It’s been a month since Puerto Rico’s federally-created Financial Management and Oversight Board received the governor’s proposed fiscal plan for the bankrupt island. But there is still no hint about one of the most momentous decisions that the oversight board must make: Will it legally challenge vast tranches of taxpayer-supported debt that were incurred with the purpose of evading the island’s constitutional borrowing restrictions?
The stakes are incredibly high. Without this legal challenge, the U.S. island territory of 3.5 million residents will likely face the same fiscal calamity in the decades to come. Future unsupervised governments would feel free to replicate Puerto Rico’s crushing and confounding debt structure. The phantasmagoric vortex consists of more than 150 types of bonds issued by 18 different government entities.
At this point, no one except the oversight board can make the call on whether to challenge the debt as a disinterested outsider. Of the island’s aggregate $68.7 billion bond liabilities, approximately $38.4 billion is payable by taxpayers. However, only $13 billion of the amount is facially valid as direct public debt. But even this debt has its own problems if the government borrowed it to cover deficits in violation of the island’s constitutional balanced budget requirement.
One can only speculate about the internal dynamics that are currently taking place within the oversight board. Also, the back-and-forth fiscal plan and budget approval processes embody a complex mix of federally-mandated oversight and theoretical and practical levels of self-governance by the island’s democratically-elected officials. However, none of the main political parties appears to have the stomach to upset the cart of bad apples that preceded them. Neither the current governor, nor the governor-elect has openly called for a legal challenge to the debt. Worryingly, on the other hand, the board includes individuals with local party ties or past leadership positions in the main entity that orchestrated Puerto Rico’s voracious borrowings.
In the aftermath of island and U.S. elections, I suspect the oversight board’s decision on any legal challenge to the debt will await the inauguration of the new governments in San Juan and Washington, D.C.
Sooner or later, however, it must make the decision. And the right decision is to challenge the debt. Doing so will teach Puerto Rico and the federal government -- which ultimately controls the U.S. territory -- one of two truths: Either major portions of debt are illegal, or new laws are needed to prevent this disaster from happening again.
Mr. Martín is a corporate lawyer and author of “Puerto Rico: The Economic Rescue Manual.” He resides in Atlanta and San Juan.
BY DAVID R. MARTIN
What courage will Puerto Rico’s new oversight board show?
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