Puerto Rican government-debt crisis

Distribution of Puerto Rico's outstanding debt
Puerto Rico's budget expenses in relation to its debt obligations. Almost 9.6%—or about $1.5 billion—of Puerto Rico's central government budget expenses for FY2014 was expected to be spent on debt service.[lower-alpha 1]

The Puerto Rican debt crisis is an ongoing financial crisis related to the amount of debt owed by the government of Puerto Rico. The island has more than $70 billion USD of outstanding debt, with a debt-to-GDP ratio of about 68%.[lower-alpha 2] In February 2014, various American credit rating agencies downgraded the government's debt to non-investment grade.

The crisis has caused Puerto Rico's government to adopt policies that will ideally reduce costs drastically, increase revenues, and spark economic growth so that it can better fund its debt obligations. Puerto Rico's economy has been described as precarious, weak, and fragile, and aggravated by social distrust and unpleasantness.[lower-alpha 3][lower-alpha 4]

On August 3, 2015, Puerto Rico defaulted on a $58 million bond payment to the Public Financing Corporation, a subsidiary of the Government Development Bank, while other financial obligations were met.[4]

Background

In the beginning of the 16th century, the Spaniards colonized Puerto Rico and spread the Catholic faith through indigenous conversions. In 1898, Puerto Rico was ceded to the United States, at the end of the Spanish–American War. Prior to that, the people of Puerto Rico enjoyed Spanish citizenship; after Puerto Rico was no longer part of Spain, the people of Puerto Rico effectively lacked citizenship from a sovereign country after it was ceded: the people of Puerto Rico were neither Puerto Rican citizens, nor American citizens, nor Spanish citizens. Because of this, on April 12, 1900, the U.S. Congress enacted the Foraker Act, establishing Puerto Rican citizenship for people born in Puerto Rico.

Four years later, the U.S. Supreme Court reaffirmed Puerto Rican citizenship in 1904 by its ruling on Gonzales v. Williams which denied that Puerto Ricans were United States citizens and labeled them as non-citizen US nationals.[5] This ruling effectively restricted Puerto Ricans from being conscripted to US military service. Because of this and other local and mainland interests, Congress enacted the Jones–Shafroth Act on March 2, 1917, on the brink of World War I. This act granted American citizenship to the people of Puerto Rico, which allowed them to be drafted into military service.

Among the rights granted through the legislation, the Jones-Shaforth Act exempted interest payments from bonds issued by the government of Puerto Rico and its subdivisions from federal, state, and local income taxes (so called "triple tax exemption") regardless of where the bond holder resides.[lower-alpha 5][lower-alpha 6] This right made Puerto Rican bonds attractive to municipal investors.[lower-alpha 6][lower-alpha 7] This advantage strives from the restriction typically imposed by municipal bonds enjoying triple tax exemption where such exemptions solely apply for bond holders that reside in the state or municipal subdivision that issues them.

This factor led Puerto Rico to issue bonds that were always attractive to municipal investors, regardless of Puerto Rico's account balances.[lower-alpha 8] Puerto Rico thus began to issue debt to balance its budget, a practice repeated for four decades since 1973.[8] The island also began to issue debt to repay older debt, as well as refinancing older debt possessing low interest rates with debt possessing higher interest rates.[9]

It was not until Puerto Rico enlarged its outstanding debt to $71 billion USD —an amount approximately equal to 68% of Puerto Rico's gross domestic product (GDP)—that Puerto Rican bonds were downgraded to non-investment grade (better known as "junk status" or speculative grade) by three bond credit rating agencies between February 4–11, 2014.[10] This downgrade triggered bond acceleration clauses that required Puerto Rico to repay certain debt instruments within months rather than years.[lower-alpha 9] Investors were concerned that Puerto Rico would eventually default on its debt.[lower-alpha 10] Such default would reduce Puerto Rico's ability to issue bonds in the future. Puerto Rico currently requires as it is unable to maintain its current operations unless it takes drastic measures that may lead to civil unrest; as it already has.[lower-alpha 11][lower-alpha 12]

These events, along with a series of governmental financial deficits and a recession, have led to Puerto Rico's current debt crisis while the current debt crisis has been ongoing with Greece simultaneously.

Causes

Suzerainty to the United States

Puerto Rico is subject to the Commerce and Territorial Clause of the Constitution of the United States and, therefore, is restricted on how it can engage with other nations, sharing most of the opportunities and limitations that state governments have, albeit not being one. Puerto Rico is also subject to the different treaties and trade agreements ratified by the United States, as well as all other laws enacted at the federal level.

Map of Jones Act carrier routes for Puerto Rico.

Many reports claim that the Merchant Marine Act of 1920, better known as the Jones Act, imposes a significant cost to Puerto Rico.[lower-alpha 13][lower-alpha 14][lower-alpha 15][lower-alpha 16][lower-alpha 17] The act prevents foreign-flagged ships from carrying cargo between two United States ports—a practice known as cabotage—as foreign ships inbound with goods from Central and South America, Western Europe, and Africa cannot stop in Puerto Rico, offload Puerto Rico-bound goods, load mainland-bound Puerto Rico-manufactured goods, and continue to U.S. ports. Instead, they must proceed directly to U.S. ports, where distributors break bulk and send Puerto Rico-bound manufactured goods to Puerto Rico across the ocean by U.S.-flagged ships.[lower-alpha 18]

However, the weight of the act on the Puerto Rican economy is a contentious point amongst scholars. On one hand, for example, a recent GAO study reported that there were far too many factors impacting the cost of transportation and the cost of consumer goods in Puerto Rico to adjudicate a specific cost to the Jones Act, suggesting there might not be any.[13] Yet, on the other hand, shippers interviewed by GAO itself indicated that opening the trade to non-U.S.-flag competition could lower costs.[lower-alpha 17] Elías Gutierrez, an economist, urban planner, and former director of the School of Planning of the University of Puerto Rico, asserts that, "Under the protection of federal statutes, a monopsony has been siphoning scarce resources from the poorest U.S. jurisdiction to sustain a segment of U.S. industry that has become uncompetitive due precisely to the protection it has enjoyed."[11] He further explains that, "Although the Commonwealth of Puerto Rico and the United States should be considered the senior partners in a common market, the Cabotage laws, in practical terms, constitute a protective barrier that favors Mexican and Canadian ports of origin and destination against producers in Puerto Rico."[11] The Journal of Commerce agrees with Gutierrez noting that, "repealing or amending the Jones Act cabotage law might cut Puerto Rico shipping costs."[lower-alpha 16] In general, detractors of the Jones Act claim that Puerto Rican consumers ultimately bear the expense of transporting goods again across the Atlantic and Caribbean Sea on U.S.-flagged ships subject to the extremely high operating costs imposed by the Jones Act.[lower-alpha 19]

