4 things Congress and the White House could do to stop Puerto Rico’s crisis from getting worse

The local government will run out of money in a few weeks.

Hurricane Maria did more than destroy Puerto Rico’s electric grid and water supply. It has destroyed the Puerto Rican economy. Pharmaceutical factories, the island’s main source of jobs and income, are either closed or partially operating. Many small businesses were destroyed, and those that weren’t are struggling without reliable electricity or running water.

The tax revenue Puerto Rico’s government normally gets each month is largely gone — and by the end of October, the US territory will probably run out of money to pay workers and retirees.

If that happens, economists and some public officials are warning, a second catastrophe will unfold — one with severe long-term consequences for the territory and its people. But, they say, there are steps Congress could take to mitigate it.

“It’s inevitable the general fund will run out of cash, exposing the people of Puerto Rico to a loss of whatever essential services remain,” Antonio Weiss, a senior fellow at the Harvard Kennedy School who worked at the Treasury Department during the Obama administration, wrote in an email. “There’s no reason to doubt the governor’s estimate of end-October, and there’s no room for error in the necessary federal response.”

Puerto Rico’s governor, Ricardo Rosselló, is essentially begging Congress for help: “In addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future,” he wrote in a letter Saturday to congressional leaders.

Congress so far has been slow to act, though House leaders are expected to add more money to a relief bill after Rosselló’s request. But here are four measures that either Congress or the Trump administration could take to stop a natural disaster from turning into an economic calamity.

A relief bill could help shore up FEMA’s disaster relief fund

Two weeks after Hurricane Harvey caused devastating flooding in Houston, Congress passed an initial $15 billion relief bill — a pot of money the Federal Emergency Management Agency can use to help any disaster zones. On October 4, two weeks after Hurricane Maria hit Puerto Rico, Trump finally sent Congress a request for $29 billion more for disaster victims in the mainland US, Puerto Rico, and the US Virgin Islands; $13 billion is set aside to replenish the shrinking FEMA disaster relief fund, and the rest will go to pay federal flood insurance claims.

Late Tuesday, the White House added another $4.9 billion to that request.

Fulfilling that request would be a first step. But congressional recess means the soonest Trump could sign the bill would be early next week.

Meanwhile, FEMA’s disaster relief fund has become a key source of income for Puerto Rico. FEMA is currently funding 100 percent of the island’s emergency services through the agency’s basic disaster relief program — $37 million so far for local governments to pay police, firefighters, and paramedics. The FEMA disaster fund also provides grants to Puerto Ricans to fix their homes and businesses.

The total $18.7 billion Trump is asking Congress to put into the fund is a small fraction of what Puerto Rico (and Florida and Texas) needs to rebuild — preliminary estimates show that hurricane damage across Puerto Rico alone could cost up to $95 billion.

An emergency loan could help the government keep the lights on

The FEMA money is particularly important to Puerto Rico because its economy is virtually destroyed. With businesses closed and power out, the funding the Puerto Rican government normally received each month from income taxes, sales taxes, and corporate taxes are mostly gone.

Even when businesses and factories are able to start operating again, the government will likely collect fewer taxes than before: Thousands of people are already leaving the island, creating a smaller tax base.

That will create a long-term fiscal problem. But it’s also an immediate emergency: With revenues disappearing, and expenses skyrocketing in response to the hurricane, the Puerto Rican government could run out of money by November 1.

The government has less than $2 billion in cash left to pay its bills, Rosselló said in an interview last week with El Nuevo Día newspaper. Before the hurricane, Puerto Rico needed about $1 billion a month to cover basic services.

“Their checks bounce, they can’t borrow from the capital markets, and then the government can’t keep the lights on,” said one House Democratic aide about the potential nightmare scenario.

One possible solution to this looming crisis is that either Congress or the Treasury Department authorizes an emergency loan to the island’s government.

Typically, Puerto would go to private capital markets to escape the pending fiscal cliff. But there are two reasons this will be hard. Under PROMESA, a 2016 federal law that restructured Puerto Rico’s debt, the island is legally prohibited from accessing outside capital markets. And given the dire state of the Puerto Rican economy, it’s hard to imagine private investors eager to lend cash to an island that’s not expected to be able to pay back its existing obligations.

Which leaves, experts say, likely just one possible answer: the federal government, which has the authority to take emergency measures to give Puerto Rico a loan. Indeed, several House and Senate members have already implored Treasury Secretary Steve Mnuchin to take such a step, and Rosselló has emphasized that he’s only seeking “reasonable rates.” Congress is now also considering an emergency loan to the island, according to Bloomberg.

As of Monday, Mnuchin had not publicly promised to give Puerto Rico the desired loan. If the government fails to do so, the island could lose control of the meager public services it already has at its disposal.

Full disaster assistance would help with money to rebuild

The main problem facing Puerto Rico right now — aside from the lack of money — is the lack of electricity. The hurricane destroyed the island’s electric grid, and 84 percent of the public utility’s customers still don’t have power. Many homes and businesses are partially running on generators, but that’s hardly a sustainable solution as they require expensive shipments of fuel.

