.
Puerto Rico’s Current Fiscal Challenges:
In Brief
D. Andrew Austin
Analyst in Economic Policy
June 30July 7, 2015
Congressional Research Service
7-5700
www.crs.gov
R44095
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Summary
The government of Puerto Rico faces multiple fiscal challenges in coming weeks and months.
Concerns regarding the sustainability of Puerto Rico’s public finances have intensified over the
past year, despite several measures taken by the island’s government to reduce spending, increase
revenues, and restructure its obligations.
Puerto Rico faces several fiscal hurdles in 2015. Puerto Rico’s publicly owned electric utility
faces a $416 million debt service payment due on July 1. The island’s central government also
facesand its public
corporations face substantial debt service costs. The Puerto Rican government, which has faced major
major liquidity challenges in recent years, recently warned that it may “lack sufficient resources
to fund
all necessary governmental programs and services as well as meet debt service obligations for
for fiscal year 2016,” although it had contended that it has sufficient funds available.
The Puerto Rican government, either directly or through financing arms, has been able to issue
bonds, but on relatively expensive terms. The island’s ability to meet debt service payments
depends in part on the willingness of investors to roll-over existing debt. A $2.9 billion bond sale,
which the Puerto Rican government had contemplated, appears to be on hold. The island’s ability
to access credit markets appears highly uncertain.
A June 29, 2015, New York Times article quoted Puerto Rico’s Governor Alejandro García Padilla
as stating that “the debt is not payable” and that his Administration would seek concessions from
the island’s creditors. Governor García Padilla delivered a televised address on the same day, in
which he outlined a new fiscal strategy Much of the
Puerto Rican government’s revenue stream for the first part of its fiscal year, which began on July
1, is earmarked to redeem revenue bonds.
On June 29, 2015, Puerto Rico’s governor, Alejandro García Padilla, stated during a televised
address that “the debt is not payable.” García Padilla said his administration would seek
concessions from the island’s creditors as part of a new fiscal strategy, which would be developed
by a newly established working group on economic recovery and debt restructuring. On the same
day, the Puerto Rican government released a report it had commissioned from three former
International Monetary Fund economists. The report described severe short-term funding
challenges as well as longstanding issues with key parts of the Puerto Rican economy and public
sector.
The island’s ability to access credit markets appears highly uncertain. The Puerto Rican
government, either directly or through financing arms, has been able to issue bonds, but on
relatively expensive terms. On July 3, 2015, the government enacted a law to enable issuance of
revenue bonds by publicly owned insurers with the aim of providing liquidity for the public
sector for the first part of the fiscal year, which began on July 1. The Puerto Rican government
and its electric power utility made scheduled bond payments at the beginning of July 2015. The
island’s ability to meet future debt service payments depends in part on the willingness of
investors to roll-over existing debt. A $2.9 billion bond sale, which the Puerto Rican government
had contemplated, appears to be on hold.
The precarious state of Puerto Rico’s public finances stems in part from prolonged economic
weakness. Economic growth has been sluggish even before the 2007-2009 recession and official
forecasts project a continuation of slow growth. Previous analyses have pointed to low
employment and labor participation rates, high rates of outmigration leading to a decline in
population, an economic structure shaped more by tax advantages than comparative advantages,
and the effects of intensified global competition, among other factors.
This report will be updated as events warrant.
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Contents
Puerto Rico’s Weak Fiscal Situation ................................................................................................ 1
Public Corporations Incurred Much of Puerto Rico’s Public Debt.................................................. 3
Short-Term Challenges .................................................................................................................... 4
FY2016 Budget ......................................................................................................................... 4
Governor García Padilla Calls for Debt Restructuring .............................................................. 5
Debt Service and Liquidity ........................................................................................................ 6
Initiatives to Address Fiscal Challenges .......................................................................................... 67
Fiscal Strategy and Outmigration .................................................................................................... 79
Potential Issues for Congress ........................................................................................................... 8 10
Credit Support ........................................................................................................................... 9 10
Federal Health and Income Support Programs .......................................................................... 9 11
Restructuring and Bankruptcy ................................................................................................. 1011
Structural Reforms in the Medium and Long Term ................................................................. 1012
Figures
Figure 1. Selected Puerto Rico Bonds; Dollar Prices Since January 2011 ...................................... 2
Figure 2. Gross Public Debt of Puerto Rico in Billions of Constant Dollars, 1960-2014 ............... 3
Figure 3. Government Employment in Puerto Rico, 1990-2015 ..................................................... 67
Figure 4. Puerto Rico Resident Population Trends .......................................................................... 89
Contacts
Author Contact Information........................................................................................................... 11
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Puerto Rico’s Weak Fiscal Situation
Since mid-2013, serious concerns emerged in municipal bond markets and among other observers
regarding financial challenges facing Puerto Rico. An August 2013 Barron’s article highlighted
the island’s weak fiscal position and high public debt.1 In February 2014, the three major credit
ratings agencies downgraded Puerto Rico’s public debt to below investment grade.2 A second
round of downgrades followed after the Puerto Rican government enacted Act 71 on June 28,
2014, which sought to establish a process for restructuring of debt issued by the island’s public
corporations.3 Figure 1 shows trading prices for selected Puerto Rican bonds since January 2011.
