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Study: Fiscal Control Boards Are More Effective with Local Input

By on March 13, 2016

SAN JUAN – The operational powers of control boards should be limited to providing technical assistance to governments and approving budgets instead of making economic development policies, said an urban economist who completed her doctoral dissertation at the Massachusetts Institute of Technology on how fiscal control boards address the causes of fiscal crises in different jurisdictions.

“That is not the expertise of control boards. They have lawyers, bankers and some business people who often do not know about local intricacies…. That is the kind of area that stirs controversy,” said Deborah Kobes, who earned a Ph.D. in urban political economy and governance from MIT and a bachelor’s degree in civil engineering with architecture from Princeton University.

Kobes said that since New York City’s highly publicized board in 1975, more than 119 municipalities of all sizes have been assigned control boards, in which a state-appointed team oversees the budgetary decisions of a municipality in fiscal emergency.

Congress is working on legislation to fix Puerto Rico’s financial woes as the island battles a $70 billion debt and edges close to insolvency. The commonwealth wants access to a bankruptcy-like mechanism to restructure its debt, but the Republican-dominated Congress wants to place Puerto Rico under strict fiscal oversight and has rejected bankruptcy.

While the shape and form of the proposed federal fiscal control board is still in the works, after a recent visit to Congress the Puerto Rico Private Sector Coalition said the control board would also have the power to impose economic policies in addition to budgetary decisions.

Kobes became interested in evaluating how control boards impact local sovereignty. Her dissertation on control boards in the United States, “Out of Control? Local Democracy Failure and Fiscal Control Boards,” was completed in 2009.

If the experience in other jurisdictions is repeated on the island, Puerto Ricans, she warned, should be ready to give up some control over their local affairs to obtain financial stability. The board that were successful were the ones that had local members from the jurisdiction and who did not meddle in political or local affairs, she found.

While her research did not include jurisdictions with large debts, such as Puerto Rico, (for instance, Detroit’s $20 billion debt was ruled on by an emergency manager not a board), Kobes said a fiscal control board would help fix Puerto Rico’s fiscal problems as long as “it is part of a broader set of solutions” that may include Chapter 9 bankruptcy protection, technical expertise to go into the numbers and help improve tax collection or some form of financial help.

Her study showed that control boards tend to be established in communities with low median household incomes; low rates of employment, homeownership and high school graduation; and high rates of poverty, minority population and female-headed households.

Kobes says there are three causes of fiscal crisis, all of which have affected Puerto Rico. The first is a local government’s dependence on the market. The second is what she calls a “majoritarian tyranny within federalism,” which consists of the external factors or constraints that affect a jurisdiction, such as when a city has limitations on the amount of taxes it can impose or when it loses federal funds. Puerto Rico’s finances have been hurt by the loss of Section 936 tax credits to U.S. subsidiaries operating on the island and the caps imposed on federal Medicaid funds.

FILE - This Jan. 28, 2015 photo shows an aerial view of the south side of the Puerto Rico's Capitol building in San Juan, Puerto Rico. A federal judge ruled late Friday, Feb. 6, 2015 that a Puerto Rico debt-restructuring law that aims to protect the government from bankruptcy and make public corporations self-sufficient is unconstitutional. Gov. Alejandro Garcia Padilla approved the Recovery Act in June of 2014 after submitting a last-minute bill to legislators, urging them to approve it amid concerns that certain public agencies might collapse financially. (AP Photo/Ricardo Arduengo)

Puerto Rico’s Capitol (AP Photo/Ricardo Arduengo)

The third cause is a local democracy’s failure, which entails a lack of oversight on the government and corruption that results in the loss of public funds, she said.

The city of Miami had a federal control board in the 1990s because its elected city leadership was arrested on corruption charges.

Kobes said Miami residents were more welcoming of a federal control board to not only fix the fiscal crisis, but also to eradicate corruption because they had lost faith in their local government. In other places, residents are less accepting of another entity coming in to handle local affairs.

Oversight boards, for that reason, must conduct much work in advance to receive acceptance from the public and must continue to try to raise public support. Miami was more accepting of its control board because there were local residents in its board.

“Having local people who are from the jurisdiction and are respected within the jurisdiction goes a long way to make residents feel that their voices are being represented,” she said.

Kobes also stressed the importance of a good and cordial relationship between elected officials and the oversight board that “makes it seem” that democracy, “at least in symbolic way,” continues.

She also stressed that control boards should not overstep their boundaries. Boards have different scopes of authority, and the farther they are from approving budgets or fixing fiscal issues and get involved in decisions such as closing a hospital for instance, the more resistance from the population these will experience.

2 Comments

  1. John Smith

    March 13, 2016 at 11:55 pm

    This is the funniest article I have ever read! The whole problem with the island is its poor leadership with no logical experience in managing finances. The only way to fix the problems are to fire all the government officials who are responsible for all Puerto Ricos issues or put a control board over the island who control all decisions. Lets look at some examples of poor financial decisions made by the current administration. The government financed Coco Beach Golf Club formerly Trump Golf course for approximately 100 million dollars using pension funds. Then they sold it to a “group of local San Juan investors in November 2015 for 2.2 million” and the hotel just held a golf tournament that made 3 million dollars. They sold the hotel with no debt attached just another sign of corruption that needs to be investigated by th FBI. Another example Puerto Rico owed 300 million in tax refunds in December but chose to pay 100 million in christmas bonuses versus refunding tax dollars which would have been spent just as fast in the local economy. This is the reason that congress should not give Puerto Rico a choice in placing a control board over the island with complete powers. If Puerto Rico refuses and decides just not to pay the debt congress should send all the federal funding meant for Puerto Rico directly to pay for the bonds until they are paid for in full. Puerto Rico needs to learn their is consequences for spending outside your means and spending cuts are necessary!

  2. Errol

    March 14, 2016 at 10:08 am

    Puerto Rico has demonstrated that it is completely incompetent at self government. They elected incompetent and corrupt people to office who have wasted or stolen Puerto Rico to the point of collapse.

    And even after collapse, the people support the incompetent, corrupt politicians that created the catastrophe.

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