By: Mark Glennon*
Aside from the human dimension of Puerto Rico’s crisis, a personal account of which is below, the major significance of its bankruptcy will be whether it sets some form of precedent for Illinois, Chicago and other broke governments.
Technically, Puerto Rico isn’t in a bankruptcy proceeding. Instead, it’s in a very similar proceeding under PROMESA, the law passed last year by Congress specifically for Puerto Rico. Wall Street will watch “closely to see how other indebted municipal governments, including Chicago and Illinois, may fare in confrontations with investors,” as one report put it.
In other words, Congress could similarly act to create a specialized form of insolvency proceeding for troubled states like Illinois, whether under the Bankruptcy Code or not. For now, states are not authorized to file bankruptcy. Congress could also create a more specialized proceeding for very large cities like Chicago.
Particularly interesting to watch will be the performance of the seven-member oversight board created by PROMESA that now will have a dominant role in shaping a reorganization plan for Puerto Rico. That’s key because real control has to be taken away from the incumbent politicians who otherwise have authority to act on behalf of the government. Michigan overcame that problem with the Detroit bankruptcy by giving broad authority to an emergency manager.
While Puerto Rico indeed may set precedent, make no mistake that it’s very different from Illinois. A humanitarian collapse indeed is underway on the island. For that, I’ll add some direct observations by Jack Skagerberg, an old friend from Chicago’s south suburbs who went on to a big career in reorganizations and bankruptcies of all sorts. His wife is Puerto Rican and they have a home there.
Jack owes his success to resolving insolvencies properly and he’s among the most upbeat people I know, but when I reached him by phone today he was down. “It’s depressing to be here,” he said.
“So many people have left, especially people in prime working age.” The numbers back him up: The island’s population has dropped from more than 5 million to 3.4 million.
“Horse tranquilizers and opiates are everywhere. It seems like 40% of the males are stoned every day,” he said. Xylazine, a horse tranquilizer, is in fact a drug of choice in Puerto Rico. A National Geographic piece said it has created “zombies on a zombie island.” It’s often used together with heroin or cocaine.
On the face of the numbers, Illinois might not seem terribly far behind Puerto Rico. The island has debts of about $70 billion plus unfunded pension liabilities of another $40 billion. That’s about $34,000 per person. Illinois’ per person debts are about $18,000 per person if you include bonds, unfunded pensions, retiree healthcare and our bill backlog.
But Puerto Rico has lost almost all its ability to deal with its debt, Jack says. “Nothing is manufactured here since tax subsidies for pharmaceutical production ended some years ago. Tourism has collapsed. Sales and income taxes have skyrocketed so everybody wants cash payments to avoid paying. There’s a 20-year supply of condominiums for sale. There’s little farming because of poor soil — only tree-grown products are produced domestically.”
That’s not Illinois. Puerto Rico’s population loss of 1.6 million is particularly striking and makes Illinois’ loss of 37 thousand seem trivial.
No, Illinois isn’t Puerto Rico. Nor is Chicago. But Stockton and San Bernadino, California weren’t either. Not being Puerto Rico doesn’t mean you can’t run out of money. And it doesn’t mean Puerto Rico won’t frame the debate about how to resolve government fiscal crises.
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.