Puerto Rico’s Moonshot Opportunity: Recommendations for the U.S. Territory’s Economic Future

PUERTO RICO’S MOONSHOT OPPORTUNITY: RECOMMENDATIONS FOR THE U.S. TERRITORY’S ECONOMIC FUTURE

January 2022

PUERTO RICO’S MOONSHOT OPPORTUNITY: RECOMMENDATIONS FOR THE U.S. TERRITORY’S ECONOMIC FUTURE

Princeton School of Public and International Affairs Policy Workshop Report January 2022

Faculty Director Eduardo Bhatia

John L. Weinberg/Goldman Sachs & Co. Visiting Professor in Public And International Affairs

Authors Juan Pablo Alvarez Enriquez • Joscelyn Garcia • Karlin Gatton • Guillermo A. Herrera • Nethaniah Josma • Jia Jun Lee • Ryan Price • Joshua Seawell • Francis Torres • Andre Zollinger

Table of Contents Acknowledgements..........................................................................................5 About the Team...............................................................................................7 Executive Summary.........................................................................................8 Introduction....................................................................................................10 Building A Better Environment for Fiscal Growth...........................................13 Ensuring Fair and Effective Public Assistance and Disaster Relief...................22 Achieving Resilient and Sustainable Growth..................................................34 Conclusion......................................................................................................52 Endnotes.........................................................................................................53

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Acknowledgements We are grateful to the many individuals and organizations that contributed their time, knowledge, and effort to aid us in our research. Firstly, we would like to thank our workshop facilitator Eduardo Bhatia for his invaluable instruction and guidance throughout the process of producing this report. We also thank the staff at the Princeton School of Public and International Affairs for their support.

Our work is particularly indebted to local civil society leaders, activists, experts, and elected officials in Puerto Rico, who graciously and enthusiastically supported our research endeavor. We are particularly grateful to the Center for a New Economy for their sustained engagement with our project and for allowing us to present a preview of our report in their 2021 Growth Policy Summit.

The authors would like to thank the following individuals for their contributions: Pedro Pierluisi, Governor of the Commonwealth of Puerto Rico José Luis Dalmau, President of the PR Senate Rafael Hernández, Speaker of the PR House of Representatives Omar Marrero, Executive Director of the PR Fiscal Agency and Financial Advisory Authority Francisco Parés Alicea, Secretary of the PR Treasury Juan Carlos Blanco Urrutia, Director of the PR Office of Management and Budget Zulma Rovira-Pérez, COR3 Luis M. Collazo Rodríguez, Administrator of the PR Public Employee Retirement System Julia Nazario Fuentes, Mayor of the Municipality of Loiza Natalie Jaresko, Executive Director of the Financial Oversight and Management Board Antonio Weiss, former Counselor to the Secretary of the U.S. Treasury Kent Hiteshew, former Director of U.S. Treasury’s Office of State and Local Finance Rosanna Torres, HUD Senior Advisor for Puerto Rico Sergio Marxuach & Deepak Lamba-Nieves, Center for a New Economy Cecille Blondet, Daniel Santamaría & María Mercedes Rodríguez Rivera, Espacios Abiertos Rolando Emmanuelli, Bufete Emmanuelli, C.S.P. Rafael Arrillaga-Romany, RAR Consulting Group, LLC Javier Rua-Jovet, JRJ Consultants and Legal Advisors Jorge Irizarry, Executive Director of Bonistas del Patio José Coleman & Emiliano Trigo, former officials at the PR Government Development Bank Javier Balmaceda, Senior Policy Analyst at the Center on Budget and Policy Priorities Ricardo Cortés, Public Affairs Director at Discover Puerto Rico John Bozek, Research and Stratregy Director at Invest Puerto Rico

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Members of the workshop team meeting with Puerto Rico Governor Pedro Pierluisi. From left to right: Professor Eduardo Bhatia, Ryan Price, Nethaniah Josma, Juan Pablo Alvarez Enriquez, Joshua Seawell, Gov. Pedro Pierluisi, Francis Torres, Joscelyn Garcia, Andre Zollinger, Jia Jun Lee, Guillermo A. Herrera.

Published January 2022

Cover Photo by Stephanie Klepacki on Unsplash

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About the Team Juan Pablo Alvarez Enriquez is a second-year Master in Public Affairs candidate studying International Development. Before Princeton, he worked at the United Nations High Commissioner for Refugees in Mexico where he co-designed and coordinated a local relocation program to integrate refugees into the formal economy.

Joscelyn Garcia is a second-year Master in Public Affairs candidate studying International Development. She previously worked as an administrative associate at World Relief Chicago, working with immigrants, refugees, and asylum seekers.

Karlin Gatton is a second-year Master in Public Affairs candidate studying economics and public policy. She has served as an international affairs fellow at the United States Treasury and a senior analyst at the Federal Reserve Bank of New York.

Guillermo A. Herrera is a second-year Master in Public Affairs candidate studying International Development. Prior to Princeton, he worked as a Project Coordinator at the International Budget Partnership, where he promoted fiscal transparency, accountability, and participation.

Nethaniah Josma is a second-year Master in Public Affairs candidate studying development and urban affairs. Prior to Princeton, she worked for the U.S. Department of the Treasury’s Office of the Comptroller of the Currency as an Associate National Bank Examiner.

Jia Jun Lee is a second-year Master in Public Affairs candidate studying economics and public policy. He previously worked as a research analyst at the World Bank in Washington D.C. and an environmental specialist at the World Bank Indonesia office.

Ryan Price is a second-year Master in Public Affairs student studying international relations.

Prior to Princeton, he worked on U.S. climate policy and served in the White House Office of Legislative Affairs during the Obama administration.

Joshua Seawell is a second-year Master in Public Affairs candidate studying Domestic Policy. Before Princeton, he worked as a Research and Policy Associate at the think tank Employ America.

Francis Torres is a second-year Master in Public Affairs candidate studying Domestic Policy.

He previously worked as a communications specialist at the Washington Office on Latin America and the Puerto Rico-based think tank Center for a New Economy.

Andre Zollinger is a second-year Master in Public Affairs candidate studying International Development. Before coming to Princeton, he managed a tech incubator in France and consulted for the European Commission on innovation and sustainability.

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Executive Summary Circumstances are converging to make this a seminal decade for the people and the government of Puerto Rico. The territory’s Plan of Adjustment is expected to herald in a much lower debt burden for the government. Local officials simultaneously face the challenge of spending more than $50 billion in appropriated federal recovery funds. Used strategically alongside other targeted policy interventions, these measures can give Puerto Rico a unique “moonshot” opportunity to overcome and reverse the concerning trends of the prior decade and grow once again.

The challenges facing Puerto Rico are significant but surmountable. The poverty and labor force participation rates have both held fast in recent years around 45%, making Puerto Rico an economic outlier compared to the rest of the United States. Around one-fifth of residents have migrated out of Puerto Rico in the last decade, leaving an older and less productive population. Years of austerity and high sales tax rates have also limited the government’s ability to raise revenue and spend on public goods and services.

To better understand the challenges and opportunities facing Puerto Rico, we examined these issues and studied the course of Puerto Rico’s debt crisis and the federal response under the PROMESA law. From October 18 to October 22, 2021, we met with nearly 30 prominent stakeholders in Puerto Rico to better understand the various perspectives across the private sector, civil society, government officials and legislators. Our research and interviews convinced us of Puerto Rico’s ability to grow anew with key reforms. While this report does not address every critical challenge for Puerto Rico’s economy, it higlights key areas of concern and puts forth a series of actionable recommendations.

We have structured the report around three main imperatives for Puerto Rico: Build a Better Environment for Fiscal Growth, Ensure a Fair and Robust Public Asistance and Disaster Relief, and Achieve Resilient and Sustainable Growth.

Image by Paul Stringer on Shutterstock

Executive Summary

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Recommendations Build a Better Environment for Fiscal Growth.

Taking inspiration from Detroit’s successful return to the bond market, our proposed strategy focuses on framing the return to market as a fresh start for Puerto Rico, while remaning cognizant of current market conditions. We also recommend enhancing the stature and authority of the Chief Financial Officer position, reinstituting a Legislative Budget Office and implementing special training programs to build a stronger local civil service.

Ensure Fair and Robust Public Assistance and Disaster Relief.

Parity for federal public assistance programs, namely Medicaid, SNAP, and SSI. HUD and FEMA can provide additional training and knowledge-sharing assistance for local agencies and fund recipients to maximize their use of federal funds, and local disaster recovery agencies should leverage federal funding to create a cross-cutting, publicly accessible open data portal for recovery spending. To ensure the recovery meets the needs of the territory’s most vulnerable communities, we recommend the creation of a framework for civil society to participate in recovery planning and oversee the use of federal disaster funds.

Achieve Resilient and Sustainable Growth.

This section focuses on manufacturing, tourism, agriculture and renewable energy. We suggest pathways for Puerto Rico to grow each of these sectors in the coming years. For medical manufacturing, we recommend market research and policies to develop an import substitution strategy. For tourism, we propose research and investments to inform a shift towards high-end experiences such as ecotourism and medical tourism. For agriculture, we encourage consolidation around high-productivity firms as well as reforms to the territory’s land use plan with the goals of increased agricultural production and sustainability.

Puerto Rico should also strengthen the role and capacity of the Puerto Rico Energy Bureau, take advange of federal funding and other financing opportunities to accelerate renewable energy projects, and establish policies to mitigate the distributional impacts of the prosumer model.

Lastly, we recommend continued advocacy to eliminate or scale back the Jones Act shipping restrictions for goods travelling between Puerto Rico and other U.S. ports.

Executive Summary

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IntroductionIntroduction Brief History of Puerto Rico’s Economic Development In the middle of the 20th century, Puerto Rico embarked on an industrialization process that paid off with significant growth: Puerto Rico’s GDP grew at an annual average rate of 4.9% during 1950 to 2000. However, from 2000 to 2010, Puerto Rico’s economy dramatically slowed down to a yearly growth rate of 0.7%. In the last decade, the growth rate has been negative, on average at a level of -1.3% .1 The economic growth and subsequent shrinking of Puerto Rico’s economy is tied to its industrial policy. According to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the industrialization policy applied in the Caribbean, including Puerto Rico, after the 1940s focused on developing industry through the attraction of foreign direct investment. In other words, “industrialization by invitation.” Puerto Rico was different from the rest of the Caribbean because of its special relationship with the United States (U.S.). As an organized territory of the United States with Commonwealth status, Puerto Rico attracted mainland U.S. companies and “exported” the remaining labor that could not be absorbed in the local economy. Puerto Rico imported capital and exported labor. This strategy was known as “Operation Bootstrap” and involved local infrastructure and social capital investment, tax concessions, grants, subsidized rentals, utility rates and low wage rates.2 Figure 1: Puerto Rico’s Average GDP Growth Rate by Decade

Note: Graph based on calculations using World Bank data.

According to ECLAC, “the U.S.-ownership led industrialization strategy of development in Puerto Rico constrained the development of a local industrial class.” Essentially, Puerto Rico skipped the import substitution industrialization (ISI) component of Operation Bootstrap and moved into the export-oriented phase without properly linking foreign investment with the local economy.

Introduction 10

The population on the territory followed a similar path. Puerto Rico’s population has been falling since 2004 due to a decline in birth rates and outmigration, exacerbated by disasters and persistent recessions. Previously, the territory had experienced steady growth following World War II. From 1950 on, the population of 2.2 million increased, peaking around 3.8 million in 2004. By 2020, the population had decreased 18%, down to 3.1 million. More dramatically, the population of Puerto Rico is aging. The median age is 42 years old (40 for men and 43 for women). In comparison, the median age of the U.S. is 38.1 years old. The age dependency ratio in Puerto Rico is 65%, leaving only about 1.02 million people in the labor force. The population decline and increased aging have debilitated the labor force and the capacity for economic growth.

Due to the 1917 Jones Act, Puerto Rico’s bonds are exempt from taxation by the US Government and any State, county, or municipality. This taxation advantage allowed Puerto Rico to raise liquidity regularly. In contrast, Puerto Rico has a considerable disadvantage relative to the 50 States of the Union regarding federal funding for social programs. For example, the federal government currently pays for 76% of Puerto Rico’s Medicaid costs, when the rate would be 83% if the territory was treated as a state. Puerto Rico’s inability to fund social programs and its ease of borrowing money led to an unsustainable level of indebtedness.

PROMESA and the Creation of the FOMB Since 2006, Puerto Rico has experienced a string of economic crises, leading to fiscal challenges. The government has had a long history of political disagreement on managing cash flows and funding operating expenses. The government opted to borrow during previous downturns, issuing bonds to access liquidity and sustain government functioning.3 In 2009, credit rating agencies began downgrading revenue bonds issued to the Puerto Rico Highways and Transportation Authority to junk bond status for notable decreases in revenues and increasing operational costs.4 Over the years, further concerns around the heavy indebtedness and economic decline of government agencies led to downgrades of Puerto Rico’s general obligation debt. The government retained access to credit markets and continued to borrow to manage its severe financial difficulties, amassing an unprecedented amount of debt.5 It was not until credit rating agencies downgraded Puerto Rico’s general obligation debts from a “Baa3” to a “Ba2” rating (“junk” status) in 2014 that the government faced public and legal pressure to address its ballooning debt. In 2015, former Governor Garcia Padilla announced a potential default on $73 billion of outstanding debt. This announcement presented the largest impending default in U.S. history and ignited public debates on the territory’s fate because of its inability to file for bankruptcy using the tools under Chapter 9 of the U.S. Bankruptcy Code.

(In 1984, the U.S. Congress changed the federal bankruptcy code to preclude territories from filing for protection.) Lacking a mechanism to restructure the debt, the government of Puerto Rico passed local legislation, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. The U.S. Supreme Court rejected in 2016 the Recovery Act, determining that it violated the U.S. Constitution. The Supreme Court decided that it was only within the power of the U.S. Congress to approve legislation that facilitates bankruptcy procedures.6 The law’s rejection created a dangerous policy gap, further increasing the difficulty presented by the debt crisis. It was evident that Puerto Rico needed a mechanism to reorganize future Introduction 11

debt payments while avoiding costly and unpredictable collection litigation from bondholders.

Puerto Rico needed a breather but did not have the power to declare a “stay” under either local or federal law.

Passed by the U.S. Congress on June 1, 2016, the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) provided the government and other territories with a legal mechanism to default and procure a litigation stay while restructuring its debt.7 The most politically controversial aspect of the legislation mandated a seven-person fiscal oversight and management board (FOMB) appointed by the President of the United States. Puerto Rico lawmakers and politicians insisted on an independent body to oversee negotiations and reconcile the concerns across multiple stakeholders and creditors. Opposition parties have claimed the Board is an obstructive body that impedes the territory’s ability to self-govern and puts significant constraints on public resources. Under Sec. 209 of PROMESA, the FOMB will terminate once Puerto Rico restructures its debt, shows the capacity to access capital markets at reasonable rates, and achieves four consecutive balanced budgets.

The FOMB currently handles the restructuring of the debt and oversees Puerto Rico’s fiscal health. After five years of tense and difficult negotiations between FOMB, creditors, and the Puerto Rico Legislature, the FOMB filed the proposed 8th amended Plan of Adjustment to U.S. District Court Judge Laura Taylor Swain for confirmation on November 5, 2021. At the time of writing, the federal judge had not ruled on the plan. The current plan aims to reduce the $73 billion in outstanding debt to $34 billion, cutting 80 percent of the largest amount of claims against the territory from $33 billion to $7.4 billion. The plan would ensure the government’s maximum debt service payment is $1.15 billion per year. The government must also address $55 billion in pension liabilities.

