Puerto Rico-based tax, economic and investment banking specialists are criticizing the 10-year fiscal plan the governor submitted to the Puerto Rico Oversight Board last month.
The trio of experts questioned the plan's financial projections and its assumptions about government actions at a forum hosted by the Puerto Rico Chamber of Commerce last week, and discussed their objections in phone interviews with the Bond Buyer.
The plan said that even if Puerto Rico's government paid none of its debt and took a wide variety of taxing and spending measures, it would face a $6 billion funding gap from this fiscal year to fiscal year 2026.
In the plan Puerto Rican officials led by Gov. Alejandro García Padilla told the board that federal actions and aid would be required before the commonwealth would have any money to pay bond debt.
José Villamil, chairman of Estudios Técnicos, told the Bond Buyer that the plan's choice to look at gross domestic product and its growth rates rather than gross national product and its rates, was a "huge mistake." The former is about $103 billion annually according to the World Bank while the latter is about $62 billion annually, he said. Looking at GDP rather than GNP exaggerates that amount of production helping Puerto Rico's government, he said.
Villamil criticized the plan's use of the economic tool known as the Phillips Curve to estimate inflation. Developed by A. W. H. Phillips, the curve illustrates how inflation and unemployment generally have an inverse relationship in economies. When one is up, the other is down.
One should not use the curve to estimate inflation in Puerto Rico, Villamil said. This is because on the island prices are largely determined exogenously (since so much is imported) and the unemployment rate is largely determined endogenously.
For his part, FPV & Galindez tax partner Kenneth Rivera took issue with the plan's argument that there was no more room for significant tax increases. While Puerto Rico's corporate corporate tax is higher than that of Greece and Spain and comparable to that of the U.S., its individual income tax level is significantly lower than that of the three nations.
Its consumer tax level is somewhat higher than in the U.S., but about half that found in Greece and Spain, Rivera said.
Property tax rates are also substantially lower than that of the U.S., he said. However, currently only the municipalities are allowed to draw on these revenues. For the commonwealth government to draw upon them, it would have to change the law. And the commonwealth government is already telling the local government to seek additional revenues since the commonwealth plans to cut back local aid in coming years, Rivera noted.
While Puerto Rico has increased taxes in recent years, further tax raises should be on the table for discussion.
Fernando Vinas, managing director at Samuel Ramirez & Co., said the plan was overly pessimistic in some respects. For example, the $6 billion deficit assumes that the Act 154 tax on foreign companies ends without an extension or a replacement. Vinas said it was more likely that the U.S. Congress and president will pass a law to handle its planned phase out in fiscal year 2018. Act 154 is expected to account for 21% of fiscal year 2017 revenues.
The plan also assumes that the commonwealth will lose all federal Affordable Care Act funding in the next few years. Though this is scheduled, it is not particularly realistic, Vinas said.
The government needs to look at five factors to improve the outlook from what is found in the plan, Vinas said. A replacement for Act 154 and an extension of ACA funding are two of them.
Third, it must find a source of about $1 billion a year to fund government pensions. Fourth, it must look at "cutting" the government rather than just "trimming" it. Vinas gave the example of the government's education spending. This currently accounts for $3 billion a year. The plan currently expects to reduce this by $300 million in fiscal year 2026. Vinas said these saving could and should be advanced to the near term.
Finally, the government must focus on economic growth because even small improvements can lead to substantial improvements in government revenues.
The fiscal plan will not be the commonwealth's government's final proposal, Villamil said. "No matter who wins the [November gubernatorial] election," he said, "the fiscal plan will likely be changed dramatically."
