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The 2006 Puerto Rico budget crisis is a political, economic, and social crisis that saw much of the government of Puerto Rico shut down after it ran out of funds near the end of the 2005-2006 fiscal year. The shut down lasted for two weeks from May 1, 2006 through May 14, 2006, leaving nearly 100,000 public employees without pay and closing more than 1,500 public schools. The crisis was publicly criticized by the business sector, non-profit organizations, Puerto Rican celebrities, and the general public (by means of opinion polls), and was described as the consequence of a political power struggle between the Commonwealth's main opposing political parties: the Popular Democratic Party and the New Progressive Party.
Background
There is much debate over the long-term causes of the crisis and Puerto Rico's economic fortunes in general, but the immediate cause of this crisis was a dispute where the Puerto Rico Legislature refused to approve the Governor of Puerto Rico's budget proposals, preventing the central government from raising sufficient revenue and decreasing expenditures for the 2005-2006 fiscal budget.
Following the General Elections in 2004, the Puerto Rican government was split between opposing political parties, with Governor Aníbal Acevedo Vilá of the Popular Democratic Party (PPD), and a Legislature controlled by the New Progressive Party (PNP). Due to an elections dispute, the elections had to be decided by the Supreme Court of Puerto Rico, and relations between the Governor and the Legislature have been poor since. The legislature has refused to approve the Governor's proposed budgets since the elections, and the government has been operating on the budget approved for the 2004 fiscal year.
The PNP has repeatedly opposed further borrowing for operating purposes by the already heavily indebted government, and blamed increased levels of spending under Vilá's predecessor, Sila María Calderón (also of the PPD), for Puerto Rico's financial problems. The PNP has advocated a fiscal reform and the use of money set aside for income tax refunds and unemployment benefits in the short term.
On the other side, some blame former Governor Pedro Rosselló, the PNP party president and current P.R. senator, for the excessive expenses during his administrations, which reportedly accumulated to both subsequent administrations.
Crisis
In April 2006, Governor Anibal Acevedo Vilá (PPD) announced that the central government of Puerto Rico did not have enough cash flows to pay projected operating expenses for the months of May and June, including the salaries of thousands of public employees. The governor asked the Legislative Assembly of Puerto Rico to approve an emergency loan of over $500 million USD so that the government could keep running, which the government would repay using 1% of a newly proposed sales tax, or else the Governor would order a partial shutdown of central government operations, including the closing of numerous agencies. The Puerto Rico Government Development Bank offered to supply the loan, but insisted on a tax reform plan that requires this new tax to be collected with a predetermined rate or amount be set aside exclusively for the loan repayment. The Senate approved the loan based on the proposed tax rate, but the PNP controlled House of Representatives refused to do so.
The House opposed the Governor's proposed rate of the sales tax, suggesting a lower rate. While Governor Acevedo Vilá proposed a global 7% rate, the House instead proposed a global 4% rate. The House also proposed a 5% corporation tax, but the Governor has argued that this would violate a number of tax incentive contracts with American corporations , and that it may even violate the Constitution of Puerto Rico. In a televised address on April 27, Governor Acevedo Vilá announced that most of the government agencies would be shut down beginning May 1, and will remain closed unless the House approves the economic plan. Government activities relating to health and security (including hospitals and police stations) would remain open, although medical professionals questioned whether hospitals would function if staff went unpaid and also raised the issue of government-funded prescriptions, whilst private security firms on contract to the government said they might cease work if the government did not pay what it owes them.
Senator Kenneth McClintock, President of the Senate and former member of the PNP, said that the government had enough funds to continue paying public workers until the first week of June. The President of the PNP, former Governor Pedro Rosselló, said he did not think Governor Vilá would shut down the government and accused him of trying to create "uneasiness" and "intimidate the Legislature".
A public demonstration against the shutdown, named the Puerto Rico Shouts march, attracted around 50,000 people on April 28. Later on, labor leaders called for a general strike if the shutdown occurred.
Many on the island have pointed out that this deadlock between the Senate and the House of Representatives to solve the impending budget crisis further validates the case for downsizing the Puerto Rican Legislative branch to a unicameral body. In a referendum held on July 10, 2005, Puerto Rican voters overwhelmingly approved the change to a unicameral legislature by 456,267 votes in favor versus 88,720 against. This change is expected to become effective in January of 2009 after an additional referendum is held to amend the Puerto Rican Constitution and tailor it to the new legislative body.
