Puerto Rico’s downward spiral

The Rust Belt to Sun Belt phenomenon clearly stops in the Sunshine State. The U.S. territory of Puerto Rico — an island that often bucks national trends — is in dire straits, losing 70,000 people per year to emigration and standing on the verge of default. And despite what the propaganda machine in the deep-pocketed Puerto Rican government may have you believe, the current fiasco is the responsibility of an Alejandro Garcia Padilla administration that continues to put Puerto Rico on the wrong path.

{mosads}Puerto Rico lost 32,000 jobs between July 2013 and July 2014, including 1,300 manufacturing positions, while the labor participation rate for those on the island fell below 40 percent. This is one of the lowest labor participation rates not just in the United States — 20 points below the rate on the U.S. mainland — but in the world. For those lucky enough to maintain a job, the cost of living still remains 13 percent more expensive than the mainland and retirement appears grim, as Puerto Rico’s pension fund is only 7 percent funded.

This downward spiral has been consistent for 20 straight months, starting shortly after Gov. Alejandro Garcia Padilla took office and began his borrow-and-spend economic policies. Under Garcia Padilla, Puerto Ricans have watched as businesses close, job losses mount, unsustainable debt levels rise, contracts get shredded and uncontrollable levels of taxation — including more than 80 new taxes or increases in less than two years — are imposed on them.

Indeed, a self-inflicted dark cloud of uncertainty continues to hover over Puerto Rico that has made the island’s residents and businesses worse off. But rather than taking the responsible path of admitting fault or correcting his course, the governor continues to dig his heels in further, taxing and borrowing along the way. This includes a risky ring-fencing strategy that has seen the commonwealth’s direct debt obligations and guaranteed debt rise to almost $20 billion since taking office. For Puerto Rico’s 3.7 million residents, the commonwealth now has a total debt of $87 billion, counting pensions, or $23,000 for every man, woman and child. Furthermore, Puerto Rican banks own government and municipal debt, so if the government goes into default, the banks will crumble. As Joseph Rosenblum of investment management company AllianceBernstein argued at a recent event in New York, “restructuring of virtually all of Puerto Rico’s debt is inevitable.”

To make the situation worse, the sanctity of contracts and the rights of bondholders are under assault from Garcia Padilla, most notably in refusing to honor tax obligations with Doral Bank even as the courts ordered the government to pay outstanding obligations. Garcia Padilla and his cronies, chiefly Melba Acosta, have waged a vicious public campaign against the bank. The issue remains outstanding and epitomizes the governor’s lack of regard for the rule of law.

Continuing a trend of ignoring debt and attacking contracts and property rights, the governor later rammed the Argentine-style Debt Enforcement and Recovery Act through the legislature, which has been written to allow the Puerto Rican government to repudiate the billions in debt owed by the government and public corporations linked to the government. Both of these actions are illegal under U.S. law and were factors that contributed to the island’s bonds downgrade to junk status. The island is now notoriously the second-most likely place in the world to default on its debts — right after Argentina.

Most recently, the governor has enacted an egregious law — Act 66, the Fiscal and Operational Sustainability Act — which enables government agencies and public corporations to cancel contracts capriciously with private-sector businesses. He did so despite the fact that it “is clearly unconstitutional” and “would take 76.63 years to extinguish the debt,” according to a recent report from Puerto Rican legal analyst John Mudd. Taken together, the governor’s actions continue to send a clear signal that the government views the rule of law as merely a deterrent to carrying out their radical agenda.

Puerto Rico has very real challenges, issues that continue to garner the attention of U.S. legislators. Earlier this month, Rep. Michael McCaul (R-Texas) wrote to Attorney General Eric Holder, noting that American companies and citizens should not operate in a state of fear or intimidation from government bodies engaged in financial disputes. McCaul is right and the time has come for Garcia Padilla to address fundamental challenges facing him and the island. Readdressing debt and financial policies through the installment of a financial control board and beginning to respect the rule of law are good places to start.

The ball is in the governor’s court. For the sake of Puerto Ricans — those who live on the island as well as on the U.S. mainland — the governor must act now.

Lopez is president of the Hispanic Leadership Fund, a national advocacy organization that promotes liberty.