SAN JUAN — When Alejandro García Padilla took office as governor of Puerto Rico in January, he quickly realized just how far the island had sunk.

The unemployment rate of 14.6% exceeded that of any U.S. state. Public worker pensions were strangling the budget. Murders had soared to record numbers as the drug trade overwhelmed the island.

What’s more, the island of just 3.7 million residents owed a staggering $70 billion in debt and had run up a $2.2 billion budget deficit that led credit rating agencies to downgrade Puerto Rico bonds to near-junk status.

«I would say, ‘I should ask for a recount,’ » García Padilla, 42, said of his first days in office.

Puerto Rico has become the latest poster child for serious debt woes. Its massive problems have led some to liken it to Greece, which has sucked $170 billion in bailout money from European countries and is still teetering toward default.

Global debt markets are concerned about default. The problem is particularly acute in the U.S. mutual funds industry, where many Americans have their retirement savings.

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Morningstar, the investment research firm based in Chicago, says as much as 80% of Puerto Rico’s $70 billion debt has found its way into muni-bond funds, and 180 mutual funds in the USA and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.

«All of a sudden … the guy who usually spends his time playing golf is saying, ‘Hey, do I have some of that?’ and their broker is saying, ‘Yes, you do,’ » said Sergio Marxuach, an economist at the Center for a New Economy, a Puerto Rican think tank.

Puerto Rico, which became a territory of the United States in 1898 after a war with Spain, cannot legally file for bankruptcy. The island’s constitution states Puerto Rico must make its debt payments before it pays for anything else.

«I would have to stop paying salaries, or close the department of health, education, police, everything before we went into default,» García Padilla said.

Its only remaining options are to cut spending and raise taxes, beg Congress for a bailout or refuse to pay.

David Chaffey, chairman of the board of Puerto Rico’s Government Development Bank, says a bailout is not on the table. «Have we asked for a bailout? No. Have they offered a bailout? No,» he said. «We have to help ourselves.»

Many factors have contributed to the island’s fiscal crisis. But economists generally pin the blame on its inability to develop an economy independent of the United States and the island’s reliance on debt to pay for a growing public payroll.

The government began creating more public jobs to give work to the unemployed in the 1970s, when factories were closing down due to skyrocketing oil prices. That job creation never stopped. Today, Puerto Rico can cover only 11.2% of its public pension costs, less than even the most dangerously underfunded state retirement systems.

Congress agreed to try to help Puerto Rico’s economy by allowing U.S. businesses to expand operations without having to pay taxes on their profits there. Pharmaceutical giants such as Pfizer, Merck, Bristol-Myers Squibb and Eli Lilly built plants here, but when Congress in 2006 ended the tax break, many companies found it too expensive to stay.

With people losing jobs and tax revenue falling, Puerto Rico fell in love with the idea of borrowing money.

The island found that Puerto Rican bonds were an especially attractive item to investors. Municipal bonds are generally exempt from state and local taxes for those who buy them in the state or city they live in. But Puerto Rican munis are exempt from federal as well as state and local taxes, no matter what state the purchaser is from.

That «triple-tax-free» status made the territory’s bonds popular. Puerto Rico issued muni bonds to pay off all sorts of things, from government deficits to debt owed on other bonds. From 2000 to 2012, the government’s public debt nearly tripled from $24 billion to $70 billion, according to the Center for a New Economy in Puerto Rico.

Then the real estate collapse hit Puerto Rico. The drop in home prices and the rise in mortgage failures prompted the Federal Deposit Insurance Corp. to force the closure of three Puerto Rican banks in 2010.

The only part of the economy that thrived was the illegal drug trade. Angel Melendez, the special agent in charge of Immigration and Customs Enforcement operations in Puerto Rico, said his office has arrested so many on drug charges that its 1,200-bed detention center is full. He now has to send inmates to the U.S. mainland to await trial.

Meanwhile, the lack of financial opportunities is driving the young and educated — the very people Puerto Rico needs to fuel its economy — from the island.

