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Center for American Progress

Congress Must Pass PROMESA to Prevent Crisis in Puerto Rico
U.S. Treasury Secretary Jacob Lew, top left, poses for photos with students accompanied by Puerto Rico Gov. Alejandro Garcia Padilla, top right, at an elementary school in San Juan on May 9, 2016. (AP Photo/Carlos Giusti)
U.S. Treasury Secretary Jacob Lew, top left, poses for photos with students accompanied by Puerto Rico Gov. Alejandro Garcia Padilla, top right, at an elementary school in San Juan on May 9, 2016. (AP Photo/Carlos Giusti)

On July 1, the Puerto Rican government will default on approximately $800 million in general obligation bonds—a payment that the government simply lacks funds to make under the Puerto Rico Constitution; however, the commonwealth’s treasury secretary must prioritize payment on these bonds. This gives the hedge funds and other creditors holding this considerable debt a huge legal cudgel, and it is not clear how successful the Puerto Rican government might be in delaying court-ordered payments.

How did Puerto Rico arrive at this situation? Beyond tourism, Puerto Rico’s economy relies heavily on manufacturing, a sector that has been in decline for the better part of a decade. That decline is largely due to the expiration of Section 936 of the Internal Revenue Code, which gave mainland companies a tax break to conduct business on the island. Puerto Rico’s current labor force participation rate hovers at around 40 percent, with many Puerto Ricans working in the gray or cash economy. Approximately 45 percent of Puerto Ricans live in poverty.

As a result, government revenues have been dramatically reduced, access to credits markets has dried up, and the Puerto Rican government has been forced to adopt a range of austerity measures. Basic services such as hospitals, schools, police, and emergency services are now dangerously underfunded. Hospitals have been forced to close floors, lay off staff, and some are having difficulty obtaining medical supplies, including cancer drugs and dialysis equipment.

The strain on Puerto Rico’s hospitals and medical system is compounded by the burgeoning Zika virus crisis. According to the Centers for Disease Control and Prevention, more than 1,300 people have tested positive for the Zika virus since the beginning of the epidemic in the United States, including 168 pregnant women, and the territory has been hit harder by the virus than any mainland U.S. state. The territory’s budget crisis has meant a cutback in mosquito-control programs, and Congress has yet to appropriate any funding to combat the Zika virus in the United States or its territories.

Congress is currently considering legislation—the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA—to avert the effects of Puerto Rico’s rapidly approaching default on its next scheduled debt payment. The bill was approved overwhelmingly by the House and is slated to be considered in short order by the Senate. As is often the case with bipartisan legislation in Congress, PROMESA represents a compromise proposal. While it is not perfect—in particular, it fails to address many of the significant underlying factors contributing to the island’s fiscal situation—PROMESA offers a critical first step toward relief and would prevent an otherwise calamitous humanitarian and economic crisis in Puerto Rico.

Puerto Rico will be able to cover only a small fraction of the $800 million in general obligation bonds that are due on July 1. PROMESA includes a stay on government debt payments, a provision without which hedge funds and other creditors would almost surely sue to be paid. Since the Puerto Rico Constitution requires that payment on general obligation bonds be prioritized, the litigation could force the Puerto Rican government to divert already-scarce funds essential to supporting hospitals, schools, police, and emergency services. This will create additional, needless hardship for the residents of Puerto Rico.

Along with the stay, PROMESA would allow the commonwealth government to restructure its debt, providing relief from current unsustainable debt obligations. The bill also would require that pensions for public workers be adequately funded while Puerto Rico develops a new fiscal plan. Currently, the pensions have no explicit protection or payment priority under the Puerto Rico Constitution.

Puerto Rico’s economic problems are severe, and it is clear that the territory’s deeper issues cannot be solved by a single piece of legislation. While PROMESA would help forestall immediate catastrophe, it does not represent a comprehensive solution to Puerto Rico’s ills. Austerity will not restart the territory’s economy, and the legislation should also provide funding for the investments necessary to re-establish growth on the island. Furthermore, the bill does not address the impending Medicaid cliff, which could reduce federal Medicaid funding for Puerto Rico by nearly 75 percent. It also fails to address Puerto Rico’s unequal treatment under federal programs—such as Medicaid, the Supplemental Nutrition Assistance Program, Supplemental Security Income, Temporary Assistance for Needy Families and the Medicare Part D Low-Income Subsidy—as well as Puerto Ricans’ inability to benefit from the Earned Income Tax Credit. Moreover, the bill should provide greater representation for the Puerto Rican people in the fiscal decision-making regime that it creates.

Additionally, the need to help Puerto Rico should not be leveraged to advance extraneous provisions. The legislation should not require abbreviated permitting processes for infrastructure projects in Puerto Rico. The territory has established its permitting processes for various public interest reasons and is fully capable of adjusting the processes as necessary without the direction of the Congress. Nor should the legislation contain attacks on the minimum wage or overtime rules.

Congress needs to take steps quickly to prevent predictable, imminent harm to the people of Puerto Rico. Despite its shortcomings, PROMESA is a bipartisan compromise proposal that would avoid this harm. Congress should approve the legislation without delay.

Marc Jarsulic is the Vice President for Economic Policy at the Center for American Progress. Erin Cohan is the Director of Intergovernmental Affairs at the Center, where she manages CAP’s relationships with state and local governments.

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Marc Jarsulic

Senior Fellow; Chief Economist

 (Headshot of Erin Cohan)

Erin Cohan

Vice President and Chief of Staff