Puerto Rico has been struggling financially for years. Yesterday the U.S. territory decided to invoke a new federal statute that will allow the island to go through a process something like bankruptcy, in hopes that it will be able to shed its crushing debt load and get a “fresh start.” Puerto Rico owes $74 billion to bondholders and has another $49 billion in unfunded pension obligations and has been unsuccessful in convincing Congress to bail it out or cajoling creditors into making concessions. Making timely principal and interest payments on its debt requires $3.5 billion in payments a year, but Puerto Rico has only $800 million to spare. The inexorable results of that math made the quasi-bankruptcy inevitable, triggering what will be the largest government “bankruptcy” process in U.S. history.
The process will be something like a bankruptcy because Puerto Rico — like every U.S. state and territory — technically cannot go through the traditional federal bankruptcy process. Instead, Puerto Rico has invoked the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), enacted during the Obama Administration, which contains some elements of the bankruptcy laws but also includes special provisions providing that, in some ways, Puerto Rico must be treated as a sovereign. Under the PROMESA law, the process of dealing with Puerto Rico’s debt will be supervised by a federal bankruptcy judge. Chief Justice John Roberts will appoint the judge, who will then start deciding what to do with Puerto Rico’s appalling financial problems.
Puerto Rico invoked PROMESA because a stay that had prevented creditors from suing ended and a series of creditors immediately filed suit, hoping to be first in line to be paid. The PROMESA law stops those lawsuits and, Puerto Rico hopes, will give it substantial leverage to negotiate with creditors and try to convince them to take pennies on the dollar for the debt — with the threat that, if creditors don’t agree, the federal judge could impose an even more draconian result. Creditors are furious. Republicans in Congress aren’t willing to go with a bailout option, arguing that Puerto Rico has already received big federal subsidies and should explain why it got into this predicament.
It’s an entirely reasonable request that, frankly, could also be made to many U.S. cities and states that face similar debt issues. Puerto Rico’s economy has struggled for years, and Puerto Rico officials decided, year after year, to borrow to pay their operating expenses rather than doing the responsible thing: cutting costs, pruning government employee pensions, trimming payrolls, and forsaking pet projects in favor of fiscal prudence. Now creditors and employees who have pension obligations will have to take pennies on the dollar, and according to a federal board Puerto Rico is “unable to provide its citizens effective services” — all because Puerto Rico’s politicians were unable to make the tough decisions and kept borrowing to put off doing so until some point in the future. Now that time has come.
Investors who may have bought Puerto Rico bonds at a discount, after the difficulties became obvious, might not be sympathetic characters, but many of its bonds likely are held by individuals who viewed bonds issued by a U.S. territory to be a pretty safe investment that would help fund their retirement years. And employees who have earned pensions will receive less than they were promised, meaning they’ll have to tighten their belts even though Puerto Rico’s successive governments didn’t do so. And a default of sorts on Puerto Rico’s governmental debt isn’t going to be helpful for other governmental entities that want to borrow through issuance of bonds, either.
Interesting, isn’t it, that the federal statute that allows Puerto Rico to go through the quasi-bankruptcy process — PROMESA — sounds a lot like “promise”? Thanks to its governmental mismanagement, for Puerto Rico the PROMESA process it will be more like promises broken. I only hope that the successive administrations who put their heads in the sand and borrowed, borrowed, and borrowed are in some way held accountable for their gross irresponsibility.