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Pension Meltdown
Puerto Rico Reaching Tipping Point

In a sign that Puerto Rico’s fiscal travails are entering their final stages, the U.S. Treasury Department has stepped up its involvement, sending high-ranking officials to the troubled territory several times in recent weeks. An acute example of blue model governance gone terribly awry, Puerto Rico is drowning in debt—much of it due to a dramatically underfunded pension system. And the territory’s problems are likely to reverberate well beyond its borders—middle-class Americans could wake up to a nasty surprise if the crisis goes unresolved, as Puerto Rico’s toxic debt is sloshing around in many of their own pension portfolios.

Unlike in Detroit, no framework exists for orderly bankruptcy proceedings in the territory. Treasury denied that a bailout or federal takeover was in the cards, so no quick fix is likely. But with major bond issuers like the territory’s electric company likely to default as early as July, some kind of big intervention seems more probable by the day.

These troubles in the territory may be part of what’s on New York Fed President William Dudley’s mind. Reuters reports that the official, who oversees Puerto Rico, recently said that the bankruptcies in Detroit and Stockton “may foreshadow more widespread problems than what might be implied by current bond ratings.” Here’s one consequence of widespread high municipal debt in places like the territory:

“At a certain point, the debt service burden clashes with maintaining a sufficient ongoing provision of services to forestall people from voting with their feet,” he said.

“This may occur well before the point that debt service capacity appears to be fully exhausted,” Dudley added. “In other words, the prioritization of cash flows to debt service may not be sustainable beyond a certain point.”

This is one of the terrible choices the blue model has forced on local governments: between paying debt and providing services. As more and more governments are confronted with it, expect a more hostile blue civil war: clashes between different interest groups who want their needs prioritized.

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  • Pete

    In Puerto Rico, like Greece, standards of livings have to fall to pay the debt.

    It’s too bad Puerto Rico can’t be spun off as an independent country and not be a constant welfare client of the U.S.

  • Andrew Allison

    Greece Redux?

    • ljgude

      Funnily enough there are some parallels worth thinking about. PR doesn’t become a state for complex cultural reasons, but it under the US umbrella so it can have a negative economic impact just like Detroit, except it is much bigger and really is a different country in certain ways. It is a tricky situation indeed.

    • f1b0nacc1

      Nice weather – check
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      Lousy economy – check

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