The Moonshoot Opportunity Puerto Rico is on the heels of a historic debt restructuring agreement that would reduce its debt burden significantly. The series of natural disasters and the COVID-19 pandemic have led to an unprecedented availability of emergency and recovery funds. Never before in recent history has the territory’s fiscal and economic situation been subject to so much attention from financial markets as well as from the federal government. In this unique context, Puerto Rico faces a momentous opportunity to overcome its misfortunes and chart a pathway towards economic prosperity for decades to come.

Our goal in this report is not to revisit past discussions on the territory’s debt, but instead to look to the future and provide a roadmap for all stakeholders interested in the long-term success of Puerto Rico. This report is organized into three sections that address different areas for reform. In Section 1, we examine how Puerto Rico could return to markets effectively and improve the quality of its governance. In Section 2, we call for parity on federal public assistance programs and propose measures to improve the implementation of disaster relief.

In Section 3, we explore economic investments that Puerto Rico could make in strategic sectors to drive growth.

We recognize these recommendations are by no means exhaustive and exclude important issues like migration and education. Nonetheless, we hope they can contribute to the consequential debate underway on Puerto Rico’s future.

Introduction 12

Building a Better Environment for Fiscal Growth

photo by rj lerich on Shutterstock

Introduction Puerto Rico’s fiscal crisis originated from large fiscal deficits and high borrowing costs. Mitigating and reversing these dynamics will be critical to Puerto Rico’s future success. While the Plan of Adjustment makes significant progress on these goals, it is not sufficient in isolation. For Puerto Rico to realize its moonshot opportunity, the territory should prepare a thoughtful strategy for returning the government to financial markets and implementing governance reforms that support long term fiscal stability and growth.

To generate reasonable fiscal stability in the long run, the government of Puerto Rico will need a strategy for re-accessing capital markets. Under Section 207 of PROMESA, the Federal Oversight and Management Board must certify that Puerto Rico has “adequate access to both short-term and long-term credit markets at reasonable interest rates to meet the borrowing needs of the territorial government.”8 Also in order to exit PROMESA, the government must maintain budgets in accordance with modified accrual accounting for four fiscal years. The Plan of Adjustment, which has already passed the Puerto Rican legislature, addresses the four fiscal years of modified accrual accounting.9 Puerto Rico’s recent fiscal challenges give the territory a unique opportunity and motive to review internal governance practices and promote transparency. Throughout our weeklong trip to the territory, we heard from stakeholders that better governance was a key factor that could help Puerto Rico seize the moment and permanently rebound from bankruptcy. This message was repeated by leaders across the public, civil and private sectors. Interviewees frequently emphasized three components of governance worth focusing on: improved transparency, enhanced institutional capacity, and establishing a common vision. Specifically, we heard the theme of transparency echoed most consistently by private- and public-sector actors during our trip. For example, one prominent stakeholder told us in no uncertain terms: “Transparency is the number one thing that can benefit Puerto Rico.”

Insufficient governance standards and a lack of transparency frequently accompany public debt crises. For example, Greece’s formal debt crisis began with updates to previously misleading financial reports and Mozambique had to make significant cuts to public spending after the “Tuna Bond” disclosures in 2016. Wary investors also demand higher returns in situations of higher perceived risk, which can be created in conditions of lower transparency.10

“TRANSPARENCY IS THE NUMBER ONE THING THAT CAN HELP PUERTO RICO.” The recommendations enclosed in this section are more than idealistic proposals to improve abstract notions of good government. Increased transparency can benefit Puerto Rico by assuring future investors, minimizing the cost of borrowing and increasing public trust. Improved institutional capacity and effectiveness would enhance government functioning and economic development.

Building a Better Fiscal Environment for Growth

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A Strategy for Market Access Regaining market access is uncharted territory for Puerto Rico, thus it is useful to consider the experiences of other entities that have undergone previous restructurings, namely the City of Detroit and Puerto Rico’s own Aqueduct and Sewer Authority (“PRASA”). While neither offers a perfect comparison to Puerto Rico’s general obligation debt—Detroit filed under chapter 9 and PRASA bonds are different from general obligation debt—the lessons for returning to market are instructive despite these differences. A coherent strategy on market access should take into account the lessons learned from these two cases.

1 — The Importance of Messaging Detroit did extremly well in its return to market following its bankruptcy. The City of Detroit filed for bankruptcy in July 2013, with around $18-20 billion in debt, making it the largest municipal debt bankruptcy except for Puerto Rico. Prior to filing for bankruptcy, Detroit had entered a state of emergency and stopped making payments on some of its debt and contributing to its pension system.11 Yields on Detroit’s general obligation bonds increased to nearly 8%. After a series of cases, Michigan’s bankruptcy court approved the City’s request to file under Chapter 9. The Legislature’s Plan of Adjustment included three years of balanced budgets.12 Four years after Michigan’s court approved the Plan of Adjustment, Detroit returned to the bond market.

The messaging from city officials on the bankruptcy process presented Detroit’s new offering as a “fresh start,” which allowed them to enter markets with less overhang from the bankruptcy.13 Detroit did not pay as large of a premium as expected when they returned to the market. In discussing the state’s finances, the Chief Financial Officer emphasized the progress that the city had made since the bankruptcy.14 The authorities also emphasized the requirements under the Plan of Adjustment to right-size the fiscal situation, including the requirement for three years of balanced budgets.

The PRASA issuance is a harbinger for future general obligation issuances in Puerto Rico, and the authorities should lean on this success when other entities return to bond markets.

The territory has not been shut completely out of financial markets after the default, as some creditors argued in the early days of the crisis. PRASA is the only Puerto Rican entity to have sought access to financial markets since 2016. Therefore, markets may reference the PRASA issuance as a model for Puerto Rico’s general obligation debt. When PRASA successfully accessed markets in January 2021, the Governor heralded the issuance as “excellent and hopeful news for PRASA.”15 Several local newspapers noted that PRASA’s issuance was one of the chief financial accomplishments of the territory since PROMESA’s approval. At the time of restructuring, PRASA had a stronger financial position than several other state owned entities and did not need or opt to restructure its debt. PRASA had around $4.6 billion in outstanding debt obligations, the second largest of state owned or public corporations in Puerto Rico.16 Though PRASA was spared from the restructuring process, the Authority’s bonds are still rated junk status.

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2 — Timing of Issuance is Essential Market timing was critical for both PRASA and Detroit, as they both entered market conditions where investors were looking for yield. In the Detroit case, it is possible that tight financial conditions meant that investors placed less of a premium on bankruptcy. Given that Detroit issued bonds at similar spreads to the comparably rated but solvent Chicago Board of Education, there does not appear to be a heavy market penalty for bankruptcy. Similarly in the PRASA case, one of the reasons the PRASA issuance was so successful was favorable market conditions. Typical investors were searching for yield, particularly in late 2020, so demand for the issuance exceeded its announced size.17 Favorable market conditions means that both the Detroit and PRASA issuances were oversubscribed with demand from institutional investors. Detroit planned to issue $111 million in bonds but increased the size to $135 million due to investor demand.18 Also, final interest rates on the sale were lower than anticipated due to the oversubscription. The yield on bonds due in 2025 was 4.95% with a 5% coupon.19 The spreads on the bonds were also quite narrow compared to a AAA-municipal bond index.

Detroit was similarly fortunate that market conditions supported the issuance. In December 2018, the bond market was “hungry for yield,” and investors were looking for high yield opportunities.20 These tight financial conditions helped contribute to the demand for Detroit’s debt and the subsequent lower interest rate than anticipated. Other actors speculate that market conditions and search for yield led investors to pay less attention to Detroit’s bankruptcy and underlying fundamentals. Beforehand, it is extremely difficult to predict market conditions and time the issuance to a friendly municipal market. While there is no telling what would have happened had Detroit entered the market during less friendly conditions, it is clear that market timing is important for re-entry after bankruptcy.21 In conclusion, based on the experience of Detroit and PRASA, we believe that Puerto Rico’s return to the financial market to be able to borrow again under reasonable rates should be feasible once the final Plan of Adjustment terms are unveiled.

Public Financial Management and Transparency Strengthen the Chief Financial Officer Role In early March, Puerto Rico’s Governor Pedro Pierluisi signed executive order 202118 establishing the current Chief Financial Officer position and laying out its writ.22 The Governor has identified 24 separate functions and responsibilities for the position, including “centralizing all the functions of financial management, improving governance and fiscal management.”23 The plans for the CFO also include “full coordination” with AAFAF, OMB, the Puerto Rico Information and Technology Services (PRITS), GSA, the Office of the Inspector General and the Government of Puerto Rico Human Resources Administration and Transformation (OATRH). From leading government-wide enterprise resource planning (ERP) to auditing the financial units of agencies, the CFO has significant and varied responsibilities.

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These directions vest significant power and authority in the CFO, and his or her success will be directly linked to the fiscal success of Puerto Rico. The creation of the CFO is a smart and prudent response to the fiscal challenges facing Puerto Rico. To the extent that good governance can be institutionalized within a program or office in the government, the CFO fits the bill. Their ownership over previously disparate responsibilities and their mission to bring greater transparency to Puerto Rico’s fiscal affairs represent the sine qua non of good governance. The legislature of Puerto Rico should therefore embrace this new office by providing the authorization and funding necessary for it to succeed. In particular, legislators should consider giving the CFO “the appropriate authorities over financial dependencies that would allow CFO authorities over critical fiscal roles, responsibilities, and processes.”24 The CFO should act to expedite the publication of audited financial statements, as the current three-year lag could harm efforts to regain access to low-cost credit.

BOX 1 CASE STUDY: Washington, D.C., 1995 Puerto Rico could learn from how Washington, D.C. overcame its fiscal crisis in the 1990s by appointing a Chief Financial Officer. Washington, D.C.’s fiscal challenges began in 1994, exacerbated the recession in the early 1990s and rising entitlement expenditures not covered by the federal government. The District started running fiscal deficits on the order of $70 million, which contributed to a $750 million debt load and high interest rates given its junk bond status. The Clinton Administration expressed concern for the District’s fiscal situation, and instructed Congress to address the situation and avoid a fiscal cliff in Washington. Congress considered several options but settled on a control board authorized under the District of Columbia’s Fiscal Responsibility Act of 1995. The Control Board had five members appointed by the President of the United States and was given the power to override the mayor and D.C. city council.25 The day Congress approved the control board, the mayor of D.C. quipped that it was “a sad day for the city.”26 The Control Board in the Washington, D.C. case exited in 2001, a year earlier than anticipated under the DCFRA. The control board left after Washington had achieved a balanced budget for five fiscal years and the Chief Financial Officer had become the final arbiter on the budget. Under the DCFRA, the Mayor appoints the Chief Financial Officer, but this individual has professional protections enabling them to review the budget without political bias.27 Puerto Rican officials should adopt similarly stringent protections for their CFO, since they have provided in Washington, D.C. “strong re-assurance that these functions are administered with the requisite professionalism and transparency while insulating financial decisions from political influence.”28 A key difference between the Washington, D.C. and Puerto Rico cases is the sunrise provision of the control board. The District of Columbia’s control board included a sunrise provision, so the Board can come back at any time if the District’s fiscal situation deteriorates.29 While in practice D.C.’s control board is unlikely to return due to political unpopularity and the District’s healthy finances, the legal architecture exists for its resurgence.30 Dr. Alice Rivlin, who was the head of the control board in 2001, noted ten years later in 2011, that given the role of the CFO, it is unlikely the District would breach any of the clauses that trigger sunrise.31 Also, several District City Council members over the past twenty years have publicly vowed to not allow for the control board’s return.

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Create a Puerto Rican Congressional / Legislative Budget Office Legislators should demonstrate their commitment to restoring the faith of creditors and the public through the local establishment of an agency equivalent to the federal government’s nonpartisan Congressional Budget Office (CBO). An expert bureaucratic agency responsible for estimating the fiscal impact of legislation would show a serious determination to avoid repeating the mistakes that preceded PROMESA. The California Legislative Analyst’s Office (LAO) provides a good model for a parallel state-based agency. “Known for its fiscal and programmatic expertise and nonpartisan analyses of the state budget,” the office reviews budget control measures, publishes special reports, estimates the fiscal consequences of new acts and forecasts revenue and expenditures.32 These activities are essential for any government aspiring to maintain fiscal stability. Precedents exist for this proposal within Puerto Rico and other states. Indeed, Puerto Rico had such an agency in CLAFI, the Legislative Center for Fiscal Analysis and Innovation, and some of these responsibilities have now been centered in the Office of Legislative Services (OSL) following CLAFI’s repeal. CLAFI was approved in 2015 under law 147-2015, and repealed less than 20 months later in 2017 under law 101-2017.

Policymakers must grapple with key design questions for this agency in the unique context of Puerto Rico. These questions include: which legislation should be automatically scored, if any? How much discretion should congressional leaders have over scoring? How can agency personnel be insulated from political pressure and remain nonpartisan? What role would this agency play under the FOMB, and how much deference should the FOMB give to its estimates?

Should staff be restricted to static or dynamic scoring? These are questions best answered by officials in Puerto Rico, ideally informed by the guiding principle of financial prudence.

Like the federal CBO, this new agency should make its findings available in a clear, transparent, and accessible manner. The agency’s work would lose much of its efficacy if its estimates were restricted to a small group of close officials. At a minimum, the findings of the agency should be available to all legislators upon request. This would prevent either party from withholding damaging information on the fiscal consequences of particular legislation, while enhancing all legislators’ ability to cast informed votes on the bills coming through both chambers.

Training Civil Servants The challenges facing government officials in Puerto Rico have rarely been greater, especially at the local level. In response to devastating hurricanes and earthquakes, municipal governments responded appropriately by shifting their resources to addressing urgent disaster-related needs. However, this has come at the expense of other important functions. The government of Puerto Rico should step in by creating a concentrated program to enhance institutional capacity at the territorial and municipal levels.

This program could take the form of a new Institute for Municipal Advancement housed at the University of Puerto Rico or any other serious institution of higher learning. In its early years, a new institute could hold specific trainings focused on capitalizing on the federal funding available to Puerto Rico. The institute would recruit individuals experienced with successful FEMA cost-sharing applications to help train government workers on FEMA’s RFRs and RFAs (Requests for Reimbursements/Advances). Other representatives could be brought in to hold Building a Better Fiscal Environment for Growth

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trainings on CARES Act funding, Community Development Block Grants (CDBGs) and strategies for municipalities to access liquidity to get work underway. This final topic could prove to be especially valuable for municipalities, as it partially explains the significant discrepancy between obligated and disbursed funds to date (~$55 billion).

These trainings would provide information on the most complex intricacies of public assistance applications for FEMA and other agencies. Sessions could cover preliminary damage assessments and the different nuances of applications for specific project categories (e.g. debris removal, emergency protective measures, permanent work). The trainings could also help incentivize the development of a local disaster recovery professional workforce by opening up participant and facilitator roles to private sector consultants for the territory.

