Ideas for Fixing Puerto Rico’s Fiscal Problems

Nicholas Johnson, Senior Vice President for State Fiscal Policy at the Center on Budget and Policy Priorities, is the author of a recent article titled “Steps for Fixing Puerto Rico’s Fiscal Problems.”

The first step, according to Johnson, is to allow restructuring of debts.  Without some sort of restructuring plan for its debts, Johnson argues, Puerto Rico “will face years of complex and costly litigation over which debts have the highest claims on Puerto Rico’s limited ability to pay.” Puerto Rico, which cannot create laws of its own to organize restructuring, also cannot afford such litigation.

Federally supported restructuring is not optional. But it’s also not enough, according to Johnson.

He says that Puerto Rico must also have a plan going forward that will improve the Island’s economic position over the long term. Providing equal support for Puerto Rico under federal programs would be a good start. “The federal government effectively picks up a dramatically smaller share of Medicaid’s costs in Puerto Rico than in the states – just 15 to 20 percent of the Commonwealth’s Medicaid costs, compared with an average of 57 percent for the states,” Johnson points out. “In fact, if Puerto Rico were treated the same as a state — i.e., under the federal formula that determines the federal Medicaid matching rate for each state — the rate for Puerto Rico would be 83 percent.”

Johnson acknowledges that the high costs for health care which result from this inequality are tough for Puerto Rico to meet, and part of the reason for the current debt crisis. He also recommends extending the Earned Income Tax Credit to Puerto Rico, another step which would help level the playing field for Puerto Rico. The EITC has been shown to reduce poverty and encourage workforce participation.

These steps are realistic ones for Congress to undertake. “Although Puerto Rico’s 3.5 million residents are Americans, they are not represented by voting members of Congress, helping to often make them afterthoughts in congressional debates,” Johnson acknowledges. “But the island’s problems are neither small nor remote.” Both parties now agree, he says, that Congress must take action.

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