The first vertical line indicates when the Barron’s article appeared, and the second vertical line
indicates when Act 71 was enacted.
Puerto Rico’s public debt has grown steadily since the mid-1980s, and is now slightly larger than
the island’s gross national product (GNP).4 Figure 2 shows the accumulation of Puerto Rico’s
gross public debt since 1962. The governor of Puerto Rico, Alejandro García Padilla, according to
a New York Times article, stated
On June 29, 2015, Puerto Rico’s governor, Alejandro García Padilla, stated during a televised
address that “the debt is not payable.” He also said his administration would ” and that his Administration would
seek concessions
from the island’s creditors.5 The appearance of that article coincided with the
release of as part of a new fiscal strategy.5 On the same day, the Puerto Rican
government released a report written by three former International Monetary Fund (IMF)
economists, which
described serious problems with Puerto Rico’s fiscal situation, budget
execution, public
administration, and tax structure.6 The Puerto Rican government now appears to
face serious
liquidity challenges over the summer, which are described in more detail below.
1
Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”
Barron’s, August 26, 2013.
2
Commonwealth of Puerto Rico, Consolidated Annual Financial Report for FY2013, June 30, 2013, note 22, pp. 230231;, http://www.hacienda.gobierno.pr/downloads/pdf/cafr/FINANCIAL_REPORT_2013.pdf.
3
Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico (Ley
71 de 2014; Act 71; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico). The
law has also been referred to as the “Recovery Act” or the “Local Bankruptcy Law” (Ley de Quiebra Criolla), even
though its text states that it is not a bankruptcy act. See also Moody’s Investor’s Service, “Puerto Rico’s Debt
Restructuring Law Raises Default Risk for Public Corporations and the Commonwealth,” July 3, 2013.
4
Puerto Rico’s gross public debt was reported at $72.2 billion at the end of March 2015. GNP estimates for FY2015
are not yet available, but FY2014 GNP was projected to be $69.2 billion. See GDB, Commonwealth Quarterly
Financial Report, May 7, 2015, p.56; http://www.gdb-pur.com/documents/CommonwealthQR-5-7-15.pdf. Also see
Statistical Appendix (Apéndice Estadístico) of the Economic Report to the Governor and the Legislature for FY2014;,
http://www.jp.gobierno.pr/Portal_JP/Default.aspx?tabid=184.
5
Michael Corkery and Mary Williams Walsh, “Puerto Rico’s Governor Says Island’s Debt Are ‘Not Payable,’” New
York Times, June 28, 2015, p. A1; http://www.nytimes.com/2015/06/29/business/dealbook/puerto-ricos-governor-saysislands-debts-are-not-payable.htmlEl Nuevo Dia, “Mensaje del Gobernador Alejandro García Padilla Sobre Situación Fiscal de Puerto Rico,” June 29,
2015, http://www.elnuevodia.com/noticias/politica/nota/
mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico-2066574/.
6
Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, Puerto Rico: A Way Forward, June 29, 2015;,
http://recend.apextech.netdna-cdn.com/docs/editor/Informe%20Krueger.pdf.
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Puerto Rican government.
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1
.
Figure 1. Selected Puerto Rico Bonds; Dollar Prices Since January 2011
Source: Electronic Municipal Market Access, Municipal Securities Rulemaking Board.
Notes: Legacy General Obligation bond is CUSIP 74514LYW1 (5.75%; 2041); NY law GO bond issued March 2014 is 74514LE86 (8.0%; 2035). COFINA Senior Note is CUSIP 74529JNX9
(5.25%; 2040); COFINA Subordinated Note is CUSIP 74529JHN8 (6.0%; 2042). Puerto Rico Electric Power Authority Revenue Bond is CUSIP 74526QVX7 (5.25%; 2040). First vertical line
indicates appearance of Barron’s article (August 20, 2013); second vertical line at enactment of Act 71 (July 28, 2014). COFINA issues revenue anticipation securities to provide liquidity to the
Puerto Rican government.
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Figure 2. Gross Public Debt of Puerto Rico in Billions of Constant Dollars, 1960-2014
Source: Statistical Appendix (Apéndice Estadístico), various years; available at http://www.jp.gobierno.pr/Portal_JP/
Default.aspx?tabid=184.
Notes: Data represent gross public debt of Puerto Rico as of June 30 of each year, provided by the Government
Development Bank of Puerto Rico. Figures for 1989 and 2014 are preliminary estimates. The Highway and
Transportation Authority and the University of Puerto Rico are included in the Commonwealth Government
subtotal. The U.S. GDP price index is used to adjust levels for inflation. These debt data differ from those
available from other sources.
