George Gibbs Center for Economic Prosperity

Pass PROMESA, Secure Puer⁠t⁠o R⁠i⁠co’s Fu⁠t⁠ure

By: The James Madison Institute / 2016

This opinion editorial originally ran in the Orlando Sentinel on April 26, 2016.

Reading about the financial challenges happening in Puerto Rico, I am reminded of stories fellow parents tell of their college-aged children. Living life on the verge of independence, our sons and daughters venture closer to self-sufficiency; yet, on occasion they find themselves in circumstances requiring our attention and assistance.

Such is the situation of the U.S. island territory currently trying to deal with fiscal problems that have confounded even some of the best economists and policymakers.

With approximately 3.5 million residents, the citizens of the Commonwealth of Puerto Rico have enjoyed the benefits of American citizenship since 1917 with the passage of the Jones-Shafroth Act. Additionally, since 1947, Puerto Rico has elected its own governor, demonstrating a faith in democracy and a desire for structure. All was well until 2006, when a fiscal crisis struck, a government shutdown took place, and a political power struggle crowded the headlines.

Suffering under a decade of recession and a loophole granting it the ability to issue bonds tax-free, Puerto Rico has managed to amass an outstanding debt of more than $71 billion — amounting to 70 percent of its gross domestic product and more than $20,000 per resident. It follows then that Puerto Rico is hemorrhaging residents to Florida at a rate of 7,500 per year, and those choosing to stay are evading taxes in their home country at a rate of 44 percent.

Unlike municipal governments in the U.S., however, Puerto Rico is not able to restructure its debt through Chapter 9 bankruptcy (unless Congress changes current law, which is highly unlikely). Which leads to the inevitable question: What possible remedies can be implemented that would respect liberty, help to correct the challenges afflicting the governance of Puerto Rico, and ensure that Congress fulfills its obligations to this U.S. territory to provide assistance without burdening taxpayers with a bailout?

Enter PROMESA, the Puerto Rico Oversight, Management and Economic Stability Act (House Resolution 4900). Recently introduced in the House Natural Resources Committee by Wisconsin Rep.Sean Duffy, this legislation has a chance to thread the needle between providing much-needed assistance for the commonwealth, respecting the rule of law, and offering a path forward to mitigate the possibility of future mismanagement. Moreover, it avoids a taxpayer bailout.

Under PROMESA, an oversight board would be created to administer the recovery and work across the legislative and executive branches within the commonwealth to execute much needed, long-term reforms. This model is similar to that which proved successful in the District of Columbia in the mid-'90s.

Of critical importance, PROMESA would prohibit retroactive Chapter 9 bankruptcy — a clear victory for the rule of law and for long-term stability in bond markets (which hold Puerto Rico debt). In addition, the legislation includes pro-growth reforms such as the ability to lower minimum-wage requirements for workers under 25 (something the U.S. government might take note of), as well as excluding Puerto Rico from theU.S. Department of Labor's proposed overtime rule. These are certainly small steps in the right direction.

The most important thread of this legislation is the balance between bringing together creditors and debtors voluntarily, and the ultimate authority by which the oversight board would operate. While it may be delicate for a commonwealth that could potentially view such a body as colonial in nature, any assistance we provide must have real teeth to be effective. Without such, there will be no incentives to curb the behavior that got us all here.

While watching over the financial decisions of our college-aged children can cause heartburn, we try where we can to offer our wisdom. However, they may be prone to misstep, and as we promised ourselves we'd do, we are there to catch them when they fall. When this happens, we do all we can to teach them how to avoid repeating the same mistakes.

Congress should take the same approach with the Commonwealth of Puerto Rico and its challenges, and follow the leadership of Duffy by passing PROMESA. It's the responsible action to aid in the economic growth, strategic development and future success of Puerto Rico.