Puerto Rico Gov. Alejandro García Padilla told the federal Oversight Board that his government has already slashed spending and that further austerity will only hurt the relatively poor society.
The day before the Oversight Board's first meeting Sept. 30, the governor sent members 10 documents describing the commonwealth government's financial condition and the island's social and economic conditions. The board was appointed under legislation signed by President Obama to help the island boost its economy and restructure bond debt the governor has declared unpayable.
Some members of the municipal bond community said there's still room for more austerity measures as the board decides who will shoulder the burden as the island's debt is restructured.
"Puerto Rico currently has 40% fewer students but 10% more teachers than a decade ago," said Howard Cure, director of municipal bond research at Evercore Wealth Management. "There are also serious questions about some of the enterprise systems and bloated number of employees such as [at] the electric utility PREPA."
He added, however, that "The commonwealth is correct in saying that there are dangers in austerity, particularly layoffs, since such a large portion of the population is employed by the government and there are few options for laid off professionals to obtain private sector employment on the island. I view this lack of opportunity as a result of disincentives for firms to hire workers and for workers to accept jobs."
While most of the Governor's documents had been made public before, at least two were new. In one of them, "
Private sector fixed investment in construction, machinery, and equipment declined 20% to fiscal year 2015 from fiscal year 2006. While U.S. labor force participation declined three percentage points to 2015 from 2006, in Puerto Rico in the same period it declined by nine percentage points.
The Puerto Rico Fiscal Authority Agency and Financial Advisory Authority wrote the report.
In response to the economic decline, Puerto Rico central and municipal governments have cut the number of employees by 24% since 2009, the authority reported. At this point the portion of Puerto Rico's employment working for state or local government places the commonwealth in the middle of the 50 states.
Puerto Rico's central government has frozen salaries, even though they are already low, the report argues. In Puerto Rico the average policeman has an annual salary of $30,870 and the average elementary school teacher is paid $35,190. This compares to U.S. average salaries of $61,270 and $57,730, respectively.
The government has also introduced substantial new taxes in the last 10 years to increase revenues. Between them the Act 154 excise tax on foreign companies and the Sales and Use Tax (now at 11.5%) are expected to provide 38.5% of Puerto Rico's revenues in the current fiscal year.
Even after the increase in taxes, the government has been running substantial deficits. According to the report, the government's net position, which is equal to assets minus liabilities, declined to negative $50 billion in 2014 from negative $16 billion in 2006.
The authority presented evidence that net emigration from Puerto Rico increased in 2014 and 2015, further reducing the government's ability to gather revenue.
Now the government faces an inability to pay $69 billion in debt and $43.6 billion in net pension liability, the authority said. Resolving the pension situation will be made more difficult because Puerto Rico's average pension per beneficiary is much smaller than is typical in the U.S. Whereas Puerto Rico's average was $14,112, the U.S. average is $26,455.
Similarly, the authority said that the education system is already struggling with underfunding; the total current expenditure per pupil in Puerto Rico is $7,981 compared to $10,763 in the United States.
The government's shortage of funds "will make it even more challenging for the commonwealth to provide for its residents, nearly half of whom already live in poverty," according to the authority, which said 46% of the population is below the federal poverty level.
Puerto Rico's "hardships will only become worse if the U.S. federal government fails to extend its current level of healthcare funding to Puerto Rico and fails to allow the continued tax creditability of the Act 154 excise tax paid by Puerto Rico corporations," the authority said.
In
Both approaches would lead to a 1.2 percentage point cut in the GNP, the consultant said. However, the job layoff approach would lead to about $8 million more in unemployment insurance and food stamp benefits. When the impacts of the two scenarios are assessed on indirect and induced job loses, the consultant said the government layoff scenario would lead to about 2,500 additional job losses.
Either scenario would lead to about 83,000 fewer government workers covered by health insurance.
In a speech to Puerto Ricans Thursday, García Padilla referred to Estudios Técnicos study, saying, "We presented a study [to the Oversight Board] about the terrible consequences classic austerity measures (such as those imposed on Greece by the European Union) would have on the well-being on the Puerto Rican people."
In addition to these reports, the government presented to the Oversight Board members the July 2015 version of "Puerto Rico: A Way Forward," by Anne Krueger, Ranjit Teja, and Andrew Wolfe; a summary of the Puerto Rico Oversight, Management and Economic Stability Act; the government's original Fiscal and Economic Growth Plan and the version from January; the August 2015 government liquidity report from Conway MacKenzie; the November 2015 Puerto Rico financial report; the errata notice to this report; and the audited fiscal year 2014 Puerto Rico report.
