How do we solve Puerto Rico's debt crisis? As Americans — both Puerto Ricans and citizens of the 50 U.S. states and the District — watch as Greece stumbles ever deeper into economic catastrophe, many of us want to know what our government plans to do about the Puerto Rican debt crisis, which, whether one likes it or not, is America's problem. A "bailout" is simply unacceptable to U.S. taxpayers. But a solution that provides fairness to creditors as well as debtors is at hand, if Congress is prepared to deploy its readily available constitutional powers. The Commonwealth of Puerto Rico should be authorized to restructure all its debts in a federal bankruptcy court. On June 29, the governor of Puerto Rico announced that $72 billion of the commonwealth's debt was "unpayable." This debt burden amounts to more than $20,000 for every man, woman and child — or roughly 70 percent of the commonwealth's per-capita gross domestic product. It is thus no exaggeration to characterize this as the most drastic fiscal crisis in Puerto Rico's history. This crisis threatens to inflict grave harm on the 3.5 million U.S. citizens of Puerto Rico, but also on the U.S. economy at large. One proposal seeks to allow Puerto Rico's public utilities to declare bankruptcy, as they could if they were the instrumentalities of a state, rather than a territory. About one-third of Puerto Rico's debt burden is owed by such utilities. Chapter 9 of the U.S. Bankruptcy Code allows municipalities, with their states' permission, to restructure their debts through bankruptcy. "Municipalities" have long included public utilities of the type facing insolvency in Puerto Rico. However, the code allows only the municipalities of states to declare bankruptcy. A bill proposed by Puerto Rico's nonvoting delegate in Congress, Pedro Pierluisi, would address this gap in the law by amending the code to allow Puerto Rico's utilities to enter Chapter 9. While the bill has stalled in the House, Sens. Chuck Schumer (D-N.Y.) and Richard Blumenthal (D-Conn.) recently introduced a similar bill in the Senate. Such a solution has obvious appeal. It is straightforward and satisfies our basic commitments to uniformity and equality. There is no reason to withhold from the municipalities of the territories the same options in bankruptcy that are afforded those of the states. Sadly, though, the Pierluisi bill does not go far enough. A significant portion of Puerto Rico's $72 billion in bonds were issued directly or indirectly by the commonwealth government, not by public utilities. A solution that addresses less than half of the total debt would simply kick the can down the road, leaving Puerto Rico with crippling payments on the other two-thirds and predictably smothering the economic growth that should be the goal of all concerned. Meanwhile, others, including some of Puerto Rico's creditors, have proposed a federal "bailout" for Puerto Rico, along the lines of recent bailouts of banks and auto companies. It goes without saying that this solution is contrary to the interests of the U.S. taxpayer. But it is also not in the interests of the people of Puerto Rico because it would arguably reward undue risk-taking and do nothing to get Puerto Rico's economy back on its feet. There is a much simpler and more orderly solution that is well within Congress's constitutional authority over territories: Congress can and should allow all of Puerto Rico's debt — including its general-obligation bonds and pension obligations — to be restructured through bankruptcy. Our federal bankruptcy system is designed to protect the interests of all relevant parties, including Puerto Rico's creditors, and has the power to ensure that these debts are restructured through a fair and binding process. This solution has the best chance of helping Puerto Rico work itself out of this crisis. So why not let Puerto Rico declare bankruptcy? There are three main objections to this plan. All seem reasonable but are easily countered. First, there is the constitutional argument. The Bankruptcy Code does not permit states to declare bankruptcy, in part, because subjecting them to federal bankruptcy or to suits from creditors arguably runs afoul of the 10th and 11th amendments. Puerto Rico, however, is a territory, and the Constitution gives Congress the power to "make all needful Rules and Regulations" respecting the territories. Congress, therefore, has authority to extend the provisions of the Bankruptcy Code to Puerto Rico, and these provisions would have primacy under the Constitution's Supremacy Clause. Second, there is the "moral hazard" argument. Why should we reward Puerto Rico and its residents for living beyond their means? To be sure, Puerto Rico has contributed to its problems by borrowing profligately to fund its bloated public payrolls. And Congress should consider imposing public-sector reform as part of any debt-restructuring legislation. In some ways, Puerto Rico is here the victim of its territorial status: Puerto Rico is part of the United States, and so it has no monetary policy of its own and is thus limited in how it can respond to a debt crisis. The best response to the "moral hazard" argument, however, is that the bankruptcy law enshrines our pragmatic recognition that a debt burden can become too crushing to handle. Although it is preferable for people, corporations and cities to make good on their obligations, in some cases this becomes practically impossible, to the detriment of creditors as well as debtors. The purpose of bankruptcy is to allow debtors and creditors to enter into an orderly and binding system of adjudication, where such debts can be restructured. Finally, there is the concern, shared by many Puerto Ricans, that treating Puerto Rico differently from the states is inconsistent with future efforts to achieve statehood. In short, if states are not permitted to declare bankruptcy, then Puerto Rico should not be permitted to do so either. In Puerto Rico, this concern is motivated by profoundly pro-American sentiments and a yearning for full equality within the American political family. But the simple reality is that Puerto Rico is in desperate trouble now, and it is a territory now. Nothing that happens today with respect to the current crisis should affect any eventual movement toward statehood, nor necessarily affect how states are treated in bankruptcy. In attempting to resolve this serious crisis, Congress should therefore be encouraged to consider the full range of its legal options. A clear-eyed view of the crisis reveals that the best solution to this difficult problem is to allow Puerto Rico and its creditors to restructure all these debts through the U.S. Bankruptcy Code. This step would both extend the protections of bankruptcy to all of Puerto Rico's creditors and give the U.S. citizens of Puerto Rico their best chance to move beyond this crisis and toward a better future. Join the conversation about this story » NOW WATCH: University of Michigan just opened their $10 million city for driverless cars
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