Congress's Puerto Rico Rescue Plan Will Tick Off Creditors

A U.S. congressional draft bill to steer Puerto Rico through its economic crisis was released on Tuesday with elements of U.S. bankruptcy law opposed by creditors who want to keep the island’s debt talks out of court.

The draft, circulated by the U.S. House of Representatives Committee on Natural Resources, includes sections of the U.S. Bankruptcy Code that allow bankrupt entities under certain circumstances to force creditors to take reduced payouts.

An official draft of the bill is expected to be released on April 11 after a public comment period.

Puerto Rico has $70 billion in debt, with major bond payments due in coming months. It also has an unfunded state pension liability of nearly $44 billion.

The bill “provides Puerto Rico with tools to impose discipline over its finances, meet its obligations and restore confidence in its institutions,” Utah Republican Rob Bishop, the committee’s chairman, said in a statement.

“We appreciate the constructive efforts by Chairman Bishop and the House Natural Resources Committee to begin drafting legislation to address Puerto Rico’s fiscal and economic crisis. But the current draft needs improvements,” said a statement from a Treasury spokesperson. “Final legislation must provide Puerto Rico with tools to achieve a lasting, workable solution to this crisis and create a path to recovery for the people of Puerto Rico.”

The Republican-led panel’s bill would create a federal board to oversee the island’s finances, monitor its accounting and help curb spending. It would also require Puerto Rico to make efforts to restructure debt consensually with creditors.

If those talks failed, the island or its public entities could file for a court-supervised debt restructuring process based on key statutes within U.S. bankruptcy law. That would allow PuertoRico to force such deals on holdout creditors.

The bill’s elements were unexpected because creditors and House Republicans had largely opposed bankruptcy for Puerto Rico.

The Natural Resources Committee had said that “retroactively adding territories” like Puerto Ricoto the federal bankruptcy code “is ill-conceived and would undermine the rule of law.”

A congressional aide stressed that the draft legislation was not a bankruptcy law, and does not directly add Puerto Rico to U.S. bankruptcy code, though it follows similar language.

The Obama Administration has advocated to allow Puerto Rico to restructure its debt in a court-sanctioned process.

House Minority Leader Nancy Pelosi criticized the “sweeping powers of the oversight board proposed” in the bill.

The bill in its final form may include language that protects an existing consensual restructuring deal between creditors and the power utility, PREPA, the congressional aide said. PREPA earlier this year reached the deal with creditors holding roughly 70 percent of its $8.3 billion in debt.

“The bill in its current form is fiscally irresponsible,” financial adviser Stephen Spencer of Houlihan Lokey said in an emailed statement. The company’s clients include major Puerto Rico creditors such as OppenheimerFunds and Franklin Advisers.

“As we showed with the PREPA deal, fair solutions can be reached between Puerto Rico and its creditors that benefit all stakeholders. However, the Discussion Draft Bill is worse for creditors than Chapter 9,” Spencer said.

How the oversight board treats the island’s General Obligation bonds, which is typically regarded as the most senior debt, versus pension payments is also a source of concern for creditors.

The oversight board will look at each bond issued and make a determination on how it relates to other creditors under the existing law, the congressional aide said. If the GO bonds are constitutionally protected and within their limits then the board would take that into consideration, the aide said.

People protest in New York City on Dec. 2, 2015 against austerity measures forced onto the severely indebted island of Puerto Rico. Photograph by Spencer Platt—Getty Images

It includes sections of the U.S. Bankruptcy Code that force creditors to take reduced payouts.

Congress's Puerto Rico Rescue Plan Will Tick Off Creditors

Latest Plan to Rescue Puerto Rico Is Met With Disdain on Island

House Republicans released a draft of a rescue plan for Puerto Rico on Tuesday that they hoped could quickly garner bipartisan support and win over skeptics on the island, on Wall Street and in Congress.

The plan, being drafted by Republicans on the House Natural Resources Committee, in consultation with Democrats in Congress and the Treasury Department, calls for putting Puerto Rico’s finances under a presidentially appointed oversight board — a bitter pill to many on the island.

“This discussion draft will change,” said Representative Rob Bishop, Republican of Utah, who has been leading the drafting process. “We are releasing it now to encourage feedback.”

