How to resolve Puerto Rico’s fiscal crisis

FISCAL CRISIS: Puerto Rico Gov. Alejandro Garcia Padilla is trying to find a way to improve the U.S. territory’s bleak economic outlook.
FISCAL CRISIS: Puerto Rico Gov. Alejandro Garcia Padilla is trying to find a way to improve the U.S. territory’s bleak economic outlook. AP

Puerto Rico, the island territory of the United States, is facing a debilitating fiscal crisis centered on its more than $70 billion of debt — more than all but two states in the nation and about the same as its annual GNP.

Together with the faltering economy, the size of the debt and the junk bond status of government credit have brought comparisons to the situation in Greece. But we might have a potential model for effective action in Puerto Rico closer to home — in the “Grand Bargain” recently undertaken by of Detroit.

Economic indicators reveal the scale of Puerto Rico’s emergency. Unemployment is running around 14 percent, and even worse, the labor participation rate, the measure of people actively involved in the workforce, is 41 percent, more than 20 points lower than the United States and one of the world’s weakest. Growth is stagnant — in fact the economy is shrinking — manufacturing is in a decade-long decline and any credit default would scare investors, worsening an already dire economic prognosis.

The human toll of these travails for the island’s 3.6 million American citizens is profound. Median household income is one-third that of the United States; 45 percent of Puerto Ricans live below the poverty line and more than a third are on government assistance.

Puerto Rico spends more on debt servicing than on education; twice as much as on healthcare. Educated Puerto Ricans, frustrated by the lack of opportunity, the high cost of basic services and rising crime are joining a historic exodus to the United States that has created a net population decline sustained over recent years and projected to continue.

For years Detroit has been synonymous with urban blight and population decline. The city’s paralyzing $18 billion debt eventually led in 2013 to the largest municipal bankruptcy in American history. The route Detroit took out of bankruptcy protection was innovative and instructive. The debt was restructured and the cherished collection of the Detroit Institute of Arts (DIA) was the centerpiece of a scheme to tackle shortfalls in city obligations, particularly in pensions.

The DIA was taken out of public hands and the art made safe from the prospect of being sold off to pay some of the city’s bills. The “Grand Bargain” saw the museum assets transferred to a non-profit organization funded in large part by philanthropic organizations together with the state and DIA donors. In exchange, more than $800 million was allocated to bolster city coffers and help make payments to Detroit’s pension schemes, a plan that facilitated the conclusion of Detroit’s bankruptcy at the end of 2014.

Puerto Rico’s political status as a Commonwealth has many practical consequences. Residents are U.S. citizens but they have no say in presidential or congressional elections. They pay no federal income tax but they do not qualify for the Earned Income Tax Credit and other benefits, and Medicare and Medicaid payments are capped. And by statute, Puerto Rico cannot seek the same Chapter 9 bankruptcy protection utilized by Detroit to restructure its debt.

Puerto Rico Gov. Alejandro Garcia Padilla has attempted to institute pension reform and has succeeded in cutting the deficit. In 2014 the territory’s House and Senate passed a law that would have allowed the debt-plagued, state-run power and highway authorities to renegotiate their debt. But in February, following litigation by private equity firms and hedge funds holding much of the distressed debt, the U.S. District Court in San Juan ruled that the recovery law was unconstitutional.

Puerto Rico’s predicament should be a cause for action in the United States, and not just from financial institutions seeking to protect their investments. The philanthropic community can take the lead in helping the island address its many challenges.

To this point, charitable foundations have shared in the common misconception of the island’s status: American foundations do not treat Puerto Rico as if it were part of the United States, while international foundations do. Either way, as with so many of these apparent conundrums tied to their unusual status, it is the people of Puerto Rico who lose out.

The twelve foundations who pledged $366 million to Detroit’s Grand Bargain have demonstrated that American philanthropy can take a direct and leading role in tackling public indebtedness, one of the most urgent issues facing Americans today. The consequences of lost investment, curtailed services and programs and diminished opportunity for the least-protected citizens are potentially devastating, as many Puerto Ricans already know.

Through its Open Places Initiatives, the Open Society Foundations have already made substantial investments in Puerto Rico. But we can and should do much more. A concerted, coordinated and focused effort by mainland foundations similar to the one in Detroit’s could bolster the island’s efforts to address the crisis. At the same time they can begin to redress a historical lack of attention to the island that has persisted since America first took control in 1898.

Alexander Soros is on the Board of the Open Society Foundations, which has established a giving program in Puerto Rico.