The commonwealth of Puerto Rico- an American territory- is in serious financial straights. By most accounts, they are $72 billion in debt and unable to pay it off. Some have compared them to “America’s Greece,” but that is a misnomer. Solutions to the problem are varied, but appear in political limbo in Congress. Most of the “solutions” suggested or proposed by the Democrats clearly miss the mark.
On a certain level, Congress is partly to blame for the state of affairs, but most of the blame must be placed squarely at the feet of that island’s government. In 2005, Congress let expire certain tax exemptions afforded investments in Puerto Rico. When they were in effect, they attracted certain businesses, mainly in the service sector. It was not as if the Puerto Rican government was not aware of the expiration of these tax breaks and the likely effects. They also failed to do anything in response to them. Instead, they continued as business as usual and that usually meant expansion of the public sector to the point that it now represents 25% of their labor force.
Puerto Rico was experiencing a recession before The Great Recession. Additionally, Congress exacerbated the problem. Puerto Rico can issue debt tax-free which makes it very attractive to investors, especially hedge funds. Unlike Greece, most of Puerto Rico’s debt is held not by the government, but by private individuals. Thus doing nothing would not greatly affect the US economy unlike Greece where a default would have been felt throughout Europe.
Unfortunately, a default on Puerto Rico’s debt will have an effect on average Americans, not the government or the economy as a whole. This will adversely affect an investor with a stake in a mutual or hedge funds that purchased bonds from Puerto Rico. Should the United States step in with a bailout of any kind, they would actually be bailing out Wall Street hedge funds and mutual funds. Thankfully, the GOP in Congress is standing steadfast against any bailout and the Obama administration has not suggested one…yet.
When one is broke, one can usually declare bankruptcy. However, Puerto Rico does not have access to US Bankruptcy Courts. This is where Democrats and Republicans start to the diverge with the Democrats favoring legislation bringing Puerto Rico under Chapter 9 bankruptcy proceedings. Chapter 9 is reserved for US municipalities, not states and regardless, Puerto Rico is neither.
The problem with that is twofold. First, even if they were afforded the luxury of protections under Chapter 9, it would do very little to solve the underlying problems. Second, actual states would demand bankruptcy protection with Illinois, California and New Jersey being the first three likely ones before a judge.
Currently, there is a bill pending in Congress that would place Puerto Rico under the guidance and direction of a 5-member board that would basically administer the island and their finances in exchange for certain “protections” against creditors. It would act like a bankruptcy proceeding without actually being bankruptcy. However, it has run into a very important wall and that is where it has an analogy to Atlantic City.
Over the years, Atlantic City was run by a series of liberal Democratic mayors and the city did enjoy boom times since they had a monopoly on East Coast gaming. Just as Puerto Rico knew the tax breaks were going to expire in 2005, Atlantic City knew they were going to face competition from neighboring states and just like Puerto Rico, they failed to prepare for that eventuality. Further, the city continued to spend despite declining tax revenues as if something was going to change and that “something” was right around the corner.
While the Governor of Puerto Rico was warning about default on the debt, he was also awarding over $125 million in Christmas bonuses to government workers. Likewise, the Atlantic City government and public workers continued to swell despite the financial warning signs. The county offered to do trash and recycling pick up at a bargain, but the city refused because it would have meant some city-paid trash collectors (note: they make great money) being let go. City officials drove around in cars paid for by the city. And still the tax base declined along with casino revenues which meant less money for the city.
Just as Congress is trying to step in with a 5-member board to correct Puerto Rico’s finances, so too is the state of New Jersey attempting the same with Atlantic City. And they are facing the same political headwinds. The state senate’s bill would put everything on the table financially for the city. The state assembly bill would exclude collective bargaining contracts and the lucrative benefits and pension packages. While the state senate passed their version, the state assembly refuses to consider it until union workers are protected. Hence, nothing gets done.
Of course, there are differences, but a bloated city government in Atlantic City and a bloated public worker force in Puerto Rico (25% of all employed Puerto Ricans) are one major cause of their financial problems. One thing unique to Puerto Rico is their adherence to the $7.25 Federal minimum wage which is equivalent to $19 a hour in Puerto Rico. But, there are more similarities than differences.
Likewise, neither Congress’ bill nor the ones in New Jersey address the key underlying factor in their bad financial states- economic development. Despite having a monopoly on casino gaming, many sections of Atlantic City look the same or worse than they did before gaming. Serious money has been squandered on things that never came to pass, or on studies.
Considering that only 15% of Puerto Rico is used for agriculture, this is one area where sound agricultural policies should be put into place. Additionally, they should be exempt from the protectionist Jones Act which benefits US unions and drives prices up in Puerto Rico. Besides the immediate problem of Puerto Rico’s debt which obviously has to be renegotiated and restructured, they must also get serious about decreasing the government, and furthering economic development. And where they could, many of Puerto Rico’s government-owned or operated corporations need to be privatized.
In Atlantic City, they must also stop talking and start doing more to diversify their tax base beyond the casinos who have won enormous tax appeals after being extorted for years. There are some promising developments in the mix such as the expansion of the local college with a campus in the city and a major utility moving their headquarters there. But beyond that, they must get serious about tightening the budget (there is no need for 8 principals in the high school, for example) and doing something about city workers who are responsible for trash pick up and the water company- two entities that can be run more cheaply and more efficiently by either the county or private interests.
Years down the road, there will still be an Atlantic City just as there will be a Puerto Rico. But, how many times must we hold up examples of liberal policies and programs coming back to bite people on the proverbial financial ass? Look at the list of failed cities: Newark, NJ (1907), Philadelphia, PA (1952), Milwaukee, WI (1908), St. Louis, MO (1949), Detroit, MI (1961). The years listed are the last time they elected a Republican leader. When you throw in the states with dire financial problems (California, Illinois) we see that they too have been run by liberal Democrats and their crony union accomplices for years with their liberal policy solutions.