With Puerto Rico buried in debt and on course to completely run out of money by the end of the year, the Obama administration is urging Congress to take unprecedented action to help the island, including granting a type of bankruptcy protection unavailable to the nation’s 50 states.
The administration said the broader bankruptcy protection, which would be available only to territories but not fiscally pressed states, is needed to help Puerto Rico avert a mushrooming crisis and restructure its $73 billion in debt.
The island will soon “face the unenviable and difficult choice between repaying its debts and maintaining vital public services,” the administration said in a statement and 10-page fact sheet released Wednesday evening. “The latest reliable estimates reveal that, without further steps, Puerto Rico will not have the resources to pay for both.”
In addition to urging Congress to offer Puerto Rico the new type of bankruptcy protection, the administration is also recommending that Congress broaden access to the island’s Medicaid program, a move that would pump money into its teetering health-care system. It also wants the island workers to have access to a broader array of federal tax credits, including the earned-income tax credit, in an effort to pump up its dismal 40 percent labor force participation rate.
Finally, the administration said, Congress should install a control board to oversee the island’s finances and ensure that they are being handled in a responsible and transparent manner.
“Only Congress has the authority to provide Puerto Rico with the tools required to lay the foundation for the Commonwealth’s recovery, and Congress must act,” read a joint statement released by Treasury Secretary Jack Lew, National Economic Council Director Jeffrey Zients, and Health and Human Services Secretary Sylvia Mathews Burwell.
It is anything but clear that the Republican-controlled Congress — which has pushed back on any previous attempts to give Puerto Rico more modest bankruptcy protection or other help — will act on the administration’s proposals. Still, the legislative proposal marks the most comprehensive response the administration has offered to an economic crisis that has left Puerto Rico mired in a nearly decade-long recession that has prompted hundreds of thousands of residents to flee for the mainland.
Top Puerto Rican officials offered praise for the administration’s plan.
“I applaud the historic step taken today by the Obama Administration in presenting a set of measures . . . to allow Puerto Rico to restructure its debt in an orderly fashion,” Puerto Rico Gov. Alejandro García Padilla said in a statement.
Pedro Pierluisi, Puerto Rico’s non-voting representative in Congress, also endorsed the plan. “I welcome this initiative by the Administration, and I am confident that it will inform the ongoing conversation in Congress about a possible legislative package to empower Puerto Rico by treating it more equitably under federal laws,” he said.
García Padilla and Antonio Weiss, a top aide to Lew, are among those scheduled to testify Thursday at a Senate hearing where officials said the plan would be publicly detailed.
For years, officials in Puerto Rico have raised taxes, slashed public employment and reduced pensions — austerity moves that both saved money and added to the island’s economic stagnation. Puerto Rican officials also have been pushing for fiscal relief both in Washington and on Wall Street. In late June, García Padilla stunned holders of commonwealth’s bonds — which include large hedge funds as well as mutual funds held by a broad swath of retail investors both in Puerto Rico and on the mainland — by declaring the island’s debt “not payable.”
Since then, officials have been working to have bondholders voluntarily restructure their debt, but any lasting fiscal relief has so far proved elusive. On Wednesday, Puerto Rico’s Government Development Bank announced that an effort to restructure less than $1 billion in debt had failed.
Many of the island’s creditors believe Puerto Rico should do more to raise revenue, including further tax increases and a tougher tax-collection regime, to fulfill its debt obligations. But island officials, and now the Obama administration, say a solution is going to take a group effort.
“Without action by Congress and further fiscal discipline by Puerto Rico, the crisis will escalate,” the administration said. “All stakeholders, including bondholders, need to be part of the solution. Without a comprehensive solution, which requires Congressional action, Puerto Rico and its creditors risk a long, difficult and disorderly crisis.”