Puerto Rico Must Not Waste Its Second Chance
Restructuring debt is just the first painful step on the road to recovery.
by Michael R. Bloomberg @MikeBloomberg
May 9, 2017 5:00 AM
Hope on the horizon?
Photographer: Christopher Gregory/Bloomberg
For too long, Puerto Rico has been trapped in political and economic limbo. Politicians have been afraid to make tough decisions. Voters have been reluctant to face reality. Investors have been unwilling to compromise.
Now there is an opportunity to break the logjam. Drastic as it seems, Puerto Rico’s decision to seek the biggest debt restructuring of any U.S. state or local government is wise. It offers the best hope for economic recovery and an orderly resolution of the territory’s more than $70 billion in debt.
Yet this arduous bankruptcy-like process is only the first step, and by no means the hardest. Far-reaching economic reforms and conditional federal support will be essential as well.
The commonwealth’s economy has shrunk by 14 percent over the last decade. Unemployment is more than double the national rate, the number of people with jobs has fallen over the last decade by nearly one-quarter, and labor-force participation stands at just 40 percent. More than 40 percent of the population lives in poverty and is on Medicaid. With $50 billion in unfunded obligations, its pension funds are about to go bust. As if all that weren’t enough, the island is grappling with Zika, a public health emergency.
Many Puerto Ricans have fled to the mainland, reducing the island’s population by some 10 percent over the last decade. When offshore bondholders — most of the island’s debt is held outside the commonwealth — ask Puerto Rico’s government to devote more money to servicing debt, they are asking for more pain to be inflicted on those who remain.
The 10-year fiscal plan recently certified by a federal oversight board imposes cuts on government payrolls, subsidies, healthcare spending and pensions. To be sure, many of these are overdue. For instance, over the past decade Puerto Rico has lost students but gained teachers. The island has fewer prisoners, but no fewer jails.
Yet the plan’s forecasts, which by law could not assume additional federal support, still expect no resumption of growth until 2022. That’s a hard blow to both Puerto Ricans and bondholders.
Washington is in a position to offer more help. It could bring Puerto Rico’s Medicaid funding to parity with the states, which would also stem the exodus of doctors. Extending a federally supported Earned Income Tax Credit would get more Puerto Ricans into the workforce, as would allowing Puerto Ricans to claim the Child Tax Credit on the same terms as mainlanders. Allowing Puerto Rico to set its own (lower) minimum wage would get more young workers into the formal economy. A waiver from the Jones Act, which forces Puerto Rico to use expensive American ships for mainland commerce, would lower costs for food and energy.
Most important is what Puerto Rico needs to do. The list is long and by now familiar — everything from collecting honest statistics and introducing effective financial controls to lifting the regulatory burden from business. (The World Bank ranks the U.S. eighth in the world for ease of doing business; Puerto Rico is 55th.)
The oversight board needs to use its influence and powers to make sure the commonwealth follows through, flyspecking subsequent annual budgets for proof of implementation. Congress, which has established a task force for promoting economic growth on the island, should promise additional support when the island delivers on economic reform, but not before.
A comprehensive debt restructuring won’t work by itself. Sustainable debts plus a measure of additional federal support won’t be enough, either: Puerto Rico’s recovery will depend first and foremost on the dedication of its leaders and people to making the most of their second chance.