Puerto Rico’s federal control board between austerity and irregularity

The U.S. territory of Puerto Rico has found itself in a dire fiscal, economic and social situation. A decade-long recession, mounting poverty, and record rates of emigration have made it increasingly difficult for the island’s government to meet its debt obligations. Last year had been particularly burdensome as federal courts shot down a local bankruptcy law which would have provided much-needed relief. But when the Commonwealth government instead pleaded for increased powers under Chapter 9 of the Federal Bankruptcy Code, the Republican-controlled Congress responded by imposing a federal control board to oversee the island’s finances. This Fiscal Oversight Board is now in full effect and is in route to not only execute unprecedented spending cuts but potentially legitimize some debt riddled with irregularities.

As part of the legal mandate which creates the Board, the Puerto Rican government is required to present a fiscal plan that would assist in getting local finances back on track. This plan would be in addition to measures already carried out by the local government during the previous decade, including reductions in government consumption by 12 percent, a decrease in public-sector employment by 24 percent, and increasing taxes by $1.4 billion annually, Puerto Rico still suffers billions in deficit. Nevertheless, in recent days the Board has rejected said plan, demanding even more austerity and increase the plan’s duration from five to 10 years.

The Board and congressional forces claim that said cuts are necessary in order to assure that the island's debt obligations are paid. Complicating the matter further, a multi-sector auditing commission has recently revealed through partial audits that billions of island debt may have been contracted illegally. The Puerto Rican Constitution, for example, requires that budgets be balanced and debt payments be capped at 15 percent. In reality, loans were taken out year after year to pay for previous years’ deficits and the portion of revenues destined to service debt as high as 24 percent. Government officials and lenders knowingly circumvented these requirements, though it is yet to be seen if the Board's members - some of whom authorized part of the territory's debt in the past - will take up the matter objectively. 

Made up of seven non-elected members, the Board is composed entirely of political appointees. Shortly after their nomination, controversy arose due to some members’ ties with the same local administrations that brought Puerto Rico to its current state. Its membership includes two former Puerto Rican Government Development Bank directors, as well as Board president José Carrión III who doubles as a generous donor for Puerto Rican and U.S. political campaigns alike. Many recipients of Carrión’s generous fundraising efforts had lobbied in favor of a control board, including the President’s brother-in-law and Resident Commissioner, Pedro Pierluisi. Almost all of the Board’s meetings are carried out in private, with the local press at times leaking grainy photos of members smiling and hugging their Puerto Rican counterparts. 

Some locals have adopted a wait-and-see attitude while others have taken to the streets. Protesters have set up a permanent camp in front of the federal courthouse, with others blocking, interrupting, and picketing Board-related meetings. The Mayor of San Juan, Carmen Yulin Cruz has become one of the loudest voices of opposition, promising to resist the Board and its austerity at every step. This is not the first time that the island faces public spending cuts, with the previous Commonwealth government having hacked 30,000 public sector jobs while increasing university tuition. Though not as severe as those cuts bought by the Board, these measures erupted into massive marches, strikes, and violent clashes with police. 

In the meantime, the local government will have to do what it can in the face of the Board's sweeping powers. Within a few minutes into its first meeting, for example, the Board invoked its powers over almost the entirety of the government apparatus. Reversing more than a century of self-governing autonomy, its presence has become the biggest federal intrusion on the island since the military invasion of 1898. If the Board opts to honor debt without a thorough audit, it may also very well be legitimizing questionable debt. In said case, its actions would also represent the most profound island heist since gold and sugarcane.

Luis Gallardo is a municipal legislator and is based out of Puerto Rico. He has an M.P.A. from Valdosta State University and a Juris Doctor from the University of Puerto Rico. You can connect with him on Twitter or Facebook at @LuisGallardoPR or luisogallardo@gmail.com

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

BY LUIS GALLARDO
Puerto Rico’s federal control board between austerity and irregularity