The plan would also establish guidelines for restructuring some portion of Puerto Rico’s $72 billion of debt, “where necessary.” While Puerto Rico would not be granted standing to seek relief in bankruptcy — something its leaders wanted — it could get some of the legal tools found in bankruptcy as long as it first jumps through a number of hoops.

Creditors’ demands for immediate payment would be halted for 18 months, for example, much as creditor lawsuits are automatically stayed in bankruptcy cases. Under certain circumstances Puerto Rico would also have the authority to impose losses on unwilling creditors — an extraordinary power that is normally available only in bankruptcy. The oversight board’s duties would include keeping Puerto Rico from abusing that power.

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To some on the island, any federal oversight board at all is a deal-breaker.

Shortly after a summary of the committee’s approach began to circulate late last week, the governor of Puerto Rico, Alejandro García Padilla, denounced it as “shameful and degrading,” and something that would deprive the island “of its own government.”

The president of the Puerto Rican Senate, Eduardo Bhatia, said upon reading the proposal that he was deeply offended by the way it was written, which he said “was from the 18th century,” evoking “the worst colonial subjugations.”

Congressional staff must work at a pace seldom seen in Washington these days, because between May 1 and July 1 Puerto Rico owes debt payments totaling around $2.4 billion. By setting up a legal framework before that, Congress may be able to prevent the chaos and devastation of a disorderly default.

That means devising a package acceptable both to Democrats, who tend to support debt relief for Puerto Rico, and to conservative Republicans, who see debt relief as a bailout that would unacceptably reward profligacy.

Getting a bill onto President Obama’s desk for signature would also mean finding common ground with Senate Republicans, who have seemed less willing to assist Puerto Rico, citing its failure to make required financial disclosures.

Given the need to act quickly, House aides said, lawmakers were trying not to be “overly prescriptive,” and were leaving many details of the rescue plan for the five appointed and two ex-officio oversight board members to sort out. They said they hoped to have a bill ready to be introduced when Congress returns from Easter recess in April.

Mr. García Padilla has been calling Puerto Rico’s $72 billion of debt “unpayable” for almost a year, and asking Congress for extraordinary powers to reduce it. If there had to be an oversight board in the process, the governor had envisioned it made up primarily of people from Puerto Rico.

On Saturday, he called for candidates for governor from all parties on the island to form a united front to block the package as written.

Alejandro García Padilla, the governor of Puerto Rico, has denounced the new plan as “shameful and degrading.” Credit Sait Serkan Gurbuz/Associated Press

By MARY WILLIAMS WALSH

Latest Plan to Rescue Puerto Rico Is Met With Disdain on Island

House Republicans' draft legislation designed to save Puerto Rico

House Republicans will release draft legislation Tuesday designed to rescue Puerto Rico from its crippling debt crisis by imposing an oversight board to audit the U.S. territory’s finances and put it on a path toward fiscal responsibility.

The “discussion draft” by Rep. Rob Bishop, Utah Republican and chairman of the Committee on Natural Resources, gives the House a starting point ahead of the March 31 deadline set by Speaker Paul D. Ryan to address Puerto Rico’s $70 billion plight.

By Tom Howell Jr.

House Republicans' draft legislation designed to save Puerto Rico

What Washington Risks by Stalling on Puerto Rico

With Congress zeroing in on a salve for Puerto Rico’s debt crisis, Europe’s experience with Greece offers a telling example of the pitfalls to avoid.

An International Monetary Fund report from late last year flagged Europe’s missteps bluntly. “Debt restructuring, when it came, was often too little, too late,” it said.

Greece’s crisis erupted in 2010, but officials didn’t approve a restructuring of the nation’s huge debt load for two years. By then, creditors were forced to take larger haircuts that were still insufficient, the report said.

The lesson for Washington on Puerto Rico seems straightforward: Avoiding strong medicine now—in the form of restructuring the island’s $70 billion in debt, held mostly by investors in the U.S. and Puerto Rico—raises the odds of a federal bailout of the island later.

The Treasury Department has proposed pairing a fiscal oversight authority to audit the island’s finances with a debt-restructuring mechanism, akin to a court-supervised bankruptcy, that kicks in if voluntary negotiations fail.

House Republicans are preparing to unveil a legislative draft with such a framework this week, setting off a scramble by lawyers and lobbyists before Congress returns from recess in mid-April for potential votes.

