In today's political climate – and particularly during a divisive election year – we don't often see legislative compromises materialize. But the legislation to address the economic situation in Puerto Rico appears to be an exception to the rule. Now, the choices that President Obama and party leaders make over the next few weeks could ultimately decide whether the story of Puerto Rico's financial woes ends happily.
Recently more than a year of debate, lobbying and negotiation culminated in the bi-partisan passage of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"), which President Obama has signed into law. The legislation offers a path forward for Puerto Rico's economy and its people.
The bill isn't perfect. Commonwealth representatives have voiced concerns about Puerto Rico's potential loss of sovereignty through the president's appointment of an "oversight board" of seven individuals from a list of candidates submitted by the political leadership of both parties in Congress. Creditors – which include thousands of Puerto Ricans – are concerned that the board may focus on the short-sighted goal of slashing debt payments at the expense of addressing the fiscal and structural causes at the root of Puerto Rico's financial problems, or choose not to respect the tenets of a $3.7 trillion municipal bond market that underlie Puerto Rico's bonds.
Despite these objections, each side gained advantages they would not have had without a bill. Namely, Puerto Rico was given a tool to adjust its debt obligations and the Commonwealth's creditors got important legal and procedural protections that increase their chances to reach negotiated settlements and be treated more fairly. In these respects the legislative process clearly worked.
So what happens now?
Under the bill, the board will be tasked with overseeing Puerto Rico's budgetary, financial and contractual matters. It is not a stretch to say that the composition of the board, a topic being actively debated behind the scenes in Washington right now, could mean the difference between the Commonwealth being on a strong path to recovery in the relative near-term, and it's facing continued stagnation and decline for the next several years.
The test will be whether our politicians can put politics aside for the good of everyone involved. To do so they must deliver a control board made up of appointees that both Puerto Rico and its creditors can respect and trust to make hard decisions, and who have the right skill sets to achieve a successful governmental reform for Puerto Rico – as opposed to partisan selections meant to earn votes or favors down the line. Pragmatism, not idealism, has to be the hallmark of this board.
The financial recovery process for Puerto Rico involves three basic steps: analyzing its budget and how to fix problems that caused Puerto Rico's liquidity crisis in the first place; understanding Puerto Rico's true debt service capacity; and convincing creditors and the citizens of Puerto Rico that proposed solutions are really in the best interests of everyone. If this process is to be successful, it is critical that control board members have municipal finance expertise and the strength of will to make unpopular decisions.
An overly political board that lacks these competencies and characteristics will fail. A purely technical board without the ability to engender the trust of either creditors or Puerto Ricans will similarly fail.
Puerto Rico's future is hanging in the balance. Congress has done its part in passing PROMESA. President Obama, and our political leadership in the House and Senate must now advance the process by delivering a control board worthy of this opportunity and challenge.