Public Corporations Incurred Much of Puerto Rico’s
Public Debt
Public corporations, which have played a prominent role in the Puerto Rican economy since the
1930s, are closely linked to the island’s fiscal challenges. Some 50 public corporations serve a
broad variety of purposes and activities, ranging from public infrastructure, banking, real estate,
insurance, industrial development, health care, transportation, electric power, broadcasting,
education, arts, and tourism, among others.7 Off-budget debt issued by public corporations,
7
For one listing of public corporations, see Commonwealth of Puerto Rico, Budget Proposal for 2013-2014,
Consolidated Budget by Agency for FY2011-FY2014 (Estado Libre Asociado de Puerto Rico, Presupuesto
Recomendado 2013-2014, Presupuesto Consolidado por Agencia); http://www2.pr.gov/presupuestos/Presupuesto20132014/Tablas%20Estadsticas/04.pdf.
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generally not included in the 15% debt servicing limit, has accounted for much of the buildup in
Puerto Rico’s public debt since 2000 (see Figure 2).8 Moreover, the central government’s
financial support for public corporations has weakened its own fiscal situation.
The largest public corporation in Puerto Rico, the Puerto Rico Electric Power Authority (PREPA),
entered into a restructuring and forbearance agreement in August 2014 with major creditors.9
PREPA faces a bond
interest payment of $416 million on July 1, 2015, which may present serious liquidity
challenges.10 PREPA issued a summary of a restructuring plan on June 1, 2015, which calls for
$2.3 billion to modernize its operations and stabilize its finances.11 Independent analysts argue
that a few other large public corporations are insolvent.12issued a summary of a restructuring plan on June 1, 2015, which calls for $2.3 billion to
modernize its operations and stabilize its finances.10 The forbearance agreement has been
extended several times, most recently until September 15, 2015. The announcement of the latest
extension coincided with a statement that PREPA made a scheduled bond interest payment of
$415 million on July 1, 2015.11 PREPA’s chief executive retired in late June 2015 and has been
replaced on an interim basis by the former head of its power generation unit.12
Independent analysts argue that a few other large public corporations are insolvent.13
Short-Term Challenges
The government of Puerto Rico faces multiple immediate fiscal challenges. Several large debt
payments are due from the island’s central government and from public corporations that present
serious liquidity challenges.
FY2016 Budget
The Puerto Rican legislature approved a FY2016 budget, which was
then sent to the governor, which
reportedly setsset aside $1.5 billion for debt service costs. How the
restructuring initiative announced by Governor García Padilla on June 29, 2015, will affect the
island’s debt servicing is unclear at present.
Governor García Padilla had submitted a FY2016 budget that called for major decreases in public
spending, and aimed at achieving a balanced budget.13 The island’s lower chamber passed a
budget on June 22, 2015, and the Senate passed its version on June 25, 2015.14 A measure
reported by a conference committee was approved by both chambers on June 29, 2015.15 Senate
President Eduardo Bhatia was quoted as stating that “it is one of the most difficult budgets in the
history of Puerto Rico.”16
8
See FY2013 Economic Report to the Governor, Statistical Appendix, Table 29; http://www.gdbpr.com/economy/
documents/AE2013_T29.pdf.
9
Government Development Bank, Forbearance Agreement: Executive Version, August 14, 2014;
http://www.gdbpr.com/documents/BondholderForbearanceAgreementEXECUTED.pdf.
10
Edward Krudy, “Puerto Rico’s PREPA Upset with Creditors After Disclosure of Finance Plan,” Reuters, April 1,
2015; http://www.reuters.com/article/2015/04/02/usa-puertorico-prepa-idUSL2N0WZ05520150402.
11
PREPA, “PREPA’s Transformation” A Path to Sustainability,” June 1, 2015; http://www.aeepr.com/Docs/
RecoveryPlan.pdf. Also see Michelle Kaske, “PREPA Submits Recovery Plan as Creditors Say Talks Continue,”
Bloomberg Business, June 1, 2015 (updated June 2, 2015). Financial details of the restructuring plan were withheld
pending negotiations with creditors.
12
Center for a New Economy, Fiscal Situation Update, FY2014-2015 Budget, June 2014.
13The governor signed the measure into law
on July 1, 2015.14 The budget calls for total outlays of $9.8 billion, with $4.2 billion in funding
for government operations.
8
See FY2013 Economic Report to the Governor, Statistical Appendix, Table 29; http://www.gdbpr.com/economy/
documents/AE2013_T29.pdf.
9
Government Development Bank, Forbearance Agreement: Executive Version, August 14, 2014,
http://www.gdbpr.com/documents/BondholderForbearanceAgreementEXECUTED.pdf.
