February 20, 2019 at 5:00 am ET
Last week’s U.S. Court of Appeals for 1st Circuit decision on the appointment of the federal oversight board managing the finances of Puerto Rico — as well as the current controversy over $6 billion of the island’s debt that the same federal board had declared legally invalid — is the latest reminder that officials in Washington cannot keep putting policy toward the island on autopilot.
But how can this course be corrected? This latest judicial decision gives 90 days for Congress and the president to appoint and confirm a new board that could ratify or modify the decisions already made or start anew.
Although the authors have different perspectives on the economic and fiscal crisis in Puerto Rico, we do agree on where to start: From a bipartisan standpoint, examine the intent of the Puerto Rico Oversight, Management, and Economic Stability Act that Congress enacted nearly three years ago to address this crisis.
PROMESA originated from uncertainty in Puerto’s Rico’s finances due to lack of fiscal information, inaccurate projections and the use of non-recurring revenues for recurring expenses. Accordingly, PROMESA created a Financial Management and Oversight Board to bring transparency to Puerto Rico’s finances; restore the principle of good government planning with a multiyear fiscal plan; establish four years of balanced budgets; and place the island on a path to return to the financial markets.
Unfortunately, the FOMB has not adequately met these goals; indeed, its current fiscal plan suffers from some of the same problems FOMB was intended to address.
Island residents continue to perceive a failure of transparency amid missteps and delays to end the crisis. A few weeks ago, after reluctantly analyzing some of the issued debt, the FOMB finally took a position that about $6 billion was not legally issued.
Such diligence is a positive step in any context, but many questions still remain. What does this mean for the fiscal plan and yearly balanced budgets? Does this cast doubt about other issued debt? Is Puerto Rico’s actual debt even lower? Is it back to the drawing board for the FOMB? Will the inevitable legal challenges to this interpretation succeed? These questions illustrate that Puerto Rico is scarcely closer to a return to financial markets than two years ago.
The situation on the island is fairly unique in complexity in comparison to other jurisdictions and needs to be informed by useful guidance. Congress has not provided this guidance or sufficient oversight but can do so now.
First, Congress must request of the FOMB a complete status report, present it at congressional hearings and discuss in detail the fiscal crisis, the solutions implemented and outcomes to date.
Second, Congress can provide needed direction on issues relating to compensation, transparency and fiscal discipline of the FOMB itself. For a bankrupt jurisdiction, it is unreasonable for the FOMB and Puerto Rico government to have mirror structures of consultants, costing millions of dollars paid by the U.S. citizens of the island.
Third, Congress can pave the path for the island’s economic growth and direct the FOMB to focus more on how to encourage local private sector initiatives to strengthen the economy.
The FOMB has to answer to Congress on whether those tentative restructuring agreements are sustainable over the long run or serve as mere Band-Aids to satisfy short-term benchmarks. How will unfunded pension payment promises be made affordable for taxpayers and fair to retirees? Solutions developed for Puerto Rico could become a model for U.S. states that may find themselves in similar quagmires.
Throughout 2017, we exhorted lawmakers to remember the plight of Puerto Rico in designing the federal tax reform law. Puerto Rico needs economic development tools to restart a sustainable economy with a strong business sector.
Right up until passage of the Tax Cuts and Jobs Act, we were told that complex questions such as the tax status of U.S. companies operating there, as well as extending the federal earned income tax credit to island residents, would be resolved in other legislation … but soon. It is now well past “soon.”
The TCJA made many changes, but the U.S. tax code still classifies American-owned businesses operating in Puerto Rico as controlled foreign corporations. Because the TCJA created tough international minimum tax provisions affecting CFCs as well as other business transactions, large employers on the island face disadvantages regardless of how they structure their operations.
One helpful short-term step is to modify (and moderate) these provisions to recognize Puerto Rico’s special U.S. tax status. Additionally, Congress can legislate a tax credit to offset the federal payroll taxes for which Puerto Rico businesses and workers are liable now. This could provide an important boost to labor force participation and private sector activity, helping the island’s competitiveness.
Congress and the administration now have an opportunity to engage in a genuine partnership for the prosperity of our 3.2 million fellow Americans living in Puerto Rico. Democrats and Republicans must recognize that private investment and economic growth are key to getting Puerto Rico out of the austerity trap. They must also recognize that they cannot walk away from the FOMB’s flaws.
By getting past the urge to score political points and moving toward bipartisan solutions, Puerto Rico’s future will indeed be brighter.
Max Trujillo is president of MJTPOLICY, a government relations consulting firm, and is a former senior Democratic congressional staffer.
Pete Sepp is president of National Taxpayers Union, a nonpartisan citizen group founded in 1969.
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