Recent moves by the Puerto Rico government to cut back about $1.4 billion in operational expenditures by reducing public employee benefits is strong evidence that decades of giveaways by some irresponsible lawmakers and administrations are ultimately to blame for the drastic measures that had to be passed since last year in the face of a total government collapse.

The enactment of Law 66, passed by the current administration’s Legislature, also called the Fiscal & Organizational Sustainability Act, provoked a furious response from union leaders in June that continues in some degree to this day, particularly the law’s cutbacks in Christmas bonuses and other compensations, freezing collective bargaining agreements already in place that involve salary increases and other benefits, and eliminating the liquidation of excess sick days.

These changes have provoked strong resistance, especially from public agency unions—led by the members of the powerful Irrigation & Electrical Workers Union (Utier by its Spanish acronym), which comprises workers of the Puerto Rico Electric Power Authority (Prepa), and the Authentic Independent Union (UIA by its Spanish acronym), which represents Puerto Rico Aqueduct & Sewer Authority (Prasa) employees— prompting them to go to the streets in protest and paralyze key transportation routes, as well as cause other disturbances in San Juan and the rest of the island.

Those fierce union protests, which over the past years caused some legislators and administrations to cave in when proposing potential benefit cutbacks for budgetary purposes, threw into stark relief a decades-old dynamic of lawmakers and public officials granting ever more outrageous job benefits in exchange for political gains.

Like a spoiled child who is given everything he or she desires and who raises a ruckus each time some perk is denied or taken away, many labor unions on the island have typically been coddled by a permissive, enabling government apparatus in the past, several experts commented to CARIBBEAN BUSINESS.

This dynamic is yet another example of the Puerto Rico government’s populist and paternalistic nature, according to those interviewed. Partly as a result, Puerto Rico employees have historically enjoyed more labor benefits mandated by law than workers in any other U.S. jurisdiction and a majority of countries in the world.

Compounding the situation, such local labor laws also give businesses a strong incentive not to hire workers and also discourage offshore businesses from investing in Puerto Rico, said economists interviewed by this newspaper. They indicated that the private sector often doesn’t hire additional workers because of all the fringe benefits. The result is a lower employee count.

Puerto Rico labor laws act as a disincentive for businesses to hire employees, explained Vicente Feliciano, president of Advantage Business Consulting. «In the U.S. mainland, the labor market determines almost all fringe benefits, while in Puerto Rico, they are mostly dictated by law. A job-generating strategy would be to leave many of these determinations to the market,» he said.

Holidays are an example of the market working properly in Puerto Rico to determine labor conditions, Feliciano added. «These aren’t regulated for the private sector. For example, there is no law requiring Christmas to be a holiday. However, most private-sector employees get the day off, while the ones who for some reason need to be at their posts, show up for work.»

Conceived about 70 years ago to protect agricultural laborers from abusive practices, labor laws in Puerto Rico have established many generous benefits over the years, including vacation time, sick leave, severance pay, holiday provisions, overtime pay, paid jury duty, paid maternity leave of several months, breast-feeding time off and automatic Christmas bonuses, among many other legislated benefits.

Moreover, in cases of termination— unless totally justified, such as for stealing—employees receive compensation—after working three months that start out as five weeks’ severance pay and growing to many months—based on years of service.

These benefits extend far beyond those already provided by federal labor laws, which in almost all other U.S. jurisdictions cover the whole extent of employee benefits. Puerto Rico legislators, instead, have taken on the task of expanding such benefits locally. Business leaders have long claimed that many of these local laws are unnecessary today compared with the 1940s because federal labor laws have since granted many protections to employees. In fact, federal labor laws are so extensive that states such as Florida have almost no local labor laws.

Feliciano also said the «huge gap» in benefits between full-time workers and part-time and contract employees functions as an incentive for companies to maximize their use of contract and part-time workers, which also works to lower the overall number of full-time jobs. This, too, winds up being against the best interests of the working class.

While lawmakers frequently approve these benefits for public sector workers at first, the effect often spreads to the private sector. This effect takes place when the Legislature approves certain benefits for government workers, and later amends the laws to include the private sector in an effort to capture votes for an election; after all, lawmakers know there are a lot more employee voters than there are business managers.

