Will Puerto Rico's Debt Crisis Spark a Humanitarian Disaster?

Treasury Secretary Jacob Lew’s trip to Puerto Rico highlights the human costs lurking behind every financial crisis.

U.S. Treasury Secretary Jacob Lew visits a commercial area in San Juan, Puerto Rico, May 9, 2016. (Alvin Baez / Reuters)

SAN JUAN, Puerto Rico––Elizabeth Claudio pointed to the lone outlet in the wall of her classroom of fourth graders. She complained to Puerto Rico Governor Alejandro García Padilla that it was the class’s only outlet and that running multiple devices––such as a television, air conditioner, or a fan––would trip the breaker and that multiple classrooms using electricity together would cause the whole building’s power to fail. She pointed to the cracks in the wall and the broken fans in the room, which already sweltered in early May as the humidity settled in like a blanket over an 83-degree day.

The exchange was likely one that García Padilla has had with teachers in San Juan before. But the other guest in her classroom, Treasury Secretary Jacob Lew, was new here. And, despite the dozens of children running and playing as they normally do, offering excited singsong chants of “Buenos tardes, Jack!” when the dignitaries left the room, Lew’s mission was somber. He was here to assess just what might happen if Puerto Rico’s debt crisis blooms into a full-on disaster.

The debt crisis in Puerto Rico has been discussed mostly in terms of its dire economic outlook, with wide-reaching consequences from potential defaults, including destabilized municipal-bond markets and litigation. The fallout could spread to the mainland, and it has already impacted the economy of states like Florida as a factor in mass emigration. Secretary Lew and the Treasury Department have a direct interest in those outcomes, but instead of spending time meeting with high-ranking economists or officials, the bulk of Lew’s time was spent interfacing with vulnerable people who might be affected by debt fallout. This was a humanitarian visit.

The visit came on the heels of a whirlwind of bad news for Puerto Rico. In late April, Congress failed to settle on a deal that would have allowed a special appointed oversight committee the power to restructure the territory’s debts. That failure in turn gave García Padilla no choice but to default on a $200 million payment of debts on May 2. That default has already weakened public services and utilities on the island, and another payment date of July 1 is even more ominous, with almost $2 billion at stake. The bonds that Puerto Rico has taken out are federally backed, which means that it opens itself up to crippling lawsuits if it spends for other services or goods––even basic and vital services or goods such as water, power, and hospital supplies––without first making payment on its debts.

Unfortunately for the people of Puerto Rico, the debt crisis is just part of a long string of bad news. The commonwealth was poor long before the debt crisis, poorer than every state in both the 2000 and 2010 censuses. Despite historically and currently having high rates of coverage by public insurance, Puerto Rico sits near the bottom of many health metrics, and its Medicaid and Medicare programs are vastly underfunded compared with the States, costing the island millions of dollars. Healthy young people are emigrating from Puerto Rico in search of jobs, leaving behind disabled people, elderly people, and children. But the worst is yet to come. If things have been downhill recently, the potential July default represents a steep drop into a wide chasm, one that could have reverberating effects on how people on the island live.

As is true in any place, those effects come first and worst for the most vulnerable people; children, the elderly, people with low incomes, and those in poor health. The Treasury trip showcased those people. First was the trip to Eleanor Roosevelt Elementary, where Claudio taught. Other teachers echoed her sentiments. Deborah Cruz teaches fourth, fifth, and sixth graders in one room and told Lew about the cracked walls and lack of basic science resources, such as test tubes. Special-education teacher Iris Rosario said there are almost 100 students who need special-education services at Eleanor Roosevelt, and some special-education services are delivered in a trailer with limited electricity. Rosario also described how enrollment for special-needs children has increased, even while teachers equipped to instruct them have moved away.

Eleanor Roosevelt Elementary is not an abstract idea in a debate between congresspersons across the Caribbean Sea, nor is it some far-off disaster in the making. The school, with its termite-riddled walls, tenuous electricity, and pools of standing water––perfect places for the mosquitoes that spread Zika to hide––is a real, current example of the humanitarian implications of Puerto Rico’s crumbling economy. “The human cost is not abstract,” Lew said after the visit. “At the school, we could see infrastructure that’s crumbling.”

Lew’s next visit to San Juan's Centro Medico hospital laid bare the human costs even more. Administrators detailed both delayed funding from insurers and government sources, and how the hospital had to delay and prioritize payments to provide basic care for its patients. “We are hanging by a thread,” said Dr. Juan Nazario, executive director of the hospital. “Other things are left aside.”

Centro Medico’s plight is similar to those of many vulnerable safety-net hospitals on the mainland—but amplified. Simply put, it is difficult to remain solvent while providing affordable care for poorer populations and people of color, who tend to be the sickest and the least likely to have insurance. That problem becomes a predicament in itself in an entire commonwealth with so many poor people and people of color. While most of Puerto Rico’s residents are enrolled in Medicaid or other public insurance programs, the federal government has traditionally underpaid for each Puerto Rican enrollee as compared with those living in the States.

