With additional Puerto Rican defaults probable on July 1, just a week away, the U.S. Senate faces a pressing vote on how best to resolve Puerto Rico’s fiscal crisis. While no legislative solution will prevent the fact of insolvency, congressional action would create a sense of ordered process that could quell market fears.

Senators therefore have a tough week ahead, vetting the House-passed H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act of 2016. We at the R Street Institute have tried to convey to policymakers both the intricacies of the bill and the situation on the ground in Puerto Rico.

In short, R Street supports the legislation, as it takes the necessary steps to put Puerto Rico back on track, and we urge senators to vote yes. The bill contains the following crucial measures:

As R Street’s Alex Pollock testified before the Senate in December, the most important step to solving the crisis is putting an oversight board in place:

[T]he financial and managerial problems are severe, cash is running out, and time is wasting. In my judgment, Congress should establish the Emergency Financial Control Board for Puerto Rico as a high priority.

Contrary to claims that an oversight board violates Puerto Rico’s sovereignty, Pollock writes for RealClearMarkets:

Under the U.S. Constitution, Congress has complete sovereignty over territories like Puerto Rico and the clear authority to create a financial control board. Given the Puerto Rican government’s severe and longstanding financial mismanagement, Congress also has the responsibility to do so.

Despite worries that the board would be unable to achieve lasting change, oversight boards do have a history of success. In his testimony, Pollock compares the Puerto Rico experience to that of the District of Columbia, New York City and Detroit. Discussing D.C., Pollock explains:

[T]he Washington DC Control Board achieved clear success in financial management and controls, efficiency, and indeed reaching balanced budgets. It adjourned in 2001, after Washington D.C. achieved its fourth consecutive balanced budget. The city’s bond ratings greatly improved; they have now reached AA/Aa.

While prior success does not guarantee future performance, the oversight board structure is the best option at Congress’ disposal.

If the oversight board determines debt restructuring is necessary, PROMESA requires the board to respect the lawful priorities of the debt being restructured. Additionally, the bill creates a distinction between pension obligations and general debt and sets out a structure for renegotiation, dividing creditors into classes and allowing those classes to vote to approve any negotiation.

The oversight board holds responsibility to develop reforms for the island’s highly socialized, overly bureaucratic economy, but PROMESA begins the effort. As R Street wrote with our friends at ATR:

PROMESA also enacts several immediate pro-growth reforms, including altering the island’s unemployment generating minimum wage requirements and overtime regulations, and putting a plan in place for infrastructure improvements. These changes are an important part of altering the island’s path, and we urge the congressional task force created by the bill to search for further opportunities to reform policies currently limiting Puerto Rico’s growth and promote a market economy.

Another important consideration for legislators is that the bill avoids a bailout. Puerto Rico will never get its fiscal house in order, nor will states, if the federal government rushes in with a cash infusion. Fortunately, the bill does not authorize a bailout, and the sooner the oversight board can begin its work, the better.

The Constitution grants Congress authority over U.S. territories, establishing an entirely different relationship than the relationship with states. The bill alters existing statute only as it relates to territories, and avoids opening up the bankruptcy process to steer away from setting that precedent. By refusing to offer a bailout, removing local government control and establishing an oversight board, the bill delivers the exact opposite of what any state would seek from the federal government.

As Pollock explains:

  1. [T]here is zero probability that Illinois or any other state would volunteer to have a financial control board imposed on it. Even leaving aside the fact that Puerto Rico is not a state, this argument is vacuous.

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