Would Philly, N.J. take a cue from Puerto Rico’s plan to not pay $6 billion in bonds?

When the United States set up Puerto Rico as our somewhat self-governing Caribbean island colony, things got lost in translation. Literally.

A difference between the English and Spanish versions of Puerto Rico’s constitution may cost U.S. investors in Puerto Rico tax-free bonds billions of dollars, as federal Judge Laura Taylor Swain and a seven-member board chosen by Congress and the president work to resolve more billions in unpaid debt before this summer’s deadline.

Also unclear: Is this mess a sign that the Wall Street bond-sales and credit-reporting industry failed to mend its ways after the late 2000s mortgage crisis? Will it become a precedent for debt-laden U.S. states to escape some of their own towering debts, such as unfunded pensions? Or is it just the latest costly misunderstanding in the sad history of colonial administration?

Last month, the Financial Oversight and Management Board for Puerto Rico said it wasn’t going to repay $6 billion in bonds that Puerto Rico sold in 2012 and 2014 because they were “unconstitutional.”

The board has been fighting in court to trim billions from other bond paybacks, backed by taxes, tolls, and utility payments, for example. That’s so the island government can keep pensioners eating (though pensions are also being trimmed). Officials also need to fix island schools and close others — Puerto Rico’s school population has fallen — and replace electric stations and other public works wrecked by Hurricane Maria, poor planning, and neglect.

But the 2012 and 2014 general-obligation bonds, the last major issues sold by agencies on the island to U.S. investors before Puerto Rico began defaulting on its payments, are the only debts that the board has repudiated completely, despite the fact that they were blessed by lawyers, bankers, and credit-rating agencies, from San Juan to Wall Street.

The lawyers who first approved the bond sales appear to have relied on “the Spanish version of the Constitution adopted by the Puerto Rico assembly,” which allows island public agencies to spend as much as the government raises in “recursos totales” — aka "total resources," including borrowed money and tax revenues, according to the 62-page objection to the bonds filed for the board and other parties last month.

The lawyers concede that’s exactly what the Puerto Rican constitution-framers meant to say: Spending can equal revenues plus debt.

But “the English Version of the Commonwealth Constitution approved by the U.S. Congress" limits the Puerto Rico government to spend no more than its “total revenues," excluding debt, the lawyers added. And that means they can’t borrow more unless the budget is balanced.

And it’s the English-language Constitution that is valid in U.S. courts, the lawyers concluded, leaving hedge-fund managers or bond-coupon-clippers who expected those public bonds would get paid like other debt, to twist in the proverbial Caribbean breeze. (They have other arguments that would also get Puerto Rico off the hook from paying those bonds.)

There are people associated with the University of Pennsylvania on both sides of this fight, underscoring how many of Puerto Rico’s problems, and proposed solutions, are Made in the U.S.A.

The board that seeks to trim Puerto Rico’s out-of-control debt so it can borrow at more sustainable levels in the future includes Penn Law professor David S. Skeel, a bankruptcy expert.

Top creditors seeking top-dollar payouts include Aurelius Investment LLC, a $3 billion asset New York firm, run by Mark Brodsky, a Penn grad, whose previous boss famously seized an Argentinian Navy ship to collect on that country’s defaulted debt; and Autonomy Americas LLC, a $5 billion New York fund run by Robert Gibbons, a Penn Wharton grad.

There were plenty of warnings. “I passed on those deals. I said it was insane,” said Delaware Bay Co. president Gary Hindes, founder of the Fallen Angels Fund, which invests in distressed, often government-backed securities. “There was no way they could pay those bonds off.”

Yet some of the biggest Wall Street firms — Morgan Stanley and Barclays, among others — were pleased to work with their Puerto Rico counterparts as bond trustees and underwriters on those deals, now deemed “unconstitutional," according to the 600-page Final Investigative Report prepared for the boardlast August.

If investors were sold $6 billion in bonds that were issued illegally, shouldn’t someone go to prison, or at least get fined by the SEC?

The SEC investigated but decided “not to recommend enforcement actions,” Reuters reported last year. We don’t know why, so far.

Judge Taylor Swain has approved the board’s broad plans. But there are still legal challenges to the board’s positions — and its very appointment — by hedge funds that bought Puerto Rico debt cheap and hope to squeeze more dollars from it. There are also political challenges from Puerto Rican patriots, who don’t see why any of the island’s limited tax revenues should be going to mainland investors who should have known better.

If the board gets its way, will Puerto Rico set a precedent for New Jersey and other debt-laden states? “People ask, ‘Is this a dress rehearsal’ ” for allowing states to declare bankruptcy? "I think it’s unlikely,” Skeel said.

Even if the Puerto Rico settlement shows that financial reorganization in bankruptcy can work for state-sized communities, the political obstacles are enormous. Democrats are skeptical because it could be used to slash pension benefits and interfere with collective bargaining agreements. Republicans are "skeptical because they think it will be used to restructure debt,” hurting investors, he added.

But that’s what bankruptcy courts and appointed overseers are designed to do: force fiscally challenged Americans, including our politicians, to balance the dollars they bring in, with the dollars they spend.