Tuesday, June 30, 2015

Why Don't We Care About Puerto Rico?

Late Sunday, Puerto Rico's governor announced that the U.S. territory would likely default on $72 billion in debt. Yesterday, the White House said that the Treasury Department will offer advice, but there will be no "bailout." Rather, the White House urged Congress to pass legislation that would amend the Bankruptcy Code so Puerto Rico could reorganize its debts under chapter 9. Chapter 9 is available only to municipalities (defined as a "political subdivision or public agency or instrumentality of a state," 11 USC 101(40)), and only when state law specifically permits the municipality to use it. Puerto Rico is a U.S. Territory, not a municipality or a State, and thus is not eligible to seek relief in chapter 9.

Detroit filed for relief under chapter 9 in July 2013.  Puerto Rico's $72 billion is about 4 times bigger than Detroit's $18 billion debt problem.  Detroit confirmed a plan of debt adjustment in November 2014.  Retired Bankruptcy Judge Steven Rhodes presided over Detroit's bankruptcy and is now working to assist Puerto Rico.  "It's exactly like Detroit," he said.

There is some support in Congress for a bill offered by Puerto Rico's non-voting Congressman to open chapter 9 to Puerto Rico.  Supporters of the bill say that extending chapter 9 would be consistent with federal bankruptcy policy and would offer Puerto Rico an orderly way to extend debt maturities, reduce the principal or interest rates, or refinance with new loans.  A chapter 9 bankruptcy proceeding is not a federal taxpayer-funded bailout.  It would provide a judicial forum to consider which creditor groups and other stakeholders feel which part of the pain of Puerto Rico's debt problem. The legislation met opposition from Republicans who say they are worried that offering Puerto Rico a chance to restructure its debts in a federal bankruptcy case would relieve the Puerto Rican government from responsibility for decades of fiscal mismanagement, and disrupt the expectations of creditors who incurred debt in reliance on the current law.  Of course that's exactly what happened in Detroit.

About a third of the population of Puerto Rico relies on government support to survive.  Government workers make up about a quarter of the work force.  Just 41% of Puerto Ricans are working or looking for work (compare to 63% on the mainland). To raise revenue, in 2014, the government raised taxes, $1.3 billion in new taxes.  Public debt as a percentage of GDP is 64.9%; for Haiti it is 21.3%.  With an economic situation as grim as this, it's hard to imagine that even a chapter 9 proceeding could result in a plan to put Puerto Rico's economy back on track.  

Puerto Rico is an economic disaster area. So why the lack of  federal interest in the Puerto Rican debt problem?  Perhaps Puerto Ricans don't matter because Americans don't think of Puerto Ricans as "Americans."  But they are as American as the citizens of Detroit.  The term "United States" includes the 50 states. DC and Puerto Rico, Guam and the Virgin Islands.  8 USC 1101 (a)(38).  Puerto Ricans are US citizens and can move and work anywhere in the US without passports or green cards.   And move they did.  An August 2014 Pew report showed that from mid 2010 to 2013, more Puerto Ricans left the island than during the entire decades of the 1970's, 80's and 90's. The recent migrants are less educated than those who stayed, and are more likely to hold less skilled jobs.  640,000 Puerto Rican voters make up about 10% of the population of central Florida.  Although residents of Puerto Rico do not have voting representation in the U.S. Congress and are not entitled to electoral votes in a Presidential election, the votes of Puerto Ricans who live on the mainland count in local and national politics.  In Florida, Puerto Ricans are 28 percent of Hispanic registered voters with real political clout in that state and in the 2016 Presidential race.  (When Obama won Florida over Romney in the 2012 presidential election, he did so by a margin of 74,000 votes.)  So, Puerto Ricans in Florida matter.  But, nobody seems too concerned about the Puerto Ricans in Puerto Rico.

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