As Bankruptcy Lifts, Puerto Ricans Rebuild Community Capital

When it comes to paying the debt, the working-class people, the poor people, are the ones suffering. The debt has been restructured. Following the logic of decapitalization, the challenge is how do we recapitalize.

Dr. Nelson Colón, President, Puerto Rico Community Foundation

As the above quote indicates, the dominant economic logic in Puerto Rico in recent years has been one of disinvestment. This “logic of decapitalization” is hard to undo. Nonetheless, as NPQ has covered, amid multiple crises, nonprofit and community activism has surged. Three years ago, such activism even forced a governor to resign.

How do you recapitalize? To explore that question and more, I spoke recently with Dr. Nelson Colón, president of the Puerto Rico Community Foundation (Fundación de la Comunidad de Puerto Rico or FCPR). In our conversation, Colón was clear-eyed about the challenges that the estimated 3.26 million residents of Puerto Rico face. At the same time, he outlined an inspiring vision for rebuilding that is focused on equity, applies a multiple capitals approach that extends far beyond dollars and cents, and is focused on building community ownership and long-term environmental sustainability.

But how did the disinvestment that Colón aims to counter occur in the first place?

Understanding the Roots of Puerto Rico’s Economic Crisis

A report issued last year by the Puerto Rico-based Center for a New Economy outlined what author Sergio M. Marxuach labeled the Puerto Rican economy’s “threefold challenge.” Marxuach was referring to the combination of COVID-19, Hurricane Maria, and the island’s financial crisis. The COVID-19 pandemic, of course, is global. Still, it is worth pointing out that over 120,000 of about 887,000 employed Puerto Ricans lost their jobs in the month following the economic shutdown of March 2020. Employment took nearly two years to recover. Hurricane Maria’s effects in Puerto Rico were even more severe. The powerful Category 4 storm struck the island in September 2017 with devastating results, including the deaths of an estimated 3,000 people. Many people were left without power for nearly a year. Complete rebuilding remains many years away.

Last, but not least, is the financial crisis. In 2015, Puerto Rico’s government indicated it could no longer pay its debts. A year later, Congress passed PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act , enabling the Commonwealth to use a bankruptcy process to restructure its debt. This process would be overseen by a Washington-appointed control board. In May 2017, the Puerto Rican government officially declared bankruptcy on $123 billion in debt. Of this amount, about $70 billion was public debt, and the rest involved public pension obligations.

Last month, Puerto Rico exited bankruptcy. But its bankruptcy process continues. Not only are some parts of its debt, including $9 billion in debt from the island’s electric agency, not yet renegotiated, but, as author Dánico Coto of the Associated Press explains, the fiscal control board “is expected to remain in place until Puerto Rico has four consecutive balanced budgets.” In other words, the limits on the island’s financial sovereignty continue, and public reinvestment is likely to remain on hold until at least 2026.

The impact of colonialism is evident in the external “control board” process, but colonialism also contributed greatly to the financial crisis itself. Puerto Rico has been a territory of the United States since 1898. As residents of a “commonwealth,” Puerto Rican voters elect representatives to govern local matters, but the US federal government retains control of key issues, including citizenship, the military, currency, transportation, communications, and trade. Notably, this allows for provisions, such as the Jones Act, which requires goods arriving by ship to the island—that is to say, anything that does not arrive by air—to be carried by vessels built, owned, and mostly operated by Americans, thereby raising the cost of imported goods. Meanwhile, as a territory, Puerto Rico gets no votes in Congress; if it were a state, it would have five representatives in the US House of Representatives as well as two Senators.

All this discussion is relevant to understanding how Puerto Rico entered bankruptcy. Say the word “bankruptcy,” and the image one gets is of profligacy. Indeed, Coto writes of “decades of corruption, mismanagement and excessive borrowing.” But while the island’s government was hardly faultless, that is not the whole story—or even half of it. As Michael Kranz wrote in Business Insider back in 2017, “Looking at the long-term history of Puerto Rico’s debt and what caused it reveals that the federal government in fact shoulders much of the blame for the crisis.”

Effectively, as Kranz explains, the federal government first subsidized US corporate investment in Puerto Rico by passing a tax law in 1976 (known as Section 936) that exempted corporations from federal income tax on revenue generated by subsidiaries located on the island. These subsidies reduced manufacturing costs for US corporate subsidiaries. They also shifted investment capital and talent away from local Puerto Rican businesses to the easy money offered by US corporations.

As Citizens for Tax Justice explains, “Puerto Rico soon found itself stuck with the ‘finance curse,’ which occurs when a nation’s political and economic institutions are increasingly oriented towards and co-opted by wealthy international elites to the detriment of its people.” Pharmaceutical companies especially benefitted from the tax law provision. When subsidies were phased out between 1996 and 2006, Puerto Rico’s own business sector was ill-equipped to step back in due to the previous decades of underinvestment. As a result, tax revenue to the Puerto Rican government fell. For years, Wall Street hedge funds happily financed the enormous revenue gap—for a price, a price that led to the bankruptcy from which the island is still recovering.

A Community Capital Approach to Rebuilding

The obstacles facing Puerto Rico are enormous. For Colón, true rebuilding can only come from tapping into the creativity of Puerto Rican communities. As Colón puts it, “The basic assumption is these communities have wealth internally. They have people, structures, cultures, and internal cohesion.”

