Pensions, Debt Pushing Puerto Rico to the Brink
October 17, 2013
Detroit's bankruptcy was intense, but it might be dwarfed by Puerto Rico:
Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. Detroit and Puerto Rico have been rapidly losing population, leaving a smaller, and poorer, group behind to shoulder the burden.[…] Puerto Rico has also made big pension promises, but the bulk of its debt is owed to investors that hold its bonds.
Until a few months ago, Puerto Rico was the belle of the bond markets. As a territory, it can sell bonds that pay tax-exempt interest in all 50 states, a rare and desirable trait. Puerto Rico's bonds also pay higher interest than many others because its credit rating is relatively low — but not low enough to scare off investors.
State bonds are generally only tax-exempt in their own state; every state taxes the bonds of all other states. Utah nicely exempts the bonds of any state that doesn't tax Utah bonds, but since no one refrains from taxing, it's an inactive provision.
So far, the territory has privatized some assets, and is printing lottery numbers on all sales tax receipts in the hope that it will encourage people to pay sales tax when they buy things. Bond yields have risen above 10 percent. Governor Alejandro Garcia Padilla has promised reforms to public employee pensions, which have a huge unfunded liability that the government cannot possibly cover, and promises to cut their $820 million budget deficit in half. Unemployment stands at 13 percent.
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