Puerto Rico’s finances have been a disaster for a while, but the scale of their potential municipal default makes the crisis surprising nonetheless. The news of a default certainly came as a surprise to Puerto Ricans, who had consistently been told by Governor Alejandro Garcia Padilla that the government would pay its bondholders on time. One former president of the island’s central bank told the Washington Post that the change shocked many, and that Garcia Padilla’s announcement this week shook confidence in Puerto Rico, not to mention bank values:
Gov. Alejandro Garcia Padilla startled Puerto Rico and financial markets by declaring that the island’s debt of at least $73 billion is “unpayable.”
A former president of Puerto Rico’s central bank, who asked not to be identified because his current employer does not want to anger the government, said Garcia Padilla’s declaration is sowing “a lot of confusion,” largely because until recently the administration was pursuing big, new loan deals. Also, the governor has always said flatly that the government will pay its debts.
“That was a sudden change of direction,” he said, noting that the island’s three major banks all lost about a fifth of their value in recent days. “The governor put a lot of shock in the system.”
Garcia Padilla’s message was delivered in a televised address to the Puerto Rican people. But it was aimed at both policymakers in Washington and investors on Wall Street, who he hopes will come to the table to help forge a long-term solution.
Senate Democrats want to open up a short-term solution for Puerto Rico and Garcia Padilla, which is access to Chapter 9 bankruptcy. The mechanism, used most recently by Detroit and Stockton, allows for an orderly rebalancing of assets and liabilities, and offers some protection to investors — where a default offers none at all. However, it also puts the balancing in the hands of the court and in most cases the politicians who created the crisis. Senate Republicans aren’t too keen on that idea:
The Chapter 9 proposal has faced opposition, largely from conservatives, who have been labeling it a bailout, which occurs when a company or country is given financial assistance, and some who prefer that Puerto Rico be placed in receivership.
Under Chapter 9, the island’s government can work out a payment scheme with creditors under a plan that must be approved by a bankruptcy judge. It has been used by Detroit, Harrisburg, Pa. and other communities faced with the inability to pay off borrowing.
Conservatives want a more extensive solution that addresses the island’s structural problems, especially its reliance on public-sector unions and bureaucratic approach to the economy. Former Congressional hopeful and Green Room contributor Jorge Bonilla wrote about the endemic problems of Puerto Rico four years ago, calling Puerto Rico “the ghost of Obama Future”:
50+ years of unfettered progressivism have placed Puerto Rico in a situation where there is an abundance of government (and corruption), and no real solutions to its deep structural problems. The inhabitants of this small(ish) island are governed by one governor, 53 representatives, 31 senators, 78 mayors (with their respective city councils), and a government that constitutes over a third of its total workforce. When we combine this workforce with recipients of transfer payments, over 60% of the island’s population depends on the government for income, whether partially or totally. The local government not only subsidizes power and water for local residents of public housing, but also subsidizes cell phone usage. Recently, the state university shut down due to violent student tuition protests. The resulting decay has spread throughout the fabric of society, leaving many no choice but to abandon their beloved island, never to return.
There are those who suggest that the island’s political status needs to change in advance of any structural changes. I reject that argument, and submit that these policies have been enacted by both Popular Democrats and New Progressives, who have identified as Democrats and Republicans. Even now, Governor Fortuño was once touted as a VP hopeful because of his early dismissal of over 20,000 government employees. Since then, he has embraced ObamaCare, yet is still facing a brutal re-elect. The current Commonwealth status can prosper if run conservatively. Conversely, Statehood can only aggravate the island’s problems, if they are left unaddressed.
To look at Puerto Rico’s embrace of unchecked progressivism and the resulting decay of her institutions is to gaze upon the Ghost of Obama Future. We now know how this is going to end. We can confirm that the light at the end of that tunnel is indeed an oncoming train.
That train has hit this week, after accelerating when voters sent Fortuño packing in favor of Garcia Padilla. Giving Puerto Rico access to Chapter 9 only provides a Band-Aid to the acute issues, and does nothing for the chronic fiscal and political ills that brought this crisis to pass. Nor should the US contemplate a simple bail-out, for the same reason.
However tempting it might be for Republicans to wash their hands and walk away, or just use this crisis as an example of Big Government’s inevitable end result, they need to start looking for a solution to the crisis. In my column for The Fiscal Times, I point out that this is actually a great opportunity to demonstrate the GOP’s ability to govern — and to a specific and critical demographic in a key swing state:
“Stateside Puerto Ricans, having fled the soft tyranny of Big Government, should be regarded as a potentially natural conservative constituency not seen since the Cuban exile community,” Bonilla told me.
Republicans should engage these voters fleeing the island – roughly “the equivalent of three Mariel boat lifts,” only with American citizenship – to see the lessons from “the painful, brutal consequence of the structural and institutional decay resulting from decades of unfettered liberal Democratic governance (both from PPD and PNP administrations alike).”
Until now, though, the Republican response to Puerto Rico’s failures has been at best benign neglect – neglect that extends to those seeking a better life even though they have familial and emotional ties to the island they left behind. Bonilla agrees that Congress should not just bail out Puerto Rico, but any aid should come with “strict Congressional oversight” that would require “radical political, constitutional, and structural reforms that are beyond the will of its existing political class” in Puerto Rico.
This crisis could give Republicans a chance to design a policy that neither imposes federal receivership nor an unaffordable bailout, but offers aid conditioned on a series of free-market reforms that will restore investor confidence in Puerto Rico while marginalizing the entrenched establishment that has led the territory to ruin.
Will it be easy? Of course not, but it’s worth doing – politically, financially, and civically. A comprehensive Puerto Rico policy would show voters that the GOP takes governing seriously and would give Republicans inroads to a key 2016 constituency. It worked for Snyder in Michigan when Republicans around the country were more inclined to let Detroit disintegrate.
Just how big is the Puerto Rican demographic? Four years ago, Bonilla put it at 4 million nationwide, of which 847,000 live in Florida — and 300,000 in the critical I-4 corridor that Republicans must win in 2016 to have any hope of carrying the state. The fiscal crisis will undoubtedly have more people leaving Puerto Rico to live in Florida, all of whom can and will vote as they already have US citizenship. Obama and his team knew this well enough in 2011 to have staged a victory lap there after nominating Sonia Sotomayor to the Supreme Court. After courting these voters assiduously, Obama won 83% of the Puerto Rican vote in Florida in 2012, enough to narrowly win the Sunshine State and a second term in the White House.
If Republicans want to win in Florida, they need to start making inroads among Latino demographics. The large Puerto Rican community might be easier to reach, especially given the disastrous nanny-state policies that drove most of them to decamp to Florida. Republicans can’t make that case without a real plan to show that the GOP cares about their friends and family still in Puerto Rico and a set of policies to make life better there. This is an opportunity, and Republicans had better not blow it.