A man waves a national flag as protesters march through San Juan May 13, 2015. University students and employees took to the streets to protest government plans to cut public university budgets, according to local media. Reuters/Alvin Baez

After Sarahi Alicea and her husband, Hector Carrasquillo, visited family in Buffalo, New York, in 2012, the couple decided it was time to shut down their struggling home-based restaurant business in Fajardo, Puerto Rico, and start over on the mainland.

“My husband and I wanted a better life,” Alicea said. “I noticed when we were visiting family that there wasn’t a food truck serving Spanish Puerto Rican food. We decided this would be a good business to bring to Buffalo.”

The couple spent a few years selling food at local upstate New York festivals and saved enough money to kick-start their next venture. Earlier this month, the Ricos Pinchos Place food truck opened for business, serving alcapurrias, pastelillos, piononos and other Caribbean specialties just miles from the U.S.-Canadian border.

Alicea and Carrasquillo are among the roughly 50,000 people fleeing Puerto Rico’s crippled economy every year, an exodus that will continue as the island’s 3.6 million people face economic austerity measures and higher taxes. After nine consecutive years of economic contraction, 20 years of excessive borrowing and heavy public pension obligations, the island’s sobering moment of truth has arrived.

Puerto Rico’s Senate approved early Thursday a $9.8 billion budget for the 2016 fiscal year that starts July 1. In the coming days, senators and House members will debate the specific spending cuts that make up a proposed $674 million raft of cost reductions and a possible $1.4 billion set aside to service the island’s $72 billion debt.

The commonwealth's House and Senate must reach agreement on the budget by July 1 before it can borrow up to $1 billion more to fund government operations. Additional revenue will come from a sharp increase in sales and use taxes that go into effect next month.

Even with the steep cuts proposed by Gov. Alejandro García Padilla and legislative leaders, a partial government shutdown, the first since 2006, is still a distinct possibility. San Juan has enough cash right now to cover a series of debt payments that come due next month, according to Washington-based investment firm Height Securities, but little is left to cover day-to-day operations. In July alone, the government faces $1.92 billion in debt-servicing payments.

“We’re looking at a situation where 35 to 40 percent of the Puerto Rican government gets furloughed,” said Daniel Hanson, a Height Securities analyst who has been tracking Puerto Rico’s fiscal train wreck. “[In 2006] you had trash piling up in the street. People were stranded because of a lack of transportation. Things very quickly became unraveled.”

Puerto Rico’s dire financial straits have led to a complex juggling of finances, including slower payments to government suppliers, lending and borrowing among government agencies, and a delay in issuing tax rebates. The Government Development Bank’s cash pool drained to $778 million at the start of June, down from $2 billion in October.

‘Retirees Vote, Puerto Ricans Don’t’

For years, Puerto Rican debt has been an attractive part of bond portfolios as institutional investors in the U.S. and elsewhere saw it as a relatively safe way to increase returns. Bonds earn more money when the investments are at greater risk of default. Investors saw Puerto Rico’s securitized debt as a safer way to increase returns than buying bonds from sovereign states.

“Puerto Rico’s status has been quite favorable for borrowing,” said Mauro Guillen, a Wharton School professor of international management. “They don’t have their own foreign policy. They don’t have their own currency or banking supervisor. All of those things are being provided by the United States.”

The government’s tax-free general obligation bonds, which account for about $28 billion of its debt, are also protected by a constitutional guarantee of payment, making them more attractive to bond buyers. And because of the island’s commonwealth status, bankruptcy protection requires U.S. congressional approval from lawmakers, many of whom would get an earful from voters who rely on bonds to pad their investment portfolios if they supported legislation that many would view as a bailout.

“Retirees vote, Puerto Ricans don’t,” said Hanson, referring to the limited voting rights of citizens based in U.S. territories.

But since the city of Detroit’s costly bankruptcy in 2013, investors began scrutinizing their exposure to local government bonds, especially those issued by the commonwealth’s public corporations responsible for services like power generation and sewage treatment. This has forced the government to depend more heavily on hedge funds that are betting that the restructuring of these public corporations will lead to higher returns.

Austerity & Privatization

Because bankruptcy is off the table, Puerto Rico will need to borrow more money as it restructures, slashes costs and public services, and seeks out new revenue streams.

To entice lenders, San Juan will have to provide a game plan for reforms that involve deeply unpopular measures, a can that the legislature has been kicking down the road for years. Guillen says this plan will be a painful process for the commonwealth’s residents.

“In the long term, they need to find a balance between private-sector and public-sector employment to try to make the whole economy more competitive,” said Guillen. “If for 20 years you haven’t done your homework, then the day of reckoning is tough and the decisions are painful. And bond markets aren’t forgiving.”

One of the more controversial measures that could be in play in the future is the privatization of state-run corporations, including the power company, known as Prepa, which owes $8.7 billion in bonds and faces a possible default on a July 1 payment. Public entities responsible for sewage and highways also are deeply in debt and need more capital to expand.

Luis G. Fortuño, who served as the commonwealth’s governor from 2009 to 2013 and implemented a lot of unpopular measures to cut costs, says privatization of certain public institutions is likely on the table as a way of generating more revenue and shed debt.

“Puerto Rico enacted a very modern and attractive public-private law in 2009,” he said. “I see that we’ll go back to that again.”

During Fortuño’s administration, San Juan’s international airport was privatized and two major highways became toll roads under the management of a consortium that includes investment bank Goldman Sachs. He also privatized bus services and sold off government-owned hotels, moves that won him accolades from Wall Street. But layoffs of public workers turned him into an enemy of austerity and privatization opponents.

“I cut spending and I wasn’t re-elected,” said Fortuño, who now practices law in Washington.

On the table for future privatization is Prepa, which is in eleventh-hour talks to avoid defaulting on a $415 million payment to bondholders on July 1. But privatizing the power authority, an idea that’s been talked about since at least 2012, would face steep opposition.

Privatizing big government-owned assets would be a longer-term prospect. Gov. García Padilla, a member of the leftist Popular Democratic Party, already has overseen, and faced criticism for, some unpopular measures, including higher taxes and deficit-reducing spending cuts.

As the island’s government tries to figure out how to spur growth and jobs creation, keep lenders satisfied, and implement bitter-pill reforms, the people of Puerto Rico will see costs rise and services cut while unemployment remains perniciously high. Meanwhile, much of their taxes will go to servicing debt instead of paying for public services. And that means more people like Sarahi Alicea and Hector Carrasquillo will look for mainland opportunities to improve their lives.