Puerto Rico's Economic Crisis Spurs Exodus From Island, Fears About American Retirement Plans

While all eyes have focused on Detroit’s record bankruptcy, an economic crisis is deepening in Puerto Rico that many experts say may be far more harmful to the U.S. economy.

Puerto Rico has been mired in economic recession for almost eight years, with public debt skyrocketing to $70 billion and unemployment climbing to 14 percent, higher than that of any U.S. state. The island’s debt load accounts for 93 percent of its GDP.

Many economic experts worry that Puerto Rico could default on its debt, having a potential direct impact on mainland United States.

In September, Puerto Rico's Government Development Bank announced it would cut bond sales after investors pushed the yield on Puerto Rico bonds above 10 percent. The island's general obligation bonds have been hovering at just above near-junk status. That worries economic experts who note that many Americans’ retirement funds include Puerto Rico bonds.

“It’s not just the residents of Puerto Rico” who are affected, said Tom Schatz, president of Citizens Against Government Waste, based in Washington D.C. “It’s Americans across the country who are at risk as well.”

The situation on the island is so critical that residents are fleeing in the largest numbers in decades, ushering a quiet exodus. Tens of thousands have left for mainland U.S. between 2010 and 2012, according to The Washington Post.

Companies also are eyeing the exits.

Pfizer announced recently that it was closing one of its three plants in Puerto Rico, leaving an unknown number of people unemployed. The move came just days after Merck announced it would stop active ingredient production at its plant in Barceloneta, a Puerto Rican city that was once considered a pharmaceutical hub.

While the Obama administration and Puerto Rican Gov. Alejandro Garcia Padilla say a U.S. bailout is not in the offing, the U.S. government nonetheless is concerned enough about the island’s tattered finances to put together an advisory team that is spending part of December there to help Puerto Rico manage the economic crisis.

“Not only is there a debt problem, but there’s a deep [economic] structural problem,” said Juan Carlos Hidalgo, a Latin America policy analyst at the Cato Institute. “Puerto Rico has one of the lowest labor participation rates in the world. Only about 40 percent of the working age population is in the labor force.”

And of those in the labor force, a third, Hidalgo said, work in the public sector.

“So you have a very tiny percentage of the population actually sustaining the economy,” he said.

Beyond that, Hidalgo said, there's a heavy welfare dependency in Puerto Rico.

The island also is bound by U.S.-mainland minimum wage laws, which Hidalgo argued are not suitable to Puerto Rico’s labor and economic factors and have led to high unemployment among its youth and low-skilled workers.

“Employers are not going to hire very young or unskilled workers for minimum wage,” he said.

The joblessness, Hidalgo noted, has fueled a high crime rate, and re-energized the illegal drug business. And the exodus of Puerto Ricans, many of them of working age and high-skilled, has meant a glut of abandoned homes on the island where mortgages are going into default, he said.

Former Gov. Luis Fortuno, a Republican, tried to address the economic problems and the bloated government workforce. He slashed nearly 40,000 government jobs, which shrank the public workforce by about 20 percent.

Fortuno also cut personal income and corporate taxes, and made a host of other economic changes. His dramatic moves helped lower the deficit to $660 million from $3.3 billion.

But while the island saw some aspects of its economy improve, major problems remained, and some even grew worse. The welfare rolls, for instance, swelled in large part because of all the government workers who suddenly were unemployed.

Former Puerto Rico Secretary of State Kenneth McClintock places much of the blame for the island’s financial mess on former Gov. Aníbal Acevedo Vilá.

“He put in place a number of user fees, he increased everything by such large sums that it produced our first non-mainland-triggered recession,” said McClintock. “We began a recession at a time when the rest of the United States was not in a recession. He refused to make major spending cuts and, as a result, we accumulated all these deficits.”

When he and Fortuno were sworn into office in 2009, McClintock said, “We found a $4.4 billion deficit. It got to the point where we did not even have the cash for the first payroll that January.”

The decision to lay off a huge part of the public sector, he said, was a tough one.

“That’s why we lost the election,” he said.

Hidalgo added: “Gov. Fortuno did not get enough time to finish his work.”

Garcia Padilla did not maintain many of the policies that his predecessor put in place, McClintock said.

Some of Fortuno’s critics say that while he did make many necessary cuts, he failed to take longer-term steps, such as laying out a plan for job creation.

Besides the move to cut bond sales after investors pushed the yield on Puerto Rico bonds above 10 percent, Garcia Padilla said he would increase the borrowing capacity of Puerto Rico's main debt issuer, the Sales Tax Financing Authority.

Garcia Padilla also has taken other measures to appease Wall Street ratings agencies, including the reformation of a public pension system that had a $37.3 billion unfunded liability.

Puerto Rico, a commonwealth, is ineligible to file for bankruptcy.

Enter the U.S. advisory team that is spending part of December on the island.

The team will be composed of officials from the departments of Education, Health and Human Services, and Housing and Urban Development, as well as the Environmental Protection Agency. The team is expected to work with the U.S. territory's government on how best to maximize federal funds in those areas to help boost its economy.

The officials will work in an advisory capacity, making sure federal money available to Puerto Rico is being taken advantage of and is being appropriately administered.

No additional federal funds are planned beyond current allocations.

Former Puerto Rico House Speaker Jenniffer (CQ) Gonzalez said she considers the move as a type of receivership.

"It shows the lack of trust that the federal government has concerning the capacity of the current administration over economic and fiscal matters," said Gonzalez, a representative affiliated with the pro-statehood New Progressive Party.

While Garcia Padilla did not respond to requests for comment regarding the U.S. team visit, his chief of staff Ingrid Vila rejected Gonzalez's comments.

"There is no federal takeover of Puerto Rico," she said. "Our economic plan is working, and we are continuing to work through the next phases of our plan, which includes tapping the Obama Administration for advice on how we can maximize our federal resources, so that we can grow the Commonwealth's economy."

In an interview with the Washington Post, Garcia Padilla echoed Vila.

“I can assure you that Puerto Rico will not default,” he said. “Puerto Rico will pay our debts. It is a constitutional obligation. But for me it is also a moral obligation.”

The Associated Press contributed to this report.