Debate Forum: 5/10/16

Warped Wing Brewing Company Brewmaster John Haggerty watches the line of Ermal's Belgin Cream Ale being canned at the brewery in Dayton. JIM WITMER Warped Wing Brewing Company Brewmaster John Haggerty watches the line of Ermal's Belgin Cream Ale being canned at the brewery in Dayton. JIM WITMER


Should Puerto Rico be able to file for bankruptcy?
By Sarah Sidlow

Someone’s been blowing up Puerto Rico’s cell with collections calls.

Don’t worry, we didn’t understand the Puerto Rican economic crisis either, so we looked into it for you. Basically, Puerto Rico—which is, in fact, a United States territory—has a $72 billion debt the governor says is “not payable.” Not good.

Last week, it missed a very important payment. How did we get here? Well, a while ago, U.S. government set up a sweet deal that gave major tax breaks to corporations operating in Puerto Rico. Everyone loved it, and the island enjoyed lots of business. Then, in 2006, Congress let those tax breaks expire, and businesses decided they would take their business elsewhere. With Puerto Rico’s economy in a recession, people started leaving the island, which meant they weren’t paying taxes. Really not good.

Fewer people, lower tax revenue, and Puerto Rico had to cut back on public services, and raise tax rates. Then, even more people left the island. In fact, recent headlines tell stories of one doctor a day leaving the island. Really, really not good. This is the third time the island has defaulted on bond payments.

As a U.S. territory, Puerto Rico is in a precarious spot. Puerto Ricans are U.S. citizens, they use the U.S. dollar and can join the military. But they don’t pay certain federal taxes, they can’t vote in presidential elections and—drum roll—none of its cities or public companies have access to U.S. bankruptcy protections. In fact, in 1984 Congress explicitly barred Puerto Rico from restructuring debt in bankruptcy, without leaving any rationale for doing so.

The next big payment is due July 1. Which leaves a big ol’ question mark in the “next steps” category.

Enter Congress, which the island hopes can provide some sort of relief in what Puerto Rico’s governor is calling “a humanitarian crisis.”

The big C is in the process of finalizing an aid package—but not without a range of opinions. The biggest sticking point right now is whether it will include some kind of “Oversight Board” to babysit the island’s finances for a while. It’s not a sexy idea to a lot of Puerto Ricans, who argue the board would strip the island of its democratic rights if board members can supersede the decisions of the island’s elected officials.

Another solution would be to grant Puerto Rico Chapter 9 bankruptcy rights, which would allow the island to restructure some of its debts (a la Detroit, rock city).

Treasury Secretary Jacob J. Lew is on board with this plan, and recently warned House Speaker Paul Ryan without swift Congressional action, Puerto Rico is in danger of getting caught in “a series of cascading defaults,” which could lead to a taxpayer bailout.

And there are more than just dollar signs at stake, supporters argue. Puerto Rico has 99 problems and mass emigration, an economic crisis, a potential health-care collapse, and the rising threat of Zika are just four of them. For the 3.5 million Americans who still live in Puerto Rico, Congressional help is essential.

But there are others who say Daddy’s wallet can’t solve college-kid Puerto Rico’s woes. They argue that filing for bankruptcy wouldn’t do enough to solve the island’s underlying spending issues—hence the proposed oversight provision. Many creditors and Republican lawmakers also point to the island’s years of political and financial mismanagement (like the fact that it still hasn’t completed its 2014 audit), and posit that Congressional swiftness now will set a dangerous precedent for deeply indebted states later. Others are concerned Congressional interference would negate Puerto Rico’s constitution.

Editor’s note: For more information on this topic, please consider watching Last Week Tonight with John Oliver: Puerto Rico at

Reach Dayton City Paper freelance writer Sarah Sidlow at

Let’s bail

By Don Hurst

Congress should allow Puerto Rico bankruptcy protections, if—and this is a big if—Puerto Rico’s government finally completes its financial audit report and agrees to federal budget oversight. That’s a hard sell for San Juan. Federal control lacks popularity on the island territory. Puerto Rico’s Governor Alejandro Garcia Padilla believes a budget chaperone undermines the island’s autonomy.

