Because the island is a U.S. territory, this is a matter of concern to taxpayers in Virginia and throughout the country.
As a territory, its government cannot declare bankruptcy under current Chapter 9 law — but wants to do just that.
No government gets itself into this kind of trouble with its eyes closed. When it created an unsustainable financial network of government businesses and obligations, it knew that bankruptcy is not allowed under current law.
Today Puerto Rico owes some $74 billion in current debts, with long-term liabilities exceeding $160 billion. One example of financial mismanagement: Government agencies have accumulated more than $200 million in past-due electric bills, owed to the government-run electric utility. And this utility is the major debtor of the island government.
This summer, major payments are due to bondholders, and it looks as if those payments might not be made. So what is the territorial government asking of Congress? It wants authority to declare bankruptcy and leave hundreds of thousands of Americans, including many here in Virginia, holding worthless paper.
Bailout legislation is pending in the House Judiciary Committee, chaired by Virginia's highly respected Congressman Bob Goodlatte, R-Roanoke.
Bailout legislation would be a bad precedent, and would leave Puerto Rico's system of financial mismanagement unaddressed.
Bonds were purchased by individuals and investment funds knowing that, under current law, Puerto Rico cannot declare bankruptcy. That was a major reason people felt comfortable buying bonds from this U.S. territory. To change the law and allow bankruptcy would send all sorts of negative messages.
For instance, with that precedent, the federal government could, when the time comes, decide not to pay its own obligations for Social Security, U.S. Treasury bonds, or other obligations. If it was good enough for Puerto Rico, then clearly — some might say — it is good enough the United States.
Bankruptcy would simply allow Puerto Rico's leaders to walk away from the debt with little repercussion for themselves. The result would be U.S. taxpayers underwriting a bailout and U.S. seniors and working Americans being forced to absorb financial losses for problems not of their own making.
Bankruptcy would harm the territory's current investors, and court cases would be instituted that would end up costing the taxpayers even more money — with the outcome possibly in doubt. No one knows how the courts would rule — and then Congress might be right back in the middle. And the island would be an even worse economic basket case than it is today.
The bankruptcy idea should be discarded by the House Judiciary Committee, and Puerto Rico should be told to make the tough restructuring decisions that the real world requires.
To be sure, something needs to be done. But there are better options than bankruptcy.
Puerto Rico can negotiate with bondholders, requiring it to make substantial changes in its financial management of the island's public businesses. There are indications this is going on today, but the island territory is reluctant to make required changes hoping that Congress will bail it out. That is exactly why Congress should not.
And there is a time-tested action Congress can take that would make a lot more sense. In the 1990s, Washington, D.C., was in grave financial trouble, and Congress created the D.C. Financial Control Board, which took over the city's finances. A similar board can restructure the Puerto Rican government, consider selling its government businesses and reform its tax code.
It is clear that Puerto Rico's political leaders are not up to the task of making the tough and perhaps unpopular choices needed to put the island on a sound financial course. A financial control board worked 20 years ago for the District of Columbia, and our capital city is in much better financial shape today.
And, finally, one of the requirements for any U.S. government efforts to help Puerto Rico out of its current financial troubles should be that it will never become a state. Its financial mismanagement should disqualify it from ever reaching that status.
Michael Thompson is chairman and president of the Thomas Jefferson Institute for Public Policy, which focuses on Virginia and deals with the issues of educational improvements, government reform, economic development and environmental stewardship. He can be reached at mikethompson@erols.com.
Opinion/Column: Virginians should not help bail out Puerto Rico
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