Field Notes: Kathryn Hagerman MPP'13 on Harris' Puerto Rico Trip

Editor's note: This story is one in a series, #PolicyForward, that spotlights how faculty, students and alumni at the Harris School of Public Policy are driving impact for the next generation. Leading up to the May 3 grand opening of Harris’ new home at the Keller Center, these stories will examine three of the most critical issues facing our world: strengthening democracy, fighting poverty and inequality, and confronting the global energy challenge.

It’s easy to trace the roots of Puerto Rico’s well-documented problems back centuries, but most people agree that the current crisis is a result of the withdrawal of U.S. corporate tax incentives, economic stagnation, and the government’s failure to balance budgets. How it got this bad and what can be done about it is more than just a gripping policy question. To the people whose pensions or  retirement savings is tied up in questionable bonds, the children growing up in poverty, the communities left without electricity for nearly a year after Hurricane Maria, and all of the more than 3 million people living on the island – a few of which happen to be my family – it’s personal.

The Trip

This spring, members of the Harris Public Policy community set out to meet the leaders working to make Puerto Rico work for its people. Thanks to the Center for Municipal Finance, Executive Director Michael Belsky, the Office of Alumni Relations, and amazing local University of Chicago alumni and friends, we had the opportunity to meet with key players in Puerto Rico’s recovery. Our journey put us in contact with heads of government and fiscal oversight, investigative journalists, entrepreneurs, non-governmental organizations, and leaders in the energy sector. Each of the people we met were making a difference in unique ways and engaging with them deepened my understanding of the challenges facing Puerto Rico. Summarizing what we learned was difficult because the situation is complex and the outlook appears bleak. Without minimizing the difficult situation, I tried to focus on the passionate people we met – including a few Harris alumni – and the impacts they are making. 

Politics

We started our first full day in San Juan at el Capitolio de Puerto Rico, home to the Legislative Assembly, where we met with Senate Minority Leader Eduardo Bhatia. Inside a sunny hearing room, the Senator – who is also a candidate for governor in 2020 – gave us a crash course on the origins of Puerto Rico’s fiscal crisis. 

It started with Spanish gold. It ended with the government borrowing billions of dollars to feed growing deficits by issuing the infamous COFINA bonds on which it defaulted in July 2016. Ineligible for Chapter 9 Bankruptcy protection like other governments in the United States, Puerto Rico was facing a potential hurricane of creditor lawsuits when it defaulted on a huge debt payment to bondholders. 

President Obama signed the Puerto Rico Oversight, Management and Economic Stability Act, known as PROMESA (“promise” in Spanish), just in time to avoid disaster. PROMESA established an oversight board to advise the government on budgets and fiscal policy as part of the debt plan. In October 2018, more than two years after it was established, the board approved an unpopular five-year fiscal plan designed to set Puerto Rico on the road to recovery. Although PROMESA was seen as a last resort to avoid a total economic disaster, Puerto Rican politicians in both major parties have criticized the oversight board as just another colonial institution infringing on the island’s sovereignty. 

The board’s executive director, Natalie Jaresko, told us she understood this view when we met with her later the same day at the Treasury Department. Jaresko is a brilliant financial strategist who, as Ukraine’s Minister of Finance, negotiated agreements with the IMF to restructure Ukrainian debt. She acknowledged PROMESA strikes an uneasy balance between democracy and oversight. While it is unelected and operates outside the control of the legislature, it is intended to provide relief and support while the government works to get back on track. Most importantly, she said, it is temporary. 

The primary purpose of the oversight is to guide Puerto Rico out of the debt crisis by balancing budgets and rehabilitating its credit. However, in her view debt and deficits are only symptoms of the real problem: Puerto Rico is not set up for economic growth. Energy and labor costs are high, skilled workers are hard to come by, and ease of doing business is relatively low. The devastating storms that hit the island just a year after the board was established only complicated matters: widespread suffering made spending cuts even more painful, and the promise of federal relief funds made it seem feasible to further delay austerity measures. 

For all the criticism from politicians, the Oversight Board can only offer recommendations and budgetary oversight. It does not have the power to force adoption of the fiscal plan. Furthermore, because of the antagonistic political climate it has not been able to work with political leaders to develop and implement what it views as sensible, development-oriented policies. 

