The federal budget is an itemized plan for the annual public expenditures of the United States. These include white papers, government data, original reporting, and interviews with industry experts. Puerto Rico has turned to tax increases to alleviate its debt problems. History has bequeathed the island inefficient state-run enterprises and a government unable to balance its budget, but Puerto Rico could have a bright future if it undertakes the ⦠According to the World Bank Group’s Doing Business rankings, it is significantly more difficult to do business in Puerto Rico than on the U.S. mainland. U.S. Government Accountability Office. The only way to bring about lasting fiscal stability in Puerto Rico is to address the island’s declining economy. Compounding the issue is the fact that Puerto Rico receives far fewer federal dollars to assist with social spending than states with comparable populations. A relatively high minimum wage and strict labor laws contribute to the underground economy by driving up the costs of formal employment. [3] Real GNP in Puerto Rico fell 13 percent from its peak from 2006 to 2014. An aging population, mounting costs of social programs, and a declining population have exacerbated debt problems as well. As a result, many of Puerto Rico's most skilled health care workers have jumped ship in favor of more lucrative jobs in other parts of the U.S. Puerto Rico's population peaked in 2005 at 3.91 million and has been steadily declining. It is estimated that 3.2 million residents lived on the island in 2019. Puerto Ricans are relocating to the mainland in droves due to better economic opportunities and low airfare and moving costs.. [14] The tax increases will do more harm than good in an already declining economy. Levels of debt in Puerto Rico became untenable, as the tax advantages of holding Puerto Rico's bonds expired, and Hurricane Maria wreaked additional havoc on the island's floundering economy. S&P Dow Jones Indices. These figures are in real 2014 dollars computed using Puerto Rico’s GNP deflator. While the islandâs significant fiscal problems have overshadowed the status debate lately, some press coverage is ultimately finding its way back to questions involving Puerto Rico status as U.S. territory and the ⦠View Spanish version of Highlights (PDF, 1 page).. What GAO Found. The island’s population has declined by more than 250,000 (7 percent) over the past decade. In March, the island government raised the import tariff on crude oil by 68 percent, from $9.25 per barrel to $15.50 per barrel. By 2017, bond values had mostly returned to levels seen in 2014-2015 but then fell again in 2019 under the proposal that would allow Puerto Rico to reduce debt under bankruptcy protection.. PUERTO RICO IN CRISIS Ñ T I M E L I N E Ñ . Visitors will find U.S. dollars equally acceptable. How Puerto Rico's Debt Created A Perfect Storm Before The Storm For years, the nation's largest banks made millions off Puerto Rican debt as the island approached financial ruin. Rather than raising taxes, Puerto Rico should seek to boost economic growth, which in turn would drive up tax revenues. Reduced corporate presence led to GDP declines, worsening the island's debt-to-GDP ratio and hastening its credit downgrade. "State and Local Government Debt in the United States as a Percentage of Gross Domestic Product in the 2017 Fiscal Year, By State." The economic decline that resulted was tantamount to what Detroit experienced during the darkest days of the Big Three auto slump. You can learn more about the standards we follow in producing accurate, unbiased content in our. [9] And the business climate in Puerto Rico has been growing worse, not better. Financial Oversight and Management Board for Puerto Rico. [13] In May, the government raised the sales tax from 7.0 percent to 11.5 percent—a 64 percent hike. Authors: Accessed July 7, 2020. Supreme Court takes case on Puerto Rico financial crisis June 20, 2019 / 2:10 PM / AP This image shows the U.S. Supreme Court in Washington, D.C., on January 31, 2017. In Puerto Rico, however, that minimum is equivalent to 77 percent of the median wage. "S&P Municipal Bond Puerto Rico Index." Instead it's become famous for its $70 billion debt crisis. U.S. Government Accountability Office. An economic decline in Puerto Rico led to widening budget deficits over the years. An aging population means less tax revenue and greater expenditures. Accessed July 7, 2020. [3] Puerto Rico Planning Board, Statistical Appendix of the Economic Report for the Governor and