Puerto Rico's biggest problem is tight liquidity, not high government debt, Cumberland Advisors vice president Michael Comes said Tuesday.
In remarks at a Global Interdependence Center forum, Comes said two factors lessen the Puerto Rico's debt burden compared with U.S. states: Puerto Ricans generally don't pay federal income taxes and many services that localities provide in the 50 states are provided by the commonwealth government.
Adjusting for these factors, Puerto Rico's commonwealth government has the lowest debt as a portion of gross domestic product compared with the 50 states.
However, Comes said, the commonwealth's government has about a third the median liquidity of the 50 state governments. In recent years it has sold several tax anticipation notes. It remains to be seen if the Puerto Rico government will be able to turn those over.
While many analysts have pointed out that Puerto Rico's public pensions are drastically underfunded and soon to run of money, Comes offered some good news on that front. He said age groups 15-19 and 20-24 are the largest five-year age groups on the island. Many of these young people will enter the labor force in the next few years and this will help the government pay its retirees' pensions, he said.
Comes said Puerto Rico's economy wasn't as bad as some media outlets have said. Though manufacturing employment continues to decline, the service sector has been fairly steady in the past year or two.
Over the last five years, there was a $2.95 billion funding gap per year in Puerto Rico. Ultimately bondholders will probably have to cover much of this gap, Comes said.
However, seeking Chapter 9 bankruptcy for Puerto Rico would be a bad idea, he said. It would take a long time for Puerto Rico to establish its eligibility. Also, if the commonwealth used this approach it would have very high borrowing rates for decades to come.
An important step to solving Puerto Rico's problem would be to crack down on the roughly 25% of Puerto Rico's economy that evades taxes, Comes said. About a $1 billion is annually lost to the current sales tax due to tax evasion, he said. Converting the current sales tax to a value added tax, as is planned next spring, will aid in tax collections. Improving commonwealth income tax collections could bring in an additional $250 million or so.
Nevertheless, a restructuring of Puerto Rico's debt in the near future is quite likely, Comes said. Ideally, a control board will be founded to handle the commonwealth's debt and decisions about it, he said after the forum. Perhaps the control board should also handle tax and spending measures, but it would be harder to get the local government to go along with this, he said.
Also at Tuesday's forum, Capital Alpha Partners president Charles Gabriel said it was unlikely that the federal government would act to help Puerto Rico in the next few months. There has to be more open pain in Puerto Rico -- and perhaps a contagion of Puerto Rico's debt problems to the rest of the municipal market -- before Washington legislators, particularly Republicans, are likely to approve anything significant for the commonwealth, he said.
