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Puerto Rico And The Mess To Come

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Puerto Rico is a financial mess. Years of overspending has the island in bankruptcy and drowning in more than $100 billion in debt and pension liabilities it has little hope of crawling out from under anytime soon. Why should you care about what happens to the economy of an island you’ll probably never visit? Because while you may never visit Puerto Rico, the problems in Puerto Rico may well visit a state near you soon, and they will have an impact on your wallet and retirement.

Since Puerto Rico is a United States territory, Congress is involved in the process, and that, as you might imagine, has led to even more problems.

Which debts get settled first and for how much is always a fight in bankruptcies. With Puerto Rico’s total liabilities surpassing a staggering $100 billion, there are thousands of creditors and special interest group scrambling to get their piece of the pie settled before there is nothing left with which to settle. Toss in Congress and all the politics Washington, DC, has to offer and that scramble reaches an intensity rarely seen and opens it up to lobbying and political patronage that complicates matters further.

Just a few months in, those complications are already rearing their ugly heads.

Congressman Rob Bishop (R-UT) is Chairman of the House Committee on Natural Resources, the committed charged with overseeing the bankruptcy of Puerto Rico. He has taken a keen interest in $9 billion of Puerto Rico’s debt stemming from Puerto Rico Electric Power Authority (PREPA), according to Reuters.

Why would Congressman Bishop care about one set of Puerto Rico’s creditors over others? So concerned is Bishop that he held a subcommittee hearing on this subject of the PREPA proposal alone on March 22, completely ignoring the larger picture.

But the larger picture matters, the whole picture matters. Favoring one creditor over another is politics, not prudence.

PREPA’s deal would lead to higher utility rates for customers and worse settlements for other creditors. In other words, Chairman Bishop picking a winner is, logically, him also picking losers.

Favoring PREPA over others will not only cost Puerto Ricans more for utilities going forward, it will harm the island’s economic future when potential creditors abandon the island out of fear of Washington picking winners and losers. Puerto Rico’s only hope for the future is a strong economy, Bishops meddling threatens that.

The bankruptcy, no bankruptcy, should not be done piecemeal, it needs to be comprehensive and deal with all creditors equally and fairly. This is bigger than Puerto Rico, it will set the precedent for all municipal bankruptcies going forward.

Puerto Rico’s bankruptcy is a record for a municipality in the United States, but could be the first of many.

The state of Illinois can’t pay its bills. The Associated Press reports, thanks to new court orders, the state’s Comptroller “must pay out more each month than Illinois receives in revenue.”

The AP reports, “A mix of state law, court orders and pressure from credit rating agencies requires some items be paid first. Those include debt and pension payments, state worker paychecks and some school funding.”

Another court order added Medicaid payments to that list, which Mendoza says brings outlays to 100 percent of Illinois’ monthly revenues. The AP reports, “There would be no money left for so-called ‘discretionary’ spending – a category that in Illinois includes school buses, domestic violence shelters and some ambulance services.”

The state, any state, can’t function long with a financial situation like that. Politico reports, “There would be no money left for so-called “discretionary” spending – a category that in Illinois includes school buses, domestic violence shelters and some ambulance services.” How long can Illinois last?

Illinois’ is not unique, many states are slouching in that direction.

What happens when states start slumping into inevitable bankruptcy? More importantly, what happens to your pension, IRA, or 401(k)? What will happen to your retirement when politicians attempt to have a say in whether or your retirement is funded.

The federal government has already shown itself as willing to circumvent normal bankruptcy procedure in the auto industry, and it now setting what will be the precedent for governments’ bankruptcies with Puerto Rico. While it may seem like what’s happening in the Caribbean has no impact on your life, it really could.

And unless governments start spending responsibly, and Members of Congress like Congressman Rob Bishop stop interfering in the normal process of things, it will.

Puerto Rico’s bankruptcy needs to be handled properly, with all creditors being treated equally, not Washington politicians picking winners and losers. Setting the island on a path toward economic growth and responsibility needs to be the priority, not political favoritism.

This will set the precedent for future bankruptcies going forward, so it must be done fairly and right. Otherwise we’re all going to end up paying a lot more for it in the end.

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