Puerto Rico Gov. Alejandro Garcia Padilla is husbanding the Commonwealth's cash to keep vital services up and running following its debt default on Monday.
"The Governor of Puerto Rico's very intentional fashion of going about this is keeping the ship steady until, hopefully, President Obama can step in with a global solution," said Michael Santoro, professor of management and global business at Rutgers University.
Padilla in June said Puerto Rico could no longer service its $72 billion dollar public debt. Since that declaration, the Commonwealth has made some payments but strategically missed others.
Early last month, the island's legislature ensured that Puerto Rico could make its biweekly $250 million payroll by voting to suspend its payments on general obligation bonds. Some bonds are backed by specific revenue, some by the full faith and credit of the government, and others merely secured by the promise that the legislature will fund payment of the obligation.
"What we are seeing is that, not unlike with Greece, Puerto Rico has to choose between maintaining basic services and paying their bondholders," Santoro said. "This is part of America, and we have for far too long neglected it and its people."
Puerto Rico's boosters in Congress are pushing for the Commonwealth to have the option of declaring bankruptcy, as Detroit did in seeking protection from its creditors in 2013. Under existing law, and unlike local governments, U.S. states may not file for bankruptcy.
That restriction has drawn criticism.
"This is not a surprise to anyone, and I am deeply disappointed that House Republicans adjourned for August recess without considering legislation to permit Puerto Rico's public utilities to resolve their debts through Chapter 9 of the U.S. Bankruptcy Code," said Rep. Nydia Velázquez, D-N.Y., in a statement after Puerto Rico paid only $628,000 of a $58 million payment due Monday.
Late last month, Velazquez warned that the implications of a broader default would be felt well beyond Puerto Rico.
"Given that 53 percent of U.S. municipal mutual funds hold Puerto Rico's bonds, it is likely that those most affected will be individual American investors, including many senior citizens who depend on such funds for regular income," she said. "In addition, U.S. entities, many of which are household names, including mutual funds, commercial banks and hedge funds, have sizable holdings of Puerto Rico's debt."
Backers of the bondholders are touting a report prepared by consulting firm Centennial Group International on behalf of 34 hedge funds with financial interests in Puerto Rico. Key findings include that over the last 10 years, while spending on education jumped 39 percent, school enrollment dropped 25 percent. According to the report, Puerto Rico only collects 56 percent of the sales tax its owed, compared to the 83 percent average collection rate for the 50 states.
Back in the spring, Puerto Rico instituted a mandatory two-day furlough per month for its public workforce, which officials said would save $50 million dollars. With almost a quarter of a million public workers, close to one in four of the jobs on the island are in the government sector.
Close to half the island's population falls below the poverty line, and youth unemployment is close to 50 percent. The lack of employment opportunities has driven many people, especially younger and more educated workers, to leave Puerto Rico.
Since 2007, Puerto Rico's real estate has lost 25 percent of its value and close to $30 billion dollars in equity. And while Caribbean neighbors like Cuba and the Dominican Republic have seen a dramatic rise in tourism, Puerto Rico's hospitality sector has stagnated.
Puerto Rico's Fiscal and Economic Recovery Working Group, a panel set up by Padilla, is scheduled by month's end to provide a draft plan for how to resolve the debt crisis.