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Governor Padilla: Puerto Rico’s Debt is “Not Payable,” Seeks Federal and Local Reforms

Puerto Rican Governor Alejandro Garcia Padilla has indicated that he will seek to renegotiate the territory’s $73 billion debt.   “There is no other option,” said Garcia Padilla as first reported in the New York Times.  “I would love to have an easier option. This is not politics, this is math.”

Garcia Padilla was expected to outline details of his proposal for the fiscal sustainability of the insular government in a meeting this afternoon to which he invited all members of the Legislative Assembly, all mayors of the islands’ municipalities, and some non-governmental leaders.  He has also planned a televised broadcast at 5:00 pm this evening.

The suggested reforms are based on a report by a team of former International Monetary Fund officials led by Anne Kreuger that recommends a score of Federal and local policy changes in addition to restructuring of bond obligations.

The Kreuger team report, commissioned by the García Padilla administration, recommends that the Federal government take the following measures:

• Exempt Puerto Rico from the minimum wage. With the also recommended local labor law changes, this is estimated to increase government revenue $56 million in FY17, $376 million in FY20, and $1.237 billion in FY25.
• Exempt Puerto Rico from the Federal Jones Act, which requires shipping between U.S. ports to be on vessels that are U.S. built, owned, flagged, and crewed.
• Adjust Federal Nutrition Assistance Program and housing assistance rules to enable more people to benefit.
• Extend the authority of States to authorize government instrumentalities to revise their debts under Federal Bankruptcy Code Chapter 9.

A  2013 U.S. Government Accountability Office report analyzing possible reform of the Jones Act came to a mixed conclusion, noting that “effects of modifying the application of the Jones Act for Puerto Rico are highly uncertain, and various trade-offs could materialize depending on how the Act is modified.finding economic cons as well as pros.”

The Kreuger report also makes numerous recommendations for Puerto Rico territorial government action, including:

• Adopt a long-term fiscal plan.
• Establish a fiscal oversight board that would be empowered to vet the Governor’s budget proposal and enforce budget laws.
• Enact rules for across-the-board spending cuts or for a requirement that measures that would increase spending beyond the plan be offset by other spending cuts or revenue increases.
• Approve the Governor’s Value Added Tax (VAT) proposal, which was recently rejected by the Legislative Assembly (and almost all residents, according to polls). This would generate $1.057 billion in FY16, $1.051 billion in FY20, and $1.104 billion in FY25.
• Increase income taxes on businesses paying from nothing to four percent under tax exemption agreements, ultimately to 10-15% of income. These are primarily companies from the States that manufacture in the territory. This would generate $250 million in FY17, $1 billion in FY20 and $1.05 billion in FY25.
• Raise property taxes to provide an additional $100 million in FY16, $350 million in FY20, and $386 million in FY25.
• Reduce the subsidy to the University of Puerto Rico $121 million in FY17, $485 million in FY20, $606 million in FY25.
• Cut the number of teachers and schools $50 million in FY16, $400 million in FY20, $571 million in FY25
• Amend law to cut overtime pay and eliminate the requirement for an end-of-the-year bonus for all workers.
• Reduce Medicaid benefits, saving $75 million in FY 17, $150 million in FY20, and $187 million in FY 25.
• Eliminate tax prepayment deals and amnesties, raising $50 million a year beginning in FY17.
• Rescind restrictions on trucking.
• Increase use of privately provided electricity.
• Make it easier to register property, pay taxes, and obtain construction permits.
• Continue current spending cuts, saving $568 million in FY18, $1.051 billion in FY20, and $1.106 billion FY25.
• Merge the Government Development Bank and Treasury Departments.
• Improve transparency of budget data and improve economic statistics.



2 thoughts on “Governor Padilla: Puerto Rico’s Debt is “Not Payable,” Seeks Federal and Local Reforms”

  1. I think we should use this as a vehicle to discuss the future of Federal minimum wage in general, not just it’s application to Puerto Rico.

    I believe that each state and territory should be able to set their own minimum wage according to their local economic realities. I do believe it should be required to be at least $5/hour however. What works for Nebraska may not work for New York.

    That said, the major damage to Puerto Rico’s economy is the same as here in New York – out of control taxes, and an anti-business administration that relies on gimmicks and temporary tax breaks. Garcia Padilla and Cuomo = two peas in a pod.

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