The local government of Puerto Rico, however, has requested several times to the U.S. Congress to exclude Puerto Rico from the Jones Act restrictions. Each request has not been granted. [lower-alpha 20]

Another federal statute that contributed to the crisis was the expiration of the section 936 of the U.S. Internal Revenue Code which applied to Puerto Rico.[lower-alpha 21] This section was critical for the economy of the island as it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating in the island to send their earnings to the parent corporation at any time, without paying federal tax on corporate income. The whole economy of the island based itself around this privilege, and has been unable to recoup after its loss.[lower-alpha 21]

Puerto Rico also receives less federal funds when compared to states of the United States, although most residents of Puerto Rico do not pay federal income taxes.[lower-alpha 22] The island is usually treated as if it were a state for all legislative purposes, albeit not enjoying all the benefits of being one.[lower-alpha 23]

In terms of monetary policy, Puerto Rico does not control its money supply, nor its coinage, nor its interest rates as it uses the U.S. dollar for currency and is subject to the Federal Reserve as its central bank even though it is not a state of the United States.

Puerto Ricans, however, have held a referendum three times on whether they should seek to join the United States as a state of the Union, or become an independent sovereign nation. Only in the latest referendum have Puerto Ricans chosen statehood as a majority.

All this positions Puerto Rico at a disadvantage when compared to U.S. states and neighboring countries in the Caribbean; another factor that contributed to Puerto Rico's aggressive bond issuing in order to spark economic growth and stabilize its finances.

Disparity in federal social funding

More than 60% of Puerto Rico's population receives Medicare or Medicaid services.[17] There is a significant disparity in federal funding for these programs when compared to the 50 states, a situation started by Congress in 1968 when it placed a cap on Medicaid funding for United States territories.[17] This has led to a situation that Puerto Rico might typically receive $373 million federal funding a year, while, for instance, Mississippi receives $3.6 billion.[17] Not only does the situation lead to an exodus of underpaid health care workers to the mainland, but the disparity has had a major impact on the finances of Puerto Rico forcing it to borrow money to keep Mi Salud afloat which is its Medicaid program that affects about 40% of the population.[17]

Costs of importing fossil fuels

PREPA's operating expenses for FY2013 denote how fuel purchases take over 58% of the authority's operating expenses.

Puerto Rico does not have any coal, natural gas, nor oil reserves[18] so it must import all its fuel in order to produce energy. The Puerto Rico Electric Power Authority (PREPA), a government-owned corporation, produces 70% of all energy in Puerto Rico through several power plants dependent on fossil fuels. 58% of PREPA's budget goes directly to these costs. Additional indirect costs of imported fossil fuels are paid through power purchase agreements for the 30% of the country's energy produced through private companies dependent on fossil fuels. To meet energy demands, Puerto Rico must import oil at a rate of 8.0 billion kWh and about 1,499,196 km3 of natural gas per year[44] as well as a very large amount of coal.

Perplexingly, less than 3% of all energy is produced through renewable energy even though Puerto Rico enjoys more than 65% sunny hours per day in average and 19-knot (22 mph; 35 km/h) winds year round. The island could also generate all its energy through hydroelectric dams due to its local geography which features many rivers. Biofuel, biomass, geothermal energy, wave power and tidal power are still in its infant stages although there are some microbusinesses providing energy from those sources or performing research on the subject. The Puerto Rican government has made plans to reduce dependency on costly imported fossil fuels,[18] but lacks funds to make more than modest progress.

As a result, Puerto Ricans pay 26¢ per kilowatt per hour of electricity, compared to an average of 11 to 12 cents or less in the United States.[lower-alpha 24] This places Puerto Rico at an enormous disadvantage when compared to other states that produce electric power at less than half of Puerto Rico's price.[lower-alpha 24][20] Electric utility costs ultimately create a ripple effect on the economy as it adds to the cost of living and the cost of doing business.[lower-alpha 25] For example, 20% of Bacardi's expenses on the island come from electricity, while the company that owns all Wendy's, Applebee's, and LongHorn Steakhouse on the island has simply opted to keep the lights and air conditioning off in certain areas when employees arrive.[lower-alpha 26][lower-alpha 27] A similar situation occurs with Puerto Rico's comparably high water utility prices.

Labor costs

The cost of doing business in Puerto Rico is further increased by complex labor laws that force employers to pay for several employee benefits from their own pockets.[22][23][24][25] Puerto Rico also lacks at-will employment—an absence that puts significant restraints on employers when they want to dismiss an employee.[lower-alpha 28]

The state, despite a much weaker economy, also adheres to the U.S. minimum wage, which increases labour cost. One study commissioned by the local government, for example, concluded that, "Employers are disinclined to hire workers because the US federal minimum wage is very high relative to the local average."[27]

All these constraints diminished Puerto Rico's ability to grow economically. As Puerto Rico experienced downturns for several years, the government opted to issue more debt to stabilize its finances rather than make adjustments.[28]

Taxation complexities

Residents of Puerto Rico are also subject to a highly complex tax system with many different exemptions and disparities between taxes.[lower-alpha 29] For example, an ordinary retail sale might have to pay: import taxes, sales taxes, property taxes, corporate net income taxes, national taxes, excise taxes, and sin taxes depending on the item being sold.

Triple tax exemption

Interest income paid to owners of bonds issued by the government of Puerto Rico and its subdivisions are exempt from federal, state, and local taxes (so called "triple tax exemption").[lower-alpha 6] Unlike most other US triple tax exempt bonds, Puerto Rican bonds retain tax exemption regardless of where the bond holder resides in the United States,[lower-alpha 5][lower-alpha 6][lower-alpha 7] a marketing and sales advantage consequent to the restriction typically imposed on municipal bonds with triple tax exemption in which exemptions are available to bond holders that reside within the state or municipal subdivision that issues the bonds. Triple tax exempt bonds are considered subsidized because bond issuers can offer a lower interest rate to satisfy bond holders; as a result, Puerto Rico can issue more debt.

