The plan to aid Puerto Rico falls short

Puerto Rico's financial burdens may not be completely relieved by President Obama's latest plan to help. However, there is potential for the island territory.

Ricardo Arduengo/AP/File
A nun walks in front of a closed down furniture store in Lares, Puerto Rico (Sept. 2, 2015).

Last week, the Obama Administration unveiled a far-reaching roadmap for Congress to aid the beleaguered island territory of Puerto Rico. The plan incorporated some of the best ideas floated by think tanksindependent agencies, and government task forces since the island started losing people and jobs a decade ago with the final phase-out of tax subsidies for US multinational firms located there.

However, by not specifying a price tag for the plan and a way to pay for it, the Administration may have missed an opportunity to avoid a messy default and put the island on more sound economic footing.

What would the plan do? First, it would redress what some have called a drafting error in the US bankruptcy code that bars territories – but not states – from allowing their municipalities and public corporations to enter bankruptcy. Bills introduced in the House and Senate would similarly grant this power. However, the Administration plan would go even further, effectively treating the whole territory as a municipality and granting it access to “super Chapter 9.”

The plan would also create an as yet unspecified mechanism for independent financial oversight, a key step forward. As I’ve previously written, Puerto Rico’s own proposal for an internal control board was destined to fail. The only way that jurisdictions as diverse as New York City, the District of Columbia, Miami, and Cleveland have overcome severe fiscal challenges was through externally appointed control boards, emergency managers, or financial overseers.

The next steps are a little murkier. The Administration would treat Puerto Rico more like a state when it comes to Medicaid. This would mean increasing the rate at which the federal government reimburses the island for its Medicaid expenses and eliminating the current cap on federal payments, resulting in another $1 to $2 billion in annual transfers to Puerto Rico according to the GAO.

In addition, the plan would extend the federal earned income tax credit (EITC) and child tax credit (CTC) to Puerto Rican residents. This step could help address Puerto Rico’s low labor force participation rate. However, it could also cost the federal treasury up to $6 billion over ten years unless accompanied by greater tax liability for people living in Puerto Rico, who currently – despite being American citizens—do not owe federal income taxes (although they do pay payroll taxes).

So what’s next? If Congress fails to act, Treasury will continue to provide technical assistance, which is no small feat given the Commonwealth’s out of date information systems. (The Commonwealth has not filed audited financial statements since 2013, although it has released some very dire bond offering statements.)

Perhaps there will also be action on another proposal floated two weeks ago for Treasury to help the territory collect taxes and direct bond payments to investors, who may appreciate the added security enough to accept new bonds at a lower interest rate or other restructuring. However, given a complicated history and upcoming gubernatorial elections, few Puerto Ricans would welcome Uncle Sam as tax collector and financial guardian.

Puerto Rico can emerge from this fiscal and economic crisis. The island has many inherent strengths – and some weaknesses – stemming from its unique relationship to the United States (Figure 1). However, Puerto Rico will need help getting through the next few months. It will need sustained support building local capacity for economic development, quality public services, and the like. Private foundations and educational institutions should play a role, as they have in other distressed US states and cities. But, in the end and as in many other troubled jurisdictions, the federal government will need to step up.

This article first appeared at TaxVox.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to

QR Code to The plan to aid Puerto Rico falls short
Read this article in
QR Code to Subscription page
Start your subscription today