In search of a Puerto Rico strategy

A humanitarian crisis of grave proportions will soon unfold in Puerto Rico, a U.S. territory of 3.6 million U.S. citizens, if the political branches in Washington fail to craft an innovative strategy for cleaning up the island’s monumental fiscal mess.

Not surprisingly, the idea that Congress (in the exercise of its authority under the Constitution’s territory clause) should pass legislation establishing a federal fiscal control board for Puerto Rico has begun to gain momentum in Washington circles. This proposition should not be taken lightly. It merits grave and careful consideration.

{mosads}As a threshold matter, it is essential to discard the possibility of blindly extrapolating the 1995 District of Columbia Revitalization Act to the Puerto Rican scenario. The District’s $722 million budget deficit and $5 billion unfunded pension liability (as measured by 1995 standards) pale in comparison to Puerto  Rico’s chronic $2.5 billion per year budget deficits (3.5 percent of GNP) and over $33 billion unfunded pension liability. While certain provisions of the District’s Revitalization Act would certainly prove useful in the Puerto Rican context, such as for instance those addressing governmental cash-flow problems, these measures alone will prove insufficient to assure the island’s long-term sustainability.

As the 2015 Krueger and the 2014 Federal Reserve Bank of New York reports have both suggested, solving Puerto Rico’s woes will require much more than a powerful dose of austerity. It will also require doing away with the applicability to Puerto Rico of a host of federal statutes and regulations, such as the Jones Act (1920 Merchant Marine Act as amended), which have severely diminished the island’s competitiveness in the global economy.

While it is true that local politicians have recklessly mismanaged the island’s finances, it is pretty clear that the fundamentals of Puerto Rico’s political relationship with the US are highly unsatisfactory. The political status meltdown has clearly exacerbated the island’s fiscal and economic malaise. Therein lies what some voices in Congress have now come to describe as the island’s “structural” problem.

The political branches in Washington would be well advised to pay heed to the following observations as they explore the possibility of introducing a fiscal control board bill for Puerto Rico:

1. The proposition that the federal government “cannot” and “should not” extend to Puerto Rico bridge financing facilities is unrealistic. Addressing the island’s long-term structural asymmetries, will require in the short-term access to external sources of liquidity. If seen in light of the impending debt service deadlines facing the island’s central government and public corporations (totaling close to $3.5 billion over the next 10 months), and these entities’ incapacity to access the markets, it becomes patently clear that there will be no successful debt restructuring without short-term liquidity. Nothing, as a matter of law or policy, stands in the way of the Treasury’s or the Federal Reserve’s assistance by way of facilitating Puerto Rico appropriate short-term financing facilities within a wider revitalization strategy that brings to the fore the federal fiscal control board mechanism. One thing must go with the other.

2. The sheer magnitude and complexity of Puerto Rico’s debt restructuring negotiations will no doubt require that any federal control board legislation bestow on that board broad authority to engage the island’s creditors in the restructuring negotiations — bearing in mind, of course, the fiduciary duties that would necessarily make the board accountable to Congress.

3. Federal legislation establishing a fiscal control board for Puerto Rico must also contain explicit provisions detailing a fixed timetable for Puerto Rico’s decolonization. As soon as Puerto Rico hits the applicable fiscal and economic growth benchmarks, the people of Puerto Rico should face a stark choice between sovereignty and annexation. The status quo must be discarded from the outset because it is both the source of the structural crisis besieging the island and a colonial anachronism at odds with the US’s geopolitical interests in the Americas. The sovereignty formula presents, in of itself, a dual choice between separate sovereignty and associated sovereignty. The annexation alternative, for its part, would amount to Puerto Rico becoming a “part” of the United States as an “incorporated” territory — bearing in mind that it befalls on Congress to spell out the conditions the island would then have to meet in order to enter the Union as a state on an equal footing with the 50 states.

The Puerto Rican fiscal crisis presents a unique opportunity for articulating a sound policy for disentangling an ancient jigsaw puzzle — the solution of which has so far eluded Washington. The current territorial condition of Puerto Rico has become an albatross around the neck of any possible path for undoing the epic fiscal crisis besieging the island today.

Alomar is a professor with the David A. Clarke School of Law at the University of the District of Columbia.


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