Puerto Rico’s Debt Crisis: Explained and Examined
August 08, 2016
By Courtney Sloan, C’17
In the 1990’s, Congress enacted a law that gave businesses a tax break for producing goods in Puerto Rico. This led many companies to begin manufacturing their products in Puerto Rico, which bolstered the economy. In 2006, this tax credit expired, marking the beginning of the economic woes in Puerto Rico. Once this credit expired, businesses stopped manufacturing their goods in Puerto Rico, drastically slowing the economy. When businesses left the island, many Puerto Ricans lost their jobs and came to America in search of employment and a better life.
This population emigration to the United States drastically lowered the amount of tax revenue that the Puerto Rican government received. As a consequence, the government downsized the amount of services it offered its people, and residents began to pay higher taxes. Emigration to America increased and the Puerto Rican government began borrowing money, in the form of municipal bonds, from investors in the United States. Since 2006, the government has been amassing debt, which is currently valued at 72 billion dollars. As of May 2016, it is time for Puerto Rico to repay bondholders. This repayment of bonds has had dire consequences on Puerto Rico’s economy, and it has become apparent that this is not a sustainable economic situation.
Puerto Rico is defined as a commonwealth, or an independent country or community, though it is technically a territory of the United States. Puerto Ricans cannot vote, do not have to pay certain taxes, but are defined as American citizens and are able to join the army. Puerto Rico’s unique position has contributed to this debt crisis. Because it is not one of the 50 states, Puerto Rico is not able to declare bankruptcy in U.S. bankruptcy courts. Because it is a territory of the United States and not an independent country, it is unable to request funding from the International Monetary Fund. Therefore, Puerto Rico has limited options in dealing with its economic crisis.
On June 13, the United States Supreme Court rejected Puerto Rico’s request to enact a law that would allow them to restructure debt through the Puerto Rican court system, citing that it was a violation of federal bankruptcy code. This decision underscores the reality that Congress is the only entity that can enact a policy to help Puerto Rico.
The proposed legislation is known as the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). This bill would create an oversight board consisting of seven members, elected by Congress and the U.S. president, whose job is to create a plan that restructures Puerto Rican debt. PROMESA has bipartisan support, and has been backed by President Obama, Treasury Secretary Jacob Lew, House Speaker Paul Ryan, as well as minority leader Nancy Pelosi.
The legislation is not perfect. Critics of the bill call it “colonial,” citing that America is asserting too much power in dictating the affairs of Puerto Rico, but the bill appears to be the only viable solution.
I recently attended an event at the Center for American Progress (CAP) where the governor of Puerto Rico, Alejandro Garcia Padilla, was a panelist. During his speech, Padilla urged the United States to pass the PROMESA bill, claiming that there is literally no other option for his country. He explained that even if he shut down all government operations within the Puerto Rico, he would still be unable to repay the country’s debt. As an audience member, it was difficult to be unmoved by the sincerity and urgency in his voice. The Puerto Rican debt crisis has been an ongoing issue. There is blame to be placed all around: on the Puerto Rican government for mishandling the economy, the bondholders who continued to buy bonds despite knowledge of Puerto Rico’s economic struggles, and the United States for failing to act on this issue sooner.
On July 1, Congress passed the PROMESA bill. This decision was critical for Puerto Rico. Although the country defaulted on its debt payments on July 1, the legislation puts a hold on creditor lawsuits until five or six months after the oversight board has been assembled. Puerto Rico has been cutting back on major governmental services such as schools, hospitals, and Zika virus containment efforts due to its momentous debt. But, the passing of this legislation means that the United States will now take the necessary steps to help Puerto Rico revive its economy and settle its debts.
Puerto Ricans are American citizens and their government is an extension of the American government. Therefore, Congress made the correct decision by passing this bill. With this bill in place, the United States can ensure the upward trajectory of the Puerto Rican economy and the Puerto Rican people. Although the legislation isn’t perfect, it provides the most plausible solution for this ongoing crisis.
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