Figure 2: Puerto Rico Recovery Funding Total Funds Allocated

Total Funds Obligated

Total Funds Disbursed

$76,677,924,808

$64,289,389,482

$21,919,656,996

Source: COR3 Transparency Portal

FEMA provides much of its funding via reimbursements. City governments hoping to launch significant recovery projects must therefore access their own liquidity before work can get underway. Puerto Rico’s Fund for Recovery Work helps to alleviate this problem, as it opens up $750 million in advance funding for local governments. The FOMB recently approved the first request to tap into this account. More liquidity should be made available to municipalities to help ensure federal funds do not go unused. The Institute for Municipal Advancement could serve as a good organizing entity for these efforts.

Policymakers should also consider making COR3 its own independent agency. Unfortunately, Puerto Rico will experience more frequent and intense disasters with climate change, including powerful hurricanes. The niche responsibilities of COR3 do not fit cleanly under the Puerto Rico Public-Private Partnerships Authority (P3), its current parent agency. The board of P3 is not as well equipped to review the contracts, consultants and administrative measures of COR3 as an independent board and leadership team could be.

The Puerto Rico Government can request FEMA to provide greater logistical support for aid subrecipients. The agency could then dedicate staff and resources for trainings, workshops, and ongoing support on topics such as Section 428 alternative procedures, best practices in documentation and record-keeping, and other areas of concern for local officials. Given the challenges that subrecipients in Puerto Rico face with the Public Assistance program’s reimbursement system, the agency can also provide guidance on accessing or leveraging other sources of bridge funding, such as CDBG-DR funds or public-private partnerships. Section 2 of this report provides further information on ways the federal government can ensure the fair and expeditious implementation of recovery funding.

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BOX 2 Tangible Benefits of Effective Governance in Jayuya The evidence supporting the power of improved governance is clear. Jayuya is a municipality in central Puerto Rico with 330 people per square mile and a total population of about 15,000. Two hours away by car, the capital of San Juan has 7,000 people per square mile and a total population of about 340,000. With around 5% of both the density and the population, Jayuya has somehow managed to secure more than $275 million in obligated FEMA Public Assistance funding, almost twice the $145 million secured by San Juan.33 According to conversations with recovery experts interviewed during research for this report, the explanation for this difference lies in the unique staffing composition of Jayuya.

Many of the staff in this small municipal government have worked there for decades, since Hurricane Georges hit the territory in 1998. Following Hurricane Maria, they had the know-how and ability to manage FEMA funding requests and went to work early to gather the necessary documentation to compete for federal funding. This anecdote illustrates the importance of investing in institutional capacity in Puerto Rico and providing attractive incentives to retain civil servants.

Rotational staffing program for FOMB and government employees The Fiscal Oversight and Management Board is tasked with restoring fiscal stability to Puerto Rico, and Natalie Jaresko, the Executive Director, conveyed to us directly the importance of enhancing human capital across the Puerto Rican government. As of July 2021, FOMB has 93 staff and continues “to hire personnel in key areas related to fiscal plan implementation, monitoring, and reporting.”34 A long-term focus on strengthening human capital in Puerto Rico’s civil service should lead the FOMB to seek placement for many of its knowledgeable personnel within the government following the FOMB’s termination. If FOMB staff instead depart for other opportunities outside of the Puerto Rico civil service, the investment made in those professionals and their training will accrue to entities other than the Puerto Rican government. These placement efforts can begin before the FOMB’s termination with the introduction of a rotational staffing program between the FOMB and key agencies.

This rotational program could take the form of similar secondment programs within the federal government and other agencies. Staff from key agencies (e.g. AAFAF, OMB, COR3) could “rotate on” to service at the FOMB for defined durations, allowing them to gain an in-depth understanding of the FOMB’s approach to Puerto Rico’s fiscal stability. FOMB staff would also “rotate out” to these agencies and others for similar durations. This mutual exposure across the government and FOMB would result in skill building, broaden the exposure of staff and facilitate new professional connections for FOMB personnel. These experiences would also create natural pathways for FOMB staff to find placement in other agencies following their FOMB service or the FOMB’s termination.

The minimum duration for such secondments should be one year. Shorter rotations may not give staff enough time to make meaningful contributions in their placements; by the time staff would Building a Better Fiscal Environment for Growth

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be trained, they would leave. This rotational program may also lessen some of the criticism of the FOMB as an “outside” imposition upon Puerto Rico, as its composition would come to consist partially of bureaucrats from the existing government of Puerto Rico. It would convey a serious commitment to building human capital in the government, as the oversight board would lend its own personnel to the mission. This arrangement constitutes a shared victory for the FOMB, other agencies in the Puerto Rican government and their collective mission.

Recommendations Market Access • Puerto Rican Government Officials should develop a strategy for returning to market that: 1) messages the return to market as a fresh start, and 2) remains cognizant of market conditions.

Public Financial Management and Transparency • Enhance the stature and authority of the Chief Financial Officer of Puerto Rico with legislative authorization.

• Create a nonpartisan Congressional / Legislative Budget Office to score legislation at the request of Congressional leaders or the Governor.

• Build a stronger civil service through training programs and FOMB rotational staffing.

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Ensuring Fair and Effective Federal Public Assistance and Disaster Relief

photo by CaseSensitiveFilms on Shutterstock

Introduction Like any U.S. state and territory, Puerto Rico relies on the federal government to finance a wide array of public services, especially its social safety net and measures for disaster relief.

However, the quality and effectiveness of these programs have been undermined by unequal access to funding, discriminatory application of onerous bureaucratic procedures, and weak local implementation capacity. This was made starkly clear in 2017 when Hurricanes Irma and María devastated Puerto Rico. Although the federal government allocated large sums in disaster relief, the funds were slow to reach victims and support rebuilding efforts. Likewise, people whose livelihoods were severely harmed could not receive nutrition assistance, healthcare, or cash assistance that would otherwise be made available to them in the mainland.

Realizing Puerto Rico’s moonshot opportunity requires removing these disparities and fortifying federal public assistance and disaster relief. A robust safety net would ease the hardships of vulnerable communities like low-income people, people with disabilities, and the elderly, and enable them to lead more prosperous and dignified lives. Effective disaster relief would maximize the $77 billion that has been allocated to rebuild Puerto Rico into a thriving and secure economy.

NOW IS THE TIME FOR BOLD ACTION: DEMOCRATIC CONTROL OF CONGRESS AND THE WHITE HOUSE PRESENTS A RARE POLICY WINDOW TO ELIMINATE DISCRIMINATORY POLICIES AND STRENGTHEN FEDERAL SUPPORT.

Unfair Participation in Federal Public Assistance Programs As a U.S. territory, Puerto Rico participates in certain federal programs in a manner distinct from the states. The most significant programs that involve special arrangements are Medicaid, Supplemental Nutrition Assistance Program (SNAP), and Supplemental Security Income (SSI).

Generally, Puerto Rico’s versions of these programs are inferior to those found in the states.

These federal programs are critical components of the public safety net, meaning Puerto Ricans are relatively deprived of essential forms of public assistance, especially during times of crisis.

Federal lawmakers are aware that current funding levels for these programs are inadequate and have enacted additional support to salvage them multiple times. The poorer quality of these programs, combined with the lack of predictability on funding, severely constrains Puerto Rico’s ability to respond to the needs of its people. It also limits Puerto Rico’s tools for disaster relief, which are only becoming more important due to climate change.

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Medicaid Medicaid was created in 1965 as a public health insurance program for low-income people.

It is funded jointly by federal and state (and territory) governments and administered by states subject to federal guidelines. This structure means eligibility and benefits can vary considerably depending on the state or territory.

Generally, the federal government pays for at least half of Medicaid costs in states and territories, but it could cover as much as 83 percent of total costs by law. The percentage that the federal government pays — known formally as the Federal Medical Assistance Percentages (FMAP) — is determined by the average per capita income of a state relative to the national average. However, in the case of territories, the FMAP is statutorily set at 55 percent (prior to 2011, it was 50 percent), regardless of their per capita income levels.

If Puerto Rico were treated as a state, its FMAP would instead be the maximum rate of 83 percent. Another important distinction from states is that federal funding for U.S. territories is provided through a block grant, meaning it’s capped at a certain amount independent of the legal FMAP. These two policies dramatically shortchange the amount of federal funding that territories receive for Medicaid. In 2019 the base block grant funding that Puerto Rico received was about $370 million, even though the total Medicaid expenditure in the territory was $2.8 billion.35 During 2015 to 2019, the base block grant only covered, on average, 13.9 percent of Puerto’s Rico’s total Medicaid costs – far below the statutory FMAP. Supplementary federal funding has raised the current federal contribution to 76 percent, though.

In Puerto Rico, where about 44 percent of the population lives in poverty, eligibility and benefits are more limited than for states. Income eligibility for Medicaid in Puerto Rico is determined by its own poverty rate, not the federal one, which is much lower.36 As a result, many people who would be eligible in the mainland are not on the territory. In terms of quality of care, Puerto Rico’s Medicaid does not cover seven of the 17 services that states are required to provide by federal law. These include care in nursing homes, home health services, non-emergency medical transportation, and the full range of benefits for children that are guaranteed by Medicaid’s Early and Periodic Screening, Diagnostic, and Treatment benefit. Fewer prescription drugs are covered as well because Puerto Rico does not participate in the Medicaid Drug Rebate Program.37 Due to the inadequacy of Puerto Rico’s Medicaid funding and the string of crises it has faced, Congress has provided multiple rounds of additional Medicaid funding since 2011. The most significant temporary change happened after Hurricanes Maria and Irma, when Congress provided an extra $4.8 billion for 2018 and 2019, and increased the FMAP to 100 percent.

In 2019, Congress again extended Medicaid funding through 2021 and lowered the FMAP to 76 percent. Note, these cash infusions were designed to support the existing Medicaid program in Puerto Rico, without changes to eligibility or benefits. For the past decade, the territory has been on a constant fiscal cliff to afford its relatively meager version due to its special treatment.38 Congressional lawmakers broadly agree that Puerto Rico’s Medicaid situation is unsustainable Fair and Effective Federal Public Assistance

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and requires longer-term solutions, but they have been unable to arrive at a decision. The most recent bill on this issue is H.R. 4406, the Supporting Medicaid in the U.S. Territories Act of 2021, introduced on a bipartisan basis in July 2021 to provide more short-term relief.

The bill would essentially extend current federal funding for Puerto Rico for five years (about $2.8 billion annually, unadjusted for inflation) and for other territories for eight years. The FMAP for Puerto Rico would be kept at 76 percent and for other territories it would be 83 percent.39 While this measure would provide needed long-term funding to Puerto Rico, it would still preserve a fundamentally disadvantageous arrangement for Puerto Rico and other territories.40 Puerto Rico’s Medicaid FMAP would still be artificially lower than needed, eligibility would still be stricter, and coverage would still be inferior.

Puerto Rico should have full parity in terms of funding and coverage with states to increase access to healthcare for the most vulnerable communities. This would reduce the fiscal pressure on Puerto Rico and allow it to better weather future crises, as people would automatically qualify for Medicaid if needed.

Nutrition Assistance Program The Nutrition Assistance Program (NAP) helps low-income people in Puerto Rico put food on their table. It is equivalent to SNAP, which is the nutrition assistance program available in the 50 states of the U.S., the District of Columbia (D.C.) and some territories. However, as with Medicaid, the major difference is that NAP is financed through a federal block grant, whereas SNAP funding is determined by eligibility and has no spending caps.

The NAP is administered by Puerto Rico’s Department of Family Socioeconomic Development (ADSEF in Spanish). Each year, the ADSEF must submit for approval a Plan of Operations to the U.S. Department of Agriculture’s Food and Nutrition Service (FNS), which outlines how benefits will be distributed within federal funding caps and guidelines.41 Eligibility is determined based on the net income of households. For example, a family of three must have a net monthly income below $1,706 to qualify. NAP is one of the largest sources of federal funds to Puerto Rico. The total amount of the NAP grant in FY 2021 is $2.03 billion.42 The NAP provides essential support to low-income and vulnerable communities in Puerto Rico. About a third of the population experiences food insecurity and nearly half receives NAP benefits, according to official government statistics.43 Among recipients, 32 percent are elderly or people with disabilities and 25 percent are children. Further, 65 percent of them have monthly incomes below half of the federal poverty line. Despite this need, NAP assistance is quite modest — the maximum monthly benefit for a family of three, for instance, is $315. Benefits vary by household size, income, and other characteristics.

Households with elderly individuals receive a 20 percent boost in NAP. Although it would not universally be the case, most recipient households would likely receive higher benefits under SNAP. As with Medicaid, the federal government has allocated multiple rounds of additional funding for NAP, particularly in response to crises. Prior to hurricanes Maria and Irma Fair and Effective Federal Public Assistance

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in 2017, the net monthly income limit was originally $599 per month. Afterwards, the government provided an additional $1.27 billion, which allowed the income limit to rise to $1,606 and for the max benefit to rise to $511. Importantly, this funding was approved in October 2017, but was not disbursed until five months later in February 2018 because the USDA had required Puerto Rico to deliver a comprehensive Plan of Operation beforehand.

Since then, the federal government has provided another $800 million to sustain NAP for disaster and COVID relief, although the max benefit fell back down to $315.44 The recent cash infusions in NAP reveal a major limitation of the program: it is not equipped to respond to disasters like SNAP. During recessions or disasters, SNAP enrollment automatically increases to support those affected and newly eligible. For instance, the Virgin territory participates in SNAP and was able to provide assistance through the Disaster SNAP program just 47 days after the 2017 hurricanes. In contrast, the NAP has limited funding that prevents it from adjusting unless Puerto Rico or the U.S. government step in. Even if Congress enacts additional funding, delays arise from Puerto Rico having to develop a new Plan of Operation. Overall, transitioning Puerto Rico to SNAP would both provide greater assistance to low-income people and provide a critical lifeline to future victims of disasters.

In recognition of this problem, there have been multiple legislative proposals to transition NAP into SNAP. Most recently, the Puerto Rico Nutrition Assistance Fairness Act was introduced in September 2021 and would transition NAP to SNAP using the assistance of an advisory board.45 At the same time, there have been proposals to cut back on SNAP eligibility. In 2018, the Fiscal Oversight and Management Board (FOMB) for Puerto Rico called for Puerto Rico to implement work requirements to NAP, such that recipients would need to work for a minimum of 80 hours per month, based on the notion that the program disincentives work.46 The NAP is a lifeline to low-income Puerto Ricans, but its reach and impact is unfairly limited. Work requirements would be a misguided approach and disqualify many informal workers from nutrition assistance at a time of insufficient demand for formal labor. Ample research has shown that work requirements are ineffective and do not incentivize work.47 The optimal approach would be to grant Puerto Rico SNAP.

Supplemental Security Income Few programs reflect how deeply Puerto Rico is shortchanged by the federal government than Aid to the Aged, Blind, and Disabled (AADB). AADB is a cash transfer program for lowincome people who are (as implied by the name) elderly, blind, or disabled. It is Puerto Rico’s equivalent of the Supplemental Security Income (SSI) program available in the mainland, except the benefits are significantly lower and eligibility is slightly more limited.

The AADB offers a maximum basic benefit of $64 per month and a secondary benefit equal to 50 percent of actual shelter costs up to $100 per month. By comparison, SSI’s maximum monthly benefit in 2021 is $794, and many states supplement this amount. Both programs have similar eligibility rules. To qualify, recipients need to have less than $2,000 in assets.

