Time is growing short for Congress to help Puerto Rico out of the worst debt crisis any state or territory of the United States has faced since the Great Depression nearly 100 years ago. By every possible measure, Puerto Ricans are facing a grim present and an even darker future unless Congress offers a helping hand.
What Puerto Rico needs is access to the same type of debt restructuring framework that every one of the 50 states of the union can use as an economic shelter of last resort. Congress can supply it, and should.
We’re not talking bailout here. No federal loans or grants are required. What Puerto Rico needs is an act of Congress before a deadline for repayment as early as May. Action by lawmakers will allow the island to sidestep a catastrophic default that will lead to years of litigation and leave creditors short of the full amount they are owed.
It’s hard to see how the lenders can get everything they’re due. In all, Puerto Rico owes $72 billion, the sad result of irresponsible borrowing and the end of U.S. tax-code provisions that gave investors an incentive to do business there. For technical reasons, the restructuring would affect only $49 billion of that amount, but that is still a very big number for the island territory to cope with. Consider: Typical state spending, according to testimony in Congress, requires about 5 percent of tax revenue on payments of interest and principal to bondholders. But at this moment, this type of debt is eating up 36 percent of Puerto Rico’s tax revenues.
That’s unsustainable, no matter how much Puerto Ricans tighten their belts. Already the crisis has led to massive layoffs in government and the private sector, and reduced the island’s gross national product, personal income and business activity. Teachers who manage to remain employed haven’t seen a raise on a base salary of $1,750 a month since 2008. It’s a bleak picture all around.
Then there’s unemployment. It stands at 12.2 percent, according to the U.S. Labor Department, which is bad enough, but it’s down from 16 percent in recent years. How has Puerto Rico managed to lower the jobless rate amid a financial crisis? Well, that’s where Florida comes in.
One of every 13 people left the island between 2010 and 2015, many destined for Florida. Of the estimated 300,000 who left since 2012, tens of thousands came to the Sunshine State, where more than 1 million Puerto Ricans live.
Many of them would rather go back home, but there is no way for them to do so until Congress opens the door to a way out of the financial mess in order to reignite economic growth.
Some Republican lawmakers remain skeptical. They’ve raised an important point: Allowing Puerto Rico to enter into a financial restructuring might weaken investor confidence in general obligation bonds issued by the 50 states, raising their costs of borrowing in the future.
To avoid this outcome, Congress should craft a restructuring under the Territorial Clause of the U.S. Constitution that is designed only for Puerto Rico — and only this time. Puerto Ricans won’t like it, but the deal must include a federal oversight board to ensure that Puerto Rico lives within its means and meets its reduced debt obligations.
This is by no means an ideal solution. Lenders will take a haircut, and it will revive complaints among Puerto Ricans that they’re being treated like a colony. That, unfortunately, is the price of getting into a financial mess — and the only way out of the nightmare.