Some Puerto Ricans, discouraged by financial crisis, plan to move off island

In historic Old San Juan, in the soft light of an early morning, a group of university students gathered to take photographs.

There was no shortage of subjects. A young man stood with large iguanas crawling up his arms and across his shoulders, waiting for tourists to snap his picture and pay him a dollar or two. An elderly man, his worn shoes held together with fraying Velcro strips, swept leaves into a dustpan as more swirled to the ground in the salty sea breeze.

But the students, all of them American citizens by virtue of their birth in this U.S. territory, did not reach for their cameras. Instead, they were absorbed in a spirited debate about the future, and their vision did not bode well for Puerto Rico. Each of them planned to leave the island, discouraged by an economic situation whose grim state was illuminated with the governor’s warning on June 29 that Puerto Rico was running out of money to pay its $72-billion debt.

“The economy is just on the floor,” said Alejandro Cardona, 19, part of the photography class from the University of Puerto Rico in Bayamon, near San Juan, the capital. “There is going to be less money and fewer jobs. I want to start my own company, but here, I don’t think I can do it.”

Classmate Juan Hernandez, 27, who already has a degree in graphic arts, said his part-time job at a call center did not pay enough to cover his rent, car payments, student loans and food each month.

“I have to get out of here,” Hernandez said. “I love Puerto Rico, but we are a little island, and I have big dreams.”

Many Puerto Ricans will tell you that it is hard to dream big on the island, especially in light of Gov. Alejandro Garcia Padilla’s televised announcement about the financial crisis. It came after the release of a government-commissioned report by an independent team of financial experts, who used words like “dire” and “unsustainable” to describe Puerto Rico’s economic footing.

“Crisis looms,” they said, despite recent local government measures such as higher taxes — the sales and use tax increased from 7% to 11.5% as of July 1 — pension reforms and spending cuts.

Experts offer various reasons for Puerto Rico’s slide. They include decades of poor fiscal management, failure to build up the tourism industry to its full potential, an oil-dependent energy sector and the phasing out in 2006 of IRS tax incentives offered to U.S. companies operating on the island. That led to job losses when firms moved elsewhere.

Through it all, successive administrations piled on debt by selling more bonds to pay the bills.

The report noted that despite its year-round warm climate and proximity to the U.S. mainland, Puerto Rico’s tourism numbers are lower than they were a decade ago, and the number of hotel rooms remains about what it was in the 1970s. San Juan’s leaders consistently overestimated anticipated revenue by about $1.5 billion a year, the report said.

It also criticized Puerto Rico’s labor practices in the private and the public sector, noting in particular that it has 10% more teachers than a decade ago despite having 40% fewer students, and employment rules that discourage hiring. Those rules include a mandatory Christmas bonus for most workers and generous overtime and vacation rules compared with mainland employers.

The 26-page report, whose chief author, Anne Krueger, is a former World Bank chief economist, recommended a variety of fixes, including reducing the dependence on imported oil; cutting wages to reduce labor costs; and revamping labor laws to encourage hiring, thereby reducing the 12.2% unemployment rate and alleviating the 41% poverty rate.

It also called for debt restructuring, which would require cooperation from hedge funds that turned to Puerto Rico expecting big gains, and for a change to the U.S. law that bars Puerto Rico from filing for Chapter 9 bankruptcy. Because it is not a U.S. state, Puerto Rico cannot access the federal bankruptcy law that Detroit turned to when it hit rock bottom. It also has no access to emergency funding from the International Monetary Fund or other institutions that step in to save flailing countries, because it is not an independent nation.

“In this way, Puerto Rico is stuck between a rock and a hard place,” said Eric LeCompte, an advisor to the United Nations on global development and debt relief and the executive director of the Jubilee USA Network. The faith-based organization lobbies for debt relief for developing countries.

“From our perspective, because we represent religious organizations, it’s imperative to end the poverty,” LeCompte said, but he added that all Americans should be concerned about Puerto Rico. That’s because of the amount that U.S. bond funds have invested in Puerto Rican bonds.

