I’ve been reading about Puerto Rico’s budget problems and heard from a friend who works in the government there that bankruptcy is more of a given than a possibility. He says that it’s probably a matter of days or weeks.
So what will happen if the Puerto Rican government declares that it is bankrupt?
I know Puerto Rico is a territory of the U.S., but not a state. What will the net effect be? Would it be the same if, say, Virginia or New York filed for bankruptcy? Can a government even file for bankruptcy? If it does, can I buy it at a reduced price on the open market?
Have you been to Puerto Rico? It’s like a third world country anyway. I don’t think much will change. Because of the generally high poverty level the people there are used to doing more with less and are more hardy than us here in the US. Many are used to growing big gardens, raising livestock, batering, etc. Life will go on as usual.
It might be just my perception, but I think that a lot more people here depend on assorted government handouts than elsewhere. If that goes away, the issue would go beyond unrepaired potholes and underequipped classrooms.
I know of several families who live a decent life purely on food stamps (called “tarjeta de la familia”) and free healthcare. I shudder to think of what would happen to them without any form of government assistance.
Then again, the new batch of city majors and local authorities just gave themselves salary raises in the range of 40-50%. The poor suffering things.
I’ve been wondering if there were potential for widespread state and local government bankruptcies in the US. What if this isn’t confined to Puerto Rico, but you end up seeing whole regions of the country with bankrupt state governments? Is it a likely scenario?
Wait, I seem to remember three years ago it was in a similar situation (and voted to increase the taxes on the general public instead of taxing the industries).
Amp, when was the last time you went there? Unless you live in the scarcely populated center of the island, there is not enough space for the majority of the people to grow their own gardens and livestock like you said. Heck, many of the poor people in the metro area live in big humongous public housing developments. I can’t go against bartering, though, of that they’re good. But I doubt many will be good with farming and agriculture (and in fact, I bet many will resist that).
Sapo, one whole side of my family subsists entirely or almost entirely of government handouts (except one cousin). Shudder They’re damn good budgeters… which makes me mad they don’t put that skill into something marketable and employable.
One thing that people forget sometimes is that most of the industries in Puerto Rico came because of the low taxes. They do not give a lot of money back to the island. The goverment sees little, if any, money from them. They do provide some infrastructure, and they do hire people to build and maintain their facilities and employ the people who work there, but they do not pay as many taxes as they would in other places.
Indeed, which is why most of the tax plans from governments new and old hinge around taxing daily expenditures (sales tax, cell tax, etc). Those, of course, suffer greatly when people stop spending and the impact of a recession is worsened by it. There are few fixed sources of taxes here (property taxes and such).
Last time I visited family there was 2002. I mainly stay in Naranjo, which is a barrio in the mountains north of Ponce, so yeah, basically the center part of the island. Damn near every single one of my family members also subsists off of government hand outs along with the farming, coffee and sugar cane, and raising pigs and chickens.
I am a bit ignorant when it comes to the metropolitan areas. The biggest city I visit when I’m there is Yauco. My family prefers to stay in the mountains. I always refer to my lineage as Purto Rican hillbillies.
Wait, Ponce is a bigger city than Yauco, so you may be going there. And yes, the people in the mountains can subsist (and unless the lands are taken for construction, they can farm).
But for comparison, some of the biggest public housing projects, within San Juan (capital city), house more people than some of the small rural towns. I doubt many of them can farm (plus they would certainly lack space).
I was wondering the same thing when I was writing the OP last night. It’s one thing to see businesses go under, but the government of a U.S. territory going bankrupt wouldn’t do much to help consumer confidence.
So far, only cities have either officially or unofficially gone bankrupt, or been downrated to junk-bond status (NY, Philly, Detroit). IIRC DC got its fiscal home rule intervened and the Virgin Islands had a federal auditor placed on them in the relatively recent past. PR , AFAIK, would be the biggest subfederal level jurisdiction to go into default.
In '06 what there was was a cash-flow problem: what happened was that in '05 the budget was not passed so FY 06 was run entirely on a continuance of the prior year’s budget, but actual costs were rising (more on this later) so by May of '05 the Treasury had run out of cash-on-hand so there had to be a government shutdown. That the place did NOT collapse just because 100K public servants didn’t show up for work for a few days seems to have gone unremarked (more on this laterl)… but thousands of them marched demanding that the legislature approve SOMETHING, ANYTHING and it got squared away by passing a new sales tax. That solved the immediate problem for a couple of years. And in fact, legislation passed earlier this year prevented that happenning again now.
Which is why nobody dares substantially raise the industries’ taxes. In a place where 9% unemployment was considered a historic low (it’s officially 13% now, in real terms once you factor participation rates it should be half again as much), the Pharmas quickly start the blackmail, including mass mailings from their [del]hostages[/del] employees as to how terrible that would be. The current crisis has finally seen a bill that will tack on an extra 5% tax to banking and big industries, but the specifically tax-sheltered corps remain so, after all that’s their whole raison d’etre. And a big sin tax raise is in there, too and Lord how have both Coors and the local Medalla brewery alike wailed and bitched. One funny thing, too, is that many of the people who ask why don’t we sock it to the corporations, ALSO complain bitterly that back in the 90s the biggest of the tax breaks WAS phased out (but it was federal, so it did not mean money for us).