Mismanagement and disparity

The local government has proven to be highly inefficient in terms of management and planning; with some newspapers, such as El Vocero, stating that the main problem is inefficiency rather than lack of funds.[lower-alpha 30][lower-alpha 31] As an example, the Department of Treasury of Puerto Rico is incapable of collecting 44% of the Puerto Rico Sales and Use Tax (or about $900 million USD), did not match what taxpayers reported to the department with the income reported by the taxpayer's employer through Form W-2's, and did not collect payments owned to the department by taxpayers that submitted tax returns without their corresponding payments.[lower-alpha 32][32][33] The Treasury department also tends to publish its comprehensive annual financial report (CAFR) late, sometimes 15 months after a fiscal year ends, while the government as a whole constantly fails to comply with its continuing disclosure obligations on a timely basis.[34][lower-alpha 33] Furthermore, the government's accounting, payroll and fiscal oversight information systems and processes also have deficiencies that significantly affect its ability to forecast expenditures.[lower-alpha 34]

Similarly, salaries for government employees tend to be quite disparate when compared to the private sector and other positions within the government itself. For example, a public teacher's base salary starts at $24,000 while a legislative advisor starts at $74,000. The government has also been unable to set up a system based on meritocracy, with many employees, particularly executives and administrators, simply lacking the competencies required to perform their jobs.[lower-alpha 35][lower-alpha 36]

There was a similar situation at the municipal level with 36 out of 78 municipalities experiencing a budget deficit, putting 46% of the municipalities in financial stress.[37] Just like the central government, the municipalities would issue debt through the Puerto Rico Municipal Financing Agency to stabilize its finances rather than make adjustments. In total, the combined debt carried by the municipalities of Puerto Rico account for $3.8 billion USD or about 5.5% of Puerto Rico's outstanding debt.[lower-alpha 37][lower-alpha 38]

Political stubbornness

The political class has proven to be highly stubborn when examining existent public policies.[lower-alpha 39][lower-alpha 40] This stubbornness ultimately forced Puerto Rico to incur higher opportunity costs. For example, even though the island's geography features many rivers, the government has opted to leave the hydroelectric industry behind. Public policy has also opted not to pursue nuclear power either. Instead, even though Puerto Rico does not have any oil-based resources, it has opted to power its electric plants with fossil fuels: less than 3% of all energy is produced through renewable energy even though Puerto Rico enjoys more than 65% sunny hours per day in average and 19-knot (22 mph; 35 km/h) winds year round. This forces PREPA, the government-owned corporation and government monopoly that owns and manages all electric power distribution and transmission, to spend 58% of its operational expenses in fuel purchases alone.

In terms of food production, Puerto Rico imports 85% of its food even though most of the land is arable with only 6% being infertile.[41][42] This perplexing situation has been caused due to a shift in priorities towards industrialization, bureaucratization, mismanagement of land, lack of alternative methods, and a deficiency in the number of agricultural workforce.

Similarly, when looking at forestry, even though a study conducted more than two decades ago by the U.S. Forest Service concluded that local soil could sustain a lumber industry if the proper species were used, almost all wood used on the island is imported.[43]

Higher education suffers the same fate: Puerto Rico spends almost $800M per year on its state university. While the university has a productive engineering school located at the Mayagüez campus, and the Río Piedras campus and nearby Medical Science Campus are home to the premier law and medicine schools in the island, the university suffers from a highly politicized management structure, making it vulnerable to the government's lack of fiscal responsibility. Although its six-year persistence and graduation rates are higher than the University of Wisconsin, Texas A & M University, University of Washington, and the University of Minnesota[44], the system graduates about 12,000 students per year while the Puerto Rican labor market generates only about 6,000 jobs per year, 25% of which require a college education.[lower-alpha 41] This effectively means that the Puerto Rican labor market has no demand for 97% of those who graduate with an undergraduate or graduate degree from the state university.

The same occurs in primary education and secondary education: Puerto Rico spends almost $4 billion per year in its public education system even though 40% of all the students that enter tenth grade in public schools in Puerto Rico drop out and never finish secondary education.[46][47] In addition, ninety-five percent (95%) of public school students in Puerto Rico graduate at a sub-basic level while sixty percent (60%) do not even graduate.[48] Furthermore, according to the Department of Education of Puerto Rico, thirty-nine percent (39%) of public school students perform at a basic level (average performance) in Spanish in the Puerto Rican Tests of Academic Achievement.[49] Likewise, 36% perform at a basic level in Mathematics while 35% perform at a basic level in English and 43% at a basic level in Science in the relevant tests.[49] Overall, 1,321 out of 1,466 public schools in Puerto Rico (about 90%) do not comply with the academic progress requirements established by the No Child Left Behind Act.[50]

The government's inability to correct these perplexing situations led to Puerto Rico to remain uncompetitive against other nations in Latin America and the Caribbean, with many residents opting to emigrate to the United States for a better quality of life and a lower cost of living. As with other scenarios, the political class opted to issue bonds rather than make adjustments and transform its society and economy.[lower-alpha 42]

Economic depression

Puerto Rico has been experiencing an economic depression for 11 consecutive years, starting in late 2005 after a series of deficits and the expiration of the section 936 that applied to Puerto Rico of the U.S. Internal Revenue Code. The government has also experienced 16 consecutive government deficits since 2000, exacerbating its fragile economic situation as the government issued new debt to fund the payment for maturing debt.[lower-alpha 43]

Population decline

From 2000 to 2010, the population of Puerto Rico decreased, the first such decrease in census history for Puerto Rico; it went from 3,808,610 residents registered in 2000 to 3,725,789 in 2010 (a −2.2% decrease);[52] it peaked at 3.91 million in 2005.[53] A declining and aging population presents additional problems for any society as its labor force decreases and, consequently, so does its economic output.[lower-alpha 44] Two years later, another estimate noted that the population of Puerto Rico decreased further to 3,667,084 residents from April 1, 2010 to July 1, 2012; a −1.6% decrease.[54]

Emigration is also major part of Puerto Rico's declining population. Starting soon after World War II, poverty, cheap airfare, and promotion by the local government caused waves of Puerto Ricans to move to the United States. This trend continued even as Puerto Rico's economy improved and its birth rate declined. In recent years, the population has declined markedly, falling nearly 1% in 2012 and an additional 1% (36,000 people) in 2013 due to a falling birthrate and emigration.[55]

As fewer people reside in Puerto Rico, the government collects less revenue from its residents. With lesser revenues, the government opted to issue more outstanding debt to maintain its operations rather than making adjustments.

