Everyone is in agreement that the federal government needs to address Puerto Rico's insolvency sooner rather than later. What that would entail is where the consensus breaks down.

The big battle to date has been whether the federal government extends some version of Chapter 9 bankruptcy to the island. Chapter 9 allows the states to authorize the reorganization of the debt of their municipalities and government agencies, but it does not allow states themselves to restructure their own debts. The Treasury Department has agitated to not only allow Puerto Rico to avail itself of Chapter 9 protection but to expand the law so that it applies to the Commonwealth itself, essentially treating Puerto Rico like a municipality of the federal government. Puerto Rico's entire debt is $72 billion, of which roughly $20 billion belongs to the commonwealth itself, is backed by the "full faith and credit" of Puerto Rico, and is given absolute priority by the island's Constitution.

The Heritage Foundation and other limited government advocates have vociferously protested extending bankruptcy of any sort to Puerto Rico, arguing that doing so ex post amounts to an unfair deal for the investors who bought the island's bonds thinking that the island had no recourse to Chapter 9. While that might be a solid conservative precept, the problem is that without some sort of haircut on the island's debt it's going to leave taxpayers on the hook to prop up the island's finances.

At first blush, it seemed that the Tea Party types won the battle when Rep. Rob Bishop, Chair of the Natural Resources Committee and primary author of the committee's recently released bill, hewed to that rhetoric by explicitly rejecting Chapter 9 for the Commonwealth: the summary of the proposed legislation states that "Chapter 9 bankruptcy is a tool designed for municipalities of sovereign states, not territories. Retroactively adding territories to Chapter 9 of the Bankruptcy Code is ill-conceived and would undermine the rule of law."

However, the proposed legislation does just that and more, by enabling a federally-appointed "Oversight Board" to, in essence, allow a Puerto Rico itself to declare bankruptcy and restructure all of its debts, including those backed by the "full faith and credit" of the Commonwealth itself. This is, in effect, a "super" Chapter 9 bankruptcy, and just because it's not called that does not change the substance of the proposed restructuring regime

This is a truly problematic precedent: No state or territory has ever had the power to seek federal bankruptcy relief to compromise its own debts.

The trouble with allowing such a broad debt restructuring is the fact that there are a few states with their own fiscal problems - most notably Illinois, with a pension plan teetering on insolvency and a completely wrecked state budget - that are looking for a way to continue postponing making any difficult decisions. The prospect of the federal government allowing them to declare bankruptcy and haircut their general obligation debts would take a lot of pressure off, allowing them to postpone reforms and potentially raising the cost of borrowing for all states.

Bishop's bill goes even farther by imposing an automatic stay on all bondholder lawsuits against the commonwealth. In a regular bankruptcy case, the law provides an automatic stay, which consolidates all litigation to the bankruptcy court. This works because there are well-established rules that limit how and when the debtor can pay its creditors. However, the stay included in the Natural Resources Legislation differs in two important ways: It applies only to bond claims and does not merely consolidate legal proceedings to the bankruptcy court, but prohibits them altogether. Thus, what the stay actually does is give the Puerto Rican Government legal cover to stop paying bondholders while using its existing resources to pay off other creditors on the island.

So while the Committee may not call this bill Chapter 9 for the Commonwealth, the bankruptcy protections it does extend are nearly identical, and would be just as damaging to the broader the municipal market and welfare of American bondholders. Worse, the legal stay in the legislation would serve to directly facilitate the payment of Puerto Rican government pensions and other non-bondholder creditors at the direct expense of Americans across Puerto Rico and the broader United states who hold Puerto Rico bonds.

The practical answer to reorganizing the Puerto Rico's fiscal mess is simple: the extension of the normal Chapter 9 bankruptcy protection to the island combined with a fiscal control board. The Natural Resources Committee gets it half right, but in its contortions to avoid the appearance of adopting something that could be construed as a bankruptcy it has contrived of something that's much worse and includes all of the essential elements of the bankruptcy code that it purported to avoid.

Ike Brannon is the president of Capital Policy Analytics, a consulting firm in Washington.