Now what?

So what do YOU want to know about Puerto Rico but were afraid to ask? This Skimm story provides a nice overview, so allow me to jump right to the ending. No, not of their story — rather, of how the Puerto Rico story is likely to end. No, not end as in literally end, as if the island were to sink into the Caribbean Sea. That it will not do.

So here is what seems likely to happen, from my perspective as a journalist, analyst and communications consultant on the island.

Puerto Rico has several bond payments due in the next couple of months for which it simply will not have the money. Everyone is waiting for the governor to present his Next Grand Plan in late August, but no one expects it to actually solve the problem — that is, to pay bondholders AND leave money available to actually run the government, all in an orderly way.

Neither the Congress nor the White House will produce a bail-out, nor is Puerto Rico eligible for a Chapter 9 debt restructuring. So if Puerto Rico itself does not pay, bondholders — who are madly blocking congressional efforts to permit Chapter 9 — will take the government to court and at the end of the day, the government will have to pay, which is an outcome bondholders do not mind.

But that path will produce absolute chaos — forced privatizations, massive public-sector layoffs, street protests, social unrest, further economic collapse, unprecedented migration to the states…not pretty. At all.

The answer? It is found in this letter from Treasury Secretary Jack Law, urging the Senate to enact Chapter 9 bankruptcy for the island to avoid precisely this kind of chaotic end game. But Chapter 9 will not happen, so there is one and only one way out. Check out the next to last paragraph in his letter:

Did you read between the lines? If you failed to catch it here, the writing is on the wall. Perhaps you can read it there. I and others on the island have come to believe that this Treasury team assigned to Puerto Rico is already packing their bags and making plans to move to the island in the coming weeks, as part of some Supervisory Board structure that will amount to no less than a temporary takeover of the Puerto Rico government.

What will they do? The steps are in this report prepared by a group of hedge funds holding much of the Puerto Rico debt. It received global media coverage here, here, here and elsewhere. The funds call for unprecedented privatizations, public-private partnerships, government layoffs, spending cuts, and a huge IRS-style crackdown on rampant tax evasion by local businesses and wealthy Puerto Ricans.

They are right on the math. These measures would no doubt solve the problem. But Law is right, too — between the lines — in expecting chaos if this is allowed to happen in a disorderly manner. Here is the other relevant quote from his letter:

Replace the phrase in bold with the Supervisory Board, and there you have it. The feds may not bail out Puerto Rico with money nor allow for an orderly process through Chapter 9, but they can and likely will intervene this way.

But wait, it gets better.

51st state or 197th country?

A federal Supervisory Board of any stripe, regardless of how successful it will be, or not, in solving the fiscal crisis and setting Puerto Rico on its way toward economic recovery, will have one certain POLITICAL consequence: It will bury what is left of the Commonwealth or territorial status Puerto Rico has had since 1952, when Congress began treating the island more like a state and less like a pure colony.

As a territory, Puerto Rico has resided in the Territorial Clause of the U.S. Constitution since 1898, the same clause where Congress places a territory while it decides to either let it loose as an independent country or bring it in as a state of the Union. While there, Congress has plenary powers over the territory, which means complete and direct governing authority. It can do as it pleases without the consent of the governed.

What it did in 1952, however, was to suspend those plenary powers in the case of Puerto Rico, because it wanted the United Nations to remove the island from its list of colonies. The argument was elegant: The Commonwealth status granted Puerto Rico a constitution, a locally elected government, and a similar degree of limited sovereignty over local matters as enjoyed by the 50 states — ah, and the state-like presence of most if not every federal regulatory agency, which act on the island exactly as they do in the states, since federal laws apply here as they do everywhere.

In decision after decision at the U.S. District Court level, federal judges have consistently upheld the state-like treatment and denied federal jurisdiction in cases involving matters traditionally left to the states. Some have even suggested, in their role as interpreters of legislative intent, that it would have been a monumental hoax had Congress not really, truly intended to suspend its plenary powers over Puerto Rico when it allowed the island to have its own state-like constitution, government and local sovereignty.

The Popular Democratic Party (PDP) has represented the Commonwealth status in local politics — including the current administration — while the New Progressive Party (PNP) promotes statehood and a number of small minority parties push for independence, led by the Puerto Rican Independence Party (PIP).

