By Dr. Pierre Canac—This is the continuation of last week’s blog, and thus, it is advised to first read Part I if you haven’t done so.
The ball is now in Congress’ court and the speaker of the House, Paul Ryan, indicated that he would push for a solution by March 2016. Commissioner Pierluisi introduced a bill in Congress in February 2015 to give Puerto Rico chapter 9 in order to allow the island to benefit from the same bankruptcy laws as U.S. states in regard to sub-state entities; to this day, it has not been voted on. As a matter of fact, Congress created the chapter 9 bankruptcy law in 1933 to assist cities impacted by the Great Depression; between 1933 and 1984, Puerto Rico was included in that law. However, in 1984 Congress somewhat arbitrarily amended the bankruptcy code, forbidding Puerto Rico to invoke chapter 9. In 2014 the Puerto Rican legislature passed its own bankruptcy law, modeled on chapter 9, but the U.S. Court of Appeals for the 1st Circuit struck down this law that would have allowed the island’s utilities and municipalities to declare bankruptcy.
The court argued that states cannot pass their own bankruptcy codes because it undermines uniformity, which sounds like a perverse argument given that the 1984 law treats Puerto Rico differently from U.S. states. Judge Juan Torruela, the only Puerto Rican on the federal appeals court, said that the court implicitly approved a “colonial relationship” between the U.S. and Puerto Rico. Unless the U.S. Supreme Court, which is set to issue a ruling by the end of June, overturns the Appellate court decision, it will be up to Congress to decide whether to give back to Puerto Rico the 1933 bankruptcy code that it took away in 1984.
Another solution would consist of making Puerto Rico the 51st state; a majority of the Puerto Ricans (61%) supported statehood in a 2012 referendum. However, the vote was not binding and the final decision was up to Congress which chose not to proceed.
Anne Krueger, former World Bank chief economist and first deputy managing director of the IMF, and professor of International Economics at Johns Hopkins University, wrote a report (with two co-authors) on Puerto Rico in June 2015 arguing that its debt must be restructured and reduced and its competitiveness improved. The former requires a change in the bankruptcy code as discussed in Part I last week. The later requires that labor, electricity and transportation costs be reduced as Puerto Rico (like Greece) does not have a currency to devalue. Cutting energy costs requires an increase in competition and a lesser dependence on imported oil. Currently the only provider of electricity is the insolvent Puerto Rico Electric Power Authority (PREPA) which provides free electricity, generated by its ancient and inefficient power plants, to municipalities and other government run entities such as public schools, hospitals, water and sewage systems and the highway authority leading to wasteful over-consumption.
Reducing transportation costs would require another action of Congress to repeal or amend the 1920 Jones Act, which requires foreign ships to be totally unloaded in the first U.S. port they reach. Thus goods intended for Puerto Rico (including oil) that are shipped for example from Brazil on a foreign ship must be unloaded, let’s say, in New York and reloaded on a U.S. ship before reaching San Juan, causing imported goods and commodities to be very expensive on the island. Incidentally it is interesting to note that another U.S. territory, the Virgin Islands, is exempted from the Jones act; so why not Puerto Rico?
Puerto Rico suffers from another discriminatory measure: Medicare and Medicaid reimbursement rates for health care providers on the island are 40% and 70% lower respectively than for doctors and hospitals in the 50 states. This has contributed to increasing the outflow of physicians from the island impairing further the health of Puerto Ricans at a time when the Zika virus is spreading across Latin America and the Caribbean.
Because Puerto Rico’s problems, as discussed in Part I & II, are not entirely homegrown, the solution to them will require some action of Congress. The big question is whether Congress, in an election year, will be able to agree on a long-term solution that will require changing the status of Puerto Rico, or will apply a band aid (in the form of some federal assistance combined with additional austerity measures imposed by a Fiscal Control Board as currently discussed in Congress) thereby kicking the can further down the road and making the situation worse. Given that Puerto Rico has no voting representation in Congress, U.S. laws may instead continue to favor Puerto Rico’s creditors who are supported by their congressional lobbyists. As long as Puerto Rico does not have the tools it needs to help itself, it is in a worse condition than Greece. The U.S. authorities should have learned what not to do by observing how counterproductive the austerity measures imposed upon Greece by the European Union over the last eight years have been. The austerity measures imposed upon both Greece and Puerto Rico have only contributed to increasing the debt to GDP ratio and worsening the recession in both locations. Clearly some kind of fiscal rule, in addition to some structural reforms, requiring that the island balances its budget over the long run following debt reduction must be part of the solution. However, such a rule must allow the island to use counter cyclical fiscal policies (in the absence of monetary policy) by running a deficit whenever output is below potential while running surpluses in good times. If nothing is done within a fairly short amount of time, the young and most educated will continue leaving while the old and sick will stay behind with limited medical assistance. This could result in an even more severe humanitarian crisis.
Pierre Canac, Ph.D.
Associate Professor of Economics