CNE: Puerto Rico’s fiscal base has, will continue to erode
Puerto Rico’s socioeconomic fiscal base has eroded and continues to erode significantly, while the central government and some public corporations are basically insolvent.
Such were the conclusions reached by local think-tank The Center for a New Economy upon analyzing the government’s Comprehensive Annual Financial Report (known as CAFR) released Monday for the fiscal year ended June 30, 2012.
In his analysis, CNE Public Policy Director Sergio Marxuach said it “would be a mistake to blame a specific administration or [political] party for this situation because it is the product of decades of mismanagement, undue politicization of public administration, and misuse of temporary solutions to address recurring problems.”
“We have an expensive, dysfunctional government, on the verge of bankruptcy, infected by corruption, and that does not meet the needs of the people of Puerto Rico,” Marxuach said in his latest entry into the CNE’s blog. “Looking ahead, we need to begin a serious process of analysis and collective introspection, without deluding ourselves.”
The first step in that analysis, he said, is to acknowledge that Puerto Rico’s current socioeconomic order has “clearly come to an end, and everyone knows it, but nobody wants, or dares, to talk about it. It’s time to start the dialogue.”
Upon scrutinizing the numbers submitted in the annual report corresponding to Gov. Luis Fortuño’s last year in office, the CNE noted that as of June 30, 2012 the government had a little more than $15.4 billion in assets, and some $55 billion in liabilities, resulting in a negative net worth of $40 billion.
This compared with assets of $13.9 billion and liabilities of $48.4 billion, which generated a negative net worth of $34.5 billion for fiscal year 2011. Therefore, the cumulative deficiency increased by about $5.4 billion, equivalent to 16 percent during that period.
According to the report’s footnotes, approximately $33.2 billion of the cumulative deficiency as of June 30, 2012 is the result of the issuance of debt.
“This situation arises from the government’s practice to issue debt at the central level and then transfer funds to other governmental entities (including municipalities) to finance certain capital improvements and to cover operational needs,” he said. “As a result, the central government retains the obligation on its books but the related asset appears in the books of the entity to which the funds were transferred.”
“It’s important to note that the deficit in the government’s net worth has more than doubled in the period between 2006 and 2012, increasing by approximately $23 billion during that period,” Marxuach said, attributing the increase to debt issued by the Sales Tax Financing Corp. (known as COFINA), whose obligations as of June 30, 2012 were $16.1 billion.
“The proceeds of these issues were used to finance operating expenses, pay debt that had no identified source of repayment, and other uses. The practice of long-term debt incurred to pay current expenses, instead of financing permanent improvements, results in a net increase in accumulated deficiency because there is no asset with which to match up the financial obligation incurred long term,” he said. “This is one of the most harmful practices to the prudent management of public finances in Puerto Rico.”
Central government affairs
Meanwhile, the central government’s “Statement of Activities,” which is analogous to a private company’s profit and loss statement, shows that operations during fiscal year 2012 cost $21.1 billion, while total available resources totaled $15.6 billion, resulting in a $5.4 billion deficit.
“If we exclude the payment of debt service of about $1.9 billion, then the Puerto Rico government’s primary operating deficit for the fiscal year 2012 would be around $3.5 billion,” Marxuach noted.
For fiscal 2011, the central government’s operations cost $19.2 billion, while available resources hovered at about $15.9 billion, resulting in a $3.2 billion deficit. Excluding debt service payments of about $1.8 billion, the operational deficit for that fiscal year would have been about $1.4 billion.
The CAFR reflected that as of June 30, 2012, public corporations had consolidated assets of $60.3 billion and liabilities of $51.4 billion, resulting in a positive consolidated equity of $8.9 billion. These numbers compare to 2011’s results of $58.6 billion in consolidated assets and $49 billion in liabilities, resulting in a positive consolidated net worth of $9.5 billion.
“It is important to note, however, that 14 public corporations reported negative net worth at June 30, 2012, including major corporations such as the Puerto Rico Electric Power Authority (PREPA), the Health Insurance Administration, the Metropolitan Bus Authority, the Puerto Rico Medical Services Administration, the Automobile Accident Compensation Administration and the Tourism Company,” he said.
Finally, the consolidated income statement of the public corporations reflects that they reported aggregate losses of $583 million during fiscal year 2012. Of particular interest are the losses incurred by the Highway Authority ($363 million), PREPA ($346 million) and the Government Development Bank ($63 million).
For fiscal 2011, the companies reported aggregate losses of $1.3 billion, including the Highway Authority ($409 million), PREPA ($272 million), the Puerto Rico Aqueduct and Sewer Authority ($112 million) and the Health Insurance Administration ($30 million).