The main problem is simple. Puerto Rico’s economy has been contracting since 2006. Job opportunities are sparse and dwindling, businesses are leaving, and home prices are plummeting.

Puerto Rico residents, who are American citizens, are responding with their feet by moving to the mainland. The population has been shrinking since 2005, but declines accelerated over the past five years. Prime-age workers are the ones leaving. Around 1 in 5 residents are now over the age of 60, a higher share than any U.S. state. The population of children under age 5 is down 37% since 2000.

“If you wait, the crisis will become considerably worse. More people will leave,” said Simon Johnson, former chief economist at the IMF, at a hearing with lawmakers last month. “The tax base will further disintegrate, and the creditors will get even less.”

To balance budgets over the past decade, the island borrowed heavily. In July 2014, debt service accounted for 27% of government revenues, more than double the highest share of any U.S. state, according to Moody’s Investors Service.

ENLARGE

Revenues are up this year thanks only to a sales-tax increase. The island’s pensions also have an additional $43 billion in unfunded liabilities and are projected to exhaust reserves in two years.

Underinvestment in infrastructure has deterred potential private investment. “Brownouts, water rationing, crime—these are not things that make you want to open up a business,” said Tracy Gordon, an economist at the Urban-Brookings Tax Policy Center.

While there are legitimate concerns that the island’s public sector is bloated, “it’s a dangerous game to some degree to experiment with austerity when your population is declining as fast as theirs is,” said Sean McCarthy, head of municipal credit research at Pacific Investment Management Co. To have the room to put in place a real economic growth plan, “they need relief from debt.”

Puerto Rico has already defaulted on some small debts. Officials have warned of much bigger ones on more than $2 billion in payments due in May and July. The territory isn’t allowed to restructure municipal debts in bankruptcy court because it isn’t a state. Courts struck down a local law that would create a similar avenue last year. The U.S. Supreme Court heard arguments in the appeal last week and should rule by June.

Making matters more complicated, the island has a series of debt issues with competing security pledges, devised over the years to skirt debt-sustainability standards. This has made some creditors more willing to take their chances in court. Others have suggested the island is embellishing its fiscal travails.

The upshot is that some creditors have been reluctant to offer concessions in voluntary restructuring talks. They are also lobbying heavily on Capitol Hill to weaken restructuring legislation, which some have characterized as a bailout even though restructuring puts no taxpayer dollars at risk.

Analysts at asset-management firms Pimco, AllianceBernstein and Nuveen Investments have in recent weeks pushed back against arguments that restructuring legislation for Puerto Rico would introduce new risks in the broader $3.7 trillion municipal-bond market. Without an orderly restructuring framework, the alternative would be a series of defaults and lawsuits. “A long and costly ordeal for all parties involved,” said Mr. McCarthy.

Former Treasury Secretary Larry Summers has called Puerto Rico a test of whether financial interests control Washington.

For policy makers, the choice isn’t necessarily between restructuring the debt or simply imposing tougher oversight. It is between tackling the crisis now or facing calls for more expensive help later in the form of federal transfer payments or loans, says Aníbal Acevedo Vilá, who was Puerto Rico’s governor from 2005 to 2009. Some bondholder advocates and local political leaders, for example, are invoking the 2009 bailouts of Detroit auto makers in calling for the Treasury Department to refinance or guarantee debts.

This is a nonstarter in Washington for now because it could put taxpayers on the hook for a Puerto Rican borrowing binge facilitated by Wall Street.

But the water crisis in Flint, Mich., serves as a timely example of how economic decline can spawn public emergencies that compel more costly responses.

It doesn’t take much imagination to summon parallels for Puerto Rico. The Centers for Disease Control and Prevention warned last month that 20% of the island’s population could contract the mosquito-borne Zika virus in an outbreak this summer. Separately, the island’s power company temporarily cut off electricity to a hospital with $4 million in unpaid bills earlier this month.

The big question is how the island’s economy will stanch migration to the mainland and return to growth, a task made all the more challenging as creditors brawl over who should bear the costs of poor investments.

Decisive action now to halt debt crisis could save much costlier remedies later

By Nick Timiraos

What Washington Risks by Stalling on Puerto Rico

All But One Puerto Rico County Lost Population

All but one county in Puerto Rico lost population during 2010 to 2015, further entrenching population declines that began at lower levels at the start of the century.

