By Danika Fears
June 9, 2017 | 12:13am
Thousands of Puerto Rican revelers clad in red, white and blue will hit the streets of New York City on Sunday to celebrate their heritage in the annual Puerto Rican Day Parade.
On that same day, the 3.4 million Puerto Ricans living on the island will have the opportunity to participate in a nonbinding referendum about the territory’s political status — voting for statehood, independence, or the status quo.
This vote is not the first of its kind. A similar referendum was held in 2012, with 54 percent of participants rejecting Puerto Rico’s current status as a US commonwealth. Of those who wanted change, the majority voted for statehood.
But this year’s referendum comes at a particularly troubling time for Puerto Rico, currently in the throes of a crippling debt crisis that forced the island to file for a special kind of bankruptcy protection this year.
Puerto Rican Gov. Ricardo Rossello has been a passionate advocate for statehood — an issue that has historically divided residents — and believes the island’s dire economic situation has made more people support that option than ever before.
“I’ve seen the people of Puerto Rico have a significant shift in the past couple of years . . . It partly is because of the crisis,” Rossello recently told The Post’s editorial board.
“People understand by being a territory we are limited in the scope of political power, we are limited in the scope of resources that we have.”
Of course, even if Puerto Ricans were to choose statehood overwhelmingly, it would take congressional action to make their choice a reality.
And given that the island is currently staring down a $123 billion in public debt and pension obligations, some experts say it’s unlikely there will be any support in Washington for statehood.
“At this point, it’s a cruel joke,” said Arturo Porzecanski, an economist at American University in Washington, DC. “What ability would the island have to negotiate any kind of arrangement in this weak position?”
In 2015, then-Gov. Alejandro Garcia Padilla declared that Puerto Rico’s bond obligations, more than $70 billion, were “unpayable.”
“This is not politics, this is math,” he said bluntly.
With creditors clamoring for payment, Puerto Rico finally declared a form of bankruptcy this month, setting the stage for a protracted legal battle steeped in uncertainty.
The move was made possible under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), created by Congress last year to help the territory turn itself around after a decade of economic recession and mounting debt.
Under that law, a Financial Oversight and Management Board was formed to help Puerto Rico oversee its finances.
But in May, the board reached a grim conclusion: “Puerto Rico can no longer fully pay its debt and pay for government services.”
“Nor can Puerto Rico refinance its debt — it no longer has access to the capital markets,” the board said in a court filing. “In short, Puerto Rico’s crisis has reached a breaking point.”
Many factors underpin Puerto Rico’s financial woes, including a government that has mismanaged its spending for years.
“The basic underlying reason is just extremely poor decision-making at the government level,” said Barry Bosworth, an economist at the Brookings Institution.
Puerto Rico’s municipal bonds were particularly attractive to American investors since they’re exempt from city, state and federal income taxes. And even as Puerto Rico’s debt burden ballooned, the territory continued borrowing to keep things running.
“They lost revenues because the economy is continually sinking — the debts have been taking up a bigger and bigger portion of the taxes that were coming in,” Bosworth said.
“They couldn’t cut expenditures fast enough and couldn’t convince anyone to pay a higher tax rate.”
On top of the bond problem, the island’s public pensions and health-care system are nearly insolvent.
Forty-six percent of Puerto Ricans currently live in poverty, the unemployment rate was 11.5 percent as of April 2017, and labor-force participation hovers around a dismal 40 percent.
As US citizens, Puerto Ricans have the option of packing their bags and heading to the mainland to seek out new economic opportunities — and they’re doing it in droves. In 2016, the island’s population was 3.4 million, down from 3.8 million in 2004, according to the Pew Research Center. The island’s population is projected to continue shrinking, and the resulting “brain drain” and diminished tax base could have disastrous consequences for the territory.
“It is possible for Puerto Rico to remake itself, but one thing they’ve had is an easy escape route,” Porzecanski said.
Manufacturing, primarily of pharmaceuticals, is still Puerto Rico’s largest economic sector, accounting for nearly half of the island’s gross domestic product in 2015. Tourism brings in about $4 billion a year.
Puerto Rico was once a source of low-cost labor, but that changed in the ’70s, when the US opened up trade to the rest of the world, he explained.
Job opportunities have also been hindered by the fact that Puerto Rico’s minimum wage is the same as the rest of the country, despite the island’s weak economy.
And between 1996 and 2006, Congress phased out tax incentives for companies that built manufacturing plants on the island, a major blow for an island dependent on outside corporations, experts say.
Then there’s the Jones Act of 1920, which mandates that goods transported between domestic ports must be shipped on American vessels, making goods more expensive for an island economy like Puerto Rico’s.
