The Washington Diplomat / November 2016
By Larry Luxner
SAN JUAN — It’s another 85-degree afternoon in Old San Juan, and dozens of cruise ship passengers stroll along the waterfront, casually making their way toward Pier 4, where the 110,000-ton Carnival Glory awaits them. An elderly man walks by, selling coco, piña and parcha-flavored ice cream to tourists, while a local entertainer wrapped in the red, white and blue Puerto Rican flag sings “Stand By Me” in front of a kiosk selling Puerto Rico-themed baseball caps, license plates and necklaces.
The musician, known only as “El Gallo de San Juan,” has been here for 20 years, arriving every morning at 8 a.m. and walking up and down the entire waterfront with his songs and trinkets.
“The people are buying,” he says. “They don’t spend a lot. They buy cheap things, but they’re buying.”
Directly across the street is the Hacienda, Puerto Rico’s Treasury Department, which chafes under the weight of the island’s $68 billion budget deficit. But the tourists — clad mostly in shorts, T-shirts and flip-flops — don’t seem to care, any more than they care about the Zika epidemic that’s frightened so many islanders or the staggering brain drain that has seen hundreds of thousands of Puerto Ricans flee for the U.S. mainland in the wake of economic stagnancy.
If anything, tourism is booming.
“The economy here is good, especially the underground economy,” said vendor Karem Quintana, who drives here each morning from the northern coastal town of Rio Grande to offer homemade jewelry to cruise ship tourists. “People are selling all kinds of things — bags, perfumes, even drugs. All the malls are full. You can go to Walmart right now and there’ll be a big line.”
Quintana, who’s been peddling her necklaces, pendants, bracelets and earrings here for 13 years, says she averages $800 a day; some days when lots of cruise ships are in port, she makes up to $1,200.
“We don’t take food stamps, and we make enough money to send my daughter to a private school,” she told us proudly. “Here, the bad thing is the government. They say we’re bankrupt and people are leaving. But I think they’re really saying that so the U.S. will give us more money.”
Money is at the heart of the schism between Washington and Puerto Rico, a U.S. commonwealth in the Caribbean that’s home to 3.5 million people and is saddled with a per-capita debt exceeding $15,700 — more than 10 times the average per-capita debt in the 50 states.
This summer, Congress had to pass emergency legislation to keep the island from defaulting on its debt. The rescue plan, dubbed PROMESA, sets up a seven-member control board to oversee the island’s budget, stabilize its economy and facilitate debt-restructuring talks with creditors. The idea of Washington bureaucrats dictating how Puerto Rico manages its money, however, has stirred deep resentment among residents and revived calls for the U.S. territory to secede from the “colonist” mainland.
There is plenty of blame to go around for Puerto Rico’s fiscal crisis, which many observers say is the result of poor governance, mismanagement, an inefficient welfare system and overregulation. On the one hand, the government wracked up debt, spending far more than it was collecting (for example, in the 1990s, it created a health insurance system for the poor but never found a way to pay for it). At the same time, federal tax breaks encouraged reckless borrowing.
Because Puerto Rico is not a state, its tax laws are riddled with quirks and loopholes. For decades, Puerto Rico benefited from U.S. laws that provided financial incentives to manufacturers that developed production in Puerto Rico instead of outside the United States. But Congress phased out those incentives over a 10-year period that ended in 2006, devastating the manufacturing sector and triggering a full-blown recession.
The downturn sparked a vicious cycle of people leaving the island for better job prospects, further squeezing tax revenues. More than 500,000 people have booked one-way flights from the island since 2006 — mainly bound for Texas, New York and Florida — in what has amounted to one of the largest U.S. population shifts in recent memory.
To pay its bills, the Puerto Rican government took the easy way out, issuing debt in the form of municipal bonds to help cover revenue shortfalls and expenses. This debt was triple tax-exempt, meaning it was exempt from federal, state and local taxes — which in turn drew opportunistic Wall Street investors.
“The debt was tax-exempt for investors throughout the United States and paid higher yields than other munis, making it attractive to scores of retail bond mutual funds. Hedge funds and other risk-seeking investors also piled in as the island’s financial woes mounted,” wrote Mary Williams Walsh and Liz Moyer in a July 1 New York Times article.
Puerto Rico agreed to pay certain bondholders ahead of public services, so the cash-strapped government began shutting down schools, hospitals and other public services while hiking sales taxes.
Today, the island faces a dizzying avalanche of crises ranging from a 45 percent poverty rate, rising crime and unemployment to the alarming spread of Zika throughout the Caribbean territory. Whether PROMESA can help Puerto Rico climb out of its prolonged funk and overhaul its sluggish economy, however, remains to be seen.
