Puerto Rico Needs Structural Reform, Not A Bailout by Andrew F. Quinlan, InsideSources
Years of fiscal irresponsibility have caught up to Puerto Rico. Its government has long lived beyond its means and today the bills are coming due, but the island’s economy has also been hampered by costly local and federal mandates. Rather than reward Puerto Rico’s spend-happy politicians with a bailout as legislators are currently contemplating, Congress should remove impediments to economic growth so that the island can prosper.
As the third-largest issuer of municipal bonds in the United States, Puerto Rico has racked up $73 billion in debt under the mistaken notion that borrowing and spending are the path to prosperity.
Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More
Puerto Rico’s economy is heavily dependent on welfare and subsidies. It features an abysmal 50 percent labor-force-participation rate, as relatively lower median salaries often make federal welfare benefits preferable to work. Almost 40 percent of the population is on food stamps. A government audit even found that the Social Security Administration was approving Puerto Ricans — where Spanish is predominant — for disability simply on the basis of not being fluent in English.
Of those who actually are employed, approximately one-third work for the government. Though “work” may be too strong a word, as there is apparently enough cause for one researcher to recommend a requirement that government workers collect their paychecks in person so as to ensure they actually show up for work.
Opportunities for work in the private sector are lacking, due in part to misguided federal policies. The one-size-fits-all federal minimum wage imposes a much higher burden and obstacle to hiring in Puerto Rico where incomes are generally lower than the 50 states. The Jones Act — which requires that goods shipped between two U.S. locations are transported on only U.S.-made and operated ships — also takes a high financial toll on the island. The costs it adds to shipping proliferate throughout the local economy, and have made manufacturing on the island all but impossible.
With dwindling employment prospects and a tanking economy, citizens are fleeing Puerto Rico in droves — its population declined more than 7 percent in the last decade — and thereby further exacerbating the fiscal situation. Yet the Puerto Rican government has not similarly reduced its bloated payroll.
They don’t seem to get it yet.
It’s not clear whether Congress gets it, either. While many do seem to recognize that a bailout would be the wrong approach because it would reward irresponsible politicians and reduce any incentive to undertake sustainable but politically challenging reforms, some also think that allowing Puerto Rico access to Chapter 9 bankruptcy is some sort of compromise. In truth it is a bailout by another name.
Detroit went through bankruptcy, and while it succeeded in shedding debt by stiffing creditors and undercutting the municipal bond market, it failed to produce a fiscal path forward. The problem of excessive pension costs, the largest single outlay in the budget, was kicked down the road. None of the city’s 28 agencies were shuttered.
Puerto Rico is looking at more than three times as much debt as crippled Detroit. Its command-and-control style government features a myriad of outdated and inefficient agencies and public corporations in need of drastic overhaul.
A better path is provided in the example of the financial crisis faced by the District of Columbia in the late 1990s. Instead of going bankrupt, the District was placed under supervision by a financial control board. A similar approach was also used in New York City in the 1970s. Both emerged in much stronger shape without needing access to bankruptcy. Such a board with the power to renegotiate labor contracts and impose fiscal discipline would similarly benefit Puerto Rico.
If Congress is committed to trying to help even beyond the establishment of a financial control board, it should consider granting exemptions to the federal minimum wage requirement and the Jones Act, the latter of which has already been done for the U.S. Virgin Islands. These options would amount only to a first step toward a pro-growth, market economy, but nonetheless provide the prospect of a new path for Puerto Rico. In contrast, both a bailout and Chapter 9 bankruptcy would mean just more of the same for years to come.