Deep in debt: Puerto Rico struggles to make cents

Editor’s Note: Around the World is a semi-regular series in which The Pitt News breaks down world news with the help of local experts to give you the low down on what’s going on internationally. In this installment, The Pitt News spoke with assistant clinical professor of law at Pitt, Sheila Vélez Martinez, assistant professor of economics at Pitt, Sewon Hur and associate professor and director of graduate studies in Pitt’s economics department, Marla Ripoll to tackle Puerto Rico’s debt crisis.

Early this month, Walmart’s Puerto Rico branch threatened to throw its tea in the ocean over the commonwealth’s newest tax laws.

Metaphorically, that is. What Walmart Puerto Rico actually did was file a lawsuit against Puerto Rico in which the company states the government “shortsightedly and illegally targeted Walmart Puerto Rico” as the result of a paralyzing financial crisis.

In May 2015, Puerto Rico Gov. Alejandro García Padilla signed Act 72 into law and increased the Tangible Property Component. The TPC taxes transferred property from a related entity outside of Puerto Rico, meaning that Walmart will face higher taxes because it brings in a lot of product from other countries.

Walmart alleges that García Padilla’s newest transfer tax is a cash grab in a desperate situation — Puerto Rico is $72 billion in debt.

“Let us be clear: We have no cash left,” García Padilla said in a Senate Judiciary hearing Dec. 1. “This is a distress call from a ship of 3.5 million American citizens that have been lost at sea.”

A bonded economy

The Puerto Rican financial crisis has been brewing for some years but recently reached a tipping point because of a downgrade on its bonds that will cut the time Puerto Rico has to pay back its impressive debt.

Sheila Vélez Martinez, assistant clinical professor of law at Pitt, said the island’s crisis isn’t news.

“This was bound to happen, the economy has been in trouble for a long time,” Martinez said.

Martinez said Puerto Rico has only remained stable because of an economy built on loans and bonds.

Puerto Rico’s bonds are completely exempt from taxes, which makes them intriguing to U.S. bondholders. A low rating from Standard and Poor’s, a financial services company that provides analysis and research on stocks and bonds, downgraded Puerto Rican bonds to non-investment grade, or “junk status.”

The downgrade triggered acceleration clauses, which would force Puerto Rico to repay certain debts within months instead of years.

Puerto Rico made a $354 million payment the first week in December as an attempt to reassure investors that it would not default on its debt. But Sewon Hur, assistant professor of economics at Pitt, said that wasn’t enough.

“They made a big show of paying back, but they already cut bonuses and raised revenue, so what else can they do?” Hur said. “Puerto Rico can’t sustain this payback, and it looks like [it is] going to have to default.”

The question of statehood

Many economists think filing for bankruptcy would be a more viable alternative for Puerto Rico than trying to settle its debt. But Chapter 9 of the U.S. Bankruptcy Code allows municipalities of states to declare bankruptcy.

The problem is a matter of legal definition — Puerto Rico isn’t a state, it’s a territory and can’t declare U.S. bankruptcy.

“I’d be in favor of some sort of coordination to provide help,” Marla Ripoll, associate professor and director of graduate studies in Pitt’s economics department, said, adding she would advise a special Chapter 9 for Puerto Rico.

Ripoll said Puerto Rico’s status as a non-state makes it difficult for its treasury to seek financial help.

“In order to avoid a legal mess, the treasury may want to step in, but they technically can’t. The [International Monetary Fund] may not want to get involved because Puerto Rico isn’t a country,” Ripoll said. “That’s terrible. No legal entities to go to for Puerto Rico.”

Walmart insists that in an unstable financial situation, the corporation has been one of Puerto Rico’s biggest economy boosters.

“Walmart Puerto Rico collects more sales tax on behalf of the commonwealth than any other company or entity,” the almost 40-page lawsuit reads. “Every year, Walmart Puerto Rico purchases $1.6 billion of products from Puerto Rican vendors and suppliers.”

The multinational retail brand alleges that the Puerto Rican government’s tax increase is aimed at megastores and that time is of the essence for the court to rejoin the law because Puerto Rico’s unstable economy leaves Walmart’s future as perilous as it is.

Hur said the most likely course for Puerto Rico’s financial future would be for the island to default on its debt.

For example, instead of paying off student loans when they’re due, a student could default and push the payments back for months or years.

“Default isn’t pretending the debt doesn’t exist so much as it is a rescheduling [of the payments],” Hur said.

Looking ahead

As U.S. citizens, Puerto Ricans can move freely from Puerto Rico to any of the 50 states, making it easier for people who have the means to escape the financial debacle.

The steady flow of Puerto Ricans moving to the mainland United States began during the economic downturn in 2008, and Ripoll said it will most likely continue.

“There will be more migration for sure, even if negotiations are good, I’m not sure the growth Puerto Rico needs to recover will come any time soon,” Ripoll said.

At the moment, there is no agreement on a course of action. The financial situation is too complicated for any plan to be a realistic solution for all the contributing problems, according to Martinez.

“Puerto Rico needs a major structural change, there’s no Band-Aid,” Martinez said.