The US Congress finally introduced a bill on Wednesday which could serve as a silver lining — helpPuerto Rico with its ongoing debt crisis and dissipate economic uncertainty. Bond defaults convinced the senators to finally take action and tackle the economic issues. For now, the Congress maintains its stance that there will be no bailout for Puerto Rico.
The proposed bill includes $3 billion in cash relief, payroll tax breaks, and aims to establish an independent authority which will function on behalf of Puerto Rico to borrow (without any tax payer guarantee). The island defaulted on small part of its debt payment in August, and now has bigger chunk of payments due in the near future.
The commonwealth has seen a decline in its output since fiscal year '05. Going forward, many expect a stagnant household income in Puerto Rico for a long period of time. Unemployment for the next 10 years at the island is expected to average around 13%, according to CNBC statistics. The country is also in the midst of an extraordinary migration due to which its population is on a decline.
The said bill however doesn't match up with the the proposal given by President Obama, which aimed to give Puerto Rico bankruptcy rights equal to other US states. A US senator even warned that without proper action Puerto Rico may risk another decade i.e. with economic downturns and stagnation.
The US government does not guarantee the debt obligations of the Island. The bill presented demands that Puerto Rico should disclose the actual financials of its pension plan, as the fair market values will be helpful in diverting money from bondholders to pension funds.
The Governor of Puerto Rico, Alejandro Garcia Padilla, at a hearing in Washington on December 1, stressed on the urgent need to deal with liquidity crises. He also requested for a legal framework under which its $70 billion debt can be restructured. It should be noted that the island does not have access to Chapter 9 of the federal bankruptcy code, as other states do. The Governor used the phrase “death spiral” for the debts, implying that it’s very difficult for the island to payback its debt.
On a bright side, the tax relief granted under the bill will reduce social security taxes by 50%, which is currently deducted directly from the payroll. A chief financial officer will be designated to advice the Governor on following the budget strictly, as per a clause in the bill. More importantly, the chief financial officer will remain in office even if there is a change in government. Hence add to the much-needed transparency and credibility in operations.
Transparency continues to remain a major issue in Puerto Rico due to which the US senate is unsure of extending full support to the island. The government’s spending is of vital importance to decision makers in US, as scandals of corruptions have been a common occurrence at the island. Despite repeated attempts by the Congress to sort issues in federal tax, health care and pension policies, discrepancies continue to exist.
A debt payment of $902 million is due on January 1, 2016, of which the officials are not sure how the government will make payments, given that they are running out of cash. About one-third of these payments are from general obligation bonds which can't be skipped (except in the case of bankruptcy).
The point Republicans are stressing upon which is quite valid at this point: if Puerto Rico is to get a way to legally impair general obligation bonds then other financially troubled states will start asking for the same.
Economic conditions in Puerto Rico are not favorable either. The inefficient Puerto Rican Electric Power Authority (PREPA) is producing electricity at least 2.5 times the cost paid by US mainland. Consequently, businesses are finding it hard to compete due to shipping costs, expensive labor and generous federal welfare benefit regulations which have already made things worse.