The oversight board’s plans require steep government-spending reductions and less stringent labour rules to incentivize the private sector
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By Amanda Gomez
NEW YORK (Reuters Breakingviews) - Puerto Rico filed for a kind of bankruptcy in May 2017 with some $72 billion (all dollars US) of debt. That was the culmination of a slow spiral of economic decline and outward migration. Then Hurricane Maria unleashed widespread devastation, knocking the island back further. Last week the federal board overseeing Puerto Rico’s finances since the bankruptcy certified plans that include cuts to pensions and other austerity measures.
What they don’t reckon with adequately is the risk of yet more working-age people jumping ship.
BRAIN DRAIN
The gates were shut to the University of Puerto Rico in Mayaguez – my school at the time – for two months in 2010. There and elsewhere, disgruntled students and faculty were protesting fee hikes and cuts in benefits. The next year I transferred to Rutgers University in New Jersey, leaving Puerto Rico along with an estimated 40,000 others. At the time it was the largest exodus in recent history, but the record has been broken five times since then.
After Hurricane Maria struck last September, more than 130,000 people, from a population of just over three million, have left according to government estimates. And yet after a nearly six per cent projected decline in the fiscal year to July 2018, the Financial Oversight and Management Board forecasts just over one per cent of Puerto Ricans will leave in each of the following five years, on average.
The oversight board’s plans require steep government-spending reductions and less stringent labour rules to incentivize the private sector. Based on the certified cuts to outlays, the government would have to dismiss about 40,000 employees, according to a statement from Carlos Mendez, the speaker of the Puerto Rican legislature.
The plan would also freeze salaries for the remaining staff. Most retirees would see their pensions reduced by five per cent to 25 per cent. In some cases, retirees already near the poverty line could be pushed below it, depending on their household income.
Corporations, meanwhile, will be spared the requirement to pay the traditional Christmas bonus, and mandated vacation and sick leave will fall from 27 days to 14 days. Some laws were reformed last year: Christmas bonuses are now 2 percent of pay instead of 6 percent, and overtime rates were dropped from 200 percent of pay to 150 percent.
BECAUSE THEY CAN
All in, that's enough to convince many others to quit the U.S. territory. All Puerto Ricans have American citizenship. Since 2010, a tenth of the population has left. In the two years after Maria, the population could drop an additional 14 percent, according to the Center for Puerto Rican Studies. Raising taxes and cutting expenditures are standard austerity measures following financial crises. Usually, though, most citizens have little choice but to struggle on. Not in this case.
A better life isn't guaranteed, but the opportunity is greater on the mainland. The overall U.S. unemployment rate is less than half the 10 percent-plus on the island. Youth unemployment is a problem in the territory and the minimum wage is lower for those under 25 years old. The mean annual wage in Puerto Rico was $28,930 last year, much lower than in Florida, Texas or New York, according to the Bureau of Labor Statistics. As it happens, Puerto Ricans also get to vote in federal elections if they move to one of the 50 states – a right the island’s status as a U.S. territory does not confer.
Puerto Rico Governor Ricardo Rosselló has said he won’t implement some of the benefit cuts, but even his own plans would make leaving an easier choice. The oversight board submitted the changes to the labor laws to Congress, but Mendez says he is considering all options to stop implementation of the plans altogether.
A ROCK AND A HARD PLACE
To be fair to the federal board, Puerto Rico's finances are unsustainable without spending cuts, along with a big writedown of its debt – in addition to the substantial but deserved help needed to rebuild after the hurricane. The approved reforms are expected to increase gross national product by 5.9 percent in the year to mid-2019, compared with the 13.2 percent drop estimated for the current fiscal year – which includes losses related to the last hurricane season. Between 2020 and 2023, GNP is expected to grow between 1 and 2 percent annually.
It’s hard, however, to see how this growth will take hold amid fresh cuts to Puerto Ricans' income and a bigger-than-expected exodus of productive citizens. But it's also hard to identify obvious alternatives, aside from somehow preventing residents from leaving or, more practically but improbably, persuading the U.S. Congress to provide a big bailout to reset the island's economy.
All the same, Puerto Rico must adjust to economic reality. The oversight board has run the numbers, but it’s doomed to fail if it ignores the human element.