Downgrade

Puerto Rico was effectively downgraded to non-investment grade on February 4, 2014 by Standard & Poor's when it downgraded Puerto Rico's general obligation debt (GO) from BBB- status to BB+, one level below investment grade.[56] The agency cited liquidity concerns for its downgrade and maintained a negative outlook on its watch.[57] Moody's would follow three days later by downgrading Puerto Rico's GO debt on February 7, 2014 from Baa3 to Ba2, two levels below investment grade.[58] Moody's, however, cited lack of economic growth for its downgrade while assigning a negative outlook to the government's ratings. Fitch Ratings would be the last to downgrade on February 11, 2014 by downgrading Puerto Rico's GO debt from BBB- to BB, two levels below investment grade.[10] Fitch cited both liquidity concerns and lack of economic growth for its downgrade while assigning a negative outlook to the government's ratings.

Each and every one of these downgrades triggered several acceleration clauses which forced Puerto Rico to repay certain debt instruments within months rather than years.[lower-alpha 9]

Forbearance

On June 28, 2015, in a surprising turn of events, Governor García Padilla admitted publicly that, "the debt is not payable", and that, "[if his administration doesn't make the economy grow] we will be in a death spiral".[lower-alpha 45][lower-alpha 46] Previous to García Padilla's admittance, various government instrumentalities had already entered into forbearance agreements with their lenders but the warning still provoked a drop in Puerto Rican bonds and stocks.[60][61]

Reactions

Reactions to the crisis have so far been ordinary and predictable: taxes were hiked, expenses were cut, contracts were renegotiated, reforms were enacted, social unpleasantness increased, and so on. Fortunately, civil unrest have been minimal with no major concerns expected although pessimism is high and prevalent on the island.[62] In general, the people of Puerto Rico and its politicians are aware of the implications and inherent costs of the crisis.[lower-alpha 47][64] Some groups, however, rejected to adopt changes that affected them either because they believe they should not pay for errors committed by others, or because they have already sacrificed enough before and during the crisis. At the national level, White House officials categorically stated several times that the federal government of the United States would not bail out Puerto Rico but that it would monitor the situation closely.[lower-alpha 48][66] Interestingly, some Puerto Rican bonds even experienced a rally, although it is too soon to determine what the future will be for Puerto Rico and its people.[lower-alpha 49]

Local market

Around $30 billion or about 42% of Puerto Rico's outstanding debt is owned by residents of Puerto Rico. As financial experts mull over Puerto Rico defaulting on its debt, local bond holders deal with the inherent risk of losing income based on yields, as well as a loss of value on their financial assets backed up by Puerto Rican bonds.

Microeconomically, the residents of Puerto Rico and its business people have been the ones bearing the hike in taxes and cuts performed by the government in order to stabilize its finances. Michele Caruso from CNBC reported on January 24, 2014 that, "Taxes and fees went up on nearly everything and everyone. Personal income taxes, corporate taxes, sales taxes, sin taxes, and taxes on insurance premiums were hiked or newly imposed. Retirement age for teachers was raised from as low as 47 to at least 55 for current teachers, and 62 for new teachers."—a significant cost to bear for a country with a purchasing power parity (PPP) per capita of $16,300 USD and with 41% of its population living below the poverty line.[lower-alpha 50][2]

The Legislative Assembly, together with the governor, also reduced operating deficits, and reformed the public employee's, teacher's, and judicial pension system.[lower-alpha 51] They also announced the intent to further reduce appropriations in the current fiscal year by $170 million and budget for balanced operations for the upcoming fiscal year.[lower-alpha 52]

As another countermeasure, the 17th Legislative Assembly of Puerto Rico enacted a bill on March 3, 2014 allowing the Puerto Rico Government Development Bank to issue $3.5 billion USD in bonds to recover its liquidity. The governor promptly signed the bill the day after, effectively becoming law as Act 34 of 2014 (Pub.L. 2014-34).[68][69]

U.S. municipal market

Nearly 70% of U.S.-based municipal bond funds own Puerto Rican bonds or have some kind of exposure to Puerto Rico.[lower-alpha 53] A notable cause for this tendency is the fact that Puerto Rican bonds are triple tax-exempt in all of the states regardless of where the bond holder resides.[lower-alpha 6] Despite the expected impact, preemptive measures actually slowed the damage of the downgrade's fallout.[70] When the downgrade began being perceived as imminent, investors were warned that it would affect the municipal market in general and concerns surrounding a worst-case default scenario were already being considered.[71] However, by the end of February 2014, municipal bond funds that relied on specific debt were already experiencing the backlash, leaving portfolio managers with fewer options in the market.[72] Organizations such as First Investors made it clear that they didn't intend to invest in Puerto Rico for a prolonged time period, at least until Puerto Rican bonds were restored to investment grade.[72]

Skepticism

Several experts, including Senator Ángel Rosa, have expressed that Puerto Rico's debt is simply impossible to repay, and have thus recommended that Puerto Rico should instead negotiate payback terms with bond holders.[73] Others, such as economist Joaquin Villamil, have found necessary that Puerto Rico issues debt at least once more to return liquidity to the Puerto Rico Government Development Bank and be henceforth able to repay back its debt.

