What a federal financial control board means to Puerto Rico

Puerto Rico is spiraling out of control and the Federal government will not break the fall.  Island leaders may not have the will, popular support, or financial tools to pay down the $72 billion debt.  So it is no surprise that calls for a federal financial control board intensified after Governor Alejandro Garcia Padilla announced that Puerto Rico’s debt is unpayable.  Establishing a control board may be the easy way out for a wary Congress but it is not as simple as it seems and could backfire.

A federal financial control board for Puerto Rico was first proposed a year ago by supporters of Doral Bank in its dispute with the Puerto Rican government over a $230 million tax refund.  Most of Doral’s supporters are affiliated with the conservative Koch brothers.  They include Republican Reps. Jeff Duncan (S.C.), Scott Garrett (N.J.), Darrell Issa (Calif.) and Matt Salmon (Ariz.) who received Koch Industries PAC contributions and who prior to Doral had never been involved with Puerto Rico. 

{mosads}Last month, Duncan recommended to his House colleagues that a control board be established.  The 60 Plus Association, another Koch funding recipient, is lobbying for a control board.  While frustrated Puerto Ricans are increasingly talking about the need for a control board, the majority of the Island opposes it with good reason.  

First, Puerto Ricans feel that given the right tools, they can fix the fiscal crisis on their own. Right now the most important tool is access to Chapter 9 federal bankruptcy.  From 1933 until 1984, Puerto Rico could allow its municipalities and public corporations to declare bankruptcy in the same way as the 50 states.  In 1984 Congress amended the bankruptcy code and excluded Puerto Rico for reasons unknown.    

Most agree that overall losses to investors will be higher if Puerto Rico is not given access to Federal bankruptcy and defaults.  To avoid this scenario Puerto Rico passed its own bankruptcy law which was challenged by bondholders of electricity provider PREPA which owes $9 billion.  The law was recently struck down in Federal court.  The Puerto Rican government may appeal to the U.S. Supreme Court. 

The same group of creditors is fighting bankruptcy legislation introduced in Congress.  Issa, who sits in the subcommittee reviewing the bill, opposes it.  The conservative Heritage Foundation calls it a bailout even though it supported Chapter 9 for Detroit.  

Second, Puerto Ricans are distrustful of any financial control board established by a national government that has denied it political representation for 117 years.  The distrust is heightened by knowledge that the chief supporters of a control board are members of the conservative Koch brothers’ network and creditors whose objective is to make money off Puerto Rico rather than enable Puerto Rico to remake itself.  

Third, Puerto Ricans fear a federally mandated board would threaten their hard-earned sovereignty. Washington DC’s board powers were expanded from fiscal control to every aspect of the District government.  It took 54 years for Puerto Rico to achieve self-rule after being “liberated” by the U.S. in 1898. It would be very hard for Puerto Ricans to give up control over their affairs and imposition of a control board could even lead to political violence.   

Going forward there are two plausible paths for Puerto Rico to take.  The first alternative is a Federal financial control board including majority membership of individuals representing Puerto Rico. The New York City Financial Control Board was made up of the governor, the mayor, the city and state comptrollers and three business executives appointed by the governor.  New Yorkers may have felt a loss of sovereignty but at least the board included some of their elected officials. 

The second alternative is Governor Garcia Padilla’s action plan to restructure the debt, produce a five-year budget, and create a non-partisan fiscal board to guarantee that the government keeps its commitments.  Regrettably, the working group appointed to direct this plan is comprised only of members on the governor’s pro-commonwealth party.  The governor himself is running for reelection.  This arrangement is suspect to the opposition which can easily undermine it. 

For this plan to be credible and successful it needs to be depoliticized.  The governor should include the opposition in the working group. He should also propose limits on the length of the 2016 campaign period.  Emphasis must be placed on transparency.  

But the most important condition for Puerto Rico to succeed is for all its elected officials to show commitment to economic reform even if means losing the next election.  This is what Washington and Wall Street expect.  This is what the people of Puerto Rico deserve.   

Not since 1952, when Puerto Rico ratified its own constitution, have Puerto Ricans of different political stripes been asked to take on a challenge of equal magnitude.  The stakes are high and there is much to lose.  Failure to act judiciously and in concert will serve as justification for the imposition of a Federal financial control over which Puerto Ricans may have little influence and which could put the interests of Puerto Rico’s creditors before the interests of its people.

Sierra-Zorita is a public policy and advocacy specialist working on media diversity issues for the National Hispanic Foundation for the Arts. She is curator of Puerto Rico En Serio, an online community focused on issues affecting Puerto Rico and the diaspora.