Padilla argues that allowing Puerto Rico to file for bankruptcy is not a taxpayer funded bailout. All he wants is to reduce the debt the government owes to holders of Puerto Rico’s municipal bonds. These holders are hedge funds and Wall Street equity firms—not taxpayers. But who are the clients of these hedge funds and equity firms? Taxpayers.

Congress isn’t just being mean to Puerto Rico by not allowing it to file for bankruptcy to write off its municipal bond debt. Investors consider municipal bonds one of the safest securities available. After all, cities don’t go out of business. The only way for investors to lose their money is if a government declares bankruptcy.

When Congress removed the possibility of bankruptcy investors flocked to Puerto Rico’s municipal bonds. Instead of having to raise taxes on the island’s citizens, Puerto Rico received money for critical public works, like schools and hospitals, through private investment. An unforeseen consequence was that the San Juan government treated bonds like an immature teenager with their first credit card. Puerto Rico never had had to make tough decisions about its budget. It used municipal bonds to plug short falls instead of cutting expenses or raising taxes.

Now the bill is due. Something has to be done. Allowing Puerto Rico to file for bankruptcy is preferable to complete default. At least this way retirement accounts lose some money it invested in Puerto Rico instead of all of it.

Padilla keeps saying he wants the same treatment as Detroit, but bankruptcy alone did not solve Detroit’s problems. The debt was restructured, but the mismanagement that created the wrecked economy still exists. This week Detroit Public School teachers staged a “sick out,” protesting the emergency budget that runs out of money to pay them on June 30. Detroit Public Schools required a $500 million bailout from the state to remain open. That is just the Detroit Financial Woe of the Week.

The ongoing mess of Detroit’s finances has taught us that budget reform must accompany bankruptcy proceedings. Without dramatic change it is only a matter of time before a government is in financial trouble again.

When Detroit needed money again they did exactly what got them into trouble in the first place: sell bonds to investors. Detroit learned that sell bonds after bankruptcy cost more. The market did not forget that it lost money. The city had to offer higher yields and better rates. That means when those bonds come due Detroit is paying out more money than ever.

Right now, those higher rates are limited to just Detroit. The municipal bond market as a whole has not been damaged. It is crucial to our national economy to keep that market healthy. All cities rely on revenue raised through bonds to fund public building projects. If the municipal bond market becomes as risky as trading stocks then investors will demand higher rates of return. That will affect the ability of all cities to conduct business. National threats to commerce fall into the scope of Congress’ powers. They have to weigh in on economic matters that could affect all of the United States.

Investors can stomach bankruptcy better if plans are in place to correct the mistakes that lead to financial disaster in the first place. Unfortunately, Puerto Rico’s government is resistant to reform. It can’t even show how it spends its money. San Juan failed to complete its annual financial audit won’t even speculate when the report will be completed.

That does not inspire confidence. If the government can’t account for its money, then how can investors expect it to manage new money? Puerto Rico will need future investment.

Puerto Rico’s government bristles at the idea of federal oversight into its budget, but investors will demand it. A financial chaperone would not be there to teach the Puerto Ricans how to balance their books. That chaperone is there to reassure the rest of the world that their investments are safe.

With the decimated tax base due to massive migration off the island, Puerto Rico needs money—desperately. San Juan won’t be able to raise revenue through taxes to fix its problems. Just like Detroit, they will have to issue more municipal bonds after they get through the bankruptcy proceedings.

Investors only tiptoed back to Detroit because the Michigan state government oversaw the city’s finances. Municipal bond buyers will not return to Puerto Rico without similar assurances. Unless Puerto Rico fully discloses it finances by producing its annual audit report and submitting to federal oversight investment will disappear. Then the bankruptcy is just life support, allowing Puerto Rico to limp along for a couple more years before its eventual but inevitable collapse.

