How to Fix Puerto Rico's Fiscal Mess Without Bailout or Bankruptcy

Puerto Rico continues to face a fiscal crisis of unprecedented proportion. The island of only 3.5 million people carries a massive debt load of $72 billion and $44 billion of unfunded pension liabilities. With dwindling tax revenues and a credit rating deep into junk territory, the Commonwealth cannot access the capital markets to obtain funding necessary to maintain municipal services and public works. Even the governor has suggested that default is all but inevitable, a scenario that would wreak havoc on Puerto Rican's economy and the lives of its citizens.







The Obama administration has proposed a plan for Congress to address the crisis. Its key features include: 1) amending the U.S. Bankruptcy Code to allow Puerto Rico and its public authorities to file for bankruptcy; 2) installation of a Federal Oversight Board; 3) removing the cap on the Commonwealth's Medicaid program; and 4) providing Puerto Rico residents access to the Earned Income Tax program. Congressional action is necessary. However, the plan falls far short of enhancing Puerto Rico's ability to jump-start its economy. And authorizing bankruptcy for the Commonwealth is not a solution.

A comprehensive strategy is needed to create jobs and mitigate population loss that have punished the island's economy in recent years. That requires a focus on key industries such as tourism, manufacturing, pharmaceuticals, petrochemicals, electronics or textiles, which have the potential to reverse the downward spiral undermining growth. It will have to utilize the public sector in a strategic manner to support such industries and to build out the infrastructure of the Commonwealth. Economic growth should focus on businesses committed to a long-term presence in Puerto Rico.

However, even the most ambitious turnaround plan will not succeed without changes in certain U.S. laws that disadvantage the Commonwealth compared with Caribbean nations. A primary example is the Jones Act, requiring imports to be shipped on U.S. vessels, thereby significantly increasing the cost of shipping goods to Puerto Rico. Also critically needed are measures to extend provisions of the tax code that expressly benefit Puerto Rico, and creation of tax incentives to promote economic development. None of these changes in law constitute a bailout.

As proposed by the administration, Congress needs to appoint a Financial Control Board to guide Puerto Rico through the crisis. While the Commonwealth's executive branch supports a law allowing the Governor to take that step, such a Board would not have the credibility and power to ensure implementation of plans and budgets unless it comes through an Act of Congress. Only Congress can create an effective board with powers beyond the reach of local politics and self-interest.

By David Dubrow

How to Fix Puerto Rico's Fiscal Mess Without Bailout or Bankruptcy