And because Puerto Rico doesn’t have money, it can’t pay the billions of dollars it needs to fix the electrical system, which was already in bad shape before the hurricane.

Despite this, FEMA has not authorized full disaster aid for the island — including money for more permanent repairs to the island’s roads, bridges, water control facilities, public utilities, and government buildings. FEMA authorized this level of aid for Texas 10 days after Hurricane Harvey flooded the Houston area with 4.5 feet of rain.

A spokesperson for FEMA in Puerto Rico told Vox last week that the commonwealth submitted the paperwork a week ago, but didn’t say how soon the aid might be authorized.

So far, Puerto Rico has only gotten the basic FEMA disaster aid, known as A-B public assistance. This help is crucial, but it only covers the cost of emergency services and debris removal in disaster zones. It is not meant to fund more permanent repairs to damaged infrastructure.

That kind of aid would fall under FEMA’s reconstruction program, known as C-G public assistance. Unlike the initial emergency response, this level of help is more about funding reconstruction projects that could take years to complete. The federal government will pay at least 75 percent of the cost, but the president could decide to cover it all. After Hurricane Katrina, FEMA spent $9.9 billion rebuilding the New Orleans area as part of this program.

Fixing damaged infrastructure has been an insurmountable challenge for responders in Puerto Rico. The hurricane completely wiped out the island’s cellphone towers and electrical grid, so it’s been immensely hard for emergency responders to provide basic help. The C-G aid would help Puerto Rico hire contractors and utility crews to undertake such projects.

The most dramatic step would be wiping out Puerto Rico’s debt

But all these measures — emergency spending from Congress, FEMA repairs, a loan from the Treasury Department — can only do so much for an island that faced an intractable fiscal and economic crisis before the hurricane.

Puerto Rico also faces a crippling debt burden and pending dramatic cuts to spending on government services — cuts that make it virtually impossible to imagine how the island’s economy rebounds, especially post-Maria.

“They have to get out of this perpetual state of austerity,” said Steve Charles Kyle, an economist at Cornell who grew up in Puerto Rico and has been monitoring the situation closely. “If they went along with the existing austerity plan, it will take a hell of a lot longer for them to recover, if not making it impossible.”

The roots of Puerto Rico’s long-term economic meltdown date to President Bill Clinton’s 1996 decision to phase out the island’s tax breaks for US companies over 10 years. Vox’s Matt Yglesias has chronicled how that decision, coupled with the Great Recession, crippled the island’s economy. (One part of the problem is that because of its peculiar status, Puerto Rico can’t file for bankruptcy under Chapter 9.)

Faced with default, Puerto Rico had little choice but to enter into negotiations with its creditors. But there are two huge remaining problems from the federal law, called PROMESA, that Congress passed in 2016 to put the island on a path to solvency — both of which are exacerbated by the hurricane.

The first is that the Puerto Rican government has never been expected to be able to pay back the reduced amount — $8 billion — it may have to under the deal, and it definitely won’t be able to do so now. The second problem is that in order to get some of its debt absolved, Puerto Rico agreed to impose the harsh austerity measures — reducing education and health spending, for instance — that hurt growth at the same time that thousands are fleeing to the mainland in search of economic opportunity.

Nobody knows exactly how Congress would intervene, but experts argue that the current trajectory spells doom for the island. Trump signaled that Puerto Rico’s debt would have to be “wiped out,” but the comments were quickly walked back by Mick Mulvaney, his budget director. Trump can’t do much about the $75 billion the government owes Wall Street creditors on his own; it’s possible that the federal government could pay off some of it, but a massive bailout won’t go over well in Congress.

Some are at least encouraged that Trump seems to recognize that the island’s debt situation is unsustainable. “What’s really great is that people weren’t talking about [wiping the debt] before, and now everybody’s talking about it. It doesn’t have to literally be wiping the whole debt” to help, said Lara Merling, a research assistant at the Center for Economic and Policy Research.

And Kyle, the economist, argues that Congress can and should revise PROMESA to reduce the island’s debt — either by putting some of it on the federal tab or simply by telling the island’s Wall Street creditors to take a hike. “Wall Street will jump up and down and scream all they want, but Puerto Rico can’t repay it right now anyway,” Kyle said. “Congress should arrange some way for the debt to be reduced and for the bondholders to take a haircut and reduce it.”

Short of that, Kyle said, there are still some measures Congress must pass to stave off a brewing humanitarian crisis on the island. The Trump administration only waived the Jones Act, which creates exorbitant costs for shipping to the island, for 10 days; the waiver just expired, even though several senators think it should be permanently abolished.

The federal government could also begin requiring Puerto Ricans to pay federal income taxes; that may sound bad, but it would ultimately help the island by allowing them to be paid in full for Medicaid. (Currently, unlike in the mainland, Puerto Ricans’ health care payments are capped.) The Brookings Institution has also noted that Puerto Rico doing so would make Puerto Ricans eligible for the federal earned income tax credit, which they currently are not.

“If you really cared about Puerto Rico, you’d say: We will invest in this place to make it a viable economy,” Kyle said. “But step one is: get rid of the debt, and get rid of the austerity plan.”
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