The US and Puerto Rico Relations:
History and Facts

Sen. Eduardo Bhatia, JD, President of the Senate of Puerto Rico, reminded the Forum of the island’s long history, first as the “puerto rico” or “rich port” where Latin American gold was secured before being transported to Spain in the sixteenth century. In 1898, Puerto Rico became a US possession after the Spanish American War.

As the 20th century approached, Puerto Rico became a strategic naval base for the US to protect access to the Caribbean. In 1917, Puerto Rico was declared a Commonwealth of the US under judicial oversight by the First Circuit Court of Appeals in Boston, Massachusetts, in an action instigated by the island’s Boston-based sugar barons. That year, US citizenship was granted to all Puerto Ricans, and their Senate was established.

“For 100 years, we have been trying to understand what US citizenship means for Puerto Ricans,” Senator Bhatia said.

The US Congress decides which laws are applied to Puerto Rico and what rights its citizens have. For example, Puerto Ricans who move to the US mainland can register and vote in federal elections. But Puerto Ricans who remain at home are US citizens but they cannot vote in federal elections. Puerto Ricans serve in the US Armed Forces, but are not eligible for veterans’ benefits on the island.

Taxation is equally complex. In 1976, Section 936 of the US tax code exempted from taxes all income earned by US firms operating in all US possessions. With this incentive, Puerto Rico became a manufacturing hub, with rising wages and a sophisticated workforce staffing the pharmaceutical and other manufacturing sectors.  In 1995, there were 178,000 manufacturing jobs in Puerto Rico, which represented 50% of the island’s economy, compared with 6% from tourism.

But the bonanza was short-lived. In 1996, the US Congress enacted legislation that repealed the credit after a ten-year phase-out. The loss of the tax credit coincided with the 2006 market crash. US businesses pulled out of Puerto Rico. By 2015, only 80,000 jobs remained, and the higher wage, more sophisticated jobs disappeared. Puerto Rico now has the highest unemployment rate in the US, and 15% of the population had fled to the US, mostly to Florida.

 More People Are Leaving Puerto Rico for USA

Source: Pew Research Center

In 2014 alone, 64,000 Puerto Ricans left the island for the US, taking with them assets and skill sets. The loss of people and manufacturing jobs created Puerto Rico’s public-debt crisis.  As of 2013, there were more Puerto Ricans living in the U.S. mainland (5.1 million) than on the island itself (3.5 million).

In 2014 alone, 64,000 Puerto Ricans left the island for the US, taking with them assets and skill sets. This loss of people and the loss of 100,000 manufacturing jobs between 2006 and 2015 created Puerto Rico’s public debt crisis.

From 2000 to 2012, general fund expenditures exceeded revenues, which led to an accumulated deficit of $21.8 billion. An average year saw $7.8 billion in revenue against $9.8 billion in general-fund expenditures. In 2006, the hope was that the financial crisis would be short-lived, and money was borrowed to cover the current debt. The repayment schedule bundled the payments for FY 2016-2019 in a balloon payment due in 2015, with the expectation that, by then, the economy would have recovered. But it did not.

Inaccurate audit reports also added to the problem. KPMG, who has been responsible for Puerto Rico’s audits for many years, are correcting their audits from 2011, 2012, and 2013, while the 2014 report has not yet been issued.  Sen. Bhatia noted, “people made investments in Puerto Rico based on these erroneous reports.”

 Revenues and Expenditures FY 2000-2014

Revenues and Expenditures FY 2000-2014

In response to the debt crisis, the Puerto Rican government slashed costs by cutting 40% of government jobs from 150,000 in 2007 to 89,000 in 2014 and increased revenues by raising the sales tax from 7% to 11.5%.

But these measures have not been sufficient to resolve the debt crisis. Because Puerto Rico is not a republic, it cannot approach the International Monetary Fund or World Bank to obtain a loan.

