Puerto Rico, as many of you know, filed for bankruptcy last week. They were the first, but they may not be the last:
Puerto Rico’s situation is unique in that it’s the first U.S. territory to file for bankruptcy. But the circumstances now being faced by the island is serving as a warning sign to other U.S. territories, more pointedly the U.S. Virgin Islands, as well as states and municipalities like Illinois and Philadelphia facing similar situations — rising pension costs, and continuous downgrades from rating firms that make it more expensive to borrow money. In the case of the U.S. Virgin Islands, the government has been shut out of the market altogether, forcing the Mapp administration to cut cost and raise taxes to bolster the government’s coffers.
But the local government still has no access to the bond market, and it remains to be seen whether the sin taxes, property taxes and timeshare unit taxes recently enacted will raise the revenues needed to keep government services operational. The administration has also adopted an aggressive tax collection agenda with the aim of collecting over $400 million the government says is owed to it.
Puerto Rico’s many creditors — whose lawsuits filed against the island on Tuesday prompted its request for court relief on Wednesday — are likely to receive far less of their money back than they want. The plight may serve as a lesson and cautionary tale for bondholders, and complicates the USVI’s situation, as Puerto Rico and the U.S. Virgin Islands are close in proximity, and have many of the same problems.
In fact, in some ways the USVI’s condition is worse. Per capita debt is more than a third higher than Puerto Rico’s, the economy has contracted by significantly more, and both territories were borrowing to fill long-time massive budget gaps. While the USVI’s overall tax-supported debt at $2 billion is much lower than Puerto Rico’s $53 billion in tax-supported debt, per capita debt is about a third higher: $19,000 in the USVI compared with $12,000 for Puerto Rico.
The Virgin Islands’ situation is nearly as hopeless as Puerto Rico’s. The economy has been devastated by the loss of crucial tax breaks, the closure of major employers like the HOVENSA oil refinery, and the 2008 recession from which it has never recovered. The islands’ government has been borrowing to try to fill the gaps, and has now reached the end of their rope on that strategy, just as Puerto Rico has.
They need to be worked quickly through a bankruptcy process like Puerto Rico, and then we need to either find ways to encourage private business to invest in in the islands or allow them to be an independent country. It does the United States no good to allow US territories to flounder like this.