The Commonwealth of Puerto Rico is a small island, population 3.5 million, but it’s counting on Washington thinking that the commonwealth, like Wall Street banks and Detroit automobile manufacturers, is too big to fail. Decades of out-of-control management has pushed it to the brink of financial collapse.
The day of judgment is at hand. Puerto Rico has its hands out, expecting Washington to ride (or surf) to the rescue. One of the enthusiastic surfers is House Speaker Paul Ryan, surfing in support of indulgent legislation emerging from the House Natural Resources Committee. Since the president has failed to lead on this issue as he has so many others, Mr. Ryan called a special conference last week to talk about his plan.
Like many sovereign states in trouble, Puerto Rico is reaping what its leaders have sown over several decades. Cronyism, featherbedding, economic chicanery, and wasteful spending financed by continued borrowing, imposed debts which now must be paid.
Instead of negotiating with its creditors to refinance the debt, island leaders have continued to spend as before, confident that Washington will pay. The commonwealth obviously expects Congress to put a control board in place and to wipe the debt clean.
The Ryan bill would enable Puerto Rico to take refuge in a kind of super Chapter 9 bankruptcy, under which its debts would be “restructured,” including the general obligation debt, backed by the “full faith and credit,” such as it is, of the Puerto Rican territorial government. Unfortunately, this would set a precedent for profligate states, making it difficult to say no when Connecticut, California or Illinois come calling to say that what was good enough for Puerto Rico is good enough for them, too.
This Ryan solution would raise borrowing costs across the board for everyone who invests in the public finance sector, which has always been be one of the safest places to put private money.
It’s not clear why Mr. Ryan wants to put so much of his prestige on the line for such a suspect bill. Rep. John Fleming of Louisiana, a Republican member of the House Natural Resources Committee, complains that leadership pressure was applied to require him to remain silent when the bill was “marked up,” or revised in committee. He was encouraged to leave the room when votes were taken.
“In all my time in Congress, no one has ever asked me to do something quite like this, until last night,” he said on the morning after. “I was angry. To be asked to walk away — to be told to miss a vote — is a request that flies in the face of every member’s conscience. Leadership had no business making such a request.”
If Congress must help Puerto Rico find a way out of a crisis it created for itself, the legislators must do it in a way that doesn’t make matters worse. Mr. Ryan and his colleagues can do better.
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