The nonpartisan Congressional Research Service issued a report on April 11th on the current financial challenges facing Puerto Rico. The report provides a broad summary of the current situation in Puerto Rico and various proposed actions.
Among the factors identified as problematic for Puerto Rico’s economy:
- Low employment and labor participation rates
- High rates of outmigration leading to a decline in population
- An economic structure shaped more by tax advantages than comparative advantages and meaningful pro-growth policies
- The effects of intensified global competition
- Weaknesses in fiscal and operational controls
The report points out that Puerto Rico and the U.S. government have invested in some high-profile financial advisers in recent years in hopes of coming up with a plan that could prevent a default and the cuts in essential services which have been making headlines, but that these efforts have been ineffective. Unable to use the bankruptcy protection of chapter 9, Puerto Rico tried to enact its own bankruptcy protection law, but was blocked by federal courts. Litigation on Puerto Rico’s restructuring authority is under consideration by the Supreme Court, and a ruling is expected by the end of the term. Credit downgrades took place over a period of years, and Puerto Rico no longer has access to credit markets. The government has been declared insolvent and the government’s financial problems are affecting the people living in Puerto Rico.
Steps taken by Puerto Rico’s government are also listed in the CRS report:
- Cutbacks to public pensions
- Tax increases making Puerto Rico’s sales tax the highest in the nation
- Tax administration reforms
- A reduction in public sector jobs
- School closings and teacher job reductions
- Cancellation or postponement of salary and benefit increases
- Reductions in transfers to municipalities
Clearly, these changes have not been significant to ameliorate the situation. Increasing hardship for people in Puerto Rico encourages movement from Puerto Rico to the States, decreasing Puerto Rico’s human capital. Since younger people are more likely to leave, an aging population adds to the effect on potential future economic growth.
“Possible options for Congress to address the fiscal distress faced by the government of Puerto Rico and its constituent public corporations are framed by the island’s status as a territory,” the report points out, acknowledging that a territory is “something different than a state and different from an independent sovereign country.” The federal government is typically not willing to provide financial support to States, and some members of Congress have expressed concern that helping Puerto Rico could send a message to the States that might encourage them to be less fiscally responsible than they otherwise would be.
The report goes on to quote the U.S. Treasury’s 2015 call for Congress to “provide the critical tools Puerto Rico needs to restructure its debt, enhance its fiscal governance, fix its healthcare system, and help jumpstart its economy.”
Given the grave financial situation in Puerto Rico, the complications of its territorial status, and the determination of the White House to see congressional action, what can the Congress do?
The report lists a number of possible options:
- End the Jones Act in Puerto Rico. The Government Accountability Office did a study on this question, and was unable to confirm that exemption from the Jones Act would be financially beneficial for Puerto Rico. There is, moreover, a significant bipartisan group of Senators and Representatives who oppose exempting Puerto Rico from the Jones Act. Yet it is a policy issue that continues to endure.
- Reduction in the minimum wage in Puerto Rico. Critics point out that a lower minimum wage would never be low enough to compete with Puerto Rico’s Caribbean neighbors and it would further encourage movement to the U.S. mainland.
- Revenue policies. This phrase in this report refers to special tax deals, such as those like section 936 that exempted corporations from taxes and Act 22 which lured wealthy people to live in Puerto Rico. Neither created sustainable jobs or wealth in Puerto Rico.
- Bankruptcy protection. Allowing Puerto Rico access to bankruptcy protection would, according to the U.S. treasury, provide a more orderly long-term solution.
- A control board. A neutral fiscal control board is one of the more popular options, though some question whether it might limit democracy in Puerto Rico and give outsiders too much power.
- Improving federal support for medical costs. Puerto Rico currently receives significantly less support than the States do; equalizing these funds could free up local government funds.
- Credit support. The federal government could guarantee loans for Puerto Rico, allowing access to currently unavailable credit markets and allowing Puerto Rico to go even further into debt.