In July 2015, the Puerto Rican government declared its $120 billion debt “unpayable.” That was before Hurricane Maria cost the government $139 billion dollars. Here’s a closer look at how the debt crisis came to be and where it is now.
How did it get so bad?
- Puerto Rico has accumulated an extremely large debt over the past decades, which is comprised mostly of bond and pension payments that are due
- Congress passed the Puerto Rican Oversight, Management, and Economic Stability Act (PROMESA) to help restructure the debt, but the law has run into many legal challenges and critics
- The struggling economy has been further hurt by industries leaving, depopulation, poor infrastructure, and the large cost of Hurricane Maria
Why is this debt situation so unique?
Countries, including the US, tend to have a lot of debt, whether it be from projects built on credit or bonds they owe payment on. These countries are continuously paying off and regaining debt. Puerto Rico’s debt is different because Puerto Rico doesn’t have the money with which to pay their creditors now that it has to.
Furthermore, Puerto Rico doesn’t have the methods and resources in place to handle debt like a state, but unlike a city or county, it can also cannot declare bankruptcy either.
What did Congress do about it?
In June 2016, President Barack Obama signed into law the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). This law created a board of seven people that would have large, sweeping, decision-making power in regards to restructuring Puerto Rico’s debt. In September 2019, they came up with a plan for Puerto Rico which would make paying off the debt only 9% of the island’s budget (it is currently 30%). So far, this plan hasn’t been put in action, so the board’s effects have been small. It’s important to note that PROMESA was created before Hurricane Maria and the debt situation has changed in many ways since then.
Issues with PROMESA
PROMESA has dealt with a lot of issues since its inception. Primarily, it’s been criticized for having the board be comprised of unelected officials that were chosen by the President, had no Senate confirmation hearings, and who can only be removed by the President. Critics argued that this law not only ignored the checks and balances the constitution requires, but also that the law gave little voice to the Puerto Rican people who would be impacted by PROMESA’s action.
PROMESA is currently being disputed in the Supreme Court; arguments were heard on October 15, 2019. It is unclear whether PROMESA’s plan would be carried out if the Supreme Court ruled that it was created unconstitutionally. The ruling will also affect how Puerto Rico is allowed to manage this debt as a whole, as the court could rule on bankruptcy law in general.
Why have industries left?
In 1976, Congress enacted Section 936, a tax break which allowed US manufacturing companies to avoid paying income taxes on profits made in territories; this prompted manufacturers (largely from the pharmaceutical industry) to flock to Puerto Rico. However, the tax break was criticized as too costly, corporate welfare, and unfair to domestic Puerto Rican companies. So, in 1996, the process of phasing the tax break out over 10 years began. This prompted the first wave of plant closures and job losses.
Figure 2: Capital building of Puerto Rico
For many years now, Puerto Rico has been facing an issue of depopulation. This has increased since Hurricane Maria struck, as the devastation and slow recovery made many industries and people leave for the mainland. The last 10 years of depopulation are well-illustrated in this graph by Pew Research Center.
Figure 3: Graph from Pew Research Center
So how can the Puerto Rican economy move forward? Read our ideas on economic development here.
Summary of Funding Sources
Funding is a necessity in any sort of proposal or project; it is one of our biggest factors in determining the feasibility and economic sustainability of our proposals. Consequently, we have identified three areas of suitable potential funding sources: the government and economy, business investments, and charitable funds. We aim to provide proposals that are affordable to Puerto Rico.
Government and Economy
The US federal government and the Puerto Rican government have and will continue to play a huge role in funding the recovery and improvement of resiliency in Puerto Rico either through direct funding or policies (explained below). Direct funding could be in the form of emergency aids, like from FEMA (Federal Emergency Management Agency), directly after a hurricane or from other US government departments over longer periods of time to accomplish projects like improving energy infrastructure. The governments can also enact policies as indirect funding; subsidies (paying companies to keep prices low) and tax incentives like credits, lower rates in taxes, or zero duties (no cost to import goods) can promote business opportunities and appeal to companies to invest in Puerto Rico. Once the government can get the attention and interests of businesses, there will be more likely of a chance a businesses will invest. If private stakeholders can invest capital and technology, it would minimize the amount of funds the government has to directly invest into a project.
The process of recovery and building resilience is a continuous commitment of resources, not a single investment. Funding for any projects that take years and perhaps decades, a strong economy is required to provide Puerto Rico’s government the resources to support such a huge project. To improve future recovery efficiency and resiliency to hurricanes, moving in a progressive direction and rebuilding and expanding Puerto Rico’s economy would greatly benefit Puerto Rico’s recovery speed and goals towards resiliency. Industries like manufacturing, agriculture and tourism could be more heavily invested in since they are the island’s most profitable sectors. Besides large scale investments in industries, rebuilding a strong resilient economy, Puerto Rico needs people and businesses. Improving the economic environment on the island would attract more people and business since it shows an increase in economic opportunities that could be invested in. On the whole, Puerto Rico has the potential for a lot of economic development, but it will depend on government policy and the willingness of businesses to invest.
Businesses can be beneficial in the investment of small scale projects. Businesses are societal institutions that seek profits. If companies see a business opportunity too great to turn down, they will be more likely to invest. Projects that seem profitable will give more incentive for a business to invest since it will provide a larger economic return. If they fund the projects, it would decrease the need for government funding, allowing the government to invest funds elsewhere. Our proposal hopes to address how Puerto Rico could aim to attract companies from multiple different industries and economic prosperity to Puerto Rico. These new businesses could not only benefit the overall economy but also the local communities it is part of, providing goods and services and also jobs. Even with all the potential benefits, there are risks involved if business are allowed to operate with complete freedom. To minimize the potential harm that could be resulted, the Puerto Rican government would have to amend and create policies that would regulate how businesses can be operated.
With the current state of Puerto Rico’s government and economy, funding for many of our proposals through the private sector or NGOs (nongovernmental organizations) seems to be a necessity. NGO funding is typically proposed for solutions that can be tried and tested in a few communities before going island-wide, as it is easier to secure NGO funding for trials. The solar microgrid system we propose to test is one such example. Other private donations for Puerto Rico likely be most beneficial if redistributed towards immediate needs. The amount of funds that could be generated can be enough to help with some of the recovery efforts, but are unlikely to be enough to fund island wide infrastructure projects.