Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

With Little Cash, How Will Puerto Rico and the Virgin Islands Rebuild?

They both had bleak financial outlooks even before the hurricanes hit.

puerto-rico-no-power
In downtown San Juan, Puerto Rico, some buildings have generator-driven lights, as there is no public electricity working anywhere on the island.
(TNS/Carolyn Cole)
For financially beleaguered Puerto Rico and the U.S. Virgin Islands, the physical devastation wrought by recent hurricanes has thrown into question the territories' economic futures. How is Puerto Rico's bankruptcy affected, for example, or the Virgin Islands' own debt troubles?

It's still too early to tell. But the one thing that is certain is that because of the territories' already tight finances, the pace of the recovery will be slow.



Since both U.S. territories had such a low financial capacity to deal with a major disaster in the first place, it will take them much longer to rebuild than Houston and the Florida Keys, which were also hit by major hurricanes this year. "It's going to easily be a decade," says Deserai Crow, a disaster recovery expert at the University of Colorado Denver.

That's in part due to the level of devastation brought by the hurricanes. Puerto Rico's entire electric grid was severely damaged following Hurricane Maria in September, leaving the whole island without power and, in most cases, a working water and sewer system. Federal officials say it could take months before power is restored there.

Maria also ravaged St. Croix, the largest of the U.S. Virgin Islands, while St. John and St. Thomas were pummeled by Hurricane Irma just 14 days earlier. All three islands are facing widespread power outages as well. Although, running water is expected to return this weekend.

But long before the hurricanes hit, both territories' credit was rated at junk bond status and, as a result, the islands were shut out of the bond market. One early estimate by Moody's Investors Service puts Puerto Rico's damages between $45 billion and $90 billion. That means the storm could potentially cost more than the $72 billion in debt that pushed Puerto Rico into bankruptcy. Damages for the Virgin Islands are still being assessed, but the islands shoulder about $2 billion in debt, giving them the dubious status of having the biggest per capita debt load of any U.S. territory or state.

 
This all means that the territories have very limited financial flexibility when it comes to responding to their massive recovery and rebuilding efforts. Although the federal government does reimburse most of the costs for recovery, the affected jurisdictions have to put up their own money first.

That's a real problem for two places that can't turn to the bond market to raise money.

Puerto Rico and the U.S. Virgin Islands also aren't likely to have the ability to raise taxes or fees -- even temporarily -- to quicken the pace of the rebuilding. Meanwhile, some of their largest income sources are likely decimated. For Puerto Rico, those sources are utilities and income taxes; for the Virgin Islands, it's tourism-related taxes.

"They're out of money," says Matt Fabian, who is a principal at Municipal Market Analytics. "They didn't have much money to begin with. Any collections they did have will be going to zero."

So, Crow says, the territories "are stuck with this process where you do one or a few projects at a time because it's your money upfront. It does slow it down an awful lot."

For its part, Puerto Rico's financial oversight board has authorized as much as $1 billion in its current budget for disaster-related spending. But it's not clear where in the budget that money is coming from.

One longer-term outcome that's possible is that the cost of rebuilding could permanently shift the demographics of the islands from one that consists of huge swaths of poverty to one that is made up of predominantly wealthy people. It's already happened to other U.S. mainland areas destroyed by natural disasters, such as the small community of Lyons, Colo., devastated by floods in 2013.

The amount of destruction and the cost of rebuilding in Puerto Rico and the U.S. Virgin Islands could mean that only those who can afford to come back, will. "What you have with Puerto Rico now is a wider range of outcomes with a potentially better upside," says Fabian. "But there is certainly a much darker downside."

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
Stay on top of the latest state & local government news.

Sign up for Governing Daily. Delivered each morning to your inbox.