Come January, when the new administration headed by Gov.-elect Alejandro García-Padilla takes over the reins of the government, it will have 90 days or so to present stateside credit agencies a “viable and concrete” plan outlining its strategy to tackle Puerto Rico’s fiscal problems, executives from the Center for the New Economy said Tuesday.
Think-tank officials pointed out three areas of priority that the incoming administration needs to address: retirement system deficiencies; stabilizing revenue collections; and taking control of the grave fiscal conditions of the Puerto Rico Electric Power Authority (Prepa), the Puerto Rico Acqueduct and Sewer Authority (Prasa) and the Highway Administration.
“We don’t have much time, about 90 days or so after January 2 to present a plan showing what we’re going to do,” said Sergio Marxuach, the CNE’s director of public policy. “They need to come up with a plan to address retirement system deficiencies and other issues, and it must be a long-term plan.”
The government of Puerto Rico currently has five retirement systems: the Commonwealth Employees Retirement System, which covers nearly all central government, public corporations and municipal employees; Teachers Retirement System, which covers public school system teachers; Judiciary Retirement System, which covers the courts; the University of Puerto Rico Retirement System; and the Puerto Rico Electric Power Authority Retirement System.
Each of the retirement systems has an actuarial deficit, which would impede them from meeting future obligations for a lack of enough resources. Three of the systems depend directly on general fund contributions: the Commonwealth Employees Retirement System, which has an estimated deficit of $23.7 billion; the Teachers Retirement System, which has $9.1 billion accumulated; and the Judiciary Retirement System, with $319 million, the CNE calculated.
“It’s not about having to show you have the $30 billion up front, but how you’re going to finance it in 20 or 30 years and the numbers must be balanced,” Marxuach said. “Even tougher than that, it must be a plan that has the support of all of Puerto Rico’s political sectors, because it’s a long-term plan.”
To achieve that political support, the new governor and his economic team must undertake a negotiation process with every sector involved — labor groups, retirees, and all other stakeholders, he said.
Just after the November elections, the CNE proposed a 15-measure package of suggestions to deal with the problem, ranging from increasing the retirement age to requiring private-sector employees who don’t benefit to contribute to the pool.
On the issue of revenue collections, Marxuach said the first priority will be to stabilize how much the government is putting into its coffers, which at present depends heavily on taxes levied on about 40 manufacturing companies under Law 154 of 2011.
“You have 40 companies generating 24 percent of Puerto Rico’s revenue collections right now,” said Marxuach.
According to the Treasury Department’s most recent collections report, those corporations paid $622.2 million in taxes from July 2012 to October 2013 of the total $2.4 billion collected.
That amount is down 4 percent from the $650.1 million paid during the same period in 2011-12, as a result of government decrees and other adjustments companies have made to reduce their tax burden.
The special temporary tax, in effect through 2016, was passed to float the Gov. Luis Fortuño administration’s sweeping tax reform, which among other things, granted substantial tax breaks to individuals and businesses. The reform was to be implemented in stages that depended on certain criteria being met.
“We believe the second phase will have to be suspended because those collections conditions are not being met,” Marxuach said.
Another concern is how to deal with lower collections as the effective tax rate is reduced through its expiration date. At that point, Law 154 stipulates that companies will be subjected to the “source of income” rule that establishes other parameters for them to follow when cutting their tax payment checks.
“There are ways to negotiate that as long as they’re able to continue receiving federal credit for what they pay, as they do now,” he said.
Public corporations under watch
During the ongoing government transition hearings, it was revealed that both Prepa and Prasa are buckling under massive debt with a combined $1 billion in unpaid obligations.
“What’s most concerning about PRASA’s situation is that it has to comply with an improvement plan imposed by the federal government that requires it to make $6 billion in capital investments over 15 years. We’re now in year six and they have no access to debt,” Marxuach said. “So, the only way they’ll be able to meet their obligation is to either increase rates, get a subsidy from the central government or renegotiate the plan with the feds, which isn’t that easy.”
PRASA would have to increase rates 50 percent during fiscal 2014 or tap the general fund for a subsidy of between $335 million and $425 million to meet all of its obligations, the CNE estimated.
As for Prepa, the agency has accrued about $500 million in debt, about half of which is related to the amount owed by government agencies and municipalities.
Puerto Rico’s fiscal situation is compounded by the fact that it is dragging a $1.4 billion general fund structural deficit, making it virtually impossible for it to help out any of its agencies. Furthermore, the island is facing $68.4 billion in debt this year, which outpaces its GNP’s $66.4 billion balance.
“Public debt represents 103 percent of Puerto Rico’s GNP. That’s like having a maxed-out credit card that you can’t use, but still must pay,” Marxuach said.