Some, like House Minority Whip Jennifer González, claim the crisis is mere propaganda created so that the incumbent political party can enact, amend, and repeal laws that would otherwise be unable to justify.[lower-alpha 54][lower-alpha 55] Others, such as the President of the Senate of Puerto Rico, Eduardo Bhatia, claim the crisis was created by ruthless investors wishing to profit from credit downgrades.[74]

Proposed solutions

Restructuring of debt

The government of Puerto Rico commissioned an analysis of its financial problems asking for solutions that resulted in the "Krueger Report" published in June 2015.[40] The report called for structural and fiscal reforms as well as for a restructuring of outstanding debts.[75]

One month later, a report was published that rejected the need for debt restructuring. It was commissioned by a group of 34 hedge funds that specialize in distressed debt —sometimes referred to as vulture funds— who had hired economists with an IMF background. Their report indicated that Puerto Rico has a fixable deficit problem, not a debt problem. It recommended to improve tax collection and reduce public spending.[76] The report also recommended to consider public private partnerships and to monetize government-owned buildings and ports. The report made use of data of the Krueger Report and warned that the costs of default would be high.[76] One of the authors opined that Puerto Rico has been "massively overspending on education".[77] Detractors remark that Puerto Rico's spending on education is only 79% of U.S. average per pupil while supporters remark that when compared to Puerto Rico's GDP such spending is extraordinarily high.[77]

In response to the hedge fund report, Víctor Suárez Meléndez, chief of staff of the governor of Puerto Rico, indicated that "extreme austerity [alone] is not a viable solution for an economy already on its knees".[77]

On October 14, 2015, The Wall Street Journal reported that "U.S. and Puerto Rican authorities were discussing the possibility of issuing a "superbond" as part of a restructuring package". This plan would have a designated third party administer an account holding some of the island's tax collections and those funds would be used to pay holders of the superbond. The existing Puerto Rican bondholders would take a haircut on the value of their current bond holdings.[78]

Debt nullification

Manuel Natal and some other lawmakers have proposed not to pay that part of the debt that may have been issued in violation the Puerto Rican constitution.[79] This strategy of "debt nullification" has been used elsewhere in the U.S. and is likely to lead to a legal challenge by creditors.[79]

More autonomy

As Puerto Rico's financial problems are closely related to its ambiguous legal status under U.S. law, a proposed solution called to reconsider its political status so that either its autonomy would be enhanced or it would be entitled to have similar protections and rights as bestowed by statehood.[80]

Bailout by the US federal government

On October 15, 2015, White House spokesman Josh Earnest denied reports that the US Treasury will bail out Puerto Rico.[78]

Bankruptcy

Puerto Rico or any of its political subdivisions and agencies cannot file for debt relief under chapter 9 of the federal Bankruptcy Code because it applies only to municipalities on the mainland.[78] Puerto Rico's nonvoting representative in the US House of Representatives, Pedro Pierluisi, introduced H.R. 870 in February 2015 seeking to give Puerto Rico's public agencies and municipalities access to chapter 9. In the US Senate, members submitted similar legislation in July 2015. But, neither bill was enacted.[81] In December 2015, the New York Times addressed investments in Puerto Rico securities by major distressed-debt and other hedge funds. John Paulson’s firm Paulson & Co., Appaloosa Management founded by David Tepper, Marathon Asset Management, BlueMountain Capital Management and Monarch Alternative Capital were amongst purchasers of bonds in March 2014. The Times also traced opposition from the hedge funds, US Senator Marco Rubio, and Jenny Beth Martin of Tea Party Patriots to Congressional bills which would expand public-authority bankruptcy restructuring options.[82]

