Puerto Rico is in the midst of a bleak economic crisis.
The island has $74 billion in debt and another $50 billion in pension obligations on the books, making its case by far the largest municipal bankruptcy ever filed.
Court documents in support of Puerto Rico’s bankruptcy paint a stark picture of what life is like and just how daunting the crisis is.
1. Fewer than 1 million people have jobs
The island has a population of about 3.5 million people — and only about 1 million of them are employed. Obviously, not all of them are old enough to work or are looking for a job. But Puerto Rico’s unemployment rate topped more than 12% in October and is more than double that of the mainland U.S.
The lack of jobs, particularly well-paying jobs, has also led to a population exodus in Puerto Rico. The island’s population has dropped 10% since 2007.
“Negative economic growth has persisted for nine of the last ten years along with population diminution highlighted by exiting young doctors and other professionals,” according to the bankruptcy documents.
CNNMoney has found that doctors are leaving Puerto Rico at a rate of one per day.
2. It owes $8 million to Microsoft
Court filings reveal the 20 creditors to which Puerto Rico owes the most money. The biggest debt, $12 billion, is owed to the Banco Popular de Puerto Rico, which is the trustee on the massive bonds the island has issued to help fund day-to-day operations.
But there are some other notable names on the list. Puerto Rico owes Microsoft more than $8 million for “services” the software company has provided. It also owes $3.2 million to Manpower, a talent recruitment agency.
None of the companies immediately responded to a request for comment about the debt.
3. Puerto Rico could face ‘many’ creditor lawsuits
The island faced at least 22 lawsuits from creditors at the time its bankruptcy documents were filed May 3.
Bankruptcy could help Puerto Rico remain protected from them.
A law called PROMESA (Spanish for “promise”) originally safeguarded the island from the suits. While that law’s protections expired May 1, the bankruptcy filing created a new shield for Puerto Rico.
If a federal judge declines to take the case, however, Puerto Rico could be thrown back into a legal shark tank.
4. Cutting Obamacare funds will make crisis ‘exponentially’ worse
One document in the filing says that Puerto Rican residents and creditors are “victims of a crisis situation exponentially getting worse.”
The filing claims the island is set to lose hundreds of millions in funding from the Affordable Care Act next year. And it adds that losing the funding is projected to cost the commonwealth more than $16 billion over the next decade.
5. Pension programs are drying up
The three main retirement systems in Puerto Rico are expected to “deplete” all their assets between July and December, the documents say.
The commonwealth says it has already made extensive pension system reforms that will reduce future benefits, and that there are more reforms in the works. But the government and employers have been overpromising while not paying enough into the pension systems.
That leaves the system for public employees “severely underfunded,” according to the court filings.
Puerto Rico files for biggest US municipal bankruptcy
Puerto Rico has filed for bankruptcy.
Bankruptcy won’t be an easy process. A judge still has to approve it. Many prominent Wall Street firms own Puerto Rico’s bonds. They are angry about the bankruptcy filing because they fear now they won’t get paid back all the money they are owed.
Puerto Rico’s situation is ugly. The island has been in an economic recession for about a decade and the unemployment rate is 11.5%.
The island’s financial crisis is so bad that Congress installed a Fiscal Oversight Board to call the shots last year. The board stopped trying to negotiate with creditors this week and filed for bankruptcy.
“Make no mistake: The board has chosen to turn Puerto Rico into the next Argentina,” says Andrew Rosenberg, a lawyer at Paul, Weiss, Rifkind, Wharton and Garrison, who is advising some of Puerto Rico’s bondholders.
Trump says no bailout
On the campaign trail, Donald Trump said he would not “bail out” Puerto Rico. He repeated that again in a recent tweet.
Mick Mulvaney, Trump’s budget director, said Wednesday that the White House pushed hard to ensure no federal dollars would go toward paying the island’s debts in the latest Congressional budget deal.
People are literally fleeing Puerto Rico to go and live in the mainland US, especially Florida. The island’s population has declined by 350,000 in the past 10 years. Even worse, CNNMoney found that a doctor a day has left Puerto Rico, causing a severe shortage of medical help as the island was fighting the Zika crisis.
As businesses and people say goodbye to Puerto Rico, there’s even less money to pay back creditors. The island’s latest budget plan includes only $800 million a year to pay back creditors. That’s a mere 20% of what the island had been paying creditors in the past.