10
PREPA, “PREPA’s Transformation” A Path to Sustainability,” June 1, 2015, http://www.aeepr.com/Docs/
RecoveryPlan.pdf. Also see Michelle Kaske, “PREPA Submits Recovery Plan as Creditors Say Talks Continue,”
Bloomberg Business, June 1, 2015 (updated June 2, 2015). Financial details of the restructuring plan were withheld
pending negotiations with creditors.
11
PREPA, “PREPA Announced All Principal and Interest Due Has Been Paid to Bondholders,” press release, July 1,
2015. See also Gerardo E. Alvarado León, “AEE Paga a los Bonistas $415 Millones (PREPA Pays Bondholders $415
Million),” El Nuevo Dia, July 1, 2015, http://www.elnuevodia.com/noticias/locales/nota/
aeepagaalosbonistas415millones-2067350/.
12
Yennifer Álvarez Jaimes, “Renuncia Juan Alicea Flores a la AEE (Juan Alicea Flores Resigns from PREPA),” El
Vocero, June 23, 2015, http://elvocero.com/renuncia-juan-alicea-flores-a-la-aee/.
13
Center for a New Economy, Fiscal Situation Update, FY2014-2015 Budget, June 2014.
14
Office of the Governor, “Gobernador Firma Presupuesto para el Año Fiscal 2015-2016 (Governor Signs Budget for
FY2016)”, press release, July 1, 2015, http://www.fortaleza.pr.gov/content/gobernador-firma-presupuesto-para-el-ofiscal-2015-2016.
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Puerto Rico’s Current Fiscal Challenges: In Brief
Governor García Padilla had submitted a FY2016 budget that called for major decreases in public
spending, and aimed at achieving a balanced budget.15 The island’s lower chamber passed a
budget on June 22, 2015, and the Senate passed its version on June 25, 2015.16 A measure
reported by a conference committee was approved by both chambers on June 29, 2015.17 Senate
President Eduardo Bhatia was quoted as stating that “it is one of the most difficult budgets in the
history of Puerto Rico.”18
Whether the FY2016 budget for Puerto Rico would actually achieve a balanced budget is unclear.
The report of the ex-IMF economists stresses that the structural budget deficit, according to their
estimates, is larger than other measures of budget balance used by the Puerto Rican government.19
A structural budget deficit excludes effects of one-time budget adjustments or cyclical economic
effects. That report estimates annual interest and principal costs at $2.8 billion.
Governor García Padilla Calls for Debt Restructuring
Governor García Padilla, in a televised address on June 29, 2015, called for a comprehensive
restructuring of Puerto Rico’s fiscal obligations, arguing that the public debt had grown so large
that it was impeding economic growth as well as the island’s access to credit markets.20 The
governor outlined a fiscal strategy that included
•
reestablishment of economic growth through legislation to improve
competitiveness, a reform of social insurance programs, and investments in
infrastructure;
•
a call for a moratorium on debt payments;
•
creation of a working group for economic recovery composed of financial
experts and senior island policymakers; and
•
a long-term fiscal adjustment plan, to be developed by the working group by
August 30, 2015.
The fiscal adjustment plan, according to the governor, would propose reductions in public
outlays, improve tax administration, privatize some publicly provided services, improve
15
“Puerto Rico Gov Files $9.8B Budget That Calls for Deep Cuts,” Associated Press, May 20, 2015;
http://www.nytimes.com/aponline/2015/05/20/world/americas/ap-cb-puerto-rico-economy.html. See also the Puerto
Rican Governor’s Recommended Budget (Presupuesto Recomendado 2015-2016);, http://www2.pr.gov/presupuestos/
Presupuesto2015-2016/Pages/default.aspx.
1416
Michelle Kaske and Ezra Fieser, “Puerto Rico’s Senate Passes 2016 Budget in Preliminary Vote,” Bloomberg
Business, June 25, 2015;, http://www.bloomberg.com/news/articles/2015-06-25/puerto-rico-s-senate-approves-2016budget-in-preliminary-vote.
1517
La Resolucións Conjunta de la Cámara 747 and 748. See El Nuevo Dia, “Ajustan Presupuesto Ante Escenario de
Renegociación de la Deuda,” June 30, 2015;, http://www.elnuevodia.com/noticias/politica/nota/
ajustanpresupuestoanteescenarioderenegociaciondeladeuda-2066681/.
1618
Luis J. Valentín, “Puerto Rico House, Senate Seek Consensus on Final Budget Plan,” Caribbean Business, June 28,
(continued...)
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Whether the FY2016 budget for Puerto Rico would actually achieve a balanced budget is unclear.
The report of the ex-IMF economists stresses that the structural budget deficit, according to their
estimates, is larger than other measures of budget balance used by the Puerto Rican government.17
A structural budget deficit excludes effects of one-time budget adjustments or cyclical economic
effects. That report estimates annual interest and principal costs at $2.8 billion.
