Latin America Advisor

A Daily Publication of The Dialogue

Is the Puerto Rico Deal Good for the Island & Taxpayers?

U.S. Secretary of the Treasury Jack Lew / U.S. Treasury Photo

U.S. House Republicans and the Obama administration on May 18 reached a deal on legislation to help Puerto Rico reduce its massive $72 billion debt load. The agreement would set up a federal oversight board and would allow some workers on the island to be paid less than the federal minimum wage, among other provisions. Is the agreement a good deal for Puerto Rico and U.S. taxpayers? Would it help the U.S. territory get on the right financial footing for the long term? What are the consequences if the measure does not win congressional approval and become law?

Kenneth McClintock, former secretary of state and lieutenant governor of Puerto Rico: “The PROMESA bill agreed upon by House Republicans and the Obama administration and marked-up by the House Natural Resources Committee on Wednesday does facilitate Puerto Rico’s debt restructuring but at a very high cost—impairment of Puerto Rico’s right to self-government, placing our young in virtual servitude with sub-minimum wages, promoting an increase in depopulation and virtually no incentives for sustained economic growth. The looming July 1 deadline for a massive default has forced many, including former Secretary of State Hillary Clinton, to grudgingly accept this bill as a temporary fix and necessary evil, but much more will be required for Puerto Rico to recover from this crisis. Undoubtedly, she or whoever occupies the Oval Office in January will fine tune PROMESA to include Puerto Rico’s newly elected government in the decision-making process, extend equal treatment in federal programs necessary for the territory to grow, invite the young who may have left escaping the shackles of sub-minimum wages and, in her case, resolve the island’s distracting and damaging debate on its ultimate political status. Ironically, the people of Puerto Rico three years ago proposed a permanent fix. It imposes more responsibilities on the island’s 3.4 million American citizens, automatically provides the tools that the PROMESA bill contains, strengthens, rather than impairs, self-government, allows for an orderly debt restructuring and has a 100 percent success rate of promoting economic growth when applied in the past. By a 54-46 percent margin, Puerto Ricans rejected territory status and with 61 percent chose a permanent fix. The fix? Statehood.”

Charles R. Venator-Santiago, associate professor in the Department of Political Science and El Instituto at the University of Connecticut: “The latest version of the PROMESA bill (H.R. 5278) offers too little too late to address the Puerto Rico debt crisis. This version represents a center-right effort by House Speaker Paul Ryan and President Obama’s administration to create both a financial control or review board and a debt restructuring mechanism to address what is presently an insurmountable financial debt incurred by the Puerto Rican government. Although we do not know the real debt obligations of the Puerto Rican government, we do know that it owes upwards of $73 billion to bondholders and $45 billion to the local public employee pension fund. We also know that various levels of government (from island to local or municipal) have borrowed heavily to both address legitimate public responsibilities and to finance partisan clientelism. Puerto Rican debt obligations most likely hover in the vicinity of $250 billion. Given the long-term effects of the Puerto Rico debt crisis on U.S. pension funds held by taxpayers on the mainland as well as on the island, PROMESA is not a good deal for the average U.S. citizen. The legislation does not help Puerto Rico get on the right financial footing in the long term because it does not contain an economic development component, which would include a bailout or infusion of resources necessary to jump-start the economy. In the absence of other legislation, and depending on the forthcoming Supreme Court ruling on the Puerto Rico debt restructuring legislation, PROMESA could stabilize costly litigation and secure some payments to bondholders.”

José J. Villamil, chairman of the board of Estudios Técnicos in San Juan: “There’s a saying in Spanish ‘ir por lana y salir trasquilado’ that translated means you got more than you bargained for. Going to Congress as the only solution to a difficult fiscal situation was a grievous mistake. The result, at least as of Wednesday, when the U.S. House Natural Resources Committee approved a bill to create a fiscal control board, will be very harmful to the island. True, the Puerto Rican political class has made a mess of the fiscal situation, but there were and still are better options than delegating the management of the territory to seven unknowns, including proposals put forth by the Centro para una Nueva Economía, a local, highly regarded, think tank. The board’s mission is to put in place an austerity program; everything else is secondary. The debt restructuring process is so cumbersome that it might very well not occur. Although the bill creates a congressional committee for developing an economic development program in a few months, and includes measures on energy and others that will reduce business operating costs, the main thrust of the board’s task is to strengthen the island’s capacity to pay its debt. Lack of trust in the local political class has made the control board acceptable to many in Puerto Rico, including business organizations. Mistakes made in dealing with the debt and liquidity situation made it almost inevitable, particularly postponing measures that would have addressed the issue three years ago. Austerity measures will make reconstructing the economy a very difficult and long-term proposition, made worse by the fact that they will almost certainly promote even more migration from Puerto Rico. To add insult to injury, the costs of the control board will be paid by Puerto Rico.”

Emilio Pantojas García, senior researcher and professor of sociology at the University of Puerto Rico: “H.R. 5278 is not a debt reduction package, nor is it a federal bailout. It establishes a financial control board by a softer name: ‘Puerto Rico Oversight, Management and Economic Stability Act’: PROMESA. It does not contemplate any disbursement of money, nor does it provide a set formula for debt restructuring. The board will act as a financial overseer and manager of last resort for the finances of the government of Puerto Rico, controlling the balance between revenues and expenditures with powers over and above the elected legislature and governor (a non-voting member of the board). With approval from the legislature, the governor will submit a fiscal plan to the board in accordance with parameters set in the bill and by the board. Once the fiscal plan is approved, the board will review the government budget to ensure that it complies with its objectives and goals. The government shall submit quarterly reports on revenues and expenditures. Lack of compliance with the plan and any other restriction will be declared a violation. The board will then act to reverse any government decision found in violation, cut programs, cancel contracts and take measures to ensure compliance. Debt restructuring will be on a case-by-case basis. The board will authorize any restructuring process after certifying that there were good faith negotiations with creditors and that the government agency or public entity involved has adopted effective procedures to present audited financial statements. There will be a brief ‘stay of actions’ period for pending cases. This is not a get out of jail free pass. It is an act of punishment, probably deserved, for the malfeasance and irresponsibility of the bipartisan ruling political elite. Not passing H.R. 5278 will mean pandemonium in courts and in local government and politics. Approving it will mean making those who did not create the crisis pay for it (pensioners, working poor and the waged middle class). The ruling elite will find ways to lessen its impact on them.”

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