Puerto Rico is possibly the most financially distressed political entity in North America. The most widely available statistic is that the island has $73 billion in debt. However, if one considers unfunded pension liabilities some estimates place Puerto Rico’s debt at $167.46 billion. For comparison, the largest municipal bankruptcy in the history of the United States is Detroit. Detroit, at the time it filed for bankruptcy had debt between $18-20 billion. Accordingly Puerto Rico’s restructuring would represent the largest municipal restructuring by debt in American History.
This amount of debt is staggering considering the size of Puerto Rico. Puerto Rico has: a population of 3.6 million, an unemployment rate of 14.3% (in 2013), where the government directly employs 20.6% of the labor force. If Puerto Rico was a state it would be slightly more populous than Connecticut (approx. 3.6 million people) and less populous than Oklahoma (approx. 3.9 million). Yet Oklahoma has only $19.4 billion in total public debt and Connecticut has $44.6 billion in total public debt. The national unemployment rate in 2013 peaked at 8.0%, indeed during the height of the recession it peaked at 10.0 in October of 2009. In January of 2015 it was 5.7%.
Even in terms of GDP Puerto Rico compares poorly to other states. For 2012 Puerto Rico’s GDP is estimated at approximately 101 billion. Washington D.C. (just the city) has a GDP of 105.46 billion for 2013.
In response to the debt crisis gripping the government and its publicly owned companies, the government passed a law (the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Act”) allowing certain government owned entities to restructure in proceeding much like the federal bankruptcy proceeding that Detroit used to restructure its obligations. The need for the Act is that Puerto Rico and its companies are specifically excluded from using the same mechanism that Detroit used to restructure- Chapter 9 of the United States Bankruptcy Code.
However, on February 6, 2015, a federal judge in Puerto Rico, in response to a challenge by the holders of hundreds of millions of dollars of Puerto Rico bonds declared the Act unconstitutional. Now the government of Puerto Rico has indicated that it will appeal that decision. The Federal Court held the law to be an infringement on the exclusive power of Congress to pass bankruptcy laws and he also noted that it would improperly affect the contractual rights that the bond holders had with the government. Accordingly the existence of the Act itself was held to violate Article 1, Section 8, Clause 4 of the Constitution of the United States.
While Puerto Rico has significant hurdles to overcome, conventional wisdom is that it is a political dead-zone for politicians in Washington D.C. This line of thinking reasons that there is zero benefit to any politician in the Nation’s Capital in bailing out Puerto Rico, because it does not vote in national politics.
This is an incredibly short sighted position. Literally BILLIONS of dollars of Puerto Rico debt are held by millions of people and businesses in the US mainland because of their nationwide triple tax free status. If Puerto Rico defaults on its obligations the shockwave will reverberate through the entire US economy as billions of dollars held by pension funds, retirees and others crash in value. This should matter to Washington. Indeed, this should matter to all of us.
Bonds of the Puerto Rico Power Authority (Prepa) the most distressed of the government owned entities, rose on the news of the Court’s ruling that the Act was unconstitutional as mentioned above. But the island’s general obligation bonds fell (to about 81 cents on the dollar). In other words Puerto Rico’s debt remains at junk status.