Such politically motivated moves have been made, almost without exception, to the detriment of the island’s business sector, as well as its ability to spur economic development and job creation, several people agreed. «The rationale behind many of these labor laws is that they can win much more support by passing laws that benefit hundreds of thousands of workers, rather than hundreds of businessowners,» said a leading banker.

The result has been increased labor costs and a regulatory patchwork that many employers find hard to navigate, especially amid Puerto Rico’s recession, which has continued unabated since at least 2006. In an ironic twist, the «excessive» paid benefits that the government requires the private sector to provide to its employees keeps the cost of doing business in Puerto Rico too high to effectively promote job creation. Over the years, there have been many companies that have considered establishing businesses on the island, but when they hear about the labor laws, they just turn around and leave.

«Our onerous labor laws promote unemployment,» said William Riefkohl, a former executive director of the Puerto Rico Manufacturer’s Association. «Populist legislation only adds to the cost of doing business in Puerto Rico, making it hard to attract new investment to the island. The effect is that fewer jobs are created.» The situation has gotten so bad that some labor lawyers will file a case in the local courts and file the same case in federal court, causing the employer to settle just to cut legal costs, another business leader said.

One example of an «anti-job-creation» labor law is the much-discussed 90-day trial period during which an employer decides whether to keep a new employee after three months. «There are only 68 working days in 90 calendar days. Who can tell during that period if an employee who has never worked has bad habits or not? It doesn’t matter if the person has a high school diploma or even a college degree,» said a local retail executive off the record. «If the employer waits more than 90 days to get rid of that employee, the employer has to pay nine weeks’ severance pay. As a businessperson, how can you hire a young, inexperienced person under those conditions?» Anybody can behave well for 60 working days. Afterward, bad habits frequently come out, but it costs the employer nine weeks of severance pay, indicated another business leader.

Meanwhile, emerging markets such as China, India and even the neighboring Dominican Republic, which not long ago was unable to compete successfully with Puerto Rico’s robust industrial scene, have increased their competitive levels by being less bureaucratic and curtailing labor laws. Nowadays, the Dominican Republic is literally booming compared with Puerto Rico’s stagnant economy, and the D.R.’s growth isn’t just because of lower labor wages, some experts agreed.

BIGGEST OFFENDERS

Back in June 2006, amid the government shutdown that arguably began the island’s homegrown recession, CARIBBEAN BUSINESS published a Front-Page story titled «Wanted,» in which lawmakers who submitted anti-business, anti-jobs legislation were taken to task. Back then, there were more than 25 pieces of labor legislation that cost companies doing business in Puerto Rico hundreds of millions of dollars, doubling their payroll expenses and, in some instances, killing small and midsize businesses.

The article held nothing back. Afterward, the names and faces of offending legislators were posted as part of a regular column similar in style to the FBI’s Ten Most Wanted. The response by CB readers was swift and loud, with more than one legislator reportedly calling the CB editorial offices to beg for the mug shots to be taken off the purported wall of shame.

Today, circumstances are very different regarding labor benefits. The central government’s fiscal crunch has prompted officials to at least curtail the trend toward ever more outrageous perks, if not eliminate some employee benefits altogether. As part of discussions for the fiscal 2015 budget last May, Office of Management & Budget Director Carlos Rivas said the government was looking into «freezing» Christmas bonuses to $600 and eliminating the liquidation of excess sick days, thereby saving about $75 million a year from the payroll budget.

However, despite the environment of austerity forced upon officials by the commonwealth’s state of near bankruptcy, there are still a handful of lawmakers who seemingly haven’t gotten the message that these are different and difficult times.

An investigation by CARIBBEAN BUSINESS has uncovered close to a dozen anti-business, anti-jobs pieces of legislation under consideration in the Legislature by the likes of representatives such as Jesús Santa Rodríguez and senators such as Rosanna López León and Martín Vargas Morales, all from the Popular Democratic Party (PDP).

Although the number of bills in consideration is roughly half of the whopping 25 pieces of legislation that were reported back in CB’s First «Wanted» story, they are still about a dozen too many, especially considering the precarious need for permanent jobs in the private sector that the current administration has acknowledged through its «Jobs Now» private-sector proposal (see box for an in-depth look at the bills in question).

