Words by Kristal Roberts
Less than 1 million of Puerto Rico’s 3.5 million residents have jobs. Half of the population is surviving off of welfare.
Take that coupled with billions of debt in unfunded liabilities, and it’s clear that the island’s economic vitality is in dire straits—but that figure only scratches the surface.
El Nuevo Dia, a newspaper publication that’s a part of Puerto Rico’s leading media group was applauded for openly reporting some uncomfortable facts: Puerto Rico is “broke,” and needs a restructuring of the public debt.
The daily reported the US $73 billion figure that’s been widely quoted as Puerto Rico’s debt is more like US $168 billion when accounting for mounting interest and debts from retirement funds and public programs.
When it comes to identifying the root cause of Puerto Rico’s financial fiasco, the contributing factors appear to be endless.
According to El Nuevo Dia, the Puerto Rican government began borrowing money to pay debts as a way to deal with the reduction of tax revenues and a series of economic challenges, including the 1970s oil embargo, and the recession from the mid 1980s through the early 1990s.
Essentially, the government has been operating under a constant deficit for decades.
The poverty rate is 41 percent, twice as much as America’s poorest state, Mississippi.
The amount of bureaucratic red tape involved for a resident to start a business—buying a license and undergoing the registration process— makes it extremely difficult to create jobs.
The executive director of the Puerto Rican Chamber of Commerce Justin Valez-Hagan investigated the process of opening an assisted living facility business in 2010, and discovered it would have taken him more than five years to get the doors open.
In addition to facing a lengthy, costly procedure, a local business owner would also have to take a huge gamble on a weak local economy.
Food costs have also increased 50 percent in the last decade.
Not surprisingly, the lack of work, budget cuts and the lack incentive for residents has resulted in slowed entrepreneurship and thousands of Puerto Ricans moving to the states for better opportunities.
The government has explored a number of ways to try and dig itself out of the financial hole, with some solutions penalizing everyone from residents to investors.
Governor Padilla enforced a 16 percent VAT (value added tax) on residents to raise an addition US $1.6 billion. In recent months, tons of debate swirled around the U.S. territory as lawmakers considered whether to let the island nation file Chapter 9 bankruptcy. Chapter 9 allows cities, counties and certain state-created corporations to file for bankruptcy protection. Detroit used Chapter 9 to restructure debts owed to bondholders and city retirees during notable financial duress in 2013.
The issue is it’s not legal for U.S. territories to seek refuge under Chapter 9.
A Recovery Act was passed to restructure government agencies, (like the Puerto Rico’s power company for example) but a federal judge ruled against it in February, as it’s unconstitutional to allow a state government to modify municipal debt.
That came as good news to the country’s existing creditors, including bondholders and banks that would have gotten the short end of the stick after making investments under a different set of rules.
That ruling left Puerto Rico with no legal footing to go about restructuring their debt. However, Puerto Rico’s push to get some sort of bankruptcy protection similar to Chapter 9 isn’t over.
Congress is debating the 2014 Uniformity Act, which would allow Puerto Rico to have a court advised Chapter 9 filing. Puerto Rican political leaders from opposing parties have come together to support the act, recognizing it as the key to amending the constitutional limits, and getting on the road to financial recovery.
Until a solution can be agreed upon, Puerto Rico remains in a financial purgatory.