Long before Hurricane Maria blew into Puerto Rico and decimated the island’s property and infrastructure, it was already a crumbling vacation destination that had gone from a strong and vibrant economy to a tragedy waiting to happen. Yes, Maria’s winds were clocked at over 130 mph but it didn’t much of a breeze to topple the house of cards that the island had become.
Puerto Rico was a mess long before the storm was even a thought. Decades of government mismanagement, corruption and staggering debt had the island spiraling towards economic disaster. Those who had the ability to leave the island left for a more lucrative life on the mainland and those who stayed behind faced a decaying infrastructure and a standard of living that most on the mainland would find unacceptable.
Prior to the storm, the Bureau of Labor Statistics reported the unemployment rate more than double that on the US mainland and poverty was skyrocketing. The service economy of Puerto Rico also took a hit in 2016 with the Zika virus destroying the island as a vacation destination and costing thousands of workers their jobs. As opportunities vanished, crime skyrocketed on the island even further threatening the tourist industry. Although crime rates seem to have leveled off, the island remains a hotbed of gang activity fueled by the illegal drug trade among the Caribbean Islands. As government coffers went empty, it was forced to close schools and lay off teachers to save money. Water and electric systems went into decline as money to fix them did not exist.
How did Puerto Rico get to this point? The story may sound eerily familiar to many of us here on the mainland. Let’s briefly review it.
Some 60 years ago, federal lawmakers in Washington decided that Puerto Rico needed to be brought in parody with the rest of the country. They convinced the island leaders to leave the agriculture system behind and begin to focus on industry to grow the island’s economy. The plan, known as Operation Bootstrap, started with tax breaks designed to draw manufacturers onto the island.
For a time, the plan worked and between 1950 and 1980, Puerto Rico’s gross national product increased ten-fold. Tourists flocked to the island increasing the service economy and the island’s residents began to experience a growth in their disposable income and young Puerto Rican's began to attend college at record rates.
As the economy grew, so did the population and the need for government to provide more social and educational opportunities. With surplus money in government coffers, the island’s politicians began giving out bonuses and making promises that would be paid for with future tax collections. Government corruption became rampant and promises and money were traded for votes.
But the gravy train was heading for a derailment.
In 1976, another tax break was enacted that began to draw the ire of the existing native businesses of Puerto Rico and the politicians in Washington. This incentive allowed mainland manufacturers to avoid corporate taxes on profits made in US territories. As Puerto Rico's government's financial burdens increased, less money was coming in as manufacturers paid no taxes to support the promises made. Native Puerto Rico companies now had the financial burden fall upon them as their taxes increased exponentially, essentially forcing them out of business.
In Washington, politicians decried this plan as corporate welfare and in 1996, President Bill Clinton signed a bill that phased out this tax break. Soon, those mainland companies that enjoyed the financial windfalls left the island as doing business off shore became too expensive and burdensome.
This left the island in desperate financial straits as the off-shore companies packed up and left and the native businesses had closed their doors years before. As plants closed, jobs were eliminated. Money that employees made at these jobs that were taxed and putting some money into the government disappeared as the employees were forced to collect government benefits. As a result, the exodus from the island began and along with them, went another part of the tax base. Puerto Rico’s slow decline began to accelerate.
As the island moved into 2016, the government was nearly $70 million in debt and the pension system was facing close to $50 million in liabilities forcing the island to pursue bankruptcy. This forced Washington politicians to pass a bill during that year called PROMESA, signed and endorsed by President Obama, which created a process similar to bankruptcy that would allow the island to resolve its enormous pension liability and eliminate the government debt.
Under the law, an oversight board was put into place which proposed a cut of 10% to pensioners who were already being paid at a much lower rate than those on the mainland. Current government employees would be furloughed two days a month to save money for the government (while cutting the income even further for island residents forcing them into an even lower standard of living).
