Helping Puerto Rico may start a whole new wave of bailouts
If you have a retirement fund or pension, or you’re a taxpayer, get ready to have your pockets picked.
The Obama administration wants Congress to enact a bankruptcy plan for Puerto Rico, forcing holders of Puerto Rican debt (including New York City pension funds) to settle for less than they’re owed.
Puerto Rico is over $70 billion in debt and already defaulting. House Speaker Paul Ryan has promised action by March 31, and the Supreme Court took up the issue on Tuesday.
In 1984, Congress amended federal bankruptcy law to prohibit Puerto Rico from enacting any law that would force creditors to accept less than what they’re owed. If Congress rewrites the rules now retroactively, it will jolt municipal-bond markets. Jittery lenders will demand higher interest from states and cities that need to borrow, whacking taxpayers who foot the bill.
Bankruptcy’s not the answer. Congress needs to show Puerto Rico some tough love, by imposing a board to oversee the island’s finances, curb its profligate spending and cut its bloated government payroll.
Puerto Rico’s pols have flunked civics. The island is mired in cronyism and corruption. Rep. Nydia Velazquez (D-NY) calls a control board a “colonial power grab.” Nonsense. A control board turned around New York City in the 1970s and the District of Columbia in the 1990s, without resorting to bankruptcy.
Allowing the island to weasel out of its debts will encourage more irresponsibility. Last Christmas, Puerto Rico’s governor doled out $120 million in bonuses to employees, just before defaulting on millions in debt.
Puerto Rico’s publicly owned utility is $9 billion in debt, but still provides free electricity to 78 municipalities, keeping local pols happy, and even powers an ice-skating rink in the tropical heat. Yet on Tuesday, the utility pleaded with the Supreme Court justices to be allowed to stiff its creditors.
Predictably, the Obama administration supports allowing Puerto Rico to default, telling Paul Ryan a bankruptcy would “cost taxpayers nothing.” If you believe that, I have some Puerto Rican bonds to sell you.
Even liberals like New York City Comptroller Scott Stringer and Bronx Borough President Ruben Diaz Jr. blasted Obama’s proposal, saying it would hurt the value of the city’s pensions and “by extension the retirement security of New York City workers.” Ditto for retirees and investors nationwide.
Rep. Tom McClintock (R-Calif.) warns against Obama’s plan. Investors will realize that if Congress can erase Puerto Rico’s debt, “they can do that for California and Illinois and New York,” leading to a “rapid escalation of borrowing costs for states.” And their taxpayers.
On the legal front, Puerto Rico’s lawless politicians didn’t wait for a congressional bailout. In 2014, the debt-mired island passed its own local bankruptcy law — now being challenged in the Supreme Court.
Puerto Rico wanted to help its electric utility escape paying its debts in full. Trouble is, the US Constitution and federal law both prohibit that. The Constitution’s framers barred local governments from passing bankruptcy laws, reserving that power for Congress alone. After all, if local politicians could rewrite the rules and erase debts, who would ever loan money?
Ignoring the Constitution, Puerto Rico passed its law anyway. What chutzpah. But the utility’s creditors challenged it in federal court, and have won each step along the way.
It’s amazing that the Supreme Court is even hearing an appeal on this. Even worse, during oral arguments Tuesday, Justices Ruth Bader Ginsburg and Sonia Sotomayor seemed sympathetic to this lawless act. With Justice Antonin Scalia deceased and Justice Samuel Alito recusing himself, the island has a shot at a 4-3 victory. It would be a defeat for the rule of law.
In 2013, President Obama pushed Congress to avoid a national debt default, insisting “we’re not some banana republic . . . We don’t run out on our tab.” Why is that behavior suddenly acceptable for Puerto Rico?
Betsy McCaughey is a senior fellow at the London Center for Policy Research.