The Challenge to Congress to Essential Public Services


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eBlog, 6/28/16

In this morning’s eBlog, we consider the dwindling number of days for the U.S. Senate to act to avert a potential human catastrophe in Puerto Rico, already the Zike frontier for the U.S. We note U.S. Treasury Secretary Jack Lew’s epistle to the Senate—and we include a superb op ed by former New York Lieutenant Governor Richard Ravitch on the issue.

Ensuring Essential Public Services. U.S. Treasury Secretary Jack Lew is warning the Senate that any delay in acting on the House-passed PROMESA legislation to avert insolvency could carry severe repercussions for the U.S. territory, advising Senators that if Congress fails to pass a bill by July 1, a torrent of litigation from creditors could put the territory’s public services at risk. Puerto Rico has $2 billion in debt payments due, and government officials have warned they have insufficient funds, leading the Secretary to warn: “In the event of default, and if creditor lawsuits are successful, a judge could immediately order Puerto Rico to pay creditors over essential services such as health, education, and public safety…This could force Puerto Rico to lay off police officers, shut down public transit, or close a hospital.” Sec. Lew added that were Congress to miss the July 1 deadline and pass something retroactively, it would be unable to halt such a judge’s order, meaning the island’s essential public services would be at risk: “Doing nothing now to end the debt crisis will result in a chaotic, disorderly unwinding with widespread consequences…Some well-funded creditors are working hard to delay legislative action this week, even if it comes at the expense of the Puerto Rican people.”

Roadmap to Sustainability. In an op ed in today’s Wall Street Journal, former New York Lieutenant Governor Richard Ravitch, a member of the Detroit Financial Review Commission, wrote:

Citizens in democratic nations are right to worry when they see intrusions on self-government. Many Puerto Ricans thus are understandably concerned about the powers of the oversight board prescribed in legislation the U.S. House of Representatives recently passed to assist the commonwealth. The Senate is about to take up the proposed law, which has drawn criticism in Washington and Puerto Rico for impinging on its sovereignty.

The alarm is misplaced. Consider what happened in 2013 when the city of Detroit was facing circumstances frighteningly similar to those Puerto Rico is experiencing today: debt it couldn’t afford to pay; a population exodus; inadequate funds to pay contracted retirement benefits to employees; high risk of social disorder; and endless litigation. Michigan Gov. Rick Snyder appointed an emergency manager, pursuant to state law, to take over the city’s governance. The powers of the mayor and City Council were totally subordinated on all budget, financial and contractual matters.

There was a large public protest led by the Rev. Jesse Jackson. A lawsuit was brought in federal court by a number of plaintiffs, including unions representing public employees, alleging that the governor’s measure was unconstitutional. And there were crowds shouting that the man appointed to the emergency-manager job, Kevyn Orr, should leave town.

Had the protests succeeded, Detroit would not be going through the recovery that is now occurring. Public retirees would not be receiving benefits, bondholders would not have agreed to debt adjustments, people would not be buying real estate and opening restaurants. There would only have been litigation, social unrest, population decline and continued disinvestment.

Puerto Rico has a debt-service payment of $2 billion due July 1 that it cannot pay. The U.S. territory has a real chance of running out of cash, despite defaulting on its debt, by the end of the summer. Litigation in Puerto Rico and the U.S. promises to be endless and to consume scarce resources of the beleaguered commonwealth’s government. And more people will move to the mainland.

As much as I appreciate the concerns about the powers of the oversight board, the U.S. Senate should pass the bill by July 1, protecting the people of Puerto Rico from the dangers that loom if the legislation isn’t enacted. I had the privilege of working with the bankruptcy judge and the emergency manager in Detroit. As soon as the restructuring was accomplished through the negotiated consents of all the creditors, the return of power to the elected government was instant. Praise for the process was almost uniform. Those who want to stop passage of a law providing similar help to Puerto Rico should be prepared to take responsibility for the consequences of their shortsighted actions.


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