According to a Pew Research Center analysis of newly released county-level Census Bureau data, Gurabo, located in eastern Puerto Rico, was the only county, or "municipio," that saw a population increase.

The county with the largest decrease was San Juan, where the island's capital and largest metro area are located. There, the population fell by 40,000 people to 355,000. Nine other counties saw their populations decline by at least 10 percent during those years.

Pew said that population increase had been the norm in Puerto Rico until 2,000, when a 10-year drop of about 2.8 percent began. But that accelerated in 2010.

The population fell to 3.47 million in 2015, down 334,000 from 2000. Three quarters of that drop has occurred since 2010.

Puerto Rico is going through a severe financial crisis. Thousands of its residents have been leaving the island in the last several years and coming to the U.S. mainland to seek better job opportunities.

The Census Bureau estimates that the Puerto Rico population will decrease to 2.98 million by 2050.

by Daniela Franco

All But One Puerto Rico County Lost Population

Zika Fears Prompt Feds to Ship Blood to Puerto Rico

The federal government is shipping blood and blood products to Puerto Rico because of worries that local supplies might be contaminated with mosquito-borne Zika virus.

The Health and Human Services Department said it was organizing shipments of blood products from the continental United States to Puerto Rico, where Zika is spreading fast.

Last month, Centers for Disease Control and Prevention Director Dr. Thomas Frieden said Puerto Rico can expect to be hit especially hard with Zika, because it's got Aedes aegypti mosquitoes, which carry and spread the virus.

"We will likely see significant numbers of cases in Puerto Rico and other U.S. territories," Frieden told a House Foreign Affairs subcommittee hearing on Zika.

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The Food and Drug Administration has asked people living in or traveling from Zika-affected zones to delay giving blood until they are in the clear.

"In the absence of special measures to screen for infection or reduce pathogens, the risk of Zika virus transmission through blood products is considered likely based on the most current scientific evidence of how Zika virus and similar viruses (flaviviruses) are spread, and what is currently being reported about transfusion-associated infection occurring outside of the United States," HHS said in a statement.

"We are arranging the importation of blood products from areas unaffected by local Zika transmission to ensure the safety of Puerto Rico's blood supply," said

"Availability of safe blood products for the residents of Puerto Rico is a major priority for HHS," said Dr. Karen DeSalvo, the agency's acting assistant secretary for health.

CDC staffers test pesticides at the CDC's dengue lab in Puerto Rico. The agency has adjusted work at its dengue research center to focus on fighting Zika, a related virus. Jane Derenowski / NBC News

by Maggie Fox

Zika Fears Prompt Feds to Ship Blood to Puerto Rico

How Puerto Rico got into its current financial mess

Among the many who have been hit by Puerto Rico’s 11-year economic recession are the island’s school teachers.

With the closure of more than 200 schools, cuts to benefits and a freeze on salaries, many teachers are among the tens of thousands of professionals who have left the island for better jobs on the mainland as the government struggles with about $70 billion in public debt.

Teachers have not seen a raise in the base salary of $1,750 a month since 2008, according to Aida Diaz, president of the Puerto Rican Teachers Association, the island’s largest teachers union.

“A teacher can’t aspire to getting married, much less starting a household,” she said.

Across the U.S. territory, conditions are grim. Nearly half of the island’s 3.5 million people now live below the poverty line, and more than 50 percent of all children live in families that receive some sort of public assistance. The unemployment figure stands at about 12.2 percent, according to the U.S. Bureau of Labor Statistics. That’s a drop from 16 percent in recent years, but it would be much higher if the island weren’t undergoing an extraordinary bout of depopulation: One out of 13 people left the island between 2010 and 2015.

Even Santurce, once one of San Juan’s most upscale neighborhoods, filled with shops and cultural venues and once home to a solid middle class, is now pockmarked by shuttered buildings covered in graffiti. The island’s economic stagnation has defied all efforts to redevelop this once-tony district.

“People have tried to start businesses in some of these buildings, but they have had to close down,” said Samuel Medina, 30, the owner of Libros AC bookstore on Santurce’s main avenue.

The islanders’ misery is poised to become worse, a top U.S. Treasury Department aide has warned.

