Puerto Rico: A U. S. Territory in CrisisIntroduction Puerto Rico is a political paradox: part of the United States but distinct from it, enjoying citizenship but lacking full political representation, and infused with its own brand of nationalism despite not being a sovereign state. More than a century after being acquired by the United States from Spain, the island continues to grapple with its status as a U. territory and the legacy of colonialism in the Caribbean. The debate over Puerto Rico’s statehood remains as relevant as ever, as the island struggles with the combined effects of economic depression, shrinking population, debt crisis and bankruptcy, natural disasters, the COVID-19 pandemic, and government mismanagement.

4 billion, lowering Puerto Rico’s annual debt payments from nearly $4 billion to just over $1 billion. Supporters say the deal puts the island on a sustainable path while avoiding any cuts to public pensions, which had been a major point of contention. However, critics are wary of the resolution. Some argue that cutting debt without requiring deeper structural reforms means problems are likely to repeat.

history. The island’s legislature tried to design its own restructuring process [PDF], which would have allowed public services to continue uninterrupted while it negotiated lower debt payments, but the U. Supreme Court rejected the law. Congress and President Barack Obama’s administration drew up an alternative plan, the 2016 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Most notably, PROMESA created a seven-member financial oversight board appointed by the White House that was granted full control of Puerto Rico’s finances. It also created a debt restructuring process similar to Chapter 9 that governed negotiations with creditors to reduce debt payments. Those negotiations were beset by controversy, as it became clear that all involved—bondholders, Puerto Rican pension funds, and other public services—faced steep losses.

Just months later, however, the United States invaded the island during the 1898 Spanish-American War as part of a broader effort to push Spain out of the Caribbean and the Pacific. Spain lost the war and ceded Puerto Rico to the United States, along with other territories, including Guam and the Philippines. How has its relationship with the United States evolved? A raft of legislation and court rulings in the early twentieth century forged a unique relationship between Washington and its Caribbean territory.

Like most U. states, the island receives billions of dollars more in federal spending, including on Medicare and Social Security, than its residents pay in taxes. In addition, the U. government has allocated more than $25 billion in disaster-recovery funding to the island since 2017. What is the island’s economic outlook? Puerto Rico continues to be ravaged by a sustained recession. Annual economic growth fell by roughly 12. 5 percent overall between 2004 and 2020, while Puerto Rico’s population shrunk by more than 16 percent. It has also struggled under a large public debt in recent years, totaling about $70 billion—or 68 percent of gross domestic product (GDP)—in 2020.

Hurricane Maria brought ruin to the island in 2017, causing about three thousand deaths [PDF], knocking out the electrical power grid, and costing tens of billions of dollars. An earthquake at the start of 2020, the island’s strongest in a century, also created a power blackout. Months later, the pandemic exposed the territory’s disjointed and inefficient health system, which critics say has impeded care for COVID-19 patients.

It took more than five years of negotiations for a federally appointed oversight board to approve a restructuring plan, and controversy persists. As a territory, Puerto Rico’s options were limited from the beginning. It could not receive assistance from the International Monetary Fund, like insolvent countries such as Greece have. Neither could it file for Chapter 9 bankruptcy, which municipalities such as Detroit have used to receive legal protection against creditor claims while restructuring their payments. Then there is the sheer size of the debt: Puerto Rico’s is by far the biggest government bankruptcy in U.

However, some benefits could change as a result of legal challenges. In August 2020, a district court judge ruled that denying island residents several forms of federal assistance, including Supplemental Security Income (SSI), is unconstitutional. The federal government appealed the decision, and in November 2021, the case was heard by an appeals court, which held that Puerto Rico’s exclusion from the SSI program violates the Fifth Amendment. In April 2022, the Supreme Court reversed that decision.

government began phasing out Internal Revenue Code Section 936. This provision had allowed American businesses to operate tax-free in Puerto Rico, which critics viewed as a windfall for wealthy corporations. Section 936’s repeal triggered a deterioration of Puerto Rico’s manufacturing sector, and the territorial government increasingly turned to debt to cover its spending. The 2008 global financial crisis hit Puerto Rico especially hard, with the recession further lowering tax revenues, souring an early-2000s construction boom, and giving investors pause. The territorial government implemented austerity measures, including layoffs of public workers, that sent unemployment soaring. It also crafted dubious deals to balance its budget, including letting government agencies borrow from one another to pay back bonds. On top of that, experts say, much of this money was poorly spent. Leaders failed to parlay the billions of dollars they borrowed into strong institutions, a deficit laid bare by the natural disasters that have devastated Puerto Rico’s underfunded and poorly maintained infrastructure.

Several versions of a sweeping plan to cut the island’s debt were floated, but creditors promised legal challenges, and efforts were paused due to the COVID-19 pandemic. In January 2022, a federal judge approved a final plan between the PROMESA board and Puerto Rico’s government, paving the way for the island to escape bankruptcy and resume making payments to creditors. The deal cuts $33 billion in total debt obligations down to $7.

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