By: Sergio M. Marxuach
Puerto Rico’s failure to publish its Comprehensive Annual Financial Report (“CAFR”) for fiscal year 2014 has generated all sorts of speculation and harebrained theories—from accusations of incompetence to frankly ridiculous conspiracy allegations.
In our view, this issue, while clearly important, has been blown out of proportion. Timely publication of the CAFR is both essential to keep investors adequately informed about the financial health, or lack thereof, of the Puerto Rican government and necessary to hold accountable those in charge of Puerto Rico’s finances.
Furthermore, the failure to publish these audited financial statements has eroded whatever residual credibility the Commonwealth government had with Congress, the capital markets, and the people of Puerto Rico, and allowed nefarious vulture funds, fake “civil society” organizations funded by shady U.S. political operators, as well as other assorted financial predators and their highly-paid influence peddlers and mercenaries from K street, to plausibly argue that Puerto Rico is “hiding” money somewhere or otherwise exaggerating its financial weakness. A preposterous argument, in our opinion, since we do not know of any government in power, in any country, that has been re-elected by faking its own insolvency. In our view, feigning bankruptcy simply does not seem like a winning electoral strategy.
That being said, it is true that the current situation is clearly unacceptable from an accountability and good governance perspective. Puerto Rico should publish its CAFR for fiscal year 2014 as soon as possible, or at the very least provide a detailed, clear, and coherent public explanation for its failure to do so. The Commonwealth’s government needs to take this issue off the table.
Bear in mind, however, that publishing already stale financial information dated as of June 30, 2014 is, by this point in time in the long-running Puerto Rican debt saga, irrelevant to obtaining an accurate picture of the state of Puerto Rico’s finances today. In all honesty, we seriously doubt that knowing whether the Commonwealth’s agencies took the right depreciation charges during FY2014 will shed any light on the Commonwealth’s ability to make its GO bond payment due on January 1st.
In our view, the really important issue today is whether the Commonwealth has, or can reasonably expect to have, enough cash on hand to honor all its obligations as they become due and payable. Thus, we at CNE believe that the government, in addition to the CAFR, should also make public as soon as possible a detailed statement of actual cash flows for the first six months of the current fiscal year and provide an updated forecast of cash flows for the next six-month period.
If bondholders are not going to get paid on time, taxpayers will not get their tax refunds until hell freezes over, and government workers will not get their Christmas bonus, then the Commonwealth’s financial managers have an unavoidable obligation to open up the checkbook for all to assess and verify the government’s current financial situation.
These cash flow statements should set forth a detailed breakdown of all sources and uses of cash during the current fiscal year, on an actual cash basis for the first six months, and include a reasonable forecast for the rest of the fiscal year.
On the sources side it should include all cash from taxes, fees, and other revenues, using the standard reporting format already used by the Puerto Rico Treasury Department, as well as an aging of accounts payable by 30, 60, and 90-day periods. It should also include an explanation of all the “emergency cash measures” taken to date and disclose any short-term financing obtained, or expected to be obtained, during the current fiscal year, if any.
On the uses side, the statement should be broken down by expense type, including payroll and related costs; contracts for professional services; utility and transportation expenses; expenditures on equipment, materials and supplies; spending on subsidies, grants, and incentives; expenditures for public relations, advertisements and media purchases; and debt service.
Finally, these statements should set forth the monthly ending book cash balance and the ending bank cash balance of the Puerto Rico Treasury Single Account and explain any material differences between the two.
Accountability and citizen’s control of politicians in a democracy are, at best, fragile and imperfect things. In theory, according to Guillermo O’Donnell, in a democracy “all citizens are equally entitled to participate in the formation of collective decisions under the existing institutional framework, a democratic statement to which is added the republican injunction that no one, including those who govern, should be above the law and the liberal caution that certain freedoms and guarantees should not be infringed.”
Keeping that bit of political theory in mind, as well as the context of the current crisis, the least the government of Puerto Rico can do—if it intends to (1) alter the current public finance institutional framework; (2) put above the law those in charge of its finances; (3) infringe certain contractual rights and guarantees; and (4) ask citizens and creditors to make onerous concessions in order to stabilize its finances—is to come clean, publish its audited CAFR, and, perhaps most important of all, open up its checkbook to public scrutiny.