Amid Donald Trump’s firing of federal agency leaders, one episode has been lost in the flurry of terminations: the ouster of six of seven members of Puerto Rico’s financial oversight board, which has been in charge of the island’s fiscal affairs for nearly a decade. Depending on who he appoints to replace them, the move could send Puerto Rico back to the brink of financial collapse.
In 2016, the island was in the throes of a catastrophic debt crisis. Puerto Rico could no longer pay back tens of billions of dollars it had borrowed — nor could it, as a commonwealth, file for bankruptcy. Fearing that creditor lawsuits would send the island into an economic death spiral, Congress established a bankruptcy process that would help Puerto Rico reduce its debt. The law, known as Promesa, involved the creation of an oversight board — a bipartisan panel of experts to represent Puerto Rico in bankruptcy court and help balance the territory’s budget.
In coordination with the Puerto Rican government — and in the face of a Job-like series of natural disasters including hurricanes, earthquakes and the Covid-19 pandemic — the board, which we have both served on, has made great progress. It has completed the largest public debt restructuring in U.S. history, paring down the government’s debt to some $7.4 billion from around $34 billion. It has shored up Puerto Rico’s depleted public pension system. And it has brought the island’s budget back into the black after years of deficits.
These efforts have prevented the people of Puerto Rico from losing access to basic services such as health care and education, and have given the island a path to a stable financial future.
Now, the board has only one major restructuring left: the Puerto Rico Electric Power Authority, known as Prepa. Decades of mismanagement, damage and neglect have left the utility in woeful shape; grid failures are so common that the rapper Bad Bunny immortalized them in a song. A group of bondholders — including a prominent hedge fund, bond insurers and mutual funds — is demanding full repayment for their claim of about $8.5 billion of principal plus interest, which totals about $12 billion. That could require sharply raising rates for consumers. But Puerto Rico’s electricity rates are already among the highest in the country, and its median household income is just half that of Mississippi, the poorest state in the union. After concluding that full repayment would burden Puerto Ricans and hamper efforts to repair the dilapidated energy system, the board judged that Prepa could repay only a small fraction of the total sum.
For years, this group of bondholders has resisted the board’s efforts to restructure Prepa’s debt, but has largely been locked in a stalemate — until now. The White House, which has not yet replaced the six ousted members, cited the board’s supposed inefficiency as a reason for the purge. But, as figures such as Representative Nydia Velázquez, Democrat of New York, have suggested, it is possible these bondholders have the president’s ear. If that is true, this moment presents a window of opportunity for Mr. Trump to stack the board with creditor-friendly interests. (These bondholders deny that they persuaded the president to intervene on their behalf.)
Such an arrangement would echo past colonialist blueprints in their most offensive, extractive forms. Throughout the imperialist era, Western powers used gunboat diplomacy to force debtor nations to repay their obligations. In 1881, Britain and other European powers effectively took control of many of the Ottoman Empire’s revenue streams to ensure repayment of loans made by European creditors. The United States did something similar in the Dominican Republic in 1905, installing federal officials in the customs office to force repayment of debt.
As disgraceful as these episodes are, a takeover of Puerto Rico’s financial board could be worse.
Under Promesa, board members have a legal and fiduciary duty to represent Puerto Rico’s bankrupt institutions and, by extension, the people of Puerto Rico. The board must seek the most favorable terms for Prepa and Puerto Rico before a federal judge overseeing the case. Bondholders themselves are represented before the judge, as they should be. But appointing board members who would operate as proxies for the island’s creditors would make a sham of the process.
These bondholders have argued that Prepa’s debts should be paid using money from Puerto Rico’s government, which was not party to Prepa’s borrowing — a tacit acknowledgment that Prepa cannot afford to pay its own debt. To put Puerto Rico’s taxpayers on the hook for billions that they did not borrow and do not owe is both unfair and saps crucial resources that should be earmarked for the island’s economic recovery.
Some critics, including the right-wing activist Laura Loomer, claim the board members deserve to be fired because $2 billion has been spent enacting Promesa, up from a 2016 estimate of $370 million. But that estimate was reached before the slew of natural disasters that devastated the island’s power grid; and many of those funds were spent by the Puerto Rican government on fruitless legal battles trying to pass unaffordable legislation. That spending is not a good reason to extract billions more from the people of Puerto Rico.
Claims that the board was ineffective or obstructive also cannot withstand scrutiny. The board’s restructurings have saved Puerto Rico more than $55 billion in debt payments. Its fiscal responsibility measures — overhauling government purchasing practices, temporarily freezing government salaries, instituting financial transparency measures — have saved the island another $17 billion. In our view, the main reason the Prepa bankruptcy has not been resolved is the bondholders’ ongoing demand that they be paid nearly in full.
The firing is likely illegal, too. Under Promesa, the president cannot remove board members without cause, a high bar that the administration did not even try to meet. Nor can Mr. Trump cite executive authority over federal employees in firing the board members: The Supreme Court ruled in 2019 that the board is a branch of the Puerto Rican government, meaning its members are not federal officers.
The board has often been criticized by Puerto Ricans, many of whom understandably view it as a violation of the island’s sovereignty and refer to it as “la junta.” But oversight boards are common when governments go bankrupt, and Puerto Rico’s board has undeniably helped guide the island away from economic catastrophe. If the six dismissals stand, this may soon cease to be true.
If the board were to lose its independence, and lobby on behalf of the island’s creditors instead of its inhabitants, Puerto Rico could find itself right back in the financial morass that forced Congress to intervene nearly a decade ago. The consequences for Puerto Ricans are almost too depressing to contemplate.
Andrew G. Biggs is a senior fellow at the American Enterprise Institute. David A. Skeel Jr. is S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Carey Law School.
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