Don Hurst is a combat vet and a former police officer. He now lives in Dayton where he writes novels and plays. Reach DCP freelance writer Don Hurst at

Tough love

By David H. Landon

Puerto Rico is in deep financial trouble. With more than $72 billion in outstanding debt, the island is looking to the United States Congress for a bailout. As a U.S. territory, Puerto Rico is not eligible for the type of relief afforded to U.S. cities under chapter nine of the United States Bankruptcy Code, but that is exactly the relief they are seeking. Puerto Rico wants to be granted the ability to file bankruptcy. And there are some Wall Street banks that are also looking to Congress to protect the risky loans they made to Puerto Rico with a bailout. While a bankruptcy is both ill advised and currently not authorized by federal law, a bailout, like those we saw for Wall Street and the auto companies in the wake of the financial crisis, also should be rejected. Throwing good money at bad behavior would only entrench the poor financial management that led to the mess in the first place

Puerto Rico’s troubles are both self-inflicted and predictable. Although the island has a significant tourist industry with great beaches, its economy lacks substantial diversification. The balance of the economy is insufficient to generate the revenue needed for the very generous welfare spending. Currently Puerto Rico has one of the lowest labor-participation rates in the Western world.  Less than half of Puerto Rico’s adult population is employed or even looking for a job.

This bleak economic outlook has created an exodus from the island to the mainland. Puerto Ricans are American citizens who need no special permission to move to the mainland. As a result, both the island’s best and brightest and the unskilled workers rendered unemployable by the artificially high minimum wage are leaving in large numbers. Those who are not leaving are employed in the tourist industry or with the island’s largest employer—the government.

The Republican Congress is looking for a solution that will not reward bad fiscal behavior. That solution must work without putting taxpayers on the hook for the irresponsible spending behavior of a territory that pays no federal income tax but is a recipient of generous federal subsidies. Fortunately, there is an economic model for Congress to follow from a previous financial crisis that worked remarkably well. This crisis can be solved by looking back in time to how Congress addressed the financial woes of Washington, D.C. In the 1990s, the D.C. model worked because its cornerstone was a strong independent control board. In that instance, Congress created an oversight board that supervised the city’s budgeting and spending practices, which stayed in place for six years until Washington D.C. was able to get back on sound financial footing and balance four consecutive budgets.

The same type of oversight board could work in Puerto Rico by creating a strong independent control board to provide oversight of the island’s finances and help them regain control of their bloated budget. There are Republican proposals in Congress calling for such a board to help the island reassess its financial situation and make structural changes that will get Puerto Rico’s fiscal affairs back on track. This would be an essential first step to remedying this crisis. Puerto Rico’s political elite is decrying any such arraignment as insulting and degrading to the people of Puerto Rico. The people of the island see it differently. A recent poll shows 70 percent of the islands population would welcome such an arraignment if it could help bring an end to the financial crisis.

Secondly, it is important that the island’s bond creditors, representing senior citizens, savers and investors from all across the world, have a say in how the government debt is restructured. The Puerto Rican government seems more concerned in protecting government pensions than in protecting the bondholders who have invested in Puerto Rico over the years. We remember well the unlawful Obama bailout of the auto industry where union pensions were protected but secured bond holders were forced to accept pennies on the dollar.

Some Democrats, who are perhaps anticipating a day of reckoning for the state of Illinois with its underfunded government pensions and wanting to protect the government employees unions, propose rewarding San Juan’s self-indulgence and fiscally irresponsible behavior. They favor pouring more Medicare, Medicaid and other benefits into the island. They also favor giving protection of unionized government employees’ pensions a priority over payments even to holders of general obligation bonds guaranteed by the territory’s constitution.

The Constitution of Puerto Rico guarantees that its bondholders would be repaid first before any other creditors should the island become insolvent.  Allowing the San Juan Government access to bankruptcy court could erase that guarantee, and return only pennies on the dollar to its investors by allowing the island to repay other creditors ahead of its bondholders.

We only need to look to Illinois to see a Puerto Rican-type financial crisis on the mainland.  Illinois’ budgetary problems were labeled the worst in the nation in a July 2015 study by George Mason University’s Mercatus Center, which looks at state cash flow, budgetary solvency, long-term liabilities, state assets and the ability to raise additional funds to form its ranking. We need to be very careful with how we deal with Puerto Rico crisis or we could find ourselves passing laws which reward states for fiscal irresponsibility.

David H. Landon is the former Chairman of the Montgomery County Republican Party Central Committee. He can be reached at

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Sarah Sidlow
Reach DCP editor Sarah Sidlow at

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