What’s Going on in Puerto Rico?

By | March 11, 2016

I recently made my third trip to Puerto Rico, and it was no less amazing than the first two. The weather is still perfect, the food is still second to none, and the natural beauty of the place is so stunning that you come home with pinch marks everywhere from verifying over and over again that it is not, in fact, a dream. If any of you have ever looked out into the Caribbean from Castillo San Felipe del Morro, one of the castles that defended the island in battles past, or stood on the top of El Yunque, Puerto Rico’s incredible mountain/rainforest, you know exactly what I mean. Time seems to stand still, and any troubles seem too far away to matter. But once you get past the postcard scenes, clean the sand off your feet, leave the resort, and take a peak at the present socioeconomic situation, it becomes clear something is wrong in PR.

Puerto Rico is in the midst of an economic crisis. In fact, it’s been in a recession ever since the rest of the country was back in 2007. While the mainland eventually clawed its way back to economic growth, Puerto Rico has been in decline ever since. You wouldn’t have known it, though, until the last two or three years because it’s unique status as a territory rather than a state kept the storm at bay for a while. In an unfortunate twist of fate, however, the unique situation that initially maintained business as usual is now a straightjacket preventing healthy rehabilitation.

What Is Puerto Rico?

As it stands right now, Puerto Rico is a territory of the United States with an official status as a commonwealth. To fill in the rest of the relevant timeline, it became a US territory in 1898 after the US won the Spanish-American War, people were granted US citizenship in 1917 (despite the fact that Puerto Ricans opposed the move, seeing it as merely a gateway for US armies to draft more soldiers in WWI), and in 1952 it was officially designated a commonwealth upon the approval of the Constitution of Puerto Rico.

So what is a commonwealth? The Merriam-Webster dictionary says it’s like this:

“A group of countries or states that have political or economic connections with one another. A political unit that is like a US state but that pays no federal taxes and has only a representative in Congress who does not vote.”

Vocabulary.com adds some interesting points to that:

“Nowadays, a commonwealth has come to mean any government in which all people involved have a say, or a loose formation of nations with a shared loyalty. It is also the official designation of a few states including Kentucky, Massachusetts, Pennsylvania, and Virginia.”

That’s right, there are four current states whose official designation is “commonwealth.” So does that mean Puerto Rico is a state too? Well, no it seems. Evidently “commonwealth” was simply the term used in the original constitutions of those states, so the language still remains, but they are, as we know, recognized as four of the current fifty states. Puerto Rico is not.

And About That Economic Crisis?

As I said earlier, Puerto Rico never really got over that whole Great Recession that started back in 2007. Many people, though, both citizens and tourists, wouldn’t have noticed much for about the first six or seven years. According to stats from The Economist, retail spending has remained steady throughout despite the falling economic output. How is this possible? How can you keep spending the same when you are making less? You go into debt, of course.

Here’s where Puerto Rico’s unique status as a territory initially seemed wonderful. Some of you may know that municipal bonds, debt from entities like city utilities and the like, are tax exempt. In other words, the bond holders (investors, or people who loan them money) don’t have to pay state or local taxes on interest earnings. Giving less of your earnings back to the government makes municipal bonds relatively more attractive, all else being equal. In Puerto Rico’s case, though, the deal is ever sweeter because they are also exempt from federal taxes, again because Puerto Rico is a territory not a state. These triple-tax-exempt bonds were thus very attractive to investors who continued to buy them and fund Puerto Rico’s spending despite the economic disaster in the making. As long as Puerto Rico managed to keep paying their bills, even if partially by getting even more into debt, their bonds would remain very valuable to investors who continued enjoying their interest earnings dessert without the taxation of heartburn.

And then Detroit happened. In the summer of 2013, Detroit filed for Chapter 9 bankruptcy protection after simply having too much to pay and too little cash to do so. At this point municipal bond investors woke up to the cruel fact that it was possible for a municipality to go broke and stop paying its debt, which caused everyone to take a second look at Puerto Rico’s bonds as well. That nice triple-tax-exempt status doesn’t mean much if they don’t pay the interest they promised in the first place. This was the tipping point for Puerto Rico because once investors stopped buying their bonds, the Puerto Rican government was forced to own up to the fact that they had done a poor job of balancing the checkbook for almost a decade.

Now being a territory and commonwealth rather than a state actually became a problem. While Detroit was surely in bad shape, its ability to file Chapter 9 bankruptcy protection gave it options and flexibility. It could negotiate with its creditors, extend payment terms, reduce interest rates, or offer haircuts on the bonds and reduce the principal outstanding. Taking a haircut on the bond essentially means they pretend that instead of owing someone $100 they really only owe them $80, which in some cases makes both sides happy because Detroit remained in business and the people it owed money to at least got something rather than nothing.

Unfortunately, Puerto Rico cannot do the same. Only state municipalities are able to able to file for Chapter 9 bankruptcy protection, and Puerto Rico, if you recall, is not a state. There is currently a proposed bill to extend this option to Puerto Rico, but it has yet to get much attention from Congress. And it doesn’t help that Puerto Rico’s only representative has no power to vote and thus little influence to push the bill forward. In the mean time, Puerto Rico is sitting on a debt load of a little more than $70 billion, which is actually a bit more than 100% of their entire economic output per year. For comparison purposes, the US state that is the closest to Puerto Rico’s situation is Rhode Island with a debt load of 19% of annual economic output. Yes, you read that right; Puerto Rico is over 100%.

