Economy & Budget

Puerto Rico needs fair treatment

Puerto Rico is not requesting, and should not get, a bailout. What Puerto Rico needs is fair treatment from the federal government as one component of a recovery package. On the island, fiscal adjustments are leading to economic contraction, emigration, reduction in tax revenues and the need for further fiscal adjustments. The federal government is contributing to this downward spiral because of discriminatory policies in several areas such as the bankruptcy law, the Jones Act and Medicare regulations.

{mosads}What Puerto Rico needs is economic growth. The Republic of Ireland has a larger fiscal deficit than Puerto Rico and its public debt as a percentage of the economy is higher. However, Ireland issues government debt at 3 percent rates, while Puerto Rico has difficulty placing debt at 10 percent. Ireland’s debt is investment grade because its economy is growing at nearly 4 percent a year, while Puerto Rico’s economy has been either contracting or stagnating since 2006. Immigrants are moving to Ireland, while Puerto Rico’s population is declining at a rate of approximately 1 percent per year.

While the spending profligacy of previous Puerto Rican governments is unquestionable, so are the efforts over the past several years to control spending. There were public-sector dismissals in 2009, which were since followed by attrition. Today, there are 64 public-sector employees per 1,000 residents in Puerto Rico; this is lower than the 66 per 1,000 residents average in the United States. Fringe benefits for public-sector employees, such as sick leave, have been cut; major pension reform has been enacted and more than 100 public schools have been closed. More could be done, but this is hardly an example of out-of-control spending.

In parallel, taxes have been sharply increased. In 2007, a new sales tax of 7 percent went into effect. In 2013, the gas tax was increased significantly. In March 2015, there was another round of gas tax increases and the sales tax was increased to 11.5 percent, starting in July. In October 2015, a new 4 percent sales tax on business-to-business service transactions will go into effect.

Meanwhile, investment is required in infrastructure needed for economic recovery. The Puerto Rico Aqueduct and Sewer Authority increased rates by 60 percent in 2013. This covered the water utility’s operational expenses, but left little for capital expenditures such as dredging water reservoirs. Therefore, the island was ill-prepared for the present drought. Water rationing has been established, and most San Juan-area residents and businesses have two days of dry taps for each day of running water.

The Puerto Rico government has been committed to paying both central government and government-owned corporation debt. However, the commitment has faltered as successive fiscal adjustments and rate increases failed to generate the financial resources to pay the debt. Rather than sanctioning a major electricity rate increase, in 2014, the Puerto Rico Electric and Power Authority entered into a forbearance agreement and is currently negotiating a debt restructuring with creditors.

The federal government can meaningfully support a Puerto Rico turnaround by changing discriminatory public policies that hamper economic growth. Three examples are the bankruptcy law, Medicare rules and the Jones Act.

Contrary to what happens in the 50 states, Puerto Rico government-owned corporations are excluded from the federal bankruptcy law. Thus Puerto Rico is denied a proper legal framework to restructure this part of its government debt. H.R. 870 would allow this, but it is stuck in committee.

The Jones Act, from 1920, forces maritime commerce between U.S. ports to be with U.S. crew and U.S.-built ships. This shamelessly protectionist law increases the cost of bringing production inputs and consumer goods to Puerto Rico while acting as a tax on exports. The law has little impact on a state such as Tennessee, while the territory of the U.S. Virgin Islands is excluded from the law. It is a burden on producing and living in Puerto Rico.

Puerto Ricans pay for Medicare according to the same rules that apply to their fellow U.S. citizens. However, the rules are different for health providers and Medicare beneficiaries operating or living in Puerto Rico. For example, health providers on the island receive less remuneration for the same medical procedure conducted stateside. Equal treatment for all U.S. citizens would entail hundreds of millions of recurring funds to the Puerto Rico economy.

Puerto Rico made mistakes in the past and is making amends. However, unless it gets real support from the United States by eliminating discriminatory policies, the turnaround is in doubt.

Feliciano is an economist and president of Advantage Business Consulting.

Tags Commonwealth Financial crisis Jones Act Medicare Puerto Rico U.S. territory
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