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‘Financial reality is not negotiable’: Puerto Rico bankruptcy could send dangerous signal to states

By   /   May 6, 2016  /   News  /   No Comments

Puerto Rico defaulted on a $422 million bond payment on Monday, and a congressional restructuring of the territory’s debt could set a dangerous precedent for several states that are heading down the same fiscal road as the island commonwealth.

Puerto Rico is more than $70 billion in debt with no visible means of ever paying the money back, leading to widespread calls for some form of federal bankruptcy declaration. But a proposal in Congress would do little to address the causes of the current crisis, and might make things worse elsewhere.

The Puerto Rico Oversight, Management, and Economic Stability Act does not include a direct taxpayer-funded bailout, but would create an oversight board empowered to lower the cost of Puerto Rico’s public debt at the expense of the island’s creditors.

El referéndum les consultará a los votantes de la Isla de Puerto Rico si desean continuar con el estatus actual

Critics, including Heritage Action for America, the activist affiliate of the conservative Heritage Foundation, fear the legislation (dubbed PROMESA) would contribute to risky government spending and borrowing by giving state lawmakers reason to expect similar treatment.

“PROMESA sets a political precedent, although not a legal one,” Heritage Action wrote. “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 their debt.”

The national economic recovery following the 2007-09 recession has yielded higher tax revenues, but state debts remain substantial. Illinois, New Jersey, Massachusetts, Connecticut and New York ranked at the bottom in a Mercatus Center study of states’ fiscal conditions published last summer.

All five states have unfunded liabilities “constituting a significant risk to taxpayers in both the short and the long term,” study author Eileen Norcross wrote.

“One definition of bankruptcy is ‘a condition of financial failure caused by not having the money that you need to pay your debts.’ In that sense Puerto Rico is bankrupt and so are the federal government and most state governments,” said Sheila  Weinberg, CEO of Truth in Accounting. “According to the latest data available, in 2014 the territory had only $27 billion of assets available to pay bills totaling $115 billion.”

The numbers are stark.

“While each taxpayer in New Jersey would have to come up with $52,300 to pay the state unfunded debt, each taxpayer in Puerto Rico would have to come up with $77,500,” Weinberg said.

Jonathan Williams, vice president of the Center for State Fiscal Reform at the free-market American Legislative Exchange Council, said ALEC hasn’t taken a formal position on how Congress should address Puerto Rico’s debt crisis.

Williams told Watchdog.org he expects any action the federal government takes “will be closely analyzed for potential precedent-setting policies” by state and local officials nationwide. But he says there’s already an important lesson to be learned from Puerto Rico.

“Namely, financial reality is not negotiable,” Williams said. “Out of control spending and a long-term accumulation of debt lead to massive financial consequences.”

“Since states and municipalities cannot print dollars and generally need to keep within some sort of a balanced budget framework, the PR financial crisis should be a clear reminder that budget and pension reform need to be taken seriously,” he added.

In January, ALEC project State Budget Solutions published a list of nine “budget gimmicks” state and local politicians often use to hide the long-term cost of pension liabilities, welfare spending and capital projects.

SBS estimated in 2014 that states had a total of more than $5 trillion in outstanding debt, unfunded pension liabilities and other unfunded employee benefits, with unfunded pension liabilities amounting to nearly $4 trillion of that sum.

Regardless of how the situation in Puerto Rico is resolved, more stringent disclosure laws and accounting standards would help states and municipalities avoid similar problems, Williams told Watchdog.org.

Weinberg suggested that PROMESA include a requirement that all reports the Puerto Rican government is required to submit on its finances be made available to the public.

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Jason was formerly a reporter for Watchdog.org