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Puerto Rico: Greece of the Caribbean?

California has taken some much-deserved flak on this blog and elsewhere for its woefully underfunded public pensions, and the President’s home state of Illinois has thoroughly wrecked its finances with pension stupidity, but the worst pension crisis in America is not in any of the states—it’s in Puerto Rico. The island territory has had a rough go of it lately; tax revenues have been falling as a shrinking population, a long recession, and the growth of the underground economy cut into the tax base. The government has been reduced to selling off roads and airports to raise money to cover its debts. But the biggest problem is the pension system. The New York Times (where thanks to ace reporter Mary Williams Walsh coverage of the pension crisis remains outstanding) reports:

The main fund, which serves about 250,000 government workers, past and present, is only 6 percent funded — a small percentage of what is considered the minimum needed for a marginally healthy pension plan — and could run out of money as soon as 2014. Another fund, for about 80,000 teachers, which is 20 percent funded, will last just a few years longer if nothing is done. Police officers and teachers in Puerto Rico have opted out of Social Security and rely entirely on their pensions.

It’s not clear that any help is on the horizon. Although outgoing governor Luis Fortuno had adopted an austerity plan aimed at fixing the fund, his defeat in the recent election has killed the plan, and his successor has given few signs of what he plans to do. Meanwhile, the territory’s bond ratings continue their freefall:

Since the election, yields on the island’s 30-year bonds have continued to widen.

“I don’t think that there’s a default that’s about to happen, but a default isn’t the only bad thing that can happen when you’ve got bonds,” Mr. Schankel said. Puerto Rico’s bonds are just a notch or two above junk status. If they fall to that level, at least some institutions would be forced to sell, potentially setting off a chain reaction. And individual investors could get a jolt if they saw the value of their holdings fall. Many people own Puerto Rican debt without knowing it, through their mutual funds.

There has been much excitement around Puerto Rico’s first ever vote in favor of statehood, but the island’s case would be much stronger if it could get its house in order. As things stand now, Congress will be wary of approving statehood for the Greece of the Caribbean.

Also worth noting: most of the Puerto Rican retirees aren’t getting lavish pensions; in many cases they are looking at $1,000 a month — and this is for workers who don’t collect Social Security. The cynicism and corruption of a political class (and union leadership) that could put elderly low income people in this kind of position is breathtaking. If a private company behaved this way, its executives would face huge civil penalties and jail time.

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