In spite of all of these challenges, the fiscal plan was a starting point. With a growing economy and some federal stimulus there was opportunity to make progress. The governor recently signed PS 1121, a bipartisan bill Bhatia co-sponsored and which he calls “Puerto Rico’s Green New Deal.” The bill establishes benchmarks for moving to renewable energy by establishing networks of “prosumers” who will generate their own solar energy and sell what they don’t need back to the grid. To say the goals outlined in PS 1121 were very optimistic would be an understatement, but it represented a commitment to radical action. And, as we would see throughout our visit, innovation and progress has been happening in unexpected places. 

The Private Sector

Throughout our visit, we heard about the weak Puerto Rican private sector. Many joked that it is so dependent on the government that it’s barely private. Counterproductive policies like taxes based on inventory may have contributed to the island being unprepared with stockpiles of resources to see its people through a disaster like Hurricane Maria. The ease with which anyone can relocate to Florida or anywhere else on the mainland has meant that skilled workers abandon Puerto Rico in droves when the going gets tough. Many traditional businesses have been slow to move online. And the rising price of energy gave manufacturers one more reason to relocate when the tax incentives expired. 

In the 1950s, PREPA, Puerto Rico’s government-owned power utility, was viewed around the world as an excellent model for the energy sector. Today, it is known for a crumbling infrastructure, rates more than double what customers on the U.S. mainland pay and, of course, leaving many people without power for months after the storms hit the island in September 2017. It has also been drowning in debt. Like everything else, PREPA has been highly politicized. Improvements have been hampered by lack of funds and a focus on urgent fixes to get power restored after the storms. The company has been cautious on shifts to renewable sources like solar because they could take paying customers off the grid when it is already struggling to cover a massive pension liability. 

Jose Ortiz Vazquez stepped into the role of CEO, appointed by the governor of course, nearly a year after the hurricane destroyed the grid. He will likely preside over a shift to private management for the utility when a winner is selected in an ongoing concession process. He met us at an innovation hub in the Santurce neighborhood of San Juan to discuss Puerto Rico’s energy future. He was joined by Javier Rua-Jovet of Sunrun, a private solar energy company that specializes in generation and storage of the kind needed to support bipartisan calls for renewable energy sources. 

Both Ortiz and Rua-Jovet touted a future transformation of the energy sector, with government backing - remember the Puerto Rican Green New Deal. We heard that PREPA plans to invest $6 billion in grid improvements over the next three years. They explained how shifts to natural gas combined with progress in storage for renewable energy will bring costs down and make transmission more efficient. Ortiz explained delays in restoring power to remote areas, in part, by pointing to the Federal Emergency Management Agency’s (FEMA) slow and bureaucratic assessment process. I left this conversation with great expectations balanced by concerns about the politicization of this important sector. 

Civil Society

Puerto Rican politics are consumed by the question of the relationship to the United States - Senator Bhatia pointed this out to us first, and then we heard it in different words from various others over the next two days. The two major parties that have been trading control of the government since the Constitution was established in 1952 are organized around favoring either statehood or some other variety of free association. The question has been put to numerous citizen referendums over the years, the results of which have never been acted upon by the U.S. Congress. Nonetheless, political parties have remained more aligned around questions of status than on are on critical economic policies or other issues like education. Politicians in any country find it difficult to justify austerity measures, and this is no different in Puerto Rico. When the issues get tough, the United States and now the oversight board, provide a perfect foil to avoid policy-making. 

Holding the government accountable to the people of Puerto Rico is a big challenge, and one that a new crop of organizations have been tackling. NGOs like Abre Puerto Rico, co-founded in 2012 by Arnaldo Cruz (MPP 2004), Elizabeth Perez Chiques (BA 2001; MPP/MA 2005) and Alvin Quinones Oppenheimer (BS 2001; MPP 2007) have made previously difficult-to-obtain government data – from school ratings to campaign contributions – accessible to everyone. 

