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Government Development Bank speaks of local situation at New York conference

GDB president outlines Puerto Rico’s challenges before international economic and political leaders


April 28, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

William Lockwood, president of the Government Development Bank (GDB) of Puerto Rico, was in New York last week for the annual meeting of the Bond Market Association. The meeting, which was held at the Waldorf Astoria Hotel on April 20, was a platform for legislators, policy makers, business leaders, and industry professionals to share their views and offer insight into the issues currently faced by the global fixed-income markets.

Featured speakers at the meeting were U.S. Secretary of the Treasury John W. Snow, the Chairman of the U.S. Securities & Exchange Commission William H. Donaldson, the U.S. Director of Central Intelligence George Tenet, the president & CEO of the Federal Reserve Bank of New York Timothy Geithner, and Director General of the Internal Market & Services of the EU Commission Alexander Schaub, among many others. Lockwood, who was also one of the featured speakers, spoke about the economic health and political situation in Puerto Rico.

The first thing Lockwood pointed out during the address was the challenge brought on by the different political parties leading the executive and legislative branches. "As a result, the bank needs to deepen its working relations with underwriters and other issuers to support major government reengineering and fiscal controls, gain institutional autonomy, and restructure itself for Puerto Rico’s next economic development phase," he said.

Lockwood anticipated that an upcoming report on Puerto Rico’s economy conducted by the Government Accountability Office, to be submitted before the year’s end, will help develop policy on fiscal management, economic development, and the role of Puerto Rico in existing and new federal programs.

After outlining the budget crisis the island currently faces, Lockwood emphasized the importance of arriving at a balanced budget for the new fiscal year. Despite the current debate raging between the Legislature and the executive branch, Lockwood assured those present that come June 30, there will be a new balanced budget, as the constitution requires. However, Lockwood didn’t explain the consequences of the latter possibility if there is no agreement by that date, which would mean the present budget would once again be in effect. If this were to happen, the government would start the new fiscal year already in the red.

Explaining the origin of the deficit, Lockwood pointed out four factors: a portfolio of large infrastructure projects started prior to 2001; a shift from being a direct provider of health services to a payer of private health insurance; increasing fiscal drain from the Puerto Rico Aqueduct & Sewer Authority (Prasa); and a lack of stronger controls on hiring, spending, and debt issuance policies after 2001. These factors contributed to the government’s need to take out GDB loans to cover operating expenses for three years in a row.

As some of the planned remedies to the situation, Lockwood highlighted the replacement of the tax system. "A detailed tax reform agenda will kick off at the end of April, as a fiscal reform commission jointly chaired by the CPA and Economists’ Association heads submit their report to the government," he pointed out. However, the committee won’t offer a recommendation on the tax system to be implemented, a sales tax, or a value added tax. Rather, in a report that must be submitted by April 30, the committee will simply outline the details the tax system should meet, and let the Legislature decide on the specifics of the plan. The branch is expected to favor a sales tax system; however, as has occurred with the proposed budget, a prolonged debate on the situation is also a feared possibility.

Lockwood pointed out that one of the issues which aroused most interest in the meeting was the $9.8 billion unfunded liability straining the Commonwealth Retirement System. Offering details on the plan to safeguard the system, Lockwood mentioned the issuance of $2 billion in Pension Obligation Bonds (POBs) to increase the system’s liquidity and a plan to double the funding ratio from the current 17% to 35%. That increase will come hand in hand with an increment in employer and participant contributions from 9.275% and 8.275% respectively, to 10%. Later on there will also be a priority pledge of resources from tax reform, committing tobacco settlement funds becoming available during the next decade, complementary arbitrage transactions between the Puerto Rico exempt market and the U.S. market, and the sale of illiquid investments and real-estate holdings.

Referring to the government subsidy of the water company, Prasa, Lockwood explained the company is increasing prices in order to start a plan that will eliminate the $400 million per year subsidy from the general fund by 2007. He also referred to the increase in tuition at the University of Puerto Rico as a step towards ensuring greater fiscal autonomy. However, Lockwood later explained to CARIBBEAN BUSINESS that there are presently no plans to revise the subsidy formula.

Currently, a student protest against the tuition hike has had the university paralyzed for weeks, making the final details of the increase unclear and how it will support any efforts to achieve greater autonomy.

After outlining other measures to remedy the budget situation, Lockwood emphasized that the GDB itself will need to act with greater autonomy with respect to the executive and legislative branches, as well as greater independence from party politics. He also pointed out the importance of relying on outside sources of guidance, "We need wider input that takes into account credit considerations and underwriters’ experiences in other jurisdictions, allowing us to look outside of the box. We will also approach fellow issuers in the municipal market for insight on policy measures, implementation tactics, and institutional strengthening which, with the help or our attorneys, may fit into the constitutional, legal, and institutional scheme."

Lockwood pointed out that after listening to the fiscal situations of other states, one measure that could perhaps be considered for future implementation in Puerto Rico would be granting greater continuity to the Treasury Department and the Office of Management & Budget by making the heads of these offices career employees; therefore, providing the needed stability for the establishment of new programs and systems.

This was the first time Lockwood spoke at the Bond Market Association annual meeting. The trade association represents the largest securities markets in the world, the estimated $44 trillion debt markets, and represents a diverse mix of securities firms and banks. The members account for approximately 95% of the U.S. municipal bond underwriting and trading activity, and includes all primary dealers in U.S. government securities, as recognized by the Federal Reserve Bank of New York, and all major dealers in U.S. agency securities, mortgage- and asset-backed securities and corporate bonds, as well as money market and funding instruments.

This Caribbean Business article appears courtesy of Casiano Communications.
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