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Policy: Economy

Puerto Rico's 'unnatural status' undermines its economy, hurts US investors

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Op-Eds,Taxes,Barack Obama,Puerto Rico,Economy,Spending

As Puerto Rico marked the Nov. 19 anniversary of its discovery by Christopher Columbus, the Obama White House announced it was dispatching an interagency task force to give advice to the island's beleaguered government.

With nearly $70 billion in public debt and a credit rating hovering near junk status, San Juan needs all the help it can get.

But sending capable bureaucrats, or even a bailout, falls well short of fixing the problem that hatched Puerto Rico’s economic meltdown: the territorial status it has been stuck with since the end of the Spanish-American War in 1898.

Just consider that Puerto Ricans, who were granted U.S. citizenship in 1917, cannot vote for president and do not have proportional voting representation in Congress.

Puerto Rico has only a nonvoting delegate in the House of Representatives, like the District of Columbia.

Sadly, the federal government has done nothing to address this undemocratic arrangement. But decades of neglect could now very well come to an end as the nation is suddenly, and quickly, becoming aware of the disastrous economic consequences of Puerto Rico’s territorial status.

Puerto Rico is waist-deep in a financial crisis due to its massive public debt, which is the third-largest of any sub-federal level of U.S. government after California and New York.

Its bonds are considered by some to be at serious risk of default — money manager Kyle Bass of Hayman Capital Management told CNBC recently that there could be an 80 to 90 percent write-down.

This is already having a serious impact on the U.S. municipal bond market, where more than 70 percent of funds own Puerto Rican government debt.

Many have loaded up on it because the IRS provides a “triple exemption” from federal, state, and local taxes for such bond payments.

OppenheimerFunds, a major player in the mutual fund industry, made a big bet that has gone south. Several of its state-focused bond funds -- including for Maryland, Virginia, Massachusetts, and North Carolina -- have more than 25 percent of their assets in Puerto Rico municipals.

Investors accustomed to steady returns in this traditionally sleepy market have been given a jolt, as the S&P Municipal Bond Puerto Rico Index is down 18 percent over the last year.

While the island's leadership must bear responsibility for amassing the extraordinary amount of debt, their excessive spending and borrowing is a product of the unequal tax treatment that the federal government affords investors in Puerto Rico, as well as an underachieving private sector beset by an unclear and uncertain political status.

Without the level of private investment that states are able to attract, labor participation has remained incredibly low (only about 1 million out of the island's 3.6 million people work) and unemployment is almost 14 percent.

It is not surprising that hundreds of thousands are migrating to the mainland seeking the jobs and salaries they cannot find at home.

How can Puerto Rico end its debt-dependence and bring in the investment necessary for long-term economic growth when investors have no clue what Puerto Rico is?

Is it a part of the U.S. or an autonomous political entity? Is it protected by the federal laws and regulations that apply to the states, or is it treated differently?

The answers, including as they pertain to municipal bonds, are unclear. President Ronald Reagan put it best when he said that "Puerto Rico is now neither a state nor independent, and thereby has an historically unnatural status."

As a recent Washington Post editorial put it, Puerto Rico's economic and financial troubles are "traceable, ultimately, to its muddled political status."

But contrary to the editorial's conclusion that "there will be time enough to debate [the island's political status] later,” the reality is that the only way to resolve Puerto Rico's economic woes is to deal with this issue right away, ending once and for all its limbo in territorial status.

The White House should revisit three key findings of the President’s Task Force on Puerto Rico’s Status: (1) “[T]he status question and the economy are intimately linked.”

(2) “[I]dentifying the most effective means of assisting the Puerto Rican economy depends on resolving the ultimate question of status.”

And, (3) “the long-term economic well-being of Puerto Rico would be dramatically improved by an early decision on the status question.”

Washington cannot let the economic situation of the island get worse, and it has no stomach for a bailout. Fortunately, last year, the majority of the people of Puerto Rico provided the federal government a way forward by voting to end the territorial status in a government-mandated referendum.

Congress now has an opportunity to allow the people of Puerto Rico to achieve full self-governance by allowing them to become a state or choose independence.

That would not only be a good outcome for Puerto Rico, it would be the American way.

Alfonso Aguilar is executive director of the Latino Partnership for Conservative Principles and the former chief of the U.S. Office of Citizenship under President George W. Bush. Rich Danker is the director of the economics program of American Principles Project.
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