The Federal Reserve of New York recommended Puerto Rico's government make six major changes in a report it issued Thursday.
William Dudley, president of the New York Federal Reserve, said Puerto Rico had made positive steps toward reform. However, since 2012 "serious fiscal challenges have surfaced that are closely interrelated with the island's ongoing weak economic performance."
According to the report's authors, the island must either improve its economy and secure its government's fiscal situation or have the market force a more painful adjustment.
The authors recommended Puerto Rico take six steps to improve its condition:
- Puerto Rico must get its economy rolling. To do this, the government should lower job creation barriers, improve the business environment, and improve the partnership between higher education and the private sector.
- The commonwealth must reform its tax system. Among other things it must simultaneously expand its tax base and lower its tax rates. Puerto Rico has a substantial underground economy that is untaxed and should be taxed, the authors stated. The commonwealth is working with KPMG to create a reformed tax code that would be put in place in fiscal year 2016.
- The commonwealth government must improve its financial reporting.
- The public-sector corporations must strengthen their performance and harden budget constraints.
- The government should adapt a capital budget and a binding balanced budget rule for the central government. It should also have a strengthened rule for building and maintaining a rainy day reserve fund.
- The commonwealth should adopt a legislative framework requiring multiyear budgeting, specific fiscal targets, and monitoring mechanisms to help ensure targets are met. A nonpartisan independent entity should review the budget. It should set debt targets for the authorities as well as the government.
The authors wrote that the island has considerably strengths: "a bilingual and well-educated adult population, an open economy occupying a central position in the Caribbean, wide experience as host to multinational corporations, and close ties to the U.S. mainland economy."
Puerto Rico has the "assets and attributes" to tackle its fiscal problems and emerge stronger, the authors wrote.
In response to the report, Puerto Rico Gov. Alejandro García Padilla said, "Since entering office, I have worked tirelessly to reform key institutions, attract new business investment and improve the lives of families - in other words, making the hard choices and necessary reforms that previous administrations avoided for decades. We've achieved substantial results, including passing the first balanced budget in 22 years, achieving our target of creating 50,000 new jobs since taking office and bringing global businesses like Lufthansa to Puerto Rico. There is more work to be done and we continue to execute on a comprehensive plan to drive economic growth and fiscal stability."