See also

Notes

  1. ↑ PRGDB "Financial Information and Operating Data Report to October 18, 2013" p. 142[1]
  2. ↑ Caruso Cabrera (2014) "The island, a territory of the United States, is in the midst of a debt crisis."[2]
  3. ↑ GDB (2014) "The Commonwealth’s very high level of debt may affect the performance of the economy and government revenues."[3]
  4. ↑ GDB (2014) "The Commonwealth [...] will be required to reduce the amount of resources that fund other important governmental programs and services in order to balance its budget."[3]
  5. 1 2 Pub.L. 64–145 §3 "[...] all bonds issued by the government of Porto Rico, or by its authority, shall be exempt from taxation by the government of the United States, or by the government of Porto Rico or of any political or municipal subdivision thereof, or by any state, or by any county, municipality, or other municipal subdivision of any state or territory of the United States, or by the District of Columbia."
  6. 1 2 3 4 5 Caruso Cabrera (2013) "That's because the island's bonds have what's known as "triple exemption." No matter what state you live in, if you own a Puerto Rico bond, you don't pay federal, state or local taxes on the interest."[2]
  7. 1 2 Roos "Some taxpayers also have to pay state and local income taxes, depending on where they reside. In this case, a triple tax-free municipal bond—exempt from federal, state and local taxes—is highly attractive."[6]
  8. ↑ Ismalidou; Trianni (2014) "Puerto Rico’s over-borrowing was facilitated by an eager group of U.S. investors. U.S. mutual funds were more than willing to buy Puerto Rico bonds, because the island has a special financial advantage: its bonds are triple tax-exempt [...] This created a large buyers base for Puerto Rico’s bonds, which encouraged the commonwealth to keep issuing debt."[7]
  9. 1 2 Caruso Cabrera (2014) "Moody's estimates that if Puerto Rico does get downgraded to junk status, it faces $1 billion in additional short-term costs due to collateral calls on loans that are contingent on Puerto Rico not being rated junk."[2]
  10. ↑ GDB (2014) "The Commonwealth’s liquidity has been adversely affected by recent events, and it may be unable to meet its short-term obligations."[3]
  11. ↑ GDB (2014) "If the Commonwealth’s financial condition does not improve, it may lack sufficient resources to fund all necessary governmental programs and services as well as meet debt service obligations. In such event, it may be forced to take emergency measures."[3]
  12. ↑ GDB (2014) "If the Commonwealth is unable to obtain financing through the issuance of tax and revenue anticipation notes, it may not have sufficient resources to maintain its operations."[3]
  13. ↑ Gutierrez. "Mr. Chairman, we are here to express our support for any effort that would unburden the economy of the Commonwealth of Puerto Rico from the unfair and unreasonable restrictions that stem from dispositions of the Merchant Marine Acts of 1920 and 1936 on trade conducted between the Commonwealth and the United States mainland."[11]
  14. ↑ Gutierrez. "Being treated as an extension of the United States coastline by the protectionist merchant marine statutes has imposed a heavy and unfair cost on United States citizens in Puerto Rico."[11]
  15. ↑ Gutierrez. "The Merchant Marine Acts inflict costs to the Puerto Rican economy."[11]
  16. 1 2 JOC (2013) "Repealing or amending the Jones Act cabotage law might cut Puerto Rico shipping costs"[12]
  17. 1 2 JOC (2013) "The GAO report said its interviews with shippers indicated they [...] believed that opening the trade to non-U.S.-flag competition could lower costs."[12]
  18. ↑ Gutierrez. "The "cabotage" laws impose significant restrictions on commerce between Puerto Rico and the U. S. mainland by requiring that merchandise and produce shipped by water between U.S. ports be shipped only on U.S.-built, U.S.- manned, U.S.-flagged, and U.S.-citizen owned vessels."[11]
  19. ↑ Gutierrez. "Because such restrictions boost shipping costs, American consumers pay the price."[11]
  20. ↑ Santiago (2021) "Local detractors of the Jones Act [...] for many years have unsuccessfully tried to have Puerto Rico excluded from the law's provisions[...]"[14]
  21. 1 2 Ismalidou; Trianni (2014) "The spark that lit the fuse came in 1996, when President Clinton repealed legislation [section 936] that gave tax incentives for U.S. companies to locate facilities in Puerto Rico. The island’s economy began to sputter, and after the great recession, the decline in the island’s governmental finances continued."[7]
  22. ↑ Mead (2014) "Federal funding to Puerto Rico is far below what the island would get if it were a state."[15]
  23. ↑ 48 U.S. Code § 737 "The rights, privileges, and immunities of citizens of the United States shall be respected in Puerto Rico to the same extent as though Puerto Rico were a State of the Union [...]"[16]
  24. 1 2 NotiCel (2013; in Spanish) "Actualmente, el costo por kilovatio hora en Puerto Rico es de 26 centavos, frente a EE.UU. que es de 11 a 12 centavos. "[19]
  25. ↑ Kaske (2014) "High energy costs take money out of consumers’ pockets and make it difficult for businesses to expand and invest," Ingrid Vila-Biaggi, chief of staff for Governor Alejandro Garcia Padilla, wrote in an e-mail. "Energy reform will enable us to stabilize Prepa’s finances, reduce costs for consumers and businesses and become a model for energy policy in the region."[21]
  26. ↑ Kaske (2014) "[...] 20 percent [of Bacardi's] expenses [come] from electricity [...]"[21]
  27. ↑ Kaske (2014) "For Wendco of Puerto Rico Inc., which owns 100 franchise restaurants on the island, such as Wendy’s, Applebee’s and LongHorn Steakhouse, keeping the lights off is one strategy. When employees arrive in the morning to open the eateries, they keep some areas dark and without air conditioning until they’re in use [...]"[21]
  28. ↑ SHRM (2012). "Employees in Puerto Rico are not at-will employees. All employees in the 50 U.S. states, with the exception of Montana, are considered employees at will, meaning that they can be discharged at any time and for any reason, unless the discharge is in violation of a contract, applicable law or public policy. However, employees in Puerto Rico are not employees at will. Instead, the laws in Puerto Rico provide numerous safeguards for employees in terms of the legal and monetary ramifications of employment termination."[26]
