The destruction brought to Puerto Rico by Hurricane Maria just a few weeks ago was intensified by more than a century of efforts by Washington and Wall Street to exploit the island. Shortly after the United States seized Puerto Rico, Guam and the Philippines from Spain in 1898, Congress sought to minimize federal funding obligations while allowing treatment of these colonies unequal to that of states.
Puerto Rico was especially singled out for financial exploitation, as a 1917 law created a separate tax system for the island not administered by the Internal Revenue Service. Under this law, Puerto Rico was free to issue “triple tax-exempt” bonds, relieved from local, state and federal taxes. In turn, the federal government was relieved of responsibility to extend full support to the island. In the 1940s, mainland manufacturers came to Puerto Rico to use its large labor pool, low labor costs (Puerto Rico’s minimum wage was not aligned with the rest of the U.S. until 1983), and duty-free exports to the U.S.
In 1976, with the promise of creating more good-paying jobs on the island, the federal tax code was amended to allow Puerto Rico’s companies to transfer income tax-free to their U.S. parent companies. A number of mainland companies, especially pharmaceuticals, fled to the island. The program made lots of money for participating companies, but resulted in billions of dollars of lost tax revenues, and provided relatively few jobs.
Seeking another source of income, Puerto Rican and mainland financiers revisited the triple-tax-exempt bonds. Initially such bonds were tied to traditional debt issued by Puerto Rican public corporations to fund power, water, and highway projects. Before long, with the help of Wall Street, Puerto Rico launched more exotic debt instruments, such as bonds tied to Puerto Rico’s new sales tax. The bonds were issued as Capital Appreciation Bonds — the “buy now, pay later” favorite of municipal finance—and allowed Puerto Rico to borrow beyond limits outlined it its constitution.
By 2014 Puerto Rico needed to restructure $73 billion in bonds and another $30 billion in unfunded pension liabilities. Unlike a sovereign nation, Puerto Rico could not just print more money or, like a state, seek the relief of U.S. Bankruptcy Court to restructure its debt. In fact, Puerto Rico was removed from Chapter 9 eligibility of the 1984 U.S. Bankruptcy Code. When Congress addressed Puerto Rico’s debt in 2015, it could have reinstated Puerto Rico’s eligibility for Chapter 9, a strategy preferred by many bankruptcy legal professionals.
Instead, Congress passed the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA). As with the 1917 law that gave Puerto Rico its own private tax code, PROMESA set up a separate bankruptcy law outside of the federal code available to the states. On July 1, 2016, the day after the law was signed, Puerto Rico defaulted on their debt. The whole matter is now the U.S. Federal District Court, instead of the more traditional U.S. Bankruptcy Court, as further evidence of Puerto Rico’s ongoing separate and unequal status.
This is the muddled economic environment into which hurricane Maria crashed, destroying much of the infrastructure and assets behind the debt. A month after Maria’s landfall, 80 percent of households remain without power, and half of the island is without communications. It was also into this environment that Donald Trump crashed, criticizing Puerto Ricans in a series of tweets that stated “Electric and all infrastructure was disaster before hurricanes,” and quoted a TV host who said of the territory that “a financial crisis looms largely of their own making.” As aid efforts were just getting underway, Trump capped off the callous comments with “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. Forever!” New York congresswoman Nydia Velasquez said on Twitter that the president’s comments were “outrageous, indefensible and irresponsible. We will not allow our gov’t to abandon our fellow citizens.”
Clearly oblivious to the history of Puerto Rico — and the large role the U.S. has played in creating the financial environment adding to the humanitarian crisis wrought by Maria — through his comments and actions Trump has assured that Puerto Ricans, U.S. citizens all, will remember the indifference and haughty dismissal of responsibility for ongoing aid and support. In the near term as many as 100,000 Puerto Ricans, by some estimates, are heading to the mainland, with most settling in Florida and Texas.
While residents in Puerto Rico, these U.S. citizens cannot vote in federal elections, but more than a million Puerto Ricans now live in Florida, a state Trump won by fewer than 113,000 votes. Those current residents, and the influx of Puerto Ricans insulted and dismissed by Trump as little more than parasites, represent a new flood landing on the shores of this country. Washington, Wall Street and Maria may have combined to create a tragic crisis that callous egotists exploit for their own ends, but Puerto Ricans are strong and proud citizens, and they won’t forget how they were treated. Politicians like Trump, and those that cower in his shadow, may well regret unleashing the energized flood of Puerto Rican voters, and those who empathize with the plight of Puerto Rico.
Despite the sunny reports from Trump and FEMA, there’s a lot of work left to do in Puerto Rico. Here’s a good place to start.
