Puerto Rico in crisis
The How and Why
I am both a proud Puerto Rican and proud citizen of the United States. I am also very much concerned with the future of Puerto Rico. The island, unfortunately, is currently undergoing a crisis that is not only financial, but also political and humanitarian.
Although Puerto Rico’s fiscal crisis has continued to worsen, my feelings about the island’s future have surprisingly been improving. President Obama recently signed a law that establishes a Fiscal Control Board to oversee Puerto Rico’s finances. From my point of view, for the Fiscal Control Board to be successful in revamping the island’s finances and benefitting all of Puerto Rico’s citizens, it has to first promote economic development.
Fiscal Control Boards have been implemented in New York City and Washington D.C. to oversee specific areas of city finances. Other cities have used different mechanisms, such as Detroit with its “emergency manager.” As I wrote on the Huffington Post, the imposition of a Fiscal Control Board in Puerto Rico is a modern example of the U.S.’s colonial power over the island. However, that’s a story for another day.
You are also probably asking yourself, why is Puerto Rico in a fiscal crisis? and how bad is it? Well, right now the territory faces a grim reality. Puerto Rico owes approximately $70 billion to its creditors, a number that puts the island’s debt on par with enormous states like New York and California. It’s unprecedented. To understand the crisis, it’s important to look at its underlying causes:
– Exhaustion of Section 936 of the U.S. Internal Revenue Code: When the U.S. Congress repealed Section 936, Puerto Rico’s problems began.This Section allowed special tax treatment for U.S. corporations operating within Puerto Rico and other U.S. territories. All this economic activity led to unprecedented levels of employment and with it, tax revenue.
– Triple tax exemption: Puerto Rican bonds were very popular because many of them were exempt from taxes at the local, state, and federal levels. This continuous bond boom has caused the government of Puerto Rico to pay more than $900 million in fees since 2000.
– Balancing the fiscal deficit: Puerto Rico’s public debt went from $24 billion in 2000 to $72.2 billion in 2015. Instead of issuing debt to finance infrastructure projects, the government began issuing debt to increase pension benefits, pay for subsidies, and sustain a growing government workforce, while at the same time keeping afloat its state-owned corporations.
– Population trends: According to the U.S. Treasury Department, more than 300,000 people have left Puerto Rico in the past 10 years. In 2014 alone, net migration was 64,000.
– Pension underfunding: The principal pension systems managed by Puerto Rico are heavily underfunded. According to the Mercatus Center at George Mason University, the island ranked last compared to the rest of the fifty states in terms of trust fund solvency in 2013.
With these mounting issues, the government was (and is) unable to pay its debts. To make things worse, Puerto Rico doesn’t have a mechanism to go bankrupt. While U.S. municipalities (cities, state-owned corporations, among others) have access to a bankruptcy procedure through Chapter 9, the case is different for Puerto Rico. Because the island is not a state of the Union, the bankruptcy law denies Puerto Rico from accessing Chapter 9. When the local government of Puerto Rico passed its own bankruptcy law, the U.S. Supreme Court ruled it unconstitutional. After much debate (in Congress, in local Puerto Rican politics, in the White House, on Wall Street, etc.), Congress finally approved the Board to oversee the island’s finances.
The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed in June by President Obama to impose a seven-member board to preside over the island’s budget, laws, and fiscal spending plans. The Board, whose members are not required to be Puerto Rican, will have the authority to decide all fiscal and public policy decisions as it deems relevant. The law also creates the mechanism through which the island can engage in a bankruptcy process.
In a macroeconomic sense, the Fiscal Control Board can bring positive change to the situation in Puerto Rico. The Board can push to implement major economic development initiatives, such as public-private partnerships that have been blocked for years because of a ridiculously inefficient bureaucracy. Hopefully, then, the local economy will grow and generate more tax revenue for the government which will allow it to again provide services and, ultimately, to pay back its creditors. Moreover, the island’s political status as it is now does not provide a long-term solution for Puerto Rico. The passing of this bill should pressure Congress to provide binding solutions to the U.S. citizens that call Puerto Rico home. Also, it can incite Puerto Ricans to engage in significant discussions about the status of their home.
Puerto Rico endures a tough reality. I am confident, however, that the island’s future is bright and will be characterized by growth and opportunity. Let’s hope for Puerto Rico to shine again.
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