Worse still, a sense of inaction seemingly pervades within the Puerto Rico Legislature. Recent remarks by Senate Majority Leader Aníbal José Torres perhaps best exemplifies this when he hinted that any actions regarding the Teachers’ pension reform will be an issue best left for the next government administration to handle in 2016. «This type of ‘hot potato’ dynamic has gone on for decades, and has contributed to an environment that is less than conducive to any real change in public policy,» said one minority legislator.

Meanwhile, recent decisions by other legislators have also led to their fair share of controversy. For example, there was Rep. Manuel Natal Albelo’s (PDP) announcement that he would live for a whole month on a minimum wage salary, in an apparent effort to promote discussion about how unfairly low is the current federal minimum wage of $7.25 an hour. The experiment has resulted in heavy backfire from several sectors, particularly from some minimum-wage workers who have taken the legislator to task for «daring to step in their shoes,» as well as business leaders who have long maintained that raising the minimum wage at this juncture would have a devastating effect on countless businesses that are already struggling to meet their bottom lines.

Finally, there’s the long-running PDP Sen. Antonio Fas Alzamora, who recently filed a bill that aims to make Spanish the only official language in Puerto Rico, with English as a secondary language (both languages have been officially recognized on the island since 1993). Specifically, the bill intends to pass a law «establishing Spanish as the island’s No. 1 language and make its use obligatory in Executive, Legislative, and Judicial areas.» The proposed law could have repercussions for business dealings in Puerto Rico as well.

The bill, according to the legislator, seeks to «do justice to the estimated 80% of Puerto Ricans who don’t know English and are faced with a government that can change arbitrarily from Spanish to English in its daily operations as long as the two languages are equally recognized.»

Frank Worley-López, a blogger for online periodical The PanAm Post, took issue with this assessment. «While it remains a U.S. territory and continues to receive funding from the U.S. government, we can’t expect U.S. citizens from the 50 states and other territories who visit Puerto Rico and may be in need of assistance from its government, to be refused services in English while on the island,» he wrote. This emphasis on «Spanish-first» could also threaten to derail the operations of businesses based in the U.S. mainland that have dealings on the island.

P.R. LABOR LEGISLATION VS. OTHER U.S. JURISDICTIONS

To illustrate just how onerous employee benefits in Puerto Rico can be, it helps to establish a detailed and definitive comparison between such benefits on the island compared with those in some other U.S. jurisdictions, specifically Florida, California, Texas and New York. Under some aspects, most notably the minimum wage, most U.S. jurisdictions operate in the same playing field, with a federally mandated minimum of $7.25 an hour, barring exceptions in which a jurisdiction’s requirement exceeds that of the federal level, such as California’s $8 minimum wage. However, in many other instances, the differences can be jarring.

In Puerto Rico, overtime is paid at the rate of double a nonexempt employee’s regular rate of pay for all hours worked either in excess of eight hours during any period of 24 consecutive hours, or in excess of 40 hours during a workweek. Meanwhile, in New York state, overtime is paid at the rate of 1.5 times the employee’s regular rate of pay for all hours worked in excess of 40 hours in a workweek. California has the same regulations as New York, but adds an overtime requirement that pays two times the employee’s regular rate for all hours worked in excess of 12 hours in any workday.

Florida and Texas, on the other hand, don’t have laws governing the payment of overtime so federal overtime laws apply. Such laws, contained in the Fair Labor Standards Act (FLSA), require that nonexempt employees receive overtime pay for hours worked over 40 in a workweek at a rate not less than 1.5 times their regular rates of pay. However, the FLSA doesn’t require extra pay for weekends, night work or double-time pay.

With regard to meals and break periods in Puerto Rico, a one-hour meal period is mandatory, commencing after the end of the third hour of work and before the sixth hour of consecutive work begins. For the employee’s convenience, it may be reduced to 30 minutes subject to a written agreement.

New York has more complicated requirements in this matter, which are divided between factory and nonfactory work, as well as the time in which the work shift begins. However, meal breaks generally don’t extend much further than 30 minutes and an additional 20-minute break later, or a single 45-minute break during the work shift. California employees must be provided a meal period of no fewer than 30 minutes when they work more than five consecutive hours, as well as a 10-minute paid rest period for every four hours worked, whereas Florida and Texas don’t have any laws requiring an employer to provide a meal period or breaks to employees.