  29. ↑ Alvarado León (2014; in Spanish) "Nuestras estructuras de consumo e ingresos son demasiado complejas, particularmente por la existencia de una plétora de provisiones (créditos, deducciones, exenciones, etc.) que no están sujetas a un análisis de costo-beneficio."[29]
  30. ↑ Vera Rosa (2013; in Spanish) "Aunque Puerto Rico mueve entre el sector público y privado $15 billones en el área de salud, las deficiencias en el sistema todavía no alcanzan un nivel de eficiencia óptimo."[30]
  31. ↑ Vera Rosado (2013; in Spanish) "Para mejorar la calidad de servicio, que se impacta principalmente por deficiencias administrativas y no por falta de dinero[...]"[30]
  32. ↑ Rivera Sánchez (2014; in Spanish) "En 2012 [...] la tasa de captación en el segmento de ventas al detal fue de 52% con una tasa de evasión de 48%. En el resto de los renglones, la captación fue de 56% con una evasión de 44%."[31]
  33. ↑ GDB (2014) "On several occasions the Commonwealth has failed to comply with its continuing disclosure obligations on a timely basis. For example, the Commonwealth has failed to file the Commonwealth’s Annual Financial Report before the 305-day deadline in nine of the past twelve years, including the two most recent fiscal years (2012 and 2013)."[35]
  34. ↑ GDB (2014) "[The government's] accounting, payroll and fiscal oversight information systems and processes have deficiencies that significantly affect its ability to forecast expenditures."[3]
  35. ↑ Acevedo Denis (2013; in Spanish) "Para el profesor de la Escuela Graduada de Administración Pública de la Universidad de Puerto Rico, Rafael Torrech San Inocencio, más que una cuestión de que funcionarios del Gobierno devenguen altos salarios, es si tienen o no las competencias para los cargos que ocupan."[36]
  36. ↑ Acevedo Denis (2013; in Spanish) "Hay funcionarios bien pagados, funcionarios excesivamente pagados y funcionarios que merecen mejor paga. El problema es cómo se parean las remuneraciones con las competencias profesionales."[36]
  37. ↑ WAPA-TV (2014; in Spanish) "El informe sobre la medida señala que al presente los municipios arrastran una deuda agregada de aproximadamente $590 millones [...]"[38]
  38. ↑ PRGDB "Financial Information and Operating Data Report to October 18, 2013" p. 61[1]
  39. ↑ Sotomayor (2015) "If Puerto Rico’s ills were to be summarized concisely, the island is paying the price of applying rich-country policies on what is (to this day) an essentially poor society."[39]
  40. ↑ Clark (2015) "Puerto Rico’s bond default on Monday – along with statements that preceded it – cast doubt on the ability of its leaders to fully understand and manage the island’s unfolding financial crisis."[40]
  41. ↑ Calderón (2013; in Spanish) "En 2012, se graduaron cerca de 50,000 estudiantes de nivel subgraduado y graduado y se proyectaba que el mercado laboral generara en promedio cerca de 6,000* empleos por año, de los cuales sólo el 25% requiere esos niveles de educación."[45]
  42. ↑ Sotomayor (2015) "Like Greece, Puerto Rico wants to restructure debt but not its economy."[39]
  43. ↑ Walsh (2013) "In each of the last six years, Puerto Rico sold hundreds of millions of dollars of new bonds just to meet payments on its older, outstanding bonds — a red flag. It also sold $2.5 billion worth of bonds to raise cash for its troubled pension system — a risky practice — and it sold still more long-term bonds to cover its yearly budget deficits."[51]
  44. ↑ GDB (2014) "Changes in population have had, and may continue to have, an impact on economic growth and on the growth of tax revenues."[3]
  45. ↑ Corkery, Williams Walsh (2015) "The debt is not payable," Mr. García Padilla said. "There is no other option. I would love to have an easier option. This is not politics, this is math."[59]
  46. ↑ Corkery, Williams Walsh (2015) "My administration is doing everything not to default," Mr. García Padilla said. "But we have to make the economy grow," he added. "If not, we will be in a death spiral."[59]
  47. ↑ Ruiz Kuilan (2014; in Spanish) "[Santa] calificó de positivo que la gente sepa los riesgos reales que conlleva una degradación."[63]
  48. ↑ Krudy (2013) "A Treasury spokesperson told Reuters on Monday that the Treasury was monitoring the situation but would not discuss where the monitoring would lead."[65]
  49. ↑ Kaske (2014) "[Some Puerto Rican bonds] have benefited from a rally across Puerto Rico debt. Investors have been adding Puerto Rico securities since the island had its general obligations cut to speculative-grade, opening the door to buyers who had been waiting for the move."[21]
  50. ↑ Quintero (2013; in Spanish) "Los indicadores de una economía débil son muchos, y la economía en Puerto Rico está sumamente debilitada, según lo evidencian la tasa de desempleo (13.5%), los altos niveles de pobreza (41.7%), los altos niveles de quiebra y la pérdida poblacional."[67]
  51. ↑ Hitchcock; Aldrete Sánchez (2014) "That the rating is not lower is due to the progress the current administration has made in reducing operating deficits, and what we view as recent success with reform of the public employee and teacher pension systems, which had been elusive in recent years."[57]
  52. ↑ Hitchcock; Aldrete Sánchez (2014) "We view the current administration's recently announced intent to further reduce appropriations in fiscal 2014 by $170 million and budget for balanced operations in fiscal 2015 as potentially leading to credit improvement in the long run [...]"[57]
  53. ↑ Caruso Cabrera (2014) "Nearly 70 percent of U.S. municipal bond funds rated by Morningstar have some kind of exposure to Puerto Rico."[2]
  54. ↑ Ruiz Kuilan (2014; in Spanish) "La portavoz de la minoría penepé en la Cámara, Jennifer González [...] sostuvo que junto con el gobernador el mensaje que se pretende difundir es uno alarmista para inquietar al País y que al final se tomen medidas menos severas. De esa forma, dijo González, el pueblo "no reacciona de una manera más agresiva" pensando que pudo ser peor."[63]
  55. ↑ Ruiz Kuilan (2014; in Spanish) ""Con un plan de medidas de control de gastos las casas acreditadoras hubieran visto que Puerto Rico mantenía un presupuesto balanceado, que no se estaba gastando más de lo que tenía." [...] sentenció la representante [Jennifer González]."[63]

