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Aiding Puerto Rico: Not as simple as bankruptcy

As the debate over how Puerto Rico can best address its steep fiscal challenges has reached a fever pitch, it has been gratifying to see even presidential candidates and the U.S. Treasury call for action to help our territory.  We are facing an urgent crisis and there is indeed much that needs to be done.  However, in the rush to help repair Puerto Rico, it is imperative that decisions are not made rashly, and that establishing a real path to long-term economic growth for the island remains the true goal.      

Recently, the discussion in Washington has largely coalesced around only one potential solution – granting Chapter 9 bankruptcy eligibility for Puerto Rico’s public corporations.  While I believe many of the politicians calling for Chapter 9 both on the mainland and the Island have their hearts in the right place, the reality is that this would not be a cure-all panacea for what ails Puerto Rico, just as the 1970s Section 936 manufacturing tax credit was not, and would not come without significant economic risks.       

{mosads}Importantly, if we focus solely on Chapter 9, we may lose sight of the broader set of challenges facing the island.  That is why we must continue to advocate for a range of policies that can drive lasting positive change for Puerto Rico and will set the Island up for sustainable success as we look toward the future. 

For example, Puerto Ricans contribute federal payroll taxes at the same rate as other Americans, yet Medicare only reimburses medical providers on the island at a rate that is less than two-thirds the national average. What’s more, Medicaid funding is capped at around $300 million for Puerto Rico – much lower than what many U.S. states receive. Our representative in the U.S. Congress, Pedro Pierluisi, has introduced legislation to address some of these inequalities, and these bills warrant attention.   

Additionally, Puerto Ricans are not eligible for the federal child tax credit for their first two children, while all other American families can claim this credit for all of their children. The federal earned-income tax credit, which helps the federal minimum wage more accurately reflect a living wage, does not apply in Puerto Rico. Simply equalizing needy Puerto Ricans’ treatment under the tax code would go a long way towards spurring our economy. On these issues, why not give equality a chance?  

The passage of Chapter 9 could also have a number of unintended consequences that need to be closely considered. Bankruptcy would hurt the finances of the Island’s cooperativas, or local credit unions, which hold Puerto Rican municipal bonds. If they suffer losses, they would tighten credit and rein in lending, thus putting pressure on countless small and medium businesses. With available credit already tight, this could be the death knell for entrepreneurs across the territory.  

Individuals on Island with IRA accounts would also suffer losses, since many such retirement accounts hold municipal debt. Much of the debate around Chapter 9 has centered on the idea that Wall Street should pay for speculating in Puerto Rican bonds. But the fact is that large Wall Street investors hold a minority of the Puerto Rican debt.  In reality bankruptcy would hurt Puerto Rican investors and businesses along with mainland US retirees proportionately much more than Wall Street investors, since the former two classes of investors hold a disproportionately high percent of Puerto Rico bonds. 

Back in the ‘70s, members of Congress thought that by extending special tax treatment to Puerto Rico manufacturers, they could push Puerto Rico to the back of their agendas.  I fear that their successors may once again believe that cosponsoring Chapter 9 now allows them to ignore Rep. Pierluisi’s other bills that will provide direct help to stimulate sustained economic growth, and bring about a more equal treatment in other federal programs to the American citizens that live in Puerto Rico. 

It is the responsibility of our policymakers, as well as those in the U.S. who would seek to help our citizens, to appreciate the need for a full package of long-term solutions that will set the stage for true economic recovery and growth for decades to come. We need actions that will repair the lack of confidence in our economy and lead to a future in which Puerto Ricans stop leaving the Island and instead remain to enjoy prosperous lives.  All politics aside, this must be the shared goal for all those who would seek to help Puerto Rico.

McClintock served as Secretary of State / Lieutenant Governor of Puerto Rico from 2009 to 2013. He is also a former president of the Puerto Rico Senate. He is currently employed by Politank, a lobbying firm, which has among its clients the Puerto Rico Electric Power Authority  bondholders who oppose the bankruptcy solution.


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