Luis Vazquez, a cutting and fabric spreader at Bluewater Defense, flattens a roll of fabric at the company’s factory in Corozal, Puerto Rico, where they make uniforms for the U.S. military. (Angel Valentin/For The Washington Post)

COROZAL, Puerto Rico — It’s almost the end of the shift at Bluewater Defense, a maker of U.S. military uniforms, and hands are flying fast, sewing shapeless strips of camouflage fabric cut from 250-yard rolls.

Step by step, each piece of clothing marches across nine sewing tables — for pockets, zippers, belt loops and buttons. The workers hurry to keep pace with one another as the company tracks daily output, sets targets and awards bonuses for good performance.

With official unemployment running 11.7 percent in Puerto Rico, the 523 people working in this small hill town value these jobs. They travel as much as three hours round-trip for pay that, including benefits, averages about $10 an hour.

Eric Spackey, chief executive of Bluewater Defense, says it has grown difficult to run a business in Puerto Rico. (Steven Mufson/The Washington Post)

Eric Spackey, chief executive of Bluewater, said he too feels pressure to keep the doors open, and as military uniform orders decline he has hustled to find new customers. “These people need these jobs,” Spackey said. “If we took them away, they’d be on government assistance.”

Bluewater is trying to keep afloat on an island that is foundering in a sea of debt. Despite the passage of legislation in Congress to help Puerto Rico manage its $72 billion in bonds and $43 billion in unfunded pensions, the situation on the ground here remains fraught. Agencies are running out of cash, taxes are rising, the state-run electric utility is delivering dismal service at high prices, and many young, capable people are bolting for better prospects on the mainland.

Nearly 1,600 miles away in Washington, Congress has been working on a lifeline. It has created a seven-person financial oversight board, which will have the power to overrule the local legislature’s spending plans and negotiate with a warring, noisy, litigious group of bond funds, hedge funds, pensions and politicians to restructure the territory’s debts.

For now, the legislation — known as PROMESA, for the Puerto Rico Oversight, Management and Economic Stability Act — bars litigation over the debts. And in the end, the control board will be able to force recalcitrant creditors to accept haircuts on bonds the commonwealth cannot fully repay.

But the board, whose members have not been named or vetted, will need three to six months to get up and running. Meanwhile the island’s financial condition is deteriorating. On Friday, the territory defaulted on most of about $2 billion of interest and principal repayments coming due. About $800 million of those payments would have gone to cover general obligation bonds, backed by tax revenue and long considered among the most secure.

Signs are everywhere that the government’s finances are freezing up: The territory’s agriculture department has suspended subsidies to farmers. The treasury has withheld tax refunds. Many suppliers, unpaid and unwilling to extend commercial credit, now demand to be paid on delivery by a government that owes them a total of $2 billion. Building contractor Ariel Ferdman said that one government agency owes his company more than $1 million and that he received two large checks — for a total of $164,030 — from the Government Development Bank (GDB) that bounced.

“We’re businesses trying to get the economy moving, and we’re not able to do it,” Ferdman said. “The government doesn’t pay debts to us, let alone bondholders. The government owes billions to contractors. That’s killing us in the economy. We’re choked. I owe some of that money to others. There’s a chain that goes down. It’s a mess.”

Credit unions, or cooperatives, have moved about $1 billion from the GDB accounts to private commercial banks that are considered safer; the cooperatives have sharply reduced their consumer loans for car and home purchases because they have big stakes in troubled government bonds.

Commercial banks have shrunk their balance sheets by half over the past decade, making it harder to borrow money. The political uncertainty hasn’t helped. One banker, who spoke on the condition of anonymity to protect business relationships, said that as many as 10 major potential investors he knows are waiting to see how things shake out before going ahead with their plans, even though his bank has approved their loans.

“Our toolbox is empty,” Puerto Rico’s governor, Alejandro García Padilla, told a forum in Washington on June 23, making a plea for Congress to pass legislation he believes is flawed but necessary. “The future of Puerto Rico is hanging by a thread.”

Nowhere is that more true than at Bluewater Defense. The company was a child of federal and Puerto Rican law and regulation. When most of the U.S. textile industry was shutting down because of low-cost competition from Asia, Bluewater flourished. That’s because the U.S. military must buy uniforms from American factories. The company expanded to 2,000 workers in four plants.