Antonio Weiss, counselor to U.S. Secretary of the Treasury Jacob “Jack” Lew, told the U.S. House panel looking into the island’s fiscal crisis that Puerto Rico’s debt should be restructured immediately.

“Puerto Rico is already in distress. What started as a recession has turned into a fiscal and a liquidity crisis that shows signs of becoming a humanitarian one as well,” Weiss testified in Washington on Feb. 25.

SEEDS OF CRISIS

Puerto Ricans can date the start of the current economic slide to 2006. That’s when the 10-year phaseout of the federal tax code provision — commonly known as Section 936 — exempting income earned by U.S.-based companies in Puerto Rico was complete.

Since going into effect in 1976, the tax breaks had attracted numerous manufacturing companies, especially pharmaceutical firms and medical equipment makers. The companies provided thousands of well-paying jobs, underpinning a large middle class.

The double whammy of the end of that favorable tax provision and the onset of the Great Recession pushed Puerto Ricans, including tens of thousands of professionals, to move to the U.S. mainland, further eroding the tax base in a vicious downward cycle local leaders characterize as “a death spiral.”

“The phaseout of the tax benefits to corporations was accompanied by a spike in unemployment, which was tempered by the exodus of Puerto Ricans from the island,” said Vicente Feliciano, a San Juan-based economist.

“When the chips are down, Puerto Ricans don’t have to pay the debt. They can buy a one-way ticket to Florida,” Feliciano said. “People leave the island and reduce the capacity [of the government] to pay.”

As tax revenues dried up, successive governments began borrowing heavily — into the teeth of the recession — to pay their debts, racking up tabs well into the billions. Some of the bigger creditors are Franklin and Oppenheimer funds.

But despite the island’s mounting debt, investment portfolio managers continued to gobble up Puerto Rico’s government bonds thanks to another favorable provision exempting bondholders from paying tax on dividends. The bonds sold well to both institutional and mom-and-pop investors.

According to the Government Development Bank, Gov. Anibal Acevedo, who governed between 2008 and 2012, added $15 billion to the government debt, while his successor, Luis Fortuño added $15.6 billion

In addition to borrowing heavily, then-governor Fortuño instituted austerity measures that included cutting 30,000 public-sector jobs and closing 200 public schools during his four-year term.

Some island leaders also blame U.S. policies that, they contend, treat the territory less generously than states.

“Consider that, historically, Puerto Rico has received $300 million in annual Medicaid funding, while similar-sized Oregon receives $5 billion,” said Pedro Pierluisi, Puerto Rico’s resident commissioner. He is the island’s sole member of the U.S. House of Representatives but has no vote. “I challenge any state to run a decent Medicaid program with that insulting sum without overborrowing in the capital markets.”

The unpopular measures cost Fortuño the governor’s office. In 2012, he was defeated at the polls and replaced by current Gov. Alejandro García Padilla.García Padilla began his term with defiant words for the bond-rating agencies that have downgraded Puerto Rico’s bonds to junk status. But as the situation worsened, he instituted an 11.5 percent value-added tax on business-to-business transactions and juggled government pension fund money to make debt payments.

By the middle of 2015, García Padilla acknowledged that the crisis was so severe that the government would not be able to pay its debts.

“This is not politics,” said García Padilla. “It’s mathematics.”

The unpopular economic policies have led García Padilla to announce he will step down after his first term ends next year.

In his State of the Commonwealth speech last month, he laid the blame on both of the island’s major political parties — the Popular Democratic Party, which supports the continuation of commonwealth status, and to which he belongs, and the New Progressive Party, which favors U.S. statehood and to which Fortuño belonged. “Governors from both parties have come before you balancing their budgets with loans,” he said.

REMEDIES UNCERTAIN

Various policies meant to reinforce the economy have failed.

An income tax-break program devised by Fortuño that aimed to entice wealthy mainlanders to move to the island has failed to produce ancillary investments the government had hoped for. Overall, the austerity measures have had the effect of driving Puerto Ricans to the mainland.

In the U.S. Congress, committees are now considering whether to give the island the right to Chapter 9 bankruptcy protection, now prohibited. Chapter 9 is available exclusively to municipalities to assist them in the restructuring of debts; Detroit, for example, filed under Chapter 9. The plan, favored by the governemnt of Puerto Rico, would create a “strong independent federal oversight” restructuring authority to take charge of island finances.

