Disaster in Puerto Rico: Uncontrollable Debt

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The grey sky looms over the Puerto Rican Capitol Building where legislators recently passed a debt restructuring.

Almost a year has passed since the previous Puerto Rican governor, Alejandro Garcia Padilla, claimed that Puerto Rico’s $72 billion debt was “unpayable”. Puerto Rico’s debt crisis has forced the U.S. territory to spend close to one-third of all tax revenue on repaying debt, cutting funds from schools, and other government facilities.

    Under U.S. law, Puerto Rico, as a commonwealth, is barred by the U.S. Congress from applying for bankruptcy, whereas Detroit, Michigan, filed for Chapter 9 bankruptcy in 2011. However, under the PROMESA bill, passed last year, Puerto Rico may file for proceedings very similar to bankruptcy. Ironically, the U.S. Congress helped create Puerto Rico’s debt crisis through tax breaks in the 1970’s.

In 1976, U.S. Congress passed Section 936, an act which granted Puerto Rico tax breaks. These tax breaks were intended to stimulate economies in U.S. territories, by granting tax exemption for U.S. enterprises in those territories. As well as granting tax free interest rates on bonds sold by the Puerto Rican government. Consequently, a large amount of manufacturing companies, notably in the pharmaceutical sector, moved to Puerto Rico to take advantage of the potential for profit for untaxed products. Puerto Rico rapidly became one of the largest pharmaceutical manufacturers in the U.S, accountable for 26% of all American pharmaceutical exports. The pharmaceutical industry dominated the island, and generated about a quarter of the island’s GDP. However, the developing manufacturing industries, that relied on tax breaks, did not allow for as much development in other sectors, like tourism or infrastructure. Instead, Puerto Rico became increasingly dependent on offshore manufacturing companies that involved Section 936. 

In 1996, U.S. Congress began to repeal Section 936 and remove tax break privileges from Puerto Rico. Only in 2006 did the U.S. government finalize this procedure, which led to Puerto Rico’s manufacturing industry no longer benefiting from tax breaks. Companies left the island, and Puerto Rico’s unemployment rate rapidly increased from 10% in 2006 to a high of 17% in 2010. 

Puerto Ricans struggled to find jobs and could not rely on undeveloped sectors that were not intertwined with the now invalid Section 936. In turn, Puerto Rico was met with unprecedented population decrease, losing 9% of its population since 2000, according to the Pew Research Center. As many as 40% of Puerto Ricans migrated to the U.S. for better job opportunities, and others reasons like a better education and quality of life that the Puerto Rican government struggled to fund. This decreasing population led to a decade long economic depression and less tax money for the Puerto Rican government.

Puerto Rico originally acquired its debt because of their inability to pay back their old debt. Along with the tax breaks in the 1970’s, Puerto Rico was allowed to sell municipal bonds that had no taxed interest. This was very appealing for enterprises, because they did not have to pay taxes on any interest they made on their bonds. Puerto Rico sold many of these bonds, but delayed in paying them off and eventually had to acquire more debt with higher interest rates to pay off the old debt. Now, the new debt is considerably more, and Puerto Rico’s government cannot pay it off because they have less revenue in taxes due to the decreasing population and employment rate.

Puerto Rico’s inefficient government also contributes to adding more debt to the island. Puerto Rican political leaders failed to create balanced budgets. Even with an increase in taxes, Puerto Rico is struggling to pay for every day services on top of their large debt payments. 

To this day, the pharmaceutical industry continues to generate approximately 25% of the island’s GDP. However, the over development of that industry has led to drastic inefficiencies in the in other economic sectors. Therefore, when Section 936 was repealed, Puerto Rico could not rely on their other sectors to generate jobs or to keep Puerto Ricans from moving away. Puerto Rico’s unpaid bonds also dramatically added to the debt. Last year, the treasury department made it clear that Puerto Rico will not be given a bailout for their astounding $72 billion debt. Yet, under the PROMESA bill, Puerto Rico has been given leeway to follow bankruptcy-like procedures, such as restructuring debt- an action absolutely necessary to Puerto Rico if they ever want to get rid of their enormous debt. The PROMESA bill also controversially allows Puerto Rico to pay back their unsecured bonds on new conditions that would have Puerto Rico pay less. The question remains: Should the U.S. Congress provide more aid towards Puerto Rico, if they are partially responsible for this small territory’s debt crisis?