Employees in Puerto Rico are entitled to vacation leave with full pay at a rate of 1.25 days per month (equivalent to 15 days a year) in which the employee has worked at least 115 hours. If the employee works fewer than 115 hours in any month, no vacation leave is accrued. Employees have the right to enjoy vacation leave after accruing it for one year.

In this particular instance, Puerto Rico stands alone. New York, California, Florida and Texas require employers to provide employees vacation benefits, either paid or unpaid.

The same dynamic occurs when it comes to sick leave. In Puerto Rico, sick leave entails full pay at a rate of one working day for each month (equivalent to 12 days per year) during which employees have worked at least 115 hours. Sick leave not used by the employee during the year will accrue for successive years up to a maximum of 15 days. New York, California, Florida and Texas have no such requirements, although California has state laws that provide paid sick leave, but only under certain circumstances.

When it comes to maternity leave, regulations by jurisdiction are too complex to go into much detail, but the same trend applies in that Puerto Rico provides by far the most benefits. Pregnant employees in Puerto Rico are entitled to a rest period of four weeks before and four weeks after childbirth. They may choose to take as little as one week before childbirth and extend their post-delivery leave for the remaining time. The employer has to pay any salary or other compensation to which a woman is normally entitled during her leave. Leave can be extended for up to 12 weeks in the case of related medical complications.

California makes it unlawful for employers with more than five employees to refuse leave to a pregnant employee for a reasonable period not to exceed four months. The law, however, allows an employer to require an employee to give reasonable notice of the date the leave will begin and the estimated duration of the leave. The pregnancy disability leave requires the position be held during the four-month absence. The law, however, doesn’t require the employer to pay the employee during the four months. Under the California Paid Family Leave Act, up to six weeks of paid leave may be taken with the employee receiving about 55% of her salary. Although all employers are covered under this law, businesses with fewer than 50 employees aren’t required to hold a position for a worker who takes paid family leave.

In New York, women can take up to 12 weeks maternity leave while keeping their health insurance, but without pay. Meanwhile, under state laws, neither Florida nor Texas are required to provide maternity leave, either paid or unpaid. However, in both instances, the federal Family & Medical Leave Act guarantees women can take up to 12 weeks without pay while keeping the same health insurance.

Out of all the jurisdictions under discussion, Puerto Rico is the only one that requires Christmas bonuses. They comprise either 6% of the total wages earned for companies with more than 15 employees, up to $600, or 3% of the total wages earned for employers with 15 employees or fewer, up to $300. Employers must pay the bonus to employees who worked 700 hours or more within the previous 12 months.

Not only that, the Christmas bonus was increased from $200 to the current $600 back in 2009. This has prompted more and more companies to request exemptions due to financial difficulties, which has in turn increased the number of employees not receiving the bonus.

Finally, concerning severance payments, Puerto Rico also stands alone as the sole jurisdiction that requires employers to provide employees with severance pay. Moreover, employers must first have just cause to terminate employees; if so, the employer doesn’t have to indemnify the employee with severance pay. Otherwise, severance must be paid based on the number of years the employee worked for the employer.

A history of massive public debt
Bond issues once for infrastructure now cover huge public payroll

Just as when people borrow to buy an automobile or their first home—when they are employed and earn enough to cover the payments— governments borrow to finance infrastructure and public utilities. Just like the consumer who didn’t have enough cash to pay the car or home, the government borrows for big infrastructure projects.

There once was a time in Puerto Rico when the government did exactly that. Debt was issued and roads, coliseums, reservoirs, hospitals, bridges and convention centers were built. It has been that way dating all the way back to Puerto Rico’s first elected governor, Luis Muñoz Marín, up until the administration of Gov. Pedro Rosselló, who in two terms (1993-2000) built highways, bridges, reservoirs, a museum, a superaqueduct to bring water to the north coast, the state-of-the-art Puerto Rico Convention Center and the Puerto Rico Coliseum, which ranks among the top-10 event venues in the entire U.S.

