Fixing Puerto Rico

Puerto Rico is in a financial bind. The Commonwealth, along with its public utilities and various municipalities, collectively owes more than it can realistically repay.

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The island’s government would like the option to do something similar to what Michigan did to help Detroit: give its municipal corporations the ability to restructure their debts under Chapter 9 of the federal bankruptcy code, bring its creditors into a negotiation, and craft a viable reorganization plan that gives the island’s economy some breathing room and politicians some authority to undertake further economic reforms.

The only problem is that Puerto Rico—unlike the 50 states—cannot use Chapter 9, for historical reasons that no one remembers and that don’t make good financial sense. The island tried to get around that obstacle by passing legislation that would have accomplished nearly the same thing as a Chapter 9 restructuring, but a federal judge in Puerto Rico struck down the new law. Puerto Rico also has asked Congress to amend the bankruptcy code to treat it like the 50 states, and the House Judiciary Committee recently held a hearing on the issue.

This effort has fomented opposition among some Tea Party groups, who argue that such an action would be tantamount to a federal government bailout of the island’s economy. This opposition apparently worries some Republican congressmen, who fear any accusations of profligacy.

However, the notion that it would cost the federal government money if Puerto Rico’s municipal corporations were permitted to restructure their debts under Chapter 9 woefully misconstrues both Puerto Rico’s current situation as well as how a Chapter 9 proceeding actually works. Absent some sort of restructuring under Chapter 9, Puerto Rico’s situation may keep deteriorating until a federal role—along with a potential federal bailout—becomes necessary.

By IKE BRANNON

Fixing Puerto Rico