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Hell or Highwater
Story by Philipe Schoene Roura
Editor's Note: The AFL-CIO and Gov. Luis Fortuño reached an agreement to put plans for more massive layoffs in government on hold. The deal is based on the commitment of mainland labor lobbyists to back Puerto Rico's pursuits in Washington . These include seeking protection for some 100,000 manufacturing jobs at “controlled foreign corporations” on the island as well as backing the government's efforts to obtain more Medicaid funds in order to address the commonwealth's health insurance deficit. The proposal also includes the use of union members from several government agencies to help the Puerto Rico Treasury Department in its efforts to collect outstanding debts. If successful, the whole package could amount to several billion dollars, with the added political value of enhancing Fortuño's image.
Now well into the second 100 days as Governor of Puerto Rico, the wee morning hours of Nov. 5, 2008, are just a memory to Luis Fortuño. He barely recalls his Brooks Brothers shirt still damp with sweat after a 20-hour day that culminated with his acceptance speech before a throng of New Progressive Party faithful drunk with victory.
Although the high of his acceptance speech lingered well past those early morning hours, the newly elected governor's high hopes that he could fix Puerto Rico 's fiscal woes are slightly more fleeting. Top of mind, Fortuño knew he'd soon have to contend with the thorny issue of job cuts. The island's steady decline in the manufacturing, construction, commerce, tourism and agriculture sectors had sent far too many jobs to the public sector, long an overburdened dumping ground for the private sector's unemployed.
For Puerto Rico 's governors over the past generation, a bloated public payroll has posed a conundrum of mammoth proportions: cut public jobs and commit political suicide. Fortuño would face the political costs of fiscal frugality soon enough.
“But I had no idea things were as bad as they were,”says Fortuño, who is sitting in a rocking chair during an exclusive interview inside La Fortaleza's executive office. “Often times I say that my 100th day on the job was Feb.14, because everything started on Nov. 5, 2008. Less than a week later, I was naming the Fiscal and Economic Reconstruction Advisory Committee [known by the Spanish acronym CAREF] and the members' most important contribution was to put together all this data and tell us, ‘guys, it is not a deficit of $800 million, it is a deficit of $3.2 billion, and you better get going.'”
Hard Day's Night
The recommendations made by CAREF were met with enormous antipathy by the people of Puerto Rico , long suffering the consequences of a deep recession with unemployment climbing above 13 percent. They did not want to hear that they would have to pay taxes on their cell phones or that they would have to pay more at the gas pump, as the committee had suggested. All the outcry over the committee's laundry list gave Fortuño a very accurate trial balloon for testing public tolerance.
The study also gave the new governor a thorough assessment of Puerto Rico 's financial position, drafted by professionals of every ideological stripe. With the findings in hand, Fortuño and Pedro Pierluisi, Puerto Rico's non-voting representative in the U.S. Congress, commenced working with members of U.S. President Barack Obama's transition team, explaining the gravity of Puerto Rico 's fiscal position. The governor wanted to make certain Puerto Rico fully participated in the American Recovery and Reconstruction Act.
Days later, Fortuño and Carlos García, the eventual designee to run the Government Development Bank, were on a plane to the credit rating agencies in New York City.
“Guys, it is much worse then we had thought,” were the first words out of Fortuño's mouth in his meeting with the credit analysts at the Moody's rating agency. “But give us some time,' we told them.” The analysts listened to the new governor's pleas, but they wanted evidence that the government could make quick work of the administration's game plan; they wanted to make certain the legislature would approve the chief executive's recommendations.
A reflection of Puerto Rico 's precarious financial position rings clearly in the somber tone of Fortuño's voice, which comes to a near whisper when he tells us that: “a big achievement during the first three months was to save our credit. People don't realize how close we were to the abyss.” Then he adds “we were this close,” pinching his fingers together to stress his point of Puerto Rico's proximity to meltdown. “The brink of the abyss” pushed Fortuño to act quickly. His plan was a hard sell to the people.
