Breaking the Promise - Puerto Rico "PROMESA" Legislation
Congressman McClintock's House floor remarks on H.R. 5278 (Puerto Rico "PROMESA" Legislation):
Breaking the Promise
June 9, 2016
The House is expected to take up the “PROMESA” bill today, with serious implications to every taxpayer in the country.
This bill applies a form of Chapter Nine bankruptcy to the general obligation bonds of Puerto Rico that are guaranteed by the commonwealth’s constitution.
Article VI, Section 8 of Puerto Rico’s constitution explicitly provides that “interest on the public debt and amortization thereof shall be paid first.” PROMESA ignores the Puerto Rican constitution and breaks that promise.
Here’s why this is so important to the rest of the country. Every state government has similar constitutional provisions that guarantee their general obligation bonds. This is what allows them to borrow at extremely low interest rates, because their debt is constitutionally guaranteed and therefore the risk of default is extremely low.
If Congress is willing to undermine a territory’s constitutionally guaranteed bonds today, there is every reason to believe it would be willing to undermine a state’s guarantee tomorrow.
This, in turn, invites credit markets to question such guarantees as being no longer secured on constitutional bedrock, but rather dependent on the shifting whims of Congress. And this, in turn, means the value of those bonds is devalued and interest rates paid by taxpayers on that debt will increase.
The governors of six states have already raised this warning. And the U.S. Virgin Islands, whose credit is directly undermined by this bill, wants out of the bill for that reason.
PROMESA could have respected the $18 billion of constitutionally guaranteed debt and focused instead on restructuring the $54 billion of Puerto Rican municipal debt that is not constitutionally guaranteed. After all, there is no reason to treat San Juan’s municipal debt any differently than San Jose’s. But constitutionally-issued debt is fundamentally different, and its reliability must be maintained. Tellingly, supporters of the bill voted down just such an amendment in committee.
Supporters say they have addressed this concern by inserting instructions to the control board to “respect the relative lawful priorities in the constitution, other laws, or agreements.” Ironically, one of those “other laws” the control board is instructed to respect is the government’s repudiation of its debt.
Furthermore, the same section instructs the control board to “provide adequate funding for public pension systems,” and includes other contradictory instructions. The only possible interpretation of these provisions is that the sanctity of the sovereign debt is subject to balancing – and therefore subordination to junior claims -- by the control board.
Just last week, Treasury Secretary Jack Lew and the White House admitted this was the intent of the bill.
Meanwhile, another provision of PROMESA prevents lawful bond holders from enforcing their claims in court for a period of six months, but does not prevent the government from paying out other junior claims during this period.
Indeed, in anticipation of this bill, the new budget for Puerto Rico INCREASES general fund spending while it radically reduces its debt service payments.
Honoring the rule of law and maintaining the commonwealth’s full faith and credit guarantee would be a powerful signal to bond markets that the United States stands by its promises, even when it is inconvenient.
Under current law, it is in the interest of both sides – debtor and creditor – to work out terms that both can live with to restructure and repay this debt. Indeed, until the prospect of a congressional bailout arose, Puerto Rico was negotiating terms of a debt restructuring with the mutual consent of its creditors.
It is also in the interest of the people of Puerto Rico to uphold the full faith and credit clause in their constitution, which will be vitally important for them to re-enter the credit market once their affairs are put back in order.
Puerto Rico faces both a crisis and an opportunity: a crisis born of slavish devotion to failed leftist economic policies and an opportunity to replace those policies with proven free market solutions that can create a fresh start for the people of Puerto Rico and shine as a beacon of hope for other similarly afflicted states.
I fear the net result of this legislation will be to spread the crisis to other states with heavy debts by increasing their debt service costs, while squandering the opportunity to revive the Puerto Rican economy and to restore the American dream to that beautiful island.