Legislative Assembly, April 2014, http://www.gdb-pur.com/economy/statistical-appendix.html (accessed July 23, 2015). Joint Committee on Taxation. Accessed July 7, 2020. When a government issues bonds, it is effectively lending money, with interest, to bondholders. Among the factors weighing down Puerto Rico’s business climate are difficulties registering property (Puerto Rico ranked 163rd); dealing with construction permits (158th); paying taxes (133rd); and enforcing contracts (92nd). For a while, Puerto Rico had something else to drive its economy. Brain drain is a slang term indicating substantial emigration or migration of individuals. Puerto Rico has been shedding residents since 2005. The island's population is also aging. Puerto Rico was a Spanish colony for centuries until the US invaded it during the Spanish-American War in 1898. and Confronting this massive debt will require difficult political decisions. [10] That means that inefficient government bureaucracy is significantly retarding growth. Unsurprisingly, investment dollars began flooding into Puerto Rican government bonds. The tiny island is ill-equipped for the manufacturing and production of goods. An aging population, high costs for social programs, and an exodus of many of its residents are also adding to Puerto Rico's debt problems. The U.S. minimum wage of $7.25 applies to Puerto Rico. As they expired over time, many companies elected to discontinue their Puerto Rican presence. Accessed July 7, 2020. As the situation in Greece has shown, economic growth is necessary for fiscal sustainability. The island has defaulted on its debt for the first time, and its economy is in shambles. One of these stipulations involved Puerto Rican municipal bonds and the ways in which they would be treated differently than bonds issued by states.. [2], Puerto Rico is not experiencing a temporary recession; it is in economic decline. Making matters worse is a decline in labor force participation (LFP) among the island’s remaining residents. Puerto Rico's Disappearing Tax Advantages, Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them, State and Local Government Debt in the United States as a Percentage of Gross Domestic Product in the 2017 Fiscal Year, By State, An Overview of the Special Tax Rules Related to Puerto Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative Options, The Causes and Consequences of Puerto Ricoâs Declining Population, An Act to Provide Civil Government for Porto Rico and for Other Purposes, More Puerto Ricans Move to Mainland United States, Poverty Declines. Charles K. Djou. But Thursdayâs report provides new ammunition to the people and groups in Puerto Rico and the mainland United States who have long argued that banks and other financial institutions should be held to account for their role in facilitating and exacerbating Puerto Ricoâs debt crisis. High employee costs and regulations are not the only problems confronting employers. It did this by giving bond investors higher returns and loosening borrowing limits. Creditors who took the risk of lending to the Puerto Rican government will most likely suffer financial losses. However, it proved unsuccessful, and former Governor Ricardo Rossello moved the crisis to a form of bankruptcy court in 2017. Puerto Rico is already in a financial crisis. "An Act to Provide Civil Government for Porto Rico and for Other Purposes," Page 953. At $72 billion, Puerto Rico’s debt is now more than 100 percent of its gross national product (GNP). [4] U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Tables, http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=1&isuri=1 (accessed July 23, 2015). Alejandro García Padilla finally admitted defeat on Sunday, telling The New York Times that the island could not pay its massive $72 billion debt . The U.S. territory Puerto Rico has been plagued with recurring debt issues, which were compounded by a credit downgrade in 2012. Library of Congress. Jones-Shafroth exempted Puerto Rican municipal bonds from all three levels of taxation. As a result, residents of all 50 states and other U.S. territories could invest in Puerto Rican bonds without paying interest on the income. Moreover, recurrent earthquakes pose ⦠The U.S. is ranked seventh out of 189 countries for ease of doing business in 2015, while Puerto Rico is ranked 47th. Financial Crisis in Puerto Rico. Accessed July 7, 2020. Puerto Rico is hoping to reduce $123 billion in debt and pension obligations. Another serious problem stems from Puerto Rico's underfunded social