What Lawmakers Should Do Before Considering Puerto Rico Bailout

ECONOMYCOMMENTARY
Rachel Greszler / December 14, 2015

San Juan, Puerto Rico (Photo: iStockphoto)

San Juan, Puerto Rico (Photo: iStockphoto)

With over $42 billion in debt, a five percent decline in population over just five years, and only half of all working-age residents actually working, Puerto Rico faces a severe economic and financial crisis. Some have even alluded to a potential humanitarian crisis.

Attempting to ward off such a crisis, a number of Puerto Rican and mainland policymakers—the president included—have introduced plans to help address the commonwealth’s problems. Senators Orrin Hatch, R–Utah, Chuck Grassely, R–Iowa, and Lisa Murkowski, R–Alaska, offered their solution in the Puerto Rican Assistance Act of 2015.

The Assistance Act contains five main provisions:

A five-year payroll tax holiday equal to half (3.1 percent) of employees’ share of the payroll tax, available to all employees working in U.S. territories (including Puerto Rico, American Samoa, Guam, the Mariana Islands and the Virgin Islands).
Pension reforms, including recommendations to improve the solvency of Puerto Rico’s underfunded pensions and changes to both Puerto Rico’s and mainland states’ pension plans. The changes would increase transparency and accountability and provide an option for states and territories to eliminate further pension underfunding by purchasing private annuity contracts that couldn’t be skipped or reduced at whim when funds fall short.
A “Financial Responsibility and Management Assistance Authority,” similar to the District of Columbia’s control board, which would maintain some level of sovereignty for the commonwealth while ensuring necessary reforms are enacted.
Up to $3 billion in “transitional assistance,” authorized through borrowing power of the Authority, which can issue bonds that have preferred repayment status over existing debts, but not lack the backing of the federal government.
A study and report to propose a more equitable healthcare treatment of Puerto Rico under the Patient Protection and Affordable Care Act.
Benefits of the Assistance Act

First, there’s the good. The Plan’s pension reforms are both necessary and beneficial. Although the reforms lack force, they will prevent public pension plans from continuing to hide unfunded liabilities, hopefully increasing the chances of meaningful reform.

Moreover, the new pension plan option sets the stage for public pensions to do what they’ve never been able to in the past—keep their promises by fully funding pension obligations.

The Authority offers the potential to impose much-needed reforms that are unlikely to arise through Puerto Rico’s political process alone.

By rescinding unobligated funds from a so-called Obamacare slush fund (the Prevention and Public Health Fund), the proposal does not add to the deficit.

Drawbacks to the Assistance Act

And then there’s the bad. The plan may not add to the deficit, but that doesn’t change the fact that it’s a multi-billion dollar bailout—one which could lead to a multi-trillion dollar bailout elsewhere.

A Puerto Rican bailout sets the precedent that any U.S. state or locality on the mainland which encounters severe financial and economic troubles—and there are plenty of those lying in wait—can also expect similar “assistance” from the federal government.

But while American taxpayers can probably “afford” to bail out Puerto Rico, they cannot afford to bail out trillions of dollars of state and local debt and other unfunded obligations.

Right Response: Take a Do-No-Harm Approach

Before Congress proactively meddles in Puerto Rico’s sovereign affairs, it should take a do-no-harm approach. Congress should pare back regulations that increase costs and reduce businesses’ ability to compete, including the maritime Jones Act, which roughly doubles shipping costs, and the federal minimum wage, which makes employment extremely costly and drives workers into welfare or underground employment. Additionally, Congress should grant Puerto Rico more flexibility in how it administers federal welfare benefits. This would help avert a healthcare emergency and could end the opportunity for individuals to earn more on welfare than they can by working.

Multi-billion dollar Puerto Rican bailouts should not be on the table until Congress frees the commonwealth from its own federally-imposed burdens.

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