After years of fiscal mismanagement, the Commonwealth of Puerto Rico is essentially bankrupt, owing more than $70 billion to creditors. This financial fiasco was largely the result of a declining economy brought on by poor policy decisions and has only been made worse by what appears to be a collective unwillingness to make tough but responsible financial decisions.
In the wake of Puerto Rico’s default on this massive debt, Congress last year passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to create a plan to deal with the crisis.
The PROMESA legislation created an oversight board and gave it the responsibility of approving a fiscal plan, ostensibly to get Puerto Rico on the right track by making the hard decisions on spending and debt restructuring. But the fiscal plan, presented in January by recently elected Governor Ricardo Rosselló, was rejected by the board. Unable to negotiate a deal with creditors, Rosselló in May forced the Commonwealth into Title III, a bankruptcy-lite-type of protection also created by PROMESA.
{mosads}Now, a year after Congress passed legislation, the path forward for Puerto Rico continues to be riddled with obstacles, including controversy over how to handle the massive debt owed to creditors.
While most experts think the Commonwealth needs a comprehensive settlement with all its creditors to get to get back on its feet, some politicians believe the way to go is to make side deals with select creditors and reduce the amount that will be repaid to them (a “haircut”) by a larger percentage than other creditors.
Just last month, a subcommittee of the U.S. House Committee on Natural Resources reviewed the status of one key creditor, the Puerto Rico Electric Power Authority (PREPA), the island’s sole electric provider. The company serves 1.5 million Puerto Ricans.
Rep. Rob Bishop (R-Utah), the chairman of the subcommittee, sent a letter to the Oversight Board pressuring it to approve a special deal for PREPA that would limit its haircut on bonds to 15 percent while other bondholders could get haircuts of 70 percent. While PREPA is important to the rebuilding of Puerto Rico, favoring it over other classes of creditors stands to endanger the long-term economic growth for Puerto Rico. The result of such a huge disparity between treatment of PREPA and other creditors is likely to result in more limited credit access for the Commonwealth in the future.
The bottom line is that Puerto Ricans are worried about their future. Spending cuts include closing schools while young people are not sure if they’ll be able to go to college or get well-paying jobs. Retirees are worried about their reliable access to healthcare. Small business owners are struggling to grow and create jobs in an environment where they’ve seen tax bills rise. Young families are hurt by the lack of economic opportunities. People who are able are fleeing to the mainland in search of a better life.
On top of all this, Puerto Rico is facing a major demographic problem. The population in Puerto Rico is getting older, with 14.2 percent of the population above the age of 65. As the unemployment rate increases and the workforce shrinks, the territory’s unfunded pension commitments ($49 billion) will continue to a big problem.
The best chance of ending this spiral is to develop and implement a plan that relies on proven and sane policies that allow for job creation and economic growth. Given the reality that access to credit markets will likely be a key component of any such revival of the Puerto Rican economy, it seems the prudent thing to do would be to avoid steps, like the PREPA side-deal, that will put at risk Puerto Rico’s access to capital necessary to rebuilding its economy.
Otherwise, the economic crisis in Puerto Rico is likely to last much, much longer.
Mario H. Lopez is president of the Hispanic Leadership Fund, an advocacy organization aimed at promoting liberty, opportunity and prosperity for all Americans.
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