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It is time to bite the bullet

BY ELISABETH ROMAN of Caribbean Business

June 17, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

The government of Puerto Rico’s Comprehensive Annual Financial Report (CAFR) for the fiscal year ending June 30, 2004, obtained by CARIBBEAN BUSINESS, confirms in audited statements what CARIBBEAN BUSINESS has been saying since January. The government of Puerto Rico is in a difficult financial situation and has accumulated a tremendous deficit. As of June 30, 2004, the Commonwealth had accumulated a deficit of nearly $13 billion. If the government of Puerto Rico had been a private company, it would be insolvent by now.

The only way it has survived is by borrowing from the Government Development Bank (GDB) for current operations, issuing tremendous amounts of debt, and raising taxes and costs for public utilities.

A lot has been said publicly and in local media regarding the government’s structural deficit, but no one has carefully examined the Commonwealth’s annual financial statements as CARIBBEAN BUSINESS has. From fiscal 2003 to fiscal 2004, the Commonwealth is reporting in its financial statements a deficit of almost $3 billion.

Total government expenditures escalated substantially, from $10.3 billion in fiscal 2001, to $15.2 billion in fiscal 2004, a 46.4% increase in just four years. By comparison, for the four previous fiscal years, from fiscal 1997 to fiscal 2001, total government expenditures grew from $9.3 billion to $10.3 billion, an increase of only 10.4%.

Excessive government spending and billion-dollar deficits are the primary reasons behind the recent credit-ratings downgrade by Moody’s Investors Service and Standard & Poor’s (S&P) of the Commonwealth’s general obligation bonds (GOs). The credit-rating agencies didn’t downgrade the government bonds, as many would have us believe, as a result of the differences currently underway in the Puerto Rico Legislature or because the fiscal 2006 budget hasn’t been approved.

The fact is the new budget doesn’t come into effect until July 1, and the ratings agencies evaluated the Commonwealth’s existing financial condition when they downgraded the GOs. To say differently is just putting the blame in the wrong place. The downgrade of the government’s bonds, which already possessed the lowest rating of any state government in the U.S., occurred because the Commonwealth is now in serious financial trouble and has been for the past three to four years, mostly due to excessive government spending, growth, and borrowing to cover huge budget deficits.

One look at the Commonwealth’s fiscal 2004 financial statements and it is easy to see the liabilities far exceed government assets. If the Commonwealth were a private enterprise, it would be on the verge of bankruptcy if not already bankrupt.

Some people may take the following advice as being political. That will be their prerogative. We will start by saying, like all businesspeople, there is nothing we would like more than to have something better. We prefer to be experiencing and facing a strong economy. However, the only way this is going to happen is when this administration stops doing what the past administration did–it puts its time into blaming everything wrong on the opposition party and forgets to govern correctly to build a strong economy. It has left a disaster behind. The government can’t continue to spend more than $1.25 for every dollar it receives in revenue as it has been doing for years. Any business that would do this, soon would be bankrupt. This administration can’t continue to do what the past administration did–borrowing for current operations as it just did to meet this month’s government payroll. It can’t keep taking money out of consumers’ pockets with more taxes and increases for government services.

This government has to face up and recognize it has a serious financial and economic problem. If a person or entity doesn’t recognize and face the real problem and accept it, it can’t solve the problem. The past administration added over 40,000 jobs to the government. In its first four months, this administration added 6,000 jobs. This can’t continue!

Getting Puerto Rico’s finances back on the right track and restoring the Commonwealth’s credit ratings won’t be easy tasks. It will require strong leadership on the part of the governor of Puerto Rico and the Legislature to impose major cuts in spending, tax reform, and drastic restructuring and downsizing of government bureaucracy.

To repair its finances, the Commonwealth of Puerto Rico must depend less on debt and more on reducing spending. Government re-engineering is required to reduce existing bureaucracy and improve employees’ productivity. Equitable tax reform, where more revenue is captured from the informal economy while the tax burden is reduced on others, is necessary to help motivate economic activity and investment. If drastic changes to the Commonwealth’s finances aren’t carried out, it will continue to go deeper into debt. The government structure, which employs one-third of the island’s workforce, will have to be reduced drastically to avoid additional declines in the island’s economy.

These aren’t easy measures, but they certainly are needed if the Commonwealth of Puerto Rico is once again to become financially sound. It can happen over the next three and a half years if the governor bites the bullet now.

This Caribbean Business article appears courtesy of Casiano Communications.
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