The Governor Who Cut Government
Puerto Rico's Luis Fortuño on the economic benefits of slashing the state
Luis Fortuño is the country's most accomplished governor when it comes to reducing the size of government, having slashed spending by 20 percent in his two-plus years as Puerto Rico's chief executive. A native of San Juan, Fortuño is a corporate lawyer who has moved in and out of politics during the last two decades, taking posts in the mid-1990s as head of the Puerto Rico Tourism Company, the island's Hotel Development Corporation, and then the Department of Economic Development and Commerce. Long active in both the Republican Party nationally and the New Progressive Party (NPP) of Puerto Rico locally, Fortuño narrowly won the office of resident commissioner for Puerto Rico in 2004, making him the unincorporated territory's official nonvoting member of the U.S. House of Representatives. In November 2008, with Puerto Rico deep in the throes of a fiscal and economic crisis, Fortuño and the NPP were swept into power by historic majorities.
Can a pro-statehood, pro-immigration Republican who believes in contracting out infrastructure and rethinking the drug war somehow influence the mainland GOP in 2011? At a time when the fiscal day of reckoning is dawning from California to Wisconsin to New Jersey, Fortuño has a compelling story to tell: The economy can improve when you reduce the size of government.
Editor in Chief Matt Welch spoke with Fortuño in February, when the governor was visiting Washington, D.C., to attend the Conservative Political Action Conference (CPAC). For the video version of the interview, go to reason.tv/video/show/puerto-rico-governor-luis-for.
reason: What did you run on back in 2008, and what did you discover once you checked under the hood of the state?
Luis Fortuño: We knew we were going to be facing a serious fiscal situation, but it was three times as bad as we thought it would be. I had said that we needed to shrink the size of government, and that I wanted to actually put back in the people's hands the money that they had earned working every day, and that was my pledge. However, when I came into office, we didn't have money to meet our first payroll; we had to take out a loan. It was really bad. So our cuts are deeper than in any other part of the country because of this dire situation that we face. Actually, the rating agencies were about to throw us into junk status, and we had to buy time to avoid that happening.
In the first two years, we have been successful in slashing the size of government by 20 percent. And because of that, we have commenced lowering taxes across the board.
reason: You had to go to New York to talk to the rating agency heads. How did that meeting go?
Fortuño: Even before being sworn in, I knew that they had been lowering our rating year after year and we were at the brink of being thrown into junk status. So in December '08, I flew up to New York, met with rating agencies, acknowledged that we had a problem. I thought it was bad, but it was much worse. But at least we told them that we had a plan. We bought six months, and we immediately started working on that plan and delivering on that plan. And that's why our rating has come up.
(Interview continues below video.)
reason: Let's get to the size of the problem. What was the budget deficit, what was the state of the economy, and how has that changed in two years?
Fortuño: Our recession commenced two full years before it started in the rest of the country. So the economy really was at a standstill at best. Secondly, our state budget deficit was the largest, proportionally speaking, in the country.
reason: Actually worse than California? Illinois?
Fortuño: Much worse proportionally. Forty-four percent of revenues was deficit. So we didn't have a choice. It's not like we wanted to do it this way or that way, or we knew it was going to be 20 percent—we just did what was right.
reason: And unemployment at the time was more or less—
Fortuño: Close to 17 percent.
reason: Concretely, what were the first steps that you took to cut the size of government?
Fortuño: Well the first step was to cut my own salary by 10 percent. You have to actually act that way if you are in public service, I feel. I slashed the cabinet secretaries' salaries by 5 percent, and then we turned to everything else as well. We slashed by 15 percent all government contracts. You know, if you wanted to contract with the government, we're going to slash 15 percent off right away.
reason: Existing contracts, you ripped up?
Fortuño: Well, we went back to them and said, "You know what, we're either moving to another place, or we slash 15 percent," because we always had escape clauses. Contracts do have escape clauses. So we told them, "We cannot continue paying you as if there is no tomorrow."
We eliminated credit cards from government, official vehicles, cell phones—my cell phone, I pay for it. I travel from my own credit card, and I get reimbursed. And then we had no choice but to turn to an overbloated government bureaucracy. By voluntary and mandatory measures, we slashed 17,000 public employee positions.
reason: Out of a total state sector of…?
Fortuño: Central government was about 140,000. About 12,000 were mandatory, and the balance were voluntary. We just had another voluntary window of early retirement, and we just added another 4,000 to that. The idea is then either to retire altogether, or we had provided them with incentives to create their own businesses or go back to school if they wanted to.
reason: The idea of economics that prevails right now is that if you cut the size of government in the teeth of recession, you're just going to make a recession into a depression. So this is an interesting experiment—you cut the size and the cost of government. What has happened to the economy in Puerto Rico?
