By Judd Gregg
December 14, 2015 at 5:00 am ET
If Congress extends Chapter 9 bankruptcy privileges to Puerto Rico, it will be akin to a doctor addressing a patient’s symptoms without treating his true ailment. The Commonwealth will find itself no closer to economic health. The lingering side effects will include financial losses for American retirees invested in Puerto Rico’s bonds, heightened borrowing costs for municipal governments across the U.S. and the establishment of a dangerous precedent that fiscally impaired states will seek to follow.
For all of our sakes, U.S. and Puerto Rican leaders must resist the impulse to tout politically expedient bandages that only conceal the breadth of the Commonwealth’s financial crisis. Americans, who lived through the Great Recession, know all too well what happens when a brewing financial calamity is not identified and comprehensively addressed in a timely manner.
Fortunately, Puerto Rico’s fiscal diagnosis — an anemic economy compounded by $72 billion of debt — represents an ailment that while unpleasant is still treatable with a growth agenda. This remedy, however, will require both Congress and Puerto Rico to remain laser-focused on structural economic and fiscal reforms.
The truth is that the Puerto Rico’s leaders could spend months or even years lobbying for Chapter 9 bankruptcy privileges. This is why it is not the right first step on the Commonwealth’s road to recovery. Allow me to elaborate:
First, bankruptcy does not absolve Puerto Rico from all of its obligations. Select creditors, such as Puerto Rico Sales Tax Financing Corporation (COFINA) bondholders, are secured and have strong legal property rights under both the Puerto Rican and U.S. Constitutions. COFINA bonds, for example, account for more than $15 billion in debt that cannot be currently restructured without the consent of COFINA’s creditors. These types of issuances are of a higher credit quality and seniority than Puerto Rico’s much-discussed General Obligations bonds.
Second, it is naive to believe that bankruptcy will provide an orderly process for restructuring $72 billion of debt and nearly 20 issued debentures. Puerto Rico’s prospective use of Chapter 9 would spur years of negotiations and several creditor lawsuits. During this costly and time-consuming period, Puerto Rico’s fiscal status and its citizens’ living standards will continue to deteriorate. It is much more prudent for the Commonwealth to demonstrate its ability to implement structural reforms before seeking to restructure debt with presently skeptical creditors.
Third, bankruptcy protection or the issuance of a “Superbond” will not matter if Puerto Rico does not begin to reignite its economy. The World Bank reports that the island’s annual percentage growth rate of GDP remained in negative territory each year from 2006 to 2013. This period of sustained contraction is reflected in the Government Development Bank’s November 2015 update that highlights the island’s 14.2 percent unemployment rate and its meager 40.9 percent workforce participate rate. Until Puerto Rico reduces its public sector dependence and implements job-creation incentives for businesses across emerging sectors, corporations and young talent will be forced to look elsewhere in the Caribbean.
Fourth, Congress also must take steps to help Puerto Rico modernize its economy. The Federal Reserve Bank of New York recently reported that the Merchant Marine Act of 1920 includes coastal shipping provisions that make it unnecessarily expensive for the Commonwealth to trade with mainland America. In addition, requiring Puerto Rico to comply with the Federal Labor Standards Act looks to be discouraging much-needed private sector investment and spurring an “off the books” sub-economy. While a full-time job at the hourly minimum wage of $7.25 equates to 28 percent of U.S. per capita income, the same wage translates to 77 percent in Puerto Rico.
Fifth, if the Congress truly wants to help Puerto Rico, it should reintroduce Section 936. This section of the U.S. tax code gave special treatment to companies that did business in Puerto Rico. It was a tremendous success when it came to generating economic growth and good jobs on the island. If reauthorized for a specific period of time, at least 15 years, it would make Puerto Rico an attractive investment opportunity again and relieve some of the pain of economic stagnation which now afflicts the island. This is a much less expensive and more constructive way for Congress to help than getting on the slippery slope of expanding bankruptcy.
In sum, Puerto Rico’s financial crisis is a byproduct of fiscal irresponsibility, stagnant growth and an unattractive business climate. But with a documented public debt that represents approximately 100 percent of GDP, Puerto Rico’s fiscal standing is relatively in line with the likes of Belgium, Canada, England and many developed nations. The biggest point of deviation between Puerto Rico and advanced economies is on the growth front. This is something that Chapter 9 will not fix.
Before Congress considers any bankruptcy bill, it should first pass a legislative package that helps drive on-island commerce, lifts business disincentives and establishes a federal mechanism to oversee budgetary activities. Empowering Puerto Rico to modernize its economy and provide much-needed fiscal guidance will signal to corporations, citizens and creditors that the Commonwealth is on the mend.
Judd Gregg is a former U.S. Senator from New Hampshire who served as chairman of the Senate Budget Committee and as ranking member of the Senate Appropriations Foreign Operations subcommittee. He also served on President Obama’s National Commission on Fiscal Responsibility and Reform (Simpson-Bowles).