What happens now is of a different nature than 06, though related insofar as irresponsible policies.
During the big Clinton boom of the 90s, when money flowed freely, the PR administration of the time expanded a lot of big healthcare, transportation, construction, welfare, etc. programs. Boy was there expansion. And tax cuts, too. And the public employee unions got big breaks and great contracts, too. But it seems this was predicated on the boom continuing forever, or that by then the people would have voted for statehood and the share of federal funds would be even bigger.
The good times did not last and statehood did not make it past 46% in the vote.
After the dot-bomb, growth slowed down significantly and the legacy expanded programs of the 90s began rising in cost and/or the debt incurred in the process began coming due. Now, the sensible thing to do in the 01-04 term would have been to cut back on the programs and cut down on the payroll.
But who are you kidding, that would be the sensible thing to do. The then-new admin decided to start a $billion disadvantaged-community reconstruction program. Because if the earlier guy started a $billion+ healthcare program , why, we have to do something just as big. And of course, *“we cannot lay off public workers!”. *When the mostly-unionized public sector at what passes here for “full employment” is 25% of the labor force, you don’t want to touch the public employees. Besides, the local private sector, since the 1975 oil crash, has been unrelieble as a source of secure employment and remained dependent on the whole “gimme a tax shelter or I leave for Honduras (or wherever)” thing. Add that because of insularity and cultural divergence, a Puerto Rican worker has a much harder time just packing up and moving to a part of the US where things are better. So instead the government started doing very limited cutbacks and financial moves involving debt-to-pay-debt and regular old tax increases.
Be that as it may, those measures worked, for a while, because there were always ways to cover for the deficit with asset sales, or with loans, or by going to the financial houses to restructure your debt and bond issues… OK, you read that last phrase again. I think you can imagine where THAT comes back to bite us later.
Come the '04 election, what we then got for 05-08 was a politically deadlocked government with no winner and the executive and BOTH houses of the legislature divided amond two parties plus a dissident faction within the second party. That is what results in the '06 shutdown, that got dug out of with the sales tax. However…
While all that is going on, deficit expenditure CONTINUED RISING. The 05-08 Legislature refused to approve increases in revenue, but at the same time, the Executive refused to back down and make deep cuts in programs or payroll, so the debt kept accruing and compounding. Meanwhile the bond rating agencies began worrying and, under pressure from them and from the big holders of Commonwealth notes, commitments were made to legislate to ensure coverage of these obligations in order to get some financial-instrument restructurings. If you just shuddered at the thought that we were depending for our fiscal solidity on billions in financial instrument restructurings in the period leading up to 2008, you are a sensible person. Besides surrendering much flexibility this pretty much ensured that in case the general economy went tits up, the bondholders and raters would take a bath and demand at least their pound of flesh back from us.
As you may have noticed, since 2007 the general economy has gone tits up. This of course has some severe effects on our ciffers since with a slowdown in business and industry, we’ve had a greater-than-billion $ drop in real vs. expected revenues, while we’ve had comparable increases in services that have to be provided to the newly unemployed and poorer. Meanwhile the Legislature = no new revenue measures vs. Executive = no cuts in government stalemate continued. Over 2007-08 the Commonwealth started doing such things as public entities not paying debts to one another and stiffing suppliers.
The “book” deficit for FY09 was estimated to be 1.2Billion, potentially rising to 1.8 due to losses in revenue (out of a $9.6 Billion General Revenue budget); but the incoming administration claims that the total real-terms, on-and-off-book deficit is really closer to two to three times that much. Now they went as usual to the financiers to ask what can we do about this, how we can avoid paying all that is due right now… but this time the financiers said"“Sorry dudes, no more breaks, WE are hurting, WE want cash and we want it now, else we’ll junk-rate your bonds, which means say goodbye to any growth. You know what to do.” “What to do” = yep, more tax raises AND cut expenditure by no less than 20%. Which means, layoffs. (And for the first time ever, we have a governor who actually dares to say we SHOULD cut a lot of employees – some 30 thou, between one tenth and one eighth of the public payroll. On the minus side, he’s one of the last of the Bushists, but then again you take what you got.)
Or, default. With all the consequences. Save 30K jobs this year, lose 130K over four? Wipe out the pension funds? Have to pay for everything cash-on-the-spot for 10 years? We can’t just print money.
Boy is everyone screaming now! And I’m at the edge of deciding to ditch the whole PR public service gig and move away to a cabin in the Idaho woods, if it weren’t for the *&^%$ cold there. The pension fund is already nearly worthless anyway!
I’ll be away from the Dope until Monday (Government business. Of course) so if anything else comes up I’ll follow up then.
