Kathryn Wylde

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Por Kathryn Wylde
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Recovering Puerto Rico: Lessons from New York City's Fiscal Crisis

(This article was first published in The National Institute for Latino Policy Report on April 3, 2018.) 

After New York City reached the point of bankruptcy in 1975, a financial control board was imposed as a condition of a bail out that was structured by state and federal governments, unions and financial institutions. For the next thirty-three years, the city had to submit its budget and debt offerings for review and approval by a board composed of state-appointed officials and independent business leaders. By 2008, the factors that led to the city's fiscal crisis -economic decline, loss of population, and excessive government spending- had been reversed and New York emerged with one of the world's strongest, most vibrant urban economies. 

This turnaround in the city's fiscal fortunes was possible because of cooperation and a high degree of trust among leaders of business, labor, civil society and all levels of government. Together, they constructed a recovery and rebuilding process that put the interests of the city first. Partisan politics and sector rivalries were essentially set aside; rigorous accounting standards and procedures were imposed; public accountability and transparency ruled the day.  

During this period, local government focused its limited resources on improving basic municipal services -police, sanitation, education. The city's nonprofit sector took on new responsibilities for delivery of human services, community revitalization, and workforce development. Universities, medical centers, civic and cultural institutions became partners in rebuilding neighborhoods, attracting new investment and talent, and developing diverse industries. The business sector played an expanded role in planning and financing of affordable housing, infrastructure, and economic development.  

Puerto Rico today finds itself in a similar situation to New York City in the 70's, but with political, fiscal and economic challenges that are substantially larger and more difficult to resolve. The island's problems are well known -$72 billion in debt, $50 billion in unfunded pension liabilities, a shrinking population, a sagging economy, electrical power and water utilities that are broken, and police, health and public education services that are underfunded and generally failing. The impact of the hurricanes of 2017 have brought these underlying conditions into dramatic focus and heightened the urgency of addressing them.  

In New York, state government was the authority under which the fiscal crisis was resolved. The commonwealth government lacks the legal or political status of a state. The island's government is literally under the thumb of Congress and, thanks to the storms, the Department of Homeland Security as well. A U.S. Judge and federal oversight board are making basic management decisions for the island. The relationship between the Puerto Rican government and the forces that control the island's destiny is adversarial at best.   

In March, William Dudley, President of the Federal Reserve Bank of New York, observed that for Puerto Rico to achieve a sustainable economic recovery, everyone will have to give up something; all sectors must do their part. New York emerged from its crisis because every sector did do their part. Partisan voices set aside their ideological biases; unions passed up salary increases and accepted the need for layoffs and downsizing of government; the private sector took extra risks, invested in public priorities that were not their historic focus, and agreed to necessary tax increases.

Unfortunately, despite the willingness of most Puerto Ricans to make the same sacrifices for their country, they are not in a position to do so. The commonwealth government's powers are circumscribed by the U.S. Congress, making it far weaker than a state.  

For tax purposes, Puerto Rico is treated like a foreign country; for trade, it is a colony at the mercy of U.S. commercial interests; when it comes to federal aid and entitlement programs, it is a poor step child getting a fraction of the formula funding that goes to states. As Estudios Técnicos recently reported, Puerto Rico's dollar contribution to the U.S. economy is double what it receives back, a balance of payments deficit that has made the island permanently dependent on a largely unresponsive U.S. government.  

So before Puerto Ricans can come together in a unified effort to save their island, it is the U.S. government that has to give something up. That could start with amending the tax law passed in December, 2017, which treats Puerto Rico as a foreign country when it comes to the 12% tax on many imports produced on the island. It must include relief from the Jones Act that doubles the cost of shipping to and from Puerto Rico. It must adjust Medicaid, SSI, Education, food stamps and other formulas for aid and entitlements to reflect the true costs and levels of poverty on the island. And when it comes to disaster aid, the U.S. government must redirect the 90% of contracts and jobs that are currently going to U.S. mainland contractors to the Puerto Rican businesses and residents that are prepared to fill them.  

New York State was able to provide fiscal stability for the city and a framework for retiring its debt. The state also relieved the city of some financial obligations, such as funding the public universities. In the case of Puerto Rico, only the federal government can fulfill these functions.  

Once the federal government does its part, it is appropriate to call upon the people of Puerto Rico to take some tough actions, such as:  

The lack of trust among Puerto Ricans for the U.S. government is well deserved and has infected the island culture, making collaboration both within the island and with the mainland very difficult. The handling of the fiscal crisis and the natural disaster have exacerbated the tension. Only forceful action by the U.S. government to demonstrate their respect for the people and institutions of Puerto Rico will set the island on a path to economic recovery and allow Puerto Rico to achieve the measure of self-reliance that it needs to move forward.

(Kathryn Wylde is President and CEO of the nonprofit Partnership for New York City, the city's leading business organization. Its mission is to work with government, labor, and the civic sector to build a stronger New York, with a focus on education, infrastructure and the economy. Together with her husband, Wilfredo Lugo, she has a home in Quebradillas, Puerto Rico, where she serves on several nonprofit boards.)

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