Importantly, AABD does not raise this limit to $3,000 for married couples like SSI, which Fair and Effective Federal Public Assistance

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effectively acts as a marriage penalty.

With regard to income, AADB and SSI exempt the first $25 of unearned income per month (like Social Security benefits or pensions) as well as the first $65 of earned income per month.

Beyond these low thresholds, the benefit falls by about $0.50 for every dollar of earned income. Because the income limitations are so strict, few people receive the maximum benefit in either program. The average AADB was just $75 per month in 2015 and the average monthly SSI benefit was $580 in 2020. Lastly, children under age 18 are ineligible for AADB, unlike SSI, which is the only direct income support for children with disabilities.48 To place AADB into context, it is important to note that SSI is already a very strict and modest program.

Nearly 9 in 10 recipients are eligible due to a severe disability, based on rigid medical criteria.49 Because of this, almost half of SSI applicants are rejected for medical reasons. In addition, over half of SSI recipients report having no additional source of income besides SSI. The max SSI benefit, which few receive, represents three-fourths of the federal poverty line for an individual.50 AADB is administered by ADSEF and funded through a combination of federal and local money. Namely, the federal government funds 75 percent of the program and 50 percent of the administrative costs. Puerto Rico receives its federal funds in the form of a block grant worth about $36 million (not indexed for inflation) reserved for adult assistance, foster care, adoption assistance, and AADB.51 By comparison, SSI is fully funded by the federal government’s general revenues and administered by the Social Security Administration (SSA). According to the Government Accountability Office (GAO), the federal government in 2011 spent less than 2 percent on AADB relative to what it would have spent if Puerto Rico received SSI.52 States have the option to supplement the federal SSI benefits, many of which do.

Forty-six states and D.C. provide additional assistance, although the amount and eligibility requirements vary widely. For instance, California offers independent elderly individuals an extra $160 per month, while D.C. offers adults living in foster care homes an extra $640 or Figure 3: Medicaid, SNAP and SSI Under Current Law and Parity Program

Current Law

Parity

Medicaid

Effective federal match rate of 76 percent, inferior coverage for medical servicxes and drugs

Federal match rate of 83 percent

SNAP

Max base benfit of $315 per month for a family

Max base benefit of $505 per month for a family of three

SSI

Max base benefit of $64, with 76 Max base benefit of $794, fully funded percent of costs covered by the by the federal government federal government Fair and Effective Federal Public Assistance

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more.53 The amount that Puerto Rico is forced to contribute to AADB is money that could instead be used to increase support for the disproportionately high number of people with disabilities in the territory. About 14.9 percent of its adult residents have a disability, compared to 8.6 percent of the general U.S. population, per the U.S. Census Bureau estimates for 2019.54 That amounts to roughly 476,000 adults, even though only 20,000 adults received AABD in 2015 (the latest year available).55 If Puerto Rico received SSI, its average monthly participants would climb from 34,401 to 354,000 in 2011, per the GAO.56 The fate of AADB is presently in limbo. In November 2021, the Supreme Court heard oral arguments on a case that could oblige the U.S. government to transition Puerto Rico (and other territories on AADB) to SSI.57 Regardless of the outcome of the trial, AADB should be converted to SSI. It represents a profound inequity in how some of the most vulnerable people in Puerto Rico are treated by the federal government.

Discriminatory Treatment and Unmet Needs in Disaster Recovery Since 2017, Puerto Rico has experienced devastating natural disasters that have caused unprecedented damage and complicated the ongoing bankruptcy process. These historic disasters, including Hurricanes Irma and María, as well as a series of earthquakes and aftershocks in early 2020, threatened Puerto Rico’s long-term economic viability even before the impact of the Covid-19 pandemic.

Due to these events, federal recovery, reconstruction, and resilience funding makes up a significant portion of the federal assistance that Puerto Rico will receive in coming years. As of November 22, 2021, Congress had appropriated a total of $76.73 billion in funds for Puerto Rico’s recovery efforts. Of those, $64.18 billion have already been obligated by federal agencies.58 However, these essential recovery funds have taken much longer than anticipated to reach the territory—largely due to onerous approval processes and bureaucratic obstacles that federal agencies forced on Puerto Rico early in the recovery.59 This unequal treatment greatly exacerbated the impact of the natural disasters, compromising the territory’s economy in the middle of its debt restructuring. Though the Biden Administration has taken steps to speed up disbursement and eliminate many bureaucratic barriers, the damage caused by unequal treatment earlier in the recovery still persists.

MORE THAN FIVE YEARS AFTER HURRICANE MARÍA MADE LANDFALL, ONLY 29% OF ALL ASSIGNED FUNDS HAVE ACTUALLY BEEN DISBURSED TO RECIPIENTS IN PUERTO RICO.60 At this critical juncture for both Puerto Rico’s recovery and debt restructuring process, the territory and the federal government must make key reforms to ensure that the remaining disaster funding is disbursed expeditiously, transparently, and in a manner that centers the needs of the territory’s most vulnerable populations. The following section includes an overview of key federal programs for Puerto Rico’s recovery, highlights concerns with implementation, and proposes recommendations to achieve a more resilient and equitable recovery process.

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Figure 4: Federal Disaster Funding by Agency (millions of $)

Source: COR3 Transparency Portal

Overview of Key Recovery Programs Two federal agencies, the Federal Emergency Management Agency (FEMA) and the Department of Housing and Urban Development (HUD), manage most of the funding for Puerto Rico’s disaster recovery. At the local level, FEMA funding is channeled through the Puerto Rico Central Office of Recovery, Reconstruction and Resiliency (COR3) while HUD programs operate through the Puerto Rico Department of Housing (PRDOH). Though these agencies manage multiple federal disaster relief programs, our analysis and recommendations focus on FEMA’s Individual Assistance and Public Assistance programs, and HUD’s Community Development Block Grant - Disaster Relief (CDBG-DR) program.

In Puerto Rico’s case, FEMA Individual Assistance provides funds to individuals and families who have sustained losses due to disasters, while Public Assistance principally provides grants for “subrecipient” entities such as municipalities or NGOs to permanently restore community infrastructure. At time of writing, FEMA had approved $1.5 billion in Individual Assistance spending in Puerto Rico, and obligated $25.6 billion in Public Assistance funding.61 HUD’s CDBG-DR program provides support for a broad range of long-term disaster recovery activities, including housing redevelopment, infrastructure investments, and economic revitalization of impacted communities. For an activity to receive CDBG-DR funding, it must meet one of three objectives: (1) primarily benefit low-and moderate-income (LMI) individuals and communities, (2) respond to an urgent need, or (3) prevent slums and blight. These grants also have a “targeting requirement” that requires grantees to ensure that at least 70% of funds benefit LMI individuals and communities.62 Following Hurricanes Irma and Maria, Congress Fair and Effective Federal Public Assistance

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provided an allocation of $20.2 billion in CDBG-DR assistance for Puerto Rico.63

Inequities in Implementation Despite the historic amount of federal funding available to Puerto Rico, the territory’s recovery has suffered greatly from slow action, burdensome requirements, and a lack of consideration for local conditions and processes.

Puerto Rico’s large stock of informal housing led to one of the earliest flashpoint issues for FEMA funding. Despite the fact that approximately half of the territory’s homes and commercial buildings were constructed without building permits or following land use codes, Individual Assistance grants for housing repairs initially required formal proof of ownership for applicants to receive funding. Predictably, FEMA’s disregard for local housing conditions slowed initial disbursement and led to an unusually high percentage of denied applications for housing repair aid.64 In 2018, FEMA started allowing Individual Assistance applicants to submit a signed selfdeclaration of ownership in lieu of formal documentation. However, as of July 21, 2021, only 232,429 of 1,126,413 applicants—just over 20%—had received housing repair or replacement assistance.65 Two thirds of those who were able to access funds received awards of less than $3,000.66 There have also been delays in permanent restorations through FEMA’s Public Assistance program. On October 30, 2017, the Puerto Rico Government agreed to use alternative procedures under Section 428 of the Stafford Act for all large permanent work projects funded through Public Assistance—the only state or territory that has ever done so.67 The alternative procedure allows subrecipients to restore and improve facilities beyond their pre-hurricane condition. However, the program involves significant risk, as Puerto Rico’s government must reach cost estimate agreements with FEMA, and cover any cost overruns. This serves as a risk mitigation strategy for the federal government, limiting its exposure to additional costs while shifting the burden to a local government undergoing bankruptcy.

Additionally, since Public Assistance functions on a reimbursement basis, Puerto Rico’s precarious fiscal condition has made it difficult for government agencies, instrumentalities, and other subrecipients to access the bridge funding needed to start permanent restoration projects under the program. As of January 15, 2021, Puerto Rico and FEMA were still working on cost agreements for around 6,100 more projects - the first stage in order to be able to obligate Public Assistance funds. At that time, the territory had only spent less than 1% of its $17.5 billion PA obligation to reimburse subrecipients for permanent work projects.68 Puerto Rico faced even greater obstacles and onerous restrictions for accessing HUD’s CDBGDR funds.

Under the original allocation, the territory had to apply for grants in increments through a tranche structure and submit its grant notices to a HUD-appointed Federal Financial Monitor for review. During the Trump administration, the Office of Management and Budget (OMB) also required HUD to submit Puerto Rico’s grant notices to an unprecedented interagency review Fair and Effective Federal Public Assistance

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process, while also pushing Puerto Rico to implement new property management systems and even alter its minimum wage requirements on federal contracts as preconditions for accessing the funds.69 Under current Secretary Marcia Fudge, HUD has now removed these onerous conditions and renewed its commitment to an expedient and equitable recovery70, but bureaucratic delays and conditions early in the process exacerbated the impact of natural disasters in Puerto Rico and increased the vulnerability of the populations that the federal program is meant to serve.

For example, PRDOH’s Home Repair, Reconstruction, or Relocation (R3) Program, the main housing assistance program using CDBG-DR funds in Puerto Rico, had only rebuilt 6% of qualifying homes as of June 2021.71

THERE ARE ALSO SIGNIFICANT ONGOING DISPARITIES IN CONTRACTING USING CDBG-DR FUNDS— 36% OF THE TOTAL VALUE OF DISBURSED CDBG-DR FUNDING FOR RECONSTRUCTION PROJECTS HAS GONE TO PUERTO RICO-BASED CONTRACTORS, VERSUS 63% FOR US-BASED CONTRACTORS.72 This inequity goes against the spirit of the Housing And Urban Development Act of 1968, which requires recipients of HUD assistance to contract with local businesses that provide economic opportunities to low-income persons to the greatest extent possible.73 In the case of Puerto Rico’s recovery, this inequity in contracting represents a risk that large off-territory contractors will capture a significant amount of the economic benefit from disaster relief funds.

Technical Assistance and Capacity Building Puerto Rico’s recovery will require the coordination and timely execution of thousands of complex projects, and yet the territory still confronts a systemic lack of expertise and capacity among government officials, aid recipients, and its disaster recovery workforce. It is not enough for the federal agencies to simply undo harmful policy—they must take proactive steps to set up Puerto Rico for success. We identified ways in which the Puerto Rico government can build technical capacity to use federal disaster funding in Section 1. Additionally federal agencies can make strategic investments to ensure the success of recovery initiatives on the territory.

HUD can facilitate horizontal learning between the PRDOH and other CDBG-DR recipients through workshops and educational forums. It can also directly provide assistance on the ground by rotating high-level career staff to the local Puerto Rico office as a resource to PRDOH and local grantees—a strategy that the agency has taken in other disaster recoveries.74 The Urban Institute notes that a more proactive HUD can guide grantees in incorporating best practices in data use and transparency, help entities formulate comprehensive strategies and/or collaborate with private or non-profit actors, and leverage CDBG funds for additional funding.75 HUD’s recent creation of a Special Advisor for Puerto Rico position is an encouraging step in the right direction; the agency should continue to build out a dedicated, cultually competent and bilingual team to share best practices with the PRDOH and local CDBG grant recipients, as well as coordinate with other federal and local agencies involved in the reconstruction.

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Encouraging Transparency At the moment of writing, there is no consolidated open data portal through which the general public can access information on all federal recovery funding flows and ongoing projects. Puerto Rico’s recovery and reconstruction plans—as well as updates, amendments, and public comments—are spread out across at least three documents: COR3’s Economic and Disaster Recovery Plan, PRDOH’s CDBG-DR Action Plan, and the Fiscal Plan. Instead of such a piecemeal approach, Puerto Rico’s disaster management agencies and central government can leverage federal funding to develop a comprehensive open data portal for all disaster recovery, reconstruction and resiliency spending. Such a portal should include data on all large projects, including program design and evaluation metrics, progress assessments for subgrantees, and thorough monitoring of contracting trends, among other metrics. It must also be fully bilingual, as only 23.4% of Puerto Rico’s population describes themselves as speaking English “very well.” In such a context, the lack of Spanish-language resources constitutes a serious barrier to an equitable and fully participatory disaster recovery process.76 This tool for greater transparency can also help address the ongoing inequity in procurement between local and off-territory contractors. Local stakeholders have criticized PRDOH’s website and informational services for making it difficult to identify and learn about new procurement opportunities.77 PRDOH, COR3, and their subgrantee agencies can implement e-procurement best practices such as using the open data portal to publish procurement information and make it accessible to all stakeholders.

Recovery Through Community Engagement Puerto Rico also needs a forum for robust community engagement that allows non-government stakeholders to keep an outside eye on the federal funds flowing into the territory. This framework should be inclusive of Puerto Rican civil society, empowering local experts and affected communities to provide oversight for the use of public funds. Two existing proposals are particularly well suited to this task: FEMA’s Whole Community Approach, used in several past disaster recoveries, and the Center for a New Economy’s Civic Committee for Transparency and Reconstruction.78 The Whole Community Approach is built on three main principles — “understanding and meeting the actual needs of the affected communities, engaging and empowering all parts of the community, and strengthening what works well in communities on a daily basis.”

Under this framework, disaster management agencies empower community leaders and civil society organizations to establish funding priorities, help implement programs, and evaluate outcomes. The Civic Committee for Transparency and Reconstruction proposal builds on this idea further by establishing a formal committee of nonpartisan issue experts and civil society representatives. The committee could provide independent audits of COR3, PRDOH, and other local agencies involved in the disaster recovery. The purpose should not be to add another hurdle to the disbursement of funds, but rather to ensure that government agencies engage seriously with civil society input on the recovery process and use it to inform policy-making at the local and federal government levels.

Such a body could help keep local agencies accountable to the communities they serve by Fair and Effective Federal Public Assistance

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providing public updates of any misuse of funds. They could also serve as partners to Congress and federal agencies by ensuring that aid recipients are meeting statutory goals of hiring locally and addressing the needs of low-income communities. Local oversight will also help build the local capacity needed to shepherd the recovery process to a successful conclusion.

Recommendations Public Assistance • Parity for federal public assistance, namely Medicaid, SNAP, and SSI.

Disaster Recovery • HUD and FEMA to provide additional assistance for local agencies and federal fund recipients.

• PRDOH and COR3 to leverage federal funding to create a cross-cutting, publicly accessible open data portal for recovery spending.

• Puerto Rico Government to create a framework for civil society to participate in recovery planning and oversee the use of federal disaster funds.