Fortuño: Well from 17 percent, unemployment is down to 14.5 percent, and all economic indicators are moving in the right direction. Actually, by slashing taxes, I'm convinced that it will move even quicker in the right direction. But the truth of the matter is that after being in a recession for five years, this trimester we're seeing positive numbers in essentially every economic indicator.
reason: You cut government first and then taxes second.
Fortuño: We slashed individual and corporate taxes across the board. On the corporate side we had a 39 percent top corporate rate, plus a 2 percent surtax that was imposed by my predecessor. So it was actually an effective tax rate of 41 percent. We slashed that down to 30 percent this year, and to 25 percent by 2014. On the individual side, we slashed taxes by 25 percent this year, and actually it's a sliding scale—in the next five years, that will, at the end of the day, save taxpayers an average of 49 percent on their taxes. What happens halfway through it, however, is that we must balance our budget by the end of 2013. If we haven't balanced our budget, if we're not meeting our goals on the fiscal side, then we will not be moving to the next phase in 2014, '15, and '16. So that makes the taxpayer the watchdog of our tax cuts and the watchdog of a responsible government.
reason: How has the reaction been so far? I imagine that it hasn't been totally smooth. There must be people who squawk when you cut 17,000 government jobs.
Fortuño: Well, there are some that have a philosophy that the government can handle our money much better than we can. I totally disagree. I believe that, actually, people are working hard, sometimes with two or three jobs, to earn that money. They should keep it. And they know much better than any government how to handle it, starting with my own.
So I went on TV. I've been preaching this message. There is some disbelief out there; I'll be honest with you. People don't believe that actually we're slashing taxes as dramatically as we are. Because this had never happened before. The last time in Puerto Rico that the government slashed taxes was over 20 years ago. Ever since then the government has been raising taxes and taking more and more of our own money. We're moving in the right direction for the first time in a generation. And so there's some disbelief.
reason: What are the sources of opposition? Who's trying to block you?
Fortuño: Well, certainly the minority in our state legislature. The unions have been trying to block us as well. But at the end of the day, there's nothing more powerful than individual freedom to start to grow and do better for yourself and your family. And that's more powerful than any union, any government, any party, and I'm convinced that that's why this will be permanent.
reason: What message do you have to the other governors, particularly the new ones who got elected in 2010, who want to cut the size of government? What is replicable about the Puerto Rican experiment so far?
Fortuño: A lot of states are facing exactly the situation we faced two years ago. We were dead last when I started in office two years ago in terms of the size of our budget deficit. We were the worst in the country. Today we're 20th. So there are 31 states that are worse off than we are.
reason: And how have the bond ratings changed? Weren't you 51st…?
Fortuño: Exactly. And today we have the highest rating in 35 years. For the first time since 1983, the rating agencies have provided us with a positive outlook for our economy and our fiscal situation. I'm not saying this—third parties are saying this.
The new governors must act swiftly and do everything they need to do in year one. Communicate properly and level with people. If it's bad, tell people that it's bad and tell them what you're going to do. And start with your own salary. If you do that, people will buy it. There will be some pushback, but people will buy it, and there will be enough time for you to actually then lower taxes and implement pro-growth policies.
reason: You're pro-statehood.
Fortuño: We've been part of this great country since 1898. We've been citizens since 1917. And we have served in every single war in the 20th century, and the 21st century as well. So if we are good enough to fight alongside other citizens from every single state in the country in the trenches, we should be good enough to also partake in the decision-making process in this country. All laws and regulations that apply to every single state apply to Puerto Rico. But we cannot participate in that decision-making process.
reason: So you can't vote for the president, but you could run for president?
Fortuño: Yes, because we're natural-born citizens. Actually, if you move to Puerto Rico, you lose your right to vote for the president. If I move to D.C. or Virginia or California, I gain that right, because we're citizens. It's a territorial issue, not a citizenship issue.
reason: What needs to happen for statehood to be achieved?
Fortuño: It's very simple: a request by the voters of Puerto Rico, a simple majority in the House and the Senate, and a signature by the president for the enabling bill. That's it; it's a bill.
reason: Is there any traction for that on the mainland?
Fortuño: There was a bill that was approved on the House side in Washington last year; the Senate did not act upon it. So now we're back to square one, as to what we are going to do. And I know we're getting into a presidential race, so there may not be a lot of people wishing to discuss this.
reason: Puerto Rico had immigration to the mainland in the '50s and I guess in the '70s, in places like the Northeast and Florida. And also you get a lot of immigrants from places like Cuba and Haiti. Talk about how that perspective makes you different from or the same as mainstream Republicans when it comes to immigration.
Fortuño: I'm a Reagan Republican in the sense that I believe that this country needs to keep growing and opening trade and opening ourselves to ideas. I believe we need to open ourselves in an orderly, legal fashion, to new people who want to work hard, want to add to our national fabric, and want to do better for their own families. We received a lot of Cubans, for example, in the '60s and '70s, and they added tremendously to our economy and to the fabric of our society in Puerto Rico. And we're proud of that. We are receiving Dominicans lately.