The plan goes even further, forcing the government to cut pensions another 10% by 2020, remove bonuses and furlough even more employees to save cash. The law also lowers the minimum wage on the island to $4.25 for everyone under the age of 24. Once again, the PROMESA law was based on future incomes and tax collections that did not consider any future events like a hurricane. The storm has now altered the calculus dramatically.
What is being predicted now is that even more able-bodied residents will leave the island for income and safety on the mainland throwing off the expected outcome of PROMESA. The only people who will be forced to stay are those who have no financial ability to leave or the retirees who do not have jobs but collecting from the system. Because of the damage on the island, businesses will avoid any investment in the economy and those currently there may seek to move elsewhere taking with them potential tax revenues.
Before the hurricane, the people of the island knew they had a problem and sought to change things by changing the government. The current governor, Ricardo Rosello of the New Progressive Party, was elected in 2016 with just 41% of the vote in a four way race, which did not reflect much of a mandate. Rosello, who is the son of former governor Pedro Rosello, entered office without experience and never held a job in the private sector. Prior to his election, Rosello served as a delegate to the Democratic convention in 2008 and 2012 and worked briefly as a political reporter before founding his own organization that supported statehood for Puerto Rico.
Those Rosello put into place around him also had little experience in solving the economic issues present on the island. The new government was struggling with the realities of the 2017 Puerto Rico economy and then the hurricane hit, throwing the fledgling government deeper into crisis. Their only hope is to address the corruption and attract industry back to the island so it can rebuild and move towards self-reliance once again, a tall order for the devastated land.
So, what are the lessons? Let’s look at the problems that led Puerto Rico into their current situation;
Overwhelming pension liabilities because of political promises based on money not yet in hand and no way to pay them
A pension plan that was so underfunded that promises made to workers will not be met and reductions will be sought in the payouts
Annual budget shortfalls that result in money being taken from one source to fund another
Budget surpluses that were quickly wiped out as politicians found ways to spend the money (to perhaps buy votes) without saving for a rainy day
Government providing enormous tax breaks to attract companies onto the island while existing companies were forced to shoulder the burden through increased taxes, fees and strangling regulations
Citizens moving elsewhere due to high taxes and burdensome fees and taking with them the tax base that the current crop of politicians were gambling the future on
Governments planning on monies in the future that are not yet collected to pay for their promises and growing debts
Even more fees and innovative ways to raise tax money (like tolls) forcing the remaining tax base to head elsewhere.
Do any of these things sound familiar in your state or city? I invite you to go back and read my blog on pensions a few weeks ago.
The bottom line is this, it’s not a matter of “if” we have our own crisis like Hurricane Maria but a matter of “when”. Many of our own cities and states are now teetering on economic collapse due to overwhelming debts, out of control budgets and pension plans so underfunded that bankruptcy may be an option.
Citizens are being taxed more and more, fees on basic government services continue to rise and yet politicians continue to promise more and more as those responsible for producing continue to disappear or open up shop in more business friendly locations.
But let’s take this one step further.
There is also a lesson for individuals in this tragic event. Are we ready for our own personal tragedy that will undoubtedly occur? Whether it be an illness, accident or death, are our financial plans in place to keep us solvent? Estate and long-term care planning can offer us some solace when life’s seas become restless. Even more important, those with pension plans should develop a plan to protect what you have earned and worked hard for.
Let’s learn from the lessons around us and avoid similar mistakes.
Attorney Connelly practices in the area of elder law. This area of law involves Medicaid planning and asset protection advice for those individuals entering nursing homes, planning for the possibility of disability through the use of powers of attorney for the both health care and finances, guardianship, estate planning, probate and estate administration, preparation of wills, living trusts and special or supplemental needs trusts. He represents clients primarily in the states of Rhode Island, Connecticut and the Commonwealth of Massachusetts. He was certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation (NELF) in 2008. Attorney Connelly is licensed to practice before the Rhode Island, Massachusetts, Connecticut, and Federal Bars.