Puerto Rico on the verge of discharging its bankruptcy
Last month, the architects of The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) got to see the fruits of their work. Federal judge Taylor Swain gave the judicial nod for the plan of adjustment of Puerto Rico's debts after years of tough negotiations and litigation. This paves the way for the largest restructuring of public-sector debt in U.S. history and the eventual exit of the Financial Oversight and Management Board from the island.
The reaction of the main actors in this saga of negotiation and litigation has been mostly positive, with the executive director of the oversight board, Natalie Jaresko, declaring in a statement, "Today begins a new chapter in Puerto Rico's history. Today, Puerto Rico can start to move on from fiscal instability and insolvency into a future of opportunity and growth." Democrat Governor Pedro Pierluisi joined in, stating, "The agreement, although not perfect, is very good for Puerto Rico and protects our pensioners, the University, and our municipalities, which serve our people[.]"
Capitol of Puerto Rico.
The policy triumphalism of some of these actors has some merit, as the plan reduces a considerable portion of Puerto Rico's debt obligations and saves billions of dollars in debt payments — an important achievement for a commonwealth government that in May of 2017 declared to the world that it couldn't fulfill its obligations to bondholders and pension systems.
However, despite this triumphalism, structural problems and a political culture that operates outside fiscal reality mean that Puerto Rico may once again find itself in the same fiscal mess that it has for now left.
The plan of adjustment has restructured the debts of Puerto Rico, but there has been a failure to pursue the structural reforms needed for a healthy economy and fiscal outlook. These reforms, which range from labor and regulation to infrastructure and energy, coupled with a long-term vision for the economy, are needed if the island is to avoid defaulting in the future. The differences aired in a recent meeting of the Fiscal Oversight Board show that a majority of its members have no trust that politicians on the island will undertake such reforms. This shouldn't be surprising when local news reveals a political culture disconnected from the fiscal realities of the island.
An example of this culture is the current governor's promise to deliver tax reform to lower taxes and make the island competitive. This sort of reform in other circumstances would be a welcome development, particularly for an economy that faces stiff competition from Caribbean and Latin American countries. But a commonwealth that has just exited Title III bankruptcy and has considerable financial commitments should not be reducing its tax rates.
Furthermore, there has been recent debate and protest to increase the wages of some public-sector workers such as teachers, police, and firefighters above the level agreed to under the adjustment plan. These important public-sector staff do deserve better pay; the base salaries for these workers hasn't been increased in years, and there is a necessary fiscal price to retain them. To this end, in the case of teachers, the Puerto Rican House of Representatives approved Bill 413 to increase their base wage.
Nevertheless, unless additional public funds can be identified, a jurisdiction such as Puerto Rico with a delicate fiscal situation and emerging from a bankruptcy process should not be in the business of unfunded wage increases.
These examples are a small glimpse of how detached the Puerto Rican political culture is from its fiscal realities. Unless there is a major change in this political culture, that sees high government spending and government as the messianic solution to every problem facing the island, Puerto Rico will slide right back to fiscal disarray.
Avoiding a return to the circumstances that led to PROMESA requires changing the political culture and basing it on giving a vote of confidence in the ability of Puerto Ricans to manage their private affairs. This means policies that emphasize entrepreneurship, free enterprise, and a state whose role is limited to what is essential for individuals to live within a community.
The plan of adjustment and Puerto Rico's exit from bankruptcy are a welcome development. However, without structural reforms and changes to the political culture toward confidence in free individuals, the commonwealth will probably become insolvent within a decade. In light of this experience, policymakers on Capitol Hill should begin preparation for another PROMESA.
Ojel L. Rodriguez Burgos is a professor of international relations at the University of Sacred Heart in Puerto Rico and a Ph.D. student in the School of International Relations at the University of St. Andrews. His political commentary has appeared in The Hill, The Washington Examiner, and Forbes. Follow him on Twitter: @ojelrodriguez.