The Case for Comprehensive Disaster Relief


Erika P. Rodriguez for The New York Times

By: Sergio M. Marxuach
Public Policy Director

This hurricane season has been particularly bad with major storms hitting Florida, Texas, Puerto Rico, the United States Virgin Islands, and several Gulf states. Total damages are estimated to exceed $200 billion. The Federal Emergency Management Agency (“FEMA”) is doing the best job it can with the resources it has at its disposal, but it is clearly reaching the limits of its capabilities. Under the American constitutional system, only Congress has the authority to enact a comprehensive relief and reconstruction package to address this situation.

The devastation in Texas, Florida, the United States Virgin Islands, and Puerto Rico has been well documented. The destruction of public infrastructure and the loss of private property affect millions of US citizens. A well-financed, broad-based recovery and reconstruction program would provide a much-needed boost to economic activity in these heavily damaged areas and help many hard-working families get back on their feet. READ MORE

Puerto Rico’s excise tax change looms over commonwealth’s fiscal horizon

by Simone Baribeau and Javier Balmaceda


About a fifth of Puerto Rico’s general fund revenue is at risk.

The future of the 4% excise tax on foreign manufacturers hinges on political gales in Washington, D.C., as well as uncertainty at home. In FY14, the commonwealth raised USD 1.9bn through the tax, or 20.3% of its general fund revenue.

Known as Law 154, the excise passed as a temporary measure in FY11 under the administration of former Governor Luis Fortuno, and was designed to fall each year until it reached 1% in 2016.

But in 2013, as the tax began to fade out and Puerto Rico’s financial situation deteriorated, the commonwealth changed course. Governor Alejandro Garcia Padilla successfully backed a measure that returned the tax to 4% until 2017, at which point the method for calculating the tax changes.

The risks to the tax are two-fold. The federal government, which has allowed companies that pay the tax to fully write it off against their federal returns, could stop permitting the write-off, said Treasury Secretary Juan Zaragoza and House Finance Committee Chairman Rafael “Tatito” Hernandez. Even if it remains creditable, because of the change in the way the tax is calculated, it will be difficult to predict how much revenue it will generate in 2017, said Zaragoza.

“There’s so much uncertainty as to the yield of that methodology,” Zaragoza said. “We are meeting constantly with officials at Treasury [to discuss the future of the tax].”

From crisis to crisis

The change to the excise tax in 2017 isn’t the commonwealth’s most immediate crisis.

The Government Development Bank for Puerto Rico warned lawmakers last month that a government shutdown in the next three months was “very probable” unless the government balanced its FY16 budget, completed a five year fiscal adjustment plan and passed a tax overhaul that moved toward a value added tax and away from a sales and use tax. The House subsequently voted down the tax overhaul leaving the commonwealth’s financial plans up in the air.

Even if Puerto Rico fixes its more immediate fiscal crises with tax reform, the commonwealth will have “three big black clouds” left to address, Economic Secretary Alberto Baco said. Those issues are pension systems that are woefully underfunded, a healthcare system that is expected to run out of money in 2018, and the changes to the excise tax.

“Those are the three other [challenges] that we have to solve,” Baco said.

But, he added, as soon as the commonwealth addressed its immediate financial problems, outside stakeholders, including the federal government, will be more willing to help find solutions.

“That’s something that the federal government has been reasonable in the past and will be again if they see we are able to solve our basic issues,” Baco said.

Looking the other way….for now

So far, the federal government has allowed companies to credit the tax against their federal liability, effectively allowing a transfer of federal money to Puerto Rico. In a 2011 notice the Internal Revenue Service (IRS) said it was evaluating the “novel” tax, and that it would be creditable until they decided otherwise.

“I call it the ‘gentlemen’s agreement’ between Puerto Rico and the [IRS], about the treatment of that tax,” said Senator Ramon Luis Nieves, a member of the governing Popular Democratic Party.

By not making a final decision, the IRS gave itself the option to limit the amount of money transferred to Puerto Rico, if, for instance, the commonwealth increased the tax rate or made it permanent. And Puerto Rico has already taken steps to change the original law, scrapping the five-year reduction in rates and extending the date of the methodology change to 2017 from 2016.

The creditability of the tax may rest on who wins the presidential election in 2016, said Hernandez.

“It’s an issue of what happens if Jeb Bush wins, is he going to support that or not?” Hernandez said. “We don’t know.”

However, he noted that while Republicans “never like” the island, manufacturers are likely to push their own – likely successful – effort at maintaining creditability.

Technical, but relevant

The change is technical and it applies to relatively few companies. In FY13, 27 companies – primarily pharmaceuticals and medical device manufacturers – paid the tax. Six companies paid 75% of the revenue collected, according to the annual financial report. The tax, which is now “pretty simple,” is about to become much more complex, Zaragoza said.

