Contrasting Puerto Rico’s current economic conditions with those of the U.S. mainland’s, Gov. Luis Fortuño said the “U.S. is starting to suffer the consequences of not acting immediately” to its escalating fiscal troubles.
On Friday, credit ratings agency Standard & Poor’s downgraded the federal government’s “AAA” credit to “AA+” for the first time in 94 years, dissatisfied with the results of the spending cuts package agreement between the Republican-controlled Congress and Democrat President Barack Obama reached last week.
While the federal government faces a credit degradation and “possibly the worst recession since the Great Depression, in Puerto Rico we reaffirm that the road and the initiatives that we took two and half years ago to ensure a promising present and future for the Puerto Rican economy have paid off,” Fortuño, a Republican, said.
And while S&P degraded the U.S. government’s credit, the opposite is true for the island, where the credit rating agency improved Puerto Rico’s classification from “BBB-” with a negative outlook to “BBB” with a stable outlook in response to the administration’s fiscal reform, implemented in 2009 and 2010.
“On the island, we decided to take the necessary measures to straighten out our finances, as soon as we realized the situation we were in,” Fortuño said Sunday. “Like many European countries, the continental United States has begun to suffer the consequences of not acting immediately — as we did — and for the first time in history, ratings agencies downgraded the federal government’s credit.”
Among other things, Fortuño said reducing the deficit from 44 percent to 7 percent, substantially reducing tax rates and keeping basic services (education, health and safety) intact, are some of the steps the local government has taken, while stateside administrations have had to do the opposite.
Finally, Fortuño said he intends to create a work group to rethink social benefit programs that depend on federal funds and the steps that need to be taken to deal with the cutbacks in discretionary funding expected to go into effect in 2013.
All is not rosy
While the administration is riding high on S&P’s pat in the back, a credit downgrade is still possible from Moody’s Investors Service, which in May told the Fortuño administration it would be conducting a 90-day review of the Commonwealth Retirement System’s $28 billion funding shortfall, as well as the government’s strategy to address the problem.
“I still worry about the Retirement System’s high levels of indebtedness,” Fortuño said. “Although there has been a concern for accrediting houses, we’ve already begun a plan on the short and medium term to resolve the situation we inherited, once and for all. We have made a lot of progress, but we can not lower our guard; we must remain cautious and judicious in spending.”
The Commonwealth Retirement System’s actuarial deficit has been mounting for several decades, and currently stands at 91.5 percent of its obligation. The agency has about $1.6 billion in assets, but owes nearly $17 billion. Even though there are 140,000 public employees presently contributing to the pension system, the amount is not enough to cover current and future obligations.