Category 5
The governor's message to Puerto Rico, televised on the island's TV channels and broadcast on the main radio stations, drew high ratings—much as hurricane bulletins hold the people captive when a category 5 storm is approaching Latitude 18.15' N, Longitude 66.30.' Fortuño's announcement that he was sending austerity measures to the capitol raised the people's concern; and his hinting at the elimination of 30,000 government jobs put the labor unions on red alert. The governor's decree came on March 3; six days later he was signing three measures into law.
The first measure, entitled the Special Fiscal Emergency Law (known by the Spanish acronym LESEF), would help generate more income through a 5 percent tax increase on corporations, insurance companies and banks, and a boost in tobacco and alcohol sin taxes.
The income from the latter component is to help finance Puerto Rico 's ailing health reform program. Two other measures signed that morning, the law for the criollo economic stimulus plan (PEC) and the federal economic stimulus act are complementary programs drawing funds from the state and federal coffers. The $500 million criollo stimulus package contains a host of incentives—loans to small- and medium-sized business, mortgage relief and funds for the purchase of new and existing homes—intended to offset the potentially devastating effects of the expenditure cuts and layoffs demanded by the rating agencies.
The federal component in Fortuno's legislative triumvirate provides structure for the mechanisms that will help channel $5 billion in federal funds earmarked for Puerto Rico as part of the American Reconstruction and Recovery Act signed by President Obama. The main thrust behind the federal law is to create the mechanisms that will maximize Puerto Rico 's ability to obtain every last penny it has coming and to put those funds to work quickly in infrastructure works and entitlement programs that might shock a moribund economy back to life.
In Puerto Rico , politics is a full contact sport, and the jury is out on whether or not these measures will ultimately fulfill their purposes. Nevertheless, most serious analysts agree that the concerted effort of the executive and legislative branches working together to swiftly sign the measures into law helped put off the disaster of a credit downgrading to the pits of bond markets.
In the short term, Fortuño's measures staved off the doomsday scenarios prognosticated by friend and foe. Moody's issued a March report stating that: “the measures taken by the Puerto Rico government together with the fiscal stimulus monies and the opportune restructuring of the AFI escrow account support plans for the fiscal solvency of the economy.”
With the measures passed, Puerto Rico 's credit held at Baa3. Puerto Rico's stabilized credit allowed the government to access bond issues totaling $1.1 billion that was used to pay suppliers, some of which had accounts one year past due. The new governor knows that he cannot continue to receive services if he does not pay the government's suppliers. Fortuño insists there was a larger issue that went beyond insolvency. “Our credibility was in question,” he says. “More importantly we will balance our budget during this term.”
Same As It Ever Was
The governor is well acquainted with the devastating effects of downgraded credit because, as the former director of economic development for Puerto Rico , he dealt with all things financial. In his years as the economic czar, the government saw an average of $2.94 billion in bond emissions.
Typically, governments sell bonds to develop infrastructure; the most recent bonds emission ($1.1 billion) will be used to pay suppliers. Rating agency analysts see bonds for infrastructure as a necessary expenditure, but bonds going to pay deficits and debt is seen in rather negative terms. In Puerto Rico 's bond culture the trouble is two-fold.
First there is a constitutional quandary. Puerto Rico 's constitution clearly prohibits the government's financing of operational costs through the issue of long-term debt. For the past six administrations, dating back to the administration of Rafael Hernández Colón in 1988, Puerto Rico 's governments have circumvented the constitutional roadblock by financing operational expenditure as extra-constitutional debt. The higher the debt, the greater the fiscal trouble down the road.
Then, there is the issue of debt ratio. To establish a country's debt ratio, ratings agencies divide the total personal income of island residents by the total amount of outstanding debt. Puerto Rico's debt as a percentage of personal income hovers at 63 percent, which is in the upper stratosphere compared to Hawaii , which at 9.9 percent has the highest debt ratio in the United States .
