After more than four years of seeking the restructuring of the ruinous public debts of Puerto Rico, the special body representing the government is looking forward to finishing its work and dissolving.
However, the most important part of the job is left undone. Someone must put in place an impregnable bulwark against the fiscal mismanagement that resulted in what the Congressional Research Service called “perhaps the largest restructuring of public debt in U.S. history.”
Before the year’s end, the Financial Oversight and Management Board of the Commonwealth of Puerto Rico is trying to wrap up the restructuring plan for the central government of the most populous U.S. territory. Over-optimistically regarded as a new beginning, the plan is part of a raft of bankruptcy proceedings for the island of three million people. The proceedings have involved not just the main government, but a long list of public entities, including the government-owned power company.
The bankruptcy restructurings were made possible by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) passed by Congress in 2016.
In addition to approximately $54 billion of underfunded pension obligations, the Puerto Rico government overwhelmed resident taxpayers with more than $70 billion of bond debt. Many of these bonds, including more than $17 billion issued by the dodgy Sales Tax Financing Corporation (known locally as COFINA), were of questionable legality.
Too many people in high places were connected to the borrowings. Riven by conflicts, the local government did not have the stomach to challenge the dubious debt deals that ran counter to the balanced budget and debt service limitations in the island’s constitution.
The need for PROMESA confirmed that, at least in practice, the island’s existing constitutional debt limitations were weak. But none of the parties in interest were willing to take matters to their legal conclusion to determine how much of the taxpayer-funded debt was enforceable. This means that after the FOMB is gone and desperate politicians regain their grip on the levers of public finance, the debacle can happen again.
Importantly, the protection for Puerto Rico’s taxpayers used to be a matter of federal law.
The federal debt limit, based on the assessed tax value of the island’s real property, was repealed by Congress in 1961. The repeal was a huge mistake. But the terms “autonomy” and “self-determination” were starting to hit their resonating stride as America sought to shake off images of its imperialist past.
So, to expand Puerto Rico’s rights to self-governance, Congress and the Kennedy administration let the island try fiscal discipline on its own. In the same year, Puerto Rico adopted a convoluted debt service limit that tests even the most careful scholars of Puerto Rico constitutional law.
Sixty years later, even after PROMESA’s spotlight goes dark on Puerto Rico’s cautionary tale, the door will remain open for another calamity.
The creative workarounds that were used to issue bonds and game the constitutional debt limit, and that were never struck down by the courts, are reliable roadmaps back to fiscal perdition.
Over time, the temptations to issue debt instead of raising taxes on voters, especially important campaign contributors, will be too much to resist.
Moreover, the utter ineffectiveness of local policymakers to grow the economy and stop its continuing slide all but ensures that the tax base will be insufficient to service the restructured debts.
Therefore, the FOMB must lobby Congress and the Biden administration to take a hard stance and pass a new federal debt limit for Puerto Rico, like the one repealed in 1961.
Alternatively, the dedicated volunteers of the FOMB should take all possible steps to work with Gov. Pedro Pierluisi and legislative leaders to amend the island’s constitution to include a failsafe debt limit.
This limit should apply to any bonds for which taxpayers may be liable, include a 30-year statute of limitations for civil and criminal liability, require audited financial statements before borrowings, and grant whistleblower rights to sue.
Without a rigorous and non-gameable debt limit to protect the island’s taxpayers, nothing but our fading memories of history will stand in the way of another fiscal disaster in Puerto Rico.