Puerto Rico Fiscal Update

$10 and the US Treasury

The Center for the New Economy (CNE) has just published its analysis of the proposals contained in the Governor’s budget request for fiscal year 2013. The analysis also includes a review of the fiscal trends for the fiscal year 2012, which ends on June 30, as well as an update of ten budget indicators that CNE has followed over the last five or six years.

Some of the highlights of the report are:

    1. The structural deficit for fiscal year 2012 is estimated to be approximately $1.449 billion, which is equal to the difference between revenues of $8.650 billion less expenditures of $10.099 billion.
    2. We estimate the deficit for fiscal year 2013 to be approximately $1.036 billion, which is equal to the difference between revenues of $8.647 billion less expenditures of $9.683 billion. This deficit amount would be $413 million, or 28%, less than the $1.449 billion deficit we estimate for fiscal year 2012.
    3. During the last twelve years Puerto Rico’s total public debt has exploded both in absolute terms and relative to the size of the Puerto Rican economy. At the end of fiscal year 2000 total Puerto Rico public debt amounted to approximately $24.2 billion, while as of March 2012 it amounted to $68.5 billion, an aggregate increase of $44.3 billion, or 183.05%. During this period public indebtedness increased at a compound annual growth rate of 9.06%.
    4. Meanwhile, Puerto Rico’s Gross National Product (GNP), at current prices, increased from $41.4 billion in 2000 to an estimated $66.4 billion at the end of fiscal year 2012, an aggregate increase of $25 billion, or 60.4%. During this period Puerto Rico’s GNP increased at a compound annual growth rate of 4.01%.
    5. Consequently, Puerto Rico’s public debt to GNP ratio has increased from a relatively manageable 58.4% in 2000 to a decidedly risky 103.08% in 2012.
    6. The Commonwealth’s consolidated budget has increased from $28.146 billion in fiscal year 2009 to a projected $28.572 billion for fiscal year 2013, an increase of $426 million, or 1.51%. This increase is equivalent to a compound annual growth rate (CAGR) of 0.38% during the period between fiscal years 2009 and 2013, which is significantly lower than the 2.58% CAGR of nominal GNP during the same period.
    7. Federal funds are expected to account for 23.8% of all consolidated budget expenditures during fiscal year 2013, a proportion that is essentially the same as the 23.2% registered in 2012. This means that approximately 1 out of every 4 dollars spent by the Commonwealth’s central government during the next fiscal year will come from Washington.
    8. The Commonwealth’s general fund budget has decreased from $9.483 billion in fiscal year 2009 to a projected $8.750 billion for fiscal year 2013, a decrease of $733 million, or 7.7%. This reduction is equivalent to a CAGR of negative 1.99% for the period between fiscal years 2009 and 2013.
    9. The amount of the general fund allocated to payroll has decreased from $5.501 billion for fiscal year 2009 to a projected $3.608 billion during fiscal year 2013, a decrease of $1.893 billion, or 34.4%. This decrease is equivalent to a CAGR of negative 10%.
    10. General fund tax revenues, the principal component of the general fund, are expected to increase from $6.948 billion in fiscal year 2009 to a projected $8.181 billion during fiscal year 2013, an increase of $1.233 billion, or 17.7%. This increase is equivalent to a CAGR of 4.1%.
    11. The general fund budget for fiscal year 2012-13 includes $1.036 billion in non-recurring revenues, an amount that is $413 million, or 28.5%, lower than the $1.449 billion in non-recurring revenues included in the general fund budget for the fiscal year 2011-12.
    12. With respect to the consolidated budget, the amount allocated for debt service has increased from $3.184 billion in 2009 to a projected $4.021 billion in 2013, an increase of $837 million, or 26.3%. This increase is equivalent to a CAGR of 6.0%.
Substantial Progress But Still Not Out of the Woods

Our analysis of the Commonwealth’s financial situation shows that Puerto Rico has made great strides towards achieving fiscal stability. General fund expenditures have been brought under control, payroll expenses have decreased significantly since 2009, the use of non-recurring revenues has diminished, and the structural deficit has been cut by 65%.

On the other hand, Puerto Rico is still seriously dependent on federal funding, enlarging the tax base has proven difficult, and the structural deficit, while showing a generally declining trend since 2009, still exceeds $1 billion. Therefore, Puerto Rico’s fiscal situation, in our opinion, has stabilized during the last three years but it is still quite fragile.

Perhaps more worrisome in the short term is the fact that Puerto Rico’s levels and rates of indebtedness are not sustainable. Puerto Rico’s total public debt sums $68.460 billion, an amount equal to 103.08% of its expected GNP for fiscal year 2012. Since 2000, Puerto Rico’s public debt has increased at a compound annual growth rate of 9.06%, while its GNP, at current prices, has increased an annual rate of 4.01%.

Furthermore, the expiration of COFINA’s authority to issue additional debt, the phase-out of federal stimulus spending under the American Recovery and Reconstruction Act, and the relative weakness of GDB’s balance sheet, will severely limit the flexibility of the Commonwealth’s financial managers to fund any unexpected expenditures, manage an unanticipated liquidity crunch, or cover unforeseen revenue gaps in the short term.

Over the medium term, Puerto Rico’s faces a challenging fiscal situation. It remains to be seen whether the income source rule would generate enough recurring revenues to achieve structural balance and federal funding is likely to remain stagnant in the best case scenario or be significantly reduced in the worst.

At the same time, Commonwealth financial managers will have to balance intense competing pressures on the general fund to (1) make up any lost federal funding, (2) subsidize financially struggling public corporations, (3) keep the public pension systems afloat, and (4) finance all the health, education, and public safety services that the Puerto Rican people expect from their government.

In sum, Puerto Rico’s public finances have stabilized but are still weak, its levels and rates of indebtedness are not sustainable, its fiscal viability over the medium term is uncertain, and its economic outlook remains quite modest.

Créditos: Puerto Rico Fiscal Update

Por: Sergio M. Marxuach | Director de Política Pública, Centro para la Nueva Economía
Publicación: 15 de junio de 2012
Foto: Ryan McFarland via flickr cc

 

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