Under the current law, Puerto Rico affiliates of pharmaceuticals or other manufacturers that sell drugs or other goods to their parent company pay 4% of the internal sales to the commonwealth, said Sergio Marxuach, public policy director for the Center for the New Economy.

In 2017, this will change to a so-called “source rule,” where, through a complex set of calculations, the tax liability will be based on the value of the total sales of the products made in Puerto Rico, which is less susceptible to companies’ internal “financial shenanigans,” Marxuach said.

The tax liability under the source rule is calculated by averaging four fractions: looking at each of the purchases, sales, property and payroll in Puerto Rico and dividing it by the companies total purchases, sales, property and payroll, respectively, according to a 2010 opinion by Steptoe & Johnson on the creditability of the law.

“The problem is that implementing those rules is very complicated,” Marxuach said.

Not only is it complicated, but the Treasury Department lacks the information it would need to determine the tax liability, Zaragoza said.

“In order for me to determine [the tax liability], I will need access to [pharmaceutical companies] worldwide income and I don’t have access to that,” Zaragoza said.

There’s also a constitutional question. If challenged, Puerto Rico must show that the income is closely enough tied to Puerto Rico – that there’s a sufficient nexus – for Puerto Rico to tax the income.

“There can be no assurance that [the tax’s] constitutionality will not be challenged and that, if challenged, the courts will uphold [the tax],” the commonwealth said in its first-quarter financial statement.

A taxing ‘nightmare’

Companies have accepted that, in one form or another, the excise tax will remain, said Puerto Rico Industrial Development Company Executive Director Antonio Medina.

“We’ve already informed the companies that it’s not going to go away,” Medina said. “The companies have already told us that as long as it’s creditable they’re okay with it.”

Under the source rule, the excise tax “should achieve [federal tax] creditability in the long term,” he said.

Still, he said, companies would prefer a simpler, more predictable tax, like the excise tax.

“The question is how can we change that law into something that’s simpler to implement than the sourcing of income and maintain creditability in the long term?” he said. “[As is] it’s going to be a nightmare to audit this tax.”

A USD 3.5bn tranche of Puerto Rico 2014 8% general obligation bonds due in 2035 last traded in round lots today at 78.5, yielding 10.602%, according to Electronic Municipal Markets Access. Standard & Poor’s last rated Puerto Rico’s general obligation bonds CCC+/negative on 24 April. Fitch Ratings gave them a B/negative on 26 March. Moody’s Investors Service’s last rating was Caa1/negative on 19 February.



Reforma Contributiva necesita estimular la economía de la clase trabajadora


Por: Laura M. Quintero
Publicado: 12/12/2014 04:58 am

En momentos en que la Administración García Padilla baraja un aumento a las contribuciones al consumo de hasta 14%, un grupo de investigadores de la alianza Espacios Abiertos (EA), presentaron el jueves una propuesta ante el Departamento de Hacienda, para que se disminuya la regresividad del impuesto y la desigualdad económica entre el sector desfavorecido y adinerado del país.

Deepak Lamba (Josian Bruno/NotiCel)

“Si esta nueva reforma (contributiva) tiene como prioridad únicamente que el Gobierno logre ingresar una cantidad más grande de dinero, nosotros queremos que cambien las prioridades”, advirtió, director de investigaciones del Centro para la Nueva Economía (CNE), DeepakLamba Nieves. “Vamos a impulsar otras prioridades: vamos a pensar en las familias trabajadoras”, abogó el planificador.

Convencidos de que las políticas propuestas por La Fortaleza restringen la actividad económica, al reducir los ingresos de los trabajadores pobres, EA propuso que se restablezca el crédito por trabajo, eliminado por el Gobierno de Alejandro García Padilla este año.

Este crédito propuesto de entre 4 a 12% del ingreso familiar, aliviaría el bolsillo de las personas que trabajan, cuyo salario no les da para pagar sus gastos; quienes están desprovistas de un seguro de salud porque no cualifican para Medicaid, ni tienen suficiente dinero para abrir una cuenta individual para su retiro. READ MORE

Study urges PR to restore work credit


By CB Online Staff;

Puerto Rico should look to craft and enact a work credit tax program to replace the one that was eliminated last year due to the island government’s fiscal ills, according to a leading policy research organization.
The Urban Institute has issued a study assessing the experience with the work credit that was in effect from 2007 to 2013 and suggests elements for a possible redesign that are consistent with the goals of rewarding and stimulating work, reducing hardship, strengthening the tax base and offsetting regressivity.

The study was commissioned by the San Juan-based Center for a New Economy thanks to a grant received from the Open Society Foundations and Espacios Abiertos.

