An oversight board can work in Puerto Rico, but not the one in Promesa bill
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Congress has been trying to tread a very fine line on the path to rescuing Puerto Rico from the fiscal mess it's gotten itself into. On the one hand, conservative Republicans will not tolerate anything resembling a bailout. On the other hand, left-wing Democrats want to see investors (whom they indiscriminately, and inaccurately, label "Wall Street") take a haircut. A letter from Vermont socialist and quixotic presidential candidate Bernie SandersBernard (Bernie) SandersElection Countdown: Small-donor donations explode | Russian woman charged with midterm interference | Takeaways from North Dakota Senate debate | O'Rourke gives 'definitive no' to 2020 run | Dems hope Latino voters turn Arizona blue Bernie Sanders' age should not disqualify him in 2020 Small-dollar donations explode in the Trump era MORE to his colleagues implores them to "stand with the working people of Puerto Rico," whatever that means.


In an effort to walk this tightrope and appease both sides, House Speaker Paul Rya (R-Wis.) and Minority Leader Nancy Pelosi (D-Calif.) have come up with a bill they claim will make both sides happy: It creates an independent oversight board that will assume control of the island's finances until the crisis is resolved. This is a solution that has worked well in places like Washington and Detroit, and so it seems logical to extend it to Puerto Rico as well.

In a lengthy summary provided by the House Committee on Natural Resources, we are assured that the bill, going under the admittedly clever acronym of Promesa, will "restore the rule of law and the lawful rights of the island's investors." If it were only so.

The appeal of oversight boards is that they can make unpopular, but necessary, decisions without the fear of being thrown out at the next election. But this very strength is also dangerous if it is not properly reined in. A board with unchecked power risks becoming dictatorial, and so the proper safeguards must be carefully included in any legislation authorizing such a board.

These safeguards appear to be sadly absent from the current iteration of the Puerto Rico rescue bill. The board is given the power to certify debt restructuring agreements as binding, but without the creditors actually having to agree to them. Whoopsie. As long as the board determines, within its own subjective judgement, that debtors have made a good-faith effort to negotiate with bondholders, there's nothing preventing them from unilaterally making debt restructuring decisions against the will of creditors, and using the time bought by the stay to plump the coffers of the near-bankrupt pension of the Puerto Rican government — a move that would be essentially financed by haircutting the debt.

What's more, the bill does not give any protection to general obligation bondholders, whose debt is supposedly backed by the full faith and credit of the Puerto Rican government, as specified in the commonwealth's constitution. Chapter 9 of the bankruptcy code makes no provision for the reorganization of general obligation debt, but Puerto Rico's control board will not be constrained from doing so.

While trying to pass this legislation off as a way to enforce fiscal discipline and protect the rights of creditors, what Congress has actually created is something that relies far too heavily on debt restructuring and which doesn't place enough emphasis on the necessary fiscal measures to improve Puerto Rico's long-term situation. If this bill passes, it is likely that Puerto Rico will soon find itself in financial trouble again, but this time with no access to credit markets, investors having been once bitten, twice shy.

As hateful as it may seem to Sanders and his ilk, there have to be consequences to debtors for behaving irresponsibly. If Puerto Rico's oversight board is permitted to merely wish away their obligations, the problem will return again again, and it's not just Puerto Rico that will feel the effects. The mainland United States has no shortage of localities that are struggling to keep up with government pensions and other obligations. Whatever solution is ultimately reached in Puerto Rico will be viewed as a precedent for how to handle these other crises when they arrive.

A bill that allows the board to unilaterally haircut investors will scare off potential bondholders from markets all over the United States, badly harming economic growth as well as reducing the incentive for future cities and states to be responsible with their finances and avoid getting into a similar situation to Puerto Rico.

While an oversight board of some kind is likely the right approach to dealing with Puerto Rico's financial problems, the legislation as it currently stands fails to implement that board in such a way as to protect creditors from being swindled, and by extension, protect the island's long-term access to credit markets. Any debt restructuring agreements reached between creditors and debtors must be truly voluntary, or else we are only talking about bankruptcy in disguise.

Albright is the director of research for Free the People, an organization that promotes personal freedom and economic liberty.