But in 2011, the federal budget sequestration nearly did it in. Moreover, that year President Obama began to withdraw troops from Iraq and Afghanistan. Soon the Pentagon cut its orders.

Workers at Bluewater Defense travel as much as three hours round trip for pay that, including benefits, averages about $10 an hour. (Angel Valentin/For The Washington Post)

To survive, Bluewater Defense closed three of its plants and slashed its labor force. In mid-2012, the Labor Department provided nearly $2 million to help 400 of Bluewater Defense’s workers retrain.

Bluewater Defense turned to Puerto Rico’s government.

The Puerto Rican Industrial Development Co. (PRIDCO) owns the building where Bluewater operates and charges a low rent. The agency also chipped in money for a training program for new hires in 2014. And when Bluewater was really on the ropes, PRIDCO wrote a check directly to Bluewater’s material supplier, and in exchange the uniform maker kept jobs it might otherwise have shed.

Today that is one reason the development agency has run out of money.

Other parts of the Puerto Rican government have compounded Bluewater’s problems. For example, the company has struggled with almost daily power failures even though it pays staggering electricity bills — as much as $60,000 a month — to the state-owned electric utility, an unwieldy company that still burns expensive fuel oil to generate power.

Each time it loses power, the clothing plant switches to backup diesel generators, but not before the most modern equipment has to be reset. Two weeks ago, a power surge damaged the circuit board of an expensive automated cutting machine. Spackey had to replace it at a cost of $3,400.

Spackey, who had a successful career in the telecom industry, has encountered frustration in his personal finances as well as at the factory. The government recently capped personal mortgage deductions, saying the holders of big mortgages could afford to pay more taxes. Writing in an e-mail, Spackey called Puerto Rico “an idiocracy” and said the change would cost him $18,000 a year in new taxes.

The company has struggled with almost daily power failures that disrupt production. For the unreliable service, it pays staggering electricity bills — as much as $60,000 a month — to the state-owned electric utility. (Angel Valentin/For The Washington Post)
Exodus to the mainland

Discontent is also stirring among Puerto Ricans of more modest means, nearly 400,000 of whom have fled to the mainland over the past decade in search of better jobs and health care.

Irma Delgado Rios, who keeps the production floor clean at Bluewater Defense, has a daughter who left a job at Bluewater nine years ago to work in a restaurant in Syracuse, N.Y. Hiram Rivera-Baez, 50, who sews the final trouser seams on uniforms, said his son-in-law left for Texas five years ago to start an air-conditioning business. Three years ago, Rivera-Baez’s aunt, uncle and brother left to join him in Texas and all three found jobs. Now they want him to go, too, but he said: Puerto Rico “is my home. If I have a good job, I’ll stick with it.”

Recently the Baltimore police force came here to recruit officers. About 1,600 Puerto Ricans signed up for the civil service test. Many more were interested.

The flight to the mainland has hurt hospitals most severely. For example, Puerto Rico’s only stroke center with round-the-clock specialists closed after three of its four neurologists moved to the mainland and the last, overworked, resigned. Widespread Zika infections — Bluewater Defense had its first case last month — will add to the health-care system’s costs.

“We’re losing doctors, and they tend to be the better doctors,” said Jim O’Drobinak, chief executive of MCS, the largest private health-care company in Puerto Rico. The reason: The federal government has cut reimbursement rates and MCS has had to cut costs — “and that means wages,” he said.

He said he had bumped into a young couple who worked for MCS on a plane to Florida. They told him that they were going to see an Orlando Magic game. When they later quit to move there, O’Drobinak realized that they had gone for job interviews.

What’s left is older patients, with more health problems, and older doctors. He said the average age of a doctor here is about 60.

That hurts the island’s ability to attract people to work here. “Would you bring your family to live in a society where you cannot have access to a quality doctor of your choice?” O’Drobinak said. “If your wife or you actually got that appointment for your children, would you want to wait hours and hours in that doctor’s office?”

Recently O’Drobinak saw the effect of the shrinking pool of doctors. When he went to see a doctor about his back at 7:30 a.m., half an hour before clinics usually open, he discovered the hallways were packed with people lining up to get in.

Some Puerto Ricans are determined to stay. Carlos Lopez-Lay runs 10 car dealerships. He has started a “social movement.” He calls it: “I’m Not Quitting.” He said: “I don’t want to say just survive. We can flourish.”

