Congress is currently debating a bill that while little known here in Idaho could have significant impact to our state finances. The bill, which is being considered in the House Natural Resources Committee, of which Rep. Raul Labrador is a member, would rewrite the rules that states and territories are required to honor in dealing with the debts they individually take on.
Today, the U.S. Commonwealth of Puerto Rico is broke. Its leaders have mismanaged its finances so disastrously over so many years that it is in danger of defaulting on $72 billion in debt. To put that figure into perspective, that amount is larger than Idaho’s entire gross state product.
A large portion of Puerto Rico’s debt comes in the form of general obligation bonds, which are legally backed by the “full faith and credit” of the commonwealth; precisely as other states and territories bonds are backed. The Puerto Rico Constitution also guarantees that holders of the commonwealth’s general obligation debt will be repaid before other creditors.
Many private and institutional investors in the United States — including organizations that manage the pension and retirement funds of ordinary Americans — have long bought Puerto Rican general obligation bonds because of that guarantee. In fact, many investors seek and prefer government bonds over stocks because they find the volatility of the stock market too risky.
But the Puerto Rico bailout bill that is emerging in the House erases that legal — and constitutional — guarantee. It would let Puerto Rico ignore the holders of general obligation bonds and pay other creditors first.
This would be an unprecedented blow to the average Americans whose money was invested on the premise of a contract guaranteed by a U.S. territory’s very constitution. And changing this legally binding contract could have terrible financial ramifications.
Why? Because like Puerto Rico, Idaho and all the states guarantee their bonds by pledging the “full faith and credit” of their financial resources to repay them, come what may. If Puerto Rico can have its guarantee changed, this could call into question every other state’s or territory’s bonds.
Casting doubt on these once safe investments could increase interest rates and upset U.S. markets. In Idaho, that could mean higher borrowing costs to our universities, our cities and even our state when it goes to Wall Street to borrow money.
Puerto Rico did not get into the mess that it is in overnight, and it will not get out of this mess quickly. What it needs to do first and foremost is learn to live within its means by electing leaders willing to make the tough decisions required to put the island back on a stable financial footing.
There is a lesson here for every state that has not followed the example of Idaho in balancing its budget every year and that has lived within its means: You can’t run to Congress to change the rules and break contracts with investors when the party’s over and it’s finally time to pay the bill.
State Sen. Jim Patrick is chairman of Senate Commerce & Human Resources Committee and spent 20 years in the banking sector in Idaho.