If Puerto Rico was in bad shape, it would be in a much better place than where it is now. Due to poor budgeting, lack of restraint, and utter negligence, Puerto Rico has collapsed into a mess that seems unimaginable. This is not the optimistic story of Puerto Rico’s recovery though, but a glimpse into the future of large-scale life style changes in America if we do not work towards real solutions.
Puerto Rico has been making headlines over the last couple of years, but even more so the last few months due to both hurricanes Maria and Irma. These hurricanes have acted as a catalyst for a ticking debt bomb that was all too easy to forget about.
As of the end of June, 2014, Puerto Rico reported a deficit of nearly $50 billion (states are required to report this data no more than 188 days after the end of their fiscal year, but for Puerto Rico, there are massive delays as we do not even have 2015 data yet). This deficit of $50 billion is estimated to be nearly $70 billion today, and really, with no solution in sight. To pile on even more, out of date infrastructure (which will be costly to repair) has amplified the effects of the hurricane season. Many citizens are left without healthcare, food, and water leading to many preventable deaths and an uncertain future. So how did this even happen?
If Puerto Rico was a state, it would be the 30th largest. Roughly 3.4* million American citizens live there.
In 1898, when Puerto Rico became a territory of the United States, it wasn’t exactly put on a path to statehood. Although in 1917 the Jones-Shafroth Act granted its residents US citizenship, they still could not, and to this day can not, vote in general elections. These citizens are allowed to move freely from the island to the United States, which lead to higher migration from the island. Furthermore, this act exempted Puerto Rican bonds from many local, state and federal taxes. In 1920 the Merchant Marine Act prevented the island from doing direct business with foreign entities, greatly increasing the cost of imports to the island and affecting their ability to compete within their region.
The commonwealth was allowed to draft its own constitution in 1951 and approve its own interpretations of debt limitations in the process. It was congress though, that continued to regulate the island. Two more important decisions were to come, the exclusion from important bankruptcy provisions and setting of limitations on ways they may tax corporations.
Today, the federal government still manages most of Puerto Rico’s affairs. By setting (or removing) debt limits, controlling trade, creating tax codes and minimum wages, they effectively control the commonwealth’s economy. As unintended as it may have been, allowing the removal of a practical debt limit and the complete tax exemption of Puerto Rican debt were two main factors that lead to the territories crisis. It’s for these two reasons the islands debt became very attractive to many investors, and it found itself owing tens of billions of dollars to Wall Street. Furthermore, removing corporate tax benefits in 2006 lead to the desertion of many businesses and therefore investment that once helped sustain Puerto Rico.
It is hard to be concerned about the stability of a territory though.
If you agree with the previous sentence, then think about this: The State of Illinois is battling its own financial battles too, and they are all too similar to Puerto Rico’s. Both states owe large deficits to pensions and post-employment benefits. Furthermore, large amounts of debt have been sold in both cases, and there is hardly enough government revenue to make up for it. Both governments are positioned very similarly, and will never accumulate enough assets to accommodate for their debt.
Puerto Rico, as mentioned before, is home to only 3.4* million people. Problems on this scale are much simpler. What problems could be in store for a state that is four times larger and is home to the nation’s third largest city?
Another entity that comes to mind that is facing an increasing pension liability and heavily reliant on debt to continue operations is the United States Government.
Since large portions of debt are accumulated in all three cases by retirement benefits, could the current retirement culture of the United States be in great danger, and early signs be found in Puerto Rico?
It is easy to identify these problems, and it is not to say the outlook for the United States is a massive financial crisis, but it does raise interesting questions surrounding these debt funded programs, and how long they will be sustainable. Maybe one day we will look at Puerto Rico, and hopefully the solutions we have come up with and, in the future, use them to help continue with our current lifestyles, but what if we can’t?
As we continue to search for stability in Puerto Rico, it is important to remember to learn from past mistakes so we can avoid them in the future.