Congress should let Puerto Rico restructure its crippling debt but should impose strict new federal oversight to make sure the island territory doesn’t backslide on its budget cuts, the Obama administration said Thursday, trying to figure a way out of a thorny political impasse.
Facing $70 billion in debt, Puerto Rico is already taking drastic steps to avoid a default, including withholding tax refunds and selling off pension assets to fund its operations.
Congress is under intense pressure to help bail the U.S. territory out — though lawmakers are wary of setting a bad precedent or leaving taxpayers on the hook. But the Obama administration insists something must be done.
“There is no room for error in this economy,” Antonio Weiss, counselor to Treasury Secretary Jacob J. Lew, told the House.
Puerto Rico’s lack of statehood is complicating the rescue mission, as lawmakers walk a fine line between helping their fellow Americans and recognizing local autonomy.
Mr. Weiss said any attempt to restructure the island’s debts should be routed through the territorial clause of the Constitution, a route that could be palatable to congressional Republicans who do not want to allow Puerto Rico to claim Chapter 9 bankruptcy protection. The U.S. bankruptcy code only makes those protections available to municipalities in the states.
After taking a pass late last year, Speaker Paul D. Ryan set a March 31 deadline for himself to come up with a recovery package.
Mr. Weiss said debt restructuring should be paired with a federal oversight panel — some members called it a “control board” — that would allow local leaders to tax, spend and govern as they see fit, yet force them to live up to their fiscal obligations.
Analysts say Puerto Rico’s woes are the result of years of overborrowing and spending and the steady exit of young, working-age residents who could help turn around the island’s fortunes.
As it stands, the island is scrambling to meet its bond payments without slashing health care, education and other service.
Mr. Weiss proposed a temporary stay of litigation against Puerto Rico, so the government can operate while it enters voluntary negotiations with creditors.
Some Republicans were reluctant to throw the island a lifeline, however, until Puerto Rico produces more financial statements.
“I think Congress is flying blind,” Rep. Jeff Duncan, South Carolina Republican, said. “And I don’t believe we should take any action, until we truly know an audited financial picture of the commonwealth.”
Other GOP lawmakers want the island to reduce its bloated government workforce and kick-start its economy, so that it doesn’t sink into another fiscal morass.
Mr. Weiss said Puerto Rico cannot expect much investment, however, until its economy is stable.
“The question is not whether the commonwealth will emerge from this crisis,” he said. “But when, and at what cost to the 3.5 million Americans on the island.”
Commissioner Pedro Pierluisi, the island’s non-voting representative on Capitol Hill, said both federal and local leaders have failed Puerto Rico, in part because it doesn’t enjoy the benefits of statehood.
“To compensate for the shortfall in federal support, political leaders in Puerto Rico have tended to overtax local residents and businesses, impeding economic growth, and to over-borrow in the bond market, creating excessive deficits and debt,” he said. “Under certain administrations in San Juan, policymaking crossed the line from imprudent to negligent.”
He said he could support an oversight board, so long as it supplements but does not displace local control. But he also urged those seeking repayment to show restraint.
“Puerto Rico and its creditors are on the same ship,” he said. “We’re going to sail safely to shore together, or we’re going to sink together.”
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