By Jose Portela and Javier Ortiz
Puerto Rico and its current fiscal situation were top of mind of the Obama Administration and Congress recently. On one hand, U.S. Treasury Secretary Jack Lew released a set of legislative proposals to address Puerto Rico’s debt crisis. The plan solidly lays out a very good way forward. While the situation is far from ideal for everyone, the Treasury Department’s proposal is to help Puerto Rico gain the tools to address its unsustainable debt of more than $72 billion in the quickest, most efficient way.
On the other hand, Sen. Lisa Murkowski chaired a comprehensive hearing of the U.S Senate Energy and Natural Resources Committee where Antonio Weiss, counselor to the treasury secretary, Puerto Rico’s Gov. Alejandro Garcia Padilla, resident Commissioner Pedro Pierluisi, and others provided excellent testimony on the major human impact the debt is having in Puerto Rico and communities across the nation. The hearing was well attended by Republican and Democratic senators, who joined in calling for immediate action from all sectors to address the major human impact that is compounding Puerto Rico’s inability to come out of more than 10 years of recession.
The plan Weiss eloquently outlined contains four essential components and provides more robust provisions than legislation being considered in Congress. It grants Puerto Rico “Super Chapter 9” bankruptcy protection to address the unique circumstances of all territories of the United States — it creates an “independent and credible” oversight board at the federal level to oversee reform, expands access to Medicaid, and allows Puerto Rico residents access to the earned income tax credit, which is unavailable today. These are significant steps that would make great strides to improve Puerto Rico’s economic situation. Giving Puerto Rico residents access to the earned income tax credit alone would encourage more people to enter the workforce and likely have a multiplier effect across the whole economy.
Some argue that investors exploited the suffering of Puerto Rico’s taxpayers by buying up their triple-tax-exempt “junk bonds” and making money off of the increased risk. It is rumored that Wall Street elites are aggressively advocating against allowing Puerto Rico’s government to declare bankruptcy. We don’t know if this is the case, but it would be an irresponsible case for anyone to make — for it requires Puerto Rico to prioritize debt payments over basic services.
While the hedge-fund managers may eschew Treasury’s proposed plan, the alternative is no better. An orderly restructuring should be welcomed by investors, as opposed to the long, protracted legal battles that would result, following the island’s default. In addition, U.S. mom and pop bondholders would be acutely hurt by default, as many everyday Americans are exposed to Puerto Rico bonds through their retirement investments. According to data from Morningstar, 52 percent of muni funds are invested in Puerto Rico bonds — these individuals will be hit the hard should Puerto Rico default on obligations without a plan to restructure.
We must obviate the major human impact of this current crisis, as well. Everyone born in Puerto Rico is an American. Unemployment is twice the national average of mainland U.S. unemployment and they have a median income of less than half of the one on the mainland.
Over the past decade, Puerto Rico’s economy has contracted every year but one, and the current poverty rate is nearly double of that of our poorest state, Mississippi. Massive out-migration has compounded problems — those who could afford to leave, did, as the economic downturn got worse. This led to a brain drain, with lower tax revenue and fewer workers.
Inaction is not an option — Padilla recently highlighted that the commonwealth will become insolvent in this month, leading to a default on the December 1 bond payment. A massive default on obligations is in no one’s best interest here, and Congress has a duty and responsibility to act.
Massive debt restructuring oversight and access to the social benefits every American enjoys while living on the mainland will go a long way to help revive Puerto Rico’s stagnant economy.
Otherwise, Puerto Rico will become America’s Greece — and every American will pay the price.
Brigadier General Jose Portela, USAF Reserve (Retired) is a member of the National Advisory Board of the Puerto Rico Economic Recovery Initiative and lives in Dallas, Texas. Javier Ortiz co-founded the Puerto Rico Economic Recovery Initiative and is a partner at Falcon Cyber Investments.