Because Puerto Rico is not an independent country, it cannot turn to international lending agencies such as the World Bank or the International Monetary Fund. Because it is not a state, it cannot seek Chapter 9 bankruptcy protection without authorization by Congress.

That authorization may be slow to come.

At a Congressional hearing in early February, creditors argued that the bureaucracy-heavy government should be reformed before debt is restructured. House Republicans oppose restructuring the Caribbean island’s debt, suggesting instead that the Puerto Rican government adopt “pro-growth” policies.

Some, like Puerto Rican-born Rep. Nydia Velázquez, D-New York, have suggested restoring tax breaks for companies doing business in Puerto Rico.

House Speaker Paul Ryan has promised Puerto Rico that Congress will take up the territory’s economic predicament before the end of this month.

During a trip to Puerto Rico in January, U.S. Treasury Secretary Lew repeated his call for congressional action. He told government officials that the House bill should be “comprehensive” — that is, cover the entirety of the island’s liabilities. That would cover more than Chapter 9, which is more limited in its coverage.

“A legislation is urgent to promote the sustainability of the island through tools of comprehensive restructuring, federal monitoring and economic growth measures,” said García Padilla in a statement after the meeting in San Juan with Rob Bishop, R-Utah and House Natural Resources Committee chairman, on March 4. “Congress owes the 3.5 million American citizens who live in Puerto Rico an opportunity to struggle for their future.”

Time is growing short. The government has already defaulted on $232 million in debt and has no money to pay $400 million due May 1 or a subsequent $700 million payment due on July 1. Some creditors have already filed suit in San Juan federal court.

All this is happening as the debt crisis slides toward a humanitarian crisis, said Eric LeCompte, the executive director of Jubilee U.S.A., which represents island churches.

The most vulnerable populations have been disproportionately affected by budget cuts, LeCompte said. One example: special education students whose teachers’ salaries have been slashed.

“Puerto Rico can’t cut its way out this crisis. It can’t tax its way out of this crisis,” he said. “There is no path to economic growth in Puerto Rico that does not start with debt restructuring.”

Meanwhile, Puerto Rican public agencies desperate for money have declared war on theft and cheating that went unpunished in the past.

The island’s water utility has prevailed on the Justice Department to file criminal charges against people who have not paid their bills or have stolen service, a step only taken in drastic cases in the past. And a government agency that issues permits recently trumpeted the fact that it imposed a $34,000 fine against a company operating an electronic billboard without its permission.

Many impoverished Puerto Ricans say the crackdown is making life even more miserable for them. “It’s not right that they are targeting Puerto Rico’s working class,” Wilma Rivera, a 46-year-old mother of three, said as she watched power company workers inspect her meter for evidence of tampering. “We’re the ones paying for everyone else’s mess.”

But for all the bad economic news, Medina, the Santurce bookstore owner, is sanguine. He said his shop, which features a restaurant space next to the book stacks, is doing well. “It’s because we offer something different: a space where people can come, meet and relax,” he said.

This report was supplemented by material from the Associated Press.

Timeline of crisis

1996

▪ In negotiations over the minimum wage, President Bill Clinton and House Speaker Newt Gingrich agree to phase out tax incentives for U.S. companies that move to Puerto Rico.

2006

▪ Tax-code phase-out takes full effect.

▪ Puerto Rico experiences the first in 10 straight years of negative economic growth.

▪ Tens of thousands of residents begin move to the states.

2008

▪ Luis Fortuño elected governor, lays off 30,000 public workers and closes 200 schools.

2015

▪ August: Puerto Rico makes first default on public debt; Gov. Alejandro García Padilla pronounces government public debt of more than $70 billion “unpayable.”

▪ December: House Speaker Paul Ryan promises full House will take up Puerto Rico debt issue by the end of March 2016.

2016

▪ March: Government Development Bank proclaims bankruptcy would only cover fraction of the debt

▪ April: 11.5 percent Value Added Tax slated to go into effect

▪ May: $400 million due on Government Development Bank debt

SNAPSHOT OF PUERTO RICO: 2005 VS. 2014

Year	Gross Domestic Fixed Investment (in millions)*	Construction investment (in millions)**	Annual personal income, total (in millions)	Tourism (no. of visitors)	Gross Domestic Product (in millions)
2005	111,901.5	6,513.6	30,676.9	5,072,800	3,821
2014	8,943.7	3,534.4	29,777.0	4,555,200	3,548

*The total investment for sectors such as construction, manufacturing, etc.