Americans eagerly bought up the tax-exempt bonds, which offered higher returns than U.S. Treasuries. The mutual fund research firm Morningstar said that as of the end of June, U.S. bond funds had $11.3 billion in Puerto Rican debt, so the island’s inability to make payments on its bonds would hit American investors in the pocketbook. Hedge funds and individual American investors held billions more in Puerto Rican debt, the firm said.

Last Wednesday, the government avoided default by making payments, including $416 million owed to creditors by the Puerto Rico Electric Power Authority and about $600 million in other general obligation bonds.

Garcia Padilla said he had appointed a working group to negotiate with creditors in hopes of postponing payments on Puerto Rico’s overall debt. He gave the group until the end of August to propose economic reforms.

Whatever changes are made, though, would take years to generate a substantial recovery. In the meantime, more Puerto Ricans will leave, reducing the island’s tax base and the labor force needed to fuel the economy.

“It’s a vicious cycle,” said Edwin Melendez, director of the Center for Puerto Rican Studies at Hunter College in New York. “The more stagnant the economy, the more people leave the island. The more people leave the island, the lower the economy, and it’s a cycle that doesn’t seem to have an end.”

Melendez, whose family went to the mainland from Puerto Rico in 1978, said the number of Puerto Ricans living stateside is more than 5.1 million, compared with 3.5 million on the island. In 2003, the numbers were about equal.

Across Puerto Rico, populations dropped in 68 of the 78 municipalities, including San Juan, from July 2010 to July 2013, the U.S. Census Bureau said last year. San Juan’s population dropped 5% in that period.

Many observers say it is time for Washington, which has been providing technical assistance and advice during the financial crisis, to do more to help Puerto Rico. Spain ceded the island to the United States at the end of the Spanish-American War in 1898. Congress made Puerto Ricans U.S. citizens in 1917, and commonwealth status, which provides some autonomy, began in 1952.

But Puerto Ricans living on the island are not eligible to vote in U.S. presidential elections, and Kenneth McClintock, a longtime Puerto Rican lawmaker, said that is one reason Washington is not more inclined to step into its economic fray now. “In a democracy, if you don’t vote, you don’t count,” said McClintock, who was Puerto Rico’s secretary of state from 2009 to 2013.

McClintock said that when the administration he served took office on Jan. 2, 2009, officials found that the government didn’t have enough money to meet the Jan. 15 payroll. “That’s how bad the situation was,” McClintock said in an interview at his lobbying firm, Politank, near the Capitol. The only option was to sell yet more bonds to raise cash, he said.

He said that his administration cut more than 30,000 jobs and that the current one could also take harsh austerity measures. But McClintock also said the Obama administration could do more to help, including steering government contracts to the island and directing federal agencies to renegotiate repayment terms on debts.

Pedro Pierluisi, Puerto Rico’s nonvoting representative in the U.S. Congress, has sponsored a bill that would allow large public corporations on the island to declare bankruptcy. White House Press Secretary Josh Earnest has said that although no bailout of Puerto Rico was under consideration, the Obama administration supports Congress considering the bankruptcy bill.

The signs of population flight and its economic effect are clear. In the touristy area of Old San Juan, whose narrow streets are lined with colonial-era buildings painted in a rainbow of colors, it is not unusual to see shuttered shops and restaurants. A short drive away from the cruise ship terminal, apartment blocks stand empty, their doors and window panes gone and their crumbling walls splashed with graffiti.

The contrast is striking between down-and-out locals and the tourists who come to lounge on white-sand beaches, roam the Spanish-built forts and dine in the shade of fig trees.

As visitors snapped pictures from a lookout spot over the harbor, the smell of unwashed bodies wafted through the park from homeless men sleeping on benches nearby. A homeless woman sought shade on the steps of a vacant building down the hill. In the beachfront Condado district, destitute men dug through trash cans, looking for leftovers tossed by visitors to the area’s hotels, casinos and seafood restaurants.

One woman in a commercial building, who would not give her name because she did not want to anger her boss, grew teary-eyed as she spoke of her plan to leave.

“I have two master’s degrees and I’m working as a receptionist,” said the woman, who is taking a teaching job in Milwaukee next year. It is the first step in launching a new life on the mainland. “I know it’s freezing there,” she said, “but it’s only for a year.”

tina.susman@latimes.com

Twitter: @tinasusman