The findings of Puerto Rico’s Fiscal and Economic Recovery Working Group should serve as a warning sign to the U.S. Government that putting off economic and budgetary reforms will ultimately cause much deeper and more painful cuts that severely hinder economic growth.
After accumulating $72 billion in debts that Puerto Rico’s governor declared unpayable in June, the island has effectively lost access to further borrowing. Even without additional borrowing, the cost of debt weighs heavy on the island. Puerto Rico owes an estimated $18.2 billion—more than a third of projected revenues—in principal and interest payments on its existing debts over the next five years.
Despite taking extraordinary measures, such as delaying payment of nearly $300 million in 2014 tax refunds until at least February of 2016, Puerto Rico’s Treasury is projected to run out of cash this November.
This means that after decades of massive budget deficits, Puerto Rico has little choice but to implement a balanced budget. Unfortunately, a crisis-forced balanced budget is very different from an economically and legislatively achieved balanced budget. Crisis-mode doesn’t have the luxury of transitions and exemptions to cushion the blow.
On top of already-implemented austerity measures, Puerto Rico is going to have to enact further deficit-reducing measures. The report recommends a five-member control board to implement the group’s Fiscal and Economic Growth Plan (FEGP) as well as other necessary reforms.
The Growth Plan includes:
- $3 billion in new taxes over the next five years
- Payroll expense reductions; cuts in government subsidies to municipalities
- Health care cost reductions
- Cuts to education (enrollment at public schools has declined 41 percent as working-age individuals and their families have fled the island for better opportunities)
Additionally, the plan seeks federal assistance including: access to a legal framework to restructure the Commonwealth’s liabilities in an orderly fashion; exemption from the Jones Act; additional Medicare and Medicaid funding; and flexibility on the minimum wage and new overtime regulation.
But even complete implementation of everything in the Fiscal and Economic Growth Plan and a hopeful $1.9 billion in growth-induced deficit reduction would still cover only half of the island’s $28 billion projected five-year shortfall.
Thus, the island will have to work with its creditors to negotiate reduced payments on its debts. Puerto Rico’s power utility (known as “PREPA”) has already worked out a proposed plan with its creditors. As recommended by the working group, the Commonwealth advisors should begin work immediately to make voluntary exchange offers to its other creditors.
It is clear that Puerto Rico cannot pay all its bills. Settling the island’s debts should be done through negotiations with creditors based on existing law as opposed to a chapter 9 bailout that would retroactively prioritize certain creditors over others.
As emphasized by the report’s findings, Puerto Rico’s problems are far deeper than its $72 billion debt. Without significant economic reforms, the Commonwealth cannot escape its current decline.