Section 2 of the Puerto Rico Constitution, are entitled to up to 15 percent of the island’s average annual total tax revenue to both service and repay their loans. Congress’ rescue plan should not supersede the plain language and clear intent of the Puerto Rico Constitution. To do so would be to unjustly strip secured creditors of their clearly established contractual rights while injecting tremendous uncertainty into an already jittery municipal bond market.
Second, the rescue plan should establish a strong and autonomous financial oversight board with the power to require balanced budgets, address pension liabilities and facilitate debt restructuring (through voluntary creditor negotiations or, if necessary, through a court supervised process). The oversight board should work closely with Puerto Rico’s governor, legislature and other key public officials to meet jointly determined restructuring objectives, all while reserving final decision-making authority.
Third, the rescue plan should not explicitly prioritize pensions over other unsecured creditors. Instead, the oversight board should retain the authority to balance the interests of Puerto Rico’s 330,000 pensioners with the interests of the thousands of other unsecured creditors, many of whom are Puerto Rican citizens.
Fourth, the rescue plan should either preserve the rights of bondholders to sue for injunctive relief should local officials selectively service some liabilities while defaulting on others, or provide for compensatory interest payments as a way to balance competing creditor interests should a temporary litigation moratorium be imposed.
Finally, the rescue plan should be enacted and the oversight board should be established as soon as possible. No matter how you slice it, Puerto Rico — its citizens, politicians, pensioners and creditors — are all in for a rough ride over the next several months and years. There is a lot of work to do, and the sooner that work begins in earnest the better.
Dan Liljenquist is a former Republican state senator from Utah and former U.S. Senate candidate. He is nationally recognized for work on entitlement reform.