Last year, Standard and Poor’s became the first of the three major ratings agencies to downgrade Puerto Rico’s debt from investment grade to junk status, increasing pressure on the commonwealth’s government to find a solution to growing liquidity risks. The US territory found itself facing a cash flow shortage, namely as a result of its habit for issuing debt to cover old debt, a practice that various administrations have been utilizing since 1976, according to Puerto Rican newspaper El Nuevo Día. This combined with nine consecutive years of recession have left the island with some $70 billion of debt that it does not have sufficient revenue to service.
Friday, a US federal court ruled that Puerto Rico’s Recovery Act, a bill passed last June that would allow the commonwealth’s public corporations to restructure their debt, was unconstitutional, per Reuters. This ruling has left the Puerto Rican government in limbo as it has practically no way to organize its debt in the face of an inevitable bankruptcy. Perhaps in anticipation of this situation, Puerto Rico’s sole representative in Congress, Pedro Pierluisi, proposed a bill that would allow Puerto Rico to be eligible Chapter 9 bankruptcy just a month after passing the Recovery Act. This is certainly the most logical solution – US bankruptcy code defines municipality as “political subdivision or public agency or instrumentality of a State” (Wiki), and Puerto Rico’s state companies are definitely public agencies subject to US law. However, US lawmakers have little incentive to act on a bill that would directly lead to the largest municipal bankruptcy in the nation’s history, so the bill died in committee (Congressional Bill Tracker). This brings us back to Puerto Rico’s limbo. As a US territory, it has no options available to it for restructuring its debt.
It is neither wise nor fair for US lawmakers to sit by and watch as the Puerto Rican economy, composed of US citizens, starves. The Chapter 9 Uniformity Act, which may not even become reality in the foreseeable future, should have been a no-brainer and the first step towards a fundamental re-evaluation of the Puerto Rican economy. While Puerto Rican’s administrations are by no means blameless, the root of many of the island’s economic troubles lie with US legislation.
The Puerto Rican government’s over-reliance on debt issuance is partially fueled by the fact that its debt is triple tax exempt, i.e. exempt from federal, state, and local income taxes. This has made the commonwealth’s debt very appealing to wealthy Americans, and has ensured that Puerto Rico has never had much difficulty issuing debt despite underlying financial problems. The Jones Act of 1920 prevents foreign ships from shipping cargo between two US ports, which prevents major cargo ships from stopping in Puerto Rico to unload goods and load Puerto Rican goods, as they opt for the mainland. “Puerto Rican consumers ultimately bear the expense of transporting goods again across the Atlantic and Caribbean Sea on US-flagged ships subject to the extremely high operating costs imposed by the Jones Act” (Wiki). There was also section 936 of the IRS code, which allowed corporations based in Puerto Rico to avoid income taxes. The island’s economy grew based on corporations attracted by this exemption, and when the exemption expired the companies left, sparking the current nine year recession.
The US is obligated to reconsider its ties to Puerto Rico’s economy. It should remove antiquated laws like the Jones Act. It should work with the Puerto Rican government to work on running a tighter budget by improving the efficiency of public companies as well as tax collection rates. I would even propose that the US backs all Puerto Rican debt, which I see to be a logical responsibility of a parent nation.