Cracks in the dam
“A new crack has appeared in the dam that restrains a great lake of federal, state, and local debt from inundating the country.”
So reads the ominous lede of Watchdog reporter Jon Cassidy’s story about the implications of Puerto Rico’s recent bankruptcy. As May began, the harsh reality of the U.S. commonwealth’s massive $70 billion debt hit the fan as the government defaulted on a $422 million bond payment.
Puerto Rico has no viable means of ever digging itself out of the hole, a fact that has led to calls for some type of federal bankruptcy declaration and Congressional action. The current bill on the table in Congress, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), would confer a large degree of power over Puerto Rico’s finances to a seven-person Oversight Board. This board would have authority over debt restructuring and the ability to override the territory’s laws, executive orders, and existing contracts.
Critics in Congress say the creation of such a board is problematic because it undercuts the authority of Puerto Rico’s constitution, which backs its bonds with the “full faith credit and taxing power of the Commonwealth.” This means, these critics argue, that bondholders should get first priority for repayment. Despite their protests, the House has refused to take this constitutional “guarantee” language seriously, undercutting the “full faith” guarantee.
Think about it this way, Cassidy wrote, “as long as your monthly income exceeds your credit card minimum, you’ve got a balanced budget, Puerto Rico style.”
The cities and states to follow
The great danger of any Congressional proposal to help bail out or otherwise fix Puerto Rico’s debt crisis is the precedent it could set for other state and local governments.
“PROMESA sets a political precedent, although not a legal one,” wrote Heritage Action in a critique of the bill. “States may reasonably conclude that Congress will be willing, when the time comes, to change bankruptcy law in their favor, offer a stay of litigation, and/or offer them novel mechanisms for restructuring debt.”
In his coverage of a study from the Mercatus Center, Cassidy lists the ten states and cities that are most likely to follow Puerto Rico’s example and come crawling to Congress for help with their debt. The bottom ten states – Kentucky, Illinois, New Jersey, Massachusetts, Connecticut, Maryland, New York, Maine, California, and Hawaii – are much closer to the basket case of our Caribbean commonwealth than they are to states in relatively good fiscal health like Texas, the Dakotas, Florida, and Nebraska. However as states they are forbidden by federal law from declaring bankruptcy. This makes them less likely than a place like Puerto Rico to fall into insolvency (at least in the short term).
Cities, though, are another matter entirely, and much more likely to try shirking their obligations to creditors. Recent years have given us a number of examples of this (Detroit, MI; Alabama’s Jefferson County; and Stockton, CA, for starters), and many more cities appear to be on the fritz. These include New York City, with a whopping $46,400 debt per capita; Jersey City, where state and local debt weighs in at $41,800 per person; and Chicago, with a crushing $46,900 in state and local pension debt per person.
Public unions play their game
As debt talks continue to stall, Puerto Rico’s public employee unions have been hard at work pushing to protect themselves in the bankruptcy. As Kevin Glass, Director of Policy and Outreach at Franklin Center, recapped in a op-ed for the Daily Caller, a commission established by the Puerto Rican government recently released a report suggesting that a portion of the debt involved was issued illegally. The report recommended a full audit was needed before attempting any further resolution to the debt crisis.
The problem with that recommendation, Glass argued, is that the head of this supposedly “independent” commission is also the president of the Puerto Rico chapter of the Service Employees International Union. This group has a huge vested interest in the outcome of the debt crisis. If only some debts are going to be paid, public sector unions want the government to prioritize its obligations to their pension funds.
“In any resolution to the debt crisis, unions will want to see every single dime of their own debt obligations to be saved, while finding ways to discount or invalidate other components of the island’s debt,” Glass noted, so having a union leader head up a government-established commission on the issue seems like a conflict of interest.
Just as unions fought to dispute the math surrounding Detroit’s pension obligations when that city went bankrupt, Glass said, “Union shops are trying to obstruct and gum up the works for any potential solution to Puerto Rico’s crisis; what’s needed is an honest accounting by those who do not have such obvious conflicts of interest.”
If more cities go bankrupt, their local public employee unions may look to Puerto Rico’s “independent” commission to see how they can protect their own interests at the cost of other creditors.