Puerto Rico faces a $70 billion debt burden, recently defaulted on a major payment and has a looming $2 billion bill to creditors July 1.
Here’s a breakdown of the territory’s fiscal woes and how Congress proposes to fix the problem.
How It Started
The island’s slip into economic turmoil stems all the way back to 1917, when former U.S. President Woodrow Wilson signed the Jones-Shafroth Act. The legislation, which granted anyone born in Puerto Rico U.S. citizenship, also granted triple tax exemption for its municipal bonds. The bonds were sold by the Puerto Rican government to fund infrastructure and other projects.
In 1976, corporations were given major tax breaks to incentivize them to do business on the island – which were later taken away in 1996. According to the Tax Foundation, companies began leaving in droves despite then-President Bill Clinton signing legislation to phase out the tax breaks over the course of a decade. The tax breaks were fully dead in 2006, leaving the commonwealth reliant on the triple tax exempt bonds for revenue. By 2014, Puerto Rico’s bond credit rating was demoted to junk status.
Stagnant economic growth in conjunction with mismanagement and out-of-control spending ultimately led to the territory defaulting on debt payments – first in August, 2015, and again in May of 2016.
What Are The Implications?
As Puerto Rico’s 10-year recession continues, roughly 84,000 people — the highest recorded figure in the last decade — left the island in 2014 alone over a lack of economic opportunity, according to a study by the Institute of Statistics of Puerto Rico. The depleting population leads to a smaller tax base that further exacerbates the island’s fiscal issues.
The Obama administration has warned the commonwealth could soon face a full-blown humanitarian crisis. Inability to pay creditors could potentially lead to more school closures, hospitals being ill-equipped and understaffed, and the inability to fund other necessary services.
Congress Intervenes Without A Bailout
The House is set to vote on the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) in coming days.
The legislation would essentially give seven President Barack Obama appointees the de facto authority to sell government assets, consolidate agencies and fire government workers in order to get the country’s fiscal books in order.
The House Committee on Natural Resources made it clear the legislation does not provide a bailout and differs from granting the island Chapter 9 bankruptcy rights since it followed the territorial clause of the Constitution. Instead, the control board would propose a plan to adjust payments, which would be subject to judicial approval. The appointees would be selected from a list provided by the House speaker.
The bill has faced pushback from those feeling the control board is an overreach into the Puerto Rican government’s authority.
Democratic 2016 presidential hopeful Sen. Bernie Sanders urged his party to reject the bill, claiming it will make the problem worse.
Top Democrats including Obama, House Minority Leader [crscore]Nancy Pelosi[/crscore] and Sander’s rival in the Democratic primary Hillary Clinton have come out in support of the measure.
House Speaker [crscore]Paul Ryan[/crscore] said it is the best option to get the island back on a path to fiscal solvency without placing the burden on the American taxpayer.
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