By: Emmett Egger
In the aftermath of Hurricane Maria, Puerto Rico faces funding issues. Hurricane Maria disrupted the economy, which is predicted to result in a $20 to $40 billion dollar loss in economic output. The governor of Puerto Rico, Ricardo Rosselló, states that “it could take $95 billion dollars to rebuild.” In addition to the loss in revenue and the financial resources it will take to rebuild, Puerto Rico has $73 billion in outstanding bond debt.
As a result, Puerto Rico and the Federal Government are exploring several ways to meet the monetary challenge Puerto Rico now faces. The monetary solutions include a $36.5 billion dollar disaster aid relief bill, which was passed by the House of Representatives last week, and possibly wiping out Puerto Rico’s outstanding bond debt. President Trump stated that the Federal government would release Puerto Rico from its obligation to repay the bond. The President, however, does not have the power to unilaterally release Puerto Rico from its bond obligations; Congress would also have to act.
It is rare for the Federal Government to release a state or city from its obligation to repay bond holders, but this type of debt forgiveness has taken place before. For example, Congress authorized the Treasury to Facilitate loans or loan guarantees to New York City in the 1970s and Washington, D.C. in the 1990s. When New York City was unable to meet its obligation to its municipal bond holders, banks refused to market the bonds leaving New York City unable to borrow.
Given Puerto Rico’s current financial situation, forgiving Puerto Rico’s upcoming bond obligations seems like an attractive option. Ike Brannon, former chief economist and Puerto Rico Advisor to John McCain, however, asserts that the Federal Government should not forgive Puerto Rico’s bond obligations as “‘[m]illions of investors have retirement funds in assets invested in Puerto Rican Bonds, and that includes tens of thousands of Puerto Rican Residents.’” Although the forgiveness may impact retirement funds, releasing Puerto Rico from its bond obligations could allow Puerto Rico to obtain the $95 billion dollars to rebuild earlier.
If Puerto Rico is able to rebuild earlier, it will allow for Puerto Rico to start raising tax revenues from its tourism industry. Currently, tourism is taking a hit. This is notable as tourism accounts for approximately 7% of Puerto Rico’s Gross National Product, and the tourism industry employs roughly 64,000 people. Due to tourism being a significant part of Puerto Rico’s economy, it is currently not able to take advantage of a meaningful part of its tax base and raise money to meets its current monetary challenges.
Forgiving Puerto Rico’s bond obligations has costs and benefits, but it could kick start Puerto Rico’s recovery. Ultimately, even if the forgiveness of debt is the best solution to the monetary issues Puerto Rico now faces, both the executive and legislative branches will have to act.