By John Ubaldi
Contributor, In Homeland Security
If the fiscal disaster impacting Puerto Rico wasn’t bad enough now the island is now suffering through two catastrophic hurricanes which leveled the commonwealth.
Last month Puerto Rico endured Hurricane Irma and Marie causing horrific damage, now the entire island is virtually without power, food and the people are barely able to sustain life’s basic needs.
Reconstruction is under way with the Federal Emergency Management Agency (FEMA) leading the relief effort, joined by various elements of the United States military. Now as difficult as this may be, this is the easy part as the relief efforts will take care of the basic needs of the Puerto Rican people, but the more far reaching challenge is how to deal with the fiscal nightmare the island has been dealing over the past decade.
Puerto Rico’s Debt burden
For the past few years Puerto Rico has suffered and is enduring through a Greece like debt crisis, what many people may not know is that the island is over $80 billion in debt, thousands have fled to the mainland, with about 10 percent of the population leaving over the last decade, leaving less than 4 million who remain to deal with the fiscal disaster.
The island infrastructure reminds many of what you would find in third world nations, not a territory of the United States.
Compounding the problem, Puerto Rico has been paying its pension obligations by selling assets, now it has no more remaining assets to sell, even its health system was running off a grant from the Affordable Care Act, but now that is beginning to run out.
The fiscal disaster in Puerto Rico, has been going on for years, and had been discussed and debated in Washington during the final years of the Obama administration, but so far a permanent solution has eluded policy makers.
Puerto Rico debt burden has Implications for U.S.
Washington has to be concerned and should be concerned as in July 2015 Jose J. Villamil published a report titled, “Why Puerto Rico’s Economy Matters for U.S. Security” Meanwhile, Puerto Rico’s debt crisis has huge implications for the United States because U.S. banks hold almost all of Puerto Rico’s massive $80 debt burden (estimated at close to $80 billion). Furthermore, since the territory’s bonds are currently exempt from all types of traditional U.S. taxes (local, state, federal), they have been traded widely in U.S. markets and are included in more than 50 percent of all current U.S. municipal bond funds.
This situation Puerto Rico finds itself has ramifications far beyond its shores, because whatever decision is reached in Washington will set a precedent, as this policy could be duplicate by the states; especially Illinois which is teetering on insolvency.
Now whatever fiscal stimulus plan Washington has for Puerto Rico, it will simultaneously have to deal with this fiscal catastrophe, otherwise all aid will be squandered.
Puerto Rico’s Dysfunctional Government has to be addressed
One of the most egregious aspect and one that needs to be addressed before any aid package is given to Puerto Rico is dealing with the islands dysfunctional government.
The current Governor of Puerto Rico Ricardo Rosselló has only been in power since January, he received praise for his handling of Hurricane Irma and Maria from the Trump administration, but he is young and has little practical experience in dealing with such a monumental task.
Arthur MacEwan and J. Tomas Hexner, writing, “Puerto Rico’s Economic Debacle: Correctly Blame Washington,” “Unquestionably, some of the blame rests with the atrocious mismanagement by the local government. Governments of both major parties have pursued damaging policies, borrowing excessively to finance current account spending, failing to collect sufficient tax revenue, and imposing counterproductive austerity policies as the economy has descended.”
Washington’s Culpability
The Puerto Rican government shares blame in the dire fiscal straits the island faces, but Washington faces culpability itself, as per the U.S. Constitution, “The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” Now with ownership comes responsibility!
As Brad W. Setser as Senior Fellow at the Council on Foreign Relations writes, there is no way Puerto Rico can pay its debts right now. And thankfully, Puerto Rico already had a framework under Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) that offers Puerto Rico some protection from creditors while the territory attempts to rebuild and recover. As Washington begins to grapple with the enormous task it must examine how it governs Puerto Rico in relationship to rules and regulations afforded to the states, but are applied differently to Puerto Rico.
As the humanitarian disaster continues to unfold, the crisis will soon turn into a fiscal catastrophe, with sales tax revenue gone for at least the next couple months, income tax collection will be drastically reduces, not to mention the effect on tourism during the winter months and all its associated revenue.
How will Puerto Rico meet its fiscal obligations now, it was unable before the hurricanes how will it recover into the future?
With the full attention focused on the humanitarian part of the disaster, Washington can’t ignore the fiscal disaster, any aid to Puerto Rico has to factor in the comprehensive devastation caused by the hurricane, but also has to address the fiscal calamity, if you focus squarely on the humanitarian and not the fiscal, then you are just compounding the crisis.
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