Puerto Rico Can Move Forward Without Congress

COMMENTARY International Economies

Puerto Rico Can Move Forward Without Congress

Feb 12, 2016 3 min read
Rachel Greszler

Senior Research Fellow, Roe Institute

Rachel researches and analyzes taxes, Social Security, disability insurance, and pensions to promote economic growth.

Congress and the president have proposed various federal interventions and bailouts to save the cash-strapped and economically troubled commonwealth of Puerto Rico. Treasury Secretary Jack Lew sent a letter to Congress last month claiming that "only Congress can enact the legislative measures necessary to fully resolve this problem."

Yet the island is working within its own laws to solve its own problems. Last week, the commonwealth released a proposal to reduce and restructure its debts while implementing economic reforms to help improve its chances of recovering.

Why would Puerto Rico move forward when it could hold out for a federal bailout? Perhaps the people realize they would likely have to give up a significant degree of self-governance in exchange for a bailout. Maybe the commonwealth recognizes that the federal government is hardly a model for fiscal restraint. Or perhaps it believes it has a better understanding of its own problems and potential solutions than the federal government does.

Whatever the reason behind it, Puerto Rico's action shows that Congress is not the island's only hope.

Under the proposal, the commonwealth would restructure $49.2 billion of its roughly $72 billion in debt. Bondholders of the affected debt would receive $26.5 billion in Base Bonds and $22.7 billion in Growth Bonds.

Base Bonds would include improved credit protections such as a commonwealth guarantee and statutory liens and pledges on certain revenues (including the sales and use tax and up to $325 million in annual petroleum tax revenues). Interest payments on Base Bonds would not begin until 2018 (and would rise from 3 percent in 2018 to 5 percent in 2021 and beyond), and principal payments would begin in 2021.

The Growth Bonds, on the other hand, would have little security, as they would not be payable until 2026, and even then only if the island's revenues exceed a specified level.

For bondholders as a whole, this means each dollar in debt would be replaced with 56 cents of debt with a more certain repayment and 44 cents of debt with less certain repayment. However, some bondholders would receive more than others. General Obligation bondholders would receive about 72 cents on the dollar, Sales Tax Revenue bondholders would receive about 49 cents, and the remaining bondholders would get an average of 39 cents on the dollar.

Not all bondholders are part of the proposed deal; those owning several types of debts are excluded. However, these excluded bondholders may work out separate restructuring agreements; one group — the Puerto Rican Electric Power Authority, or PREPA — has already proposed an agreement that is awaiting the legislature's approval.

If most bondholders accept the proposal, and if it is accompanied by successful economic reforms, the island's debt payments could fall from 36 percent of revenues to 15 percent. But getting substantial buy-in from bondholders — who have called the proposal "not credible" and "not serious" — will not be easy.

Some bondholders view this as an opening offer, and may head to the negotiating table in hopes of working out a more palatable deal.

Others, however, are likely holding out hope that Congress will step in and grant Puerto Rico retroactive access to Chapter 9 bankruptcy as an alternative way to discharge and restructure some of its debt. But creditors who bought Puerto Rican debt did so knowing that it was not subject to Chapter 9 bankruptcy. Changing the rules of the game midway through amounts to nothing more than picking winners and losers through a process that has proven neither fair nor equitable in the past.

Proponents of granting Puerto Rico access to Chapter 9 bankruptcy portray it as a cure to the island's woes. But the commonwealth's resources are what they are, with or without Chapter 9 bankruptcy. Creditors are going to receive haircuts. The only thing Chapter 9 bankruptcy would change is who receives what.

If Congress wants to help improve Puerto Rico's chances of recovery, it can start by exempting the island from the federal minimum wage, which drives up labor costs, suppresses formal labor-force participation, and reduces taxable income; exempting Puerto Rico from the maritime Jones Act, which increases shipping costs and reduces the island's competitiveness; and granting the island more flexibility in administering federal welfare benefits so that welfare isn't more advantageous than work.

But as this recent proposal shows, Puerto Rico already has a way to negotiate its debts without congressional intervention. Congress should allow Puerto Rico to pursue its own negotiations with creditors, carry out its own fiscal control board if it so chooses, and implement its own Fiscal and Economic Growth Plan.

 - Rachel Greszler, Senior Policy Analyst

Originally appeared in Real Clear Policy