The medical center is a central cog in the entire health-care system of the island, providing essential neonatal care, cancer care, and trauma services. Medicaid underpayments dovetail with the debt crisis in several ways, as the Puerto Rican government is limited in its ability to pay for services and drugs that insurers don’t pick up or don’t pay for on time. These medical problems are compounded by the fact that the debt crisis itself is centered on Puerto Rico’s massive public-services providers, and as things have gotten worse, many hospitals have faced electricity or water shortages. Even the massive Centro Medico may not be safe from rolling blackouts if the territory continues to default.

Even before any future potential defaults, the hospital’s youngest victims are suffering now, and Lew visited them as well. Dr. Marta Suarez, a pediatric nephrologist, explained how the hospital’s payment difficulties make it difficult to provide dialysis to combat neonatal kidney failure, a common danger of early infancy. “Suppliers have been waiting for payments for months and months,” she told Lew. “We hope we don’t get a complicated case.” She noted that neonatal-dialysis suppliers were reluctant to provide free or discount supplies to the hospital because of the risk of opening the floodgates for requests for free goods.After his tour of Centro Medico, Lew made the connection between health-care and the financial crisis in a press conference just outside of the hospital’s main doors. “The mounting debt crisis is clearly a financing problem,” he said. “It’s clearly something that has to be resolved with a restructuring of the commonwealth’s financing, but it’s a human crisis as well. And you see that very clearly here at the medical center.”

Lew isn’t the first Obama administration official to visit Puerto Rico during the crisis. His trip was preceded by a mission from Centers for Disease Control and Prevention chief Thomas Frieden in March. But although Frieden’s goal was different––he came to help combat the raging Zika epidemic, which threatens to infect almost a quarter of Puerto Rico’s population by year’s end––the common elements in each trip show how deeply connected the financial crisis is with humanitarian issues. Zika threatens to cripple Puerto Rico, and the debt crisis and its inability to pay for immediate interventions are direct factors in the looming epidemic. Hospitals are already overwhelmed with the different issues that Centro Medico physicians detailed, and they can barely cope with seasonal flu outbreaks, let alone a developing and little-known virus like Zika. Schools such as Eleanor Roosevelt, with their crumbling infrastructure and pools of standing water, are ideal breeding grounds for the mosquitoes that spread Zika, and children are especially vulnerable targets. In the realms of health care and education, economic woes are most directly transfigured into human misery.

To Lew’s frustration, Congress has seemingly ignored these humanitarian problems as a manifestation of the worst of its current dysfunction. While Lew was in Puerto Rico, news broke that a bill from the chairman of the House Natural Resources Committee, Rob Bishop, would be introduced two days later. Early proposals of that bill were met with intense backdoor infighting among Republicans, some of whom opposed any assistance to Puerto Rico on the grounds that aid functions as a bailout. But the news of a final, coherent bill was dampened, as the bill was again delayed Wednesday.

Bishop’s bill contains provisions that Lew championed throughout his visit, including the creation of an oversight committee that has the power to restructure Puerto Rico’s debts. “In addition to restructuring, Puerto Rico needs an oversight committee put in place,” Lew explained at a press conference. The provisions of the bill and the exact nature of the oversight are murky, but Lew stressed that the restructuring must be done in a way that can consider all of the island’s stakeholders, including its pensioners and most vulnerable people. Lew stated that above all the specifics, the restructuring and oversight were key items for any compromise.

Some of the bill’s potential provisions, however, may end up holding it up and further pushing Puerto Rico into a humanitarian abyss. A controversial proposed minimum-wage reduction for some workers raised objections from Democrats early. Plus, the proposed oversight committee, with its broad power to shape Puerto Rico’s finances without input from Puerto Ricans or the politicians who represent them, has raised the specter of colonialism.

Lew told me that his solution of implementing an earned-income tax credit in Puerto Rico, similar to the one already granted to citizens on the mainland, would help kick-start the Puerto Rican economy but that it has been rejected as a “bailout.” “If you create an EITC like the one in the States, that would actually get people into the workforce and help them work their way up,” Lew told me. But tax credits involve taxpayer funds so they are characterized as a bailout. Even without the EITC, Lew stresses that the urgency of the situation in Puerto Rico necessitates swift action on restructuring and oversight. “Without it, the path forward will be worse,” Lew said.

On the visit, Lew and the Treasury team had a glimpse of that path forward, which made clear the desperate need for the federal government to act swiftly in Puerto Rico. A bailout may end up being the least of the issues that develop down the road, as numerous connected disasters unfold, each one affected by the debt crisis. The places that Lew visited could be canaries in the coal mine for the future of the island.

Lew’s propensity for swift action is not only informed by his specific duties as treasury secretary, but by the lives of real people he had seen in Puerto Rico. He repeated the phrase “the human cost is not abstract," almost as a mantra during the journey to different sites in the territory. In the hot classrooms of Eleanor Roosevelt Elementary and in the understaffed intensive-care units at Centro Medico, the costs were not only made real but outlined in bold, stark strokes. And in many cases, those costs are not measured in credit ratings or bailout funds but in lives.