Bankruptcy does not absolve Congress of responsibility to Puerto Rico


As Puerto Rico filed last week for the largest municipal bond bankruptcy in U.S. history, many believe that all Congress needs to do is take a step back and let the process work itself out. Others are also under the false impression that merely allowing the Financial Control Board set-up under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) federal law, will provide the necessary independence and structural reforms for the economy to magically bounce back after more than a decade of negative growth. Unfortunately, nothing could be farther from the truth.

The reality is that unlike other major debt restructuring cases in the U.S. and worldwide, Puerto Rico’s 10-year plus economic depression is directly correlated to congressional policies that harmed the Commonwealth’s economy. It was Congress and the ruling political party in Puerto Rico at the time that decided to phase out Section 936 of the Internal Revenue Code, a decision that provoked the loss of 75,000 manufacturing jobs over the following decade. The phase out ended in 2006 – the year the recession started in Puerto Rico. The inability to foster alternative economic strategies to mitigate the loss of federal tax incentives, and ill–advised spending decisions by the Island’s politicians, aggravated the situation. Therefore, reasonable, and responsible remedies need to be put in place to correct this damage.

{mosads}Entering on a court supervised bankruptcy procedure was a necessary first step to reduce debt payments to a sustainable level, but it is by itself insufficient to restore economic stability, let alone to pull the island’s economy out of a decade long contraction. Before any new policies are enacted, there must be a recognition that if Puerto Rico is to be put on a sustainable fiscal and economic path to be able to pay its debts, an extreme austerity-only approach to fiscal policy is not the answer. Without targeted economic tools to help stimulate growth, Puerto Rico could well be on its way to even deeper economic doldrums. 

Why should Congress step in to “rescue” Puerto Rico? The answer is simple: helping Puerto Rico now would save money to states and the federal government. Puerto Ricans, as U.S. citizens by birth, are moving at an accelerated pace to live in the 50 states. In fact, half a million have already migrated since 2006; with more coming. If economic conditions do not improve soon, this trend is projected to increase even further, continuing to erode the tax base of the Commonwealth and leaving behind an aging population without the workforce it needs to grow. This free-falling into a downward spiral of economic contraction and unfolding humanitarian crisis must be stopped!

How exactly does this impact the states? When it comes to healthcare, if Congress does not act to prevent the “Medicaid Fiscal Cliff,” thousands of Puerto Ricans will continue moving to the states, costing these jurisdiction increased healthcare spending, since it is three to four times more expensive to treat patients in states like Florida, New York, Pennsylvania and others, than if they stayed in the Island. This Medicaid Cliff is the result of yet another congressional action that treated Puerto Rican healthcare patients as second-class citizens when it temporarily increased Medicaid funding for Puerto Rico, but which is set to run out in October.

Last week, Congress took an important but insufficient first step to fix this problem when it approved $296 million to shore up the Medicaid program in Puerto Rico. However, Health and Human Services Secretary Tom Price recently stated that the Island needs $900 million in order to avoid a complete collapse of the Island’s healthcare system at the end of the year. Puerto Rico isn’t asking for a bailout or a handout, it is merely asking to maintain current levels of funding. 

On the economic front, there are several steps Congress can take to create economic activity and reverse the downward economic spiral. As recommended by the he bipartisan Congressional Task Force on Economic Growth in Puerto Rico, full participation for Puerto Rico in healthcare programs and the Child Tax Credit (CTC), as well as inclusion in the Earned Income Tax Credit (EITC), would be a good start.

Another critical matter is federal tax reform. Congress cannot afford to repeat the same mistake it made in 1996 when it repealed Section 936. Puerto Rico is in the unique situation of being a foreign tax jurisdiction that is under the American flag with a workforce comprised of U.S. citizens. Therefore, any change to the federal tax code must encourage more, not less, investment by U.S. manufacturing companies in the Island. 

Given that there are now more than 5 million Puerto Ricans in the U.S., including over one million in the crucial swing state of Florida, their ability to organize around this issue could be a crucial driver for congressional action. That is why several non-partisan, nationwide grass roots organizations will hold a 2nd Diaspora Summit in New York City this week to discuss how these issues impact the Puerto Rican population here in the states and what we can do to address this crisis head-on. 

For too long, Congress has looked the other way while its inconsistent policies continue to harm Puerto Rico. It is high time for members of Congress to pay attention and act before the bill becomes too expensive, and before the crisis facing 3.5 million American citizens reaches a point of no return.

Dr. Meléndez is an economist and university professor. He is the Director of the Center for Puerto Rican Studies at Hunter College.

The views expressed by this author are their own and are not the views of The Hill.


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