safety net. United States Census Bureau. (See Chart 4.) Puerto Rico is supposed to be America's paradise island. Alejandro Garcia Padilla Signs Tax Increase; More Tax Hikes Coming,” Latin Post, June 4, 2015, http://www.latinpost.com/articles/57488/20150604/puerto-rico-economy-2015-gov-alejandro-garcia-padilla-signs-11.htm (accessed July 23, 2015). [14] Michael Oleaga, “Puerto Rico Economy 2015: Gov. In Puerto Rico's Debt Crisis, There Are No Easy Solutions After years of recession and rampant tax evasion, the U.S. territory is desperate to renegotiate its $73 billion debt. The U.S. territory defaulted Aug. 3, handing over only 1% of the $58 million owed. The Puerto Rican debt crisis has many origins. Medicaid.gov. Puerto Rico faces a severe fiscal crisis, but this is merely a symptom of Puerto Rico’s primary disease: a lack of economic growth. The Jones Act limits economic growth in Puerto Rico by significantly raising the cost of shipping between Puerto Rico and the mainland.[11]. Financial Oversight and Management Board for Puerto Rico. Here are five key things to know about the causes and the issues surrounding the Puerto Rican financial crisis. The Jones-Shafroth Act of 1917 granted U.S. citizenship to residents in Puerto Rico. Moreover, the population that Puerto Rico has managed to retain is aging rapidly. With over $70 billion in bond obligations and $49 billion in unfunded pensions at the time, it was the largest government to seek bankruptcy in U.S. history., To put this in perspective, the money Puerto Rico owes represented nearly 70% of the territory's gross domestic product (GDP). Bond values plummeted amid concerns Puerto Rico will never be able to repay its debt. [4] (See Chart 1. It also spelled out a number of stipulations defining the territory's relationship with the U.S. mainland. Over the past few decades, declining tax revenues and mounting debt in other areas have forced Puerto Rico to borrow money to keep its Medicaid program solvent. In 2017, Hurricane Maria devastated the island after flattening neighborhoods and taking down power grids. [5] U.S. Bureau of the Census, Population Division; Puerto Rico Department of Health; and Puerto Rico Planning Board, Statistical Appendix. Statista. During this period, despite its own recession, GNP increased in the U.S. by almost 11 percent. Financial Crisis What is the the Jones-Shafroth Act? In 2013, only 50.2 percent of Puerto Rico’s working-age population (ages 15–64) participated in the labor force, compared with 71.7 percent in the U.S.[6] The gap between Puerto Rico’s LFP rate and the U.S. rate amounts to more than 500,000 people, or 22 percent of Puerto Rico’s working-age population. "Documents," Download FOMB - Plan of Adjustment - Filed Plan - 2019-09-27. When a Puerto Rican resident is no longer of working age, the government not only loses out on tax revenue from his income but, due to high levels of poverty among the elderly, it often must spend money on this resident in the form of social welfare. Puerto Rico has lost about 10% of its population over the last decade, sparking an economic crisis that worsens by the day. [12] Puerto Rico Planning Board, Statistical Appendix, and U.S. Bureau of the Census, National Income and Product Accounts, http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=1&isuri=1 (accessed July 23, 2015). Accessed July 7, 2020. âThis is causing an economic crisis ⦠A Puerto Rico debt crisis of epic proportion is officially underway. Although Congress can do a few things to stimulate economic growth, such as freeing the island from Jones Act shipping restrictions and the federal minimum wage, Puerto Rico needs to do its part to retain and attract businesses and people by making it easier to employ workers and by reducing regulatory and tax burdens. Investopedia requires writers to use primary sources to support their work. The U.S. territory of Puerto Rico has made many attempts to reduce its debt burden and save its economy. Puerto Rico owes almost 100% of its total annual economic output, and they owe a $2 billion payment on July 1st. CNNMoney explains how it got so bad. The factors that contributed to Puerto Rico's financial condition and levels of debt relate to (1) the Puerto Rico government running persistent annual deficitsâwhere expenses exceed revenuesâand (2) its use of debt to cope with deficits. THE CENTER FOR PUERTO RICAN STUDIES | 1 Real C dula de Gracias opened Puerto 9PJV ... Puerto Rico autonomy , including the ]V[LMVYHSSSP[LYH[LTHSLZ 7\LY[V9PJV JHUUV^LZ[HISPZOP[ZV^UPTWVY[K\[PLZ and foreign trade relations. The financial crisis Puerto Rico faces a staggering $73 billion in public debt. U.S. Government Accountability Office. Accessed July 7, 2020. Puerto Rico is facing a severe fiscal crisis, and new crises will be almost inevitable in the absence of major institutional changes in the commonwealth. "Puerto Rico." Accessed July 7, 2020. Brexit refers to the U.K.'s withdrawal from the European Union after voting to do so in a June 2016 referendum. If the economy were growing, Puerto Rico would be much better positioned to address its fiscal crisis and might have averted it altogether. How Puerto Rico's financial crisis erupted: Population loss. [8] Antonia Escudero Viera, Alfredo Hopgood, and Miguel Rivera-Arce, “Puerto Rico Labor and Employment Law,” LawForChange, October 2012, http://www.lawforchange.org/images/lfc/PuertoRicoEmployment.pdf (accessed July 23, 2015). Research Fellow in Economics, Budget and Entitlements, An Economic Crisis Is the Heart of Puerto Rico’s Financial Crisis, FinCEN Should Not Lower Money Transmission Thresholds, Financial Firms Do Not Need Consolidated Federal Supervision, The Results Are in: Reopening Fuels Record Economic Expansion, http://dailysignal.com/2015/07/01/progressive-paradise-lost/, http://dailysignal.com/2015/07/08/allowing-puerto-rico-to-declare-bankruptcy-is-giving-it-a-bailout/, http://www.gdb-pur.com/economy/statistical-appendix.html, http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=1&isuri=1, http://data.worldbank.org/indicator/SL.TLF.ACTI.ZS?page=1, http://www.lawforchange.org/images/lfc/PuertoRicoEmployment.pdf, http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Chapters/DB15-Report-Overview.pdf, http://www.heritage.org/research/reports/2014/05/sink-the-jones-act-restoring-americas-competitive-advantage-in-maritime-related-industries, http://www.nbcnews.com/news/latino/puerto-rico-legislators-approve-much-debated-sales-tax-increase-n365256, http://www.latinpost.com/articles/57488/20150604/puerto-rico-economy-2015-gov-alejandro-garcia-padilla-signs-11.htm. âThese are difficult times,â said Manuel Laboy, secretary of the islandâs Department of Economic Development and Commerce. Puerto Rico will not emerge from its economic or fiscal woes without the proper foundations for growth, such as a robust labor market, an attractive business climate, a non-stifling regulatory regime, and less cronyism and corruption. 5 Things Every American Should Know About Puerto Rico's Financial Crisis By Roque Planas and Adriana Usero Puerto Rico Gov. These tax advantages, however, were not permanent. In loosening bank regulation, GOP House closes a loophole linked to Puerto Rico's financial crisis Published Tue, May 22 2018 5:53 PM EDT Updated Tue, May 22 2018 7:21 PM EDT Dawn Giel @DawnGiel For many workers, “off-the-books” jobs are either the only or the preferable option. "Quick Facts: Puerto Rico." Nelson Denis, author of 'War Against All Puerto Ricans,' details how the commonwealth's 119-year-long association with the ⦠"Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them," Page 34. Congress approved Promesaâa law that will allow a U.S. territory to seek bankruptcyâin 2016. "Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them," Page 1. Puerto Rico has been dubbed "America's Greece." From 2005 to 2014, real Puerto Rican government debt per capita increased from about $13,900 to almost $19,000 (37 percent). 2886, May 22, 2014, http://www.heritage.org/research/reports/2014/05/sink-the-jones-act-restoring-americas-competitive-advantage-in-maritime-related-industries. "The Causes and Consequences of Puerto Ricoâs Declining Population." Prompted in large part by this tax advantage, Puerto Rico issued too much bond debt and began relying on borrowed funds from bond issuance to balance its budget. [7] Heritage Foundation calculations based on data from U.S. Department of Labor, Bureau of Labor Statistics, Occupational Employment Statistics, http://www.bls.gov/oes/ (accessed July 23, 2015). "Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them," Page 34. For comparison, the average debt-to-GDP ratio for states in the United States was 17%. The territory's escalating debt, combined with its weakening economy, caused three major credit rating agencies in 2014 to downgrade Puerto Rico's debt to non-investment grade, also known as junk status., In 2019, Puerto Rico announced plans to reduce its debt by 33%, to roughly $86 billion from $129 billion, through the largest bankruptcy in U.S. history. The move