2015 is a turning point in the economic and legislative relationship between Puerto Rico and the rest of the country: it is up to Congress to decide whether that relationship will be characterized by equality and sustainable progress or costly disputes affecting citizens in the states as well as in Puerto Rico.
I am proud to be part of the Puerto Rico Financial Stability Coalition (www.stability4PR.com), supporting the Puerto Rico Chapter 9 Uniformity Act (H.R. 870). H.R. 870 would permit the insular government to authorize public instrumentalities on the brink of financial ruin to obtain a path to recovery under U.S. law – something that is authorized in the states but not Puerto Rico. From a bankruptcy policy perspective, I do not believe that the current exclusion ever made sense; it certainly doesn’t make any sense now. Puerto Rican bonds are heavily traded in the U.S. municipal bond market, so the legal rules should be the same in Puerto Rico as they are in the 50 states.
In assuming sovereignty over Puerto Rico in 1898, the United States took on an obligation to facilitate Puerto Rican economic growth and stability. However, national policies have helped as well as hurt Puerto Rico in the past decades – sometimes treating Puerto Rico in a second-class fashion – and international economic developments have hindered its growth. Puerto Rican economic growth weakened in the 1970s and has been negative for seven of the last nine years. With more than $70 billion in debt, which would require $164 billion to pay back; an unemployment rate twice the U.S. average and a labor participation rate a third of the U.S. average; a median income 50% lower than Mississippi, the U.S. state with the lowest-income; the economy still shrinking; and government entities in danger of defaulting on their debt obligations, the U.S. citizens of Puerto Rico are in desperate need of a sustainable economic solution to secure a better quality of life.
Puerto Rican bonds are also integral to the American bond market, and half of Puerto Rico’s debt is held by large municipal bond funds. 2013 was the worst year in history for municipal bond funds due in large part to the dire fiscal situations in Detroit and Puerto Rico. Detroit filed for bankruptcy, but municipalities in Puerto Rico are ineligible because Chapter 9 of the federal bankruptcy code does not apply to Puerto Rico. The Puerto Rico Electric Power Authority (PREPA), which currently carries $9.2 billion in debt, is particularly challenged. It has not met
all of its financial obligations since last July, and, if PREPA defaults on its July 1 principal and interest payments, countless American investors are guaranteed to lose money. Taking action now by passing H.R. 870 is the surest way to avoid potentially disastrous events and ensure the future economic stability of Puerto Rico and the mainland interests invested there.
In drafting the Constitution, our Founding Fathers believed that a coherent and consistent bankruptcy law would be essential to economic progress in the United States. By denying Puerto Rican government entities the right to declare bankruptcy, the U.S. government would exclude Puerto Rico from the economic crisis solution that the Founding Fathers believed to be essential beyond debate in the building of this nation. Bankruptcy, as defined under federal law, presents municipalities with an opportunity to restructure and recover, whereas a multi-billion dollar government bailout on the scale of New York City in 1975 and, more recently, General Motors and Bank of America in 2009 only increases federal debt and weakens the trust of current and future investors.
Honoring the U.S. citizenship and equality of the people of Puerto Rico means extending to the Puerto Rican government the equal right to authorize debt restructuring. H.R. 870 seeks equal treatment for Puerto Rico, not special or unique treatment. This bill is not a “carve out” or a “bail out” in any sense. If it were, I would not support it. If approved, H.R. 870 would not require the federal government to spend a single additional dollar. If it is not approved, the American taxpayer could face a bailout of $164 billion.
The people of Puerto Rico do not want to fail in graceful subordination through a federal bailout. We want the opportunity to recover and thrive, and this can only be accomplished if Congress passes the Puerto Rico Fiscal Stability Act.
Fortuño served as the tenth governor of Puerto Rico, from 2009 to 2013. All statements contained within this article are his own opinions and are not representative of the beliefs of Steptoe & Johnson LLP or its clients.