The finances of Puerto Rico’s public corporations present another major challenge. The island’s
publicly owned electric power utility has been negotiating with creditors since August 2014,
while certain debt payments have been stayed by a series of forbearance agreements. The current
agreement runs through June 30, 2015.18 The power utility, like the island’s central government,
faces large debt payments in the summer of 2015 that may be difficult to make and create strong
liquidity pressures on public finances.2015, http://www.caribbeanbusiness.pr/news/puerto-rico-house-senate-seek-consensus-on-final-budget-plan112726.html.
19
Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, Puerto Rico: A Way Forward, June 29, 2015, pp. 11-12.
20
El Nuevo Dia, “Mensaje del Gobernador Alejandro García Padilla Sobre Situación Fiscal de Puerto Rico,” June 29,
2015, http://www.elnuevodia.com/noticias/politica/nota/
mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico-2066574/.
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budgetary execution and controls, and create a nonpartisan fiscal commission, while guaranteeing
the provision of essential services.
Debt Service and Liquidity
The island’s ability to meet debt service payments depends in part on the willingness of investors
to roll over existing debt. The report of the ex-IMF economists asserted that the island was “now
virtually shut off from normal [credit] market access.”19 21
Puerto Rico had planned to issue about
$2.9 billion in bonds in 2015, but those plans were put on
hold. The García Padilla
Administration reportedly wanted to prepare the way for that bond issue
with a fiscal package
consisting of a tax reform to bolster revenues, a balanced budget for
FY2016, and a five-year plan
to achieve fiscal sustainability.20 22
The Puerto Rican legislature passed a measure to allow certain
public corporations to issue
revenue bonds, which may provide some measure of liquidity.2123 The governor signed the measure
into law on July 3, 2015, clearing the way for the issuance of about $400 million in tax and
revenue anticipation notes (TRANs) by three publicly owned insurance corporations.24 While
those notes would help the Puerto Rican government maintain access to liquidity during the first
part of the fiscal year, some policymakers expressed concerns that adding to the debt load of
those insurance companies could harm their soundness.
According to recent estimates, Puerto Rico’s government debt servicing costs—apart from debt
servicing costs of public corporations—are 13.8% of average annual internal revenues for the past
two years, not far below the 15% limit imposed by the Commonwealth’s Constitution.2225 If that
limit became binding, maintaining operations of the government could then require either further
fiscal adjustments or a constitutional amendment, which would require supermajorities in both
legislative chambers and a plebiscite.
(...continued)
2015; http://www.caribbeanbusiness.pr/news/puerto-rico-house-senate-seek-consensus-on-final-budget-plan112726.html.
17
Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, Puerto Rico: A Way Forward, June 29, 2015, pp. 11-12.
18
Joanisabel González, “Acreedores Darían Otra Oportunidad a la AEE (Creditors Will Give PREPA Another
Chance),” El Nuevo Dia, June 18, 2015; http://www.elnuevodia.com/negocios/finanzas/nota/
acreedoresdarianotraoportunidadalaaee-2062171/.
19
21
Krueger, Teja, and Wolfe, op. cit., p. 1.
20
The bonds would have been issued through the Puerto Rico Infrastructure Financing Authority (PRIFA). See Thomas
McLoughlin and Kristin Stephens, “Puerto Rico Credit & Market Update,” UBS Municipal Brief, December 15, 2014;
Robert Slavin, “Puerto Rico Gov. Lacks Budget for Annual Speech,” Bond Buyer, April 28, 2015; GDB, “Government
Development Bank for Puerto Rico Comments on Enactment of Act 29 of 2015,” March 17, 2015;,
http://www.gdbpr.com/documents/GDBCommentonAmendment.pdf.
2123
Petición de la Camera 2542 was passed by both chambers on June 29, 2015.
2224
Luis J. Valentín, “García Padilla Signs Bill to Raise $400M from Public Corporations, Suspend Monthly GO SetAsides,” Caribbean Business, July 3, 2015, http://www.caribbeanbusiness.pr/news/garcia-padilla-signs-bill-to-raise$400m-from-public-corporations-suspend-monthly-go-set-asides-113053.html. Also see Robert Slavin, “Puerto Rico
Governor Signs Cash and Spending Measure,” Bond Buyer, July 7, 2015; and Rebecca Banuchi, “Ajustan Presupuesto
Ante Escenario de Renegociación de la Deuda (Budget Altered Ahead of Proposed Renegotiation of the Debt),” El
Nuevo Dia, June 29, 2015, http://www.elnuevodia.com/noticias/politica/nota/
ajustanpresupuestoanteescenarioderenegociaciondeladeuda-2066681/.
25
Commonwealth of Puerto Rico, Financial Information and Operating Data Report, October 30, 2014. Estimates of
debt servicing costs are for July 31, 2014.
