The United States must pay more attention to its Caribbean island of Puerto Rico. If not, the mainland must be prepared for a financial disaster in the territory.
Puerto Rico is coming closer to the financial brink with each passing day and now has an estimated debt of $70 billion, and growing rapidly. Its days of living large by borrowing to make up for bad investments and swollen public payrolls have taken a heavy toll.
A favorable tax credit that long attracted manufacturing to the island has expired, along with federal aid programs. A recession that began years before the mainland’s has produced a nearly 15 percent unemployment rate that is propelling the biggest exodus from the island in decades.
Puerto Rico lost 54,000 residents, or 1.5 percent of its population, between 2010 and 2012. They are U.S. citizens who would rather take their chances trying to find jobs in the still-sluggish mainland economy. Those left behind have to grapple with skyrocketing crime.
Perhaps fueling the problem is the political push for statehood that doesn’t seem to be gaining any ground, but adds more doubt to the territory’s future.
Although its financial problems are similar to the crisis in Detroit, Puerto Rico is not a city and therefore cannot pursue bankruptcy. Moreover, Puerto Rico’s constitution gives bondholders strong guarantees they will be paid before pensioners and public workers in case the government runs out of money.
There is reason for concern on Wall Street. Bond rating agencies have downgraded the island’s bonds to one notch above junk status. Puerto Rico has a unique situation that its bonds have high yields and are exempt from federal, state and local taxes. Therefore, Puerto Rican bonds are held by three out of four municipal bond mutual funds.
Newly elected Gov. Alejandro Javier García Padilla raised the retirement age and pension contributions for public employees. He’s tightened the island’s belt, borrowing less money and slowly but steadily paying down debt. But will it be enough?
Without a change in direction, Puerto Rico’s problems will become the mainland’s problems. Congress will have to shrug off the complications of the island’s political status and determine a way forward before it’s too late.