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Achieving Resilient and Sustainable Growth

photo by Wenhao Ryan on Unsplash

Introduction While the Plan of Adjustment represents an important step towards Puerto Rico’s fiscal solvency, it alone will not set Puerto Rico on a sustainable fiscal path. FOMB analysis suggests that the country will return to budget deficits by 2036. Climate change vulnerability, increasing debt service, mercurial decisions from Washington, and the potential of future economic shocks loom large in the territory’s fiscal future.

To avoid a repeat of the debt crisis, the territory will need greater economic growth. Fortunately, the restructuring will restore business investment and municipal access to capital markets.

Moreover, suspended debt service has improved the cash balance in Puerto Rico’s accounts.

Finally, an influx of federal funds for hurricane recovery, energy development, public assistance and infrastructure will buoy the territory’s fiscal position. The convergence of these conditions provide a once-in-a-generation opportunity for the territory to move its economy forward.

Puerto Rico has several competitive advantages, including market integration with the U.S., preferential federal tax rates under its current political status, a bilingual population and public infrastructure. But the economy still needs extensive coordination to develop healthy and competitive markets. Puerto Rico must think strategically about its comparative advantages in order to invest in winning markets and firms. It must create the conditions necessary to attract dynamic businesses through improved electricity, infrastructure and governance. It must create private sector jobs that workers want, alleviating pressure on the public sector and shadow economy. This section analyzes the economic issues facing Puerto Rico and proposes

solutions to revitalize growth.

Challenges Faced We identify the following major challenges to growth in Puerto Rico: 1) An expensive, unreliable and inefficient energy sector that raises costs for the whole territory.

2) A weak demand environment due to entrenched poverty, a shrinking population, and years of economic contraction.

3) A large informal economy due to a weak demand environment and poorly designed income support programs.

4) A relatively undiversified economy that depends heavily on foreign manufacturing investment.

5) A decreasing number of children and youth for future human capital and economic growth.

Resilient and Sustainable Growth 35

Electricity Expensive and unreliable energy has been a longstanding issue for decades in Puerto Rico, even before the Puerto Rico Electric Power Authority’s (PREPA) debt restructuring process further increased electricity tariffs. Residential users pay almost twice as much for electricity as U.S. mainland customers on average.79 In 2019, Puerto Rico’s average price of electricity for residential use was higher than rates in 45 of the 50 states80, while energy contributes up to 30 percent of commercial businesses’ operating costs.81 At the same time, the per capita income in Puerto Rico is half that of Mississippi, the poorest state in the US. To repay bondholders who had a first claim on Puerto Rico’s Electric Power Authority’s (PREPA) general obligation (GO) bonds, residents faced a further 13 percent spike in electricity costs in 2019. With the concession of the transmission system to LUMA Energy through a public-private partnership, these rates might continue to rise to repay bondholders and reduce PREPA’s outstanding debts.

Several demand and supply-side factors contributed to Puerto Rico’s high energy costs. Puerto Rico’s population has been shrinking, with a 3.9 percent decline in 2018 itself, and its total population dropping by 632,000 since its peak of 3.8 million in 2004.82 With population decline, PREPA faced a decreasing revenue base and an obligation to provide power for its remaining citizens. To cover the high costs of electricity supply, PREPA charged consumers higher tariffs even while decreasing service.

Figure 5: Fossil and Purchased Power Expense of PREPA83

Source: Puerto Rico Electric Power Authority

Second, PREPA was reliant on an expensive and environmentally corrosive fossil fuel importation scheme to power its outdated and inefficient generators. Petroleum-fired power plants generated almost half of the territory’s total electricity as of 2020.84 The remaining sources of electricity generation come from imported natural gas (29 percent), coal (19 percent) and renewables (less than 3 percent). More than 90 percent of electricity generation is powered by imported fossil fuels, which make energy both costly and subject to volatile world commodity prices (see Figure 6 below). The cost of transporting petroleum and natural gas from the U.S. is extremely high for Puerto Rico given that they must use US shipping companies under the Jones Act. Furthermore, generation power plants in Puerto Rico are outdated, large, and inefficient. The territory’s four large fossil fuel-intensive power plants were built in the 1960s and 1970s and have mostly not been updated since. The power plants are also interconnected in a single centralized grid, making the entire supply vulnerable to any isolated system failures.

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Third, Puerto Rico’s transmission lines are vulnerable to natural disasters and climate change.

In September 2017, Hurricanes Irma and Maria destroyed much of Puerto Rico’s electricity transmission and distribution infrastructure. Much of this infrastructure was still unrepaired when a 6.4 magnitude earthquake with subsequent aftershocks struck Puerto Rico in January 2019, leaving two-thirds of its residents without power. The earthquakes also significantly damaged the territory’s two natural gas-fired power plants.85 Many transmission lines are still unrepaired, resulting in frequent and long-duration power outages. As of 2017, the System Average Interruption Duration Index (SAIDI) which measures the duration of outages was 14.35, while the System Average Interruption Frequency Index (SAIFI) which measures the frequency of outages was 4.83, much higher than its North American peers, who scored 1.92 and 1.04 on average respectively.

Demand Environment, Informal Economy, and Jobs Puerto Rico’s economic growth declined by 7.5% between 2004 and 2019 while the population has been declining since 2005.86 There are insufficient jobs in the formal economy to absorb the unemployed population.87 At the end of fiscal year 2019, there were 2.7 million civilians over 16 years old, with 1.1 million or 40.6% formally employed, and an unemployment rate of 8.2%, representing 91,000 unemployed people. The territory has maintained an employment rate, or labor participation rate, below 50 percent for decades. Flat and low wages suggest that these rates represent a labor demand problem more than a labor supply problem.

Figure 6: Median Household Income88

Source: Data USA Note: The chart shows how the median household income in Puerto Rico compares to that of its neighboring and parent geographies.

Puerto Rico’s labor market consists of predominantly low-wage opportunities that are at odds with the relatively high cost of living. This existing friction perhaps encourages detachment of residents from the formal economy, continued reliance on social programs, and entices movement to the United States.89 Hundreds of thousands of workers currently subsist on informal employment, undermining the territory’s tax base and workers’ and firms’ connection to financial services.

Interviewees expressed that this may owe to steep phase-outs in social support programs that effectively penalize formal earnings.

Moreover, economic and environmental shocks over the past two decades have cost the territory critical jobs and contributed to the unprecedented debt crisis.

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For instance, the United States government’s repeal and phase out of section 936 of the U.S. Tax Code in 1996 played a large role in the decline of Puerto Rico’s economy. Its repeal prompted companies to leave the territory with the significantly advantageous tax exemptions eventually drying up in 2006. Workers within the manufacturing sector were hit the hardest, with 75% of manufacturing job loss relative to the service economy stemming from the repeal.90 (The North American Free Trade Act is an alternative culprit for job loss in this period.) Similarly, government downsizing policies from 2009 to 2015 resulted in the loss of 56,000 public sector workers and reduced the share of government in total employment to below 30%. The share of government employment continues to shrink year-after-year.

Figure 7: Government Employment as a Share of Total Employment Total Employment in PR91(2000-Present)

Government Employment in PR92 (2000-Present)

Source: U.S. Bureau of Labor Statistics and Federal Reserve Bank of St. Louis.

JOB LOSS HAS REDUCED SOCIAL TRUST AND INVESTMENT IN THE TERRITORY AND ENCOURAGED OUTMIGRATION. WE BELIEVE THE CREATION OF HIGH-QUALITY FORMAL JOBS WILL REVERSE THESE TRENDS AND BRING WORKERS OUT OF THE SHADOWS. Resilient and Sustainable Growth

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Sectoral Diversity Participants generally bemoaned Puerto Rico’s overreliance on manufacturing. One interviewee described the sector as a “fixation” of government officials. The sector remarkably accounts for almost half of GDP - an outcome partly explained by decades of purposeful development through Operation Bootstrap. This reliance on manufacturing poses the following risks: • Job creation is important to workers’ wellbeing and to the political system. But manufacturing is becoming more productive, suggesting that further job growth may be limited.93 Some evidence for this trend in Puerto Rico is already available (see below). Note that increased output through productivity should translate to job growth in other sectors, so even jobless growth in the manufacturing sector should contribute to Puerto Rico’s economy.

Figure 8: Manufacturing Output as a Share of GDP94

Source: World Bank Data. World Bank national accounts data, and OECD National Accounts data files. CC BY-4.0

Figure 9: Employment in “Industry” as a Share of Total Employment95

Source: International Labour Organization, ILOSTAT database.

CC BY-4.0

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• Volatility increases. The World Trade Organization documents a relationship between “lack of economic diversification” and “increased vulnerability to external shocks that can undermine prospects for longer-term economic growth.”96 The experience is hardly theoretical for the territory: Puerto Rico’s economy was decimated by developments affecting manufacturing such as the phase-out of Section 936 and the passage of NAFTA during the 1990s and 2000s. A more diversified economy would likely have been more resilient to these shocks.

Reliance on a small segment of foreign, multinational corporations -- such as those that manage Puerto Rico’s manufacturing sector -- can undermine a healthy political economy. A “race to the bottom” may ensue in which tax rates fall as policymakers compete for businesses. Distrust of the political system may increase due to close relationships between industry leaders and politicians. Regulatory capture and conflict-averse bureaucrats may permit abuse, waste, and environmental degradation.

Population Puerto Rico is facing a major demographic crisis. Policymakers looking to maintain and increase the territory’s population face twin challenges, outmigration and fertility: • Outmigration: The territory ranks sixth in the world for net migration loss, with young people leaving at disproportionate rates.97 As a result, the territory’s median age increased from 37.2 in 2010 to 43.1 in 2019.98 Any population with a median age above 30 is considered old.99 • Fertility: Puerto Rico has a birth rate of 1 birth per woman—the second lowest birth rate in the world behind South Korea—and it is expected to decline further.100 This trend is troubling considering how countries generally pursue a “replacement rate” of at least 2.1 to sustain their populations.101 An aging, declining population will present fiscal challenges to the government as the nonworker:worker ratio increases.

Figure 10: Projected population for select age groups for Puerto Rico (2017–2047)102

Source: Jesse M Keenan and Mathew E Hauer 2020 Environ. Res. Lett. 15 074028 Note: This graph reflects Puerto Rico’s projected population if projected prior to the hurricanes (solid) and after the hurricanes (dotted).

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Participants advised that net-depopulation trends masked much ongoing “circulation” between the mainland and territory. Ongoing intermigration leads us to believe that population trends will be especially responsive to conditions on the territory; should policy and economic growthcreate better living conditions, the population will begin to increase.

Industrial Policy Despite economic decline, Puerto Rico remains a leading medical device and pharmaceutical manufacturer. Puerto Rico’s prominence in manufacturing can and should be maintained, although this should be complemented by economic diversification. The pandemic will spur U.S. investment in domestic medical manufacturing capacity that Puerto Rico is well-poised to compete for. Import substitution of additional links of the supply chain may also facilitate growth. A healthy manufacturing sector should accelerate growth in other industries, like professional services and tourism. The sector is also politically important to key stakeholders.

We recommend strategic investments in tourism, energy, and agriculture to diversify the economy. Our research suggests Puerto Rico has untapped opportunities in these industries that government involvement may help maximize. Exports, especially in tourism, are a chance to tap into richer consumer markets than exist on the territory. Import substitution in energy and agriculture has the opportunity to raise incomes and improve quality of life. The nature of these investments vary. Investments may include further information gathering and market research, subsidies and contracts and direct spending.

When the government directly supports businesses, we recommend a strict policy of withholding or eliminating support for businesses that aren’t performing well. We believe a policy of reducing support for “losers” is more fruitful and less likely to face corruption challenges than a policy of “picking winners.” This strategy was successful in South Korea and Taiwan.103 While we do not focus on supply-side reforms here, we concur with many analysts that doing business in Puerto Rico must become easier if the territory wishes to increase investment and formalization. This does not imply that deregulation and liberalization are the key means to restore growth. Instead, modernizing the tax system, reducing corruption and inefficiency, and eliminating some industrial restrictions may spur additional growth when paired with industrial policy.

PUERTO RICO RANKED BELOW THE MAINLAND U.S. IN THE NOW-RETIRED DOING BUSINESS REPORT IN INDICATORS DEALING WITH CONSTRUCTION PERMITS AND REGISTERING PROPERTY, A PROBLEM THAT DESERVES ATTENTION EVEN IF OUR RECOMMENDATIONS ARE IMPLEMENTED.104

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EACH OF OUR RECOMMENDATIONS ADDRESSES MULTIPLE OF THE KEY PROBLEMS RESTRICTING GROWTH.

Recommendations Sectoral Investments & Reform Anticipated Results

Solar Energy

Improves Energy or Ease of Business

Yes

Increases Demand Through Income and/or Jobs

Yes

Increases Demand through Exports

High-end and Medical Tourism

Agricultural Development

Supply-Chain Based Manufacturing and Development

Yes

Yes

Yes

Yes

Diversifies Economy

Yes

Yes

Yes

Stems Population Loss

Through quality of life

Through jobs

Through jobs

Through jobs

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Manufactoruring Since Operation Bootstrap, manufacturing has been the center of Puerto Rico’s economy. It accounts for 48.2% of the GDP105 — though it only directly provides 76,300 jobs.106 In 2016, manufacturing economic activity could be disaggregated into biopharmaceuticals (41.9%), basic chemicals (22.2%), computers and electronics (18.7%) and medical devices (5.2%).107 Puerto Rican firms and the workforce can boast more than 40 years of manufacturing experience and expertise — and impressive market share, with more pharmaceutical exports to the United States than any country, accounting for 8% of mainland Americans’ pharmaceutical expenditures.108 Figure 12: Medical Device, Agbio, Biotechnology and Pharmaceutical Facilities in Puerto Rico109

Source: Department of Economic Development and Commerce Note: Blue and dark blue represents municipalities with medical device and pharmaceutical manufacturing.

Puerto Rico producers likely have underdeveloped opportunities in innovative products and products of critical importance to national interest. Innovative products like new drugs or modern high-tech medical equipment are subject to demand variability and might require a faster response from the market. This type of product would benefit from nearshore production.

Additionally, supply chains for products of critical importance to the national interest are evolving in the wake of recent events. The Covid-19 pandemic crisis has encouraged the development of resilient medical supply chains, and we expect that policymakers and firms will look to expand cheap, domestic production capacity in the coming months and years. For instance, the production of mechanical ventilators could clearly benefit from additional “nearshore” inputs and components. Puerto Rico should compete for pandemic preparedness funding, perhaps through a public-private partnership that can organize grant and contract applications and help factories and other facilities adopt pandemic-resilient practices.

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To compete for this new business, the government of Puerto Rico should work in a publicprivate partnership with the leading pharmaceutical manufacturing companies to identify some of the more elastic inputs currently produced abroad that can potentially be substituted by local enterprises. The government should then work to invest and subsidize the best firms producing these products. Ideally this strategy will create new business for local small and medium enterprises.

