An unconstitutional movement is afoot fueled by President Obama and crony capitalism enthusiasts to enact federal bankruptcy legislation for Puerto Rico to make sport of the legitimate expectations of its creditors.
Like a spendthrift child of a billionaire, Puerto Rico has borrowed more than $73 billion in the tax-free U.S. municipal bond and other capital markets to support government opulence, inefficiencies and frivolities. Under existing laws, Puerto Rico will be unable to repay its lenders in full unless it embraces unaccustomed austerity, reform and hard work.
The contemplated bankruptcy legislation, however, would enable Puerto Rico to discharge or plunge the value of its existing debt without doing these things. The beneficiaries would be government employees, enterprises and contractors who profit from Puerto Rico’s bloated and wasteful expenditures and handcuffs on free markets.
But the Contracts Clause of the U.S. Constitution, as expounded by the U.S. Supreme Court in U.S. Trust Co. v. New Jersey (1977), would invalidate a retroactive bankruptcy law for Puerto Rico. Congress should stand pat, and members should honor rather than evade their oaths to uphold and defend the Constitution. Puerto Rico and its creditors relied on existing laws when they negotiated lending terms, and there is no constitutional justification for changing the rules in the midstream.
Article I, section 10, clause 1 stipulates: “No State shall … pass any … Law impairing the Obligation of Contracts.” The text excludes the federal government. But Supreme Court decisions such as Eastern Enterprises v. Apfel (1998) have equated federal due process or takings clause limitations on retroactive impairments of property rights as coequal with Contract Clause limits on state impairments of contract obligations.
James Madison, father of the Constitution, defended the Contracts Clause in Federalist 44 as a bulwark against crony capitalism:
“The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less informed part of the community.”
In Federalist 62, Madison expanded on the cronyism and economic mischief that spring from mutability in the laws:
“[I]t gives [unreasonable advantage] to the sagacious, the enterprising, and the moneyed few over the industrious and uninformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the few, not for the many…
“What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government?”
Informed by these Madisonian understandings in United States Trust Co., the Supreme Court voided New Jersey’s repeal of a 1962 statutory covenant that impaired the value of consolidated bonds issued by the Port Authority of New York and New Jersey to spur greater use of public transportation. The covenant limited the ability of the Port Authority to subsidize rail passenger transportation from revenues and reserves pledged as security for the bonds. After repeal, their price predictably dropped.
In holding the repeal unconstitutional, the court explained: “A government entity can always find a use for extra money, especially if taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”
Puerto Rico, similar the Port Authority in U.S. Trust Co., confronts a debt crisis of its own making. It has been clear for years that Puerto Rico would fall off a financial cliff if it continued with its antiquated labor and welfare laws, bloated public sector, and benighted business regulations.
If the Constitution refrains from forcing Puerto Rico to pay a price for its financial profligacy, we will get more of the same.
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