was made possible by a 2016 law passed by Congress, called Promesa, that essentially allows a U.S. territory to seek protection in bankruptcy court.. On July 1, Puerto Rico will face nearly $2 billion worth of payments that it does not have the money to pay. Read More The central government and the islandâs various public corporations have accumulated approximately $72 billion in outstanding debt, the equivalent of the territoryâs nominal gross national product. The U.S. tax code called for these advantages to expire over time. When that began to happen, companies fled the island, eviscerating its economy. Accessed July 7, 2020. The island took a direct hit from the Category 4 storm: knocking out power grids, flooding streets, and flattening entire neighborhoods. We also reference original research from other reputable publishers where appropriate. In most states, the minimum wage is between 40 percent and 50 percent of the median. Puerto Rico cannot afford the $70 billion debt that it amassed during a decade-long recessionâlet alone basic government services. Since 1917, lenders to Puerto Rico have been exempt from local, state, and federal taxesâthe so-called triple tax exemptionâeffectively boosting their profits and ma⦠Because so many of the territory's residents receive government assistance to pay for health care, providers struggle perpetually, and their workers are underpaid compared to their peers on the mainland. More than 60% of Puerto Ricans receive Medicare or Medicaid. Accessed July 7, 2020. Puerto Rico Economic Growth The economy is set to recover mildly in FY 2021 (July 2020âJune 2021), as growth is not expected until the second half of the year due to lingering uncertainty over the evolution of the pandemic and its associated measures weighing on activity. The resulting debt snowball comprises a large part of the territory's current crisis. Puerto Rico became a U.S. territory, or protectorate, in 1898 after the Spanish-American War.However, the inhabitants of Puerto Rico were not granted American citizenship until 1917, when the Jones-Shafroth Act was passed. Improvement in these basic government services would allow more opportunities for both investors and employees in Puerto Rico. Interest income on most municipal bonds is subject to taxes by various levels of government, including federal, state, and local. Over the past decade, as Puerto Rico’s debt has expanded rapidly, the economy has contracted more than 10 percent. [2] Rachel Greszler, “Allowing Puerto Rico to Declare Bankruptcy Is Giving It a Federal Bailout,” The Daily Signal, July 8, 2015, http://dailysignal.com/2015/07/08/allowing-puerto-rico-to-declare-bankruptcy-is-giving-it-a-bailout/. [7], If the federal minimum wage were not burden enough, Puerto Rico adds its own costly employment requirements such as mandatory Christmas bonuses (“el Bono de Navidad”); inability to fire employees at will without significant severance pay; and mandatory paid leave including 15 vacation days, 12 sick days, eight weeks of maternity leave, and one hour per day for breastfeeding.[8]. Rachel Greszler "Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them," Page 2. [9] World Bank Group, Doing Business 2015: Going Beyond Efficiency, 2014, http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Chapters/DB15-Report-Overview.pdf (accessed July 23, 2015). Puerto Rico faces a severe fiscal crisis, but this is merely a symptom of Puerto Ricoâs primary disease: a lack of economic growth. This failed to cause major problems for many decades. Recent headlines about Puerto Rico have focused on Puerto Ricoâs debt and its related financial crisis. Puerto Rico's fiscal crisis is entering a dangerous new phas as Gov. This practice resulted in the rapid accumulation of debt, the interest payments on which Puerto Rico covered by issuing even more debt. Here's the latest on the crisis. "More Puerto Ricans Move to Mainland United States, Poverty Declines," Accessed July 7, 2020. Kaiser Family Foundation. [6] The World Bank, “Labor Force Participation Rate (% of Total Population Ages 15–64),” 2015, http://data.worldbank.org/indicator/SL.TLF.ACTI.ZS?page=1 (accessed July 23, 2015). The Jones Act is a federal law that regulates maritime commerce in the United States. The next year, Spain ceded Puerto Rico (and Guam) to the US. Experts say the islandâs economic crisis is rooted in[PDF] twentieth century legislation that encouraged Puerto Ricoâs reliance on debt to fill federal funding gaps. 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