Treasury is right about Puerto Rico debt

After careful analysis, the U.S. Department of the Treasury determined that Puerto Rico is insolvent and any action taken must be within this framework.

Therefore, the view of Treasury is that Puerto Rico is closer to Detroit in the 2010s than it is to either New York in the 1970s or Washington, D.C., in the 1990s. In fact, the population loss in Puerto Rico in 2015 will be similar to the one experienced by Detroit during 2000-2010. Consequently, Treasury put forward a plan that would entail concessions and adjustments by the people of Puerto Rico, the federal government and bondholders. The plan received widespread acceptance among the political parties and business community in Puerto Rico. However, it has not gained traction among bondholders and the members of Congress who support them.

{mosads}The Treasury proposal provides federal funding to address structural impediments to economic growth in Puerto Rico such as the Earned Income Tax Credit (EITC) program. The plan also provides federal funding to shore up Puerto Rico’s fiscal deficit, like equal participation in health programs such as Medicare (for which Puerto Ricans pay under the same rules as U.S. participants) and Medicaid (for which Puerto Ricans contribute no federal taxes).

If Treasury is going to put money on the table, it will require some form of a federal control board. Thus, it is a sine qua non for federal support to establish some form of federal control board. Most Puerto Ricans understand this. By the same token, the purpose of federal support for Puerto Rico is not to bail out bondholders. They must take significant discounts on their debt. As such, Treasury is proposing that all Puerto Rico debt could go through a restructuring process under Chapter 9 of the federal Bankruptcy Law. Bondholders are terrified that a federal judge would weigh in the different interests and rule on debt discounts (“haircuts”) that would be fair to all the stakeholders. Instead, bondholders are demanding their pound of flesh.

Sen. Chuck Grassley (R-Iowa) is rightly concerned that public-sector employment represents 26 percent of the total employment in Puerto Rico. However, the problem is not the numerator, meaning the number of public sector employees in Puerto Rico. According to the U.S. Department of Labor, as of June 2015, Puerto Rico had 66 public sector employees per 1,000 residents compared with 68 public sector employees in the United States. The problem is with the denominator, meaning the total number of employees and in particular, the number of private-sector employees in Puerto Rico. For each 1,000 residents, Puerto Rico has 193 private sector employees compared with 374 in the United States. There is no doubt that the private sector in Puerto Rico needs to grow much more. To properly address the Puerto Rico debt crisis, the focus must be on increasing private-sector employees on the island. This is in line with Treasury’s proposal, such as the EITC credit. Focusing on the 66 public sector workers per 1,000 residents is shortsighted and ultimately, futile.

The Treasury proposal of dealing with all debt under the framework of Chapter 9 bankruptcy is correct because it addresses the need to quickly reach a settlement on all debt and the problem of all the debt being intertwined. The negotiations with Puerto Rico Electric and Power Authority (PREPA) bondholders lasted over a year and ended with a $600 million concession from bondholders, even though the book value of PREPA is negative $1.7 billion. The main concern with the preliminary PREPA agreement is that it would entail an increase in electricity rates that would make Puerto Rico even less competitive, reduce the number of private-sector employees, promote emigration, reduce tax collections and therefore negatively impact the capacity of the island to service other debt, such as general obligation bonds.

I have a daughter studying college in Missouri and another living in Puerto Rico. Bondholders are counting on fathers like me to tell their children that they should either return or stay in Puerto Rico, despite an economy that will negatively impact their careers. That they should return or stay in Puerto Rico despite a creaking infrastructure that could make it difficult to take a shower, since earlier in the year, thousands of San Juan households had dry taps five days of the week due to insufficient investment to handle a drought. That they should return or stay in Puerto Rico, with the peace of mind that they will pay taxes so that bondholders get most of their money. Regrettably for bondholders, many Puerto Rican parents are not giving this message to their children.

The Treasury plan is a good starting point to get Puerto Rico out of its debt crisis. If bondholders reject this approach, they run the risk of what happened with Shylock in Shakespeare’s “The Merchant of Venice.” He won most of the legal arguments — but he still could not collect Antonio’s debt.

Feliciano is president of Advantage Business Consulting.