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Initiatives to Address Fiscal Challenges
Puerto Rico’s government has taken numerous steps over the past few years to realign revenues
and outlays, although those efforts have not closed the structural budget deficit. Those measures
include cutbacks to public pension systems, tax increases and tax administration reforms, and a
reduction in public sector employment. Figure 3 shows trends in public sector employment in
Puerto Rico since 1990. Since 2009, public sector employment has dropped by nearly a fifth.
Figure 3. Government Employment in Puerto Rico, 1990-2015
Thousands of Persons, Seasonally Adjusted
Source: Department of Labor, Bureau of Labor Statistics, series SMS72000009000000001.
Notes: Vertical axis scaled to show variation as clearly as possible. Y-axis begins at 225,000 persons.
Other fiscal austerity measures include reorganization of public school teaching staffs and school
closings, cancellation or postponement of salary and benefit increases, and reductions in transfers
to municipalities.2326 The government has also taken steps to bolster the financial condition of its
public corporations.
2326
Center for a New Economy, Fiscal Situation Update: Analysis of the Governor’s Budget Request for FY2015, pp. 9(continued...)
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Puerto Rico has modified its pension systems to increase future employee and employer
contributions, moved participants from defined benefit to defined contribution plans, and begun a
transition to higher retirement ages.27 The Supreme Court of Puerto Rico held that the
government’s rationale for the changes were insufficient to justify abrogation of certain
contractual rights of existing or retired teachers under the Teachers Retirement System. The court,
however, reaffirmed the government’s powers to modify pension programs in order to meet
pressing fiscal demands.28 Independent analysts note that funding ratios for the Puerto Rican
retirement systems remain low.29
On May 26, 2015, the Legislative Assembly passed and sent to the governor a measure to raise
the sales and use tax rate from 7% to 11.5%., which the governor signed into law on May 29,
2015.30 Of that rate, 1% is earmarked for local
governments.2431 In addition, the measure would
establish a Consumption Tax Transformation
Alternatives Commission,2532 which would be
charged with evaluating further changes in Puerto
Rico’s tax system, including a possible
transition to a value-added tax (VAT). Previously, a
proposal to replace certain sales taxes with a
value-added tax was voted down on April 30,
2015.2633 Puerto Rico had enacted Act 1 on January
15, 2015, which raised petroleum taxes,
contingent on implementation of broader tax changes,
and took other measures to strengthen the
financial condition of the Authority for Highways and Transportation.27
Fiscal Strategy and Outmigration
The precarious state of Puerto Rico’s public finances stems in part from prolonged economic
weakness. Economic growth was sluggish even before the 2007-2009 recession, and official
forecasts project continued slow growth. Previous analyses of the growth of Puerto Rico’s
economy have pointed to low employment and labor participation rates, an economic structure
shaped more by tax advantages than comparative advantages, and the effects of intensified global
competition.28
Those trends and associated economic challenges have prompted many Puerto Ricans to move to
the U.S. mainland, leading to population decline of about 1% per year over the past decade.
Figure 4 shows estimated trends for Puerto Rico’s resident population since 1950. One study
estimated that a third of those born on Puerto Rico now reside on the mainland and found that
migrants tended to be younger and less well educated compared to island population averages.29
(...continued)
10.
24
Transportation.34
27
Ellie Ismailidou and Maryellen Tighe, “Puerto Rico’s Pension Problem Treated on a Cash-flow Basis,” Debtwire,
July 25, 2014.
28
See John Mudd, “My Short Take on the Teachers Retirement Fund Opinion,” Muddlaw website, April 12, 2014. The
decision for the case (Asociación de Maestros de PR, et al., v. Sistema de Retiro de Maestros de PR) is available here:
http://www.scribd.com/doc/217729948/Sentencia-Retiro-Maestros.
29
Ismailidou and Tighe, ibid.
30
Act 72 of 2015.
31
Luis J. Valentín, “Tax Bill Approved by Legislature, Awaits Governor’s Signature,” Caribbean Business, May 27,
2015;, http://www.caribbeanbusinesspr.com/news/tax-bill-approved-by-legislature-awaits-governors-signature110958.html. The sales and use tax is also known as IVU, an acronym of Impuesto de Ventas y Uso.
25 Also see Ernst &
Young, “Puerto Rico Enacts Income Tax and Other Changes as Part of FY2016 Budget,” Global Tax Alert, June 8,
2015, http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert—Puerto-Rico-enacts-income-tax-and-otherchanges-as-part-of-FY2016-budget.
32
Comisión de Alternativas para Transformar el Impuesto al Consumo (CATIC).
