If Puerto Rico bankruptcy ruling stands, it could devastate municipal borrowing
Congress needs to look into how Puerto Rico is managed after bankruptcy ruling
As a former attorney general of the United States, I find it crucial to shed light on a recent court ruling in Puerto Rico that demands our attention. The decision made by U.S. District Judge Laura Taylor Swain in the bankruptcy proceedings of the Puerto Rico Electric Power Authority (PREPA) has profound implications, particularly for the fairness and efficiency of capital markets, as well as the access of state and local governments to municipal bonds.
It is imperative that we comprehend the potential consequences of this ruling, as it could lead to escalated costs and hindered infrastructure development and also burden taxpayers with higher financial obligations.
In the bankruptcy proceedings of the power utility, Swain sided with borrowers and concluded that special revenue bondholders do not hold a secured claim on current and future net revenues. As The Wall Street Journal explained in March, "A federal judge curbed Puerto Rico bondholders' rights to the electric revenue generated by its public power utility."
BANKING CRISIS 2.0 COULD BE COMING: DUTCH MASTERS
Furthermore, the ruling stated that the original legal obligation of the borrowers is not the face value of the debt, but rather what the borrower (in this case "PREPA") can feasibly repay. This ruling raises concerns regarding its broader implications for the municipal bond market.
Congress needs to get involved in Puerto Rican oversight to prevent bond problems for other municipalities. FILE: The Capitol is seen in Washington, D.C. (AP Photo/J. Scott Applewhite / AP Images)
Municipal bonds play a pivotal role in financing vital infrastructure projects across America. However, Swain's decision poses a significant threat to the traditional free-market principles that underpin the structure and security of municipal bonds, particularly special revenue bonds.
These bonds have provided investors with the assurance of repayment through revenue streams generated by specific projects or utilities. By eroding this sense of security, the ruling fundamentally alters the risk-reward dynamics of municipal bonds, disregarding the principles of free markets and limited-government intervention.
Consequently, state and local governments may encounter elevated borrowing costs when issuing bonds for necessary public investments, hindering fiscal responsibility and the efficient allocation of resources.
The rise in borrowing costs associated with municipal bonds not only burdens taxpayers but also impedes economic growth. Governments should operate within their means, prioritizing fiscal responsibility and minimizing the tax burden on hardworking citizens.
A ruling in the bankruptcy proceedings of the Puerto Rico Electric Power Authority could make public sector borrowing much more expensive. FILE: A Puerto Rican flag flies on an empty beach in San Juan, Puerto Rico, May 21, 2020. (AP Photo/Carlos Giusti, File)
However, with higher borrowing costs, cities may struggle to undertake vital projects that would otherwise contribute to economic expansion and job creation. This hampers the private sector's ability to thrive and stifles the entrepreneurship and innovation that drive economic prosperity.
We must not underestimate the significance of any ruling in U.S. bankruptcy proceedings that undermines the free-market values of fiscal responsibility and limited-government intervention.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
The recent ruling in Puerto Rico carries far-reaching implications for the entire municipal bond market, posing a threat to our commitment to free markets and individual liberty. It jeopardizes the ability of local governments to access municipal bonds and manage their finances responsibly.
The rise in borrowing costs associated with municipal bonds not only burdens taxpayers but also impedes economic growth. Governments should operate within their means, prioritizing fiscal responsibility and minimizing the tax burden on hardworking citizens.
Therefore, it is imperative that Congress, which has oversight of Puerto Rico's management through the natural resources committees, chaired by Senator Joe Manchin, D-WV, and Representative Bruce Westerman, R-AR, critically examines the detrimental impact of this ruling on the efficiency of America's bond market.
We must demand a reevaluation of policies that hinder economic growth, burden taxpayers and disregard the fundamental tenets of fiscal responsibility. By advocating for a return to market-based solutions, we can ensure the fairness and efficiency of capital markets, safeguard the prosperity of our communities and preserve the principles that make our nation strong.
Matthew Whitaker is co-chair of the Center for Law and Justice at the America First Policy Institute and the former acting attorney general under the Trump administration.