While Detroit has preoccupied Americans with its record-breaking municipal bankruptcy, another public finance meltdown on a potentially greater scale has been developing off most Americans' radar screens, in Puerto Rico.
Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable in the long run. The biggest concern is that the territory, which has bonds that are widely held by mutual funds, will need some sort of federal lifeline, an action for which there is no precedent.
In a meeting with bond analysts in New York on Monday, the president of the Puerto Rican Senate, Eduardo Bhatia, said officials in the U.S. Treasury and White House had been analyzing the situation carefully, "wondering how they can help Puerto Rico send a very strong signal of stability right now."
"We are waiting for some sort of an announcement from the Treasury and the White House," he said without clarification. He also complained that analysts and investors did not appreciate the tough austerity measures that Puerto Rico pushed through in recent months.
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.
Detroit, at least, was able to seek relief in bankruptcy court, but Puerto Rico is in a legal twilight zone. Territories, like states, have no ability to declare bankruptcy. Another territory, the Northern Mariana Islands, tried in 2012, but its case was rejected.
Top Puerto Rican officials say that the territory is not bankrupt and is working through its problems responsibly. To show their good intent, the governor, Alejandro Garcia Padilla, and members of his government have been shuttling to New York and Washington in recent weeks, meeting with bankers, credit analysts, members of Congress and Treasury officials, providing details of the fiscal changes they have pushed through and discussing what else might be needed.
"These guys down in Puerto Rico, they're determined to make this work," said Alan Schankel, a managing director at Janney Capital Markets, who recently visited the island.
But the coming weeks will be critical, and how Puerto Rico comes through depends, to some extent, on factors beyond its control. If its financial problems worsen, it may need some form of sovereign debt relief for which there is no direct precedent - and that would probably be subject to approval by a Congress now paralyzed and focused on a fiscal situation closer to home.
"A lot of people believe that the Territorial Clause of the United States Constitution gives Congress the power to impose control," said Robert Donahue, a managing director with Municipal Market Advisors, who has been discussing the situation with members of the President's Task Force on Puerto Rico, a group representing 16 Cabinet-level agencies and the White House.
One idea being considered is that Congress might establish a financial control board, perhaps like the one that helped guide the District of Columbia through a turbulent period from 1995 to 2001. One of that board's first steps was to appoint a financial official with power to override the mayor and City Council.
Most Popular Stories
- U.S. Growth Stayed Steady During Shutdown, Fed Says
- Hezbollah Chief's Assassination Claimed by Sunni Group
- Newtown Massacre Heard on 911 Recordings
- Allstate Seeks to Invest in Minority Firms
- Reid Confident Congress to Pass Immigration Bill
- Latin Music Conference Turns 25
- Guardian Pressured to Stop NSA Stories: Editor
- New Home Sales Shoot up 25 Percent in October
- Boehner Blames Obama, Senate for Congressional Inactivity
- Liberty Power Gets Minority Business Nod