SAN JUAN, P.R. — Alexis Sotomayor has many reasons to stay in Puerto Rico: his two children; his mother and their gossip sessions over plates of fried rice; and the balm of salt and sun that leavens his life on the island.
But the artisanal soap business that Mr. Sotomayor built is barely hanging on amid rising costs and taxes, and sales that have sunk by 40 percent in five years. Crime is rampant; his girlfriend was nearly carjacked at gunpoint recently. So last month he boarded a flight to Orlando, Fla., to interview for a job at a rum distillery in the hope of joining the ever-growing Puerto Rican diaspora.
“I don’t see it improving,” said Mr. Sotomayor, a 47-year-old chemical engineer. “I see it getting worse. It’s the uncertainty. What am I going to do — wait until it gets worse?”
Puerto Rico’s slow-motion economic crisis skidded to a new low last week when both Standard & Poor’s and Moody’s downgraded its debt to junk status, brushing aside a series of austerity measures taken by the new governor, including increasing taxes and rebalancing pensions. But that is only the latest in a sharp decline leading to widespread fears about Puerto Rico’s future. In the past eight years, Puerto Rico’s ticker tape of woes has stretched unabated: $70 billion in debt, a 15.4 percent unemployment rate, a soaring cost of living, pervasive crime, crumbling schools and a worrisome exodus of professionals and middle-class Puerto Ricans who have moved to places like Florida and Texas.
The situation has grown so dire that this tropical island, known for its breathtaking beaches, salsero vibe and tax breaks, is now mentioned in the same breath as Detroit, with one significant difference. Puerto Rico, a United States territory of 3.6 million people that is treated in large part like a state, cannot declare bankruptcy.
From bottom to top, Puerto Ricans are watching it unfold with a mixture of disbelief and stoicism.
Alejandro García Padilla, who was elected Puerto Rico’s governor by a sliver of a margin in 2012, said that after he began to wade deeply into the island’s economic and social quagmire, his fight-or-flight instincts kicked into high gear.
“I thought about asking for a recount,” Mr. García Padilla, 42, said with a grin during a recent interview in La Fortaleza, the 500-year-old government residence, recalling, among other things, the $2.2 billion deficit. “But now it’s too late.”
A sense of pessimism pervades on the island. Streets are lined with empty storefronts in San Juan and in smaller cities like Mayagüez; small businesses, hit hard by high electricity, water and tax bills and hurt by drops in sales, have closed and stayed closed.
Schools sit shuttered either because of disrepair or because of a dwindling number of students. In this typically convivial capital, communities have erected gates and bars to help thwart carjackers and home invaders. Illegal drugs, including high-level narcotrafficking, are one of the few growth industries.
Puerto Rico, about 1,000 miles from Miami, has long been poor. Its per capita income is around $15,200, half that of Mississippi, the poorest state. Thirty-seven percent of all households receive food stamps; in Mississippi, the total is 22 percent.
But the extended recession has hit the middle-class hardest of all, economists said. Jobs are still scarce, pension benefits for some are shrinking and budgets continue to tighten. Even many people with paychecks have chosen simply to parlay their United States citizenship into a new life on the mainland.
Puerto Rico’s drop in population has far outpaced that of American states. In 2011 and 2012, the population fell by nearly 1 percent, according to census figures. From July 2012 to July 2013, it declined again by 1 percent, or about 36,000 people. That is more than seven times the drop in West Virginia, the state with the steepest population losses.
A Lack of Hope
“Today, Puerto Ricans with jobs are moving to the U.S.,” said Orlando Sotomayor, an economist at the University of Puerto Rico and the brother of Alexis. “Even people in their 40s and 50s, college professors with complete job security, are doing so. Some are starting all over. The phenomenon is highly uncommon and underscores the lack of hope that the ship can or will be righted.”
The current exodus rivals the one in the 1950s, when job shortages on the island forced farmers and rural residents to find factory work in cities like New York and Boston. Today, it is doctors, teachers, engineers, nurses, professors who are leaving Puerto Rico behind.
Just about everyone in Puerto Rico has a relative who left recently for Florida, New York, Texas or Virginia, among others. But the decision is never easy. Fathers leave behind children. Houses must be rented or sold at a loss in a glutted market. Businesses must be shut. And English must be polished, or in some cases learned, in a hurry.
Alexis Sotomayor said that on his January flight to Orlando, two acquaintances sitting nearby were also headed there hoping to find work. “Going out there in the morning and returning in the evening, after an interview,” he said.
After Coca-Cola laid him off in 2001, Mr. Sotomayor started experimenting with distilling plant extracts. He found he could make natural soaps and decided to go into business for himself, a move that would allow him more time to spend with his children.
Business boomed for years. So much so that he moved his homespun facility out of his house in 2005 and into a small building he bought in San Juan. He found that he was earning more money making soap than working as a chemical engineer.
Then in 2008, the recession pounded at his door. For five years, he has tried to lift his business; he went to fairs around the island, set up booths in shopping malls, promoted his flower-infused soaps, candles and lotions on television. He divvied up his store last year and decided to rent out half the building. He let go two of his four employees.
But his expenses mounted, including $600 a month in power bills, more than double what consumers pay on the mainland. The sky-high cost is a consequence of Puerto Rico’s inefficient government-run monopoly on electricity and its 67 percent dependency on petroleum for electric power. Other utilities are exorbitant, too. Last year, water rates rose 60 percent in a bid to help cut the state-run water company’s debt.
The cost of private tuition for his children, a total of $2,000 a month, is one nonnegotiable expense for him. Like most middle- and upper-class Puerto Ricans, he long ago lost faith in the island’s troubled public schools. Public school enrollment has plummeted in recent years, in part because of declining birthrates but also because of the schools’ poor quality.
