Blanca Flores is earning minimum wage as a 45-year-old secretary for the municipal government of Patillas, a small town of about 20,000 in Puerto Rico’s south-eastern corner. A single mother with a son who has just graduated college and a daughter entering the fifth grade, she is struggling in the midst of the island’s acute fiscal crisis.
Matters looks set to get worse for Flores. On Wednesday the island seems certain to default on one of its many debts. On the same day, Puerto Rico will introduce an 11.5% sales tax, the highest in the US, as it struggles to pay its bills. The government has warned that 600 of the island’s 1,400 schools may have to close in the coming years. Top economists have proposed cutting wages, a suggestion that had Flores throwing up her hands in exasperation.
“If they’re going to lower the minimum salary then I’m really going to have to pack up my suitcases and get out of here immediately,” she said. “As it is, I’m only left with about $300 after pension contributions, a government loan to finish building my house, social security. Where’s my money going to go?”
Lowering the minimum salary is one of the recommendations of a high-powered report made public on Monday as Puerto Rico, an unincorporated territory of the US, entered a week of reckoning over its worsening fiscal crisis. Commissioned by the island’s government and named after one of its authors, Anne Krueger, a former World Bank and IMF economist, the report suggested severe cuts in Medicaid and federal entitlements, as well as reducing the minimum wage.
This recipe for reviving Puerto Rico’s economy, which also included shrinking government and weakening labor unions, was very much in line with inequality-producing austerity programs imposed on troubled economies in Europe, including Greece, despite the fact that the IMF itself released a report this month suggesting that: “Higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital.”
For his part Puerto Rico’s governor, Alejandro García Padilla, disagreed with lowering the minimum wage in a televised speech – broadcast over an hour late, much to his critics’ derision – on Monday evening, about 24 hours after he was quoted in the New York Times as saying that the island’s $73bn debt was unpayable.
“I don’t agree with all the proposals in the [Krueger] report,” he said, “I will not promote reductions of the minimum wage for workers.”
Still, the governor’s tone and rhetoric was more acquiescent and short on details. He repeated the need for the people of Puerto Rico to sacrifice several times in almost priestly fashion, while including the bondholders as well.
“How many more sacrifices does he want us to make?” asked Flores. “We’re working six and a half hours a day only because we protested to get an extra half-hour. They still haven’t paid us for our sick days, which was due on 31 March. Does he want us to work for free?”
Damaris Peña, 33, a mother of two children, is an assistant coordinator at a healthcare nonprofit called Taller Salud in Loiza, a north-eastern town known for its concentration of Afro-descended Puerto Ricans.
Three years ago she got a master’s degree in medical science and health education from the University of Puerto Rico, but earns only $1,738 a month, just a bit more than minimum wage. She rents an apartment in Carolina, a town neighboring San Juan, and often has to struggle to find childcare close to her home.
“It’s a big headache just going food shopping,” said Peña. “I have to eat and the children, too; gas prices and electricity are expensive. This month I paid $20 toward my bill but I can’t pay it all. You have to eat and pay rent.”
“I’ve thought of moving to Orlando, Florida, or some state that has people who speak Spanish so I wouldn’t feel so lost.”
“We work through government-funded projects, and there’s one that started in January and we still haven’t been paid the first invoice. They return them for insignificant errors, and we have to file them again.”
“The reality is I get depressed; I feel like what’s going to happen? I feel an instability when it comes time to reapprove a contract – I don’t know whether they’ll approve it or whether they will cut it in half.”
“It worries me a lot because with things so tight, people need the basics. They might feel like they have to steal to get something to eat. It’s kind of like chaos. The people with more options are going to leave.”
“I don’t have confidence in the government to solve this, and I’m certainly not sure I deserve to share the blame for this.”
Despite saying he won’t lower salaries, García Padilla also said cryptically that he would “promote local legislation to make our laws more competitive to … promote job creation and a major expansion of private business”, implying a need to lower wages and weaken labor’s bargaining power.
Another suggestion of the Krueger report was to reform Puerto Rico’s comparatively generous rules on overtime – in the US, it accrues after 40 hours in a week, but in Puerto Rico begins to accrue after eight hours in a day. This came on the same day that Barack Obama raised the overtime threshold for mainland US workers.
The president has not commented on Puerto Rico’s fiscal crisis, leaving it to his press secretary, Josh Earnest, to aver that “no one in the administration or in DC federal government” is contemplating a bailout for the island’s government or its agencies.
Despite the glaring warning signs, the crisis continues to be viewed primarily as a mild scare for the municipal bond market, despite the fact that it was the high-risk nature of the bonds that drew investors to Puerto Rico (and Greece) in the first place. In a mechanism similar to the one that caused the Great Recession of 2008, overrating of these bonds when they were clearly veering toward junk status was key in bloating the debt further.
One of the specifics that wasn’t mentioned in García Padilla’s speech was the looming payment owed by Prepa, the electrical utility, due on Wednesday. The governor has continued to talk about a moratorium on payments, but in Monday’s speech did not specify the gist of the negotiations, which, according to several local economists, pivot on the idea of delaying the maturation of the bonds.
Even more threatening is a looming healthcare crisis, with a proposed cut of 11% of Medicare Advantage reimbursements. The Krueger Report calls for $150m in cuts, but Eliot Pacheco, former president of the Puerto Rico pharmacists’ association, thinks the situation is more dire. “The funds from Obamacare won’t last until 2018. The local government would have to subsidize the Medicaid and it doesn’t have any money. They need to make drastic cuts, not just $150m, or the system will eventually collapse since the federal government is not willing to give us any more money.”
Meanwhile, Puerto Rico’s strategy continues to revolve around pushing Congress to allow Puerto Rico to declare bankruptcy, which it cannot legally do as a territory.
Until a viable plan is clearly formulated, Puerto Rico’s workers will remain in an increasingly tightening vise, and the island under threat of continuing depopulation.
“How can they abandon us? We are the ones who sustain the economy,” said Blanca Flores. “I have a nephew and two sisters in Florida, and some uncles, who have all left within the last five years. My son might have to go to Connecticut. I feel bad I might have to leave. I have my roots here.”
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