Tourism Save for periods of crisis, visitation has been fairly consistent in recent decades. Between 4 to 5 million non-residents visit Puerto Rico every year, with the plurality arriving via Luis Muñoz Marin international airport and 1.4 million arriving via cruise lines.110/111 The tourism base is mostly comprised of relatives of residents/former residents, business travelers, and East Coasters in search of favorable weather. Approximately 5,000 formal businesses work in sectors serving tourists, including food and beverages, accommodation and casino establishments. Together these businesses have approximately 80,000 employees.112 While the industry remains steady in absolute terms, Puerto Rico’s share of the Caribbean tourism economy has been shrinking for decades.113

TOURISM ONLY MAKES UP 8% OF GDP114, FAR LOWER THAN CARIBBEAN NEIGHBORS.115 THIS SUGGESTS THAT ECONOMIC ACTIVITY AND THE TOTAL NUMBER OF JOBS IN THE SECTOR ARE LOWER THAN POTENTIAL. Puerto Rico has natural assets that should offer some market advantages in tourism. The territory boasts the only tropical rainforest in the United States. The territory is situated in the Caribbean, sharing a popular climate and ecosystem with tourist destinations such as the Bahamas; it sits along Caribbean cruise paths. It boasts unique aesthetics, culture, and history.

Weather remains warm year-round.116 Travel for mainland residents is easy based on its legal, currency, and language union with the mainland; travel is often affordable.

Because of Puerto Rico’s adherence to the U.S. minimum wage, economist Anne Krueger expressed severe skepticism that mass-market tourism in Puerto Rico could compete with that in other countries. She suggested that Puerto Rico would only be competitive in upscale tourism.117 We accept this view.

Puerto Rico’s beaches are an important attraction but do not distinguish it from its Caribbean destination competitors.118 Differentiation on other grounds is therefore importnt. Popular tourism niches worth exploring include “cultural tourism, gastronomic tourism, ecological tourism”119; these are all likely to attract high-income customers. Analysts and participants recommended attempting to extend the average length of stay, which is regionally low at 2.6 days.120 Puerto Rico could become competitive in any of these tourism niches. Ecotourism development is one promising strategy that could in part be funded by federal conservation and resilience grants, especially focused on the territory’s karst landscape.

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An agricultural strategy, detailed below, could facilitate agrotourism. Ecotourism and agrotourism also complement a statutory obligation to invest in growing tourism outside of San Juan. Moreover, Puerto Rico’s tourism authorities are currently pursuing a highly complementary export strategy focused on the “conscientious traveler,” a young, ethical, and culturally motivated individual reported to represent 21% of the tourism market.121 New upscale tourism development could target business travelers. The government – likely through the public-private Destination Marketing Organization (DMO) – could encourage food, cultural, and accommodation establishments to collaborate to offer 4-day or week-long travel packages, perhaps by expanding the size and quality of flexible, personal office space available to travelers and improving urban transit options. The recent expansion of remote work should facilitate longer stays among these travelers.

MEDICAL TOURISM IS ANOTHER PROMISING AVENUE. This market allows consumers to arbitrage between differences in medical service prices between different countries. The practice is growing rapidly in the United States, growing at an average of 24% every year between 2003 and 2013122, likely owing to consistent price increases in the mainland U.S. As many as 320,000 U.S. citizens report traveling abroad for healthcare to the United States International Trade Commission, mostly to South America (26%), Central America (18%) and the Caribbean (19%).

Puerto Rico should be highly competitive in this market. Its costs are lower than any U.S. state.123 State-of-the-art medical equipment and pharmaceuticals are manufactured locally. It has a large and highly qualified medical workforce. The Department of Economic Development and Commerce has already taken steps to boost local firms in this market through its Medical Tourism Corporation,124 but could double down through investments in market research, more aggressive marketing and improved infrastructure in hotel zones.

Puerto Rico has myriad options for expanding the tourism industry by attracting high-income tourists from abroad. Better data about the preferences of these tourists should inform the exact tourism strategy. Major participants acknowledged that investing in further data collection would be appropriate. Prioritizing and speeding the collection of the next Visitors’ Survey, as conducted by the Puerto Rico Tourism Company, or contracting with a market research firm may be appropriate.

Once a strategy is chosen, Puerto Rico should plan to make large investments in strategic marketing, which stakeholders bemoaned as lackluster compared to peers.

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Agriculture Prior to Operation Bootstrap, the territory was a specialized and successful agricultural exporter. It sold coffee, rum, tobacco and sugar, largely to Europe and the mainland U.S. This productivity was buoyed by the favorable, humid climate and year-round growing season endemic to the Caribbean. Operation Bootstrap attempted to reform production of the territory’s largest export, sugar, through policies breaking up large producers and favoring small producers. The territory soon stopped outcompeting mainland producers. After peaking in the early 1950s, agricultural output as a share of GDP declined for the rest of the century.125 In recent decades, Puerto Rico’s agricultural sector has reached historically low output. Only 0.8% of the territory’s GDP comes from agriculture. Part of the reason for this decline is that Puerto Rico cannot compete with cheap, subsidized food coming from the mainland, especially subsidized crops such as corn, wheat, and soy. The result is greater dependency on imports from the mainland, which now account for over 80% of food consumed in Puerto Rico.126 Modern food production is dominated by small producers, many of whom grow part-time.127 According to analysts, challenges include “outdated farming practices, land- and capitalconstrained operations, the older workforce, and labor shortages.”128 The low wages that dominate the industry are likely correlated with these problems. Prime farmland sits idle or has been overgrown by forest and may require clearing. Much of this land is owned by the government, who is hard-pressed to find a buyer.129 One participant expressed doubt that Puerto Rico could compete as an exporter, mostly due to land and labor constraints, but expressed support for an import substitution strategy, especially for produce.

Today, food security is a critical issue. Compared to the mainland U.S., a high percentage of Puerto Ricans experience food insecurity. Over 33% of Puerto Ricans experience food insecurity according to the latest official statistics,130 which predate Hurricanes Irma and Maria.

In contrast, this number is just over 12% in the mainland. Investing in local food production could alleviate suffering and increase disposable incomes.

One promising strategy to revive the sector is to encourage consolidation and professionalization of farming operations. In the short-term, the government could offer contracts at high volumes to de-risk investment, with the government then serving as a seller to grocers, hospitals, schools, nonprofits, and industry. This would change commercial incentives, derisk investment and encourage consolidation or expansion of mainland producers onto the territory. These larger businesses should be more comfortable making overdue investments in technology, talent and professionalized operations. The territory’s agricultural development investments are currently focused on small and medium businesses through the federally funded “Re-Grow Puerto Rico” program.131 The program could be restructured to offer small- and medium-sized agricultural entrepreneurs transferrable “reconstruction credits.”

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An updated land use plan (“Plan de Uso de Terrenos”) is also overdue. The guiding land use document was last updated in 2016 before major political, economic and weather events took place.A new Plan should attempt to reckon with climate change challenges and stimulate agricultural investment. To foster investment, the plan should demarcate and prepare prime, underutilized lands for the development of nutritious and cost-competitive produce growth.

Sustainability could be pursued by making less fertile terrain available for solar panels and encouraging the use of “low ceiling,” resilient growing methods. For a host of environmental reasons, monoculture should be discouraged in favor of modern, mixed-crop methods.

Finally, investments in agricultural and foodtech incubators may help coordinate off- and onterritory stakeholders and facilitate sharing of best practices.132 Should the territory pursue a gastronomic tourism strategy, it would also bolster PR’s visibility as an innovative player in the food startup scene.

BOX 3: CASE STUDY: The 1920 Jones Act as an Economic Dragnet The Merchant Marine Act of 1920, or “Jones Act,” effectively creates a tax on all goods transiting Puerto Rico by requiring that all maritime commerce with U.S. territories be conducted with U.S.-built vessels run by at least 75% American crews. The original intent of the Jones Act was primarily the development of domestic seafaring capacity for national security purposes.133 By raising shipping costs, the policy has ultimately had more profound repercussions for the nation’s economy than its security. It is commonly cited as a central reason that the cost of living in Puerto Rico is 13% above that of the mainland.134 Taking agriculture as an example: beyond acting as a tax on food imports, the Jones Act raises the price of buying inputs such as fertilizer and farming equipment, thereby raising prices of local food production and making it harder to compete with the mainland’s cheap produce. Similar parallels can be made for most if not all strategic sectors such as energy, tourism and manufacturing.

The Jones Act burdens Puerto Rican residents and firms with higher costs across the board. It is a problem shared with Alaska, Hawaii and other territory territories whose economies are stifled by the preferential treatment granted to the mainland. We recommend that these states and territories continue to lobby Congress for exemptions from the Jones Act, or at the very least more flexibility to build up alternative supply chains for certain goods, and automatic waivers in periods of emergency.

The main political opponent of Jones Act reform is the American maritime industry.135 The policy’s distributed costs and concentrated benefits make reform challenging. Given the political attention on climate, racial justice, and price level challenges, advocates should explore new rhetorical frames and seek to attach Jones Act exemption provisions to other legislation.

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Energy Reliable and affordable electricity is important not only for residential use in Puerto Rico but also to power its manufacturing and commercial sectors. Affordable, reliable and sustainable energy for all is crucial for economic development.

Renewable energy demand is increasing rapidly, particularly in the aftermath of Hurricane Maria in 2017. Households suffered from the largest blackout in US history after the hurricane and the second-largest blackout in the world, with 80 percent of the territory’s power lines knocked down.136 Given the more resilient distributed generation and storage of solar systems, renewable energy demand increased dramatically in the wake of the hurricanes. Some 10,000 systems were installed in the first year after the hurricane, almost doubling the number of systems.137 Today, there are reportedly more than 30,000 solar systems on the territory.138

A TRANSITION TO RENEWABLE ENERGY OFFERS A POTENTIAL LIFELINE TO ALLEVIATE SOME OF THE PROBLEMS FACING THE ENERGY SECTOR AND THE WIDER PUERTO RICAN ECONOMY OVER THE LONG-TERM. In particular, we focus on solar energy, which has the potential to reduce the cost of production, decrease dependence on imported fossil fuels, increase reliability with fewer and shorter outages, and improve resilience to climate change. There are several potential benefits of renewable energy for the territory.

First, distributed energy resources using solar and other renewables (hydroelectric, wind) can produce electricity at a much cheaper marginal cost relative to fossil fuel-based generation. The marginal cost of a of solar electricity is near-zero. The main cost comes from the installation of solar panels and possibly transmission lines that connect solar panels to the grid. The cost of solar energy consumption has declined rapidly with improved technology, better efficiency and greater panel durability. Over the past decade, the cost of solar energy production has declined by 90 percent from around $360 per MWh to less than $45 per MWh.139 Second, renewable energy is more reliable and resilient to power outages, particularly if backed by solar batteries and a distributed grid connection. Renewable energy can complement electricity produced in the main grid so that peaks in electricity demand (for example in a heat wave) will not cause imbalances to the grid that cause outages. Further, solar systems with batteries can store energy for discharge during non-production times, such as at night or during an outage. Such systems can also invert excess electricity back into the grid so that consumers also produce electricity (creating new “prosumers”). A distributed grid reduces the risk of outages or damages to the grid. For example, if a natural disaster such as a hurricane or earthquake potentially destroys one segment of the grid, other micro-grids are more likely to remain operational. A robust renewable energy sector with batteries and distributed mini grids will foster a more reliable energy supply less prone to disruptions.140

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Third, renewable energy will relieve Puerto Rico of its dependence on fossil fuel importation and costly fuel transportation costs, entailing positive environmental benefits. Expert analysts estimate total annual residential solar potential at 24.6 TWh (Terawatts per hour), which is roughly four times the residential electricity consumption.141 (Under these estimates, about half of this solar potential derives from low- and medium-income households below the 50th income percentile.) Reduced levels of fossil fuel imports will reduce government spending and help balance the fiscal budget. In a renewable-led, energy-flush future, households and industries will pay lower tariffs, which should reduce production costs, increase profit margins and improve labor productivity. territory carbon emissions would also decrease dramatically.

POLICYMAKERS HAVE SET AMBITIOUS EMISSION MITIGATION TARGETS INCLUDING NET-ZERO EMISSIONS BY 2050.

The Puerto Rican government has already taken steps to enable this transition. Under the Puerto Rico Energy Public Policy Act (Act No. 17-2019), policymakers have set ambitious emission mitigation targets including net-zero emissions by 2050. It has set up a green energy bank to provide financial incentives for households to install solar systems.142 Further, it has introduced renewable portfolio standards requiring minimum electricity sales by PREPA from renewable sources. It has also established incentives for firms to invest in renewable energy sources, for example offering a tax credit equal to 50 percent of the cost of “machinery and equipment for the generation and efficient use of energy” for industrial producers.143 As part of the approved IPR and Act 17-2019, net metering will be facilitated in small-scale solar generation, allowing households producing solar energy to sell excess energy back to the grid.

The government has also taken steps to respond to poor previous energy governance, including privatizing some electricity production through the firm LUMA Energy.144 Puerto Rico has established an independent regulatory body and integrated resource plan (IRP) to enable the transition. This new entity, The Puerto Rico Energy Bureau (PREB), is an independent and specialized body formed in 2014 with the mandate to regulate, monitor, and enforce the energy policy of Puerto Rico. The PREB and IRP play crucial roles in designing, monitoring, and regulating Puerto Rico’s energy transition. Finally, the territory has allocated more than $10 billion in relief funds from the Federal Emergency Management Agency (FEMA) to restore the territory’s electrical system post-hurricanes.145 Further reforms are advisable. The territory should strengthen the monitoring, coordination, and enforcement role and capacity of the PREB over energy policy. PREPA, through the Integrated Resource Plan, had advocated for greater natural gas imports, generation, and storage facilities in Puerto Rico, which would undermine Puerto Rico’s ability to reach its renewable targets.

Apart from having sufficient authority, the PREB needs to have adequate expertise and capacity to recommend and approve an IRP that is realistic yet meaningfully pursues Puerto Rico’s netzero goals. The latest approved IRP target to build 3.5 GW of renewable energy generation, 1.36 GW of battery storage capacity, and 8 mini grids by 2025 will need strong monitoring and effective implementation.

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Meanwhile, LUMA Energy’s control over transmission should also be closely coordinated with PREPA and monitored by PREB. Hence, the PREB has a crucial role in providing strategic guidance and regulatory oversight to ensure that PREPA and LUMA Energy are well-coordinated to implement projects that are consistent with the renewable energy goals set out in Act No. 17-2019. In 2019, PREPA failed to achieve a short-term target to supply 12 percent of retail electricity sales from renewable resources. In such situations, the PREB should be able to enforce this standard and place an appropriate fine or punishment on the public utility. It also needs authority to revise targets such that PREPA can get back on track. Finally, the PREB can expedite new open procurements for solar panels and batteries.

The government should accelerate the financing of renewable energy projects to meet targets.

Achieving the IRP’s renewable energy generation and battery storage capacity targets will require approximately $14 billion in spending.146 It could request that the relief funds from FEMA be channeled into renewable energy capacity as well as restoring the grid. If a substantial segment of the roughly $10 billion in aid can be channeled towards renewable energy investments, Puerto Rico will have an injection of capital investments that can promote its transition to renewable energy. Further, PREPA could take advantage of growing climate finance and ESG investing to fund renewable energy projects once it successfully restructures PREPA’s debt and returns to capital markets. Puerto Rico can use financial instruments such as green bonds, debt-for-nature-swaps and climate financing of its renewable energy projects to establish mini grids, build up battery storage capacity and construct cleaner generation plants.

Finally, the territory should modify the Green Energy Bank rebates to depend on household income and carefully consider the distributional impacts of the prosumer model (net metering).