Economists also blame the territory’s antiquated welfare system, which is structured so many Puerto Ricans are better off staying unemployed and taking government funds than looking for jobs.
‘Puerto Rico’s economy suffers from being treated as part of the US for some policies, foreign for others, and as a second-class US area in others.’
– Jenniffer Gonzalez-Colon
The restructuring of Puerto Rico’s massive debt is now in the hands of Judge Laura Taylor Swain of the Southern District of New York, who was chosen by Chief Supreme Court Justice John Roberts to preside over the bankruptcy, the biggest ever in the US.
Economists say it’s unclear how the court will handle the restructuring, which could take months or years to get worked out.
“Domestically, there’s not anything quite like it,” Bosworth said.
In the meantime, the federal oversight board has approved a fiscal turnaround plan calling for austerity measures and cuts to public spending. The plan would furnish about $800 million annually to pay debt — less than a quarter of what the territory owes each year.
Rossello presented his $9.6 billion budget for 2018 late last month, which protects pension payments while cutting government operating expenses by 9 percent. It would also slash government purchase expenses by 40 percent and payroll by 13 percent.
“In the past, money was taken from areas, increasing budgeted spending and hiding debt,” he said. “That’s over.”
Perhaps no move has garnered more attention than Puerto Rico’s decision to close 179 schools across the island, in part to help pay off the looming debt.
It’s a necessary measure, considering the number of students enrolled in the territory’s public schools has sharply declined, even as the number of teachers has risen, the governor and experts say.
“In the last 10 years, we’ve lost 43 percent of our student population,” Rossello told The Post’s editorial board. “If you have schools that have 60 students with not very many teachers or resources, our view is let’s aggregate those resources. The driving force in that decision was better education.”
The University of Puerto Rico, which serves more than 50,000 students and is a source of pride for many islanders, has been shut down for about two months, with students striking against a $450 million budget cut proposed by the federal oversight board.
Students of the University of Puerto Rico protest as a meeting of the Financial Oversight and Management Board for Puerto Rico meets in San Juan.Getty Images
Interim University President Nivia Fernandez and three members of the board of governors of the school stepped down at the end of May.
“Unfortunately, the university is being targeted by a disproportionate . . . and unfair funding cut that not only places the university’s physical integrity at great risk, but also the capacity it still has to attract top-quality teachers,” the board members wrote in a letter to Rossello.
Some experts have insisted austerity measures could make a bad situation worse, and say what the island really needs is an influx of capital to spur growth.
“I think the proposals that have been put forward are likely to make the depression in which Puerto Rico has been continue,” economist and Columbia University professor Joseph Stiglitz said at the Center for a New Economy’s 2017 Conference in San Juan.
“I’ve seen policies like this in other countries around the world, and they have almost never worked.
“The first priority needs to be a recovery of the growth of the island,” he added.
But others say Puerto Rico really has no other option.
“I thought the oversight board has been pretty realistic. I think you have to make the cuts because you can’t borrow,” Bosworth said. “Every decision they make on the expenditures side has to be covered by money on the tax side.”
Many Puerto Rican officials insist statehood is the only long-term solution to the territory’s prolonged economic malaise.
“Puerto Rico’s economy suffers from being treated as part of the US for some policies, foreign for others, and as a second-class US area in others,” Congresswoman Jenniffer Gonzalez-Colon (R-Puerto Rico) wrote in an op-ed for The Hill.
“The inconsistent and incoherent mix, coupled with the lack of a vote in our national government, has left our island underdeveloped, contributing to an economy that has lagged that of the 50 states for four decades.”
But economists aren’t so certain the move would do much to cure Puerto Rico’s tattered finances — especially in the near future.
“The economic problems that Puerto Rico faces will exist whether it is or is not a state,” Bosworth said. “It doesn’t make much difference.”
Since states are sovereign, they can’t be bailed out by the federal government, he explained.
“And in terms of complaints about funds from the federal government, if too big a proportion of these funds go to one area or one state, they’ll simply change the rules,” Bosworth added.
“I think it just reflects the divisions that are on the island, and when a population is so deeply divided, it’s very hard to agree on anything.”
Porzecanski added that there are “bigger issues” that Puerto Ricans could decide by referendum, including shrinking the role of the island’s government, developing new sources of revenue or changing up the island’s business model.
Rossello argued it would be a “terrible black eye” for the US not to take action if the vast majority of Puerto Ricans opt for statehood, as he is confident will be the case.
“Are we just going to just let a colonial territory with US citizens make a democratic decision and not take action on it?” he wondered. “There’s going to be recurring argument, ‘Well, you need to get your economy in order and then come talk to us about statehood.’ If you look historically, that hasn’t been the case for other states.”
Additional reporting by Carl Campanile