Although the government has managed to successfully contain public spending since 2008, the island’s indebtedness rate has soared at a faster pace than its Gross National Product during the last three years, currently reaching a 50-year high.
The discrepancy between how much money is available to spend and what is actually being used up has set off an alarm for the Center for the New Economy, which warned Tuesday that the island is dangerously nearing its borrowing limit.
Furthermore, Puerto Rico’s fiscal situation remains unstable and the short-term fiscal scenario remains subject to “a substantial amount of uncertainty,” CNE Director for Public Policy, Sergio Marxuach said during a roundtable discussion with members of the local media, when the think-tank offered its conclusions on how the Luis Fortuño administration has handled its finances since taking office.
In its analysis, the CNE concluded that the Commonwealth’s total public indebtedness increased by 19.5 percent to $63.8 billion in 2011, from $53.3 billion in 2008. During the same period, the island’s GNP increased 5.3 percent to $64.9 billion from $61.6 billion, at current prices.
“On the positive side, the indebtedness rate of growth appears to have slowed down substantially during the first nine months of fiscal year 2011,” said Marxuach, adding that it is too soon to tell if that trend will hold.
At present, the island’s debt service represents nearly 15 percent of fiscal 2011’s consolidated budget, which means “almost $1 out of every $6 spent by the government of Puerto Rico is allocated for debt service. In the U.S. [mainland], that proportion stands at 15 percent, and the government is worried,” Marxuach said.
The amount of the consolidated budget allocated to debt service has increased to a projected $4.3 billion in 2012 from a little more than $3 billion in 2008, the CNE’s calculations show.
Several bond offerings totaling $7.9 billion in new debt during 2009 and 2010 by the Sales Tax Revenue Financing Corporation, known as COFINA in Spanish, account for most of the increase in public debt since 2009, the CNE’s analysis shows.
“That $4.3 billion is $500 million more than what the Education Department will spend on our students next year. When you spend more on debt than you do on education, it certainly raises a flag,” the economist said.
Conservative budget, worrisome structural deficit
The Commonwealth’s consolidated budget has increased by 3.8 percent to a projected $28.6 billion for fiscal year 2012 from $27.5 billion in fiscal year 2008, with a projected net increase in spending next year of $482 million, representing a 1.71 percent year-over-year increase.
“Thus, this is essentially a conservative budget,” Marxuach said. “The Puerto Rican government has achieved significant success in restraining the growth rate of [public] spending since 2008.”
However, the fact that federal funds continue to account for more than 22 percent of Puerto Rico’s public spending is a source of concern, especially since all but $500 million in American Recovery and Reinvestment Act funds that have been available in the last two years is all that is left to spend in 2012.
Meanwhile, the government continues to drag a significant structural deficit, which the Fortuño administration pinned at $610 million in fiscal 2012. The CNE said the number truly hovers at $1.3 billion, as the figure must include the $668 million the government will spend on the debt service related to the General Obligations bonds it will refinance this coming fiscal year.
The CNE is also slashing the government’s $125 million Sales and Use Tax collection estimates for fiscal 2012 by half, saying it “is on the aggressive side.”
“It is very difficult to accurately forecast tax revenue at this time because taxpayers, both individual and corporate, are still adjusting to the new rules,” said Marxuach, noting that revenue stemming from Law 154, for example has not leveled out enough to detect a trend. “The government, however, is betting on significant revenue increases to be generated by increased enforcement of the Sales and Use Tax, through the IVU Loto, and the special excise tax on foreign affiliates of certain multinational companies with operations in Puerto Rico.”
The CNE noted that cracking down on large tax evaders on the island would likely make an impact on collections, but so far “Treasury has not had the political will to dig into that,” Marxuach said.
Meanwhile the government has implemented a number of measures to reduce its deficit, such as slashing its payroll through the elimination of 17,147 public workers since 2009. Still, “the trend … continues to be negative because it has stayed essentially flat over the last five fiscal years, both in absolute and relative terms.”
Retirement systems debacle
Moody’s Investors Service, one of three stateside companies that periodically evaluate Puerto Rico’s credit, issued a report warning of a possible downgrade of the island’s bonds classification due to the government retirement systems’ precarious fiscal situation.
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; Courts Retirement System, which covers judges; 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. However, in its report, Moody’s zeroed in on three of the systems that depend directly on general fund contributions: the Commonwealth Employees Retirement System, which as of June 30, had an estimated deficit of $17.8 billion; the Teachers Retirement System, which had $7 billion accumulated; and the Courts Retirement System, with $283 million.
“Addressing that problem raises issues of extraordinary financial, political, legal, and moral complexity. Tackling Puerto Rico’s pension problem along these four vectors will require tolerance, capacity for frank dialogue, commitment to good faith bargaining, and the willingness to make and honor concessions among retirees, current employees, and taxpayers in general,” Marxuach said. “It appears to us that any fair solution to this problem will require each one of those groups to make painful tradeoffs.”
The Fortuño administration’s proposed fiscal 2012 budget earmarks $718 million to cover the three systems this year, which is a fraction of the $2.1 billion needed to meet their full funding requirements for the year, Marxuach said.