As U.S. Treasury Secretary Jack Lew wrote to Congress late last month, recognizing the "recent commitment by the Congressional leadership to produce a responsible solution for Puerto Rico, Congress must pass legislation for the President to sign into law before the end of March." As the Treasury's report confirms, Puerto Rico's financial distress must be addressed now, and its economic recovery must be efficiently and effectively implemented—and essential governmental services to the nearly 4 million Americans who live there maintained.
Unfortunately, there is a significant misperception that allowing Puerto Rico to file for something like municipal bankruptcy protection would somehow provide for a federal bailout. Nothing could be further from the truth.
It seems ironic that there is such significant apprehension about crafting a mechanism to allow Puerto Rico to work out an orderly resolution to its debt—especially in a Presidential election campaign where the leading contender for the GOP nomination, Donald Trump, has bragged about how well his businesses have fared in bankruptcy: indeed, no major U.S. company has filed for Chapter 11 bankruptcy more than Presidential candidate Donald Trump's casino empire in the last 30 years. As Mr. Trump trumpeted during the first Republican Presidential debate last August: "I have used the laws of this country... the [bankruptcy] chapter laws, to do a great job for my company, for myself, for my employees, for my family," adding that successful businesses file for bankruptcy all the time. He added: "[V]irtually every person that you read about on the front page of the business sections, they've used the [bankruptcy] law."
Between 1929 and 1937, there were 4,700 defaults by U.S. governmental bodies in the payment of their obligations—a terrible time for the nation, which eventually led to the Bankruptcy Act of 1934, and then of 1937—laws providing that municipal debt would be adjusted to what was suitable and affordable—so as to ensure there would be no disruption of critical public services.
Do we have less of an obligation to Americans who live and work in Puerto Rico?
As director of policy and federal relations for the National League of Cities, I worked closely on the 1988 amendments to the municipal bankruptcy with then Chairman Howell Heflin, D-Ala., and Ranking Member Strom Thurmond, R-S.C.,—legislation signed into law by former President Reagan. I am also the author of reports on the nation's largest municipal bankruptcy, Detroit, as well as on the bankruptcies of Central Falls, R. I., and Stockton, Calif. It is this experience that makes me want to offer advice to the Congress.
Part of the challenge confronting Congress is that Puerto Rico is neither a state nor a municipality. On Feb. 10, 1917, my great grandfather Sen. John F. Shafroth of Colorado, during the debate he was managing on the Senate floor to create Puerto Rico as a U.S. territory, noted he had "Always stood in my Territory of New Mexico during the last 30-odd years, in my experience in the local legislatures there, and, in so far as possible for me to do so in the constitutional convention, in favor of securing a proper constitution for these people when they came into the Union...and I stand here in exactly that attitude toward the people of Puerto Rico."
A critical part of the challenge facing Congress and the Treasury is the Tenth Amendment to the Constitution—which explicitly sets forth our country's Constitutional principle of Federalism as defined by the framers meeting in Philadelphia. It states that powers not granted to the Federal Government nor prohibited to the States by the Constitution are reserved to the States. Ergo, even though Article I of the Constitution authorizes Congress to "establish uniform laws on the subject of bankruptcies throughout the United States," said power may not interfere with the power reserved to the States by the Tenth Amendment—the most unique dual sovereignty which so distinguishes our nation from every other.
That unique American attribute now creates exceptional challenges for fashioning a constructive constitutional and legal outcome. As noted bankruptcy expert James Spiotto writes: "While there may be precedent for the Federal preemption of bankruptcy law for corporations and individuals, there was, at our Nation's founding, no precedent for a dual sovereign passing a law regulating the bankruptcy of the other."
If anything, that challenge is made even more difficult because the term "state" is defined in the U.S. bankruptcy code as including Puerto Rico—except with regard to defining who may be a debtor. In fact, Chapter 9 municipal bankruptcy, as amended and signed into law by former President Reagan in 1988, was not created to deal with sovereign States and is not presently drafted to be helpful to the Commonwealth of Puerto Rico.
With time fleeting, Congress and the Administration should proceed under the authority granted them under the Territorial and Bankruptcy clauses of the U.S. Constitution.
That is especially the case here because, as Sen. Shafroth noted, under the Territorial and Bankruptcy clauses of the Constitution, Congress and the Administration have the authority to proceed: they have a responsibility now to enact legislation and provide a means to protect the future of these millions of U.S. citizens and their livelihoods.
The challenge, after all—and one of signal importance to not just the citizens and government of Puerto Rico, but also its creditors in every state across the U.S. – is a resolution that would provide the citizens of Puerto Rico with a long-term fiscal recovery plan that would ensure the provision of essential public services and public infrastructure, but also future economic development. The island needs a viable future, not a crutch. But such a future requires partners—including creditors—if there is to be a sustainable and affordable economic recovery—an outcome, after all, vital not just to Puerto Rico, but to each of its creditors.
Just as Congress and previous administrations have worked in a bipartisan manner to fashion unique legislation to provide the means for major U.S. cities to restore their fiscal accountability by means of strict financial oversight and technical assistance, lawmakers should act to enable a constructive fiscal and economic outcome for Puerto Rico. Congress should create an oversight body—as was done in New York and for Washington, D.C., and, under Article IV, should authorize Puerto Rico to restructure its $73 billion in debts.
Frank Shafroth is Director of the Center for State and Local Leadership at George Mason University
