Market-based Reform not Bankruptcy is What Puerto Rico Needs

Dean ChambersJanuary 18, 2016

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Puerto Rico needs to seek reforms not bankrtuptcy

The financial crisis in Puerto Rico has the government of the island territory coming to Congress requesting a bailout and bankruptcy protection. But that is the worst thing they could be granted, because the Commonwealth needs to enact reforms to their financial and government systems to address the root causes of the crisis. The Obama Administration has sided with the Commonwealth, without demand reforms, and has gone on record supporting bailout and bankruptcy for Puerto Rico.

The Commonwealth has been plagued for years with excessive government spending, failing to balance their annual budget, as required by their constitution, in 14 of the last 15 years. As a result of this irresponsible spending, Puerto Rico is accumulated more than $70 billion in public debt. Just recently, the governor of the Commonwealth declared their debt unpayable and defaulted on a $37 million bond payment.

Puerto Rico has incurred $15,637 per capita of debt, which is 10 times the average per capita debt of the 50 U.S. states, the public debt of the Commonwealth has reached 87.5 percent of personal income in 2013. This compares with the average of the 50 U.S. states, whose debt is 3.1 percent of personal debt. Puerto Rico’s debt is 26.8 percent of revenue, more than double Hawaii’s debt that is 13.0 percent of revenue. The Commonwealth’s debt is clearly reaching a level that may not be sustainable.

Bankruptcy would only condone poor decisions and enable more irresponsible spending and reckless financial policy on the part of the Commonwealth. Clearly the need is for reform to change the practices and policies that have lead to this crisis, not enabling Puerto Rico to continue on the current path. There are many areas where reform will go a long way to improve the economy and change the way government operates in the Commonwealth.

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Puerto Rico needs to pursue reforms of their permitting and regulatory process. A review by the World Bank “Doing Business” project in 2014 found the need for reform. Puerto Rico ranks 163 out of 189 economies in the world in ease of registering property, and it takes an average of eight steps over 193.5 days. The United States ranks 29 with an average of 4.4 steps over 15.2 days. The process takes 13 times longer in the Commonwealth than in the U.S.

The World Bank ranked the time and steps needed to build a warehouse to measure the ease of construction permits. Puerto Rico ranks 158 out of 189 economies with an average of 20 steps over 165 days. The U.S. ranks 41 with 15.8 steps over 78.6 days for building a warehouse. Cutting the red tape in this part of the permitting and regulatory process would be conducive to more economic development in the private sector in Puerto Rico.

The Commonwealth also needs to pursue solid welfare reform. Many studies, including the Kruegar Report, have documented that welfare payments in Puerto Rico are generous relative to low wage work and are contributing greatly to keeping citizens out of the workforce, or at least out of the legal, above-ground workforce. The caseload for Temporary Assistance for Needy Families (TANF) in Puerto Rico averaged 32,188 during the first three months of FY 2015 while the work rate for TANF recipients was just 16.3 percent in 2012, which ranks the fourth lowest among all U.S. states and territories, including Puerto Rico.

The Commonwealth has 1.35 million citizens participating in the Supplemental Nutrition Assistance Program (commonly known as food stamps) out of a population of 3.6 million. TANF and food stamps are funded via a block grant program which gives the Commonwealth wide latitude in setting benefit and eligibility requirements for the programs. More stringent work requirements would encourage both higher employment percentages and the migration of individuals out of the understand economy.

Puerto Rico can also benefit greatly from pursuing fiscal reforms in many areas. The Commonwealth very generous subsidizes higher education, appropriating more than $800 million annually. The University of Puerto Rico charges $2000 for in-state tuition while public four year universities charge an average of $7600 among the 50 U.S. States. Adopting need-based financial aid or tuition rates would save millions.

Student enrollment in K-12 education has been declining in Puerto Rico while per pupil spending has increased. From the 2001 to 2011, the inflation-adjusted spending per pupil has increased by 14 percent in the U.S. while it increased 59 percent in Puerto Rico.

Puerto Rico can pursue government workforce reforms as well. While the Commonwealth has taken steps to reduce the size of its government workforce, public corporations – which would be private in the U.S. – continue to employ political appointees as “trust employees.” Earlier this year, PREPA (the electric utility in the Commonwealth) reported they were still spending $902,208 per month on trust employees. Additionally, public sector employees are entitled to 30 paid vacation days, compared to 15 in the U.S. Reforms in these areas would greatly improve economic performance in Puerto Rico.

Public Private Partnerships (P3) could give Puerto Rico the opportunity to generate revenue, while also utilizing public sector management to gain control over long term costs. Since enacting P3 authority, the Commonwealth has successfully monetized several state assets including two toll roads and one of its airports. Extending P3 to several other assets, including toll roads, airports and PREPA could further improve economic performance.

While Puerto Rico has an extremely uncompetitive labor policy that increases employment costs, making it tougher for businesses there to create jobs, this could be remedied by changing over time by defining it as hours worked over 40 hours per week rather than those hours over eight per day. Only three other states in our country define overtime as those hours over eight hours per day. Puerto Rico also requires businesses to pay bonuses to employees, and broadly prohibits at-will employment. Changes in these two policies will create a more job-creation friendly economic environment. The strong prohibition of at-will employment makes it nearly impossible for businesses to terminate under-performing employees.

Puerto Rico requires employees working on Sunday to be paid 1.5 times the normal minimum wage, and requires retail businesses to be closed nine days per year, including Mother’s Day, Father’s Day, and election days. Changes in these laws would also lead to more job creation in the Commonwealth.

Congress will face a key decision on Puerto Rico. They can reward the government and their inefficient corrupted state-run enterprises by bailing them out and granting them bankruptcy protection to keep operating as they have been. Or, Congress can steer them in the direction of reform and prosperity by declining their request for bankruptcy letting them get their own house in order by enacting reforms to both their government and financial sectors.

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