Since 2000, the island has seen a net loss of 144,000 residents, mostly to the United States. Javier Colon, a political science professor at the university, says the mainland is an «escape valve» for Puerto Ricans.

Giovanni Villafañe, a 22-year-old senior at the University of Puerto Rico majoring in human resources, did an internship at Disney World last year. Despite the objections of his father, he will leave for the States when he graduates.

«I’ve had professors who tell us, ‘You’ve got to stay, you’ve got to help Puerto Rico,’ » Villafañe said. «I’m a very optimistic person, but that’s too much. By staying, you have to sacrifice so much.»

Puerto Rico’s reliance on the federal government extends to welfare benefits, too. In 2012, island residents received more than $2 billion in food stamps from the federal government. That goes to 37% of the population, higher than Mississippi’s 22%, which is the most of any U.S. state.

Colon sees the food stamps and other forms of federal aid as a «shock absorber» for people struggling. But some on the island feel the welfare has also created a sense of dependence among Puerto Ricans that makes it difficult for them to spur their own economic revitalization.

«Many Puerto Ricans came up believing the government is responsible for this or that. So it’s very logical that if they live on welfare that they would feel they need help to start a business,» said Pamela Calderon, 28, a sculptor who opened a tea room in historic Old San Juan with her husband.

They opened the tea room, called the Waffle-era Tea Room, in May 2011 with $3,000 they had saved and with the help of a credit card from The Home Depot. The tea room has done well, and they’re expanding to a larger location nearby.

Despite their success, they’re making a point of doing everything — from the renovations to painting to replacing the damaged floor — themselves.

«I don’t have $13,000 to have someone redo the floor. But a bag of cement costs $5,» said Pamela’s husband, Ricardo Figueroa, 41, his arms glittering silver after a day painting the roof of their new space. «There are people who feel they need help from the government, or a bank or someone with money. I believe in self-responsibility.»

NOT AN ISLAND UNTO ITSELF

Puerto Rico says it’s trying to wean itself from the federal government and make the hard decisions to move forward.

It has increased the retirement age for government workers to 67. It has raised taxes, water rates and highway tolls. Puerto Rico tax revenues for the three months through September rose by $70 million, or 4.4%, and officials here say they can eliminate the budget deficit by 2016.

But like European nations struggling with long-standing underfunded pensions and bloated payrolls, the reforms in Puerto Rico have failed to stimulate the economy.

Some complain that García Padilla’s focus on reducing the debt (highlighted by an estimated $1.4 billion in new taxes) is hurting any chance of economic recovery.

«The fact that the economy hasn’t grown in seven years, that’s really the underlying problem,» Marxuach said. «Increasing taxes by that much in the middle of a recession will probably make that recession more acute.»

TOURISM STILL PILLAR OF ECONOMY

When asked why the island’s tourism industry isn’t performing well, Gov. Garcia Padilla runs from his office and returns with an oversize map of the most popular portions of San Juan.

«There’s a plan for that,» he says, pointing around the map as he explains a $50 million tourism infrastructure plan set to start in February. «New architecture, new roads, burying power lines, new lighting.»

He also wants to expand Puerto Rico’s agricultural sector, which accounts for less than 1% of the economy even though the tropical island is rich with fertile land. He wants to build on the pharmaceutical manufacturing base that already exists.

And he won’t back down on paying the island’s bills, he says.

Puerto Rico increased the contributions employees must make to their pensions and is trying to have the teachers union do the same, he says. Water rates were hiked 60%; taxes have been raised on gasoline, incomes above $200,000 a year, highway tolls. And he cut salaries in his office by 10%.

«This cellphone isn’t paid by the Puerto Rican government,» he says, holding up his iPhone. «I’m the first governor … who uses a used car.»

Those are the kinds of steps, however small, that he believes will get Puerto Rico back on track. And to calm all those foreign investors who have kept the island afloat for so many years.

«For many years, the government of Puerto Rico didn’t make the decisions it needed to make,» he said. «They said, ‘Whoever comes behind can fix it.’ That’s over. It came down to us.»