Independent journalists have also worked to hold political leaders accountable. We visited the Center for Investigative Journalism (CPI for short in Spanish) at the Law School of the Inter American University of Puerto Rico. CPI journalists like Luis Valentin have been following every move made by the PROMESA Oversight Board and Puerto Rico’s political leaders – suing for records and knocking on doors. While some of what has been published may have helped to further the oversight, transparency around results and processes is an essential feature of a healthy democratic ecosystem. 

This kind of work, as Executive director Carla Minet explained, helped bring the true magnitude of the death toll from Hurricane Maria to light. CPI’s efforts combined with those of other independent organizations caused the government to revise its initial reports of a few dozen storm-related deaths to around 3,000 almost a year later. 

But civil society actors have not been waiting around for the government or the highly politicized private sector to provide solutions. We also spent time with a few of the people taking matters into their own hands where the public sector has been slow to act. 

 

Para la Naturaleza, a program of the 501(c)(3) Conservation Trust of Puerto Rico has an ambitious goal to protect 33% of the country’s natural ecosystems by 2033. On the second day of our visit, Soledad Gaztambide-Arandes whisked us across the island to one of Para la Naturaleza’s protected areas. Hacienda Buena Vista is an incredible nature preserve surrounding a historic coffee plantation in the mountains near Ponce. There, we marveled at the natural beauty of Puerto Rico and got hands-on with a project to repopulate native and endemic trees and plants. Soledad, and her colleague Marielisa Sabat gave us insight into the role environmental resilience and growth in sustainable, small scale agriculture can play in the recovery.

Education is an area that has suffered for decades – many who could afford to do so have sent their children to private or parochial schools. Kids from poor families have been stuck in under-resourced schools generation after generation. Olga Ramos, President of the Boys and Girls Clubs of Puerto Rico talked with us about how her organization has been working to support those kids. The Clubs offer after school spaces for children in the program - 89% of whom are living in poverty. When the governor signed an education reform bill in early 2018 that authorized charter schools, the Boys and Girls Clubs opened the first one on the island with the aim to create what she called “a pipeline of human capital for high-demand industries including hospitality, technology and healthcare.”  

We met Olga in the remarkable Colaboratorio in Santurce, home to the Foundation for Puerto Rico (FPR), a 501(c)(3) that promotes social enterprise and economic development. El Colaboratorio feels like a combination of NGO headquarters, co-working space, and community hub. While there, we also got to spend time with Annie Mayol, the Foundation’s president, who told us that in the aftermath of the hurricanes it was one of the few places with working wifi so even multinational corporations were using it to process payroll and other critical business. We could feel we were at the center of something big there. Since the hurricane, FPR has raised millions for disaster relief efforts and provided fiscal sponsorship and incubation for startup NGOs like Abre PR. In addition to incredible disaster response efforts – notably a partnership with AARP to restore homes damaged by water – FPR offers small business support to help local enterprises recover and build technical capacity and resilience. 

Near the end of our visit we stopped in Old San Juan, where many of the centuries-old blue bricks had been replaced with lookalike modern pavers – an investment in the tourism industry that everyone from government leaders to the Boys and Girls Club views as one of the best bets for economic development in the near term. In fact, walking around the old city, signs of the double hurricanes in 2017 were hard to spot. 

But there was definitely more than tourism. Walking around the rapidly gentrifying Santurce neighborhood, we could feel the buzz of innovation before we even entered el Colaboratorio. Beneath the gloom surrounding the private sector, I noted how local enterprises played important roles in the recovery. The evening we arrived in San Juan we met Hilda Rodriguez MPP’00 who shared how her former employer, rum-maker Bacardi, repurposed its tanks to store and distribute fresh drinking water across the island. Ken Kay AB'78 offered a window into the role venture capital and entrepreneurship might play in the future of Puerto Rico’s economy. Given more time, I would have liked to delve more into that area. 

Meeting the next generation of leaders in Santurce; as well as in el Capitolio, the University, and even the forest; gave me hope that Puerto Rico will be able to harness sunlight, both in the form of energy and political accountability, to build a sustainable and growth-oriented economy. 

Read more #PolicyForward stories that spotlight how faculty, students and alumni at the Harris School of Public Policy are driving impact for the next generation.