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Here's why Puerto Rico's broke

It's about jobs.

Since the Great Recession ended, employment levels have recovered on most of the U.S. mainland, and companies have added to payrolls. Jobs gains have ranged from just above breakeven in states like West Virginia to North Dakota's big, 28 percent boost, which came thanks to the boom in oil and natural gas exploration in that state.

But Puerto Rico's job base continues to shrink, taking its economy along with it. Since the recession ended, overall payrolls have contracted by 8 percent, as a lack of job prospects has sent many Puerto Ricans fleeing to the mainland, where the job market is much stronger.

The out-migration began before the recession sent the U.S. economy into reverse in 2007. From a peak of 3.8 million in 2004, Puerto Rico's population fell to about 3.5 million last year, according to census estimates, marking a fall of roughly 8 percent.


Puerto Rico's economic decline began before the Great Recession, in part due to the loss of a tax credit for companies that set up manufacturing on the island. Those credits expired in 2006.

Since then, the drop in employment continues to drive the out-migration as unemployment remains stubbornly high at 12.6 percent—more than twice the U.S. average rate of 5.3 percent, as of June.

The departure of younger workers has left the territory with an older, poorer population, further straining the government's social services. It's also left the local economy with fewer active workers; as of June, just 40 percent of Puerto Rico's population was officially counted as part of the labor force. (The U.S. state average in June was 62.6 percent.)

Some of those missing from the workforce are part of the local "informal" economy that employs "a large segment of the population" and allows "workers and firms to avoid many of the taxes and other costs associated with formal employment," according a report last year by the New York Federal Reserve. Because that work is conducted off the books, it's difficult to know just how much tax is lost, but the New York Fed report put the informal economy at roughly a quarter of Puerto Rico's gross domestic product.

With its job base shrinking, and sales and income taxes lost to an underground economy, the government has financed its budget shortfalls with borrowed money, adding to a crushing debt burden. As a share of GDP, Puerto Rico's $72 billion in debt has swollen its public borrowing from 60 percent of GDP in 2000 to more than 100 percent as of 2013, according to the New York Fed.

The government's heavy debt load has brought a series of credit downgrades, raising its borrowing costs further. Efforts to narrow its budget deficit brought higher taxes and layoffs of government workers, further dampening the prospects for economic growth.

On Monday, the government announced that it would pay only $628,000 of a $58 million payment due on its Public Finance Corp. (PFC) debt.

"Due to the lack of appropriated funds for this fiscal year, the entirety of the PFC payment was not made today," Government Development Bank head Melba Acosta said.

This week's debt default, though not unexpected, will propel the government into uncharted territory, and likely marked the beginning of wider defaults and a series of lawsuits from bondholders.

The government has proposed several restructurings in recent years. But the default and continued job loss likely will make it harder to reverse the downward spiral and get the territory's economy back on track.

"The island appears to face two alternatives," New York Fed officials wrote a year ago. "Either manage its own economic adjustment and put the commonwealth on a secure fiscal basis, or wait for out-migration and the discipline of the market to force an even more painful adjustment, particularly for those unable or unwilling to leave the Island."