Puerto Rico’s fiscal crisis is still not close to abating. Its economy has been in recession for 15 years, its population continues to decline, and it is attracting little new investment. In fact, it isn’t entirely clear that its government knows the true extent of its fiscal shortfall.
In the past decade the island’s government has enacted various reform plans, but to little avail. Without a resumption of economic growth it’s doubtful that any plan would have worked. Finally, in 2016, Congress enacted PROMESA, which afforded the island’s government the ability to effectively declare bankruptcy and renegotiate its $74 billion debt with creditors, something no state is permitted to do.
However, it is not clear that PROMESA will provide the pathway out of fiscal and economic insolvency. While Puerto Rico was eager to reduce its obligations by imposing debt haircuts on its creditors, it has done little to reduce either government spending or pension obligations, the main drivers of its debt. The government evinced much less interest in reducing these, since that is politically unpopular.
In 2017, Hurricane Maria struck the island and did nearly $100 billion in damage, which wreaked havoc with its budget and further complicated its economic recovery plans.
Successive governments have shown little fiscal leadership. While the advisory board created by PROMESA was intended to give the government the political cover for the difficult moves necessary return to economic growth, its previous governor, Ricardo Rossello, was more preoccupied with his Sisyphean goal of achieving statehood than dealing with the island’s debt problem, and actually cut taxes before scandal forced him from office last year. The current governor, Wanda Vazquez Garced, took over just six months ago and does not appear to be willing to take any political heat to make difficult or politically unpopular decisions, either.
The task of achieving some sort of long-run financial solution to the government’s complex debt problem is now largely up to her, with a modicum of help from the advisory board.
The basic arithmetic of the island’s debt is not complicated: Any durable plan will require debt-holders and pension recipients — the Commonwealth’s pension is essentially bankrupt — to take less money, and its citizens will have to pay more in taxes, with the federal government likely kicking in something in addition to the $32 billion in disaster aid it has already provided to achieve a lasting solution.
However, thus far, Puerto Rico has imposed only small, nominal reductions in pensions, and only on those at the upper end of the benefit distribution. The reason given for its hesitancy, of course, is that it wants to protect low-income public pension recipients and ensure that any ultimate solution to the island’s fiscal morass spares the middle class and below from any additional pain.
However, it’s not clear that the government — or anyone else, for that matter — has a good grip on what the ranks of pension recipients actually look like. We have been given broad distributional breakdowns of public pensions, but little else.
At this stage, it might make sense for the board to insist that some sort of audit be done of the island’s pension recipients so that we have a clear picture of this distribution. I am not certain that anyone knows that answer at present. In 2008, when I was part of a team at the U.S. Treasury tasked with helping to administer stimulus payments, we tried to find data to tell us what Puerto Rico’s population looks like in order to minimize potential fraud, but we got nowhere fast, stymied by an utter lack of available data. We inserted language asking that Puerto Rico collect data ex post on the population that ultimately received the payments, but it resulted in little that was enlightening or informative.
Discovering precisely who is receiving a pension and who is eligible for a pension would give us a more complete picture of any cost savings from the negotiated pension reductions currently, as well as the potential savings from the future pensions. It would also help to reduce incorrect payments and undoubtedly reduce waste and abuse as well.
Earlier this month the Hispanic Leadership Fund called for just such an audit. It would also make it easier to convince a reluctant Congress to take further steps to help the island escape its fiscal crisis. And without some sort of leadership from Congress, Puerto Rico’s chances of returning to a functioning economy seem slight.