No federal financial control board for Puerto Rico

The Senate Committee on Finance will hold hearings on Puerto Rico at the end of September. The subject of a financial control board will be on the table. Rep. Jeff Duncan (R-S.C.), Puerto Rico bondholders and the economists on their payroll are clamoring for a federal financial control board (FFCB). It probably won't happen because it would not be in the interest of the other stakeholders. A local financial control board would be more in line with the interest of Puerto Rico residents and the federal government.

The Puerto Rico pro-statehood movement is against an FFCB. Favoring the FFCB would mean accepting that Puerto Ricans cannot deal with their own issues. This is not the sort of calling card you want if you plan to demand statehood from Congress and obtain two senators and five congressmen who would delve into the issues of the nation as a whole. To the extent that the statehood movement expects to win the 2016 elections, an FFCB would mean that they do not trust themselves as a government without federal tutelage. A study on Puerto Rico's current fiscal challenges by the Congressional Research Service states: "The independence of U.S. state governments to set their own fiscal paths has thus been linked to an expectation that those governments take responsibility for their finances."

The pro-commonwealth movement is also against an FFCB because this would be a federal intervention that would shatter the idea that the commonwealth is a sui generis bilateral compact. Instead, the commonwealth would look like one of the "home rule" arrangements that the British Empire structured for its colonies. And what the metropolis gives, the metropolis can take away.

Meanwhile, the federal government does not cherish the unenviable position that an FFCB would put it into. An FFCB was successful for the District Columbia, but this effort included a bailout in which the federal government assumed some of the D.C.'s liabilities related to pensions and judicial obligations, and also increased the federal Medicaid contribution. Moreover, Puerto Rico is a more complex situation that requires much more than a good handle on tax revenues and government expenditures. Puerto Rico needs economic growth and debt discounts so that its debt load becomes manageable.

The federal government could pursue two courses of actions with a Puerto Rico FFCB. One would be to squeeze island residents until they are bled dry. There are precedents for this: The U.S. invaded Haiti in 1915 and took over customs in order to collect debt for American banks. However, such brazen imperialism is now out of fashion and impractical, particularly if pursued against fellow U.S. citizens who can move at will to the continental U.S.

The other course of action for the FFCB would be to negotiate with the largest financial institutions in the United States and obtain discounts in Puerto Rico debt that are fair to all stakeholders and would make the debt sustainable. This was the role played by the state of Michigan with respect to Detroit's debt. Michigan steered the city of Detroit through the Chapter 9 bankruptcy process and deep discounts to creditors.

It is probable that the federal government would rather leave the business of negotiating debt discounts to the Puerto Rico government. To the extent possible, the federal government should leave to a court the determination that the debt discounts required would share the burden fairly between creditors and residents.

A local Puerto Rico financial control board has many shortcomings, particularly how it would guarantee continuity across different government administrations. Theoretically, the law creating the local financial control board could be repealed. However, the pitfalls of a federal FCB are even larger. The island does not need an FFCB; it needs the tools to deal with the crisis, such as extending to Puerto Rico the provisions of Chapter 9 of the Bankruptcy Code available to the 50 states. And Puerto Rico needs to be allowed to deal with its own problems.

Feliciano is an economist and president of Advantage Business Consulting.

By Vicente Feliciano

No federal financial control board for Puerto Rico