2633
Ibid. and Gustavo Vélez, “La Nueva Ruta Sin el IVA (The New Path Without the VAT),” blog post, May 5, 2015;,
http://www.economiapr.com/la-nueva-ruta-sin-el-iva/. Also see Ernst and Young, “Puerto Rico House of
Representatives Votes Down Proposed VAT Bill by Narrow Margin,” May 7, 2015; also see http://www.ey.com/
Publication/vwLUAssets/
Puerto_Rico_House_of_Representatives_votes_down_proposed_VAT_bill_by_narrow_margin/$FILE/
2015G_CM5431_Indirect_PR%20House%20of%20Representatives%20votes%20down%20proposed%20VAT%20bill
%20by%20narrow%20margin.pdf. The measure was House Bill 2329 (Para crear la “Ley de Transformación al
Sistema Contributivo del Estado Libre Asociado de Puerto Rico” (For the creation of a Law for the Transformation of
the Contributive System of the Commonwealth of Puerto Rico).
2734
Eduardo San Miguel Tió, “Puerto Rico Governor Signs Petroleum-tax Increase into Law,” Caribbean Business,
January 15, 2015;, http://www.caribbeanbusiness.pr/news/puerto-rico-governor-signs-petroleum-tax-increase-into-law103300.html. The act also authorizes certain bond issues. Text of the law is available at http://www.oslpr.org/
legislatura/tl2013/tl_medida_print2.asp?r=P%20C2212&ult=1.
28
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Fiscal Strategy and Outmigration
The precarious state of Puerto Rico’s public finances stems in part from prolonged economic
weakness. Economic growth was sluggish even before the 2007-2009 recession, and official
forecasts project continued slow growth. Previous economic analyses of Puerto Rico’s economy
have pointed to low employment and labor participation rates, an economic structure shaped more
by tax advantages than comparative advantages, and intensified global competition.35
Those trends and associated economic challenges have prompted many Puerto Ricans to move to
the U.S. mainland, leading to population decline of about 1% per year over the past decade.
Figure 4 shows estimated trends for Puerto Rico’s resident population since 1950.
Figure 4. Puerto Rico Resident Population Trends
Estimates from 1950 through 2014
Source: U.S. Census Bureau, World Bank, and Government Development Bank.
Notes: U.S. Census Bureau population estimates are for July 1 of each year.
One study estimated that a third of those born on Puerto Rico now reside on the mainland and
found that migrants tended to be younger and less well educated compared to island population
35
Barry Bosworth and Susan M. Collins, “Economic Growth,” in Susan M. Collins, Barry P. Bosworth, and Miguel A.
Soto-Class, eds., The Economy of Puerto Rico: Restoring Growth (Brookings: Washington, DC, 2006), pp. 17-81;
Federal Reserve Bank of New York, Report on the Competitiveness of Puerto Rico’s Economy, 2012. Available in
English at http://www.newyorkfed.org/regional/puertorico/index.html.
29
Jaison R. Abel and Richard Deitz, “Population Lost: Puerto Rico’s Troubling Out-Migration,” Liberty Street
Economics, New York Federal Reserve Bank, April 13, 2015; http://libertystreeteconomics.newyorkfed.org/2015/04/
population-lost-puerto-ricos-troubling-out-migration.html.
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averages.36 Economic growth depends on productivity and the availability of resources such as
capital and
labor. By reducing the amount of labor available to the island economy, outmigration
poses risks
to future economic growth. Moreover, outmigration serves as a signal that some island residents
residents perceive that the mainland presents more attractive economic opportunities.
Figure 4. Puerto Rico Resident Population Trends
Estimates from 1950 through 2014
Source: U.S. Census Bureau, World Bank, and Government Development Bank.
Notes: U.S. Census Bureau population estimates are for July 1 of each year.
Potential Issues for Congress
Possible options for Congress to address the fiscal distress faced by the government of Puerto
Rico and its constituent public corporations are framed by the island’s status as a territory—
something different than a state and different from an independent sovereign country.3037 The
federal government has generally been reluctant to offer direct financial assistance to individual
states in fiscal distress, although Congress has at times has adjusted technical parameters of existing
federal federal
programs to provide direct or indirect support for states.31 The independence of state
30
For details, see CRS In Focus IF10241, Puerto Rico: Political Status and Background, by R. Sam Garrett; or CRS
Report R42765, Puerto Rico’s Political Status and the 2012 Plebiscite: Background and Key Questions, by R. Sam
Garrett.
31
Jonathan A. Rodden, Hamilton’s Paradox: The Promise and Peril of Fiscal Federalism (New York: Cambridge,
2006). Support for state governments and territories was included in the American Recovery and Reinvestment Act
(continued...)
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governments to determine38 The independence of state governments
to set their own fiscal paths has been linked to an expectation that those
governments take
responsibility for the consequences of their fiscal decisions. In some other
fiscal systems, the willingness of a central governmenta
central government’s willingness to cover shortfalls by state governments
has been seen as having
led to less prudent fiscal behavior. InCentral governments in some federal systems, the central
government provides provide
subnational governments with more support, but imposesimpose more intrusive
fiscal controls.
