Congress has a terrible time with deadlines. It’s not that it’s unable to meet real deadlines. Just the opposite, in fact: If it absolutely has to pass legislation by a given day it invariably figures out a way to get it done, no matter who is in charge. The trick is convincing everyone that there is, in fact, a drop-dead date.
One thing that has given impetus to the Puerto Rico fiscal reform legislation, which passed the House two weeks ago and will likely be taken up by the Senate this week, is that the members of Congress have been operating under the assumption that a legislative fix needs to come before July 1st, when the island has a bond payment due that it says it cannot make. The island’s governor, Alejandro Padilla, and Treasury Secretary Jack Lew insist that failing to have this legislation signed by July 1st will lead to some sort of economic crisis on the island.
However, there are two problems with this scenario: First, it’s not really clear that Puerto Rico cannot make its bond payment that day. Moreover, it’s hardly obvious that a default would trigger some sort of crisis.
The island has been insisting for some time that it running out of money, but at this point we can’t know for sure because it stopped providing any audited financial statements in 2013. Congress has repeatedly requested this information while it has been debating reform legislation but the Puerto Rican government has refused to provide it to them. We do know that tax revenue increased over the last year and that the island found enough money to give the people who work for the Puerto Rican government a Christmas bonus last year—so any pleas of poverty need to be backed up with more evidence.
Puerto RIco may have, however, provided the U.S. Treasury with access to detailed data not made available to Congress or, more importantly, investors who have placed some of their savings in debt issued by Puerto Rico. The potentially significant information advantage provided to the Treasury, which has actively pursued a specific legislative agenda in the U.S. Congress, arises from unexplained confidentiality agreements between Treasury and some component units of Puerto Rico’s government. According to responses by Puerto Rico Governor Padilla this spring to a lengthy inquiry from Senator Orrin Hatch, there are at least two confidentiality agreements between Treasury and component units of Puerto Rico’s government. That, of course, could mean that for some time now, Treasury officials have had access to better information about the true state of Puerto Rico’s finances than the rest of us.
The other question at hand is whether there would, in fact, be some sort of crisis if July 1 came and went without legislation. It’s crystal clear that the markets do not expect any bond payments to be made then, and it won’t mark the first time that the island has missed a bond payment. The lawsuits that have been filed against the island will not be stayed absent any legislation, but there’s no reason to think that these will be adjudicated anytime soon or that they will create any undue pain in the island in the near future. In keeping with the peculiar way that Puerto Rico has managed its debt after Governor Padilla’s decision not to pay it, another default on July 1 means more resources for the Puerto Rico government to use for human services and channeling resources into public pension funds before any federal oversight authority is up and functioning.
Treasury Secretary Jack Lew took a trip to Puerto Rico last month in an attempt to drum up fear that a failure of Congress to act would create some sort of crisis. But an overtly political message from an overtly political treasury secretary fell on deaf ears, especially when he did a press scrum in front of a boarded up shopping center that he alleged was shuttered because of the recent crisis, not realizing (or caring) it had shut down years ago. The number of teachers and police per capita are higher in Puerto Rico than in most states—which negates the fear of schools closing or police stations going dark without immediate legislation. The secretary of the department of economic development and commerce publicly said he regretted the strategy of Secretary Lew to paint a picture that a humanitarian crisis is in the offing because it was completely untrue.
In short, Puerto Rico should be forthcoming with detailed financial data before Congress passes any legislation. It is impossible for Congress to verify the true state of the island’s affairs absent more detailed financial information that it is only selectively sharing, and claims of impending disaster on July 1 without the legislation are overblown.
Ike Brannon is a visiting fellow at the Cato Institute.