Bankruptcy would be a solution to allow a federal judge to organize Puerto Rico’s debtors and restructure the debt over time. But Puerto Rico is prohibited from declaring bankruptcy because, in 1985, Senator Strom Thurmond added a little known rider to an unrelated bill simply stating that the island was excluded from Chapter 9 protection. But it wasn’t until a decade later that this was discovered. Today, Hedge Funds are buying up Puerto Rican debt at a discount.

Puerto Rico needs to have Chapter 9 protection, Sen. Bhatia and former Secretary McClintock agreed, as part of a coherent strategy to address the debt or “we will be left on our own,” Sen. Bhatia said, “We will have to close schools and hospitals, leading to pain and chaos for Puerto Rico.”

“We cannot aspire to change our political status and expand our US participation until we have our economic and financial houses in order,” former Secretary McClintock said. To achieve this, they described a 4-pronged plan that includes:

1. Cutting costs: For example, consolidating local fire and police departments into regional services.

2. Increasing transparency: In particular, getting a reliable, accurate Consolidated Audited Financial report.

3. Negotiating consensual agreements with creditors: “We want to sit down at the table with our creditors and make a practical plan,” Sen. Bhatia said.

4. Spurring economic growth: “This is the key to solving the debt crisis in a sustainable way,” Sen. Bhatia concluded.

Discussion

John Burchett (Google); Do you need the US Congress to pass a bill to help you? With the current stalemate in Congress, that is not likely to happen.

Sen. Bhatia: We have to try. There is an element of humanitarian crisis here, especially if we have to close schools and hospitals. Our people are moving to the US mainland. Congress has a duty to its US citizens—the Puerto Ricans. Speaker Ryan and Senator Orrin Hatch are both supportive, so we hope we can make progress.

Tom Finneran (Moderator): What help do you anticipate from Congress?

Former Secretary McClintock: There is much we can do internally, as described in our 4-part plan. In Washington, the Obama administration has turned our case over to the US Department of Treasury, and there is much that they could do to prime the pump. For some cases, such as access to Veterans’ Administration benefits for our veterans, President Obama could sign an Executive Order to allow access to benefits here in Puerto Rico so our veterans do not have to go to the mainland for care.

Speaker Biography

Eduardo Bhatia, JD

Eduardo Bhatia Gautier earned his JD degree at Stanford Law School and is admitted to practice law in Florida, Washington D.C., and Puerto Rico. He is the current and 15th President of the Senate of Puerto Rico. Sen. Bhatia was Executive Director of the Puerto Rico Federal Affairs Administration from 2005–2008, where he represented the Governor Aníbal Acevedo Vilá on matters before state and federal agencies. He has spoken before the US Congress and the Executive branch in support of the agency's mission of advancing the well-being of the Commonwealth of Puerto Rico and of Puerto Ricans in the US. As the Governor's Official Representative in the US, he worked in education, health, and environmental issues. He had also been involved in special projects that will help increase economic growth in Puerto Rico's rural areas.

Kenneth McClintock Hernández

Kenneth McClintock Hernández served as the twenty-second Secretary of State of Puerto Rico, one of the four longest serving people in that post. Mr. McClintock was co-chair of Hillary Clinton’s National Hispanic Leadership Council in 2008, co-chaired her successful Puerto Rico primary campaign that year, and served as the 13th President of the Senate of Puerto Rico until December 31, 2008. He chaired Luis Fortuño’s Incoming Committee on Government Transition in 2008 and the Outgoing Committee on Government Transition in 2012, the only Puerto Rican to serve in both capacities.

Other Winter 2016 Forum Highlights articles:

Eduardo Bhatia, JD

President of the Senate

Puerto Rico

Kenneth McClintock

former Secretary of State

Puerto Rico

“For 100 years, we have been trying to understand what US citizenship means for Puerto Ricans,” Senator Bhatia said.

In 2014 alone, 64,000 Puerto Ricans left the island for the US, taking with them assets and skill sets. This loss of people and the loss of 100,000 manufacturing jobs between 2006 and 2015 created Puerto Rico’s public debt crisis.

There is an element of humanitarian crisis here, especially if we have to close schools and hospitals.

Tom Finneran

Eduardo Bhatia

Kenneth McClintock Hernández

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