While news of Puerto Rico’s fiscal crisis has faded from the headlines, it’s still very much front and center for islanders as they head to the polls this month — but not necessarily to cast their vote for either Hillary Clinton or Donald Trump.
Indeed, while most observers in Washington focus on the highly divisive U.S. presidential elections, Nov. 8 also happens to be Election Day in Puerto Rico. Six candidates are vying to be the next governor, and four want the job of resident commissioner — the closest the Spanish-speaking island has to an ambassador in the nation’s capital.
The two candidates most likely to replace current Resident Commissioner Pedro Pierluisi as Puerto Rico’s top representative in Washington are both lawyers from San Juan: Jenniffer González of the center-right, pro-statehood New Progressive Party (PNP in Spanish) and Héctor Ferrer of the center-left, pro-commonwealth Popular Democratic Party (PPD), which advocates to keep the territorial status quo.
González shares the PNP ticket with gubernatorial candidate Ricky Rosselló, who according to an Oct. 11 poll by the daily newspaper El Nuevo Día leads the pack with 40 percent support. Ferrer is running with the PPD’s David Bernier, who has 28 percent.
Also seeking the resident commissioner’s job is Hugo Rodríguez of the Puerto Rican Independence Party, whose gubernatorial candidate, María de Lourdes Santiago, has 3 percent support; and Mariana Nogales, whose candidate, Rafael Bernabe of the newly formed Working People’s Party, has only 1 percent.
Two other candidates for governor, Manuel Cidre (9 percent) and Alexandra Lúgaro (13 percent), are running as independents and don’t have running mates at all.
In late August, The Washington Diplomat interviewed both González and Ferrer at their respective offices less than a mile apart from each other along the scenic highway leading to Old San Juan (see Q&As on page XX).
“The resident commissioner has to be a kind of ambassador for Puerto Rico in D.C. — to sell Puerto Rico not only in tourism but in agriculture, manufacturing and medical services,” Ferrer told us. “He should be the representative of our economy.”
González had something remarkably similar to say, despite her support for making Puerto Rico the 51st state.
“Being the sole representative from the island without voting rights in Congress, we should use the resident commissioner’s office as an ambassador for economic development — not only with foreign embassies in Washington but also with programs and agencies at the federal level so we can help the island get out of its fiscal crisis.”
Because it’s neither a state nor a foreign country, Puerto Rico often falls through the cracks. In many ways, its official status of Estado Libre Asociado (or “free associated state) is a paradox because Puerto Rico is not a state, it’s not associated and in the opinions of thousands of Puerto Ricans, it’s not free either.
The Connecticut-size island came under U.S. jurisdiction in 1898, when American troops wrested it from Spain during the Spanish-American War. That short-lived conflict also gave the United States control of both Cuba and the Philippines, though Cuba got its independence in 1902 and the Philippines in 1946. Puerto Rico, on the other hand, became a commonwealth in 1952 and has remained one ever since.
The answer to the island’s fiscal woes, some people say, is a permanent solution to the island’s perennial status dilemma.
“The United States needs to complete what it started in 1898,” said Cidre. “Most Puerto Ricans love the U.S. and love their American citizenship, so they deserve better treatment. What we’re waiting for is some expression from Congress that we can decide if we want to be independent or become a state. It’s a matter of justice.”
For years, being in statehood limbo benefited islanders, who receive federal aid but most of whom don’t pay federal income tax. At the same time, however, there are some disadvantages; Puerto Ricans, for example, receive lower Medicaid and Medicare reimbursements. Moreover, today, because Puerto Rico is not a state, it cannot declare Chapter 9 bankruptcy protection like many cities and municipalities could. And because it is not a country, it cannot appeal for emergency loans from the International Monetary Fund. Its only lifeline is Congress.
Despite longstanding calls for statehood, many doubt Congress will ever grant the territory statehood, especially now that it is mired in economic crisis. As a result, some experts think Puerto Rico will simply have to soldier through financial hardship for the next five or more years.
Tragedy in the Tropics
Lately, it’s become fashionable to equate the island’s fiscal meltdown with the recent Greek tragedy, in which a proud nation of 11 million inhabitants nearly got kicked out of the European Union.
Yet the Greek economy might actually be in much better shape than the troubled economy of Puerto Rico to which it is often compared. Even though Greece’s April 2016 unemployment rate of 23.3 percent was twice that of the Caribbean island (11.3 percent), Greece is improving, while Puerto Rico is going in the other direction. In fact, Puerto Rico saw its economy decline by 1.6 percent in 2015, and it’s projected to shrink another 2 percent in both 2016 and 2017.
Economist Anne Krueger of the Johns Hopkins School of Advanced International Studies said Puerto Rico has traditionally overestimated growth while underestimating how much the economy would shrink as a result of losing Section 936 tax breaks.