Puerto Rico lawmakers enacted the work credit in 2006 to offset the regressive nature of the commonwealth’s sales & use tax (IVU) that was established in that same year. In addition to helping offset sales tax regressivity, refundable tax credits tied to work such as the work credit have been found to reduce hardship and stimulate employment among low wage workers. In 2013, the work credit delivered benefits to 45 percent of all tax filers at a cost of $124 million. In 2014, as Puerto Rico slid into its deepest fiscal crisis in recent history, lawmakers eliminated the credit. READ MORE

Cuesta arriba recuperar la confianza

Por Ileanexis Vera Rosado, EL VOCERO –
Cerca de una década le tocará a Puerto Rico alcanzar un mejor grado de inversión, según el análisis del economista Sergio M. Marxuach, director de Política Pública en el Centro para una Nueva Economía (CNE).

Marxuach sostuvo que es muy difícil predecir  hasta cuándo se extenderá la recesión económica, no obstante al analizar las crisis de estados como Nueva York, Filadelfia y Washington, que tomaron aproximadamente seis años en recuperar su grado de inversión, entiende que a la Isla le podría tomar entre cinco a siete años más.

Destacó que al revisar la historia más reciente, la situación económica que vive la Isla se veía venir hace tiempo pero no se hizo nada para evitarlo, por lo cual no queda otra opción que pagar las consecuencias luego de varias décadas de mala administración.

Uno de los planteamientos señalados hace mucho tiempo por el CNE fue precisamente la situación de las corporaciones públicas, principalmente la Autoridad de Energía Eléctrica (AEE), la cual entiende ha empeorado marcadamente su situación al no poder cumplir con sus bonistas por primera vez en su historia.

“Superficial” la propuesta reforma contributiva

Por Ileanexis Vera Rosado, EL VOCERO

La reciente propuesta de Reforma Contributiva presentada en la Cámara de Representantes es “muy superficial”, según Sergio M. Marxuach, director de política pública del Centro para la Nueva Economía (CNE), quien la describió como un anuncio político para las gradas y no una propuesta seria de política pública.

“Sin una reforma a fondo se crean distorsiones enormes. Estamos conscientes que no es una solución mágica, sino una estrategia grande que una vez establecida tomará varios meses para estar boyante. El anuncio presentado recientemente fue uno político, sin sustancia, hay que ver los análisis de Hacienda y los demás expertos en contribuciones que trabajaron en ella para poder tener un análisis más informado”, sostuvo Marxuach.

El economista fue enfático en que dicha reforma se debe regir por varios principios básicos, como ser una de gran alcance, expandir la base tributaria, reducir las tasas marginales y simplificar el sistema.

Puerto Rico Drops to Level Unprecedented for Bonds: Muni Credit

Photographer: Nikki Kahn/The Washington Post via Getty Images Tourists meander through Old San Juan in Puerto Rico.

No state or city with a credit rating as low as Puerto Rico’s has been able to access bond markets since at least 1990, a situation that may cut off the lifeblood of the commonwealth’s finances.

On July 1, Moody’s Investors Service cut the island’s rating to B2, five steps below investment grade. No local government has borrowed at that level, according to data compiled by Bloomberg. Prices on its general-obligation debt yesterday plummeted to record lows.

“They’re done,” said Matt Dalton, chief executive officer of White Plains, New York-based Belle Haven Investments, which oversees $2.1 billion in munis. “They’re not going to be issuing any more debt on the island. I don’t see how they can bring people back to the trough at this point.”

Puerto Rico and its agencies have operated for years on borrowed money — racking up $73 billion, Bloomberg data show — and Wall Street made $910 million since 2000 by structuring its debt sales. If the government can’t sell bonds at affordable rates, it will have to curtail services for its 3.6 million residents, 45 percent of whom live in poverty. READ MORE

Puerto Rico’s Indebted Power Utility Adds to Island’s Problems

The Puerto Rico Electric Power Authority must repay $146 million over the next two months for a credit line used to buy oil to generate electricity.

The Puerto Rico Electric Power Authority must repay $146 million over the next two months for a credit line used to buy oil to generate electricity. Credit Dennis M. Rivera-Pichardo for The New York Times

Puerto Rico’s electrical utility is running out of money and time to negotiate a deal with its lenders, part of a broad reckoning for an island that relies on Wall Street to finance some of its most basic functions.

The Puerto Rico Electric Power Authority must repay $146 million to Citigroup over the next two months for a credit line used to buy oil to generate electricity. It is also uncertain whether the authority will be able to renew a $550 million credit line from Scotiabank for fuel purchases, people briefed on the matter said.

