ARTICLE

Federal solution for Puerto Rico’s debt is alarm bell for V.I.

Federal solution for Puerto Rico’s debt is alarm bell for V.I.

The first two acts of Puerto Rico’s fiscal morality play have captivated the attention of territorial financial officers and pundits for the better part of the past eighteen months. The curtain now closes on the second act. Barring any drama when the House votes on the recommendation of its Natural Resources Committee, the federal government has determined what assistance it will be provided the beleaguered Commonwealth.

Caught in a downward spiral of declining economic vitality and contracting  government  revenues,  Puerto  Rico  struggles  to  meet  its  external  debt  obligations  while  addressing  the financial demands of critical public services.

Investors demand the return of borrowed funds in a timely and sufficient manner regardless of the implication making these payments have on funding vital public services.

Chapter 9 would have kept bond investors at bay and provided the breathing room to restructure debt. It would have allowed the courts to oversee a judicious allocation of resources among competing demands and insure the continued funding of essential public services.

The White House, Treasury and the Congress, have now crafted the federal government’s  response to Puerto Rico’s request for assistance. Concerned at setting a precedence for how such problems are addressed, should other state governments require similar assistance, and determined not to commit federal funds for a bail out, the House Committee has charted a course which avoids extending Chapter 9 bankruptcy protection, committing any new federal funds yet throwing a life line of support to the Puerto Rico government.

Other state and territorial governments have been spectators to this unfolding drama.

The federal government’s response, implicit in the Puerto Rico Oversight, Management and Economic Stability Act or PROMESA, defines the boundaries of financial assistance, should other sovereign governments stray into a situation similar to Puerto Rico and be unable to meet their financial obligations.
Among the various provisions of the PROMESA bill is a contentious provision made applicable to all the territories, at the request of a territorial government.

In fact this provision provides the federal government a vehicle for assisting a government using only the resources of the affected jurisdiction. That provision allows the creation of a federal control board at the request of the petitioning government. Comprised of members largely appointed by the Congress (where a territory has no vote) and the President (for whom no territory can vote), the appointed control board will supervise a return to economic growth and financial reform.

The control board will have the authority to overrule local government decisions. It can sell assets, consolidate agencies and reduce workforces. It can act to prevent the local government from  carrying  out  legislation,  honoring  contracts  or  making  decisions,  which  in  the  control board’s determination runs contrary to promoting financial stability and economic growth.

Control boards are not new players when it comes to addressing financially problematic jurisdictions. New York City, Philadelphia, Pittsburgh and Washington DC have all had some version of a similar entity. Local governments have had a two-sided relationship with these entities. Control boards allow governments to do what is otherwise politically difficult if not impossible. However, these entities supplant elected leadership and entrust the essence of government decision-making to a non-elected group who assume responsibility for shepherding a transition back to financial solvency.

That a control board is an infringement on the right of self-government is undeniable. It exists, however, because the local dynamics– a lack of consensus or will — preclude making the needed decisions to address overwhelming financial and economic challenges head-on.

In the case of the PROMESA provision, it is only applicable to the other territories when requested by that territory. What can drive that “request”, however, will become clearer with the passage of time. For the moment, the language of the bill states that the territory itself will drive the request.
Relative to the Puerto Rico debt problems, the other territories sought to assiduously avoid being drawn into the deliberations surrounding PROMESA’s response to financial management practices. Some sought only the opportunity to participate in any financial and economic benefits Congress might make available to Puerto Rico as assistance.

All territorial governments are now bit players in the Puerto Rico drama, indirectly implicated by the extension of the control board provision of the PROMESA legislation. The challenge now is to determine how best to address this unwitting involvement.

The upside of the provision is that the territories now have an exercisable “out” if confronted with a fiscal exigency of the scope and magnitude of the Puerto Rico challenge. They have been handed this option without seeking it. As such, there is plausible denial of the need for this provision.
A narrative is possible that this provision, neither sought nor desired, has relevance only to Puerto Rico. In short, convince the audience that the unfolding Puerto Rico debt drama does not involve any other territorial government.

Convincing investors that this is the case may, however, not be so easily accomplished.

A Bloomberg Business Week article written by Brian Chappatta on May 31 complicates this narrative. Entitled, “More in Debt Than Puerto Rico the Virgin islands Rejects Rescue”, the author indicates that the forces at play in Puerto Rico are not at all dissimilar to those in the US Virgin Islands.
With a population of 104,000 persons, he points out that Virgin Islands debt represents an obligation of $23,000 per person versus Puerto Rico’s $20,000. He also suggests that among other things the two territories share cultural, fiscal and economic similarities evidenced by declining population, underfunded pensions, reductions in gross domestic product, histories of borrowing to cover budget shortfalls and unemployment rates well in excess of the US mainland. Slowly expanding economies and declining external investment is also something both territories have in common.

The rating services are similarly concerned about the Virgin Islands’ fiscal and economic decline and the impact on credit quality.

Regardless of where the blame rests for the challenges confronting both territories, the end point is not dissimilar. It is Puerto Rico’s population of 3.5 million and its diaspora community, which compelled the federal government to act decisively. It is unlikely, given the size of the other territories that in a similar situation to Puerto Rico Congresses’ response would be as forthcoming or developed. Given other federal priorities, gaining attention would be a challenge.

Regardless of the limited relief provided by PROMESA, the federal government now has a vehicle to address the fiscal challenges presented by Puerto Rico and by extension its territories. There can be no illusion that should a financial melt down occur in another jurisdiction a federal bailout is an option or that there will be another solution than turning the problem over to a financial control board.

Local governments’ challenge now becomes one of how best to internally address fiscal and economic challenges using available local and federal resources. The federal government will provide no extraordinary lifeline of support. Internally addressing challenges is undoubtedly superior to having others impose solutions, which may not be as sensitive to local realities.

Do governments have the will to do what is required?

This requires an action plan that on the fiscal side addresses structural deficits, pays down debt associated with operating cost, avoids further long-term borrowing for operating expenses, makes investments that grow the economy and addresses in a comprehensive manner retirement system’s underfunded liability.

On the economy side, local and external investments in infrastructure must be pursued and attracted; economic competitive advantages strengthened to more effectively compete regionally and globally; neighborhoods revitalized; the formation of new businesses facilitated; investment made in skill training and workforce productivity; and the attraction, retention and inclusion of well-trained millennials to staff and grow the economy made a priority.
An effective strategy will be transparent and have stated goals, objectives and metrics that allow tracking accomplishments over time. And, most importantly, that strategy will incorporate accountability among those responsible for effectuating change.

Communicating a narrative grounded in sound and implementable strategies and practices can evidence that the control board provision of PROMESA is indeed relevant only to Puerto Rico and has no applicability to the Territory of the Virgin Islands.

Will we do so? We shall see.

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