“In the late 1970s, Congress, in its wisdom, exempted companies that moved their factories to Puerto Rico from U.S. corporate taxes, but the companies that took advantage of this were largely pharmaceuticals. The inversion we now hear about was nothing compared to the tax breaks companies were given for moving there,” she said, noting that those tax breaks ended in 2006.
Unless they can somehow restore growth, it doesn’t matter what you do,” said Krueger. “They’ve got to make investments in the Electric Power Authority, although they can’t right now because it’s going bankrupt. In addition, all but a little of their power is based on oil, and oil is even more expensive in Puerto Rico because of the Jones Act,” a 1917 law that requires everyone in Puerto Rico to buy goods from an American-made ship with an American crew, which in turn jacks up prices.
Furthermore, the federal minimum wage — which applies in Puerto Rico — is a real deterrent to investment, and “raising taxes will just encourage more out-migration” to the U.S. mainland, Krueger said.
“When you have lots of different entities within the government and no orderly procedure for sorting it out, the lawyers will have fun and keep the mess going for several years,” she warned. “The downslide will continue and get worse.”
Politics of PROMESA
Both major candidates for resident commissioner are on record as opposing the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which hands fiscal control of the island to a board that doesn’t answer to elected officials. Puerto Ricans fear this unaccountable board, or “junta” as many call it, will favor bondholders over residents, who will see their taxes rise and services slashed. Supporters say the legislation will do the opposite: restore public services over near-term debt repayments and give the island time to renegotiate its unsustainable debt load.
“The two main parties are against PROMESA, but there is no real compromise to work against it,” said Nogales, one of four candidates vying for the D.C. job. “As resident commissioner, I would work to eliminate PROMESA. We have a commission to audit the debt, and its preliminary findings are that almost half the debt is unconstitutional or illegal, or has some fraud. My proposal would be to determine who is responsible and make them return the money — or even send people to jail. If we eliminated half our debt, we’d have more resources to invest in economic and social development.”
Nogales, a 42-year-old single mother and attorney who is considered a longshot for the post, said that when she was offered the chance to run for resident commissioner on the Working People’s Party ticket, she was confused.
“I didn’t know what a resident commissioner did,” said the family and civil lawyer, a death-penalty opponent who also specializes in separation of church and state issues. “But then I realized I could use this position to fight for human rights for Puerto Ricans on and off the island. I could start working on a human rights agenda for Congress, and in the case of Puerto Rico, of course, an immediate agenda for decolonization. We could also petition the United Nations, the Organization of American States and other groups to deal with our territorial status and request the U.S. to comply with its international obligations.”
At a Sept. 27 panel organized by the National Taxpayers Union — a conservative, Washington-based citizen group that calls itself “the voice of America’s taxpayers” — Warren Payne, a former policy director of the House Ways and Means Committee, called PROMESA a “critical first step” toward the orderly restructuring of Puerto Rico’s debt and said that trashing Puerto Rico’s tax breaks was a mistake.
“Congress ultimately threw the baby out with the bathwater,” he said, arguing that the previous tax system should be reworked to help Puerto Rico remain competitive. “Rather than fix the program, they repealed it entirely. That has created a lockout effect, so there’s a huge disincentive for U.S. companies to invest on the island. Companies rightly ask the question, ‘If I can’t get my money out, why would I invest in Puerto Rico?’”
Independent candidate Cidre, a Cuban-born bakery executive, also broadly supports PROMESA’s goals.
“If we work closely with PROMESA, we can use it not only to pay our debts but to develop Puerto Rico, in order to prepare it for a decision on whether to be independent or become a state,” said Cidre, who declined to discuss his individual status preference for the island. “Regardless of the final decision, if we are going to be an independent country, we have to be prepared for that. And if we want to be part of the United States, we have to be prepared for that too.”
Yet the resident commissioner is only a figurehead in the grand scheme of things, claims Cidre, who thinks the position itself is useless.
“He doesn’t have a vote, and in many cases, he doesn’t have a voice either. So why be there?” Cidre said. “The resident commissioner position was established in 1901 because of the huge distance between Puerto Rico and the mainland. But today it doesn’t make sense. The voice of Puerto Rico in Washington is the governor.”
Antonio J. Colorado, a former Puerto Rico secretary of state who is perhaps best known for his vigorous defense of Section 936, served as the island’s Washington-based resident commissioner in the early 1990s. He couldn’t disagree more.
“Most of the people who run for resident commissioner do not really know what it means,” Colorado told The Diplomat. “But as resident commissioner, they consider you as a member of Congress. Your vote is very important in committees, and in some cases it can be decisive. You can then negotiate that vote for fellow members of Congress to help you in other matters. That’s the way it works in Washington.”