Puerto Rico has experienced its fair share of woes with its government-debt crisis. On more than one occasion has Puerto Rico's structural debt issues been compared with that of Greece. There have been suggestions as to how to alleviate Puerto Rico of its debt issues, but one is of particular interest: statehood (also see here). Yesterday, the Puerto Rican people are to voted on a non-binding referendum as to whether Puerto Rico should become the 51st state of the Union (see here). Puerto Rico voted on the issue four times prior: in 1967, 1993, 1998, and 2012. While the 2012 referendum was the first time the majority voted for statehood, the political process was unclear because of 500,000 blank ballots. Due to the ambiguity of the results, we have the upcoming referendum, which provides three options: "Statehood," "Independence/Free Association", or the status quo. If Puerto Rico achieves statehood, it would receive federal funds, Social Security, Medicare, and most relevant, a right for its government agencies to declare bankruptcy. Regardless of the outcome of the ballot, statehood would still require United States Congressional approval.
I'm skeptical that anything will change Puerto Rico's status. One reason is that after four failed referenda, nothing has changed. Even though the referendum yesterday had an overwhelming 97 percent of voters voting in favor of statehood, there was a dismally low participation rate of 23 percent. The second reason has to do with political feasibility. If Puerto Rico became a state, that means that Puerto Rico would have two Senators in the Senate. The Puerto Rican Senators would probably be Democratic since Puerto Rico is overwhelmingly Democratic, which means the count in the Senate would be 52-50. Since the Republicans would have an even slimmer majority in the Senate, they would not dare risk giving the Democrats the Senate.
Even if statehood were politically feasible, I still am concerned about Puerto Rican statehood, which is tied to its debt issues. As of date, Puerto Rico owes about $120 billion, and none of this covers the $40 billion in unfunded liabilities. This might sound small in comparison to the United States' $20 trillion debt. However, Puerto Rico's state debt-to-GDP is 70 percent. To compare, the average debt-to-GDP ratio for states in the USA is only 17 percent. Puerto Rico's deficit spending and bloated pension system have contributed to the high debt, but as I explained last year, Puerto Rican debt is complex and largely due to government policy.
Aside from Puerto Rico's enormous debt, there would also be adverse effects of Puerto Rico becoming the fifty-first state. In 2014, the Government Accountability Office (GAO) released a report on what would happen if Puerto Rico joined the United States. The report found that it could result in reduced Puerto Rican tax revenue (p. 31). The report also estimated that Puerto Rico would receive $5.2 billion in federal funds while paying $2-4 billion. A government that is trying to pay off a large amount of debt does not need to cut off a primary source of revenue simply because it wants to become a state. While there are costs to admitting Puerto Rico to statehood in the United States, there are also costs of letting Puerto Rico continue on its current path and being incapable of having access to certain financial tools (e.g., bankruptcy, default). I was unable to find studies or numbers to compare the status quo with the effects of statehood.
Even without those studies, I still worry. My main issue and concern with giving Puerto Rico statehood to alleviate financial woes is that it is like putting a bandaid over a cold. Puerto Rican debt is structural and largely due to government policy. This government policy has encouraged Puerto Rico to take on a large amount of government spending that has landed them in this problem. Furthermore, if Puerto Rico joins the United States, that also means Puerto Rico would share the United States' monetary union, which means higher interest rates and contending with a forecasted stronger dollar.
If the more fundamental issues are not addressed, then more of the burden will shift over the the United States federal government while Puerto Rico continues to carelessly spend government funds. I think there should ultimately be some sort of federal oversight and debt relief, but it cannot be unconditional. It has to come with reform to get Puerto Rico out of its predicament. Otherwise, as Argentina and Greece have shown us with its IMF bailouts, it will be more of the same.
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