Puerto Rico can’t kick the creditor can down the road

Last week, on March 13, Puerto Rico’s Fiscal Oversight and Management Board approved the economic recovery plan submitted by Gov. Ricardo Rosselló.

The shortfalls in this flawed economic recovery plan strongly suggest PROMESA, the law House Speaker Paul Ryan (R-Wis.) pushed through Congress last year, will fail to bring to Puerto Rico the type of government accountability that we were lead to believe the law would bring about. Moreover, they cast serious doubt over the ability of PROMESA to succeed in its stated goals of instilling financial responsibility in the Commonwealth and restoring its access to the capital markets.

{mosads}When the bill was passed last summer, supporters touted it as the “most responsible” solution to Puerto Rico’s crisis – a law that would protect American taxpayers for footing the bill for the Commonwealth’s largesse, facilitate negotiations between the Commonwealth and its creditors, and prevent the establishment of bad precedents for the states.

Yet, so far, the only promise that has been fulfilled by PROMESA is more delay by the Puerto Rican government in making necessary reforms and facing up to its constitutional responsibility to pay the public debt.

In the nearly nine months since the U.S. Congress enacted PROMESA, Governor Rosselló has failed to carryout negotiations with bondholders. Additionally, the economic recovery plan certified earlier this month strongly suggests that Rosselló’s government will continue to default on creditors, continuing the policy of his predecessor: Alejandro Garcia Padilla.

The plan, which makes very few cuts to spending and insignificant reforms to the government’s lavish, labor-union style pension system, provides essentially no money for debt service. Instead it directs 94 percent of all government revenue to other expenditures, and elevates those expenditures above the rights of bondholders including those who own General Obligation bonds, which are protected by the Puerto Rican Constitution.

This is a plain violation of both the spirit and letter of PROMESA, which is intended to facilitate negotiation with creditors and end crony expenditures to favored political constituencies, and which states that the certified fiscal plan must respect the priority of the Commonwealth’s existing obligations as established by its Constitution.  

The enactment of PROMESA also imposed a stay on litigation against the Commonwealth, which was extended, as the law allowed, in February to run through May 1. Congressional leaders and the Commonwealth’s government argued that the stay was necessary to give Puerto Rico breathing room to get its house in order and negotiate with creditor groups. Bondholders, who contested the stay vigorously and understandably as a violation of their rights to legal recourse, were assured that it was not a mechanism which would simply allow the Commonwealth to continue defaulting on them without consequence.

But now, having failed to conduct negotiations over the better part of a year, Rosselló and his new administration have been lobbying the Oversight Board and Congress to amend the law, and extend the stay until Dec. 31 of this year.

Why should the stay be extended if the Commonwealth – under both the previous and current administrations –has not made any effort to negotiate with creditors? Moreover, what will Congress to do to address the increasingly legitimate-sounding arguments that the law is simply a congressional stamp of approval on the island’s Argentina-style campaign toward wiping out bondholders?

Speaker Ryan passed PROMESA to help Puerto Rico help itself, but now he must act quickly to ensure that Puerto Rico is living up to its own end of the deal, and not disregarding federal law once again. Failure to do so risks undermining the landmark legislation for good.

If the Commonwealth continues to violate the letter and spirit of the rule of law, and what Congress passed to help it, than not only are the stated goals of stabilizing the Commonwealth’s economy and returning it the capital markets in serious jeopardy, but the Speaker’s massive investment of political capital he made to pass the law last year will be for naught.

Andrew Langer is president of the Institute for Liberty, a conservative public policy advocacy organization.