Puerto Rico’s woes run deeper than PROMESA can cure

Years of overspending, poor policy choices and corruption have landed Puerto Rico in debtor’s prison. It may be a shell of its former self by the time it’s let out on parole.

Legislation enacted in June tightens the belt somewhat, but does not create the conditions necessary for growth, argue some critics of the measure  — the Puerto Rico Oversight, Management, and Economic Security Act — and that spells long-term trouble.

“I supported PROMESA half-heartedly,” said Desmond Lachman, a resident fellow at the American Enterprise Institute. “I thought it would do some good, but it didn’t really address the main issue of growth in Puerto Rico.”

Carlos Mercader, a Puerto Rican and deputy director of the Latino Partnership for Conservative Principles, opposed PROMESA and echoed Lachman’s concern, saying the bill “never included any economic development measures.”

The commonwealth owes $72 billion and has an additional $44 billion in unfunded pension obligations – a total of more than $100,000 in debt perparticipant in the labor force. On July 1, it couldn’t pay nearly a billion dollars to its creditors despite being required by its constitution to do so.

Enter PROMESA – conveniently spelling “promise” in Spanish. Signed into law on June 30, PROMESA was less a bailout than an attempt to prevent a future bailout, according to its supporters.

The measure places the territory under a federal control board, allows Puerto Rico to restructure its debt, and gives the island the option to lower certain worker compensation standards in an attempt to help the economy. It doesn’t give Puerto Rico any money to pay off its debts.

Legal immunization

While PROMESA allows Puerto Rico (and other territories) to restructure its debt, that restructuring involves a provision that creditors can’t go to court to get their money.

While Congress intended the rule to protect Puerto Rico from costly legal battles, creditors filed suit challenging the provision, saying it gives the Puerto Rican government the ability to “to siphon money away from (among others) bondholders protected by the Puerto Rico Constitution.”

Salim Furth, a research fellow at the Heritage Foundation, has been privately rooting for creditors to lose in the belief it would discourage future irresponsible lending and put a market-based cap on how deeply governments — including Puerto Rico, but perhaps also Greece or even Illinois — could go into debt.

But he nevertheless disagreed with Puerto Rico’s protection from lawsuits.

“People who I think were irresponsible still have full rights,” Furth said in an interview with Watchdog. “The impulse to say that I can understand the problem and cancel people’s rights is just extremely arrogant. That’s a precedent that’s terrifying to me – this idea that we’re going to take a branch of government and immunize it from lawsuits.”

Make Puerto Rico grow again

The debt restructuring hardly touches on the root of the problem: Puerto Rico’s anemic economy.

But it does give the commonwealth’s government the authority to lower the minimum wage for young people to $4.25 and exempt the territory from a new overtime rule that increases the number of workers eligible for overtime.

“Those sort of measures will be very helpful from a long-term view in making Puerto Rico more competitive, but it isn’t helpful from a short-term point of view,” said Lachman.

That’s because in the short term, such measures might exacerbate immigration from the island, further eroding the tax base.

“In terms of lowering the minimum [wage] in Puerto Rico, I don’t see it as an economic incentive for the young,” Mercader told Watchdog in an interview. “It basically gives another incentive for young professional workers to just get on a plane and leave.”

And that’s the extent of PROMESA’s pro-growth plan.

“All the control board is doing is fiscal tightening, and that’s only going to make things worse,” Lachman said. He anticipates tough times: “The economy is contracting. The population is declining. That means Puerto Rico is going to be less able to pay its debt in the future.”

Mercader takes a sunnier view of the control board’s role, arguing that it “can create a whole new investing environment, which can assure investors that the island is going to be complying with its obligations and be working towards prosperity and development. When something’s not stable, you don’t go there.”

Mercader explained that a stable environment could then be made attractive to outside investors, young professionals and entrepreneurs.

He suggested Puerto Rico could tap its university system to form partnerships with private industry and work for government contracts. This would have a dual benefit of drawing much-needed dollars to the island as well as provide incentives for college graduates to remain in or return to the island.

The basic takeaway, though, is that PROMESA’s not a magic bullet for all of Puerto Rico’s interconnected problems ranging from debt to migration to the economy.

“There’s no easy game here,” Furth said. “There’s no ‘everything’s going to be hunky dory’ if PROMESA succeeds. It’s going to be pretty crappy either way.”

‘A patronage racket’

“The economy of Puerto Rico requires more than a better government, but it does require a better government,” Furth said.

PROMESA might deliver on that promise because of the wide-reaching powers of the federally appointed Financial Control Board.

The Puerto Rican government has been “irresponsible” and “erratic,” according to Mercader, but the board – while undemocratic – has the power to change that.

On the local level, 78 municipios drain nearly $3.5 billion a year as mayors spend on politically popular but expensive projects like ice rinks and bowling alleys.

On the national level, each time a governor is elected, he makes 7,000 appointments, according to Furth. In comparison, the president of the United States makes about 3,000, for a government serving 100 times more people.

“This is not a democracy,” Furth told Watchdog. “This is a patronage racket – a spoils system – where the government is being used to take from the citizens and give to the politically connected.”

Furth recommended that the control board use the occasion of the November election to reduce the number of appointments. “Instead of firing, just say we won’t hire,” Furth said.

Because one of the control board’s main jobs is to balance the island’s budget, such firings – or lack of hiring – will likely be a part of a larger scheme to bring the budget back toward the black.

Furth suggested a simple litmus test: “Is the government of Puerto Rico serving the people? If not, then those aspects must be shut down.”

By Grant Broadhurst
Puerto Rico’s woes run deeper than PROMESA can cure