When the Puerto Rico Oversight, Management, and Economic Stability Act of 2016 (PROMESA) was enacted, Puerto Rico faced more than $70 billion in debt and over $55 billion in unfunded pension liabilities. As a U.S. territory, Puerto Rico had no legal path to restructure its liabilities and stabilize its finances because the U.S. bankruptcy code only includes states. Puerto Rico had lost access to capital markets.
Although deeply unpopular, PROMESA set Puerto Rico on a path to restructure its debt and achieve fiscal responsibility. According to its website, the Oversight Board, together with the Government of Puerto Rico, has restructured about 80% of Puerto Rico’s outstanding debt, lowering total liabilities from more than $70 billion to a sustainable $37 billion, which will save Puerto Rico more than $50 billion in debt service payments.
The debt restructuring process continues, which gives rise to the question: what happens to Puerto Rico’s debt if Puerto Rico were to become a state?
Would Statehood Transfer Puerto Rico’s Debt to the Federal Government?
To answer the question as to whether becoming a state has any automatic effect on indebtedness, we can turn to previous examples, such as Texas, which was deeply in debt upon admission.
When Texas gained independence from Mexico in 1836, it inherited a debt estimated at around $1.25 million. This debt grew significantly during the Republic’s existence due to funding military operations and government functions. By the time Texas sought statehood in 1845, the official estimated debt had ballooned to $9,949,007. Interest on this debt continued to accrue until 1850.
The newly formed state of Texas lacked the financial resources to immediately settle its debt. Additionally, there were questions about the validity of some claims. Ultimately, Texas relinquished a significant portion of its northwestern lands (around 67 million acres) to the US government, and the U.S. government assumed responsibility for a portion of the debt, estimated to be around $3.25 million. Texas was responsible for settling the remaining debt, though they were allowed to scale down the total amount and offer land grants in exchange for some of the debt. The debt issue wasn’t fully resolved overnight. Texas continued to make payments on the remaining debt for several years. The U.S. Treasury also took some time to settle all the claims it had assumed.
Louisiana and Florida had similar experiences, with the federal government taking on some of their debt upon admission in exchange for land. Arizona’s enabling act included the specification that Arizona would be responsible for all its debts. Many state constitutions include some rulings on debt.
In short, there is no reason to think that debt automatically transfers from a new state to the federal government.
What about the Puerto Rico Status Act?
The Puerto Rico Status Act, the legislation on Puerto Rico’s political status which is currently pending in Congress, says this about Puerto Rico’s debt: “All contracts, obligations, liabilities, debts, and claims of the territory of Puerto Rico and its instrumentalities at the moment of admission shall continue in full force and effect as the contracts, obligations, liabilities, debts, and claims of the State of Puerto Rico and its instrumentalities when Puerto Rico becomes a State of the Union.”
If Puerto Rico becomes a state on the terms laid out in the current legislation, then the question of debt is answered by the law. While some of the current states negotiated with federal government to get help with their debt, the Puerto Rico Status Act explicitly rejects that option.
Is Puerto Rico’s Debt Already America’s Problem?
Although critics complain that the United States would be more responsible for Puerto Rico if Puerto Rico were to become a state, as a U.S. territory, Puerto Rico is already the responsibility of the United States. No other nation is more responsible for the U.S. territory than the United States.
With PROMESA, the United States has already taken action on Puerto Rico’s debt, and has already succeeded in reducing it significantly. Actions by the PROMESA board – which were launched in 2016 and remain ongoing – could not have been taken if Puerto Rico’s debt weren’t already Congress’s business. Conversely, if Puerto Rico were a state, its municipalities would be managing their own debt, without additional federal involvement, under Chapter 9 of the U.S. Bankruptcy Code.