The situation was clearly unsustainable, and Puerto Rico’s current governor, Garcia Padilla, has been pleading to congress for attention and assistance on the situation. There was a bit of talk within Congress that Puerto Rico was just bluffing or crying wolf. In August of 2015, however, Puerto Rico had its first default. A larger one followed in January of 2016, and there is no reason to believe they won’t continue into the near future unless something changes.

So Now What?

Puerto Rico’s unemployment rate is quoted somewhere around 12-13%, more than twice the national average. It’s population, and thus tax base, has decreased considerably during this near decade-long recession. Since 1990, no US state has had a population decline in any given year except Louisiana, and that was because of Hurricane Katrina. Puerto Rico’s population, however, has declined an average of about 1% a year for almost ten years. If Puerto Rico keeps losing taxpayers and can’t grow its economy, then the only way to get out of the massive debt situation is to get help in restructuring or reducing that debt, the one thing it can’t legally do yet as a commonwealth.

Certainly getting support for a bill to provide access to Chapter 9 bankruptcy protection is a huge deal for Puerto Rico’s future. But what this all really made me start wondering about was why in the world Puerto Rico wasn’t a state yet. So I tried to figure that out. And I just started three straight sentences with a conjunction. Lucky for me the grammar police seem to be relaxing these days, and blogs aren’t graded by my high school English teacher.

The power to grant statehood to a territory ultimately lies within Congress. Since Puerto Rico has been a part of the US since 1898 without Congress drawing up or passing such a bill, clearly they must be content with the current arrangement. Something would have to happen to put pressure on Congress to act. The most logical “something” to happen would be the citizens of Puerto Rico saying “Hey, we want to be a state now.” This is officially done through a referendum, a public vote on a specific topic that’s posed to the people.

For the longest time, at least the majority of Puerto Rico was totally fine with being what they were, a territory and a commonwealth. During this lengthy recession, however, amidst arguments over what can be done to right the ship, statehood has seemingly gathered more support than in any other point in history. In November of 2012, Puerto Rico held another referendum on the topic. Depending on how you interpret the results, it could be said that this was the first time a majority voted in favor of statehood, though the wording of the referendum made it somewhat vague.

The first question asked whether citizens approve or reject the current status as a commonwealth, and voters rejected that 54% to 46%. Yea statehood, right!? The second question – and why this vote was posed in two questions, I’m not entirely sure – asked them to choose their preferred status amongst a list of options. What was odd was that the choices for this question did not include “commonwealth” as an option, so while 61% voted “statehood,” there is some question as to whether or not this is a clear mandate from the people or if they only got 61% because “commonwealth” wasn’t even listed as a choice. Nevertheless, President Obama has supported it as a clear vote by Puerto Rico to become a state and has encouraged Congress to move forward with a bill. So far, though, nothing has happened on that front.

Interestingly enough – while we’re talking about the president – despite the fact that Puerto Rican citizens living in Puerto Rico cannot vote for president (though they can if they move to a mainland state as they do have US citizenship), they do hold their own primary election, which actually happened to occur just recently on Sunday, March 6. The primary had usually been overlooked as a non-event in the past, but given the current economic crisis, the potential political actions to take place, and the fact that many Puerto Ricans have moved to states like Florida in the last ten years making them eligible voters as US citizens taking residence in one of the fifty states, this primary election may actually have some pull in 2016. For what it’s worth, Marco Rubio won and took all 23 of Puerto Rico’s delegates.

As with most things, there are both pros and cons to Puerto Rico gaining statehood, but it seems the people are beginning to like the pros more than they dislike the cons. As mentioned earlier, they would have Chapter 9 bankruptcy protection to help them manage and negotiate the debt situation. Likewise, they would get other federal benefits of being a state, namely increased healthcare program funding. On the other side of the coin, they would then have to start paying federal income taxes, and it’s even been argued by some that should they become a state they ought to abide by the national language of English instead of Spanish. For those of you not aware, Puerto Rico is currently a Spanish-speaking territory, all the way down to things like street signs. I don’t know if this is something that could be legally enforced or not, but surely it would be a large topic of dispute should English be imposed or even encouraged by our federal government. Many do speak English as a second language, but it would be a large culture change nonetheless.

Wait and See?

While we don’t know what the future holds for Puerto Rico, you can expect to see some big news and potentially big political decisions in the near future, perhaps even a 51st state. The crisis had been postponed for a few years due to skillful kicking of cans down roads, enabled by easy money from investors hungry for tax-free returns, but the party is over, and it’s all coming to a steamy head now. Congress has said it’s targeting the end of March for some sort of plan, most likely a decision on the extension of Chapter 9 bankruptcy protection, but we can’t be for sure what to expect from a Congress that has become infamous for gridlock and come freakishly close to its own shutdowns in the last few years, not being able to agree on budgets before deadlines. The fact that this is a presidential election year makes it even slightly more interesting.

Hopefully you all learned something interesting about Puerto Rico today. The situation is unique, serious, and a bit unprecedented, and I don’t believe enough of us here in the states appreciate or even know the extent of what’s going on there. I was included in “us” up until my last trip which compelled me to become more educated on the issues of an island that, to me, is one of the most special places on earth. Once I got educated, I felt like sharing. And for what it’s worth, I’m rooting for statehood.

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