Puerto Rico’s Oversight Board: The Grinch who Stole Christmas and Came Back for More

August 09, 2017

As Puerto Rico’s debt saga plays out in court, its Financial Oversight and Management Board continues to push for further austerity measures that directly impact the people of Puerto Rico. In an effort to comply with the demands of the board, the Puerto Rican government cut Christmas bonuses for all its employees. For the board these cuts were not sufficient, and in a letter sent last week to the governor, they are now mandating furloughs for government employees.

In March 2017, the Financial Oversight and Management Board, created through US Congress’ Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), certified a 10-year fiscal plan for Puerto Rico that called for severe spending cuts along with tax increases. However, all the proposed measures under the plan’s best case scenario only put aside $7.9 billion for debt repayment over 10 years, while the island’s current debt burden is estimated at over $73 billion.

This fiscal plan projects negative real growth until at least 2024, without taking into account the further negative impact the austerity measures would have on growth.  Furthermore, the plan does not address many of the underlying issues that caused Puerto Rico’s economic decline. The plan sentences Puerto Rico to yet another lost decade, and despite its rejection by creditors that triggered a bankruptcy-like procedure, the board is continuing to push for the plan’s implementation.

A sizeable chunk of the spending cuts comes from “government right-sizing,” which targets overall operational costs, along with payroll expenses of the government. Currently, the government is the largest employer in Puerto Rico’s very weak labor market: over 23 percent of people employed in Puerto Rico work in the public sector. In their efforts to comply with the board’s demands, the government of Puerto Rico has already taken steps to reduce expenses, introducing measures to save $662 million for the 2018 fiscal year. To cut down on payroll costs, the government has cut the Christmas bonuses that employees had been receiving under its labor laws since 1969.

However, the fiscal board did not believe those cuts were sufficient and demanded another $218 million in savings through mandatory furloughs until at least the end of this year. The board is requiring a furlough of two to four days per month for almost all government employees. While the $218 million would barely make a dent in Puerto Rico’s fiscal shortfall, a 10 to 20 percent pay cut for almost a quarter of its labor force will be felt strongly by the island’s residents. Although Puerto Rican officials have pledged to not implement the furloughs, the fiscal board believes that it has the power to require their implementation. If implementation is delayed, the board has warned, the furloughs will be deeper.  

The poverty rate in Puerto Rico is above 40 percent for families, and 60 percent for children. The median household income is barely above $19,000, much lower than on the mainland US, where median household income is around $55,000, despite comparable living costs. The lack of economic opportunities has spurred massive outmigration, with the island losing 10 percent of its population over the last decade. In a statement filed when bankruptcy proceedings began, the oversight board expressed concern with the Puerto Rican economy’s “bleak spiral” that will be exacerbated by out-migration as a result of the reduced demand for goods and services. This concern should extend to the consequences of cutting the incomes of over 200,000 government employees.  

The board’s decision to directly reduce the disposable incomes of almost a quarter of the labor force will impact not only government employees but also overall demand in the economy, and possibly cause some government employees to move to the mainland. For Puerto Rico’s weak and hamstrung economy such measures can have devastating consequences. The negative feedback of the cuts is likely to offset the savings the government would achieve by imposing them in the first place. Instead of forcefully pushing for measures that punish the people of Puerto Rico and exacerbate the crisis, the board should put ordinary Puerto Ricans first, and work on solutions to revive the economy and protect workers.

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