PLAYING FAVORITES IS WHAT THEY’RE ALL ABOUT: Treasury Department Plays Tricks With Puerto Rico Debt:
Obama administration Treasury officials want to discriminate against holders of Puerto Rico’s general obligation bonds and give retired public employees a better deal as the island’s debt mountain collapses. . . .
The impulse to aid Puerto Rico’s civil servants is understandable and the idea is well-intentioned, but this plan is seriously misguided. General obligation bondholders bought Puerto Rico debt under a clear and transparent set of rules—that these were senior obligations taking priority over everything else. Meanwhile, grotesquely incompetent and venal politicians promised generous pensions to civil service employees without making sufficient provision to cover those pensions when the bills came due. Now, sure enough, the territory doesn’t have the money to cover its pension obligations, or to pay back the money it borrowed from bondholders.
The Treasury seems to have decided that the best way to handle this mess is to play tricks—to decide which group of debt holders is most “morally worthy,” and to give that group the first claim on the island government’s resources regardless of contractual obligations. There’s a good argument for helping out pensioners, many of whom are now too old to go back to work, and who in any case played by the rules and did their jobs. But, as Walsh notes, it isn’t so simple. Many of the people who own Puerto Rico general obligation bonds are themselves old, retired people on limited incomes who bought these investments on the promise that they would be the first debts to be repaid. So who has the better claim: The retired teacher in New York who bought Puerto Rico bonds or the retired teacher in Puerto Rico who has a pension from the system?
Worse still, as investors everywhere realize that the U.S. government no longer thinks that enforcing the law of contract is a sacred trust and obligation—choosing instead to privilege some groups of debt holders and punishing others based on the perceived moral or political standing of each group—the value of all municipal debt in this country will fall. Cities and states will have to pay more to borrow money once bondholders realize that they can’t trust the fine print. That means fewer new schools, fewer public services, fewer repairs to bridges and tunnels, fewer mass transit projects, dirtier parks, and less safe streets all over the country.
But they’ll make life easier for loyal Democratic Party government-employee apparatchiks, and that’s what really matters. Party before country, as always with this crowd.