The governor's incredulous affectation as he assesses Puerto Rico's precarious financial position is somewhat off-putting, because he tells you these things with the innocent look of a boy scout at his first jamboree, when in fact he has roasted more than his share of marshmallows over the bonfires of Wall Street. In his days as the economic czar for Puerto Rico , Fortuño knew what the future consequences of deep government debt might signify for a generation down the road.
One of the Boys?
To be sure, Fortuño is as well connected as they come. I first witnessed his mastery of public issues during a trip to Mexico. The traveling press corps from Puerto Rico was in Ciudad Mexico covering a meeting between then President Carlos Salinas de Gortarri and former Gov. Rosselló. Fortuño, who was then the tourism director for Puerto Rico, was there to meet with his Mexican counterpart and to sell Puerto Rico as a tourist destination to the travel planners under the Aztec sun. He did so with tremendous effectiveness in presentations to standing-room only crowds at the María Isabel Sheraton. As the director of tourism for Puerto Rico, Fortuño was tasked with growing that sector of the island's economy from 5 percent to 10 percent.
Most recently, I saw Luis Fortuño's verve for the public pitch on display at the Republican National Convention during a luncheon for the New York delegation in which former New York Mayor Rudy Giuliani presented Fortuño in glowing terms as a rising star of the Republican Party. When Puerto Rico's pols travel to the United States for the national political conventions, there are connections—face time, the coordination of the photo op—that are purchased through a public relations firm, and then there are the rare cases of a truly connected politician who knows everyone on a first-name basis.
Fortuño falls into the latter category.
The thing about Fortuño is this: his hyper-connectedness in the federal realm is an Achilles heel for him in Puerto Rico, somehow symbolic of his supreme otherness: un blanquito entre tantas caras negras. He himself tells you that he is one of the boys inside the National Republican Committee. To be sure, he is a rising star in a party struggling to reconnect with the growing Hispanic electorate in the United States. That sense of belonging in the federal realm is exactly what had prognosticators saying that Fortuño could not win an election in Puerto Rico. An upper-crusty Marista High School alumn with a Georgetown Law School pedigree? “No way, no how,” said the analysts.
Nevertheless, Fortuño proved everyone wrong as he went out and trounced the once unbeatable Pedro Rosselló in the NPP presidential primaries to become the pro-statehood party's candidate for governor in March 2008. And then in November 2008, Fortuño won one of the most lopsided elections in Puerto Rico history by more than 200,000 votes.
Impressive as those momentous electoral mandates were, Fortuño's biggest asset as governor traces to his time spent on Capitol Hill and in work campaigning for other Republicans during general elections and mid-terms. Fortuño's rise in the Republican party came on the heels of a dark period for Puerto Rico in the RNC, with the former RNC Committeeman for Puerto Rico and former Speaker of the House Edison Misla Aldarondo convicted for molesting his 15-year-old stepdaughter.
When the well-heeled Fortuño came on the scene in 2000, the RNC brass had trouble believing their eyes. “If I could have two more like you, I would be happy to vote for Puerto Rico statehood,” one republican congressman told him after their first meeting in 2000. Despite those positive first impressions, a Capitol politics rife with character assassination had some members of the RNC thinking Fortuño was too good to be true. “Next time you come up, bring your wife,” one fellow Republican said to Fortuño in his early days on the job.
Fortuño took his wife Lucé Vela, herself a high-powered attorney, on his next trip. The two put on the perfect dog and pony show, talking about core values and their triplets. The Republicans were floored.
Fortuño's rapid ascent in the GOP culminated in his delivery of remarks in primetime prior to Giuliani's presentation of Gov. Sarah Palin on big Wednesday of the Republican National Convention. Even that morning, it was not quite certain who would be speaking at the convention, because the program had been cut short by one day. Fearful that it would conjure up the memory of a Bush government's inept relief effort in New Orleans after Hurricane Katrina, the GOP cancelled Monday's program at the RNC. The GOP could ill afford to be seen hosting a big bash in Minneapolis as New Orleans was being battered by Hurricane Gustav.
