This update about the situation in Puerto Rico delves into its financial woes which without a doubt will add greatly to its problems going forward. Almost everyone has seen the news that Hurricane Maria battered parts of the Dominican Republic with heavy rain and high winds as it passed off its east coast last week after making a direct hit on Puerto Rico. that caused severe flooding and cut power to almost all the island. The entire island of 3.4 million people was under a flash flood warning early on Thursday as the storm dumped massive amounts of rain on much of Puerto Rico through Friday, according to the U.S. National Hurricane Center. This has put a major damn in peril adding to the crisis the area now faces.
Maria was the second hurricane to hit Puerto Rico in two weeks following closely on the heels of Hurricane Irma. Large amounts of federal aid began to reach the stricken area on Saturday when the island’s main port was opened in the capital allowing 11 ships to bring in 1.6 million gallons of water, 23,000 cots, dozens of generators and food. Dozens of additional shipments are expected in upcoming days and are being welcomed by local officials who praised the Trump administration’s response but called for the emergency loosening of rules they blame for condemning the U.S. territory to what they see as second-class status.
The White House said late on Wednesday that President Trump had declared a major disaster in the U.S. Virgin Islands and ordered federal aid to supplement recovery efforts, Maria was ranked a Category 4 storm, near the top end of the five-step Saffir-Simpson scale, and hit Puerto Rico with sustained winds of up to 155 miles per hour (250 km per hour). Maia was the strongest storm to hit the U.S. territory in nearly 90 years. It should be noted that Puerto Rico is not a state and its massive financial problems are expected to complicate the island’s recovery. Currently, Puerto Rico faces the largest municipal debt crisis in U.S. history. Both its government and the public utility have filed for bankruptcy protection amid disputes with creditors.
Some officials predict Puerto Rico could be without power for months after Hurricane Maria and authorities are warning that many investors in the $9 billion of Puerto Rico’s outstanding electric utility bonds are at risk of never seeing their money. The plight of Prepa, Puerto Rico’s main supplier of electricity, was grim even before the storms. Prepa had filed for bankruptcy in July. Gov. Ricardo Rosselló told CNN on Wednesday night that Puerto Rico’s debt crisis will make recovery very slow and electric power will be one of the toughest things to restore. Pointing to the fact that the power grid is “a little bit old, mishandled and weak,” he told Anderson Cooper.
Multiple transmission lines sustained massive damage from the storm, said Ricardo Ramos, director of the Puerto Rico Electric Power Authority. Ramos said he hopes to begin launching helicopters by this weekend to begin inspecting the transmission lines. Power knocked out after Hurricane Irma hit two weeks ago was just beginning to be restored before Maria. Power plants were particularly vulnerable to these storms because the island’s heavy debt load, and the utility’s own chronic insolvency, had limited spending on maintenance. Telecommunications throughout the island have also “collapsed” adding urgency to an already dire situation.
While President Trump way back in May tweeted, “No Bailout For Puerto Rico” with the island’s economy in shambles, its coffers depleted, and creditors nipping at its heels, Puerto Rico had little choice but to seek what is essentially bankruptcy relief in federal court. It was the first time in history that an American state or territory had taken such an extraordinary measure. With approximately $123 billion in debt, the total includes about $74 billion in bond debt and $49 billion in unfunded pension obligations. This far exceeds the $18 billion bankruptcy filed by Detroit in 2013. While the court proceedings could eventually make the island solvent for the first time in decades, the immediate impact is very grim.
As government workers are forced to forgo pension money, public health and infrastructure projects will go wanting, and the “brain drain” the island has been suffering as professionals move to the mainland will most likely intensify. Puerto Rico is “unable to provide its citizens effective services” because of the crushing weight of its debt, according to a federal board that has supervised the island’s financial affairs since last year. Knowing that for the last decade, Puerto Rico hasn’t had the funds to repay its creditors or improve its aging infrastructure, let alone deal with the ramifications of a major hurricane sets the stage for some type of dramatic action that will most likely be very costly to the American taxpayer.
The disaster relief system is structured in a way that people are primarily meant to rely on their private insurance. Through FEMA, individuals can only receive a maximum of $33,300 which is often not enough to repair or rebuild many houses. On September 20th, a story in the Wall Street Journal reported only about 50% of houses in the territory are covered by insurance. As to where Puerto Rico will fund repairs for essential public facilities, such as the bankrupt power authority remains in question.
Further complicating matters is that Puerto Rico’s economic history will limit its fundraising options. With all its debt the island has no access to capital markets. Even if it did, willing investors would be hard to find as the expected post-Maria tourism drought will mean that tax revenue is expected to fall. Another issue is that Puerto Rico may find it difficult to appeal to Congress, where, as a U.S. territory, it has no voting power. Additionally, lawmakers have long chastised Puerto Rico for the financial mis-management that led to its bankruptcy. With huge damage numbers of around forty billion dollars of damage are being tossed around fiscal conservatives who currently control the legislative branch could attack any large relief package as part of a bailout.
Even if Puerto Rico gets the money it needs to rebuild over the next few months, its long-term prospects remain grim. Unlike Houston, which had a flourishing economy when Hurricane Harvey hit, Puerto Rico has been struggling for years. The Commonwealth’s woes can be traced back to 2006 when a tax break for U.S. companies expired. An exodus of jobs soon followed, with the unemployment rate reaching over 12% earlier this year, more than double the overall U.S. figure. As the jobs left, people began to follow. The island’s population has shrunk to about 3.5 million from 3.8 million in 2000.
One thing is certain and that it will be interesting to watch this all unfold as Puerto Rico jostles with other areas like Texas and Florida for hurricane relief from a nation whose generosity is being taxed in more than one way. This additional crisis may actually strain the ability of the federal government to pretend it can cover the cost of every calamity that strikes the nation without casting doubt on the soundness of the dollar. It also does not bode well that a few real states such as Illinois, Connecticut, and New Jersey are also spinning around the bankruptcy drain. These expensive disasters highlight the fact that with money in short supply voicing sympathy is one thing but asking people across the nation to step up and pay the bill a far different animal.
Footnote; Congress sure has its plate full but that does not mean anything will get done. Not dealing with hurricane relief will, however, open lawmakers open to more criticism. The article below looks into the large amounts of money needed to fix this mess.
H/T: Bruce Wilds