The New York Roots of the Puerto Rican Fiscal Crisis

The oversight board deciding the island’s future can trace its ancestry back to the city’s 1970s woes


“All budgets tell stories about the future,” NYU historian Kimberly Phillips-Fein writes early on in her book Fear City: The New York Fiscal Crisis and the Age of Austerity, a recounting of the budgetary fiasco that brought New York City to the brink of bankruptcy in the mid-1970s. Although she hardly intended it as such at the time, that line can be read as a prophecy to the people of Puerto Rico, and not a very optimistic one. Like that of New Yorkers of forty years ago, Puerto Ricans’ civic life is now being determined by an undemocratic process that they didn’t approve, with dire consequences on their livelihoods and their ability to survive.

Both New York in the Seventies and Puerto Rico today must have their budgets approved by financial control boards, which are unelected bodies usually composed of businessmen, lawyers, and economists, put in charge of managing bankrupt governments. Puerto Rico is the first United States territory to have been put under a financial control board, following not just New York but such cities as Washington, D.C. (1995) and Detroit (2014). Like other boards of the past, it is an unelected body usually composed of businessmen, lawyers, and economists, who have been appointed to manage an insolvent government. Puerto Rico’s Financial Oversight and Management Board (FOMB) was officially created in August 2016 under President Obama and the Puerto Rico Oversight, Management, and Economic Stability (Promesa) Act, to restructure and manage the commonwealth’s $72 billion in debt.

It was an unsurprisingly controversial move, considering that Puerto Rico does not vote in presidential elections and has no congressional seats, and so residents had zero input into the elected bodies that appointed the seven people who will now determine the commonwealth’s budget. (The former president of the Puerto Rico senate, Eduardo Bhatia, said any fiscal oversight board appointed by the federal government “was from the eighteenth century” and would evoke “the worst colonial subjugations.”) It doesn’t help matters that, according to the Center for Investigative Reporting, the oversight board has more power over its territory than any of the other 120-plus fiscal control boards that have been appointed in the United States since the first one was established in New York City in 1975.

Like most control boards, Puerto Rico’s does not come up with a budget itself, but reviews, makes recommendations on, and then ultimately approves budgets created by the Puerto Rican government. This is similar to how New York’s EFCB worked, although four of its board members — the governor, lieutenant governor, mayor, and comptroller — were elected officials (the other three were business leaders).

But some researchers, including Phillips-Fein, have questioned whether fiscal control boards are an appropriate measure, considering how government entities end up in such dire fiscal situations in the first place.

In the EFCB’s case, she says, the EFCB didn’t directly intervene in the city’s budgeting process, but instead “provided steady pressure for the mayor to push through cuts that were deeply unpopular and which otherwise might have faced more political resistance.” Thanks in part to this dynamic, the city’s workforce shrank by more than 20 percent in the late 1970s, including deep cuts to core civic services like police, firefighters, schools, and hospitals. Many of these cuts, Phillips-Fein found, were made by the city without the EFCB’s official recommendations; the board’s mere existence was enough for city officials to force draconian cuts down a resistant citizenry’s collective gullets.

To fiscal conservatives in New York and around the country — including President Gerald Ford — this was a necessary reality check that reined in New York’s hippie liberal fever dream. “The city was seen as embodying a certain liberal vision,” Phillips-Fein tells the Voice, “and its failure was proof that this was foolish and naive.”

New York’s fiscal crisis was framed as a reckoning of harsh realities that confirmed the fiscal conservative’s worldview. It was easy, then, for budding Reaganites to support cuts to services they didn’t think the government should be providing in the first place, such as free college education through the CUNY system — which, although a relatively small portion of the city’s budget shortfall, became a symbolic flashpoint for the city’s fiscal crisis as a whole.

While the rhetoric surrounding Puerto Rico’s fiscal crisis brings up images of old Latin American stereotypes about government irresponsibility and lack of transparency, Phillips-Fein says fiscal control boards are fundamentally about, well, control. “Like the control board in NYC, [Puerto Rico’s board’s] existence presumes that the central reason for the fiscal crisis in the commonwealth is a lack of ‘control’ over spending — as opposed to deeper economic problems,” she says. “And that the answer to the problem is regaining that ‘control,’ even if it means sharp cuts to public services.”

Indeed, as with most situations where fiscal control boards are utilized, there are complicated factors contributing to the local economy that are well outside of Puerto Rico’s control. The island has been in a recession since 2006, and not just because of runaway government spending. One of the biggest causes of the recession, according to Hunter College’s Center for Puerto Rican studies, was the decline in manufacturing jobs after the federal government phased out a tax credit over a ten-year period — beginning in 1996 and ending in 2006 — for mainland companies on income earned in Puerto Rico. The Center also cites “congressional and presidential neglect to enact effective policies toward the island” — as just two examples, Congress has shortchanged federal healthcare benefits despite the fact that Puerto Ricans pay into the system like all other Americans, and continued to restrict shipments from the mainland to U.S.-built, U.S.-crewed ships, at the expense of prices for everyday goods in Puerto Rico.

MIT’s Deborah Kobes, who wrote her thesis on fiscal control boards, told the Center for Investigative Reporting that, as with New York’s control board, Puerto Rico’s starts from the premise that the local government made a bunch of irresponsible decisions.

“And that’s true in some cases,” says Kobes. “But I think it’s usually more of a mix, that they just do not have the funds because they have a poor economy.” In Puerto Rico’s case, the island was never able to recover from the closing of the tax loophole that saw so much manufacturing business leave the island for the next haven. In cases like these, she says, “changing administration is not going to fix that.”

This again parallels New York in the Seventies, where the fiscal crisis was just as much about larger economic trends as the city’s expenditures. As Phillips-Fein details in Fear City, manufacturers were leaving the city, the country was in a recession, and people were fleeing for the suburbs, thanks in part to federal policies that favored homeownership and the construction of highways over investment in urban areas.

But now that the control board exists, it is tasked with ensuring that Puerto Rico has a balanced budget by 2022, regardless of the costs to Puerto Ricans. Inevitably, a drastic reduction in government expenditures will hurt the poor and middle class most, since they’re the ones most reliant on public schools, hospitals, public transit, and other key government services — as is the case with any fiscal control board, says Phillips-Fein, since “the people who cannot afford to retreat into enclaves of wealth and privilege must rely on the community of which they are a part in a daily way.”

Puerto Ricans saw how this works in practice last month, when its oversight board rejected Puerto Rico governor Ricardo Rosselló’s fiscal plan because it didn’t specify precisely where budget cuts would come from, outline which government agencies would be merged, or include enough policies to make the island more business-friendly. FOMB’s recommended amendments read like a Republican’s wet dream: island-wide at-will employment, making severance pay and Christmas bonuses optional, reducing vacation and sick days, and introducing a work requirement for able-bodied adults that are recipients of the Nutrition Assistance Program (NAP). On March 13, the oversight board approved an amended plan that cut pensions even more than initially proposed and will likely result in more mandatory furloughs that will affect tens of thousands of government employees. Privatization of the island’s power company, ravaged by Hurricane Maria, looks likely to follow.

Maria’s devastation will only further exacerbate the dual pressures facing Puerto Rico’s oversight board: providing enough of a government to keep the island functioning, but not so much of a government that creditors remain unsatisfied. But as is often the case with fiscal control boards, one side of that equation has a lot more give than the other.

To read the Voice’s complete coverage of Puerto Rico and Puerto Ricans six months after Hurricane Maria, click here.