Puerto Rico Bankruptcy and Austerity Plan Failing Citizens

Rebecca Frost

September, 2017


On May 3rd, the Governor of Puerto Rico, Ricardo Rosselló, filed for bankruptcy.

Roughly 50% of the region’s population is below the poverty line, and the island’s publicly owned utilities companies have racked up enormous debts. This, along with rising Medicaid and bond debts, has caused Puerto Rico’s debt level to balloon to approximately 100% of its GDP.

Puerto Rico’s financial troubles have caused considerable hardship on the island. The government’s debt burden has left it unable to pay out billions of dollars’ worth of pensions, and public utility companies have been known to cut off electricity to swaths of the population when unable to make payments to their creditors.

The bill that permits Puerto Rico to declare bankruptcy is called the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) - it was passed by Congress in June 2016. The bill was met with considerable opposition. A substantial amount of the criticism being directed at the bill’s failure lay out long term solutions to the structural problems at the root of Puerto Rico’s financial problems.

Senator Bob Mendez, one of PROMESA’s most outspoken critics called it “a band aid on a bullet hole”.

Puerto Rico’s situation dredges up questions that run a gamut of examinations of the nature of public debt and the conflicting financial priorities of subnational governments.

By initiating bankruptcy proceedings in order to manage what has become an unbearable debt load, the Puerto Rican government has committed to measures that will undoubtable bring harm to the island’s inhabitants.

As a condition of Puerto Rico’s ability to declare bankruptcy, Governor Rosselló must prepare and commit to an austerity plan that will result in cuts equal to 10% of the island’s GDP by 2020.

In addition to a “haircut” for creditors, the promised austerity measures are anticipated to cut spending on Medicare and Medicaid. This will be problematic for over 60% of Puerto Ricans whom rely on the government healthcare system.

Additionally, pensioners will see a reduction in benefits. Due to the scale of Puerto Rico’s pension gap, these cuts are anticipated to be more severe than the few percentage point reductions and eliminations of cost of living adjustments seen in previous municipal bankruptcies like Detroit's in 2013.

Governor Rosselló has promised to reduce the impact of the restructuring process on pensioners already below the poverty line, stating in a recent interview with Reuters, "many of our retirees are already under the poverty line, impacting them would be to cast them out and challenge their livelihood”.

Despite Governor Rosselló’s apparent empathy for impoverished retirees, the benefit structure of Puerto Rico’s pension system is widely regarded as unsustainable.

It will be difficult for the government to live up to its commitment of shielding the most vulnerable of citizens from the repercussions of the Island's financial woes given that approximately half of Puerto Ricans are beneath the poverty line; this renders a large-scale overhaul of Puerto Rico's fiscal structures that spares the poor additional hardship seemingly out of reach.

In addition to the ethical conundrums inherent to government austerity, Puerto Rico will also have to face extensive practical perils specific to its situation that jeopardize the effectiveness of Governor Rossello’s proposed cuts. Due to the fact that Puerto Ricans have US citizenship, many islanders who have the means to do so regularly flee to the mainland to escape the poverty-stricken territory.

In an interview with the Wall Street Journal, a resident of Puerto Rico said, “people sometimes just leave the key in the house or the car in the airport and just go [to the mainland]".

By enacting the austerity measures that will permit it to declare bankruptcy, the Government of Puerto Rico risks triggering a mass exodus that would further diminish its already shaky tax base.

Over the course of Puerto Rico’s impending fiscal restructuring, Governor Rosselló and those around him must walk a tightrope of obligations to anxious creditors and impoverished citizens alike.

The island’s conundrum is an illustration of the problem of conflicting priorities inherent in situations of public debt. In the words of Widener University Law Professor Juliet Moringiello,

“Priorities matter only when a municipality falls into distress. It is only at that point when we see questions about whether a bondholder will be paid before firefighters or police. Local governments exist for several reasons: they provide services, they hold land in the public interest, and they regulate for public health, safety, and welfare. The obligations of local governments are labor-intensive, therefore they will have large obligations for salaries, pensions, and health benefits”

As stipulated by Dr. Moringeillo, municipalities largely operate on the principle that they base any operation, including the accumulation of debt, is based in some greater public interest.

Puerto Rico is in the difficult position of having two competing greater public interests. On one hand, they must secure a path to financial stability and a sustainable model of fiscal governance in order to provide a stable future for their citizens, maintain their ability to borrow, and invest in the public good. On the other hand, it is increasingly apparent that a stable financial future will likely be impossible without gouging some of the island’s most vulnerable inhabitants and driving out those who could have provided vital tax revenue to sustain the island’s economic healing process.

Puerto Rico’s situation highlights the importance of considering fiscal responsibility and social welfare not as opposing forces, but as equally vital components to a model of public governance that undertakes all actions in the greatest possible public interest. Access to government funded medical care is just as vital to Puerto Ricans as the assurance that their electricity companies are financially sound enough to ensure regular service.

The bankruptcy proceedings and dealings with the Congressional Oversight Committee will likely bring near-impossible decisions across the desk of Governor Rosselló as Puerto Rico struggles to rebuild these twin pillars of its prosperity. The upcoming months will paint a telling picture of how well-equipped the United States is to deal with mounting fiscal precarity and government responsibility.