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| Puerto Rico’s Fiscal Fiasco Is a Harbinger of Mainland Woes | Puerto Rico’s Fiscal Fiasco Is a Harbinger of Mainland Woes |
| (about 20 hours later) | |
| To tourists, Puerto Rico means piña coladas and sunbathing. To Puerto Ricans, it looks very different: The unemployment rate is over 12 percent, schools and hospitals are closing, and the government debt is so huge it makes Detroit’s look modest. | |
| Puerto Rico is now supposed to pay an unfathomable $2 billion to bondholders on July 1 — which it cannot do — even as it accrues pension obligations to its workers and lets public works lapse. A relief bill is expected to be introduced in Congress on Wednesday, but even if it passes and works, the island will not be able to pull out of its financial tailspin for years. | Puerto Rico is now supposed to pay an unfathomable $2 billion to bondholders on July 1 — which it cannot do — even as it accrues pension obligations to its workers and lets public works lapse. A relief bill is expected to be introduced in Congress on Wednesday, but even if it passes and works, the island will not be able to pull out of its financial tailspin for years. |
| But mainland residents should not look smugly at Puerto Rico. Across America, dozens of cities, counties and states may be heading down the same financial rabbit hole. Illinois, New Jersey, Philadelphia, St. Louis and Jacksonville, Fla., to name just a few, are all facing their own slowly unspooling financial disasters. | But mainland residents should not look smugly at Puerto Rico. Across America, dozens of cities, counties and states may be heading down the same financial rabbit hole. Illinois, New Jersey, Philadelphia, St. Louis and Jacksonville, Fla., to name just a few, are all facing their own slowly unspooling financial disasters. |
| The blame lies with what economists call “deferred costs.” Generous pension promises made decades ago, without enough funding, are now coming due as baby boomers retire. Bonds issued in the distant past to build bridges, highways and other projects also must be paid — even as the projects themselves could by now use expensive makeovers. | The blame lies with what economists call “deferred costs.” Generous pension promises made decades ago, without enough funding, are now coming due as baby boomers retire. Bonds issued in the distant past to build bridges, highways and other projects also must be paid — even as the projects themselves could by now use expensive makeovers. |
| You cannot necessarily see deferred costs, lurking in a shadowy realm known as “off the balance sheet.” But deferring them doesn’t make them go away. They actually compound. | You cannot necessarily see deferred costs, lurking in a shadowy realm known as “off the balance sheet.” But deferring them doesn’t make them go away. They actually compound. |
| “New York City has $85 billion of retiree health obligations all by itself,” said Richard Ravitch, the former lieutenant governor of New York State and an informal adviser to Detroit’s financial control board. He helped New York City resolve its financial crisis in 1975; today he worries about possible replays across America. | “New York City has $85 billion of retiree health obligations all by itself,” said Richard Ravitch, the former lieutenant governor of New York State and an informal adviser to Detroit’s financial control board. He helped New York City resolve its financial crisis in 1975; today he worries about possible replays across America. |
| “We’ve promised more than we can pay without confiscatory levels of taxation,” Mr. Ravitch said. “Puerto Rico is just, arithmetically, the most egregious example of borrowing to cover up deficits.” | “We’ve promised more than we can pay without confiscatory levels of taxation,” Mr. Ravitch said. “Puerto Rico is just, arithmetically, the most egregious example of borrowing to cover up deficits.” |
| In Washington, for example, the peril of deferred costs hit home for riders of the Metro last month, when transit officials announced that the entire subway system was in need of urgent repairs and would be closed in pieces, on a rolling basis, possibly for months at a time. In March, the system was closed entirely for a day after a fire broke out, similar to one that had caused the death of a passenger in 2015. Federal safety regulators found that the authority — run by the District of Columbia, Virginia, Maryland and the federal government — had put off fixing leaks and corroded equipment for years. | In Washington, for example, the peril of deferred costs hit home for riders of the Metro last month, when transit officials announced that the entire subway system was in need of urgent repairs and would be closed in pieces, on a rolling basis, possibly for months at a time. In March, the system was closed entirely for a day after a fire broke out, similar to one that had caused the death of a passenger in 2015. Federal safety regulators found that the authority — run by the District of Columbia, Virginia, Maryland and the federal government — had put off fixing leaks and corroded equipment for years. |
| Similarly, in Michigan, Flint’s nightmare of contaminated water has its roots in a decrepit local water system that was built decades ago during boom times, and is now too costly for the shrunken city to fix or replace. | Similarly, in Michigan, Flint’s nightmare of contaminated water has its roots in a decrepit local water system that was built decades ago during boom times, and is now too costly for the shrunken city to fix or replace. |
| The streets and lighting system of East Cleveland, Ohio, are so far gone and repairs so out of reach that the dwindling city recently sought permission from the state to file for Chapter 9 municipal bankruptcy — just in time, as luck may have it, for the Republican National Convention in Cleveland next door. | The streets and lighting system of East Cleveland, Ohio, are so far gone and repairs so out of reach that the dwindling city recently sought permission from the state to file for Chapter 9 municipal bankruptcy — just in time, as luck may have it, for the Republican National Convention in Cleveland next door. |
| In Puerto Rico, signs of desperation include a highest-in-the-nation sales tax — raised to 11.5 percent last year, up from 8 percent — and the mortgaging of the Luis Muñoz Marín International Airport. Named for “the father of modern Puerto Rico,” the tourism hub was recently hocked to a Mexican investment firm to make sure planes could keep landing. | In Puerto Rico, signs of desperation include a highest-in-the-nation sales tax — raised to 11.5 percent last year, up from 8 percent — and the mortgaging of the Luis Muñoz Marín International Airport. Named for “the father of modern Puerto Rico,” the tourism hub was recently hocked to a Mexican investment firm to make sure planes could keep landing. |
