Puerto Rican Financial Crisis

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In 2015, the governor of Puerto Rico admitted that the island would not, in any way, be able to pay off the $72 billion that the nation had accrued in debt. Here are five key things to know about the causes and the issues surrounding the Puerto Rican financial crisis.

The Numbers

Puerto Rico owes almost 100% of its total annual economic output, and they owe a $2 billion payment on July 1st. 

In total, Puerto Rico owes $72 billion dollars. Already, two government agencies have defaulted, and on July 1, 2016, the government has a $2 billion payment that it most likely will not be able to make. At double the U.S. national average in recent years, unemployment in Puerto Rico is about 12%, and the percentage of people living in poverty is 45%.

The Tax-Exemptions

Economic policies that once developed the economy left the island in economic stagnation, and the government used high bond investing rates to cover budget shortfalls and save them for a later date.

A combination of two tax exemptions has allowed the crisis to evolve over time. The first, known as Section 936, was signed into law in 1976. In order to spur the economic development of the U.S. territory, a large tax break was given to manufacturers who brought factories to the island. As a result, textile, electronics, and pharmaceutical industries thrived, employing a large percentage of the Puerto Rican labor force. However, the ubiquitous presence of these industries caused Puerto Rico to neglect other important industries, including tourism and services. In the 1990s, when Congress declared Section 936 was “an expensive giveaway,” the tax break was slowly decreased. In 2006, Section 936 was officially phased out of the economy, costing Puerto Ricans 80,000 jobs, and the island plunged into a recession which still continues today. Due to the lack of tourism on the island, the economy has had extreme difficulty in making transitions. 

In addition, the Jones-Shafroth Act, signed into law in 1917 by President Woodrow Wilson, provided a triple-tax exemption for the island’s economy. Under this law, Puerto Rican bonds are tax-exempt from any local, state, and federal taxes in the United States (hence the “triple-tax”). As a result, Puerto Rican bonds have maintained extreme popularity. However, one century later, the Puerto Rican government has consistently used their advantage in this market to ruin their economic situation. Often times, bonds will be sold to plug annual deficits and pay for operating expenses, which have become increasingly more expensive due to the relatively high standard of living on the island, as compared to the rest of the Caribbean. As a result, in just ten years, the island’s deficit doubled.

The Bankruptcy Problem

Under U.S. law, Puerto Rico lacks the ability to file for bankruptcy and to restructure their debts. 

Unlike cities which are legally allowed to declare Title IX Bankruptcy, such as Detroit, Puerto Rico does not have this legal privilege. Declaring bankruptcy would allow the U.S. territory to manage and restructure their debts in a much more organized way. Specifically, they would be able to avoid protracted litigation and cut liabilities surrounding the crisis. As of March 2016, Congress has not taken any action on the issue. If Puerto Rico is not allowed to formally declare bankruptcy, they will still deal with the threat of default, and it will most likely create a larger crisis than the one that currently exists.

Where the Parties Stand

Although in general agreement, Congress has yet to put together and act on a cohesive plan for addressing the economic crisis. 

Although not considered a partisan issue in U.S. politics, there are some differences in thought between the two major political parties. The Obama Administration and the Democratic Party believe that the best way to deal with the crisis is to extend Title IX Bankruptcy benefits to the territory in order to restructure their debts. Federal oversight would also be included in the process to repay the financial deficit. Republicans carry varying opinions on the issue. Most would like to investigate the situation further by looking into economic data and root causes of the crisis. Some conservatives, including the Heritage Foundation, are referring to any action as a bailout, although that is an incorrect characterization of the stances of both parties. 

Outside of the political world, investors and insurers are against any aid to the island’s economy because it may force them to take losses on their investments. 

Effect on the Puerto Ricans

Puerto Ricans are leaving for the mainland in masses, and those who remain may face a humanitarian crisis if the government has to choose between paying for healthcare, school, law enforcement, and lowering the debt. 

Just as one might expect, this ten year recession and crisis has caused an exodus of Puerto Ricans to the U.S. mainland. Every week, about 3,000 Puerto Ricans leave their homes and migrate to locations such as central Florida, New York City, and Philadelphia. In total, about 10% of the population has left since the beginning of the financial downturn. The governor has also warned that soon police officers, firefighters, and other government employees are going to have to be laid off, leading to even greater problems. Eventually, a lack of public funding could lead to a humanitarian crisis. 

In regards to politics, this crisis has exacerbated divisions among Puerto Ricans on the issue of statehood. Those in favor of statehood for the island argue that the financial crisis clearly demonstrates why the territory should join the union and reap the benefits of total federal representation. Those in favor of independence argue that the lack of concern by the United States government represents an American indifference towards the welfare of the Puerto Rican community and its people.