ST. THOMAS — With multiple creditors on its heels with lawsuits, and its coffers depleted, Puerto Rico on Wednesday declared a form of bankruptcy permitted by the Promesa law, giving the island sweeping powers to forego a lot of its debt obligations, and perhaps eventually get a fresh start.
It was the first time in history that a U.S. state or territory had taken such an extraordinary action. And it sends Puerto Rico, whose total debt and pension obligations is $124 billion — far exceeding Detroit’s $18 billion bankruptcy filing in 2013 — into unknown waters.
While the action could eventually see Puerto Rico becoming solvent in the future, before that could occur, however, the island, with its over 3 million residents, will have to withstand grim consequences: government employees will have to forego pension dollars; infrastructure projects stalled; and the brain drain that the island has been experiencing could amplify.
The commonwealth’s court filing on Wednesday revealed the blunt reality of the matter: “Puerto Rico is unable to provide its citizens effective services,” because of the weight of the island’s debt, reads the filing by the federal control board.
Puerto Rico’s situation is unique in that it’s the first U.S. territory to file for bankruptcy. But the circumstances now being faced by the island is serving as a warning sign to other U.S. territories, more pointedly the U.S. Virgin Islands, as well as states and municipalities like Illinois and Philadelphia facing similar situations — rising pension costs, and continuous downgrades from rating firms that make it more expensive to borrow money. In the case of the U.S. Virgin Islands, the government has been shut out of the market altogether, forcing the Mapp administration to cut cost and raise taxes to bolster the government’s coffers.
The latest update from Governor Kenneth Mapp regarding the territory’s financial condition was cautious optimism. During a ceremony for Sterling Optical’s 3,000-foot new location on Tuesday, the governor said the economy was improving.
But the local government still has no access to the bond market, and it remains to be seen whether the sin taxes, property taxes and timeshare unit taxes recently enacted will raise the revenues needed to keep government services operational. The administration has also adopted an aggressive tax collection agenda with the aim of collecting over $400 million the government says is owed to it.
Puerto Rico’s many creditors — whose lawsuits filed against the island on Tuesday prompted its request for court relief on Wednesday — are likely to receive far less of their money back than they want. The plight may serve as a lesson and cautionary tale for bondholders, and complicates the USVI’s situation, as Puerto Rico and the U.S. Virgin Islands are close in proximity, and have many of the same problems.
In fact, in some ways the USVI’s condition is worse. Per capita debt is more than a third higher than Puerto Rico’s, the economy has contracted by significantly more, and both territories were borrowing to fill long-time massive budget gaps. While the USVI’s overall tax-supported debt at $2 billion is much lower than Puerto Rico’s $53 billion in tax-supported debt, per capita debt is about a third higher: $19,000 in the USVI compared with $12,000 for Puerto Rico.
The next step for Puerto Rico in the bankruptcy filing is for the Supreme Court to designate a bankruptcy judge to handle the case.
Puerto Rico’s governor, Ricardo Rosselló, issued a statement Wednesday seeking to offer some reassurance, even as the territory he leads seeks bankruptcy protection. “We remain committed to holding good-faith negotiations to reach agreements with our creditors,” he said, adding that he hoped the court proceedings would “accelerate the process.”
Mr. Rosselló appeared to be referring to the extraordinary power Puerto Rico will now have in court to unilaterally impose big losses on creditors.
Tags: bankruptcy, puerto rico
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