Fiscal Board: Government Deficit Higher than Estimated
SAN JUAN — The Fiscal Oversight Board (FOB) attended Tuesday the Revised Base Estimate of the Fiscal and Economic Growth Plan of the Government of Puerto Rico.
In a joint letter addressed to Gov. Alejandro García Padilla and Governor-elect Ricardo Rosselló, the board stated that, based on the most recent information, new projections indicate that under the current law the Puerto Rican government will face a $67.75 billion deficit during the next 10 years.
“After an extensive study and analysis, it is absolutely clear that the deficit the Government of Puerto Rico will assume in the next 10 years is higher than originally estimated. This reality requires the government to assume its responsibility and propose necessary initiatives and measures to overcome this abysmal fiscal challenge; even more so, to quickly start the reforms required to achieve sustainable economic growth and potentiate sustainable increase in job opportunities for all Puerto Ricans,” expressed FOB member José Ramón González in a written declaration.
To place that number into perspective, the board explained that unless due action is taken, closing the monumental budgetary breach would require the equivalent for every Puerto Rican family having to pay $5,400 (more than one fourth, or 28%, of the average annual income per family, apart from what they already pay in taxes) each year for the next 10 years, for a total $54,000 per family.
The new estimated deficit is almost $10 billion more than the $58 billion deficit originally projected in García Padilla’s fiscal plan, presented in Oct. 14. The new revised estimate was calculated by the same team of employees and advisers in the current government, and it is still undergoing validation process from the FOB and its advisers. The board will look for an independent third party to validate the starting point for the base estimate, as well as the most recent audited financial states available, which date from the 2014 fiscal year.
In the letter, FOB President José Carrión thanked García Padilla, his team and advisers “for collaborating with the board during the past month, helping us in the valuation of the fiscal plan proposed by the Government of Puerto Rico.” On the other hand, he congratulated Rosselló for his victory in the elections and reiterated that “we hope to develop a productive work relation with you and your administration to face Puerto Rico’s fiscal and economic crisis in benefit of all Puerto Ricans.”
On Nov. 23, 2016 the Fiscal Oversight Board informed García Padilla that the fiscal plan he submitted didn’t fulfill certain requirements established in the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).
“These measures must achieve the correct balance between fiscal adjustments, structural reforms and the debt restructure. And that balance must be achieved taking into consideration the impact that potential changes might have on children, senior citizens and Puerto Rican families, as well as members of the institutional sector and society as a whole. This isn’t merely a mathematical exercise to balance the checkbook, although achieving a balanced budget is fundamental. The real goal is to reestablish economic growth to improve people’s quality of life,” added board member Ana Matosantos.
According to the revised base estimate, the local government’s deficit for the next ten years “is so big that even if the entire debt was eliminated (which isn’t an option from a legal and equitable standpoint) the books would still in the red.”
“The board firmly believes that Puerto Rico has the potential to overcome this crisis in a better economic position. [We are] a tool that the U.S. Congress has created to potentiate Puerto Rico to manage this crisis. But the government and people of Puerto Rico must use that tool correctly and effectively to face the challenges ahead,” said Carrión.
In the letter, the FOB outlines a series of measures the local government should consider to achieve the following three goals:
1. Reestablish opportunities and economic growth through a series of short and long-term structural reforms that make way for a more competitive economy;
2. Achieve sustainable balanced budgets, restructuring the government and carrying out necessary budget cuts, while keeping essential services for the people of Puerto Rico.
3. Restructure long-term obligations (GOs) in a sustainable level under a fiscal plan that fulfills Promesa—including restructuring Puerto Rico’s debt, reforming pensions and attending fund insufficiency to fulfill obligations—and reestablish access to capital markets.
Among the measures the board urged the government of Puerto Rico to consider, some include:
1. Laboral reforms and social assistance to accelerate job creations and guarantee that less people depend on social assistance and form part of the workforce;
2. Energy reform to reduce costs and increase trustworthiness in the electric energy system;
3. Tax reform to reduce the tax burden upon individuals and businesses, increase collections, revise expenses and tax incentives, and create an effective and efficient of Puerto Rico Treasury Department;
4. Regulatory and permit reform to maximize the economy’s competitiveness;
5. Public-private partnerships to develop a new infrastructure and fix and improve the current one;
6. Restructure the government to the correct size to focus on the quality of basic services (such as energy, health and education), while eliminating non-essential services that the government simply cannot afford;
7. Adjust prices of government services (to the correct levels), aligning what it charges for the services it offers to their real cost, thus reducing or eliminating expensive subsidies that the government simply cannot afford;
8. Privatize the government’s actives so they can be managed more effectively by the private sector, while generating additional capital so the government can invest in infrastructure;
9. Reestructure long-term obligations, including the debt’s restructure and the reform to pension systems;
10. Reform the education and health systems.
“It isn’t the FOB’s initial role or interest to determine which measure or combination of measures Puerto Rico must adopt to achieve the structural fiscal balance required by Promesa. We can propose initiatives that the government could implement to achieve this goal. We will provide safeguards to assure fulfillment, discipline and for the government to stay on course, but in first instance the responsibility to determine which measures will be implemented is responsibility of the government of Puerto Rico. The elected officials must assume the responsibility that the people have bestowed upon them; they need to act. Doing less of what is required or postponing the solution to the problem isn’t an option anymore. We have the lawful task to analyze, evaluate and eventually certify the fiscal plan. And that is what we will do. If the government were to fail in proposing a fiscal plan that is certifiable under Promesa, then the oversight board could go one step further. But that isn’t what the board wants to do,” declared Carrión.
Goals for Puerto Rico’s future after the Fiscal Plan
Carrión emphasized that the fiscal plan isn’t a mere exercise to achieve a balanced budget, but rather a changing document that provides some guides to achieve concrete goals that make a difference toward improving Puerto Ricans’ way of life.
“The fiscal plan is a guide to reestablish economic growth and achieve more opportunities for the People of Puerto Rico within the next 10 years, and preferably before,” he said.
According to the FOB, it is important for the Fiscal Plan to include measurable goals or aspirations for Puerto Rico, such as:
1. Elevate Puerto Rico’s economic performance to a level consistent with the U.S. regional economy;
2. Increase work rate participation;
3. Achieve the highest quantity of parents and other adults to make a transition of social assistance programs toward self-sufficiency and employment;
4. Improve competence in writing, reading, bilingualism and science, technology, engineering and math (STEM) in K-12 students, routing them from an early age toward: (1) available jobs in the work market or (2) college, and provide accessible public higher education, based on financial needs;
5. Build modern, efficient and cost-effective infrastructure that guarantees to provide public services fairly to each region in the island;
6. Create a vibrant business sector;
7. Increase the average family income and reduce poverty;
8. Improve vital health statistics and average life expectancy;
9. Improve security and reduce crimes and violent deaths;
10. Reestablish population growth in Puerto Rico.
Conversations in good faith with creditors
As anticipated in its November meeting, the FOB indicated that it will begin to coordinate conversations with creditors this week. The group of creditors interested in gathering with the Board members must send a petition to firstname.lastname@example.org.
In addition, Carrión reiterated that the FOB is ready to work conjointly with the elected government to develop a certifiable fiscal plan. To these effects, he said he would maintain communication with Rosselló within the following days to discuss the necessary steps to achieve this goal before January 31, 2017.
“We trust that the incoming administration will share with the Oversight Board the need for urgency to collaborate rapidly and efficiently in this effort. The FOB is ready to assist the Government of Puerto Rico to define necessary structural reforms, mange its long-term obligations and reestablish economic growth and opportunities for the people of Puerto Rico,” he concluded.