The Energizer Crony
Fortuño was surprised when he was approached that Wednesday morning to speak about Sen. John McCain's Lexington Project for energy independence. “I was shocked,” says Fortuño, looking back in disbelief at his being pegged for such a momentous oration. “McCain is my kind of Republican, and he understands that we need full energy independence for economic reasons, as well as national security reasons. He understands that means, to a degree, that we will exploit our natural resources but that we will move to alternative energy sources in the near future. That we cannot postpone this any further and we have to act now.”
McCain's Lexington Project for energy independence convinced Fortuño that the federal government would be supporting all jurisdictions seeking diverse energy options. “Regardless of whether it was McCain or Obama, at the end of the day, I knew that if I became governor I was going to have opportunities with the Federal government to move in that direction,” says Fortuño, who is currently negotiating an agreement to sell Puerto Rico's excess energy capacity to the Dominican Republic.
In truth, Fortuño had already seen shifting energy paradigms in the hallowed halls of Congress during his days serving on the House Energy and Resources Committee. “Latin America: Energy Supply, Political Developments, and U.S. Policy Approaches,” a report by the Congressional Research Service, examines Latin America 's political environment and the apparent effect on energy in the region. As the top oil consumer in the world, the United States consumes “20.7 million barrels of oil per day with net imports accounting for 60 percent of that total. Because Venezuela is the fourth major supplier of foreign oil to the United States (after Canada , Saudi Arabia and Mexico ) providing 11.5 percent of U.S. crude oil imports, a key U.S. interest has been ensuring the continued flow of oil from that country.”
Specifically, the report states that United States is concerned about greater competition for these resources from such countries such as China and India . " China and Venezuela have signed a series of energy-related agreements since 2005, including joint ventures for oil and gas exploration in Venezuela and for increasing Venezuela 's supply of oil to China .”
There is a shared vision in the U.S. Congress, State Department and the Department of Energy that sees dependence on oil in the region as a threat to national security.
“According to the Department of Energy, oil dependency is a major problem among Caribbean island nations, where oil accounts for more than 90 percent of total energy consumed,” states the congressional report. “President Chávez has used so-called oil diplomacy to provide oil to Latin American and Caribbean nations on preferential terms, and there has been some U.S. concern that Venezuela is using these programs to increase its influence in the region.”
With the perceived threat to national security lurking on the horizon, U.S. policy wonks have been fast at work seeking to diversify energy sources. One effort stemming from U.S. policy, the Memorandum of Understanding signed by the United States and Brazil in March 2007, promotes greater cooperation on ethanol and biofuels in the Western Hemisphere . The agreement calls for sharing of technology between the two nations and has a component designed to conduct feasibility studies and provide technical assistance to build domestic biofuel industries in third countries. Fortuño's current negotiations with the Dominican Republic for the exploration of biofuel development is an extension of the U.S.-Brazil M.O.U. “We haven't signed off on our strategic agreement yet, but we discussed it in the context of the [U.S.-Brazil agreement],” says Fortuño, who adds that he himself visited Brazil as a member of Congress when the issue was first addressed.
“We're looking at developing ethanol technologies in the Dominican Republic and the Virgin Islands . Regardless of where it ends up, we want energy independence for Puerto Rico . It makes sense to us—waste to energy, solar energy, wind power—we are headed in that direction.”
Fortuño says that Puerto Rico Secretary of State, Kenneth McClintock, and the director of Puerto Rico 's Washington DC Office, Richard Figueroa, have been in touch with the U.S. State Department and the policy wonks at the federal level. “We have had meetings at U.S. State and we have had meetings at USAID,” says McClintock, prior to departing on a trip to speak on Puerto Rico 's self determination before the Florida Bar Association. “What we basically communicated was our willingness to have the state government of Puerto Rico partner with the federal government to help reduce the dependence on oil in the Caribbean, and for Puerto Rico to be a distribution point for non-oil renewable fuels, which will come partly from Puerto Rico and partly from the Dominican Republic .”
