Home Commentary and Analysis How Can Puerto Rico Endure Both Fiscal and Natural Catastrophes?
How Can Puerto Rico Endure Both Fiscal and Natural Catastrophes?

How Can Puerto Rico Endure Both Fiscal and Natural Catastrophes?

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By John Ubaldi
Contributor, In Homeland Security

If Puerto Rico’s fiscal disaster wasn’t bad enough, the U.S. island territory is now attempting to recover from two catastrophic hurricanes that leveled it in September.

Hurricanes Irma and Marie caused horrific, widespread damage. The storms wrecked residential and commercial buildings; disrupted communications, fuel, healthcare and utility services; caused massive flooding; created mountains of debris; and shut down airports and seaports.

Even now, Puerto Rico remains mostly without power and food supplies are limited. Residents still find it difficult to meet life’s basic needs.

Reconstruction is under way. The Federal Emergency Management Agency (FEMA) has led relief efforts, along with various elements of the U.S. military and countless first responders.

These relief efforts will take care of the basic needs of the Puerto Rican people and help restore the island’s infrastructure. But the more far-reaching challenge is how to deal with the fiscal calamity that has existed in Puerto Rico for the past decade or more.

Puerto Rico Suffers from a Massive Debt Burden

Puerto Rico has been suffering from a Greece-like debt crisis for some time. What many people might not know is that the island is more than $80 billion in debt.

Thousands of Puerto Ricans — about 10 percent of the population — have fled to the U.S. mainland in the past decade. That has left fewer than 4 million residents to deal with the fiscal crisis.

Puerto Rico’s infrastructure resembles that of a third-world nation, not a territory of the United States.

Compounding the debt problem, Puerto Rico has been meeting its pension payment obligations by selling off assets. But now it has run out of assets to sell. Even its public health system, supported by funds from the Affordable Care Act, is beginning to run out of money.

Puerto Rico’s fiscal dilemma was discussed and debated in Washington during the final years of the Obama administration. So far, though, a permanent solution to Puerto Rico’s economic woes has eluded policymakers.

Puerto Rico’s Debt Has Implications for US Security

In a July 2015 commentary published by the Center for Strategic and International Studies, economist Jose J. Villamil stressed that the Puerto Rican economy should be a major security concern to the United States.

Indeed, Puerto Rico’s debt crisis has huge implications for the United States because U.S. banks hold almost all of Puerto Rico’s massive $72 billion debt burden. “And since Puerto Rico’s bonds are exempt from local, state and federal taxes, they have been traded extensively in U.S. markets and are included in over half of all U.S. municipal bond funds today,” Villamil writes.

This situation that Puerto Rico finds itself in has ramifications far beyond its shores. Whatever decisions Washington takes could set a precedent that U.S. states could adopt, especially Illinois, which is teetering on fiscal insolvency.

Whatever stimulus plan Washington has in mind for Puerto Rico, Congress will simultaneously have to deal with this fiscal catastrophe. Otherwise, all aid will be squandered.

Puerto Rico’s Dysfunctional Government Needs Restructuring

Puerto Rico’s dysfunctional government also remains an unsolved problem. Puerto Rico’s governor, Ricardo Rosselló, has been in office only since January. The Trump administration has praised Rosselló for his handling of the aftereffects of Irma and Maria. But Rosselló is young and has little practical experience in dealing with such a monumental task as correcting the island’s fiscal situation.

“Unquestionably, some of the blame rests with the atrocious mismanagement by the local government,” economists Arthur MacEwan and J. Tomas Hexner write in “Puerto Rico’s Economic Debacle: Correctly Blame Washington.”

The U.S government comes in for blame too. “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, MacEwan and Hexner note.

Some of Puerto Rico’s Economic Woes Can Be Blamed on Washington

Article IV of the U.S. Constitution reads, “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.” Along with Congress’s ownership of U.S. territories comes responsibility.

“There is no way Puerto Rico can pay its debts right now,” Brad W. Setser, a Senior Fellow at the Council on Foreign Relations, writes. “And thankfully, Puerto Rico already had a framework (as a result of PROMESA) that provides Puerto Rico with protection from creditor litigation while it struggles to recover.” PROMESA, the Puerto Rico Oversight, Management and Economic Stability Act, is a federal act designed to help Puerto Rico with its billion-dollar debt.

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As Washington grapples with the enormous task of fixing Puerto Rico’s debt, Congress must examine how it governs Puerto Rico relative to the rules and regulations that are afforded to the states. However, these rules and regulations apply differently to Puerto Rico.

As the humanitarian disaster fades, attention will soon turn to the island’s fiscal catastrophe. Sales tax revenue will be gone for at least the next few months, not to mention the loss of tourist dollars during the winter months and all of its associated revenue. Income tax collection will be drastically reduced as well.

Washington should not focus solely on the humanitarian situation in Puerto Rico. If Congress ignores Puerto Rico’s fiscal issues, that will only compound the current economic crisis in Puerto Rico.

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