Insight for Puerto Rico’s oversight board

I am back on the island where I am a part-time resident.  Days here are quiet and humid during the low tourist season. But hanging in the air is a palpable apprehension.  Behind closed doors in Washington D.C., Congressional leaders consider the all-important candidates who will oversee Puerto Rico’s fiscal and economic future for at least the next four years.  The oversight board will essentially have veto power over the island’s government under the newly adopted Puerto Rico Oversight Management, and Economic Stability Act, known as “PROMESA” – the Spanish word for “promise.”

A rare bipartisan measure attempting to resolve the U.S. territory’s protracted fiscal and economic crisis, the law is meaty on debt management but skeletal on economic revitalization. The latter is mainly left to local politicians, whose ineffectiveness history has laid bare. Their role will be to propose budgets to the oversight board that should be on its feet in the next month or so.

{mosads}If past is prologue, Puerto Rico will continue to rely on economic policies that drain the island’s treasury. These favor technology-intensive, low-employment industries that have little motivation to operate on the island other than to use Puerto Rico as a tax dodge.  Tax-exempt pharmaceutical and chemical product multinationals create about 50% of the island’s Gross Domestic Product. Yet they do this using just 71,700 employees, or 6.2% of the island’s workforce.

To appreciate the degree of its tax-exemption practices, Puerto Rico fails to tax about 88% of the island’s formal economy. Demoralized and irked by the blatant tax favoritism for non-residents, few residents care to know how much tax revenue escapes in the defiant, local underground economy.

There are also gaping holes for the wealthy to shelter assets in island real estate, which pays absurdly low taxes. For example, a $3.5 million residence in San Juan’s posh Condado district pays a mere $5,100 a year in property taxes.  By comparison, the tax on my $230,000 primary residence in Atlanta is $2,300.

Given the appointment process, fiscal conservatives will likely dominate PROMESA’s oversight board. The notion that low taxes are mostly to blame for the government’s insolvency may be anathema, or at least a very tough sale, to most board members.

Another fact that will likely face incredulity is that Puerto Rico’s public services are grossly underfunded.  That’s right: spending on public services is too low. The 2016 fiscal year budget of the central government was $9.3 billion, about 9% of the island’s $103 billion GDP.  When combined with approximately $2.2 billion of the spending of the 78 municipalities, total tax-supported public spending was 12% of GDP — less than proportional public spending in Haiti and most other very poor countries around the world.

To assess the sufficiency of public spending, PROMESA board members would be wise to drive extensively throughout the island. As I have done during my most recent trips, they should drive to the small towns in the island’s mountainous interior.  They should also motor from coast to coast, as well as join the throngs in rush-hour traffic in metropolitan San Juan. I hardly exaggerate when I say that PROMESA board members should have no doubt from this experience that Puerto Rico needs to repave or rebuild practically all of its vehicular transportation system. Roads are virtually an obstacle course of poorly-marked lanes, broken pavement and potholes. My visit this month reminded me of the cratered streets of Trinidad in the 1980s.

There are pedestrian challenges as well.  Sidewalks are a minefield of cracks, holes and missing or broken utility meter covers.  One night, while walking back to my apartment in Miramar, I stepped in a darkened crevice and nearly broke my ankle.

The transportation system is only the start of Puerto Rico’s problems. Public schools are in dire condition with achievement scores at the bottom of the nation. Moreover, the police and criminal justice system are stretched thin.  This is not surprising, as the government grossly underpays teachers and public safety personnel.

If deficient public services were not enough, the allure of higher paying jobs in the U.S. mainland helps accelerate the population exodus.  During one of my prior visits in June, the city of Elgin, Illinois was actively recruiting bilingual Puerto Rican police officers at starting salaries of $66,000. Compare this with the $21,130 that a new recruit receives for risking life and limb to protect Puerto Rico’s public.

Every few days, the electrical power fails. Indeed, the Transportation Security Administration’s main checkpoint in San Juan’s international airport was recently closed due to a power outage. Passengers were forced to make a long walk to the far end of the airport terminal, suffering bottlenecks and delays at a smaller, overburdened TSA checkpoint.

To cap this all, the Centers for Disease Control in its campaign against the Zika virus now includes Puerto Rico in travel warning maps in airports around the country. This threatens deep damage to the island’s tourism sector, the main bright light in Puerto Rico’s economic future.

In spite of this scenario, conventional wisdom continues to call for further public spending cuts. Indeed, while at a conference in San Juan for Puerto Rico bondholders (of which I am not one), I listened to speeches by the two main candidates for governor. Both in their late 30s, the young men hewed to the “safe” consensus view and called for tighter spending, much to the predictable and misguided delight of the audience.

For proper oversight, PROMESA’s board needs insight. This means piercing the veil of a neo-feudal society that forsakes vital public services in order to exempt itself from taxes. The oversight board must bring to account the local oligarchy and big businesses that, together with their captive local government, have bankrupted a U.S. territory, delivering tragedy and hardship to my fellow Puerto Ricans.

David R. Martín is a corporate attorney and the author of “Puerto Rico: The Economic Rescue Manual” and “Puerto Rico’s Future Entertainment Economy.”

The views expressed by authors are their own and not the views of The Hill.