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Fixing Puerto Rico’s Debt Problem

By: Frank Worley-Lopez - Oct 30, 2013, 2:17 pm

Personal finance guru and radio talk show host Dave Ramsey calls it “math.” In a video circulating social media sites, Ramsey breaks down the Affordable Health Care Act or Obamacare using mathematics only to cut through the partisan bickering of the controversial proposal. After watching the video I got a crazy idea: what if Puerto Rico — and the United States for that matter — used this “math” stuff to fix their financial problems?

Bear with me here. Politicians understand math when it comes to elections. Not enough votes, and you lose. More votes than the other guy, and you win. I believe this form of “math” is exactly why politicians always want to raise taxes, to buy more votes, instead of cutting spending. The idea of less is just too revolting for most in the political world.

Balancing spending and expenditures is the exact opposite of winning elections. In elections you spend more to get more, which for that purpose is just fine. In government, however, politicians have proved time and time again that spending more money does not actually get you more results — at least in terms of prosperity outside of government and its cronies.

Still, no politician wants to be the guy or gal who cuts programs like WIC (Women, Infants, and Children), Social Security, SNAP (Supplemental Nutritional Assistance Program, or simply “food stamps”), or any one of the host of programs. The people who receive these programs often vote, and rarely vote for the person who might cut their programs. Luckily for Puerto Rico, none of those programs can really be cut to any significant degree at the state level.

In math, you start with the numbers, so here they are: Puerto Rico’s spends about US$9 billion in its general fund, and its general fund revenue comes to $8.75 billion, for a deficit of $250 million. However the consolidated budget shows a much worse picture. With a total budget of $28.57 billion in fiscal year 2013, the island had to raise $1.7 billion in bonds and loans. Another way to look at that is to say total revenue, including federal funds and other sources, reached about $26.87 billion for FY13. Either way you look at it, the deficit for 2013 was $1,700,000,000.

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That shortfall in revenue is exactly how the commonwealth generated a $70 billion debt — with a per capita debt ratio 10 times higher than any state in the United States. This situation that puts the island second only to Argentina in financial deep water, according to a Moody’s report cited in El Nuevo Dia.

The projected deficit for the 2014 fiscal year, which just started, is $840 million. Which apparently is a good thing, at least according to this report, as long as it is reduced from 2015. To achieve this, the government of Puerto Rico is raising taxes and expanding the tax base as a way to make up for the shortfall.

Typical election math: get more votes and expand the number of people willing to vote for you.

There is only one problem with that. At some point . . . it doesn’t work anymore. With roughly a million people receiving government assistance, another million in the workforce, a full one third of those working for the government, and professionals leaving the island by the thousands each year in search of better work on the US mainland, and an unemployment rate at nearly 14 percent, Puerto Rico might have already reached that point. So what to do when taxing no longer works?

Maybe the island could cut spending!

What if the government reduced spending by the amount equal to the deficit or about $840 million? There is a roadmap already written. Somewhere in the past budgets of Puerto Rico, there was a budget that spent exactly or nearly the amount of money the island currently receives in total revenues. What if the island’s government just pulled that old budget out, dusted it off, changed the dates and just went with that as a spending plan?

The only problem with using that old budget is that it would not account for the current debt servicing costs of $4 billion a year in the consolidated budget. So the government may have to dig deeper into the past for an even smaller budget that accounts for that kind of debt service spending.

Here’s where this all gets tricky. In the wake of the 2008 financial crisis, former Governor Luis Fortuño tried to cut spending by cutting thousands of government jobs. He faced enormous opposition, including island-wide strikes by government workers — which last time I checked were supposed to be illegal — and in 2012 he lost his reelection bid.

Agreeing to make such significant cuts, about 10 percent of current spending, would likely mean more layoffs, more protests, and more strikes. In the end, it could also cost the current governor Alejandro Garcia Padilla his reelection bid in just two years. It would also require something else that politicians are not very good at: honesty. Cutting spending by significant amounts would be an open admission that former Governor Fortuño was actually right to some degree and his only failure was not cutting enough.

In a recent development, however, there are reports that good old Uncle Sam — who has some math problems of his own to resolve — may actually be considering buying Puerto Rico bonds. These are just a hair shy of “junk” status. That’s right folks; the politicians may be spared actually doing their job once again by the same kind of fantasy patchwork accounting that led to Enron’s place in history.

That story didn’t end too well, and this one might not either.