References

  1. 1 2 "Financial Information and Operating Data Report to October 18, 2013" (PDF). Puerto Rico Government Development Bank. October 18, 2013. Retrieved March 4, 2014.
  2. 1 2 3 4 5 Caruso Cabrera, Michelle (January 24, 2014). "Why Puerto Rico needs to borrow money—and soon". CNBC. Retrieved March 2, 2014.
  3. 1 2 3 4 5 6 7 "Preliminary official statement dated march 6, 2014 subject to completion" (PDF). Puerto Rico Government Development Bank. March 6, 2014. Retrieved March 7, 2014.
  4. ↑ Williams Walsh M (August 3, 2015). "Puerto Rico Defaults on Bond Payment". New York Times. Retrieved August 4, 2015.
  5. ↑ ""They say I am not an American…": The Noncitizen National and the Law of American Empire. Christina Duffy Burnett". Opiniojuris.org. 2008-07-01. Retrieved 2014-03-02.
  6. ↑ Roos, Dave. "How Municipal Bonds Work". How Stuff Works. Retrieved March 2, 2014.
  7. 1 2 Ismailidou, Ellie; Trianni, Francesca (12 March 2014). "The Next Financial Catastrophe You Haven’t Heard About Yet: Puerto Rico". Time. Retrieved 12 March 2014.
  8. ↑ "¿Cómo Puerto Rico llegó a tener crédito chatarra?". El Nuevo Día (in Spanish). February 4, 2014. Retrieved 2 March 2014.
  9. ↑ Emmanuelli Jiménez, Rolando (February 12, 2014). "¿Sabe qué provocará la degradación?". La Perla del Sur (in Spanish). Retrieved March 2, 2014.
  10. 1 2 "Fitch becomes third agency to cut Puerto Rico to junk". Reuters. February 11, 2014. Retrieved 2 March 2014.
  11. 1 2 3 4 5 6 7 Gutierrez, Elías. "Impact of the Coastwise Trade Laws on the Transportation System of the United States of America" (PDF). Retrieved September 6, 2013.
  12. 1 2 "GAO’s Jones Act Report Is Inconclusive". The Journal of Commerce. March 20, 2013. Retrieved September 6, 2013.
  13. ↑ "Puerto Rico: Characteristics of the Island's Maritime Trade and Potential Effects of Modifying the Jones Act". www.gao.gov. Retrieved 2015-10-02.
  14. ↑ Santiago, Jaime (November 29, 2012). "Jones Act requirement comes under new light". Caribbean Business. Retrieved September 6, 2013.
  15. ↑ Mead, Kevin (March 14, 2014). "Gates: How US runs PR is ‘just wrong’". Caribbean Business. Retrieved 14 March 2014.
  16. ↑ 48 U.S.C. § 737
  17. 1 2 3 4 Alvarez L, Goodnough A (August 2, 2015). "Puerto Ricans Brace for Crisis in Health Care". New York Times. Retrieved August 4, 2015.
  18. 1 2 Puerto Rico Territory Energy Profile - EIA
  19. ↑ "AEE le explicará la reforma a Moody's". Retrieved 29 June 2015.
  20. ↑ http://www.bls.gov/ro4/aepmia.pdf
  21. 1 2 3 4 Kaske, Michelle (March 6, 2014). "Puerto Rico Electric Downgrade Brings Price Upgrade: Muni Credit". Bloomberg News. Retrieved March 6, 2014.
  22. ↑ Dreyer Duperray, Martha (2015-08-05). "Labor laws in Puerto Rico have to be revised". Caribbean Business. Retrieved 2015-08-06.
  23. ↑ "Surge nueva propuesta del Código Laboral en El Capitolio". Primera Hora. Retrieved 29 June 2015.
  24. ↑ "Página no encontrada" (PDF). Retrieved 29 June 2015.
  25. ↑ Costa, Dennis (2014-09-11). "Wanted: These legislators don't seem to understand". Caribbean Business. Retrieved 2014-09-11.
  26. ↑ Joseph, Celia (2012-05-03). "Employees’ Rights and Employers’ Obligations in Puerto Rico". Retrieved 2016-05-02.
  27. ↑ Puerto Rico - A Way Forward by A. Krueger, R. Teja and A. Wolfe, June 29, 2015
  28. ↑ http://www.gdb-pur.com/economy/documents/16.EAI-2014-02-21.xls
  29. ↑ Alvarado León, Gerardo (2014-10-28). "Hacienda apuesta al IVA". El Nuevo Día (in Spanish). Retrieved 2014-10-28.
  30. 1 2 Vera Rosado, Ileanexis (May 17, 2013). "Ineficiencia arropa a los recursos económicos de salud". El Vocero (in Spanish). Retrieved September 19, 2013.
  31. ↑ Rivera Sánchez, Maricarmen (February 3, 2014). "Hacienda pierde $900 millones del IVU". El Vocero (in Spanish). Retrieved March 7, 2014.
  32. ↑ "Hacienda espera recaudar $500 millones; mientras, atiende masiva evasión – NotiCel™". Noticel.com. 2013-03-15. Retrieved 2014-03-03.
  33. ↑ "Amnistía contributiva: aumenta recaudos, pero intesifica la evasión – NotiCel™". Noticel.com. 2013-03-17. Retrieved 2014-03-03.
  34. ↑ "Treasury Department Submits Commonwealth Of Puerto Rico Comprehensive Annual Financial Report For FY 2011–2012". PRNewswire. 16 September 2013. Retrieved 4 March 2014.
  35. ↑ "COMMONWEALTH OF PUERTO RICO QUARTERLY REPORT DATED JULY 17, 2014" (PDF). Puerto Rico Government Development Bank. 17 July 2014. Retrieved 19 July 2014.
  36. 1 2 Acevedo Denis, Ely (November 15, 2013). "Salarios públicos: Problema no es la cuantía, es la incompetencia". NotiCel (in Spanish). Retrieved March 2, 2014.
  37. ↑ Vázquez, Brenda (November 16, 2012). "Extensa la lista de los municipios con déficit". Metro Puerto Rico (in Spanish) (Metro International). Retrieved September 29, 2013.
  38. ↑ "Nace la Corporación de Financiamiento Municipal" (in Spanish). WAPA-TV. January 23, 2014. Retrieved February 20, 2014.
  39. 1 2 Sotomayor, Orlando (2015-08-03). "Puerto Rico Imposed Rich-Country Policies--And Now It Is Paying The Price". Forbes. Retrieved 2015-08-04.
  40. 1 2 Clark, Greg (2015-08-05). "Puerto Rico's Leaders: Playing Games Or Out of Touch?". Forbes. Retrieved 2015-08-06.
  41. ↑ "Latin American Herald Tribune - Puerto Rico Imports 85 Percent of Its Food". Laht.com. Retrieved 2014-04-19.
  42. ↑ "The World Factbook". Cia.gov. Retrieved 2014-04-19.
  43. ↑ "The Luquillo Experimental Forest Arboretum - Forest Service Research & Development". Treesearch.fs.fed.us. Retrieved 2015-03-01.
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  45. ↑ Calderón, Jaime (October 2013). "Panorama del sector educativo" (PDF) (in Spanish). Puerto Rico Education Council. Retrieved January 11, 2014.
  46. ↑ Census 2000 Educational Attainment Data
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  50. ↑ "Home - El Nuevo Día". elnuevodia.com. Retrieved 2014-02-09.
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  55. ↑ New York Times: "Economy and Crime Spur New Puerto Rican Exodus" By LIZETTE ALVAREZ February 8, 2014
  56. ↑ "S&P downgrades Puerto Rico debt to junk status". Reuters. 2014-02-04. Retrieved 2014-03-02.
  57. 1 2 3 Hitchcock, David; Aldrete Sánchez, Horacio (February 4, 2014). "Puerto Rico GO Rating Lowered To 'BB+'; Remains On Watch Negative" (PDF). Standard and Poor's. Retrieved March 2, 2014.
  58. ↑ "UPDATE 3-Moody's follows S&P, cuts Puerto Rico to junk". Reuters. 2014-02-07. Retrieved 2014-03-02.
  59. 1 2 Corkery, Michael; Williams Walsh, Mary (2015-06-28). "Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable’". The New York Times. Retrieved 2015-06-29.
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  62. ↑ "El pesimismo arropa a los puertorriqueños – El Nuevo Día". Elnuevodia.com. Retrieved 2014-03-03.
  63. 1 2 3 Ruiz Kuilan, Gloria (March 4, 2014). "Asoma una reestructuración completa del gobierno". El Nuevo Día (in Spanish). Retrieved March 4, 2014.
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  66. ↑ "White House says still not considering Puerto Rico bailout". Reuters. February 5, 2014. Retrieved March 3, 2014.
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  68. ↑ "AGP firma ley emisión de bonos" (in Spanish). Metro International. March 4, 2014. Retrieved March 4, 2014.
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