The agreement signed by Fortuño and Dominican President Leonel Fernández on June 4, 2009, allows the Dominican Republic to export to Puerto Rico an unlimited amount of ethanol under DR-CAFTA. And it appears there will be Brazilian know-how and Brazilian capital behind a DR ethanol project the product of which can then be sold to entities in Puerto Rico under DR-CAFTA.
Status Quietus
At this early juncture in his administration, Fortuño seems content to have averted disaster with the credit ratings agencies and seems firmly focused on his game plan to balance the budget come hell or high water. Unlike Rosselló, who in his eight years in office seemed bound and determined to bring statehood to Puerto Rico and held two plebiscites toward that end, Fortuño knows the Puerto Rico status game in Washington DC is a game of wait and see.
The former resident commissioner hoped mightily that Congress would enact a federally mandated status plebiscite for Puerto Rico . George Bush, a fellow Republican, had personally told Fortuño he was all for Puerto Rico 's self determination. Republicans held sway in Congress and the White House Task Force on Puerto Rico Status delivered a devastatingly honest assessment of the island's status as: a territory of the United States .
Then, power shifted with the Democratic takeover of U.S. Congress during the 2006 mid-term elections and the promise of passage for House Resolution 900 retreated to a fleeting possibility. Now, with a Democrat president in office and Democrats well in control of both chambers, Fortuño is handling things with the informed resignation of a veteran of the Hill.
“That is the nature of politics,” he says in a matter-of-fact fashion. “There will be new people in different positions all the time. However, every time you have a process like this one, you move the ball in the right direction…I don't know how many yards, but a few yards. We have a new team—he chuckles—and we have to deal with a new team.”
With the entrance of the Obama administration, members of the White House Task Force Rubén Barrales, Noel Francisco and Sheldon Bradshaw have been replaced by Cecilia Muñoz. In a recent visit to Washington DC , Fortuño met with Muñoz, coming away with the impression that she understood Puerto Rico 's status issue very well. Then he adds: “I mean, she is not the president of the United States and I understand that there will be a number of people who will have something to say when it comes to Puerto Rico .”
For the short term, Puerto Rico's resident commissioner in Washington, Pedro Pierluisi, has introduced a bill regarding Puerto Rico status. At this writing, insiders are split on whether H.R. 2499 will clear the House; the naysayers point to House Speaker Nancy Pelosi's opposition to the bill as a dark harbinger of its chances at clearing both chambers.
McClintock suggests it may languish in the U.S. Senate, in which case there will be a plebiscite enacted through the Puerto Rico legislature at some point over the next four years.
During a recent visit to Washington DC , Fortuño chose to focus on the economy and health care reform. He knows these are the kitchen table issues that most concern the people of Puerto Rico . As long as people can keep two cars in the garage and put their children through college, they do not seem particularly preoccupied with status. They are more concerned with feeding their families in these troubling times.
As this magazine was going to press, Puerto Rico 's unionized workers—40,000 strong—marched on the capitol to protest the Fortuño administration's pink slips to 7,427 government workers. According to the government's plan, more than 30,000 will be shown the door over the next month.
The mass protest is a sign of the public's discontent over the prophecy of austerity measures come true. Puerto Rico 's political history suggests these are often the early signs of public discontent that manifest themselves in electoral backlashes at the polls. Former Gov. Rafael Hernández Colón, a three-term governor, saw his first term end in electoral defeat in 1972 over his decision to implement a highly unpopular excise tax. Now, 30 years later, the political will to enact harsh measures is being put to the test again. Time will tell if Fortuño gets the two terms he seeks to finish the job.
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