WASHINGTON, DC -- Those who have been closely watching Puerto Rico’s economic decline and the limited response from the administration or lack of response from Congress have been sharing an inside joke lately.
“Even though there are more Puerto Ricans in the states than in Puerto Rico, some people are joking that the Cuban government has had more relations with Washington than Puerto Rico lately,” said Federico de Jesus, a political and media strategist in Washington, D.C.
Puerto Rico is in the midst of what its governor, Alejandro García Padilla, pronounced to the New York Times is a “death spiral.” It faces $73 billion in debt, double digit unemployment and has been for several years watching many in its middle class leave the island for the U.S. to flee its economic woes. The commonwealth’s debt status is now graded as “junk” and deadlines for debt repayments are days away.
Padilla said over the weekend that the island country’s debt “is not payable,” the Times reported. He scheduled a 5 p.m. EDT Monday address on the crisis.
The crisis is not yet to the level of Greece, which has commanded far more attention in news headlines, but that nation has been getting assistance from the European Central Bank and other entities, unlike Puerto Rico.
“We do not have any lifeboat or financial partners that have been willing to step up,” de Jesus said.
The White House has urged Congress to take a closer look at allowing Puerto Rico to restructure its public debt using Chapter 9 bankruptcy filing, something that is not available to Puerto Rico as it it for U.S. municipalities and has been used by cities such as Detroit, White House Press Secretary Josh Earnest said in Monday's briefing.
Earnest stopped short of saying the administration supports giving Puerto Rico the ability to file for bankruptcy.
Earnest said that Puerto Rico is getting help similar to what the administration did for Detroit through a task force that has helped advise the commonwealth of what existing resources it can seek. The work done for Detroit is a template for Puerto Rico, he said, adding that what that city received from the Obama administration has been directly related to the city's progress.
De Jesus said the crisis is something that deserves that attention of U.S. residents and lawmakers because many have investment in the commonwealth through mutual and investment fund portfolios.
According to a 2013 estimate from Chicago-based Morningstar, an investment research firm, as much as 80 percent of Puerto Rico’s debt is in muni-bond funds and 180 mutual funds in the United States and elsewhere have at least 5 percent of their portfolios in Puerto Rican bonds, USA Today reported.
Although Puerto Rico’s constitution guarantees the payment of interest on general obligation bonds before anything else - firemen, police, teachers - bonds on other public entities such as its energy and water systems are not guaranteed and are under consideration for debt restructuring. Puerto Rican bonds have always been attractive because they are exempt from federal, local and state taxes.
On Monday, the Government Development Bank for Puerto Rico released a report recommending Puerto Rico be allowed to file for Chapter 9 restructuring the way states can do with their municipalities, such as Detroit.
Pedro Pierliusi, Puerto Rico’s non-voting representative in the U.S. Congress, has pushed a bill to allow it to use the bankruptcy provision under Chapter 9 to restructure some public utilities' debt, the way states are allowed to do in municipalities. But the Democrat’s bill has gone nowhere amid opposition from some investors and some members of the GOP, which controls the House where the bill was introduced.
Among its many recommendations for a five-year plan is that Puerto Rico be granted the ability to file for bankruptcy under Chapter 9. In a statement, Padilla said the report, “for the first time acknowledges the true extent of the problem.'
“We must make difficult decisions to meet the challenges we now know are ahead and I intend to do everything in my power to lead us through this time,” Padilla said in the statement.
The report projects difficult times ahead for Puerto Rico. “A crisis looms,” the report states. It found that Puerto Rico is in worst shape than thought because it failed to fully account for all its financial needs.
A full accounting shows “the central government will be starting 2016 in a deeper hole than understood, with the room for maneuver constrained by the loss of market access, dwindling cash balances and a longer queue of disgruntled suppliers,” the report states.
But it also strikes a note of optimism for potential recovery, though calls for some drastic, comprehensive reforms. The report states that the steps taken by successive administrations have focused on fiscal deficits and not economic growth and were more ad hoc responses than long-term fixes.
The report contains several suggestions to move Puerto Rico to recovery, including some requiring action from Congress:
- Exempt Puerto Rico from the Jones Act, which forces all shipping to and from U.S. ports to be conducted with U.S. vessels and crews.
- Cut high energy costs – Puerto Rico’s utility already is in negotiations with its creditors for debt relief. The costs have forced the company to deal with overstaffing and inefficiency, the report states.
- Exemption from the federal minimum wage of $7.25 an hour.
- Adjust welfare benefits that are “generous” relative to Puerto Rico’s low incomes.
- Assess various new taxes or increase them, for example a sales tax, a corporate income tax, increase in property taxes.
- Reduce the number of teachers to lower teacher-student ratio. Reduce the subsidy for the University of Puerto Rico.