| “We have over 30 dams in Puerto Rico, and I think only one works,” said Eduardo Bhatia, the island’s senate president, in an interview earlier this year. “We’re here in the rain forest, and we have plenty of water. It’s insane.” | “We have over 30 dams in Puerto Rico, and I think only one works,” said Eduardo Bhatia, the island’s senate president, in an interview earlier this year. “We’re here in the rain forest, and we have plenty of water. It’s insane.” |
| Yesteryear’s spending decisions are coming to haunt officials around the country. Illinois, for instance, has come to grief over a century’s worth of deferred pension obligations: Last year, the State Supreme Court said it had found warnings from “as long ago as 1917” that the pension system was veering toward insolvency. | Yesteryear’s spending decisions are coming to haunt officials around the country. Illinois, for instance, has come to grief over a century’s worth of deferred pension obligations: Last year, the State Supreme Court said it had found warnings from “as long ago as 1917” that the pension system was veering toward insolvency. |
| The warnings did little good, and by 2003 the state was so hopelessly far behind on paying its pension costs that it opted for the same magic bullet Puerto Rico uses: borrowing to pay bills. From 2003 to 2011, Illinois borrowed more than $17 billion to try to replenish its pension system. It did not work. Today Illinois has a bigger pension gap than ever, officially $111 billion but probably much bigger in real-world terms — plus the additional $17 billion of bond debt. | The warnings did little good, and by 2003 the state was so hopelessly far behind on paying its pension costs that it opted for the same magic bullet Puerto Rico uses: borrowing to pay bills. From 2003 to 2011, Illinois borrowed more than $17 billion to try to replenish its pension system. It did not work. Today Illinois has a bigger pension gap than ever, officially $111 billion but probably much bigger in real-world terms — plus the additional $17 billion of bond debt. |
| Another cautionary tale comes from Jefferson County, Ala., which in 2011 filed what was then the biggest municipal bankruptcy in American history. The immediate cause? Deferring the cost of fixing an aging sewer system for more than 100 years, to the tune of $3.1 billion in sewer bonds. | Another cautionary tale comes from Jefferson County, Ala., which in 2011 filed what was then the biggest municipal bankruptcy in American history. The immediate cause? Deferring the cost of fixing an aging sewer system for more than 100 years, to the tune of $3.1 billion in sewer bonds. |
| Kicking the can that far down the road was a community effort: 20 cities and towns in Jefferson County, large and small, had shoved responsibility for their decrepit sewer systems onto the county, avoiding having to take heat from their residents for raising rates to pay for maintenance. | Kicking the can that far down the road was a community effort: 20 cities and towns in Jefferson County, large and small, had shoved responsibility for their decrepit sewer systems onto the county, avoiding having to take heat from their residents for raising rates to pay for maintenance. |
| Finally a federal judge ordered the county to fix the system, which had become a health hazard. And the cost of borrowing enough to cover a century’s worth of deferred maintenance was what ultimately sank the county. | Finally a federal judge ordered the county to fix the system, which had become a health hazard. And the cost of borrowing enough to cover a century’s worth of deferred maintenance was what ultimately sank the county. |
| In Puerto Rico, where the island’s $72 billion bond debt is out in the open, even now there is a tendency to overlook its unfunded pension obligations, stated at $46 billion. | In Puerto Rico, where the island’s $72 billion bond debt is out in the open, even now there is a tendency to overlook its unfunded pension obligations, stated at $46 billion. |
| For years, when its government was faced with bills it could not pay, Puerto Rico issued new bonds to get the money — a little like a homeowner taking out a second mortgage to buy groceries. The practice is widely known to be unsustainable. | For years, when its government was faced with bills it could not pay, Puerto Rico issued new bonds to get the money — a little like a homeowner taking out a second mortgage to buy groceries. The practice is widely known to be unsustainable. |
| At this point, conservative Republicans see taxpayers being liable for a big bailout. Democrats say the proposed reforms will punish ordinary Puerto Ricans who did nothing wrong. Elected officials on the island see federal oversight as neocolonial rule. Creditors hear themselves called “vultures” and fear being hit with all the losses. | At this point, conservative Republicans see taxpayers being liable for a big bailout. Democrats say the proposed reforms will punish ordinary Puerto Ricans who did nothing wrong. Elected officials on the island see federal oversight as neocolonial rule. Creditors hear themselves called “vultures” and fear being hit with all the losses. |
| And yet some of them have still offered to lend more money, if only to tide Puerto Rico over through the July 1 payment due date. | And yet some of them have still offered to lend more money, if only to tide Puerto Rico over through the July 1 payment due date. |
| “Their proposed ‘fixes’ are aimed at misinforming the public and dissuading Congress from doing what is right for our 3.5 million American citizens,” Gov. Alejandro García Padilla said in a statement last month. “The Commonwealth is insolvent, and the situation requires responsible efforts to find a solution.” | “Their proposed ‘fixes’ are aimed at misinforming the public and dissuading Congress from doing what is right for our 3.5 million American citizens,” Gov. Alejandro García Padilla said in a statement last month. “The Commonwealth is insolvent, and the situation requires responsible efforts to find a solution.” |
| Fewer tourists, fewer sales, fewer workers, fewer paychecks — all these mean less tax revenue for the island’s government, bigger deficits and a search for more things to tax that could discourage still more workers or tourists. The spiral is feeding itself, and while Congress gropes for solutions, the day-to-day problems keep getting worse. | Fewer tourists, fewer sales, fewer workers, fewer paychecks — all these mean less tax revenue for the island’s government, bigger deficits and a search for more things to tax that could discourage still more workers or tourists. The spiral is feeding itself, and while Congress gropes for solutions, the day-to-day problems keep getting worse. |