Lets hope the Republicans can push back on this effort by Democrats to bail out the horribly mismanaged government in Puerto Rico. There’s also been talk of making Puerto Rico the 51st state giving it the opportunity to declare bankruptcy under federal code. Read between the lines below and you’ll know why the Dems want to give statehood to Puerto Rico:
According to a report by the Congressional Research Service (CRS), if Puerto Rico were to become a state, based on a population of approximately 3.8 million, it would be entitled to at least six seats in the House of Representatives. As a state, they would, of course, receive two Senators. The island state would have the same number of electors as the state of Oregon. Puerto Rico would also qualify for bankruptcy under the federal code, a critical issue during the difficult economic situation which Puerto Rico finds itself in.
The Obama administration — in particular the U.S. Treasury — has been under pressure for months from Democrats and Puerto Rican politicians to find a solution to the commonwealth’s fiscal crisis.
Puerto Rico’s $72 billion of debt is the product of decades of mismanagement, profligate borrowing, a broken taxation system and recurring deficits:
Its political leaders and various public institutions have hidden information from the capital markets and kicked the can down the road for as long as possible without undertaking real fiscal reforms. This is why an easy “solution” to the island’s current situation does not exist outside the realm of a time machine.
This, however, has not stopped the administration and Treasury from throwing a final Hail Mary.
With the release of a somewhat vague plan that was outlined by Treasury Council Antonio Weiss and lobbied for by various Puerto Rican politicians at a Senate Energy & Natural Resources Committee, President Obama pressed Congress to give the entire Commonwealth of Puerto Rico the ability to file for Chapter 9 bankruptcy.
The new proposal is being widely referred to as “Super Chapter 9,” in part because Chapter 9 currently can only be applied to municipalities and cities in the United States. The legislation would also go even further than the Puerto Rico bankruptcy bill currently before Congress.
This deal will be a tough sell to a Republican Congress. Many conservative members have already balked at the idea of “bailing out” Puerto Rico with the more limited bankruptcy bill, and with good reason.
Any bankruptcy bill for Puerto Rico would punish retirees whose pension funds invested in these bonds because they were tax-free, had strong security and were explicitly protected from Chapter 9. Conversely, it would reward Puerto Rico and its politicians for years of irresponsible spending and poor fiscal policy.
Equally significant is the implication of this new type of Chapter 9 for American investors in the near-future. Illinois, New Jersey, Pennsylvania, Connecticut are among the states with large unfunded liabilities facing fiscal crises — and the list is growing at an alarming speed. If Super Chapter 9 is granted for Puerto Rico, why wouldn’t these states expect it?
The negative consequences of all of this could be catastrophic for infrastructure investment in the United States. The roughly $3.5 trillion municipal debt market that funds the paving of highways, schools, hospitals, and police and fire stations has rested for decades on a set of rules and laws that made these bonds “safe” investments. The status of this designation has begun to crack since Detroit filed for Chapter 9 bankruptcy back in 2013.
If suddenly it was put on the table that not only cities, but whole states, could write down their debts, with bondholders having no recourse, the effect would be to fundamentally undermine the municipal debt market. It would be akin to dropping a great white shark into a pool party — except, instead of swimmers, it would be retirees and other muni investors chaotically scrambling to safety and fleeing these investments, or else charging huge premiums to states to borrow money.
The cost of those increased rates, of course, would be borne by the taxpayers in the form of an additional and unnecessary charge for keeping the infrastructure of their states viable.
It should be inconceivable that a member of Congress from a state that has been reasonably responsible in managing its fiscal house would vote for this “super” chapter 9 approach. They would be essentially voting to raise taxes on their constituents to subsidize less responsible states, since the cost of borrowing for all states will go up dramatically if a few states threaten to take this new path. It is difficult to see how anyone could justify that back home.
Read more: The Hill