A lifelong New Yorker, I was touched by the outpouring of support from the rest of the country in the wake of 9-11. In like fashion Americanism needs to trump parochialism today as we extend a helping hand to Puerto Rico. The most eloquent voice supporting the Commonwealth should not come from a British national (John Oliver).
Efforts must go beyond rehashing of the causes of the financial crisis (succession of inept local governments borrowing and spending wildly beyond means, loss of preferential section 936 incentives, barriers to bankruptcy protection). Nor are amorphous “solutions” (federal bailout, extending access to bankruptcy) more than a band-aid. Since the Commonwealth most closely resembles a state, the blueprint for a permanent fix can be drawn from our state experience. Accordingly, the following five steps to raise the $70 billion needed to place Puerto Rico on firm and lasting footing are largely drawn from the 1975 NYC financial rescue.
At its heart this is a crisis of confidence, no one having faith in the local administration’s ability, similar to the situation the Beame regime face in 1975.The bedrock of the NYC recovery program was the establishment of a board comprised of the U.S. Treasury Secretary (Bill Simon), the state governor (Hugh Carey via his appointee Richard Ravitch), state tax commissioner (Jim Tully), and corporate America (represented by Felix Rohatyn). This group effectively ran the City until fiscal stability was restored.More importantly, the group instilled investor confidence, enforced austerity measures and coerced creditors to scale down their demands.A similar group today would have the clout to likewise restructure Puerto Rico’s debt.For present purposes, assume a modest, 30%, debt reduction, resulting in immediate savings of $21 billion.
The Commonwealth’s budget consists of $30 billion of liabilities aside from debt service.A 10% across–the-board austerity cut demonstrates the Puerto Ricans are full partners in the recovery program, restores credibility, and results in savings of $3 billion.
In 1975 the federal government, despite the infamous “Ford to NY: Drop Dead” headline, did pump in $9 billion.Economic conditions are less robust today due to federal debt levels, so we have not assumed any inflation factor, but have assumed the feds can scrounge up $9 billion to save the Commonwealth.
A critical element of the 1975 recovery was floating Big Mac bonds, which were triple tax exempt, had a slightly higher yield than other bonds, and were backed by the full faith and credit of the U.S. government.Adjusting the $10 billion so raised for inflation after conservatively discounting by 25 %, would mean a cash infusion from the investor community of $36 billion.
Puerto Rico’s unemployment level is at 12%, way over the U.S. average (5%) and at Great Depression levels (15-25%). With 140,000 unemployed, recovery will be impeded by the constant need to provide a social safety net.Why not use tax policy to pander to people’s greed?Amend the internal revenue code, providing that jobs yielding tax revenues can be used by the employer as a tax credit in any way (s)he sees fit.Thus if a company creates tax-withholding jobs, the corporation itself or the corporate officers personally can claim a dollar-for-dollar credit on their own tax returns.One wrinkle: Commonwealth residents must pay at least 10% taxes to Puerto Rico AND to the federal government (from which they are currently largely exempt). Assume the personal incentive plus the hospitable Caribbean environment leads to investment sufficient to create 140,000 new jobs at the Puerto Rican mean wage of $30,000.At a 10% tax rate, this means a $1 billion infusion.
Add the preceding and it totals $70 billion, a permanent fix and a shared recovery program. As noted at the outset, the key is the political will outside the Commonwealth. To that end we should all bear in mind that America is a chain that is only as strong as its weakest link.
The writer is a state tax specialist with AndersenTax in New York, teaches state taxes at Rutgers and is the author of The Nation’s Hope, a historical novel about the 1965 NYC mayoral campaign.