Puerto Rico started the New Year by defaulting on some of its debt. It failed to make $37.3 million in interest payments on two different types of debt — $35.9 million in Puerto Rico Infrastructure Financing Authority debt and $1.4 million in Public Finance Corporation debt.
Just two weeks earlier, with full acknowledgement that a default was likely, the governor decided to dole out $120 million in Christmas bonus payments to government workers.
Why make the Christmas bonus payments when that money could have been used to prevent a default? At a Dec. 9 press conference, Gov. Garcia Padilla claimed that, “If I have the funds, I have no option but to pay that money.”
But it’s not clear what prevented the governor from withholding those bonus payments. His office failed to respond to our inquiry asking if the decision to grant the bonuses was based on law, labor agreements or political choices.
The issue of Christmas bonuses touches on one of Puerto Rico’s primary problems: Its high cost of employment.
Certainly the island could blame the U.S. government for driving up labor costs. The federal minimum wage is fully 77 percent of the median wage in Puerto Rico. And generous federally mandated welfare benefits have made welfare more profitable than work for many.
But the Puerto Rican government has greatly exacerbated the problem by imposing excessive employment costs of its own making on island businesses.
In addition to the mandated Christmas bonuses, Puerto Rico requires that employers provide 15 vacation days, 12 sick days, eight weeks of maternity leave, and one hour per day for breastfeeding. And employers aren’t free to fire employees without significant severance pay. Despite — or because of — these regulations, hired labor in Puerto Rico earns a lower share of income than in any of the 50 states. Repealing these costly, self-imposed employment laws should be among Puerto Rico’s first steps in digging itself out of a deep economic and fiscal hole.
But instead of reversing harmful economic policies and promoting prosperity from within, Puerto Rico is seeking a federal bailout. Some Congressional proposals mistakenly attempt to come to Puerto Rico’s rescue by: retroactively changing bankruptcy laws so that it is easier for the Commonwealth to wipe out certain debts while protecting others; providing federal income tax credits to Puerto Ricans (despite the fact that they don’t pay federal income taxes); giving Puerto Rico and all other U.S. territories a five-year payroll tax cut; granting the Commonwealth access to billions of dollars in cash and new borrowing authority; and establishing a fiscal advisory board.
Perhaps the most commonsense and least harmful proposal to Puerto Rico’s problems is one that would temporarily freeze litigation — preventing creditors that do not receive payment from bringing lawsuits — until March 31. This would give Puerto Rico more time to negotiate settlements with bondholders before it has to start defending lawsuits.
Such internal settlements — without federal intervention — are the best pathway forward for Puerto Rico.
Just last week, internal negotiations led to a settlement between the Puerto Rican Electric Power Authority and its creditors and insurers. If legislation confirms the deal, creditors will suffer a 15 percent loss but will have stronger claims on their remaining debt.
Federal intervention would prevent creditors from negotiating directly with debtors and would fail to address Puerto Rico’s true crisis — its economic decline.
And a federal bailout would set a dangerous and expensive precedent. If Congress changes bankruptcy laws for Puerto Rico or throws federal tax dollars its way, what’s to stop Congress from doing the same for fiscally troubled states like Illinois when they can’t pay their bills?
Unless and until San Juan takes action to reverse its own demise, federal policymakers should not even consider bailing it out. After all, U.S. taxpayers should not be on the hook for Puerto Rico’s Christmas bonuses.
Rachel Greszler is a senior analyst in economics and entitlements policy at The Heritage Foundation’s Center for Data Analysis. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