But he’s had his knocks, too. Total car sales, which had started to recover in 2012, have tumbled again to barely half the high point in 2005. He’s done better than most dealers, but selling car loans to banks has become tougher. His dealership sales are down $60 million this year.

He offered an example of government bureaucracy at work. He took over a closed-down car dealership, invested $15 million to refurbish it and waited six months to get all the required permits. “There are more than 125 government departments in Puerto Rico, and somehow they all seem to get involved,” he said.

Lopez-Lay added that he pays a new 25 percent import tax for cars plus a special excise tax for luxury models.

Socorro Lebron, a final inspector at Bluewater Defense, gives a pair of trousers one last look before sending them to packaging. (Angel Valentin/For The Washington Post)

A bulletin board in the break room decorated with portraits of relatives of employees who serve or have served in the U.S. armed forces. (Angel Valentin/For The Washington Post)
Consumers still spend

Yet somehow, Puerto Ricans still have money, tapping an underground economy whose size is difficult to estimate. Restaurants are packed, and not just with tourists. When a shopping mall opened recently with an H&M outlet, people lined up outside. Lopez-Lay said that he went to Costco before Father’s Day and that the store was jammed, with checkout lines so long that his wife held a spot while he filled up the cart.

One reason consumers have money is that the private economy is holding steady despite contraction of the public sector. First BanCorp figures show that private employment, after tumbling from 2006 levels, has stayed virtually unchanged since 2010. Meanwhile, the cash-strapped government, municipal governments and agencies have shed 16 percent of their jobs since 2010.

To lure wealthy financiers from the mainland to Puerto Rico, the commonwealth adopted Acts 20 and 22, offering tax breaks to make many investment gains tax-free. A few hundred people have taken advantage of it, including hedge-fund billionaire John Paulson, who is said to have invested about $1.5 billion.

However, giving tax breaks to rich financiers is controversial in a country where 45 percent of the people live below the poverty line.

Though it doesn’t measure the underground economy, official Census Bureau statistics show poverty and income inequality in the territory are greater than in the rest of the United States. The top 5 percent of earners receive 25.6 percent of aggregate income, and the bottom 40 percent receive just 8.4 percent.

Enough rage to go around

The Puerto Rican government’s failure to get a handle on its budget has angered many people here. Almost everyone has a favorite example of a boondoggle.

Gil Mercado, a lawyer in Corozal, near the Bluewater Defense plant, was nursing a Coors at the bar after work. He noted that a small municipality ran out of money building an indoor stadium large enough to seat more than half the town’s population. In one of a series of articles, the newspaper Nueva Dia said another municipal government gave a large grant to sponsor “Volleyball Week.”

Sergio M. Marxuach, public policy director at the Center for a New Economy, an independent think tank, pointed to a 10-stop train system built for mass transit that never attracted a mass ridership and never sparked development that had been anticipated around station stops.

Even in tiny Corozal, the mayor, who formerly ran a sandwich truck, said he has found wasteful spending. He said he laid off about 10 percent of his 330-person workforce, terminated road-building contracts with third parties and handed that work over to people already on the municipal payroll.

Many leading politicians here have denounced the federal oversight board as an instrument of neo-colonialism. Others, unrealistically, have asked Congress to limit its exercise of power.

The Center for a New Economy has warned that a sudden contraction in government spending might throw the economy into reverse. It advocates delaying severe cuts until later in the restructuring process.

Unions have opposed the bill, too, upset about a provision that will lower the minimum wage for young adults.

But among people in the private sector and many ordinary Puerto Ricans, there is a groundswell of grudging support for federal oversight, and antagonism toward any whiff of politics as usual.

“The government is in default,” Marxuach said. “It’s hard to argue that we don’t need an oversight board. The question is what type and with what powers.”

“We believe the fiscal board brings back confidence to private investors and the consumer and the public,” said a senior bank executive, who spoke on the condition of anonymity to protect business relationships. “The board is not perfect, but at the end of the day, it is the only mechanism to put the house in order.”

“I do favor a federal board, but I don’t support PROMESA,” said Jenniffer Gonzales, who is campaigning to become the island’s nonvoting member of Congress. She singled out the clause that would lower the minimum wage for people younger than 26.

She said that although Puerto Ricans support some kind of board, people have been dismayed by the need for a rescue bill and the Supreme Court’s decision giving Congress power over what shape bankruptcy takes.

“For the first time, Puerto Ricans feel we are the oldest colony in the world,” she said.