Puerto Rico is in the middle of a financial crisis. The central government and the island’s various public corporations have accumulated approximately $72 billion in outstanding debt, the equivalent of the territory’s nominal gross national product.

Puerto Rico’s debt now equals its GNP

The government says that it is unable to repay the debt in full. In August and January, Puerto Rico defaulted on debt payments with limited legal protections, and it is unclear whether the island is willing or able to make upcoming payments. Last week, the territory enacted legislation authorizing the governor to suspend debt payments until January 2017 in order to prioritize payment for government services.

Puerto Rico may not make upcoming payments

The $72 billion debt does not include $43.2 billion in unfunded pension liabilities. With only $1.8 billion in assets and nearly $1 billion in annual payouts, public pension funds will soon be operating on a pay-as-you-go system that will consume 11 percent of the island’s annual revenue.

Puerto Rico’s economic crisis

Puerto Rico is in an economic recession that is worsening the crisis. Nominal GNP is stagnant, and inflation-adjusted GNP actually shrank by 1 percent in 2014. Unemployment is 12.2 percent — nearly double that of every U.S. state — and 60 percent of the working-age population has opted out of the workforce, compared to 40 percent in the rest of the U.S. One percent of the island’s population is emigrating every year.

Federal and local policies discourage hiring and employment. The federal minimum wage, which governs Puerto Rico, is high relative to average incomes on the island, and local regulations regarding overtime, paid vacation, and dismissal further raise the cost of hiring on the island. According to the American Action Forum, a family of three could receive $1,743 per month through welfare programs, while minimum-wage employment would yield only $1,159.

The island also suffers from high transportation costs. Import costs for Puerto Rico are nearly twice as high as those for neighboring islands. This is due to the Jones Act, which mandates all shipping to Puerto Rico from the rest of the U.S. be done by expensive U.S. vessels and crews.

Helping Puerto Rico

Puerto Rico’s central government is lobbying for authority to file for bankruptcy. Under federal law, states may authorize their public corporations to file for bankruptcy, but Puerto Rico and other territories may not. Democrats, including the president and the Treasury Department, support giving Puerto Rico this power. They have pushed for giving Puerto Rico’s central government access to bankruptcy, a power even the states do not possess.

Reforms to strengthen Puerto Rico’s economy and limit public spending must come before debt restructuring. In the absence of some restructuring authority, Puerto Rico’s defaults will result in protracted litigation and financial uncertainty.

Last month House Republicans introduced draft legislation to create a financial oversight board and authorize a special restructuring authority for the island. The public response to the draft highlights the political difficulties of addressing the crisis. Puerto Rico and Democrats criticized the draft for giving the oversight board too much power, violating Puerto Rico’s sovereignty. Others criticized it for giving the board too little power and for violating creditor rights.

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