Puerto Rico Can't Heal Itself
Not up to the job?
Puerto Rico has finally issued a plan to dig itself out from under $72 billion of public debt -- more than any state in the union except California and New York. It's a pretty good plan, too, except for one thing. The island's legislators can't be trusted to stick to it.
The Working Group for the Fiscal and Economic Recovery of Puerto Rico describes the scale of the problem. Even after calling for spending cuts and higher revenue, it predicts a $13 billion funding shortfall over the next five years, with a cash crunch of $500 million as soon as next June. And, it says, “available resources may be insufficient to service all principal and interest on debt that has a constitutional priority” -- a dark hint that general-obligation bonds might have to be restructured, too.
Puerto Rico's bondholders, including hedge funds lured by high yields, want deeper cuts in spending. They're right, though caution is warranted: Too much austerity would make it harder for the economy, trapped in a prolonged recession, to recover. Without economic growth, Puerto Rico will be even less able to pay its debts.
Puerto Rico's unusual position as a U.S. territory presents fiscal problems of its own. One is emigration to the mainland, which is shrinking the population and the tax base. School enrollment is projected to drop an additional 25 percent by 2020. Yet, even now, the island has more schools and teachers than it needs. The report identifies savings in that part of the budget, as well as measures that include loosening overly restrictive labor laws, revamping the tax system, modernizing creaky public utilities and generally reducing the cost of doing business.
Some of these changes will require the assent of the federal government, such as exemptions on minimum wage and maritime coastal transport laws as well as changes in Medicaid reimbursement formulas. Others will rely on new local legislation.
Unfortunately, there's little in Puerto Rico's recent political past to suggest that it has the gumption to implement real reforms. Earlier this year, for instance, the legislature watered down an effort to fix Puerto Rico's tax system. A recent investigation found that more than 30 government agencies ignored a law that froze hiring and spending. The legislature is polarized, and will become even more so in an election year. Running battles over Puerto Rico's future status yield frivolous legislation on the official language, rather than needed economic reforms.
The Working Group's answer is to empower an independent control board appointed by the governor, with most members proposed by "independent third parties" including the federal government. Whether a partisan governor can appoint an independent board is questionable, however. The U.S. Congress and the federal government are being asked for a lot, including an extension of U.S. bankruptcy law to Puerto Rico; they should insist on a leading role on the board.
Would that trample Puerto Rico's constitution? No more than shredding the protections the island affords to general-obligation bondholders. An effective control board offers the best chance of a brighter future for Puerto Rico's 3.5 million U.S. citizens.
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