Democrats are about to introduce some pro-union, anti-responsibility legislation in the U.S. Senate to address the mess in Puerto Rico. The New York Times:
The draft legislation proposes to designate Puerto Rico’s public pensions as “senior secured debt,” which is quite likely to be contentious. Some American lawmakers have already questioned whether Congress can change the priorities of Puerto Rico’s pensions and bonds without adverse legal consequences. […]
The bills, which were reviewed by The New York Times, would give Puerto Rico the power to restructure all of its bond debt — not just the debts of the big public corporations that operate its drinking water systems, toll roads, ports and other services.
That would mean adjusting even the principal and interest owed on general-obligation bonds, a type of debt now given absolute top priority by Puerto Rico’s Constitution. The bill would give the governor of Puerto Rico the power to “submit a restructuring proposal which specifies the ordering and amount of debts to be paid,” according to a legislative summary.
Stiff Republican opposition to the plan is very much expected. Much tougher fiscal oversight and deep reforms needed than what’s on offer. Republican legislators had demanded that any rescue plan include strict external oversight of Puerto Rico’s finances going forward. The Democrats’ proposal appears to barely pay lip service to the idea:
The bill would also establish a “chief financial officer” for Puerto Rico, appointed by the island’s governor, and would put its financial affairs under a nine-member “fiscal stability and reform board.”
Many Puerto Rican residents and officials have been wary of any such oversight board, arguing that it would carry unacceptable colonial overtones.
But the bill contains a number of provisions intended to allay such concerns. It would allow such a board to be established, for instance, only if the Puerto Rican legislature requested it first. Six of the nine members would have to be residents of the island, four would be named by the Puerto Rican legislature, two by the Puerto Rican governor and one by the island’s Supreme Court.
The board members’ terms would be staggered to promote continuity, and to separate the island’s financial affairs from electoral politics.
During the restructuring period, the governor of Puerto Rico would also have the power to submit annual budgets to the board for approval, as well a five-year fiscal plan, which would attempt to set “levels of debt, spending, and tax policy necessary to restore solvency and fully fund pensions,” according to the summary of the bill. The board would have the power to certify or deny each budget’s compliance with the fiscal plan.
This just won’t fly. General obligation bond holders cannot simply be sacrificed to pensioners. In the end, Congress ought to provide reasonable relief to the pension funds, but only when there is evidence of deep and permanent change in the way the island does business.