Shutdown
On May 1, 2006, with the House of Representatives, the Senate, and the Governor having failed to reach an agreement, 45 government agencies closed and 15 others were partially closed, leaving 95,762 people temporarily unemployed. The only agencies remaining open are security related, such as police and firefighter agencies, and health related agencies. 1,600 public schools were shut down, leaving 500,000 pupils without facilities.
There were several protests on May 1, some in front of the Puerto Rican Capitol, and another in the Milla de Oro, the financial district. Another protest occurred in front of the Department of Labor, where a confrontation between protesters and police broke out when students started to throw rocks at the windows of several banks. Several people were injured in the incident.
On May 2 the shut down continued. The New Progressive Party held a meeting and decided to stick with the 4% tax proposal, stating that there wouldn't be any type of negotiation. Another meeting between the president of the House of Representatives and the Governor ended in dispute with the Governor leaving less than 15 minutes after the meeting started. Protests were held also in front of the main offices of Popular, Inc. in Hato Rey and the Capitol.
On May 3, Governor Acevedo Vilá accepted an invitation by José Aponte, Speaker of the House, to meet with him alone in the Capitol. Acevedo Vilá suggested to Aponte that Senator Kenneth McClintock, President of the Senate, should be present. Aponte didn't agree. Acevedo Vilá arrived to the Capitol in company of Alfredo Salazar, the President of the Puerto Rico Government Development Bank, Juan Carlos Méndez, Secretary of Treasury, and Aníbal José Torres, Secretary of Government. Aponte, as accorded, asked Acevedo Vilá to meet alone with him. Fifteen minutes after the meeting Acevedo Vilá left abruptly. According to Acevedo Vilá, Aponte began to complain at some point during the meeting, specifically mentioning that a few days earlier, the Secretary of Treasury changed the financial numbers given under oath in a public hearing, and that the Secretary was absent in a meeting one week earlier, making it difficult for the House to reach him. At some point during the meeting, Acevedo Vilá noticed a smiling face in Aponte and commented that he was happy to see him smile during such time of crisis. At this point, versions differ. Allegedly, Aponte told Acevedo Vilá that he has "seen the face of distress" of Acevedo Vilá in recent days, and that if he needed a handkerchief for his tears, he could let him know. At that point Acevedo Vilá left, feeling that "it was an insult to the Puerto Rican people left in the streets". Aponte denied this, and accused the Governor of lying.
On May 4, Acevedo Vilá marched from La Fortaleza, the Governor's house, to the Capitol. It was the first time in Puerto Rican history that such an event has happened. In Puerto Rican custom, the Governor walks from the Capitol to La Fortaleza when he takes the oath of office. Acevedo Vilá was criticized due to the similarities between this march and an episode of the TV series The West Wing, in which the President of the United States (portrayed by Martin Sheen) walks from the White House, home of the President, to the U.S. Capitol, home of the U.S. Congress, in order to resolve a federal budget crisis.
On May 8, Moody's downgraded Puerto Rico's general obligation debt to Baa3 from Baa2, and appropriation bonds to junk status at Ba1 from Baa3.
Settlement
On May 4, the first signs of compromise emerged as the Senate approved a new budget which proposed a 5.9% sales tax and a corporation tax to be placed only on corporations with earnings of more than ten million dollars. This deal was still not approved by the House. An emergency commission was formed on May 8 under the Archbishop of San Juan, which negotiated with the Governor, the Legislature and the banks. It reported on May 10 and brokered a deal which was accepted in the early hours of the following morning. Under the deal, the legislautre will approve the emergency loan to finance Puerto Rico's $740 million shortfall. The Legislature is committed to approving a sales tax at a future date, with a proportion set aside for repaying the loan, but negotiations will continue over the rate of this tax, while the Governor and Senate have agreed to consider House proposals to reduce the budget for 2007 by $300 million. Having won approval by the Legislature, the Governor signed the budget into law on May 13, officially ending the shutdown.
References
"2006 Puerto Rico budget crisis"