What must be done, Colon explains, is to invest in six kinds of community capital, which he identifies as follows:

Human capital: this means investing in health and education primarily.
Social capital: this requires fostering connections internally and developing “bridging capital” that connects communities to external resources (for example, by helping communities tap into funding from philanthropy on the US mainland).
Financial capital: this includes investments in the incubation of new businesses and acceleration of the growth of existing community-based businesses.
Physical capital: this work focuses on housing and infrastructure, ensuring secure land title for the hundreds of thousands in Puerto Rico who lack it, as well as investments in rebuilding homes.
Cultural capital: this includes support for traditions and folklore and investment in arts and the creative economy.
Ecological capital: this includes investment in public facilities like parks and public beaches as well as support for renewable energy production.

One area that has gotten a lot of traction, notes Colón, is a project that FCPR is supporting called the “Green Corridor.” This project “includes solarizing the island of Culebra, as well as developing a green corridor that runs through the middle of the island,” across the island’s central mountain range (Cordillera Central). The solarization of Culebra, Colón indicates, could be completed by the end of the year. “This could be an example for the Green New Deal. You can see it. You can touch it,” Colón explains.

Another area of success has been in Loiza. Located about 20 miles east of the capital city of San Juan, Loiza is a largely Afro-Puerto Rican community known as a center for African-inspired dance, music, and cultural traditions.. Colón explained, “We have been working closely with the mayor. She is a very strong ally. We align with her vision for the town. On the human capital side, one of the major gains has been working with Taller Salud, a feminist group,” a community-based planning partner. Another important gain that Colón mentions is the formation of a community school. He explains that “since students couldn’t get out of their neighborhood, we funded a school, so they have clear and unimpeded access to education.” Colón adds that two additional areas of focus involve working with a university legal clinic to regularize land title for residents and working with the mayor to develop a “passive park,” which creates new parkland while also helping the city with flood control.

The foundation’s decision to make Loiza one of its focus areas, Colón emphasizes, is not accidental, but rather forms part of the foundation’s explicit equity focus, a focus that Colón adds is gaining prominence more broadly in Puerto Rican philanthropy. “I think it is important to bring into the mix the racial equity issue. Black communities are poorer and that needs to be highlighted,” Colón says. “It is unseen in Puerto Rico. It is invisible. That’s why I am focused on Loiza and its different assets and their capital and making its capital grow.”

The foundation’s focus on equity extends far beyond Loiza and indeed beyond Puerto Rico. The foundation is the lead organizer of a $30 million effort to create an institution known as the Racial Equity Building Institute for the Americas, or REBIA, which aims to link Black knowledge creators throughout the Americas and the Caribbean. The organization, whose launch was announced at a Black philanthropy conference last summer, has hired its first director, who will start work in May.

Challenges Ahead

The contribution of philanthropy in Puerto Rico is important, but when it comes to economic recovery, government resources are far greater. As Colón notes, in many aspects, the government response remains inadequate. The situation is still dire in many areas. There are still houses with blue tarps, Colón explains. “Houses have not been rebuilt in the center of the island. The economy has not been rebuilt. We need to produce more employment…We are still struggling with education. All of that is complicated by COVID.”

Moreover, at the government level, “there is not an alternative economic development strategy,” Colón observes. “We are still using the same old tools in the 20^th century attempting to attract manufacturers.” Rather than investing in Puerto Rican-based development, Law 60, passed in 2019, throws tax breaks at corporations based on the US mainland, repeating at the local level the mistaken approach embodied by the federal Section 936 law of decades ago.

In terms of hurricane recovery, after years of being held up, $22 billion from the US Department of Housing and Urban Development for recovery from Hurricane Maria has been released to Puerto Rico. “But there is a bottleneck locally, and the money is not flowing towards the community,” Colón explains. Part of this is mechanics. As Colón details, “The way that money has been structured you need to spend it first and then get reimbursed. That requires a lot of cash, and that cash is not available.” Colón is hoping that US philanthropy can set up a revolving loan fund to front cash. “Once that cash is awarded to organizations, they will be reimbursed by the local housing department and that money will return to the revolving loan fund,” Colón explains.

In addition to the continued logjam—still in place more than four years after Hurricane Maria—when it comes to releasing funds, Colón notes that the government’s approach to resiliency often remains inadequate. Funding for shelters to ride out storms, Colón remarks, is fine. “But why don’t we think in terms of better houses, so those people don’t have to go back to their previous condition once the hurricane has passed the island?” Colón elaborates, “Let’s work on issues of housing and coastal erosion. Let’s work on job creation, economic development, business creation. Let’s work on those areas that make communities stronger rather than create a remedy for when the hurricane hits.”

Energy infrastructure, Colón adds, is another area that is “still very fragile.” There are 200,000 customers, mostly in the island’s central mountain region, that face high risk of disconnection in the event of a hurricane. “That is something that we can remedy now with solar communities. We have funded three…It is very simple, and the technology is there.” The foundation, Colón says, can contribute in a small way, but what’s needed is a wholesale “revamp of public policy from a market approach to human needs.”

Hope for the Future

In the summer of 2019, massive protests involving an estimated 1,250,000 people—more than a third of Puerto Rico’s entire population—forced then-Governor Ricardo Rosselló to resign. The protests were spurred by the leaking of nearly 900 pages of private chat messages, which, among other things, documented both corruption and ineptitude in the government’s hurricane recovery response. A new social order was created in that moment, even if its day-to-day impact is not always visible.

Colón says the long-term impact of that 2019 mass mobilization remains uncertain, but he has seen lasting effects in citizens’ readiness to mobilize. “There is a stronger awareness of that possibility,” Colón observes, “for almost any issue.”

Colón adds, “What was before mobilizing and activism, that was pretty much the realm of political parties and labor unions. Now that has been expanded. You can see people organizing and mobilizing around women’s issues, mobilizing around the whole environmental issue. There have been some important successes around that.”