As Puerto Rico’s Debt Crisis Deepens, Congress Must Avoid Fiscal Quagmire, Uphold Rule of Law, Protect All Americans

Dear Member of Congress:

Today’s Senate Judiciary Committee hearing may very well be Congress’s final occasion to explore in-depth the causes of and remedies to Puerto Rico’s current debt crisis before events compel lawmakers to formulate a legislative response. On behalf of National Taxpayers Union’s (NTU) members across the country, including those in Puerto Rico, I urge you to craft such a response with the utmost of caution as the island confronts critical financial deadlines.

Over the course of the last several months, NTU has issued several communications on behalf of our members in Puerto Rico and the rest of the United States to provide detailed views on how best to resolve this crisis without imperiling taxpayers, eroding rule of law, or setting dangerous policy precedents. NTU’s members ask you to bear these past communications (which may be accessed online here and here) in mind over the coming days, and are asking you now to consider some additional matters. We encourage Members of Congress to support a solution for Puerto Rico that abides by the following precepts: 

1) Avoid “Super Chapter 9”. As NTU’s past analysis has indicated, the Chapter 9 process for U.S. municipalities has not been a panacea. Court-ordered debt resolution, absent a commitment from public officials to rein in fiscally irresponsible policies, has not produced uniformly desirable results for taxpayers or the local economies impacted by the procedure. Proposals for so-called “Super Chapter 9,” which would expand bankruptcy protection to Commonwealth-level obligations, would be a move in the wrong direction. Doing so would undermine good-faith negotiations between creditors and island officials, shred entirely the Commonwealth’s already-tattered fiscal constitutional fabric, and make future investors reluctant to direct capital to Puerto Rico.

Collateral damage from “Super Chapter 9” would be inflicted in the form of weakened U.S. bond markets, which in turn would have a detrimental impact on and off the island. Equally troubling, fiscally irresponsible states would doubtless perceive a political opening to lobby for similar privileges, creating perverse incentives for even more reckless tax-spend-and-borrow behavior.

Chapter 9 should not to be wielded in a wanton fashion, and cannot stand apart from a comprehensive set of reforms (see below) if it ever were deployed. “Super Chapter 9” would be the very definition of “wanton.”

2) Encourage Constructive Dialogue. Some officials in Puerto Rico’s government have resorted to ad hominem attacks against bondholders, many of whom are retirees and small business people.  This type of rhetoric, designed for political consumption, is counterproductive for anyone interested in a strong financial future for Puerto Rico.

The New York Times reported last week that creditors, specifically those holding constitutionally-protected debts, are proposing a “private sector solution” for restructuring. Congress should encourage and hasten this type of negotiation between bondholders and the government, while ensuring that any remedies avoid long-term taxpayer guarantees. In so doing, federal lawmakers will also be helping to ensure that Puerto Rico follows its own constitutional precepts in reconciling its outstanding debts – a rule-of-law approach that ultimately benefits the island more than any other actor in this very real drama.

3) Support Meaningful Policy Reforms. Whether it involves direct negotiation between public and private entities, or some kind of supervised restructuring, no solution for addressing Puerto Rico’s debts can be effective without major reforms to the island’s fiscal and economic institutions.These reforms, explored at length in NTU’s October memorandum for legislative staff, include but should not be limited to:

  • Repeal or modification of Jones Act shipping restrictions, so as to benefit exporting businesses as well as local consumers.

  • Regulatory flexibility to bring wage minimums in line with regional realities, reduce burdens on start-up companies, and allow for speedy private development of previously government-owned assets.

  • Government efficiency upgrades, such as more aggressive implementation of energy saving performance contracts, life cycle cost analysis, and whistleblower protections.

  • Tax administration improvements, such as tax tribunals and other taxpayer rights safeguards that encourage voluntary compliance from conscientious citizens.

  • Financial transparency standards, among them auditable, complete financial statements, publicly accessible and searchable databases of government grants and contracts, and a full accounting of all closing agreements between Puerto Rico’s government and businesses operating on the island (to which Governor Padilla recently testified the Commonwealth owes over $1.5 billion in deferred payments). These are the types of important tasks to which a Congressionally created, properly defined oversight body could make an invaluable contribution. Lawmakers should be wary, however, of “Super Control Board” proposals that would confer more powers to simply erase legal debt obligations than even courts could – or worse, abet schemes such as moratoriums on debt service payments. Here again, this will only diminish Puerto Rico’s future attractiveness to businesses and individuals seeking a stable financial climate in which to locate or remain.

Congress can help to effectuate these changes, but it will also require the cooperation of the executive branch and Puerto Rico’s government. Furthermore, any solution must meet the fundamental challenges facing the island’s economy within a framework that stresses rule of law.  Finally, as Senator Hatch has noted, public officials and the taxpayers they serve should know “the actual costs of any legislative or administrative proposal” in connection with a rescue package for Puerto Rico.

It is quite true that Puerto Rico’s residents, who are U.S. citizens, deserve fair legislative responses from Congress to their debt woes that uphold their dignity. It is also certainly the case that the federal government has not managed its own fiscal affairs in an exemplary manner. Knowing this context, House and Senate lawmakers must, in a bipartisan fashion, arrive at solutions that above all respect taxpayers on the island and on the mainland. Please call upon NTU to assist in this crucial task, whose urgency increases with each passing day.


Pete Sepp