While net metering encourages energy self-reliance and incentivizes virtual power plant systems, financial incentives should be considered for poorer households - who we believe are the marginal adopters - to adopt and benefit from solar systems. Battery-backed solar systems typically range in price from $10,000 to $20,000, with financing options over a 20- and 25year period provided. These costs are steep considering the median per capita income in Puerto Rico of around $20,000 per year as of 2019.

Finally, the territory should modify the Green Energy Bank rebates to depend on household income and carefully consider the distributional impacts of the prosumer model (net metering).

While net metering encourages energy self-reliance and incentivizes virtual power plant systems, financial incentives should be considered for poorer households - who we believe are the marginal adopters - to adopt and benefit from solar systems. Battery-backed solar systems typically range in price from $10,000 to $20,000, with financing options over a 20- and 25year period provided. These costs are steep considering the median per capita income in Puerto Rico of around $20,000 per year as of 2019.

The Green Energy Bank makes some progress in addressing this issue by providing rebates for solar installations. While such rebates incentivize solar uptake, it might also reward wealthier households who would otherwise be installing the systems regardless of the rebate. The Green Energy Bank should therefore provide higher rebates to low and middle-income families (below the 50th income percentile), and lower rebates for those above the 50th percentile, based on a sliding scale.

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Recommendations Manufacturing • Conduct market research to inform an import substitution and pandemic preparedness strategy in medical manufacturing supply chains. Subsidize the best firms who are competing for this business.

Tourism • Conduct market research to inform a high-end tourism strategy.

• Make large-dollar investments in marketing — and conservation, agricultural development and innovation, urban and cultural amenities, and/or medical tourism infrastructure – based on results of research.

Agriculture • Develop the agricultural sector by encouraging consolidation around high-productivity firms.

• Redevelop the territory’s land use plan with the goals of increased agricultural production and sustainability.

Energy • Strengthen the monitoring, coordination, and enforcement role and capacity of the PREB over energy policy, including expedition of new open procurement plans for solar and storage, coordination between PREPA and LUMA, and enforcement of renewable portfolio standards.

• Accelerate financing of renewable energy projects to meet targets and (a) request that the relief funds from FEMA be channeled into renewable energy generation capacity as well as grid repair, (b) take advantage of growing climate finance and ESG investing demand to fund renewable energy projects.

• Adjust the green energy bank rebates to depend on household income and carefully consider the distributional impacts of the prosumer model (net metering).

Advocacy • Continue to lobby opportunistically to eliminate or scale back the Jones Act.

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Conclusion We have been humbled by the opportunity to meet with many key stakeholders in Puerto Rico who are working intensely to create new opportunities for the Puerto Rican people, and we remain optimistic about the many circumstances aligning in the near future that will help facilitate economic growth on the territory. This report reviews many critical challenges and areas of reform, but is not intended to convey a comprehensive economic plan for Puerto Rico. Policymakers must also consider reforms in areas unaddressed by our report, including essential topics such as infrastructure, tax reform and education.

Puerto Rico’s fiscal challenges are largely a symptom of the challenges faced by the territory.

With the proposals outlined in this report, we believe Puerto Rico can create pathways to build a better environment for fiscal stability. Fair and robust federal public assistance and disaster relief will help firm up a social safety net that has already been stretched too wide.

Key investments in manufacturing, agriculture, tourism and energy can create the conditions necessary for resilient and durable growth.

As stated previously, the challenges facing Puerto Rico are significant but surmountable.

Policymakers in the territory should be encouraged by other locales’ experiences with bankruptcy, including in Washington, D.C., which today has a much healthier and more resilient economy despite experiencing a fiscal crisis in the not-too-distant past. We look forward to following Puerto Rico as it embarks on a similar resurgence, and we remain committed to raising the profile of Puerto Rico’s challenges and helping work to overcome them as future public servants.

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Endnotes 1 The World Bank Data. (n.d.). GDP growth (annual %). The World Bank. https://data.worldbank.org/indicator/NY.GDP. MKTP.KD.ZG?end=2020&locations=PR&start=1961&view=chart.

2 United Nations Economic Commission for Latin America and the Caribbean. (2006, October). Industrialisation Strategy in the Caribbean: Lessons from the Puerto Rican Experience. https://www.cepal.org/en/publications/38416-industrialisation-strategy-caribbean-lessons-puerto-rican-experience 3 Austin, D. A. (2021). Puerto Rico’s Public Debts: Accumulation and Restructuring. Congressional Research Service.

4 Government Development Bank for Puerto Rico. (2009, February 27). Press Release: S&P’s Decision to Downgrade Bonds of the P.R. Highways and Transportation Authority worries Government Development Bank. http://www.gdb-pur.com/ communications/documents/2009-02-27-PRHTA-Downgrade-SPing.pdf.

5 Joffe, M. D., & Martinez, J. (2016). Origins of the Puerto Rico Fiscal Crisis. Mercatus Research.

6 Puerto Rico v. FRANKLIN CALIFORNIA TAX-FREE, 136 S. Ct. 1938, 195 L. Ed. 2d 298, 579 U.S. (2016).

7 Puerto Rico Oversight Management and Economic Stability Act of 2016, PROMESA. Public Law, 114-187.

8 Congress.gov. (2016). Puerto Rico Oversight Management and Economic Stability Act (PROMESA). https://www.congress.gov/bill/114th-congress/senate-bill/2328/text.

9 Ibid.

10 Rivetti, D. (2021). Debt Transparency in Developing Economies. World Bank Document. https://documents1.worldbank.org/curated/en/743881635526394087/pdf/Debt-Transparency-in-Developing-Economies.pdf.

11 Daley, M. (2013, July 19). Billions in Debt, Detroit Tumbles into Insolvency. New York Times. https://www.nytimes. com/2013/07/19/us/detroit-files-for-bankruptcy.html?pagewanted=all&_r=0.

12Ibid.

13 James Tatum, “Detroit Bankruptcy and Market Re-entry” Emory Bankruptcy Development Journal 2020, https://scholarlycommons.law.emory.edu/cgi/viewcontent.cgi?article=1198&context=ebdj (accessed November 2021).

14 Pierog, K. (2018, December 4). Post-bankruptcy Detroit returns to yield hungry bond market. Reuters. https://www. reuters.com/article/detroit-bonds/post-bankruptcy-detroit-returns-to-yield-hungry-muni-bond-market-idUSL1N1Y91UO. 15 Newsroom. (2020, December 10) PRASA Successfully Returns to the Capital Markets. The Weekly Journal. https://www. theweeklyjournal.com/business/prasa-successfully-returns-to-the-capital-markets/article_23ddfdc0-3b09-11eb-97ee-w57733d57b9ca.html.

16 Austin, D. A. (2021, May 18). Puerto Rico’s Public Debts: Accumulating and Restructuring. Congressional Research Service. https://sgp.fas.org/crs/row/R46788.pdf.

17 Newsroom. (2020, December 10) PRASA Successfully Returns to the Capital Markets. The Weekly Journal. https://www. theweeklyjournal.com/business/prasa-successfully-returns-to-the-capital-markets/article_23ddfdc0-3b09-11eb-97ee-w57733d57b9ca.html.

18 Pierog.

19 Ibid.

20 Ibid.

21 Tatum, J. (2020). Detroit Bankruptcy and Market Re-entry. Emory Bankruptcy Developments Journal, volume 37 (issue 1), pages 65-93. https://scholarlycommons.law.emory.edu/cgi/viewcontent.cgi?article=1198&context=ebdj.

22 Fiscal Oversight and Management Board for Puerto Rico. (2021, July 31). Annual Report: Fiscal Year 2021. FOMB Reports. https://oversightboard.pr.gov/fomb-reports/.

23 Ibid.

24 Ibid.

25 Bouker, J. (2016). The D.C. Revitalization Act: History, Provisions, and Promises. The Brookings Institution. https:// www.brookings.edu/wp-content/uploads/2016/07/appendix-1.pdf..

26 Schweitzer, A. (2020, April). ‘It Would Be Ruinous’: How Coronavirus Could Put Trump Allies In Charge Of D.C. WAMU. https://wamu.org/story/20/04/08/it-would-be-ruinous-how-coronavirus-could-put-trump-allies-in-charge-of-d-c/.

27 Ibid.

28 Bouker.

29 Code of the District of Columbia, § 47–392.09.https://code.dccouncil.us/us/dc/council/code/sections/47-392.09.html.

30 Schweitzer.

31 DeBonis, M. (2011, January 30). After 10 years, D.C. Control Board is gone but not forgotten. The Washington Post. https://www.washingtonpost.com/local/after-10-years-dc-control-board-is-gone-but-not-forgotten/2011/01/30/AB5485Q_story.html.

Endnotes

53

32 Legislative Analyst’s Office. (n.d.). About Our Office. https://lao.ca.gov/About.

33 Central Office for Recovery, Reconstruction and Resiliency. (n.d.). Financial Analysis: Interactive Map. COR3 Transparency Portal. https://recovery.pr/en/interactive-map?fundingsource=PA&layertype=muni&amounttype=obligated&scale=2311162.2171545&basetype=grayVector.

34 Fiscal Oversight and Management Board for Puerto Rico. (2021, July 31). Annual Report: Fiscal Year 2021. https://oversightboard.pr.gov/fomb-reports/.

35 The Medicaid block grant funding for territories is adjusted annually for inflation according to the medical care component of the Consumer Price Index (CPI-M). Because Medicaid costs grow annually at a rate faster than the CPI, the real value of the block grant declines over time from an already meager level.

36 The poverty line for couples in Puerto Rico in 2020 was $6,504 compared to $17,240 in the mainland.

37 Park, E. & Solomon, J. (2019, April). “Puerto Rico’s Medicaid Program Needs an Ongoing Commitment of Federal Funds.” Center on Budget and Policy Priorities. https://www.cbpp.org/research/health/puerto-ricos-medicaid-program-needs-an-ongoing-commitment-of-federal-funds.

38 Ibid.

39 U.S. Congress. (2021, July). H.R. 4406 – Supporting Medicaid in the U.S. Territories Act of 2021. https://www.congress. gov/bill/117th-congress/house-bill/4406.

40 Roubein, R. (2021, July). “The Medicaid Five-Year Deal.” Center for a New Economy. https://grupocne.org/2021/07/20/ the-medicaid-five-year-deal/.

41 The FNS generally provides oversight of states’ and territories’ administration of SNAP. SNAP eligibility and benefits are largely set by the federal government, but states may determine their application process and certain aspects of eligibility (e.g., how property may count towards asset limits).

42 ADSEF. (2020, October). “PR NAP State Plan of Operations: FY 2021.” https://fns-prod.azureedge.net/sites/default/files/ resource-files/NAP-state-plan-fy2021.pdf.

43 Instituto de Estadísticas de Puerto Rico. (2019 June). “Seguridad Alimentaria en Puerto Rico.” https://estadisticas.pr/ files/Comunicados/Seguridad%20Alimentaria%20en%20Puerto%20Rico%20-%20Final%20%28300519%29.pdf.

44 Keith-Jennings, B. (2020, November). “Introduction to Puerto Rico’s Nutrition Assistance Program.” Center on Budget and Policy Priorities. https://www.cbpp.org/research/food-assistance/introduction-to-puerto-ricos-nutrition-assistance-program.

45 U.S. Congress. (2021, October). H.R.5220 - Puerto Rico Nutrition Assistance Fairness Act of 2021. https://www.congress.gov/bill/117th-congress/house-bill/5220.

46 Puerto Rico Report. (2021, May). “SNAP, NAP, and Equality for Puerto Rico.” https://www.puertoricoreport.com/snapnap-and-equality-for-puerto-rico/#.YYh7Xl2SmDU. 47 Pavetti, L. (2016, June). “Work Requirements Don’t Cut Poverty, Evidence Shows.” CBPP. https://www.cbpp.org/research/poverty-and-inequality/work-requirements-dont-cut-poverty-evidence-shows.

48 CBPP. (2021 January). “Policy Basic: Aid to the Aged, Blind, and Disabled.” https://www.cbpp.org/research/aid-to-theaged-blind-and-disabled; CBPP. (2021 February). “Policy Basic: Supplemental Security Income.” https://www.cbpp.org/research/ social-security/supplemental-security-income.

49 A further distinction between AABD and SSI is that the former’s disability criteria is tighter. Applicants for SSI must have an impairment that is expected to last at least a year, whereas applicants for AADB must have an impairment that is not expected to ever improve and would prevent them from working.

50 CBPP. “Policy Basic: Supplemental Security Income.”

51 The specific amount of federal funds used for AABD in 2015 was $26.5 million, while Puerto Rico’s government paid for $8.4 million, per the Congressional Research Service. See Congressional Research Service. (2016 October). “Memorandum: Cash Assistance for the Aged, Blind, and Disabled in Puerto Rico.” https://sgp.fas.org/crs/row/cash-aged-pr.pdf.

52 Government Accountability Office. (2014 March). “Puerto Rico: Information on How Statehood Would Potentially Affect Selected Federal Programs and Revenue Sources.” https://www.gao.gov/assets/gao-14-31.pdf.

53 Amounts are for 2019. See Paying for Senior Care. (2020 May). “SSI State Supplementary Payments & Optional State Supplements.” https://www.payingforseniorcare.com/social-security/ssi_state_ssp_oss.

54 U.S. Census Bureau. (2021 May). “Quick Facts: Puerto Rico.” https://www.census.gov/quickfacts/PR; U.S. Census Bureau. (2021 May). “Quick Facts: United States.” https://www.census.gov/quickfacts/fact/table/US/AGE775219#AGE775219.

55 Congressional Research Service.

56 Government Accountability Office.

57 Dánica Coto. (2021 June). “US fights ruling to extend SSI benefits to Puerto Rico.” AP News. https://apnews.com/article/ us-supreme-court-puerto-rico-business-50d85570b479bb41e2efe4a11adf065e.

58 COR3. (2021 December). “Financial Summary.” https://recovery.pr/en/financial-analysis/financial-summary 59 Jan, T. & Rein, L. (2021 April) “Investigation suppressed by Trump administration reveals obstacles to hurricane aid for

Endnotes

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Puerto Rico.” Washington Post. https://www.washingtonpost.com/business/2021/04/22/puerto-rico-hurricane-trump-hud/ 60 COR3. (2021 December). “Financial Summary.” https://recovery.pr/en/financial-analysis/financial-summary

61 FEMA. (2021 November). “DR-4339 Hurricane Maria By The Numbers.” https://www.fema.gov/factsheet/hurricane-maria-numbers

62 Puerto Rico Department of Housing. (2021 November). “Distribution of Total Available Budget by Sectors.” https://cdbg-dr.pr.gov/en/transparency-portal/transparency-reports/infrastructure-reports/budget-by-program-infrastructure/.

63 Congressional Research Service. (2020 August). “The Community Development Block Grant’s Disaster Recovery (CDBG-DR) Component: Background and Issues.” https://crsreports.congress.gov/product/pdf/R/R46475/2.

64 Garcia, I. (2021 April). “Deemed Ineligible: Reasons Homeowners in Puerto Rico Were Denied Aid After Hurricane María.” Housing Policy Debate, DOI: 10.1080/10511482.2021.1890633 65 Puerto Rico Department of Housing. (2021 November). “Puerto Rico Disaster Recovery Action Plan.”.

