Puerto Rico’s struggle with $72B of public debt

Members of Connecticut’s Puerto Rican community met in Hartford on Friday with U.S. Senators Chris Murphy and Richard Blumenthal to discuss Puerto Rico’s debt crisis. While I believe numerous politicians calling for Chapter 9 both on the mainland and the Island have their hearts in the right place, the reality is that this would not be a cure-all panacea for what ails Puerto Rico, just as the 1970s Section 936 manufacturing tax credit was not, and would not come without significant economic risks.

For example, Puerto Ricans contribute federal payroll taxes at the same rate as other Americans, yet Medicare only reimburses medical providers on the island at a rate that is less than two-thirds the national average.

Prestigious private prep schools in Puerto Rico aren’t hugely expensive by, say, Manhattan standards.

Puerto Rico’s Public Finance Company missed an August 1 deadline to make a $58 million cost on ethical obligation bonds. Meanwhile, Puerto Rico’s government could face lawsuits if it continues missing debt payments. To help address it, Blumenthal is pushing a bill that would give Puerto Rico a bankruptcy option. It’s a striking paradox: Puerto Rican left for America back when always the population growing and now they leave when the population shrinking.The above graph is from a report by the Centennial hedge fund offering unpopular suggestions on how they could get paid off, such as by laying off teachers rendered unnecessary by the decline in enrollment.

“If we don’t do something to stem this tide in Puerto Rico, to save the Puerto Rican economy”, Murphy said, “then every single retiree in this country will be affected – even though Connecticut will feel it first, and feel it most”.

“Of course, they would need to see what Puerto Rico would do to guarantee this doesn’t happen again”, he added. Access to bankruptcy courts will provide a much-needed fresh start for Puerto Rico and its 3.5 million residents, and amounts to the most sensible policy remedy for the island in the short term. Puerto Rico is especially lavish when it comes to the shifty-sounding subcategories of General Administration ($699 in PR vs. $212 in America) and Other Support Services ($644 vs. $347). The bondholders argue that allowing Puerto Rico to declare bankruptcy is nothing short of a federal bailout, and that it not only changes the rules in the middle of the game but also rewards financial irresponsibility.