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Puerto Rico's $74 billion burden left it helpless when Maria hit

Bloomberg logoBloomberg 10/10/2017 William Selway, Ezra Fieser, Jonathan Levin and Laura Blewitt

Residents wade through flood waters at their home days after Hurricane Maria made landfall, on September 22, 2017 in Loiza, Puerto Rico.© Alex Wroblewski/Getty Images Residents wade through flood waters at their home days after Hurricane Maria made landfall, on September 22, 2017 in Loiza, Puerto Rico. Year after year, as Puerto Rico’s government drew ever closer to ruin, it cut hundreds of millions of dollars from roads, schools and other public works.

It neglected the electricity system, leaving it dilapidated and prone to prolonged outages. The water utility, which was leaking untreated sewage, put a $1.4 billion construction plan on hold. At least 5,800 police and firefighting jobs were cut. Unable to cover its share, Puerto Rico lost federal funds for work on its 4,800 miles (7,700 kilometers) of roads.

Public Investment© Bloomberg Public Investment

Long before Hurricane Maria struck Sept. 20, a man-made disaster left the bankrupt U.S. commonwealth vulnerable, according to a review of the territory’s finances and $74 billion debt.

While Puerto Rico’s political leaders almost doubled the debt since 2006, proceeds were often used to keep the bureaucracy afloat, paper over deficits or finance projects that did little to pull the economy from recession. After investors stopped buying the U.S. territory’s bonds, agencies warned that the electricity and water systems were falling into decay. Investments in roads, schools, utilities and other public projects slid to $906 million last year from $2.4 billion in 2012, according to the Government Development Bank.

“This devastation is the byproduct of a long-standing set of decisions,” Governor Ricardo Rossello, who took office in January, said in an interview, referring to the crippled power grid. “It is something we knew was going to happen.”

Final Blow

Almost three weeks after Maria pounded Puerto Rico with 155 mile-per-hour winds, only 15 percent of the 3.4 million residents have electricity, nearly half the phone service is out and about 40 percent of customers still wait for clean water. The cyclone caused an estimated $95 billion of damage, more than a year’s economic output, according to figures cited by the island’s federal oversight board.

“The decades-long failure to provide much-needed maintenance to key infrastructure in Puerto Rico means that the electric grid, principal roads, and water treatment and distribution plants were in an already weakened state,” Sergio Marxuach, policy director for the Center for a New Economy, a San Juan nonprofit. “As a result, the already devastating power of the storms was magnified.”

Magical Thinking

Money was no panacea. More than a dozen agencies routinely sold tax-exempt bonds to investors with a voracious appetite for the securities, which paid higher yields than those issued by other American governments. That cycle -- which more than quadrupled the debt since 1999 -- continued until former Governor Alejandro Garcia Padilla in 2015 said the obligations were too onerous. The island declared bankruptcy in May, and some bonds now trade for pennies on the dollar.

Bondholders need to get real on Puerto Rico, Dan Fuss, Loomis Sayles & Co. vice chairman, said on Oct. 6.

“There was a widespread belief that the constitutional guarantee would ensure that investors would be repaid or that Congress would bail them out,” said Charles Venator Santiago, a University of Connecticut political science professor. “Part of it is also a lot of mismanagement at the local level. The elites in Puerto Rico, nobody really cared about Puerto Rico, they just wanted to make as much money as possible.”

Fragile Grid

Nowhere has the neglect been as apparent as at the Puerto Rico Electric Power Authority. Relying on deals with creditors since 2014 to avoid defaulting on its $9 billion of debt, the system was bankrupt and in need of $4 billion of upgrades even before the hurricane.

A power-plant fire in September 2016 knocked out power across the island for days. The authority said in an April report that “years of under-investment have led to severe degradation,” rendering transmission and generation equipment “unsafe and unreliable.”

Secretary of State Luis Rivera Marin likened the system to a decades-old automobile.

“It can be a good car, but after 20 years everything breaks,” he said. “It was very fragile.”

Leaking Filth

The water system has also been degenerating. In late 2015, the Puerto Rico Aqueduct and Sewer Authority agreed to spend about $1.5 billion on improvements to settle with the federal government for releasing untreated sewage and other pollutants into the waterways around San Juan, the island’s biggest city.

Last year, Puerto Rico shelved a plan to sell $900 million of bonds for water projects, because its defaults made it a pariah to investors. In its most recent financial report, the authority said there was a “strong concern" that lack of capital investment could result in a “critical situation.”

The storm dealt just such a blow: According to the U.S. Environmental Protection Agency, by Oct. 3 nearly one-third of the wastewater plants weren’t working, and sewage was released into waterways.

In Ceiba, a small east coast town, Benjamin Ramos-Nieves said he fears the utility’s crisis will spread disease.

“We can’t even bathe,” said Ramos-Nieves, a retired Army veteran. “We couldn’t control the storm, but afterward things have been worse because of the condition our infrastructure was in.”

Withered Forces

Puerto Rico also had cut back on another vital resource: public servants. With the population and the economy in decline, the island reduced police-department staffing to about 14,058 by January 2016, nearly 5,400 fewer than in 2008, according to financial reports. The cohort of firefighters dropped by about 500 to 1,733.

Number of Police© Bloomberg Number of Police

The pressure has continued with Puerto Rico now under the oversight of a federal board charged with ending the fiscal crisis. Hector Pesquera, secretary of public safety, said $28 million was cut in the last budget from the seven agencies he oversees.

Police officers have bought their own boots and motorcycle oil, Pesquera said. A lack of investment in communications equipment left firefighters unable to relay emergency calls. 

During the storm, hundreds of pleas for help came into San Juan. Without a reliable radio and phone system, dispatchers couldn’t channel calls to local stations. They resorted to posting pleas on their Facebook pages, said Luis Soto, a firefighter and vice president of the union that represents department workers.

Number of Firefighters© Bloomberg Number of Firefighters

“Most of the communications system we have is from the stone ages. There is no communication of any kind in some stations, not radio, not telephone,” said Soto. “In many stations, we only could respond when a citizen or the police came to the station.”

Almost three weeks after the storm, residents still wait for word from Washington on how much aid will come. It’s unclear how many will stick around to see: Tens of thousands have already been leaving for the U.S. mainland, and, if residents continue to move, the financial decline will get even deeper.

Yvette Del Valle, 65, has spent days assisting at a nursing home and helping clean the streets of Santurce, where neighbors hired two garbage trucks rather than wait for the government.

“You have to have a plan,” said Del Valle, who wants the community to take a more active role in the recovery. “If not, everything will collapse.”

A few moments later, the power went out on the street.

--With assistance from Jordyn Holman Paul Murphy and Naureen S. Malik 

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