PNP and PIP opponents have long charged that Congress retained its plenary powers and merely granted some concessions. The fact Congress did not include a full House and Senate delegation and presidential vote — opting only for a single non-voting member of the House — kept Puerto Rico firmly on the list of colonies, they say, given the thoroughly undemocratic condition of being subject to federal laws without full representation.

PDPers battled back, arguing in favor of generic consent — Puerto Ricans, that is, consent to federal laws generically, with no need for a direct law-by-law vote, in exchange for two things: avoiding the imposition of most federal taxes on the island (fiscal autonomy) and retaining their own country-like national identity (as opposed to the Hispanic minority identity of Latinos in the states).

Has this led to lower federal funding than full congressional delegations achieve for their states and districts? Yes, but that is precisely the trade-off, and Commonwealth supporters prefer the benefits of fiscal autonomy and national identity, combined with the security afforded by remaining a part of the U.S. federal system: citizenship, regulatory agencies, federal courts, the U.S. dollar, and all the rest.

Statehooders and independentistas disagree, the latter insisting that Puerto Rico would be better off with the full sovereignty countries enjoy, and both arguing that no trade-off is worth the indignity of living under laws you have absolutely no part in enacting.

On and on the debate has raged, since 1952. Support for Commonwealth had eroded substantially prior to the current fiscal nightmare. It has sunk to new lows since. The overwhelming opinion of analysts, pundits and opposition politicians has been to blame the status, even more than government mismanagement. The notion that the current crisis happened regardless of status and that the island can emerge from it without a change in its relationship with the U.S., is written off outright.

And then came Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico and Blue Mountain Capital Management LLC v. Governor Alejandro Garcia-Padilla earlier this year, the U.S. District Court decision against a local version of Chapter 9 bankruptcy. Judge Francisco Besosa ruled, as part of his opinion, that Congress does have plenary powers over Puerto Rico after all. Commonwealth supporters immediately lashed back, saying the preponderance of all those previous decisions outweigh this one single ruling.

They have a problem, though. This one single ruling came in 2015 and has fanned the flames against an already severely wounded Commonwealth and its champions within the PDP. And they have a second problem: the PDP includes a coalition of increasingly influential supporters of a fourth status option for the island, Free Association, which would have Puerto Rico removed from the Territorial Clause but remain closely tied with the United States through a bilateral pact, much like the European Union and much unlike the full-independence sovereignty advocated by the PIP.

Last week, one Free Association leader and the 2012 PDP candidate for Resident Commissioner, Rafael Cox Alomar, went on radio to urge Puerto Ricans to take advantage of the debt process to obtain Free Association-like concessions. If you know Spanish, the interview is worth a listen.

Which loops us back to the Jack Law letter. If the Treasury Supervisory Board materializes, it would be received without question as the ultimate, crudest, most brutish affirmation of those plenary powers. The court of public opinion, as it were, would settle the issue once and for all. It will matter little whether one constitutionalist or another argues that such a federal takeover does not, in fact, disavow the state-like model, or prove that 1952 was a monumental hoax. Those voices will be absolutely drowned out by the visceral, determined and far more vocal movement in favor of change.

It is quite likely that the governor, whose entire role will come into question under the temporary rule of the U.S. Treasury, will decide to abandon his reelection campaign and that the PDP will then be completely taken over by Free Association supporters, who will swiftly redirect the party toward what they have long claimed is the original and true PDP aspiration.

That, in turn, will play into the hands of the local statehood movement. The NPP already commands just under half of all votes. A PDP shift toward Free Association will lead to substantial migration by Commonwealth supporters who prefer the security blanket of statehood over the uncertainties of partial or full independence.

And so statehood will be officially petitioned, at some point in the near horizon, and your guess is as good as mine whether it will be granted by the American people, or not. Having been born and raised in the states and being an avid student of America, my gut tells me statehood will be denied and the people of Puerto Rico will finally go with Free Association.

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Pioneering Deep Climate Adaptability as a business value driver and Adaptation Ambition for faster mainstreaming. Because societies adapt only if companies do.