Why is it important to pay state and local government debt? by James Spiotto […]
MuniNet Guide provides insights and commentaries on fiscal stress and municipal bankruptcies, including how to identify and prepare for it.
A WAKE-UP CALL FOR OTHERS – THE LESSONS LEARNED AND TO BE REMEMBERED FROM PUERTO RICO’S DISTRESS AND PROMESA
By James E. Spiotto
The Treaty of Paris ending the Spanish-American War of 1898 resulted in control of Cuba, Puerto Rico, Guam and The Philippine Islands being given to the United States. Cuba in 1902 and The Philippines in 1946 were given independence. Puerto Rico and Guam remain territories of the United State. In recent years, Puerto Rico as a Commonwealth flirted with independence or statehood with no clear decision.
In 1996, Congress repealed (effective 2006) Section 936 of the Internal Revenue Code (previously Section 931) that existed since the 1920’s to encourage U.S. corporations to invest in Puerto Rico by providing an exemption from federal taxes. This measure promoted two-thirds of Puerto Rico’s GDP, namely, in finance, insurance, real estate (19.6%), and manufacturing mainly in pharmaceuticals and electronics (46.4%).
By 2006, Puerto Rico was in financial distress due to at least in part to the effect of the Jones Act that purportedly added 10-15% to the costs of many goods due to the duty on non-U.S. ships, combined with repeal of Section 936 of the Internal Revenue Code without any replacement, as well as, Puerto Rico’s claimed inequity of federal government funding compared to states costing Puerto Rico billions annually for decades relating to Medicaid, Medicare, Supplemental Security Income (“SSI”), earned income tax credit (“EITC”), child tax credit (“CTC”), etc. All of this culminated in finance distress. In 2006, Puerto Rico had $40 billion of public debt and public debt per capita of $10,666.66, double the average for state and local governments in the U.S. Also in 2006, Puerto Rico’s public debt as a percentage of GDP was 45.82%.
Historians may well debate the causes and impact of Puerto Rico’s financial and operational distress, but it should be clear public debt was not the cause of financial distress of the government. It is a symptom of a systemic problem. As noted, the Merchant Marine Act of 1920 adding 10-15% to the price of many goods carried by foreign vessels, the repeal of Section 936 of the IRS Code (previously Section 931) encouraged U.S. corporation to invest in Puerto Rico and Puerto Rico’s claimed inequities in its funding and treatment compare to states purportedly costing Puerto Rico billions annually for decades are a fertile ground for blame.
Puerto Rico was founded on the principles that public debt has a first priority of payment upon default (along with expense of insular government) embodied in Section 34 of the 1917 Jones Act, which governed Puerto Rico prior the Commonwealth’s Constitution in 1952. The inclusion of Article VI, § 8 in the 1952 Puerto Rico Constitution continued this policy providing constitutional public debt, upon insufficient funds to pay expenses, were first to receive payment from “available resources.”
When faced with the 2006 financial crisis, Puerto Rico, with $40 billion of public debt outstanding, chose to borrow more rather than restructure its debt. Puerto Rico used the COFINA securitization structure to add another $17 billion of public debt by 2015 that purportedly was not limited by the constitutional debt limit, resulting in public debt of Puerto Rico totaling over $72 billion.
Trends and Insights Into Government Debt and Expenditures
By James Spiotto Myth: States need the ability to go bankrupt and have no standing debt resolution mechanisms. […]
By James Spiotto Myth: State and local governments only recourse to financial distress is to file bankruptcy or […]
How Can We Help Local Governments in Fiscal Distress? (Ohio Auditor of State, 2013)
Press Release on budgetary legislation for catching fiscal problems early, and providing greater assistance to local governments from falling into fiscal distress.
The State Role in Local Government Financial Distress (The Pew Chartable Trusts, 2013)
Study examines the role and extent, if any, of state involvement in helping local governments recover from financial distress.
Role of the State in Supervising and Assisting Municipalities in Financial Distress (2013)
Paper describes various protections and methods that have been adopted by states to provide financial assistance, new mechanisms, and oversight.
Defeating Fiscal Distress: A State Responsibility (The Manhattan Institute, 2013)
Report on new oversight, intervention, and takeover policy solutions at the state level, so as to anticipate, prevent, and manage municipal fiscal distress.
Fiscal Stress Faced by Local Governments (Congressional Budget Office, 2010)
Economic and Budget Brief describes the economic conditions and budgeting practices that can lead to significant fiscal stress at the local level.
Municipal Fiscal Emergency Laws: State-Based Approaches (George Mason University, 2014)
This working paper is a survey of 19 state laws concerning direct and indirect involvement in local fiscal and governing affairs.
Pennsylvania Local Government Commission – What is the Local Government Commission?
A bicameral, bipartisan legislative service agency, providing the Pennsylvania General Assembly with research and analysis concerning local government.