In an attempt to stop the bleeding, Congress passed a financial rescue bill on June 30, placing the island’s finances under the control of a federally-appointed oversight board.
What does the new law do?
The new law is called the Puerto Rico Oversight, Management, and Economic Stability Act -- PROMESA, for short. It creates an oversight board tasked with resolving the island’s crisis by negotiating with Puerto Rico's creditors –- the bondholders -- and the Puerto Rican government to "restructure" the debt. That might mean allowing Puerto Rico to pay it back over a longer period of time and convincing creditors to forgive some of what they’re owed. The full text of the law is here.
Most importantly, the measure shields Puerto Rico until 2017 from being sued by creditors if it misses a debt payment. This, in theory, buys the board time to come up with a deal without Puerto Rico getting slapped with lawsuits.
But don’t mistake it for a bailout. It’s far from it.
PROMESA doesn't actually provide any money to Puerto Rico's government. It just shifts decision-making authority from its locally elected government to the federal oversight board.
The board will have seven voting members who are supposed to be experts in finance or law. The members will be appointed by President Obama, with input from Republican and Democratic leaders in Congress.
Just one of those seats is reserved for someone who lives or works in Puerto Rico. And to the chagrin of Puerto Rican officials, members of its own government are barred from serving.
Why doesn’t Puerto Rico just declare bankruptcy?
Puerto Rico’s status as a U.S. territory is definitely not working in its favor at the moment. Unlike cities or counties in U.S. states, the island can’t file for bankruptcy – as Detroit did in 2013. The federal government has been unwilling to declare emergency measures to help the island’s most vulnerable residents, as it might have if a U.S. state were undergoing a similar crisis. And unlike sovereign nations, such as Greece, it can’t seek emergency assistance from the International Monetary Fund.
Who supports the law?
PROMESA garnered a rare showing of bipartisan support, including the backing of both President Obama and House Speaker Paul Ryan. Most members of Congress see it as the best way to manage a bad situation. Some Republicans worry it sets a precedent for federal intervention in fiscally-troubled states, although party leaders are quick to emphasize that it is by no means a taxpayer bailout. And some Democrats are unhappy about a provision in the law that would decrease the minimum wage for young workers on the island to $4.25/hour. Nonetheless, the bill passed both the House and the Senate by wide margins.
Who's opposed to it?
The island's governor, Alejandro Garcia Padilla, has been less enthusiastic.
Garcia Padilla argues that PROMESA's oversight board would place too much power in the hands of outside, unelected officials, undermining the rights of Puerto Ricans to determine their own destiny.
He now appears, however, to have reluctantly accepted this path as a necessary evil.
Puerto Rico has turned into “a colony of Wall Street,” Garcia Padilla said during a recent press conference. “We are starting the process of putting it back in the hands of Puerto Ricans.”
In Congress, Sen. Robert Menendez (D-N.J.) has been most the vocal opponent of the measure, calling it "blatant neocolonialism." Sen. Bernie Sanders (D-Vt.) has consistently echoed that assessment, referring to PROMESA as a "terrible piece of legislation" that "treat[s] Puerto Rico as a colony."
Some Puerto Rican residents have publicly protested the bill, labeling it an instrument of colonialism. A smaller contingent have even called for a “Prexit” – a Puerto Rican exit from the United States.
How bad are conditions on the island?
Pretty bad. Sen. Harry Reid (D-Nev.) recently described the situation as nothing short of "a humanitarian disaster.” The crisis hits the island’s public services and poorest residents particularly hard.
More than 150 schools have already been shuttered for lack of funds, and hundreds more are expected to close.
Even with the looming threat of a Zika virus outbreak, Puerto Rico's largest pediatric hospital recently cut its hours and shut down two wings. Another hospital is operating without electricity.
Meanwhile, Puerto Rican officials have raised taxes and laid off thousands of public employees.
Puerto Rico’s unemployment rate has climbed to nearly 12 percent, more than double the national rate. And almost half of the island’s residents now live below the federal poverty line.
All this has prompted a mass exodus, particularly among sets of desperately-needed skilled workers, like doctors, who are moving in droves to the mainland. In the past decade, almost 10 percent of the population has departed, according to recent Census data.
How did Puerto Rico get into this mess?
A combination of factors. For starters, Puerto Rico for decades was a manufacturing powerhouse, fueled by U.S. companies that received a hefty tax break for basing their operations there. In 2006, though, that incentive was phased out and companies relocated, spurring a major drop in the island’s revenue and jobs. Economic conditions deteriorated further when the U.S. financial crisis hit in 2008.
It’s also been extremely easy – much too easy, it turns out – for Puerto Rico to borrow money. Lending has generally been through municipal bonds, which are “triple tax exempt.” This means that anyone who buys a Puerto Rican bond (which, in effect, lends money to the Puerto Rican government) doesn't have to pay federal, state, or local taxes on the interest they earn. Large numbers of investors, including big hedge funds, gravitated toward Puerto Rican bonds despite strong signs its economy was tanking.
For years, borrowed cash poured in. As Puerto Rico’s inefficient government spent much more than it took in, public debt skyrocketed -- from $43.5 billion in 2006 to $72 billion today. Now it’s loans are due, and the island can hardly begin to pay them back.
What’s next?
Once its members are chosen, the oversight board will begin working on a deal that can at least temporarily stabilize the island's finances. In the long run, investors will most likely have to accept that Puerto Rico simply won’t be able to pay back the full amount it owes.
Meanwhile, Puerto Rico’s poorest residents will continue to be hit hardest, as the island endures prolonged cost-cutting measures, similar to Greece’s austerity reforms.
That will probably mean even fewer jobs, increased taxes and further cuts to education, health and other and crucial public services, which in turn will accelerate the exodus to the mainland for the foreseeable future.