January 13, 2016

The New York Times: How Congress Can Help Puerto Rico

By Clayton P. Gillette & David A. Skeel Jr.

Gov. Alejandro García Padilla of Puerto Rico has offered a comprehensive proposal for reversing the territory’s downward spiral. Unlike prior proposals, which focused solely on restructuring Puerto Rico’s debt or cutting its spending, the new plan recognizes the urgent need for both. It could actually work, but only with a major assist from Congress.

Although the Puerto Rico Fiscal and Economic Growth Plan released last week outlines a wide range of proposals, its essence lies in two key features: Puerto Rico would establish a financial control board with broad budgetary authority, and it would restructure much of its $71.1 billion debt burden.

The governor’s recommendation of a financial control board suggests sincerity about reform. The proposal would give the board authority to approve a five-year plan and to implement “structural” reforms.

Central governments have imposed such boards in the past. In the 1990s, when Washington faced a deep fiscal crisis, Congress created a control board to oversee the city’s finances. The policies of the board’s chief financial officer, Anthony A. Williams, were sufficiently popular that he was subsequently elected mayor. Reforms initiated by the financial control boards that Albany imposed on New York City in the 1970s are widely credited with improving transparency and stability in the city’s budgetary process. The mayor of Detroit has embraced many of the reforms introduced by the state-appointed emergency financial manager for the city.

But sincerity requires that any control board have serious teeth. Mr. Williams essentially assumed the fiscal authority of Washington’s mayor. The boards overseeing New York City had the authority to withhold funds from the city to ensure compliance with the budget, and required a wage freeze for transport workers, tuition at the previously free City University of New York, and modifications of the city’s financial plan. The Washington board was authorized to withhold funds if revenues or expenditures deviated from the budget. In Detroit, the emergency manager replaced the mayor and City Council.

Such broad authority has raised claims that these boards are anti-democratic. But the absence of electoral accountability allows appointed boards to fashion budgets free from the political deal-making that often generates fiscal distress. And the power of these boards to dilute or displace the authority of elected officials counters the temptation by those officials to overspend and then seek relief from the state or Congress.

The credibility and viability of any financial control board will depend on granting it the power to impose seemingly harsh policies. Anti-democratic claims ring hollow in the face of Puerto Rico’s current predicament, which has led to sharp cutbacks in services that hardly reflect the desires of a majority of Puerto Rico’s citizens.

Read more here.