What’s next for Puerto Rico’s debt crisis, and why Americans should pay attention

Puerto Rico’s debt crisis has doomed many of the U.S. territory’s 3.5 million people. Photo by iStock.

Faced with $123 billion in debt it cannot pay, Puerto Rico took the unprecedented step of filing for bankruptcy protection in a federal court last week. The move marked the first time in history that a U.S. state or territory has gone to such lengths to stem a financial death spiral, piquing the concern of many of the island’s 3.5 million people.

We asked Puerto Rican politics expert Amílcar Barreto, associate professor in the Department of Cultures, Societies, and Global Studies, to weigh in on the debt crisis and its potential impact on the U.S. mainland.

First and foremost, how has Puerto Rico found itself in this quandary?

First, we have Puerto Rico’s elected officials. They took out billions in loans and mismanaged the island’s budget for decades. Second, we have the U.S. Congress. Back in 1996 it eliminated Section 936—a provision in the federal tax code that encouraged U.S.-based manufacturers to set up factories in Puerto Rico that were designed to sustain the island’s economy. As the last 936 incentives were phased out, in 2006, the factories began pulling out—and with a shrinking tax base, the island’s economy began its downward spiral. An economy that could repay such a colossal debt no longer exists.

What are the most immediate repercussions of Puerto Rico’s decision to file for bankruptcy?

This decision will shift our attention from the Financial Oversight and Management Board to the courts. But on the ground it will change very little, at least in the immediate future. It will not hinder processes that are in motion: local taxes will be increased yet again, government services will be cut, and public sector employees will be laid off. And without a light at the end of the tunnel, migration to the U.S. mainland will continue, thus shrinking the local tax base. More repercussions will be felt once we know how much Puerto Rico will have to repay.

One of the biggest casualties of Puerto Rico’s debt crisis has been its schools, more than 170 of which have closed to help the U.S. territory fight its fiscal problems. How might these school closings impact Puerto Rico’s systemic “brain drain,” which has plagued the territory for decades?

The dismissal of thousands of teachers and other public school employees will heap yet another layer of doom and gloom on an already beleaguered island. It will also alert other public sector employees that future government cutbacks may hit them next. That sentiment, coupled with economic realities, will encourage more college-educated Puerto Ricans to seek out greener pastures while convincing recent graduates that returning home is a mistake. Hundreds of thousands of Puerto Ricans have migrated off island in the past decade—particularly to Central Florida—and I fully expect that trend to continue.

“To many Americans, Puerto Rico is a vacation spot and nothing more,” wrote USA TODAY wrote last week. “But this bankruptcy could hit closer to home than they realize.” Why should the average American pay attention to Puerto Rico’s debt crisis?

The average American may be surprised to learn that this is not just an economic calamity infecting a few million U.S. citizens in the Caribbean, but an affliction that has bored deep into their investment portfolios. Wall Street fell in love with Puerto Rico’s tax-exempt bonds decades ago and, lo and behold, these bonds found their way into our 401(k) accounts. We’re not talking about a few million dollars—but billions of dollars. Invariably this debt crisis will generate shockwaves in the quarterly statements of millions of Americans.

Puerto Rico will hold a non-binding referendum in June to give voters the option of choosing between statehood and independence. But the U.S. territory would not become the nation’s 51st state without approval from Congress. First of all, do you think Congress would approve Puerto Rico’s statehood? Second, how would statehood impact its financial stability?

Congress claims that it will support whichever status Puerto Ricans prefer while surreptitiously backing the current commonwealth. That’s the only status that maximizes the federal government’s leverage over Puerto Rican affairs. Washington’s unilateral imposition of a Financial Oversight and Management Board over the island’s elected government brazenly displays that flexibility and dispels any illusion of autonomy under the 1952 Commonwealth Constitution. The island’s economic catastrophe is the coup de grace to statehood, at least as far as Congress is concerned. Thus, statehood’s impact on Puerto Rico’s financial stability falls under the idle speculation category.