**The total investment for construction projects

Source: Government Development Bank of Puerto Rico

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Highlight:

Conditions are grim across the island as income falls, unemployment rises and people leave, further eroding the tax base

The current economic slide dates to 2006, when a federal tax code provision exempting income earned by U.S.-based companies in Puerto Rico ended

The government has already defaulted on $232 million of debt and has no money to pay $400 million due May 1

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BY JOHN McPHAUL

How Puerto Rico got into its current financial mess

Puerto Rico's Growing Financial Crisis Threatens Health Care, Too : Shots

San Jorge Children's Hospital is Puerto Rico's largest pediatric hospital, drawing patients from throughout the Caribbean. It's a bustling facility in San Juan, with specialties in surgery, rheumatology and oncology. It also has brightly colored live parrots at every entrance.

"It just sends a message to the patient that they're in a friendly place," explains San Jorge's vice president of operations, Domingo Cruz Vivaldi. "That they're here to be treated, but they're also going to have a good time."

Still, as Cruz would be the first to say, right now is not a good time to be in the hospital business in Puerto Rico.

A nearly decade-long recession has taken a severe toll on the island's economy. Half of San Jorge's patients are on Medicaid now, up from a fifth just a few years ago. And, for decades, the U.S. government has capped Medicaid reimbursements in Puerto Rico at a level far below what states receive. Cruz says that cap has forced his hospital and many others to cut services — he's had to close two wings and 40 rooms.

He only managed to avoid staff layoffs, he says, by freezing 100 open positions — doctors, nurses, technicians and support personnel. And last year, when Puerto Rico ran out of money and couldn't make a $250 million payment to hospitals, San Jorge was forced to reduce hours and cut pay for all employees.

Since long before the advent of Obamacare, Puerto Rico has had a health care plan that covers nearly everyone on the island. Sergio Marxuach, public policy director for Puerto Rico's Center for a New Economy, says it's a generous plan, but has never been adequately funded.

"It has become, in a way, the third rail of Puerto Rican politics," Marxuach says. "Nobody wants to touch benefits. Obviously it's very politically sensitive. Low-income residents love it. So, it's going to be very hard to modify unless we get additional Medicaid funding, or somehow get some sort of fix that we can do locally."

The head of Puerto Rico's Health Insurance Administration, Ricardo Rivera-Cardona, describes it in another way.

"There's a saying here in Puerto Rico," he says, "which, if you translate literally into English, is 'You are against the wall and the knife.' "

Stopgap funding for Puerto Rico's Medicaid system that the Affordable Care Act has provided will run out next year. The Obama Administration has proposed a solution: removing the Medicaid cap, and giving Puerto Rico the same level of funding that goes to the states.

If Congress doesn't take action on that proposal soon, Rivera says, Puerto Rico will face tough decisions on how to provide care for 1.6 million Medicaid patients.

"We are looking at one million people that will have to be forced out of the Medicaid system," Rivera says. "The remaining 600,000 will have to experience a reduction in benefits and an increase in deductibles and copays."

That's a problem in a territory where the median household income is about $19,000 — half that of Mississippi. Across Puerto Rico, clinics are closing, and at least four hospitals have filed for bankruptcy. If enough hospitals close, those remaining will be overwhelmed, say Puerto Rico officials.

By the end of this month, leaders in Congress say they expect to have a plan ready to help Puerto Rico. The U.S. territory is mired in an economic recession and is more than $72 billion in debt — a debt that Puerto Rico's Gov. Alejandro Garcia Padilla says the island can't pay. But the chronic underfunding of healthcare is an even more pressing crisis, according to officials in Puerto Rico, who worry that the islands' health system could collapse if that lack of funding is not addressed this year.

Leaders from the U.S. territory have made regular trips to Washington in the last two years to alert members of Congress to the looming crisis. But Cruz, the hospital vice president, says Puerto Rico has an inherent problem. "Unfortunately, we don't vote. And if you don't vote, you don't count," Cruz says. "When I visit the senators, they have a bunch of issues with their own state. So how much attention can [they] pay to a state that doesn't vote?"

