Puerto Rico’s woes

The debt crisis in Puerto Rico reached a critical stage last week when a government agency signaled that it may default on a payment due August 1. Pulling Puerto Rico out of its death spiral won’t be easy, but it will require major changes that will cause pain all around.

Puerto Rico’s debt problem is smaller in scale than the one in Greece — $72 billion, versus $355 billion for Greece — but it is every bit as grave. And given Puerto Rico’s smaller population, with only 3.5 million residents, and its dire economic outlook, crafting a solution could be just as hard as it’s been for Europe to come to terms with the Greeks.

When Gov. Alejandro García Padilla announced last month that the debt is “not payable,” he said the government simply owes more money, on an accelerating deadline, than it can possibly pay. Sure enough, the Puerto Rico Public Finance Corp. last week failed to give its bond trustee scheduled debt service for payments of $93.7 million due August 1.

Because of the nature of the bonds, this does put the Commonwealth of Puerto Rico itself in default — not yet, anyway — but that narrow distinction is of interest only to creditors. The larger meaning is that the crisis is real, and it is happening now.

The reasons for Puerto Rico’s inability to pay are multiple and complex, but the basic problem is that Puerto Rico has piled more municipal debt per capita on its residents than any American state. Years of fiscal mismanagement led up to today’s impending collapse. Also contributing: the oil-dependent energy sector — it costs the electrical power company twice what it costs utilities in Florida to generate a kilowatt-hour — and a failure to properly develop the tourism industry. The 2006 phase-out of IRS tax incentives for U.S. companies operating in Puerto Rico led to major job losses.

A 26-page report prepared by outside economic experts recently criticized the island’s labor practices in both the public and private sector. It noted, for example, that Puerto Rico has 10 percent more teachers than a decade ago, but 40 percent fewer pupils. And it said that employment rules discourage hiring, pointing to a mandatory Christmas bonus for most workers and overly generous overtime and vacation rules compared with the mainland’s private sector.

Those are standard practices in most of Latin America, as is the failure to pay taxes, another practice prevalent in Puerto Rico. But the island is a U.S. territory, not a Latin American country, and therein lies part of the problem. Its residents must learn that if they want the benefits bestowed by being part of the United States, they must adopt rules of fiscal and public administration more like those on the mainland. Of course, problems occur here, too — witness Detroit’s bankruptcy. But because of Puerto Rico’s special status, it cannot file for bankruptcy.

Already there is a move in Congress, half-heartedly endorsed by the administration, to allow Puerto Rico’s municipalities and public corporations to seek protection under Chapter 9 bankruptcy. That could help the island avoid the worst consequences of the debt crisis and provide needed debt relief, but it’s only a partial remedy for Puerto Rico’s larger ills.

The Commonwealth model has served Puerto Rico well for decades, but it has bred a culture of dependence on the mainland that hampers the island’s development.

Full statehood may be the only enduring solution that gives its people equality and establishes a framework for sustained prosperity after it emerges from crisis.

This story was originally published July 19, 2015 at 1:41 PM with the headline "Puerto Rico’s woes."