Why US hedge funds are attacking struggling Puerto Rican schools

While the world has been focused on Greece’s economic woes, the United States has been experiencing a serious debt crisis in its own backyard — in the US territory of Puerto Rico.

The tiny Caribbean island owes $72 billion in debt, held mostly in US municipal bonds. Puerto Rico’s governor, Alejandro García Padilla, has called Puerto Rico’s financial situation a “death spiral” and declared the debt “unpayable.”

However, billionaire hedge fund managers, who hold about $5.2 billion of Puerto Rico’s bonds, are saying not so fast. 

A report commissioned by a group of 34 American hedge funds, called “For Puerto Rico, There is a Better Way,” suggests that Puerto Rico can lower its expenses by cutting funding to social services, allowing the territory to avoid defaulting on its debt. The main service that hedge fund managers want to slash? Education. 

Or, to put it another way, wealthy financiers say Puerto Rico should close schools and fire teachers in order to pay back the billions it owes.

The problem is that Puerto Rico has already closed nearly 100 schools this year, and its current education spending amounts to $8,400 per student, far below the US national average of $10,667.

More education cuts could be devastating for Puerto Rican children, 56 percent of whom already live below the poverty line.

The report, crafted by former International Monetary Fund economists, argues, “Education expenditures [in Puerto Rico] increased 39% or about $1.4 billion in the past decade while total school enrollment declined ~25%.”

Enrollment in public schools in Puerto Rico is dropping drastically, as thousands of families emigrate to the US in search of work. Families who have chosen to stay must now travel long distances to reach the schools that remain open.

Families who don’t want their children to travel so far for class might consider private school, but tuition at top private schools in Puerto Rico can exceed $9,000 a year, or nearly half the median income in Puerto Rico, leaving middle class families with no choice.

Puerto Rican officials don't think cuts to the island's already struggling schools are a solution for the debt crisis.

“They are proposing teacher layoffs, cuts in higher education and health benefits, as well as increased taxes. These proposals have been a disaster for Latin America and would be so for Puerto Rico,” Luis Gallardo, the majority municipal leader for Aguas Buenas, a region of Puerto Rico, said.

“The Puerto Rican government has already closed down almost 100 schools this year and reconfigured 500 more, as well has having closed down 60 the year prior,” he added. “If they expect us to lay off teachers or cut their already-low salaries, they are out of their minds.”

Víctor Suárez, chief of staff to Governor Padilla, agrees that education cuts would only serve to further cripple the island.

“The simple fact remains that extreme austerity [alone] is not a viable solution for an economy already on its knees,” he told the Guardian.

He emphasized that social spending, including education, will stay a priority for Puerto Rico.

Another economic study of the situation in Puerto Rico, "Puerto Rico — A Way Forward," or “the Krueger Report” as it's being called, looks beyond austerity measures for debt solutions. Instead, it advocates a new bond exchange, labor legislation reforms and exempting Puerto Rico from some federal laws like minimum wage and welfare rules until it gets back on its feet.

“The policy agenda is daunting but similar challenges have been overcome elsewhere and can be in Puerto Rico too,” the Krueger Report argues. “All this is a heavy lift but also one within the capacity of Puerto Rico to accomplish.”

Puerto Rico has a debt payment of $58 million due on August 1. It is currently unclear if the troubled island will be able to make the payment.