“Many parents, even lower-middle-class parents, put all their money into their children’s private school, even if sometimes they have to live in rented houses,” said Nilsa Velazquez, an economics professor at the University of Puerto Rico who plans to move to Virginia with her family this summer.
For many, the high rate of violent crime has been the capper. There were 1,136 murders in 2011, a record and far higher than the mainland’s rate. It fell to 883 homicides last year, a point of pride for the governor.
But the damage had been done. Life here has always been full of trade-offs, including a high cost of living. Now, though, there is little left to trade.
‘Live Here Just to Survive?’
“Between making less money and not knowing when someone will jump you, that pushed the quality of life very low,” Alexis Sotomayor said. “To live here just to survive? No, thanks.”
For Ms. Velazquez, the tenured professor who lives in Mayagüez, and her husband, who works for the Air Force Reserve, the mental calculations were similar. She is 50, she said. The last thing she wanted to do was give up her job as an economics professor, move her two teenage children and uproot her 76-year-old mother, who speaks no English and has never left the island.
But she has grown so disillusioned with the University of Puerto Rico Mayagüez — one of the crown jewels of the island’s higher-education system, where she has worked for nearly three decades — that she no longer views it as a viable option for her children. In the face of continuing economic stress, the University of Puerto Rico has suffered the loss of a steady stream of valued professors and funding for important research projects. Even tenured professors have left, Ms. Velazquez said.
“The most important thing for me is my children’s education, and the second is my quality of life,” she said. “You see all of these fees and taxes going up, but the streets are terrible.”
This summer she will try to rent out her house rather than selling it and take a loss, and will move to Fairfax County, Va., where her husband will work for the federal government and her children will attend a top public high school. As an economist with a law degree, she is hoping to find some kind of job.
“I thought I could do anything in Puerto Rico,” she said. “Now that is gone.”
The frustrations of Mr. Sotomayor and Ms. Velazquez speak to the depth of the island’s economic problems.
The origins of the crisis, though, stretch back more than a decade. Tax incentives have long been a draw for corporations seeking to do business in Puerto Rico, and the island in turn has benefited from its ability to offer such breaks, in large part structuring its economy around them.
Little was done to try to revamp the island’s economic framework. Instead, deficits climbed and pensions spun out of control. In 2006, the government shut down for two weeks because it lacked the cash to meet expenses. The governor moved to raise taxes. In 2010, the next governor reduced taxes and laid off 33,000 government workers. But Puerto Rico’s governors began borrowing even more heavily to get out of the economic logjam.
“It was cheap and easy to borrow,” said Mike Soto, the president of the Puerto Rican Center for a New Economy. “It got to the point where we tapped out what we can borrow.”
Last year, Mr. García Padilla, the first governor from the countryside, took over. With the island’s economy a shambles, and credit agencies threatening a downgrade to junk status, he had no choice but to take swift action.
Economists have given him credit for acting to remedy problems that have festered for decades. In one year, he moved to overhaul three major pensions, including for teachers, that were on a pace to run out of money soon. Two of them are still pending final court approval. He reduced the deficit by 70 percent. And he is holding the four main debt-laden government-run companies more accountable and insisting on more transparency.
Vowing not to lay off any more workers, he raised taxes sharply to provide much-needed revenue and then got the legislature to approve incentives to entice wealthy investors, like the hedge fund billionaire John Paulson, who has invested in an exclusive beach resort and condo complex. A number of businesses have left the island, scared away by the groaning economy and the high cost of electricity. But others have arrived or expanded, like Eli Lilly, Seaborne Airlines and Cooper Vision.
“I’ve done everything I can to avoid a downgrade,” Mr. García Padilla said in an interview, calling the move “unjust.” “Maybe I can’t detain the winds right now, but I can build the windmills. I am an incurable optimist.”
But not everyone is applauding. His tax increases have hit some businesses hard, which could pose a further drag on the economy. Among the many taxes he initiated, the governor raised the corporate tax rate to a maximum of 39 percent. Last year, the economy continued on a slide. “The new administration has a bookkeeping mentality as opposed to an economic development mentality,” said Pedro Pierluisi, Puerto Rico’s nonvoting representative in Congress and a political opponent of the governor. “Here you find Puerto Rico with an underlying economic problem charging its corporations — its job creators — 39 percent. Hello!”
Perhaps the most maligned is the new lucrative gross receipts tax, which some owners of small- and medium-size businesses say threatens to put them out of business. Because of the way the tax is structured, it affects companies with less than a 5 percent net profit margin. This means that many food-related companies, like supermarkets, and new businesses, are hit hardest. The smaller the margin, the higher the tax.
Some stores are paying an effective tax rate of 130 percent, said Manuel Reyes Alfonso, the vice president of a trade association that represents the food industry. If the tax is not revised, some will be forced to shut down and others will have to raise prices, he said.
“It is absurd,” said Mr. Reyes Alfonso. “It’s like selling the car to buy gas.”
In response, the governor is forming a committee to take a second look at the new taxes and the island’s complicated tax code. Waivers to the tax are available, but Mr. Reyes Alfonso said they were difficult to obtain.
As he sipped coffee in the bakery section of one of his stores, José Revuelta, the president of SuperMax grocery stores in Puerto Rico, said he managed to expand during the recession. But now, with the gross receipts and corporate tax cutting into his business, he is holding back on capital investments, raises and bonuses. He said he wanted reassurance that the tax hikes would be temporary.
“I can understand doing this on a short-term basis,” he said. “But there needs to be a plan.”
Not many are confident that a long-term plan exists to lift the island from such a sustained crash. But it cannot get much worse, they say.
“Sometimes you have to hit rock bottom to restore yourself,” said Mr. Soto, of the Center for a New Economy. “I’m hoping that’s what’s happening.”