The General Accounting Office has released a report to Congress: “Puerto Rico – Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them.” The report provides an update on the financial position of Puerto Rico, which includes $70 billion in outstanding public debt and $50 billion in unfunded pension liabilities.
Causes of Puerto Rico’s debt and deficits
Puerto Rico was deeply in debt before Hurricane Maria, and had been in financial crisis for some years, running deficits every year and using more debt to service old debt.
These were the factors the GA identified as the cause of the debt and deficits:
- The Puerto Rico government’s inadequate financial management and oversight practices. The territory’s government overestimated the amount of revenue they’d received and allocated funds based on these overestimates. Then agencies and departments overspent on these already too-generous allocations. A lack of transparency in the accounting made it difficult to keep track of expenditures.
- Policy decisions by Puerto Rico’s government. Decisions to borrow funds which realistically could not be paid back were a problem. The government also made decisions about pension funds and Christmas bonuses which were out of line with financial resources.Tax tricks kept demand for Puerto Rico’s bonds high without benefiting the economy, adding to the influx of dept that masked the territory’s financial problems.
- Puerto Rico’s prolonged economic contraction. The large numbers of workers leaving the island have had a predictable consequence as the workforce shrinks. Failure to maintain the infrastructure has kept energy costs higher than in the states, and a heavy reliance on imported goods (85% of food is imported, for example) has kept consumer prices high. The GAO also found that doing business in Puerto Rico is challenging, compared with doing business in States.
Solutions for Puerto Rico?
The GAO identified three potential federal actions that could help:
- Modify the tax exempt status for Puerto Rico municipal debt. Puerto Rico’s bonds were appealing to investors because they were too good to be true — their triple tax exemption meant that people could avoid taxes in their home states by buying these bonds. Getting rid of the artificial tax incentives could bring bond demand back in line with the economic reality. However, Puerto Rico has been relying on tax incentives that don’t benefit the economy for so long that the transition will probably be uncomfortable.
- Apply federal investor protection laws to Puerto Rico. Puerto Rico investment companies should disclose risks with Puerto Rico bonds and accept other requirements usual for municipal bonds. Again, this would be an uncomfortable transition.
- Modify the Securities and Exchange Commission’s (SEC) authority over municipal bond disclosure requirements. Puerto Rico has a history of failing to provide audited financial statements when required.Greater transparency could allow investors to make better decisions. Stronger SEC oversight could make Puerto Rico’s bonds a safer investment.
The GAO recognizes that reducing the Neverland quality of Puerto Rico’s bonds could make them a less attractive investment. They also note that stricter accounting requirements could involve costs.
These federal actions all basically come down to requiring Puerto Rico’s government to play by the rules the States follow.
However, Puerto Rico doesn’t get the goodies States get. Puerto Rico gets far less in Medicaid and Medicare funding, less for highways and schools, fewer government contracts, and, as the recovery efforts have shown, generally less federal support than the States.
Federal actions to address these inequities were not addressed by the GAO report.
It comes down to status
A recent commentary by law professor Andrés L. Córdova of the Inter American University of Puerto Rico, “silently underlines the status question.” States couldn’t play the tax tricks that have helped to put Puerto Rico into its current financial morass. Cordova goes on to point out that the GAO report ignores Puerto Rico’s status as Congress has generally done for more than a century. This isn’t working, says Cordova.
“Only when the political underpinnings of the current relationship between Puerto Rico and the United States are addressed can real progress be achieved on the social and economic fronts,” Cordova concludes.”Congress should act on GAO’s recommendation as a step in the right direction, formally incorporating the territory of Puerto Rico, and treating in all matters it as any other state jurisdiction.”
Jose Fuentes, former Attorney General of Puerto Rico, claimed in a recent interview that putting Puerto Rico on a path to statehood would allow the Island to solve its economic problems before admission, while continuing as a territory leaves Puerto Rico with no power to resolve its economic problems.