And like all but one state, Vermont, Puerto Rico has a self-imposed requirement to balance its budget. In many ways, however, the Commonwealth operates more independently than other jurisdictions on the mainland. Residents of Puerto Rico, unlike those of the states, do not pay U.S. personal income taxes unless they are employed by the U.S. government. The many large public corporations on the Commonwealth’s balance sheet also distinguish it from many states, although some states – New York is an example – also house a number of public corporations and authorities. Finally, a notable difference from other mainland jurisdictions is that Puerto Rico’s balanced budget requirement, while found in the constitution and relatively stringent in form, appears not to have been effective in constraining the growth of the Commonwealth’s debt. The debt buildup reflects, in part, some of these unique features of Puerto Rico’s fiscal institutions, policies and practices. In particular, the public sector in Puerto Rico comprises not only the Commonwealth government but also the municipal governments and a number of public corporations. Prominent among these public corporations are the Puerto Rico Electric Power Authority (PREPA), the Puerto Rico Highway and Transportation Authority (PRHTA), and the Puerto Rico Aqueduct and Sewer Authority (PRASA). The public corporations are especially important both for the role they have played in issuing debt as well as the scale of the public services they provide to the Island’s population.

At the urging of several business and community leaders, I commissioned a team at the New York Fed to analyze the challenges facing the Puerto Rico economy and to put forth recommendations on how to capitalize on the Island’s strengths and restore growth. Informed by consultations with local, national and international experts and stakeholders on the Island, we released that report in 2012.1 We presented five recommendations: (1) reduce barriers to labor force participation and job creation; (2) reform the energy industry, particularly, improve the efficiency of the electric  1  Report on the Competitiveness of Puerto Rico’s Economy, Federal Reserve Bank of New York. 2012. Available in English at http://www.newyorkfed.org/regional/puertorico/index.html and in Spanish at http://www.newyorkfed.org/regional/puertorico/spanish.html. BIS central bankers’ speeches  1  utility’s operations; (3) lower the costs of doing business; (4) foster partnerships between industry and higher education; and (5) promote independent policy evaluation. These recommendations were not presented as simple quick fixes, but rather as important steps to help improve the Island’s competitiveness over time. Since that report was issued, positive steps toward reform have been made in some areas. The recent bill reforming the energy sector and related efforts to expand the use of alternative energy sources should over time help to reduce the Island’s high costs of electricity. Additionally, the Commonwealth’s economic development strategy is seeking to capitalize on the strong pharmaceutical presence on the Island, to promote knowledge-based services and, importantly, to improve the general business environment on the Island.