Officials in Puerto Rico say that as much as a third of the territory's massive debt is the result of health care costs. That's why many believe that to fix Puerto Rico's overall financial mess, you must first fix its health care system.

i

Blue skies in San Juan, Puerto Rico belie the U.S. territory's struggle with massive debt. The islands have a generous health care program that covers nearly everyone, but economists say it has never been adequately funded.

Puerto Rico's Growing Financial Crisis Threatens Health Care, Too : Shots

Zika expected to infect 1 in 5 in Puerto Rico

One in 5 people in Puerto Rico could become infected with Zika virus by the end of this year — and with the start of the April rainy season looming, time is running out to stem the spread of the disease, The Washington Post reports.

The Centers for Disease Control and Prevention is stepping up efforts to protect thousands of pregnant women at risk in Puerto Rico, the most affected area of the U.S., the Post said. But it will be daunting to stop the mosquito- and human-spread virus, which has been liked with severe birth defects, experts told the Post.

The island faces serious challenges, with poverty keeping many residents from basic preventative measures like window screens and health care, the Post reports. That's in combination with a high teenage pregnancy rate, drug-resistant mosquitoes and ample sources of standing water to breed disease-ridden larvae, according to the Post.

The CDC is sending extra staff to monitor the public health emergency, increase testing and give out prevention kits. But for scared expecting mothers who are already infected, the options are limited.

Danica Coto | AP

In this Feb. 24, 2016 photo, an employee with the U.S. Centers for Disease Control and Prevention (CDC) tests human blood samples for Zika at the CDC's dengue lab in San Juan, Puerto Rico.

Anita Balakrishnan

Zika expected to infect 1 in 5 in Puerto Rico

How a Debt Bailout for Puerto Rico Short-Circuits Options for Reform

Salim Furth is a research fellow in macroeconomics at the Heritage Foundation’s Center for Data Analysis. He is on Twitter: @salimfurth.

Puerto Rico’s governor, Alejandro García Padilla, recently spent a week in Washington begging for an indirect bailout. The governor wants Congress to give Puerto Rico access to chapter 9 bankruptcy laws, which currently don’t apply to the U.S. territory. But Puerto Rico’s problems run deeper than its $70 billion debt.

The island has already defaulted on some of its debt and diverted funds from some debts with weaker legal obligations to make other payments. Partial default may be inevitable, but resistance to business and labor reforms may be part of the reason Congress has yet to act on Puerto Rico’s requests for help. Lawmakers might also not be pleased by a Caribbean Business report Thursday that Puerto Rico may try to maneuver on federal loans to the island’s public water and sewer authority (Prasa):

“Right off the bat, Prasa will no longer set aside money to service about $1.1 billion of its junior debt, most of which is guaranteed by the central government and includes federal loans made by the U.S. Department of Agriculture’s (USDA) Rural Development, which is owed $390 million, and the Environmental Protection Agency (EPA), owed $550 million.”

The story quotes the water authority’s executive president, Alberto Lázaro, saying of the suspended set-asides, “That doesn’t mean we aren’t going to pay.”

Because the debt is “junior,” the federal government’s claim on repayment is weak. Legally, “senior” bondholders and operation costs must be paid first. Because the loans are backed by Puerto Rico’s government, the cash-strapped utility can dump its obligations onto the governor.

But the commonwealth is $60 million behind in payments on its water bills so is unlikely to make good on its guarantee of the Prasa debt.

It’s not clear why the USDA and EPA lent large sums to Puerto Rico’s water utility at disadvantageous terms. Like other creditors, the federal government counted on the bankruptcy rules that apply in Puerto Rico at the time they lent funds. If Prasa cannot pay its debts, its creditors have a right to take over operations and implement reforms at the utility. That would be unpleasant for the bureaucrats who have managed Prasa, but it is likely to result in better service for Puerto Ricans.

Granting Puerto Rico access to the chapter 9 bankruptcy regulations would short-circuit possibilities for reform. Rather than giving Puerto Rico a path to growth, it could keep in place the bureaucrats who managed Prasa and other public corporations into default.

By Salim Furth

How a Debt Bailout for Puerto Rico Short-Circuits Options for Reform