Puerto Rico’s Debt Crisis: Making Puerto Rico Right

Part I: The Crisis and Its Origins

The Rise of the “Junta”

In June 2016, President Barack Obama signed into law the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), establishing the Financial Oversight and Management Board (FOMB)—commonly known on the island as La Junta. This unelected, federally appointed board was granted sweeping control over Puerto Rico’s budgets, fiscal planning, and debt restructuring. For many Puerto Ricans, La Junta became a symbol of colonial-style control: a group of outsiders dictating painful austerity measures to satisfy creditors, with little regard for local needs.

Yet La Junta did not appear out of nowhere. It was the byproduct of a perfect storm of fiscal mismanagement, opportunistic financial engineering, and federal neglect that together left Puerto Rico drowning in over $70 billion in debtby 2016.

The Perfect Storm of Bad Actors

Local Government Failures

• Puerto Rican administrations of both major parties chronically ran operating deficits, papered over by new bond issues rather than structural reforms.

• Pension systems were neglected for decades, leaving over $50 billion in unfunded liabilities.

• Public corporations like PREPA (power authority) and PRASA (water/sewer) ran chronic losses, with politically suppressed rate increases and bloated contracts.

• To sidestep constitutional debt limits, leaders created COFINA, a shell that securitized future sales tax revenues. This maneuver freed up near-term cash but locked in billions in obligations for the future.

Wall Street and Investment Banks

• Major underwriters—including Barclays, Morgan Stanley, JPMorgan, Santander, UBS, and Goldman Sachs—earned huge fees structuring exotic bonds.

• The infamous 2014 “scoop-and-toss” $3.5 billion GO bond issue was sold at junk-level yields (~8.6%) and used largely to refinance old debt and plug budget holes—a payday loan masquerading as long-term financing.

• Hedge funds and distressed-debt investors bought up Puerto Rican bonds cheaply, later suing to enforce full repayment.

Federal Government Complicity

• Congress eliminated the Section 936 tax incentive in the 1990s without a replacement, crippling Puerto Rico’s industrial base.

• Federal law barred Puerto Rican municipalities from accessing Chapter 9 bankruptcy, leaving them unable to restructure debts like Detroit or Stockton.

• The SEC and Treasury looked the other way as Puerto Rico issued bonds backed by dubious repayment capacity.

• Finally, when collapse was inevitable, Washington imposed La Junta—but only after hedge funds had positioned themselves for leverage in the restructuring fight.

Multinationals and External Actors

• U.S. corporations profited from low-tax manufacturing regimes, extracting profits while contributing little to the island’s long-term economic base.

• The Jones Act ensured all domestic maritime shipping relied on U.S.-flagged carriers, inflating costs for Puerto Rican consumers while enriching mainland shippers.

In short, Puerto Rico’s fiscal disaster was not the fault of a single government or a lone set of investors—it was the culmination of short-sighted local politics, predatory financial practices, and federal indifference, all operating in synchrony.

The Human Toll of Austerity

When the FOMB took control, its fiscal plans demanded:

• Closure of over 400 schools,

• Tuition hikes at the University of Puerto Rico,

• Cuts to pensions and public payrolls,

• Deferred infrastructure investment,

• And higher electricity rates from PREPA restructuring.

The logic was clear: free up revenues to pay creditors. But the result was equally clear: austerity deepened the economic contraction, spurring more outmigration to the mainland and eroding the very tax base needed to sustain repayment.

Enter the Trump Administration: Sorting the Problem

In August 2025, President Trump abruptly dismissed five of the board’s seven members, citing waste, inefficiency, and exorbitant legal/consulting fees. Critics saw it as a move to tilt the board toward bondholder-friendly settlements, particularly in the unresolved PREPA debt restructuring.

Trump’s challenge now is profound. If his administration bends too far toward hedge funds, it risks exacerbating austerity, alienating Puerto Ricans, and poisoning the optics of any future statehood referendum. But if he ignores creditors entirely, Puerto Rico’s access to capital markets—and the credibility of PROMESA itself—could collapse.

The problem, simply put: How to pay what is owed without destroying the island’s future.

Part II: A Compassionate Business Plan

To “make Puerto Rico right,” the U.S. must strike a balance: honor debt service in good faith, but protect ordinary Puerto Ricans from crushing austerity. The following course of action achieves that balance.

1. Debt Service Discipline

• Cap annual debt service at 7–8% of Puerto Rico’s own-source revenues.

• Restructure legacy bonds with base haircuts and extended maturities.

• Offer creditors Value Recovery Instruments (VRIs) tied to growth (GNP, tourism receipts, tax collections). Investors profit only if Puerto Rico prospers.

2. Protect the Essentials

• Guarantee minimum funding for K–12 education, basic healthcare, and public safety.

• Create a pension protection trust, seeded by asset-lease revenues and a share of federal support, to prevent further old-age poverty.

3. Energy Without Rate Shocks

• For PREPA debt, swap bonds into “efficiency notes” payable from verified fuel savings, grid upgrades, and reduced system losses.

• Establish a Rate Stabilization Fund, financed by federal disaster aid and targeted levies, to keep consumer electricity rates predictable.

4. Growth as the Exit Strategy

• Introduce a “936-lite” federal credit to revive pharmaceutical and manufacturing investment with local hiring requirements.

• Streamline permits and infrastructure to spur tourism and remote-work hubs.

• Expand LNG import and microgrid deployment to lower business energy costs.

5. Federal Responsibility: Making It Right

• A Freight Offset Program to neutralize the Jones Act cost premium, treating it as a national security expenditure.

• A conditional federal refinancing backstop—Treasury swaps old debt into lower-rate instruments if Puerto Rico complies with fiscal rules and audit standards.

• Strict transparency: quarterly cash reports, timely audits, and independent regulators.

The Payoff

This plan allows Puerto Rico to:

• Pay creditors predictably but sustainably,

• Shield families from punishing austerity,

• Protect pensions and essential services,

• Lower energy costs to jumpstart growth, and

• Restore credibility ahead of a possible statehood vote.

Conclusion

Puerto Rico’s debt crisis was born of decades of mismanagement, opportunism, and neglect—by local leaders, Wall Street, and Washington alike. But the U.S. now has a chance to correct course.

The Trump administration faces the delicate task of rebalancing La Junta, renegotiating with creditors, and charting a path that makes Puerto Rico not a perpetual piggybank nor an austerity ward, but a functioning partner in the American union.

The way to “make Puerto Rico right” is not to pick sides between creditors and residents—it is to ensure both are tied to the island’s success. Only then will Puerto Rico’s future, whether as a state or territory, be worthy of the sacrifices its people have already made.