By Gregorio Igartúa
Special to The Star
By the year 2016, Puerto Rico had roughly $70 billion in outstanding debt and $50 billion in unfunded pension liabilities, and since August 2015 has defaulted on various billions in debt.
In response to Puerto Rico’s fiscal crisis, Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) in 2016, which included a provision for the Government Accountability Office (GAO) to review Puerto Rico’s debt. The federal decision was not political but rather financial.
The GAO found various reasons that can be traced to the cause of such a fiscal crisis. The factors relate to: the Puerto Rico government running persistent annual deficits -- where expenses exceeded revenues. In short, blind administrative political ambitions superseded sound budgeting. Those deficits were incurred contrary to Puerto Rico’s constitutional provisions (P.R. Const. Art. VI Secs. 6-9), an administrative practice born either of ignorance or in an attempt to force public works on default under the veil of doing good with the bad. The practice increased continuously under several governors, particularly since the year 2000. In summary, it became the normal practice to use debt to cope with deficits.
In essence, the Puerto Rico government frequently overestimated the amount of revenue it would collect and Puerto Rico’s agencies regularly spent more than the amounts the island Legislature appropriated for a given fiscal year. Puerto Rico borrowed funds to balance budgets and insufficiently addressed public pension funding shortfalls. Even the Government Development Bank, which fiscalized public transactions for years, had to be closed. Shortly before the bankruptcy, borrowing from the selling of government notes led to inappropriate moves that got to the point of having to offer higher interest rates in the market due to investors’ growing concerns and alarm about the local financial environment (the offering of nearly 6% interest versus less than 1% on CDs in the market), more than income return from bonds issued by states and their localities. Traditionally, there was high demand for Puerto Rico debt considering favorable tax treatment. The road to economic contraction, which in turn led to bankruptcy, was unavoidable.
Other examples of factors contributing to the contraction include outmigration and the resulting diminished labor pool, and the high cost of importing goods and energy (Hurricane Maria is another example). Additional factors enabled Puerto Rico to use debt to finance its deficits.
Rigid disclosure requirements may help prevent a repetition of Puerto Rico’s fiscal crisis. Notwithstanding, without justifying the financial risks assumed by various government administrations, the fiscal crisis will persist as long as Congress continues to maintain a territorial political status that provokes differential treatment with regard to Puerto Rico that discriminates against the American citizens in the island as compared to those in the 50 states. (Federal fiscal awards to Puerto Rico are even smaller than to those of other U.S. territories. Consider also the denial of Supplemental Security Income, better known as SSI, to Puerto Rico residents even though they contribute to Social Security income.)
The Financial Oversight and Management Board is complicit in the crisis by not informing Congress that the real chaos is provoked by the unequal financial treatment of Puerto Rico by not certifying it as an incorporated territory in transit to statehood. Under the present political territorial status of non-incorporation, the chances of fiscal normality will never be achieved. Consider, for example, that we pay full Medicare in Puerto Rico, while the benefits paid to our hospitals and patients are much lower than those in the 50 states. As time passes, we are losing our doctors, our teachers, our policemen, our engineers, and other members of the workforce. Our people (over 5 million estimated) are forced to move to the States, where better working conditions are available, with which we are unable to compete. Federal tax exemptions, such as was IRC 936, are not the tool for solving our financial crisis. They maintain the political status quo under the veil of denying our democratic rights and government by consent. Kneeling before Congress for aid that is fair and equal is impractical, undemocratic and immoral.
Our quality of life has decreased, and our only hope for a future for ourselves and for our children is to have equal federal rights and government by the consent of the governed, as are the principles of our nation clearly established by our founding fathers in the U.S. Constitution. We must demand equal rights as American citizens. It is the only path to financial survival after being part of our nation for 126 years.
Gregorio Igartúa is an attorney and longtime advocate of U.S. statehood for Puerto Rico.
I have always known that relying on the government is not a good idea. First of all, because all governments are interested in pursuing political goals that are not necessarily to coincide with yours. Today they strengthen relationships with some country, tomorrow they ruin them, and your assets devalue. This is why I learned to become an independent professional trader who can work with UTrada on a permanent basis.