Puerto Rican Bond Default Raises Likelihood of U.S. Bailout
Observers lately have taken to calling Puerto Rico “America’s Greece.” That might qualify as an insult – to Greece. And the American public may be enlisted to cover mounting debts. This Monday, the island government announced that its Public Finance Corporation was unable to make a full scheduled loan payment over the weekend. The $628,000 disbursement is a blip on a total indebtedness of more than $70 billion, all of it rated at or near “junk” levels. Yet the specter of collapse suddenly has become real. Emily Raimes, vice-president for Moody’s Investors Service, terms the partial payment a “default.” She states: “This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad default on commonwealth debt.”
National Legal and Policy Center in December 2013 explored in detail the facts and historical context of Puerto Rico’s worsening debt crisis. The island, a territorial commonwealth since 1952, is part of the United States. And its residents have enjoyed automatic U.S. citizenship since 1917. Yet due to geographic, linguistic, economic and other factors, it is not a state. Nor is it likely to become one anytime soon given the lack of majority support for the idea among island voters as expressed through periodic plebiscites over the decades. As for independence, Puerto Rican voters repeatedly and overwhelmingly have rejected it. Most its 3.6 million residents accept, however uncomfortably, their territorial status. The issue is how much longer the arrangement can be sustained. The Puerto Rican government owes creditors about $73 billion. That figure, roughly double from a decade ago, amounts to about $20,000 for every resident on the island. On a per capita basis, that’s at least 15 times the median figure for the 50 states as a whole. Moody’s Investor’s Service, the bond rating firm, projects this to increase to $40,000 by 2025. Americans are tethered to this high-risk debt. In recent years, more than 50 mainland municipal bond funds have at least 10 percent of their assets invested in Puerto Rican bonds, historically attractive because of high yields and exemption from federal, state and local taxes. And at the end of June, island officials announced that the annual budget deficit was as high as $740 million.
Related to this disastrous fiscal situation are social and economic indicators to match. The island has been in a recession for nearly a decade. And it’s getting worse. Factories are closing. Unemployment is running at around 15 percent. A third of the residents are on food stamps. A consultant’s report prepared for Puerto Rico’s Government Development Bank and released in late June observed that for many island residents, it is more advantageous to collect public benefits than it is to hold a job. The government is rationing water. Crime rates are far higher on the island than on the mainland. And the pension system, with some $37 billion in long-term liabilities, is hopelessly insolvent, so much so that this past May the government announced that its main retirement system had just seven-tenths of a penny in assets for every dollar in liabilities.
In response to this economic unraveling, Puerto Ricans are voting with their feet – northward. The numbers tell the story. According to a study released a year ago by the Washington, D.C.-based Pew Research Center, net annual Puerto Rican outmigration to the U.S. mainland during 1980-90 was 13,000. During 1990-2000, the figure dropped to 11,000. By contrast, during the four-year period 2010-13, net outmigration was a staggering 48,000. All told, about three-fifths of all Puerto Ricans now live in the continental U.S. A million live in Florida alone, the Miami-Dade County, Orlando and Tampa areas being by far the most common destinations. “We’re in unprecedented territory because this is, in recent memory, the biggest out-migration that Puerto Rico has experienced,” remarked Mark Lopez, head of Pew’s Hispanic Trends program and a co-author of the study. If this bum’s rush to the mainland escalates further, Puerto Rico will be virtually out of options.
Puerto Rican officials know that current trends could spin out of control. That’s why they’ve been stepping up the pressure on Washington for aid. Governor Alejandro Garcia Padilla (in photo), who has admitted his island’s debt to be “unpayable,” declared in a televised address on June 29: “Those who want the support of Puerto Ricans must help Puerto Rico now…not in a few months during the elections.” He added: “We cannot allow the heavy weight of the debt to bring us to our knees…This is not about politics. It’s about math.” Gov. Padilla has put together a working group to develop a reorganization plan. Its results are due out by the end of this month. Meanwhile, here in the states, Bronx Borough President Ruben Diaz Jr., whose parents were born on the island, explained how he would deal with the “dire” situation: “I have and will continue to push for federal legislation that would allow the Commonwealth of Puerto Rico to declare bankruptcy and restructure its debt. This course of action is a better plan that simply allowing the island’s government to default, and I hope that Congress will act on this grim news with haste.”
The White House has stated for the record that it does not plan to bail out the island – at least not directly. The key word is “directly.” Since 1984, Puerto Rico’s public authorities, unlike state government authorities, have been barred under federal law from declaring bankruptcy as a means of obtaining relief from creditors. A growing number of lawmakers, however, want to treat Puerto Rico as our de facto 51st state effectively to repeal that law. On July 15, Sens. Richard Blumenthal, D-Conn., and Charles Schumer, D-N.Y., introduced a bill known as the Puerto Rico Chapter 9 Uniformity Act. The measure, which thus far has attracted at least 10 co-sponsors, would authorize Puerto Rican public agencies to shield themselves from creditors in order to restructure debt on favorable terms. The bill is identical to one sponsored in the House (H.R. 870) earlier this year by Puerto Rican Democratic Resident Commissioner (the territorial equivalent of U.S. Representative) Rep. Pedro Pierliusi.
Supporters of the measure insist this approach is a bargain for Puerto Rican and mainland taxpayers alike. Pierluisi, who heads the island’s pro-statehood New Progressive Party, is prominent among them. On June 30, in a prepared statement, he defended his bill this way:
H.R. 870 does not require the federal government to spend a single dollar. It would simply grant the government of Puerto Rico a power that all state governments have, namely the ability to authorize one or more of its insolvent public enterprises to work out a path forward with its creditors under the supervision of a federal bankruptcy judge based on federal substantive and procedural law…The alternative is a legal no man’s land that benefits neither Puerto Rico nor those who have loaned the territory money.
Pierluisi emphasized that his bill has generated support from a broad spectrum of interests and views, such as Fitch Ratings, Banco Popular, the Puerto Rico Chamber of Commerce and former Georgia Republican Congressman and House Speaker Newt Gingrich.
Democratic presidential candidates, enamored of both a large public sector and multiculturalism, haven’t been bashful about their support lately. On June 30, ostensible Democratic frontrunner Hillary Clinton President sent the following tweet to followers: “Puerto Rico’s debt crisis is not their alone. For PR’s economy to grow & their people to thrive, they need real tools and real support.” Another candidate, former Maryland Governor Martin O’Malley, was even more enthusiastic. “I am very concerned about the impending financial collapse of Puerto Rico,” he said. “We must help our fellow U.S. citizens, not only because it’s the right thing to do, but because our region’s economic stability depends on it.” Malley, in fact, favors putting Puerto Rico on par with other states not only in terms of the bankruptcy code, but also in terms of contributions to Medicare and Medicaid. Vermont Independent Senator Bernie Sanders, an avowed socialist, also joined in. On June 30, he announced his support for making Puerto Rico eligible for Chapter 9 protection. He wants the island government to “restructure its debt in a rational way that does harm its people, ordinary investors or pension funds in the United States.” The debt crisis, he emphasized (as if one could not have guessed), was the result of “policies of austerity and the greed of large financial institutions.”
Don’t assume that Republican presidential candidates won’t join them. Indeed, at least one candidate, former Florida Governor Jeb Bush, already has. While on the campaign trail this April in San Juan, he expressed support for granting the island Chapter 9 powers for debt restructuring. “Puerto Rico should be given the same rights as the states,” Bush declared. Another candidate, Marco Rubio, a sitting U.S. senator from Florida who co-sponsored the highly misguided 2013 “Gang of Eight”
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