If it's done in an orderly fashion, people who want to work hard should be received with open arms. And make sure that they go through the legal processes so that they can participate in this country.
reason: Should there be more visas given to immigrants than there are currently?
Fortuño: Yes, I believe we need to attract more people. Our population is not growing as fast as it needs to in order for our economy to keep growing. So we need to really sit back and decide what we want to do as a country and then provide for a process so that it can happen legally.
reason: You are also sitting in an interesting geographical place in the Caribbean. There are a lot of questions on various islands there about the effects of drug policy on your island and transshipment. What is your perspective on whether the drug war is working?
Fortuño: It's not working. It's obvious that it is not. And when the border was closed down in the Southwest, a lot of the drug trafficking then shifted toward the Caribbean area, and that's where we are. And we have seen an increase in violence in our region. That is of grave concern to all of us. Either we need resources to handle this, or policies have to be amended. But something must give; otherwise we will continue in this violent way.
reason: When you say policies have to be amended, is there anything in particular that you personally advocate?
Fortuño: Right now what I want is to make sure that we have the resources to handle this. We are not provided adequate resources. People forget that we are the third border, shall we say, and that our area has to be treated as the northern and southern border. Because the moment you're in Puerto Rico, you're in Iowa—really, there are no immigration papers or anything that you have to fill out. It's like flying from L.A. to New York. It's exactly the same thing.
I believe—and we're doing what I'm going to tell you—that those who have an addiction must be treated not as criminals but as people who actually have an addiction. We are providing medical processes to treat people who have an addiction.
reason: Talk briefly about some of the things you're doing in terms of getting private-sector money to do things.
Fortuño: Well, it is obvious that our government no longer has the kind of money that we used to have to develop our basic infrastructure. So we went around the world, and we looked at the Canadian model, the Australian model, the European model, and then we drafted our own public/private partnership legislation. It is extremely effective and is attracting a lot of capital from all over the world to construct and maintain schools, roads and highways, airports, water projects, energy projects. The interest that we have attracted is unbelievable. Instead of having a project for one highway in one state, states should move toward having public/private partnership programs, so that all our infrastructure can be upgraded by private capital. That is done on a regular basis in many other countries. For some reason, in the States that's not being done, with very few exceptions. I believe we can be the showcase for public/private projects for the rest of America, given what we've seen and what will be seen in 2011.
reason: Where are you in that process?
Fortuño: Phase one is 100 schools. We already contracted out [construction and maintenance of] about 30, 35 of them, which should be finished by the end of the summer. In the second quarter of this year, we will have contracted out two highways, and we're hoping that by the second half of this year, we'll be able to contract out our main airport.
reason: Talk a little bit about your personal philosophy.
Fortuño: Well, I was in school here in D.C. back in the late '70s, early '80s, and I lived through the end of Carter and Reagan. And it was really President Reagan who brought me into the party, and then I started reading a lot about it, and following what was going on. And I saw how tough it was at the beginning of President Reagan's term to actually clamp down on runaway government, but at the end of the day we then experienced the longest growth we have ever experienced, except for a period of wars. So it worked, and it worked extremely well back in the '80s.
reason: Even though he didn't actually cut government.
Fortuño: Well, there was an arms race going on—states, thank goodness, don't have to worry about that. So that was another aspect that actually affected that policy. But if you take away the arms race, he indeed was able to slash the size of government. So I felt that if you apply that at the state level, it should work. And that's exactly what we've done.
reason: You're in the middle of CPAC here. There's a foofaraw over whether CPAC is becoming too tolerant toward gay Republican groups. Where do you stand on social issues?
Fortuño: Well, I'd tell you, I believe in the free flow of ideas. I don't think the government, or anybody else, should try to stop that. That's why we are the freest and greatest nation in the world. And to try to stop that—you may disagree with some of the groups that are maybe there, but that's great—you should be exposed to their ideas, and then you should decide whether you disagree or agree with them. But I don't believe in shutting out different groups.
reason: Do you have any ambitions to get involved in national, mainland politics?
Fortuño: Well, I want to see—I want to assist the Hispanic community in many ways. And I would love to see the Republican Party embrace the Hispanic community even more so than it does today. So to the extent that I can assist in that, I would love to be helpful in that area.
reason: Looking at the national scene, what other politician or governors do you see as either a role model or a colleague? Someone you think is pointing in the right direction for public policy in general.
Fortuño: Well, I believe Mitch Daniels is doing an excellent job in Indiana. He actually tried a public/private program with one or two highways, as I understand it. Tim Pawlenty did a few things that were interesting in handling size of government in Minnesota, and I enjoyed sitting down with him. I just spoke with a new governor, Rick Scott from Florida, and they're doing what we have already done in terms of use of Medicaid funds in trying to move to greater flexibility for beneficiaries.