66 Ibid.

67 Cristina del Mar Quiles. (2019 September). “A Guide to Understanding the Bureaucracy of “Recovery” in Puerto Rico.”

Centro de Periodismo Investigativo. https://periodismoinvestigativo.com/2019/09/a-guide-to-understanding-the-bureaucracyof-recovery-in-puerto-rico/

68 Government Accountability Office. (2021 May). “FEMA Made Progress in Approving Projects, But Should Identify and Assess Risks to the Recovery.” https://www.gao.gov/assets/gao-21-264.pdf.

69 HUD OIG. (2021 April). “Review of HUD’s Disbursement of Grant Funds Appropriated for Disaster Recovery and Mitigation Activities in Puerto Rico.” https://www.hudoig.gov/reports-publications/report/review-huds-disbursement-grant-funds-appropriated-disaster-recovery-and.

70 HUD Public Affairs. (2021 April). “HUD Accelerates Access to Puerto Rico Disaster Relief Fund.”. https:// www.hud.gov/press/press_releases_media_advisories/HUD_No_21_066.

71 Sembrando Sentido. (2021 September) “Contracting in Recovery: Strengths and Weaknesses in Procurement Processes with CDBG-DR Funds.” https://drive.google.com/file/d/1zdqYIa22dSocToVfEUw4KEUvbLAeHE_z/view 72 73

Ibid.

HUD. “Section 3 Brochure.” https://www.hud.gov/program_offices/field_policy_mgt/section3/brochure

74 HUD. (2021 Spring). “Community Development Block Grant Best Practices Report.”, https://www.hud. gov/sites/dfiles/CPD/documents/CDBG-Best-Practices-Report-FINAL.pdf 75 Urban Institute. (2017 April) “Taking Stock of the Community Development Block Grant.” https://www. urban.org/research/publication/taking-stock-community-development-block-grant 76 US Census Bureau. (2019). “Selected Social Characteristics in Puerto Rico.” https://data.census.gov/cedsci/table?tid=ACSDP5Y2019.DP02PR&g=0400000US72 77 Sembrando Sentido.

78 Center for a New Economy. (2019 August). “Oversight that Works.” https://grupocne.org/2019/08/13/ oversight-that-works/ 79 Acevedo, N. (2019, May). Puerto Ricans already pay high energy prices. They could go higher. NBC News. https://www.nbcnews.com/news/latino/puerto-ricans-already-pay-high-energy-prices-it-couldget-n1003971.

80 US Energy Information Administration. (2020). Puerto Rico Territory Energy Profile. https://www.eia. gov/state/print.php?sid=RQ. 81 Baker, B. (2020, November 23). He’s bringing solar power to Puerto Rico — and political power to its people. Grist. https://grist.org/fix/hes-bringing-solar-power-to-puerto-rico-and-political-power-to-its-people/.

82 Newkirk, V. R. (2018, January 24). The Peril of Privatizing Prepa. The Atlantic. https://www.theatlantic.com/politics/archive/2018/01/puerto-rico-will-privatize-prepa/551342/.

83 Image from Puerto Rico Electric Power Authority. (2018, March 21). Powerpoint presentation of Amended and Restated Fiscal Plan - Draft Submission, slide 27. https://www.aafaf.pr.gov/assets/prepa-fiscal-planmarch-2018---draft.pdf 84 US Energy Information Administration.

85 US Energy Information Administration.

86

Amelia, C. (2020, November 25). Puerto Rico: A U.S. territory in Crisis. Council on Foreign Relations. https://www.cfr.

Endnotes

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org/backgrounder/puerto-rico-us-territory-crisis.

87 Puerto Rico’s Department of Economic Development and Commerce (2020, August). 2020 Puerto Rico Unified State Plan. https://www.ddec.pr.gov/wp-content/uploads/2020/03/Puerto_Rico_Unified_Plan_2020_Final.pdf.

88 Data USA. (n.d.). Puerto Rico. https://datausa.io/profile/geo/puerto-rico/ 89 Puerto Rico’s Department of Economic Development and 96,300Commerce (2020, August). 2020 Puerto Rico Unified State Plan. https://www.ddec.pr.gov/wp-content/uploads/2020/03/Puerto_Rico_Unified_ Plan_2020_Final.pdf.

90 Feliciano, Z. M. (2018). IRS Section 936 and the Decline of Puerto Rico’s Manufacturing. Centro Journal, 30(3).

91 U.S. Bureau of Labor Statistics and Federal Reserve Bank of St. Louis. (2021, December 19). Total Nonfarm Employment. https://fred.stlouisfed.org/series/SMS72000000000000001.

92 U.S. Bureau of Labor Statistics and Federal Reserve Bank of St. Louis. (2021, December 19). All Employees: Government: State Government in Puerto Rico. https://fred.stlouisfed.org/series/SMS72000009092000001.

93 DeSilver, D. (2020, May 30). U.S. manufacturing producing more with fewer workers. Pew Research Center. https://www.pewresearch.org/fact-tank/2017/07/25/most-americans-unaware-that-as-u-s-manufacturingjobs-have-disappeared-output-has-grown.

94 The World Bank. (n.d.). Manufacturing, value added (% of GDP) - Puerto Rico. World Bank Data. https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=PR 95 The World Bank. (n.d.). Employment in Industry (% of total employment) modeled ILO estimate - Puerto Rico. International Labour Organization, ILOSTAT database. Data retrieved on January 29, 2021.World Bank Data. https://data.worldbank.org/indicator/SL.IND.EMPL.ZS?locations=PR. 96 OECD/WTO. (2019, July 11). Economic diversification: Lessons from practice. Digital Object Identifier System. https://doi.org/10.1787/f61d8ce8-en.

97 CIA. (2021). Country Comparisons—Net Migration Rates. The World Factbook. https://www.cia.gov/ the-world-factbook/field/net-migration-rate/country-comparison.

98 nited States Census Bureau. (2019). Puerto Rico: Age and Sex. American Community Survey. https:// data.census.gov/cedsci/table?q=Puerto%20Rico&tid=ACSST1Y2019.S0101&hidePreview=false.

99 Ortiz-Blane, S. (2021, May 25). ‘A New Maria:’ How Puerto Rico’s population decline could be the territory’s next crisis. The Miami Herald. https://www.miamiherald.com/news/nation-world/americas/article251583678.html.

100 The World Bank. (2019). Fertility Rate, total (births per woman)-Puerto Rico. World Bank Data. https:// data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=PR&most_recent_value_desc=false; and Ortiz-Blane, S. (2021, May 25). ‘A New Maria:’ How Puerto Rico’s population decline could be the territory’s next crisis. The Miami Herald. https://www.miamiherald.com/news/nation-world/americas/article251583678.html.

101 United Nations, Department of Economic and Social Affairs, Population Division. (2017, December).

Population Facts: Government policies to raise or lower the fertility level. Department of Economic Affairs. https://www.un.org/en/development/desa/population/publications/pdf/popfacts/PopFacts_2017-10.pdf.

102 Keenan, J. M., Hauer, M. E. (2020). Resilience for whom? Demographic change and the redevelopment of the built environment in Puerto Rico. Environmental Research Letters, volume 15 (number7). https://iopscience.iop.org/article/10.1088/1748-9326/ab92c2#erlab92c2f2.

103 Studwell, J. (2014). How Asia works: Success and failure in the world’s most dynamic region. Grove Press.

104 World Bank Group. (2020). Doing Business 2020: Economy Profile Puerto Rico. https://www.doingbusiness.org/content/ dam/doingBusiness/country/p/puerto-rico/PRI.pdf.

105 The World Bank. (2020). Manufacturing, value added (% of GDP) - Puerto Rico. World Bank Data. https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=PR. 106 U.S. Bureau of Labor Statistics. (n.d.). Puerto Rico Economy at a Glance. Economy at a Glance. https:// www.bls.gov/eag/eag.pr.htm.

107 Bond, C., Strong, A., Smith, T., Andrew, M., Crown, J., Edwards, K., Gonzalez, G., Gutierrez, I., Kendrick, Endnotes

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L., Luoto, J., Pratt, K., Patel, K., Rothenberg, A., Stalczynski, M., Tong, P., & Zaber, M. (2020). Challenges and Opportunities for the Puerto Rico Economy: A Review of Evidence and Options Following Hurricanes Irma and Maria in 2017. Rand Corporation. https://doi.org/10.7249/rr2600.

108 U.S. Food and Drug Administration. (2017). Securing the Future for Puerto Rico: Restoring the Territory’s Robust Medical Product Manufacturing Sector. FDA.gov. https://www.fda.gov/files/about%20fda/published/Securing-the-Future-for-Puerto-Rico--Restoring-the-territory%27s-Robust-Medical-Product-Manufacturing-Sector.pdf.

109 Department of Economic Development and Commerce. (n.d.). Industries. https://www.ddec.pr.gov/en/ industries.

110 Bond, C., Strong, A., Smith, T., Andrew, M., Crown, J., Edwards, K., Gonzalez, G., Gutierrez, I., Kendrick, L., Luoto, J., Pratt, K., Patel, K., Rothenberg, A., Stalczynski, M., Tong, P., & Zaber, M. 111 Borschow, J. (2016). Visitor Economy: A First Step Towards Transformation. Squarespace. https://static1.squarespace.com/static/59e4cf35a8b2b019331ce112/t/5bd1f0eaf4e1fc397b1c3c6c/1540485368777/FPR-UnPasoHaciaLaTransformacion-INGLES%2B%281%29.compressed.pdf112 Bond, C. et al.

113 Borschow, J. 114 Bond, C. et al.

115 World Travel and Tourism Council. (2021). Travel and Tourism Economic Impact 2021. https://wttc. org/Portals/0/Documents/Reports/2021/Global%20Economic%20Impact%20and%20Trends%202021.pdf?ver=2021-07-01-114957116 Bipartisan Congressional Task Force on Economic Growth in Puerto Rico. (2016). Congressional Task Force on Economic Growth in Puerto Rico: Report to the House and Senate. Senate Finance Committee.

117 American Enterprise Institute. (2016, February 11). How to address Puerto Rico’s debt crisis [Video].

Youtube. https://www.youtube.com/watch?v=B7MZYhqcHiM 118 Borschow, J. 119 Ibid.

120 Ibid.

121 Discover Puerto Rico. (2021, September 24.) Discover Puerto Rico September Industry Update: Focus on “Conscientious Traveler” Target [Video]. Youtube. https://www.youtube.com/watch?v=p3jKqlzfJ9k&t=7s.

122 United States International Trade Commission (USITC). (2015). Trends in U.S. Health Services International Trade. Commission Publications Library. https://www.usitc.gov/publications/332/executive_briefings/chambers_health-related_travel_final.pdf.

123 Garofalo, G. (2020, October 7). Puerto Rico ranks lowest in health care costs among urban counterparts in the States. The Weekly Journal. https://www.theweeklyjournal.com/lifestyle/puerto-rico-rankslowest-in-health-care-costs-among-urban-counterparts-in-the-states/article_1caaf0e8-d41d-11e9-b05a432b03aee8a7.html.

124 Medical Tourism Corporation. (n.d.). Why Puerto Rico. San Juan, Puerto Rico; Department of Economic Development and Commerce.

125 Bond, C. et al.

126 Ayala, I.M., Kennedy, A. (2021, October 2). How the US Dictates What Puerto Rico Eats. The New York Times. https://www.nytimes.com/2021/10/01/opinion/puerto-rico-jones-act.html.

127 Bond, C. et al.

128 Bond, C. et al.

129 Charles, D. (2017, May 13). How Puerto Rico lost its home-grown food, but might find it again. NPR. https://www. npr.org/sections/thesalt/2017/05/13/527934047/how-puerto-rico-lost-its-home-grown-food-but-might-find-it-again.

130 Instituto de Estadisticas de Puerto Rico. (2016, December). Plan de Uso de Terrenos. https://gis.jp.pr.gov/PUT2015/ Gu%C3%ADa%20Plan%20de%20Uso%20de%20Terrenos%202016.pdf.

131 Puerto Rico Department of Housing. (2021). Program Guidelines. Re-Grow Puerto Rico Urban-Rural Agriculture Program. https://cdbg-dr.pr.gov/en/download/re-grow-pr-urban-rural-agriculture-program/.

132 Hayes, M. (2021, November 10). Puerto Rican students to connect for Food Security Innovation. CorEndnotes

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nell Chronicle. https://news.cornell.edu/stories/2021/11/cornell-puerto-rican-students-connect-food-security-innovation.

133 Grabow, C., Manak, I., & Ikenson, D. J. (2018, June 28). The Jones Act: A Burden America Can No Longer Bear. Cato.org. https://www.cato.org/publications/policy-analysis/jones-act-burden-america-can-no-longer-bear#protectionism-cloaked-national-security.

134 Yglesias, M. (2017, October 17). The Jones Act, the obscure 1920 shipping regulation strangling Puerto Rico, explained. Vox.com. https://www.vox.com/policy-and-politics/2017/9/27/16373484/jones-act-puerto-rico.

135

Grabow, C., et al.

136 Campbell, A. F. (2018, August 15). Puerto Rico Power Restored 11 Months after Hurricane Maria. Vox. com. www.vox.com/identities/2018/8/15/17692414/puerto-rico-power-electricity-restored-hurricane-maria.

137 Kern, R. (2018, September). Rooftop Solar Nearly Doubles in Puerto Rico One Year After Maria. Bloomberg Law. https://news.bloomberglaw.com/environment-and-energy/rooftop-solar-nearly-doubles-in-puerto-rico-one-year-after-maria.

138 Rua Jovet, J., Torbett, R. (2021, October). Time to turn on Puerto Rico’s untapped virtual power plant. Energy Monitor. https://www.energymonitor.ai/insights/time-to-turn-on-puerto-ricos-untapped-virtual-power-plant.

139 As measured by the levelized cost of energy consumption (LCOE) methodology 140 Environmental Defense Fund. (2020). A Plan to Strengthen Puerto Rico’s Electric Grid. https://www.edf.org/sites/ default/files/content/PuertoRicoFactSheet01.29.20.pdf.

141 Mooney, M., Waechter, K. (2020, December). Puerto Rico Low-to-Moderate Income Rooftop PV and Solar Savings Potential. National Renewable Energy Laboratory (NREL). https://www.nrel.gov/docs/fy21osti/78756.pdf.

142 Puerto Rico Office of Management and Budget. (2010, July 19). Green Energy Incentives Act of Puerto Rico, Act No. 83. https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/2-ingles/83-2010.pdf.

143 SunMetrix. (2016, October). Puerto Rico - Economic Development Incentives for Renewables. https://sunmetrix. com/incentives/3185/Puerto-Rico---Economic-Development-Incentives-for-Renewables/Puerto-Rico/.

144 Mazzei, P. (2021, October 19). ‘Why Don’t We Have Electricity?’: Outages Plague Puerto Rico. The New York Times. https://www.nytimes.com/2021/10/19/us/puerto-rico-electricity-protest.html.

145 Federal Emergency Management Agency. (2021, September 22). FEMA Explains Processes for territory’s Power Grid Projects. https://www.fema.gov/press-release/20210922/fema-explains-processes-territorys-power-grid-projects.

146 Federal Emergency Management Agency. (2021, September 22). FEMA Explains Processes for territory’s Power Grid Projects. https://www.fema.gov/press-release/20210922/fema-explains-processes-territorys-power-grid-projects.

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