Special Title III process for Puerto Rico
The bankruptcy process is a “positive step,” says Ted Hampton, an analyst at Moody’s Investors Service.
“Although a court proceeding will take considerable time and likely involve losses for all Puerto Rico bondholders, it will be an orderly process,” Hampton says.
Last year, Congress approved a bill called PROMESA (Spanish for “promise”) to try to help Puerto Rico. It created the oversight board and a special Title III process that is similar to the Chapter 9 bankruptcy provision that cities like Detroit have used in the past. Chapter 9 isn’t an option for Puerto Rico since it is a US territory.
Puerto Rico is supposed to be America’s paradise island.
The temperature rarely falls below 70 degrees and it’s smack in the middle of the clear, warm Caribbean sea. Actor Johnny Depp, who owns a nearby island, says that part of the world “can add years to your life.”
1. Government overspending
For years, Puerto Rico’s government spent more money than it took in from taxes. American states are required to craft balanced budgets every year, but Puerto Rican leaders didn’t, taking advantage of the island’s limbo status — it’s not a state, it’s a U.S. territory.
The big spending was fueled by a translation error between Spanish and English in the island’s 1952 constitution. It enabled Puerto Rico to issue debt to fund many activities, including day-to-day operations. It all comes down to the interpretation of the phrase “recursos totales” — total revenue or total resources? It was interpreted as resources, which is a broader term allowing the government to fund regular operations (e.g. education, policing, health care, etc.) via bonds.
Puerto Rico issued debt many times over the years. But it really skyrocketed in the the past decade, when total debt went from an already hefty $43.5 billion in 2006 to over $70 billion by 2014. (The island also has over $40 billion in unfunded pension liabilities).
2. The U.S. Congress changed the law
So what happened 10 years ago? Congress is partly to blame for the mess. The island used to be a tax haven for some big businesses such as the pharmaceutical industry. It was cheaper to make drugs on the island than anywhere else in America because companies didn’t have to pay federal tax on the Puerto Rican operations.
But in the mid-1990s, Congress began rolling back the special tax exemptions for businesses operating in Puerto Rico. The tax breaks phased out and fully ended in 2006.
Puerto Rico’s economy tanked after this happened, and it has yet to recover. Many good private sector jobs were lost and tax revenues dropped. The economy has shrunk almost every year since.
On top of that, the Merchant Marine Act of 1920 mandates that only U.S. vessels can take goods between Puerto Rico and the U.S. mainland. This increases prices on the island and makes goods produced in Puerto Rico less competitive than those coming from cheaper Caribbean nations that send goods on their own ships.
3. Skilled workers left the island
Residents are literally fleeing Puerto Rico, packing up and moving to the mainland U.S. in an exodus not seen since the “West Side Story” era of the 1950s.
What is especially worrying is that Puerto Rico is losing talented and skilled workers. A doctor a day (or sometimes two or three) leaves the island. Skilled professionals like doctors can get higher pay in the mainland U.S., and they just don’t see a clear path for the island to turn itself around. Families with young children — the future workforce — are also departing.
The shortage of medical workers has made the Zika virus outbreak in Puerto Rico even harder to handle. The island suffered the first death from Zika in the U.S., the Centers for Disease Control and Prevention confirmed.
4. Congress stripped Puerto Rico of its bankruptcy rights
Another major drawback for Puerto Rico is that it doesn’t have access to the same bankruptcy laws that states do. So-called Chapter 9 bankruptcy was created after the Great Depression to allow cities, towns and other municipalities to address severe debt problems under a workout process overseen by the courts. Detroit is the most famous Chapter 9 bankruptcy case so far.
Puerto Rico used to have Chapter 9 bankruptcy rights, but the island lost them in the 1980s when Congress revisited this part of the bankruptcy code. The Obama administration and the governor of Puerto Rico argue that it was an unfair decision and that Congress should give the island Chapter 9 rights again. So far, the Republican-controlled Congress is largely against it.
Many experts believe some sort of debt restructuring will be necessary. It may mean delaying payments to creditors or paying less than 100% back. The problem is Puerto Rico is in legal limbo. Neither the island, nor the creditors, want to budge much in negotiations until they know what the laws are for sure.
There’s a case sitting at the Supreme Court that could alter the rules, and Congress is debating a bill that could also change everything.
“We’re very far from the end,” says Philip Fischer, the managing director of municipal bond research at Bank of America Merrill Lynch.