Surprise! Puerto Rico’s Public Debt Is Far Larger Than Stated

EspañolPuerto Ricans awoke this Tuesday with the news that the commonwealth’s debt is about US$110 billion, not the official $72.796 billion. This substantial increase was made public in a report released by Puerto Rico’s Association of Authorized Public Accountants (CCPA), which also offered recommendation for how to rectify  the economic and fiscal crisis.

Puerto Rican College of Authorized Public Accountants
Puerto Rican College of Authorized Public Accountants. (CCPA Facebook)

With this document, the board of experts suggested that the time has come to recognize the magnitude of the fiscal crisis on the island. They hope Puerto Rico can achieve national unity, regain public confidence, and put together an economic development plan that includes fiscal discipline.

“In 2014, we added $3,500 million of debt for a grand total of $72,796 million. But the level of debt does not address an actuarial deficit of about $37 billion, bringing the debt to over $110 billion. The debt level becomes an extreme concern when we see how it has soared in relation to the gross national product, reaching a ratio to public debt  — excluding the actuarial deficit — of almost 100 percent,” states the 16-page report.

The report explains that the administrations of the last 14 years, “issued debt to subsidize operating expenses.” The authors warn that the consequences are arriving and that the administrations have simply chosen to ignore the severity of the problem.

While the accounting board raises the necessity of an increased tax burden to alleviate the debt, they explain that this is not a long-term solution. That must come with fiscal discipline — avoiding the frequent practice of funding ongoing expenses with long term debt — and a reduction in public spending:

“Raising taxes may be a part of the solution, but not the solution. We must follow the pattern of other countries, where the crisis has been addressed with a substantial cut in public spending, combined with a hike in taxes … That is to say, do not allow the tax system to obstruct the productivity of the country.”

In a telephone interview, Luis Dávila — a lawyer, news analyst, and radio host in Puerto Rico — affirms that the document reveals the island’s gigantic public debt. In that regard, he says that Puerto Rico is the “world champion” and outruns even the levels of Argentina, Japan, and Portugal for public debt.

Let’s see how long it takes to the press to report the bomb thrown by Azote: the debt is not $73 billion but $110 billion.

Dávila says a percentage of the public debt “was hiding in the books” and this is related to the debt of the pension plans handed to more than 100,000 state employees: “Their pension plans are stuck in a Puerto Rican trap, because the state has no funds to pay them,” he added.

Outlook for Puerto Rico

According to Dávila, it is going to be very difficult for Puerto Rico to change its position given the last law the commonwealth government has just passed: “What makes everything more complex is the legislation that allows public corporations to declare bankruptcy and default on their obligations.”

With this law, Dávila says, Puerto Rico is sending the signal that they won’t honor their obligations and “given these numbers, markets start to consider the island a ‘disaster zone,’ generating as an immediate effect a denial of access to international financial markets.”

“For decades, they spent more than what they could generate, and when they must tighten the nut, they try to do it with taxes. This is what happens with Puerto Rico; the government has raised taxes so much that they have wrecked business and eroded the tax base of the state; and by doing that, they kill the economy. An economy in recession that undoubtedly will end in a depression,” the lawyer concludes.

Dávila also points out that economic growth on average in Latin America ranges at 3-4 percent. That is very different from what happens in Puerto Rico, which has had nine years of economic contraction.

Meanwhile Aníbal Jover Pagés, president of the CCPA, expressed more optimism for business: “Puerto Rico is a great place to do business. We have a first-class infrastructure, maritime and air transportation, telecommunications, and internal roads. For foreign investors, we are a country with a stable currency, and above all, political stability. Do I think we can improve? Of course I do.”

Translated by Adam Dubove.

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