Fiscal Economic Dislocation?

January 22, 2017

Good Morning! In today’s Blog, we consider the ongoing federal and fiscal challenges to fiscal recovery for the U.S. territory of Puerto Rico.

‘Twas in another lifetime, one of toil and blood
When blackness was a virtue the road was full of mud
I came in from the wilderness, a creature void of form
Come in, she said
I’ll give ya shelter from the storm ∞ Bob Dylan

Modern Day Okies. Since Hurricane Maria struck Puerto Rico, nearly 300,000 Puerto Ricans have left their homes and fled to Florida. These Americans have fled to other states too, with New York a key new home. The departures raise a host of fiscal challenges, including: for how much longer will FEMA assistance be available to these U.S. citizens? Are these Americans permanent departees from Puerto Rico? In addition, if so, are they predominantly younger, and higher income?

Under the Federal Emergency Management Agency (FEMA) program, FEMA has provided hotel or lodging assistance to evacuees; however, the duration of that assistance, which has just been extended until March under the FEMA Transitional Shelter Assistance program (not as form of temporary shelter while rebuilding her damaged home in Puerto Rico, remains uncertain: is it a way to relocate and start a new life on the mainland? In the beginning, most of those leaving were elderly, disabled, or in need of critical medical care. But that appears to have changed: today young Puerto Ricans appear to be the primary departees, threatening to compound what we have previously noted to be an historic, migratory wave in the wake of the U.S. territory’s physical and fiscal crisis: mayhap as many as 25 percent of the population will have departed by the end of the decade.

Ironically, especially given President Trump’s attitude towards Puerto Rico, including the disparate response to Puerto Rico compared to Houston and Florida, the disproportionately younger Puerto Ricans coming to the mainland have been sought after—often recruited. Last November, the agency offered to airlift victims of Hurricane Maria to the U.S. mainland to reach temporary housing–a first of its kind for the agency: under the program, the Transitional Shelter Assistance (TSA) program, displaced residents and families who are still living in shelters on Puerto Rico can opt to relocate to housing in Florida and New York. Mike Byrne, a federal coordinating officer for FEMA, said the program is the first time the agency has attempted what it calls an “air bridge,” or a relief operation requiring the transportation of individuals from a disaster area. In most disasters, FEMA pays displaced residents to stay in hotels under the TSA program. In Puerto Rico, the hotels are filled to capacity, so FEMA is turning to the mainland and working with states to find accommodations.

At the same time, because of anticipated labor shortages because of the White House anti-immigration policies, many domestic employers are eager to hire bilingual workers for whom the minimum wage of a U.S. state represents a significant boost in income compared to grim options on Puerto Rico. Likewise, both the federal and Puerto Rican governments have facilitated departures: that is, in the ongoing absence of an equitable or comprehensive recovery plan for Puerto Rico, migration has become a substitute for federal disaster relief and recovery: for the first time ever, FEMA created an “air bridge” and chartered cruise ships to evacuate residents. In the beginning, new arrivals were forced to seek shelter with family members or in homeless shelters; subsequently, such families are being offered hotel stays for up to three months. (Traditionally, FEMA offers temporary shelter to homeowners who have been adversely affected by a disaster while they carry out the arduous task of rebuilding; however, in the case of Hurricane Maria, the process of recovery has been severely undercut by the lack of electricity and running water, and the inability of the federal government to supply even the most basic materials.

The increasing challenge is that, as we have noted before, those Puerto Ricans fleeing destroyed homes, devastated public infrastructure, and a shattered economy, are, disproportionately, those who can afford to leave—and those whose jobs and livelihoods have been washed away. After all, some nearly four months after the hurricanes, many restaurants, stores and offices remain closed: how can one be competitive with operating on generators, operating with reduced personnel serving only FEMA workers, and with massive layoffs? Just last week, Walmart, Puerto Rico’s largest private employer, announced it was closing three of its Sam’s Club stores; pharmaceutical companies, which, today, account for nearly 50% of Puerto Rico’s manufacturing jobs, are rethinking their location in the wake of the implementation of the new federal tax reform law—a law which treats Puerto Rico as a foreign jurisdiction. The new tax law imposes a 12.5% tax on profits derived from intellectual property held in foreign jurisdictions. (The U.S. territory of Puerto Rico is a domestic jurisdiction in U.S. law—except for federal tax purposes.) The pre-existing tax law exempted Puerto Rico residents from paying federal income taxes, a provision which sought to attract investment in manufacturing, something which, prior to the hurricane, accounted for 47% of Puerto Rico’s gross domestic product—more than $48 billion, with the bulk of the incentives encouraging pharmaceuticals and medical devices that generate revenue from patented drugs and technologies.

However, the new federal tax changes were enacted to render offshore operations less profitable, thereby rewarding corporations which opt to relocate back to the U.S. mainland—because, the IRS considers Puerto Rico to be foreign, and because many of the most significant manufacturers on the island are foreign-owned.

Perhaps unsurprisingly, the economic dislocation in Puerto Rico has led to mainland employers recognizing a diamond in the rough—meaning that they have been recruiting Puerto Rican workers to places such as Florida, North Carolina, Georgia, and Kansas: in Texas and Florida, developers hope that Puerto Rican labor will alleviate an expected shortage of construction workers as their own hurricane recovery gets underway. The efforts, piggy-backing on a trend that has accelerated over the last decade, has been focused on teachers, doctors, police officers, nurses, and engineers—exactly the positions most critical for Puerto Rico’s physical and fiscal recovery. But how to compete against Houston—a city where approximately one-third of schoolchildren are native Spanish speakers—and a city which received disproportionately greater federal hurricane assistance? The city’s school districts have already conducting multiple recruitment trips to Puerto Rico. Similarly, the police departments of Dallas, Charlotte, Baltimore, and even the nation’s capitol, Washington, D.C., have all turned to Puerto Rico as they have sought to diversify their departments with more Latino officers. In these instances, the recruiters lure workers with what appear to be high salaries when compared with the depressed incomes of a U.S. territory in physical and fiscal crisis.

Some have noted, moreover, that with the U.S. federal government closed, in no small part due to opposition to extending the DACA or Deferred Action for Childhood Arrivals program, it may be coincidental that the influx of Puerto Ricans to the mainland who were displaced by the storm coincides with the expiration of and, most recently, the end of temporary protected status for Central American and Caribbean migrants who had also fled natural disasters. That is, the combination furloughs, wage cuts, and higher prices for Puerto Rico’s working poor, combined with the massive damage to the island’s public infrastructure and disparate federal response, appears to have contributed to fueling a mass exodus—an exodus, however, of the young and qualified.