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A Fiscal Control Board For Puerto Rico


A Fiscal Control Board For Puerto Rico

A fierce independence has always been a strong part of the Puerto Rican identity. While there have always been those who desire U.S. statehood for the island, thus far all plebiscites to do so have been roundly defeated. Its current status allows it a large degree of autonomy from the federal government while still affording it most of the protections and benefits that come from being a part of the United States. It’s not a bad deal.

However, some fear that the island’s fiscal travails threaten to impinge upon its financial independence. The current consensus is that any assistance Congress provides--whether it be access to some sort of bankruptcy protection, financial assistance from the federal government, or a relaxation of federal regulations as they apply to the island--would come with the imposition of a Fiscal Control Board to oversee Puerto Rico’s tax and spending decisions for a period of time.

The creation of such a board is standard operating procedure for a government insolvency. The federal government created one to oversee Washington DC’s spending actions when profligate spending rendered it insolvent in the 1990s. Despite the abiding resentment among DC’s political class about their current lack of representation in Congress, few people resented the imposition of the board--in fact, the district’s current auditor recently suggested that the city might benefit if we reimposed one today.

However, some object to doing something similar for Puerto Rico, arguing that it might impinge on the island’s sovereignty and bring with it negative colonialist undertones, making such a thing morally suspect. It’s a dubious argument: Besides the fact that this is standard operating procedure for any chapter 9 bankruptcy (which the island has actively sought for some time), it’s hard to see how any sort of reorganization would succeed without such a creature.

Fiscal control boards work because their members are empowered to make difficult decisions, such as implementing unpopular spending cuts or laying off redundant government workers, and can do so without fear of being voted out of office. Since its members are unelected and charged with only a single duty--to return the government’s budget to solvency--there is no incentive to trade future prosperity for immediate populism, which is usually the calculus that led to the budget crisis in the first place. In other words, asking for the right to a Chapter 9 bankruptcy while resisting a control board is bound to fail, especially given the recent track record of the Puerto Rican government.

But would Puerto Ricans see a fiscal control board as an imposition on their freedom, a power grab by the United States government designed to undermine the island’s independence? It’s a reasonable question to ask, but the answer appears to be a resounding “no.” A recent poll of Puerto Rico residents done by the University of Turabo found that fully 70 percent of Puerto Ricans approve of the notion of a fiscal control board, created by Congress and empowered to manage the island’s finances through the fiscal crisis. The people of Puerto Rico seem to desire a swift conclusion to the crisis that sets short-term political exigencies aside, and put little stock in the specter of the bogeyman of a modern colonialist takeover.

Government spending has increased by over 30 percent over the last decade despite the lingering recession, and the current governor repealed many of the cost saving measures imposed by his predecessor, ballooning the government’s payroll despite the fact that it employs a much greater proportion of the island’s residents than any state in the Union.

With $72 billion in outstanding debt and an economy that’s been in recession for a decade, Puerto Rico cannot continue making its debt payments much longer and is out of options. Simply defaulting on its debt would make it difficult or impossible for the island to borrow money in the future, making a recovery much more problematic, and a federal bailout would set a precedent that would allow heavily indebted states like Illinois seek some sort of federal assistance in the near future as well rather than deal forthrightly with their pension shortfalls today.

Fears of a control board making draconian cuts and imposing sizeable tax increases are overblown. A bankruptcy judge typically presides over all major negotiations, with all affected creditors having to sign off on the final solution.

With the Puerto Rican people apparently willing to put their trust in a fiscal control board rather than their current government, there seems little reason for either Congress to resist establishing such a board. Negotiating debt restructuring through the use of a control board is less risky and more fair than other options, with the added bonus that it has a proven track record of success. It’s a shame that election year politics, along with the local government’s desire to cling to power, are getting in the way of what should, at this point, be an obvious solution.


Ike Brannon is president and Logan Albright director of fiscal policy for Capital Policy Analytics, a consulting firm in Washington, DC.

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