With the power authority’s lenders growing increasingly skittish, analysts and investors expect the utility will be forced to restructure its debts to avoid crippling power shortages for Puerto Rico’s 3.6 million residents.

The likelihood of a restructuring increased after Gov. Alejandro Garcia Padilla hurriedly signed a new law into effect over the weekend allowing public corporations like the power authority to seek protection similar to what bankruptcy provides. Representatives for Citigroup and Scotiabank declined to comment.


Category: English, Language, Web · Tags: , , , , ,

Empeora la crisis


La degradación de ayer de Moody’s representó para los economistas la bancarrota de Puerto Rico y su cierre en los mercados de capital, también coincidieron en que la nueva ley de reestructuración de deuda fue el detonante

Por Ileanexis Vera Rosado, EL VOCERO

Las casas acreditoras volvieron a propinarle ayer otro contundente golpe a Puerto Rico, luego de que Moody’s Investor Service rebajó a un nivel más profundo del grado especulativo o ‘chatarra’ los bonos de las obligaciones generales del Estado Libre Asociado (GOs, por sus siglas en inglés), así como las responsabilidades de la Autoridad de Energía Eléctrica (AEE), entre otras corporaciones públicas, en una medida que tendrá graves consecuencias contra unos $61,000 mil millones de deuda pública.

La histórica determinación aplicó también a la Corporación del Fondo de Interés Apremiante (Cofina), la Autoridad  de Acueductos y Alcantarillados (AAA), el Banco Gubernamental de Fomento (BGF), la Autoridad de Carreteras y Transportación (ACT) y la Universidad de Puerto Rico (UPR). Incluso la entidad señaló que la perspectiva del país es negativa, por lo que podrían producirse en cualquier momento degradaciones adicionales.

Esta degradación, que recuerda el deterioro progresivo de la caída económica de Grecia, se efectúa a escasos cuatro meses de la primera degradación de los GOs y apenas cuatro días de las casas acreditadoras haber degradado los bonos de las corporaciones públicas  y por segunda ocasión consecutiva los bonos de la AEE. Tras la degradación,  el valor de bonos de los GO’s cayó en un 5%, colocándose entre los 84.5 centavos de dólar y los 87.5 centavos de dólar.

Moody’s Investors rebajó los GOs en tres escalafones de Ba2 a B2, afectando a 14.4 mil millones de bonos, lo que significa que no es un inversión deseable y de alto riesgo. Mientras, en cuanto a las agencias estatales y empresas públicas se afectan cerca de 46 mil millones de bonos, “incluyendo 15.6 mil millones en bonos senior y subordinados emitidos por el impuesto a las ventas de Cofina, que, respectivamente, se redujo a Ba3 y B1”, señaló el informe. READ MORE

Quiebra criolla viabiliza venta de activos o desmantelamiento de corporaciones públicas


Por: Laura M. Quintero
Publicado: 27/06/2014 05:32 am

El futuro de las corporaciones públicas que se acojan a la nueva Ley para renegociar sus deudas millonarias con los acreedores está lleno de variables. Pero lo que está definido es que la estructura operacional de las corporaciones cambiará drásticamente al facilitar que vendan o arrienden sus activos a otras entidades del gobierno o a manos privadas.

Los directores de la AAA, Alberto Lázaro, y de la AEE, Juan Alicea, con la secretaria de la Gobernación, Ingrid Vila. (Josian Bruno/NotiCel)

Las corporaciones que se encuentren en estado de insolvencia tendrán a su disponibilidad distintos recursos para cumplir con el pago de sus obligaciones, sin que se afecten los servicios. Permite, por ejemplo, la venta y el arrendamiento de cualquiera de los activos, como pudieran ser las plantas productoras de la Autoridad de Energía Eléctrica (AEE), a otras entidades públicas o privadas que se comprometan ante el juez designado, a mantener el ofrecimiento de los servicios públicos.

Si bien las corporaciones ya tenían la facultad de crear Alianzas Público-Privadas, como las que concedió la Administración Fortuño en el aeropuerto internacional, el peaje Teodoro Moscoso y las carreteras PR-22; esta Ley facilita ese tipo de transferencias a través de un “proceso estructurado y expedito” en el Tribunal, según el economista Sergio Marxuach, Director de Política Pública del Centro para una Nueva Economía (CNE).

Marxuach comentó, sin embargo, que es improbable que la negociación requiera de una venta o privatización parcial. “Dudo que se llegue a ese tipo de remedio. Creo que la mayoría de los bonistas preferirían renegociar los términos (de la deuda), en vez de correr el riesgo de comenzar desde cero con unos dueños nuevos”, reaccionó, en referencia a la negociación del principal, interés y término de años de la deuda.


CNE Newsletter

Never miss an update!
Subscribe to the CNE Newsletter below: