Although the issue of Pueto Rico’s insolvency has been buried beneath other important news, Congress and the White House have been fighting over it lately. The island territory is in crisis because its improvident governments have accumulated $72 billion in debt, and they can’t keep it up.
There’s plenty of blame to go around. Part of the problem is of Puerto Rico’s making, and part is the result of federal laws on shipping and the federal minimum wage. But whoever deserves the lion’s share, Puerto Rico’s debt is now 70 percent of its economy. The governor admitted last year that the island cannot possibly pay it back. The debt is too large, and debt service costs unsustainable, consuming a third of all revenues.
Last week, Puerto Rico’s Government Development Bank, one of the quasi-governmental institutions that the territory uses to circumvent borrowing limits, defaulted on a $422 million loan payment. So far, the government itself has managed to keep making payments on its general obligation debts, but this won’t last.
Puerto Rico, like any other state or sovereign entity, can repudiate debts according to its own rules. The question before Congress is whether to try to override the island’s constitution and provide a bailout.
This issue should concern you deeply, even if you never plan to visit. As Joseph Lawler notes in his cover piece of the magazine this week, Puerto Rico’s collapse may be only “the first leak to spring in the boat,” with many more coming all across the United States.
Estimates of the 50 states’ unfunded pension liabilities range from $1.3 trillion to $3.3 trillion, depending on the assumed rate of return. Illinois, Connecticut and Kentucky are three examples of states whose pension account is out of control already or nearly so.
This is the result of states making unwarranted assumptions about growth in their pension funds, and failing to fund them properly, thereby leaving more money in the hands of extravegant polticians to spend immediately rather than saving for the future.
Little Puerto Rico is therefore an outsized problem, for if it gets a bailout, it will set a precedent for when bills come due in such big states as Illinois. Those would be much bigger bailouts. Senate Finance Chairman Orrin Hatch explains to Lawler that a bailout of Puerto Rico would create new expectations for other fiscal basketcases. Illinois’ debt is so dire that everyone from Medicaid doctors to lottery winners receive IOUs in lieu of prompt payment.
The pressure on Congress for federal taxpayers to take care of deadbeat states will be great even without a bad Puerto Rican precedent. As state governments cut public services to make debt interest payments, the pips will start to squeak. Lawmakers will be accused of denying public sector workers their pensions.
But there is no reason why taxpayers who elect thrifty governments in other states should be forced to open their wallets to help those who voted big spenders into office.
Congress, which exercises control over Puerto Rico in a way it does not over any state, is facing a choice between various bad options. A direct fiscal bailout would create incentives for bad behavior. So would the creation of a new bankruptcy chapter for states and territories, and it would also undermine the borrowing power of responsible states. It would, too, be an affront to state sovereignty.
The financial control board supported by Rep. Rob Bishop, R-Utah, represents a good-faith attempt to impose fiscal discipline on Puerto Rico and restructure its debts without creating bad precedents for other states.
Whatever choice Congress makes, including the choice to do nothing, lawmakers must make sure not to create incentives with more profligacy. Just as banks should never be treated as too big to fail, so too should governments in states and territories. Otherwise, taxpayers lose the shared benefit of market discipline, which is their last line of defense to keep government in check.