The borrowing in the following administrations wasn’t for infrastructure, it was to hire thousands of government employees for political purposes. Unlike Rosselló, Rafael Hernández Colón and other former governors who borrowed for infrastructure projects, the money borrowed by the last few governors went largely to pay for bloated public payroll that grew by 50,000 employees to 325,000. Incidentally, the state of Florida, with a population of 18 million, has about 80,000 employees. That troubling dynamic— issuing debt largely to cover a massive public payroll—continued over the past few administrations. «We’ve known it for years, but politicians haven’t wanted to do anything about it. The government has become overstaffed with many more employees than it needs,» said a top public official off the record.

As a result, employee salaries have comprised a significant aspect of the government’s fiscal burden, which as of this writing represents a staggering public debt totaling about $73 billion. Such a crushing debt load, accumulated over decades and throughout various government administrations, has grown due to borrowing through bond issues.

For several decades—specifically since the four-consecutive terms of Muñoz Marín in the 1950s and 1960s—bonds were mainly issued to pay for the building of infrastructure projects and for capital improvements. By the end of Muñoz Marín’s tenure in 1965, the public debt had reached $910 million, representing 33% of local gross domestic product (GDP).

In subsequent government terms, led first by Govs. Roberto Sánchez Vilella and Luis A. Ferré, the amount of public debt and its ratio to the GDP grew by a relatively small degree, yet both governors left behind a considerable slate of projects that yielded a tangible benefit. Under Ferré, the highway between San Juan and Ponce, the start of routes to Aguadilla and Fajardo from San Juan, and the Americas Expressway were built. By the time Ferré left office in 1973, public debt stood at $2.99 billion, with a ratio of debt to GDP of 48%.

Gov. Rafael Hernández Colón was next in line. During the first of his three nonconsecutive terms, Puerto Rico’s debt was at $5.99 billion, increasing the ratio to 73.2%. During the subsequent mandate of Gov. Carlos Romero Barceló, who governed for two-consecutive terms, public debt grew to $9.09 billion, but the ratio was narrowed to 60%. When Hernández Colón rose back to power during his last two terms, he also kept the public debt relatively under control. By the end of his eight years in 1992, the debt-to- GDP ratio was further reduced to 58.6% despite a public debt of $14.73 billion.

During the two terms of Rosselló, bonds were issued at a higher pace that was matched by increased development of major infrastructure projects. When he left office, public debt had increased to $27.55 billion—the ratio rose to 62.5%. Public debt increased by $12.82 billion during Rosselló’s eight years in power, at a rate of little more than $6 billion per four-year term.

UNSUSTAINABLE PAYROLL

By the time the administration of Gov. Sila María Calderón began in 2001, subsequent bond issues became necessary mainly to build up and sustain the payroll of a steadily increasing public workforce, as well as to pay interest payments on previous loans. Bond issues ballooned and increased the public debt by $10.27 billion in the space of a single four-year term.

Calderón’s successor, Gov. Aníbal Acevedo Vilá, pushed public debt higher—soaring by $15.95 billion borrowed to $53.77 billion in a four-year term. When Acevedo Vilá shuttered the government for two weeks in 2006—because public payroll couldn’t be met—it had become clear to most analysts that Puerto Rico could no longer afford to continue to hide that jobs being lost in the private sector were being stockpiled in the government.

Under the administration of Gov. Luis Fortuño, which concluded in 2012, debt skyrocketed by $16.55 billion, boosting the island’s debt to $70.32 billion. That money doesn’t include the $7.4 billion Puerto Rico received in American Recovery & Reinvestment Act (ARRA) funds during Fortuño’s four years in office.

The big question: Where did the money go? Not one significant piece of infrastructure was built. The money went to sustain the bloated government structure, even though more than 20,000 government employees leave office every four years through attrition. In just the past three four-year terms, 60,000 employees left the government through retirement, deaths, going into the private sector or leaving Puerto Rico. But those who left the island have been replaced unnecessarily.

In 2014, Gov. Alejandro García Padilla’s administration has taken steps to curtail the effects of the crushing debt load because Puerto Rico’s credit has been downgraded to junk-bond status—there is no tomorrow. Today, public debt towers at $73 billion while GDP has remained stagnant at recession level for nearly a decade. At the end of 2013, the debt ratio surpassed 112.14%—with very little new infrastructure to show for it (see accompanying chart).