Puerto Rico and an Unfulfilled PROMESA: Reflecting on Ten Years of the Territorial Bankruptcy Regime

Ten years after the passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), Puerto Rico’s debt crisis continues to expose the unresolved colonial foundations of its relationship with the United States, argues RFS Deputy Lead Editor Mariely López-Santana. While the Act created a territorial bankruptcy regime that enabled major debt restructuring, it also empowered an unelected oversight board with sweeping fiscal authority over Puerto Rico’s elected institutions. The Puerto Rican case therefore raises wider questions about subnational fiscal discipline, democratic accountability, and the continuing consequences of the island’s ambiguous status as “foreign in the domestic sense.”

As scholars of federalism and multilevel governance have often pointed out, subnational fiscal discipline is a key intergovernmental struggle for countries around the world (e.g., Wibbels, 2003; Rodden, 2006). When a subnational level defaults, what is the responsibility of the national level? How should subnational levels respond? Which governance and policy solutions are more effective to overcome these episodes? Puerto Rico (PR) is currently facing many of these questions, as it is facing the largest debt restructuring in the history of the US municipal bond market. While other US localities, including Detroit, have faced similar issues, the ambiguous status of this unincorporated within the US federal context has complicated the debt restructuring process.        

Foreign in the Domestic Sense

To understand the unique status of the US unincorporated territories we have to go back to the first years of the 20th century when it was established that the newly acquired possessions belonged to the United States, but were not part of it. As the US was expanding its federal and Imperial projects, the Insular Cases of the first decade of the 20th century established that “Puerto Rico was not a foreign country in the international sense, ‘since it was subject to the sovereignty of and was owned by the United States. Rather, Puerto Rico ‘was foreign to the United States in the domestic sense,’” since it “had not been incorporated into the United States, but was merely appurtenant thereto as a possession” (cited by Sparrow 2006, 92).

While Hawaii and Alaska (i.e., the incorporated territories) eventually became US states, and the Philippines became independent, about to 5 million residents of the unincorporated territories—Guam, Northern Mariana, American Samoa, PR, and the Virgin Islands—are still affected by the doctrines of the Insular Cases. Even if PR gained autonomy in the 1950s through the establishment of El Estado Libre Asociado (Commonwealth), those who reside in the unincorporated territories enjoy a second-class citizenship given that they do not have access to the same rights and obligations as their counterparts in the 50 states.

This unique logic also applies to the financial space. While PR was integrated into the US municipal bond market in 1900, the archipelago could not file for Chapter 9 bankruptcy when the governor declared in 2015 that the archipelago’s $72 billion debt was not payable. In 2016, US Congress intervened by passing the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Beyond the magnitude of debt restructuring, the launch of a “territorial bankruptcy regime” is noteworthy given that through a federal takeover the nature of US–PR pact was altered. More specifically, the unelected members of PR’s Financial Oversight and Management Board (FOMB), which became responsible for restructuring the debt, also gained major powers over the Commonwealth’s elected government.

After PR experienced a few hurricanes, a pandemic, and various earthquakes, la junta was able to cut the archipelago’s debt by 58 percent. But the most expensive bankruptcy in the history of the United States is yet not over, as the restructuring of PR’s Electric Power Authority has been delayed. Therefore, a decade later it is unclear when the FOMB will exit the archipelago. Meanwhile, Puerto Ricans are experiencing a grim picture, as they face constant blackouts, days without water, and increasing costs, in part to pay bondholders.

Ten Years Later: What Have We Learned?

Ten years after PROMESA was launched, what have we learned about the consequences of this territorial bankruptcy regime on the status of the US unincorporated territories?

a) Despite efforts to decolonize the unincorporated territories in the mid-20th century by increasing their autonomy, these islands are still ruled by the Territory Clause of the Constitution— “The Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.” As it became evident with the passage of PROMESA, Congress still has plenary powers over the unincorporated territories, and is willing to exercise these powers.

b) 125 years after Downes v. Bidwell (1901), the doctrines of the Insular Cases are very much “alive and kicking” in that the unincorporated territories still “belong to, but are not part, of the US.” 

c) By creating la junta, PROMESA launched an ambiguous oversight organization with significant powers, including debt restructuring and fiscal veto powers. As I have explained elsewhere (López-Santana 2023; 2026), compared to US municipalities, the ambiguous territorial structure of PR has complicated the restructuring process. Through litigation, the special Court created for PROMESA and federal Courts (including the US Supreme Court), have established that:

• First, the Financial Oversight and Management Board (FOMB) is not a federal organization, even if the members of the Board are appointed by the president and Congress. 
• Second, despite being a local organization, in line with states’ protections under the Eleventh Amendment, the Board enjoys sovereign immunity (see Financial Oversight and Management Board for Puerto Rico v. Centro De Periodismo Investigativo, Inc. 2023). 
• Third, while its unelected members are considered local officers, there is a democratic deficit, as la junta cannot be checked by local (elected) politicians and institutions, even though the FOMB’s budget is derived from Puerto Rican taxpayers. 
• Fourth, it has been determined that the FOMB has fiscal and financial powers, including veto powers over fiscal decisions taken by the legislative and executive branches, but the elected government gets to keep its political powers. Still, these lines between economic and political powers are often blurred by the FOMB, as economic decisions often have socio-political implications, as illustrated by the austerity agenda of the FOMB.

These insights are relevant as elements of the PROMESA regime might be transplanted into other territories, as well as US localities in the 50 states, facing fiscal or financial distress. Furthermore, as developing countries explore the possibility of creating their own subnational bond markets, the case of PR provides valuable insights about the politics, policies, and governance of subnational debt regimes and debt restructuring. 

To conclude, as the US celebrates its 250th anniversary, the case of PROMESA pushes us to challenge the notion that this country is a symmetric federation—after 125 years of colonialism, the unincorporated territories remain “foreign, in the domestic sense.”

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Mariely López-Santana is an Associate Professor at the Schar School of Policy and Government at George Mason University. She is currently working on a book manuscript entitled, Indebted Colony: The Political Economy of Puerto Rican Bonded Debt under U.S. Rule. She is Deputy Lead Editor of Regional and Federal Studies. 

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Note: this blog represents the views of the authors, and not those of Regional & Federal Studies, the Centre on Constitutional Change, or the University of Edinburgh. 

Image credit: Godot, CC BY SA 4.0 via Wikimedia Commons