Puerto Rico Bankruptcy Storm Heading for Mainland America

Jesse  Hathaway
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Posted: Jun 05, 2017 11:15 AM
Puerto Rico Bankruptcy Storm Heading for Mainland America

The Financial Oversight and Management Board for Puerto Rico, a federal board tasked with managing the island commonwealth’s course out of fiscal emergency, declared failure on May 3, filing paperwork to begin court proceedings restructuring the government debt.

Territory government agencies, such as the Puerto Rico Electric Power Authority, are likely to follow the government into bankruptcy court, leaving investors to potentially lose as much as 65 percent of their original investments.

In 2015, Puerto Rico Gov. García Padilla warned of an impending “death spiral” if territory lawmakers did not make pro-growth reforms. They did not, and Padilla’s warning has come to pass.

Puerto Rico is circling the drain, financially speaking, but it’s not too late for mainland lawmakers to learn from the island’s mistakes.

Puerto Rico owes creditors about $70 billion—about $19,729 per resident—in debt to creditors and investors, more than five times larger than the 2013 Detroit, Michigan bankruptcy filing.

Over the past 10 years, people have been exiting Puerto Rico in droves, leaving rock-bottom economic prospects behind for more opportunities and lower taxes in the mainland.Between 2004 and 2016, the island’s population declined by about 400,000, or about 11 percent.

It’s easy to see why: Prospects for prosperity on the island are dismal. In March, 115 out of every 1,000 Puerto Rican adults were unemployed, an unemployment rate of 11.5 percent, according to the U.S. Department of Labor’s Bureau of Labor Statistics. Of the 880,800 Puerto Ricans who had jobs, about one out of every four individuals were employed by the government, and about 1.37 million people receive food stamps from the federal government.

In other words, there are many more “takers” than “makers” on the island.

One of the causes of Puerto Rico’s meltdown is the excessive cost of doing business in the territory, leading to crippling dependency on government handouts.

The litany of mandatory fringe benefits for employees, treated as bonuses elsewhere in the United States, encourages businesses to relocate to other states, because labor costs exceed the value of employees’ productivity.

Puerto Rico is a precautionary lesson for states that are pursuing similar policies. States such as Connecticut have taken on a massive amount of public debt. Adding up the cost of postponed payments to pension and health care programs, public bonds, government deficits, and spending liabilities, Constitution State lawmakers have racked up about $36 billion in debt, or about $10,025 per person in the state.

Unsurprisingly, many Connecticut residents are deciding to become ex-residents, moving to regions with friendlier tax policies. Between July 2015 and July 2016, 29,880 more people packed up and left the state than moved in.

As demonstrated by Puerto Rico and Connecticut, higher taxes chase away new business investments and encourage companies and entrepreneurs to leave. They also incentivize other people to move to states with a better tax environment, because of the lack of available jobs and high levels of public debt.

It may be too late for the Island of Enchantment, but it is not too late for states to stop treating taxpayers like ATMs and to start enacting pro-taxpayer, pro-growth reforms that encourage in-migration and economic prosperity.