Friday, July 10, 2015

Puerto Rico: The Other Debt Crisis

Puerto Rico: The Other Debt Crisis

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While Greece has center stage in the arena of on-the-brink finance, the precarious situation in the U.S. territory of Puerto Rico may actually take a greater toll on the American economy. Last month, Puerto Rico’s governor, Alejandro Garcia Padilla, announced that the island’s public debt of $72 billion was not payable. This includes debts owed not just by the central government, but also those of public corporations, like utility companies, and cities. An archipelago of islands that lie off the tip of the Dominican Republic in the Caribbean, Puerto Rico is the third-largest issuer of state and local debt in the United States, behind California and New York. Much of the island's debt is held by individual U.S. investors in hedge funds, mutual funds or other investment accounts, raising questions about how the U.S. economy might be affected were Puerto Rico to fall behind on its debt payments. That could happen as early as mid-July, which raises the possibility that investors might sue for their funds. Chronic economic woes Yet, Puerto Rico’s plight is lost among the reports of the economic crisis in Greece. In part, this is because economic troubles in Puerto Rico are not new. The territory's economy has been in recession since 2005, when the U.S. Congress ended a tax credit designed to attract businesses to Puerto Rico. Since then, the territory has borrowed to stay afloat. “Puerto Rico’s illness is a chronic condition.” Puerto Rican congressional representative Pedro Pierluishi wrote Friday in The New York Times. “The unemployment rate, poverty rate and median household income have always been far worse than any state’s. The main cause is inequality.” Pierluishi was making the case that Puerto Rico’s status as a territory, rather than a state, has led to second-class treatment. Residents of Puerto Rico cannot vote for the president or senators, and Pierluishi is a nonvoting member of the House of Representatives. “Congress routinely treats Puerto Rico and the other territories worse than it does the states,” said Pierluishi, pointing out that medical and other benefits paid to the territory are considerably less than those provided to states. "It is little wonder then that Puerto Rico is in recession, has excessive debt and is bleeding population. Unequal treatment at the federal level, combined with mismanagement at the local level, has a debilitating effect on the island's economy." No bankruptcy protection Pierluisi has sponsored a bill in the House asking that Puerto Rico be granted bankruptcy protection, the ability to restructure in order to pay off debt. Bankruptcy is open to U.S. municipalities — the city of Detroit filed for bankruptcy in 2013 — but not to territories. “The alternative is a legal no-man’s land that benefits neither Puerto Rico nor those who have loaned the territory money,” Pierluisi said. His bill is still in committee, but bankruptcy protection for Puerto Rico has gained support from some presidential candidates. “We’re not talking about a bailout. We are talking about a fair shot at success,” Democrat Hillary Clinton said in a statement Tuesday. "I think that Puerto Rico ought to be treated as other states are treated as it relates to restructuring," Republican Jeb Bush said during a visit to the island in late April. While Puerto Rico has a population of 3.5 million, almost 5 million Puerto Ricans and their descendants now live in the States, many of them in the swing state of Florida where they are voters to be courted.




Statehood Is the Only Antidote for What Ails Puerto Rico - The New York Times - By PEDRO R. PIERLUISI - JULY 10, 2015

Statehood Is the Only Antidote for What Ails Puerto Rico - The New York Times

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WASHINGTON — PUERTO RICO’S governor recently claimed that the island could not pay all its debts. In the media, comparisons to Greece abound. But if Puerto Rico were a patient, then most commentators would have been misdiagnosing its illness and recommending improper treatment. A dose of reality is in order.
Puerto Rico is a United States territory, home to the 3.5 million people I represent in Congress. Residents have been American citizens since 1917 and have served in the United States military since World War I. There are also five million individuals of Puerto Rican heritage living in the States, and as conditions in Puerto Rico deteriorate, my constituents are now leaving for the mainland at a rate of 50,000 a year.
The analogy to Greece is inapt. Puerto Rico is not a sovereign country in a monetary union with the United States. From a constitutional perspective, Puerto Rico belongs to the United States. The federal government has almost absolute power over Puerto Rico, but has delegated to Puerto Rico about the same authority over local matters that the states possess.
Perhaps in an effort to be polite, certain commentators refer to Puerto Rico as a “commonwealth,” implying that Puerto Rico has a special status. But this word has no practical meaning, as demonstrated by the fact that several states call themselves “commonwealths.”
Puerto Rico’s illness is a chronic condition. The unemployment rate, poverty rate and median household income have always been far worse than any state’s. The main cause is inequality. Residents cannot vote for president or senators, and have one nonvoting delegate in the House. It is disheartening to see many self-styled progressives, who otherwise speak eloquently about the importance of voting rights, go silent on this subject when it comes to Puerto Rico.
Congress routinely treats Puerto Rico and the other territories worse than it does the states. Consider Medicaid, which provides health insurance for the poor. Federal funding for a state Medicaid program is open-ended, but capped for Puerto Rico. The $1 billion in annual Medicaid funding that Puerto Rico receives from Washington is about 20 percent of the $5 billion received by similar-size Oregon. Puerto Rico is also treated unequally under Medicare, even though my constituents pay the same federal payroll taxes that fund much of this program. The Affordable Care Act — Obamacare — has been the subject of partisan debate, but the law’s rarely mentioned defect is that the territories are barred from most of its new programs and protections.
The list goes on. Puerto Rico is excluded from the Supplemental Security Income program that aids the most vulnerable Americans. It does not participate in the federal nutrition program, instead receiving a block grant that shortchanges it by $450 million a year. Puerto Rico is partly excluded from the child tax credit and fully from the earned-income tax credit, which encourages low-income individuals to seek employment. Unlike a state, Puerto Rico cannot authorize its public enterprises to seek relief under Chapter 9 of the federal bankruptcy code, which impedes its recovery.
The argument that such treatment is justified because Congress does not require Puerto Rico residents to pay federal income taxes on local earnings is weak. Nearly half of all stateside households do not earn enough to owe income taxes, but are still treated equally. Moreover, because of federal tax credits, a working-class family of four in the States is likely to have greater take-home pay than an identical family in Puerto Rico.
It is little wonder, then, that Puerto Rico is in recession, has excessive debt and is bleeding population. Unequal treatment at the federal level, combined with mismanagement at the local level, has a debilitating effect on the island’s economy. To compensate for the lack of federal support, the Puerto Rico government has borrowed heavily. And when my constituents move to the States, they are entitled to vote for their national leaders and to equal treatment under federal law. So naturally they leave.
Having misdiagnosed Puerto Rico’s illness, many commentators prescribe the wrong cure, like exempting Puerto Rico from the federal minimum wage. A far wiser proposal would be to grant Puerto Rico more equitable treatment under federal spending and tax credit programs. The goal should be to close the gap with the states, not widen it.
In the near term, Puerto Rico can manage its crisis with smarter policy making, but the only enduring solution is statehood. At a recent congressional hearing, I told my colleagues: If you give us the same rights and responsibilities as our fellow American citizens, and let us rise or fall on our merits, we will rise. But if you continue to treat us like second-class citizens, don’t claim to be surprised when we fall.
In 2012, Puerto Rico voters rejected territorial status and expressed a preference for statehood. Congress responded by authorizing a federally sponsored referendum. I expect this vote will be held in 2017. If voters affirm their desire for admission, Congress must place Puerto Rico on the path to statehood. For Puerto Rico to prosper, it should be treated equally. And to be treated equally, it must become a state.
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