How do we solve Puerto Rico's debt crisis? As Americans — both Puerto Ricans and citizens of the 50 U.S. states and the District of Columbia — watch as Greece stumbles ever deeper into economic catastrophe, many of us want to know what our government plans to do about the Puerto Rican debt crisis, which, whether one likes it or not, is America's problem.
A “bailout” is simply unacceptable to U.S. taxpayers. But a solution that provides fairness to creditors as well as debtors is at hand, if Congress is prepared to deploy its readily available constitutional powers. The Commonwealth of Puerto Rico should be authorized to restructure all its debts in a federal bankruptcy court.
On June 29, the governor of Puerto Rico announced that $72 billion of the commonwealth's debt was “unpayable.” This debt burden amounts to more than $20,000 for every man, woman and child — or roughly 70 percent of the commonwealth's per-capita gross domestic product. It is thus no exaggeration to characterize this as the most drastic fiscal crisis in Puerto Rico's history. This crisis threatens to inflict grave harm on the 3.5 million U.S. citizens of Puerto Rico and on the U.S. economy at large.
One proposal seeks to allow Puerto Rico's public utilities to declare bankruptcy, as they could if they were the instrumentalities of a state, rather than a territory. About one-third of Puerto Rico's debt burden is owed by such utilities. Chapter 9 of the U.S. Bankruptcy Code allows municipalities — with their states' permission — to restructure their debts through bankruptcy. “Municipalities” have long included public utilities of the type facing insolvency in Puerto Rico. However, the code allows only the municipalities of states to declare bankruptcy.
A bill proposed by Puerto Rico's nonvoting delegate in Congress, Pedro Pierluisi, would address this gap in the law by amending the code to allow Puerto Rico's utilities to enter Chapter 9. While the bill has stalled in the House, Sens. Chuck Schumer, D-N.Y., and Richard Blumenthal, D-Conn., recently introduced a similar bill in the Senate.
Such a solution has obvious appeal. It is straightforward and satisfies our basic commitments to uniformity and equality. There is no reason to withhold from the municipalities of the territories the same options in bankruptcy that are afforded those of the states.
Sadly, though, the Pierluisi bill does not go far enough. A significant portion of Puerto Rico's $72 billion in bonds was issued directly or indirectly by the commonwealth government, not by public utilities. A solution that addresses less than half of the total debt would simply kick the can down the road, leaving Puerto Rico with crippling payments on the other two-thirds and predictably smothering the economic growth that should be the goal of all concerned.
Meanwhile, others, including some of Puerto Rico's creditors, have proposed a federal “bailout” for Puerto Rico, along the lines of recent bailouts of banks and auto companies. But that would reward undue risk-taking and do nothing to get Puerto Rico's economy back on its feet.
There is a much simpler and more orderly solution that is well within Congress' constitutional authority over territories: Congress can and should allow all of Puerto Rico's debt — including its general-obligation bonds and pension obligations — to be restructured through bankruptcy.
Our federal bankruptcy system is designed to protect the interests of all relevant parties, including Puerto Rico's creditors, and has the power to ensure that these debts are restructured through a fair and binding process. This solution has the best chance of helping Puerto Rico work itself out of this crisis.
A clear-eyed view of the crisis reveals that the best solution to this difficult problem is to allow Puerto Rico and its creditors to restructure all these debts through the U.S. Bankruptcy Code.
This step would both extend the protections of bankruptcy to all of Puerto Rico's creditors and give the U.S. citizens of Puerto Rico their best chance to move beyond this crisis and toward a better future.
Jose A. Cabranes, a federal appeals court judge who also sits on the U.S. Foreign Intelligence Surveillance Court of Review, is author of “Citizenship and the American Empire,” a history of how the people of Puerto Rico became U.S. citizens.
By Jose A. Cabranes Let Puerto Rico declare bankruptcy
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