The Obama Administration has indicated that it is not contemplating a federal bailout of Puerto
Rico, but has provided technical support and has sought to make existing federal resources
available.3239 The report of the former IMF economists was framed in terms familiar to typical IMF
interventions, in which short-term bridge financing is provided conditional on agreements with
governments to address structural economic issues over a longer term.3340 Congressional options
might thus be divided between strategies to address imminent liquidity challenges, such as
providing credit support or altering bankruptcy laws, and strategies intended to promote
economic growth over the longer term.
Credit Support
Central governments and international organizations have at times stepped in to backstop debts of
other governments to lower those governments’ borrowing costs. Such support typically has been
linked to budgetary or structural reform requirements. For example, the European Central Bank in
2011 acted to support debt offered by Eurozone countries, which dramatically lowered borrowing
costs of countries that could have faced severe liquidity challenges.34 The U.S. government
provided credit guarantees for the Mexican government in 1994-1995.35 The U.S. government
also provided indirect credit support for many state government agencies through the Depressionera Reconstruction Finance Corporation (RFC). For instance, in 1941 the RFC acted as an
intermediary to roll over $136 million in debt for the State of Arkansas.36
Federal Health and Income Support Programs
Reimbursement and eligibility rules for federal entitlement programs in Puerto Rico often differ
from those in effect on the mainland. Congress could revise those reimbursement rules and
eligibility standards.
(...continued)
(ARRA; P.L. 111-5).
3241 The U.S. government
36
Jaison R. Abel and Richard Deitz, “Population Lost: Puerto Rico’s Troubling Out-Migration,” Liberty Street
Economics, New York Federal Reserve Bank, April 13, 2015; http://libertystreeteconomics.newyorkfed.org/2015/04/
population-lost-puerto-ricos-troubling-out-migration.html.
37
See CRS In Focus IF10241, Puerto Rico: Political Status and Background, by R. Sam Garrett; or CRS Report
R42765, Puerto Rico’s Political Status and the 2012 Plebiscite: Background and Key Questions, by R. Sam Garrett.
38
Jonathan A. Rodden, Hamilton’s Paradox: The Promise and Peril of Fiscal Federalism (New York: Cambridge,
2006). The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) included support for state governments and
territories.
39
White House Press Briefing, June 29, 2015; http://www.c-span.org/video/?326821-1/white-house-briefing.
3340
Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, Puerto Rico: A Way Forward, June 29, 2015, pp. 25-26.
34
See 41
CRS Report R42377, The Eurozone Crisis: Overview and Issues for Congress, coordinated by Rebecca M.
Nelson.
35
Joseph A. Whitt, Jr., “The Mexican Peso Crisis,” Federal Reserve Bank of Atlanta Economic Review,
January/February 1996, https://www.frbatlanta.org/filelegacydocs/J_whi811.pdf.
36
Jesse H. Jones, Fifty Billion Dollars: My Thirteen Years with the RFC (New York: Macmillan, 1951), p. 179.
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provided credit guarantees for the Mexican government in 1994-1995.42 The U.S. government
also provided indirect credit support for many state government agencies through the Depressionera Reconstruction Finance Corporation (RFC). For instance, in 1941 the RFC acted as an
intermediary to roll over $136 million in debt for the State of Arkansas.43
Federal Health and Income Support Programs
Reimbursement and eligibility rules for federal entitlement programs in Puerto Rico often differ
from those in effect on the mainland. For example, funding for the federal portion of Medicaid is
capped for U.S. territories, but is open-ended for states.44 The federal matching rate for Medicaid
ranges from 50% for states with the highest per capita income to 74% for the state with the lowest
per capita income, while the matching rate for Puerto Rico is set at 55%.45 Congress could revise
Medicaid matching fund formulas or eligibility standards. It could also modify reimbursement
rules or enrollment standards under Medicare, or adjust rules governing other federal programs,
such as the income support programs. Resident Commissioner Pierluisi introduced several bills
(H.R. 1225, H.R. 1417, H.R. 1418, H.R. 1822, H.R. 2635) in the 114th Congress to modify federal
health and income support programs to provide additional resources to Puerto Rico.
Restructuring and Bankruptcy
Under current law, Puerto Rico is generally considered a state for most provisions of the
Bankruptcy Code; but it is explicitly excluded from that definition for purposes of determining
those eligible to file under chapter 9, which sets out a process for consideration of debt relief
requests of instrumentalities of state governments.3746 Thus, subunits of Puerto Rico, such as those
public corporations, are barred from filing under chapter 9.
The restructuring law that Puerto Rico enacted in June 2014, which was in part motivated by the
financial situation of PREPA and other public corporations, was established with the aim of
providing an alternative to processes provided by the Bankruptcy Code. That law, however, was
struck down by a U.S. District Court.38 That decision was appealed to U.S. Court of Appeals for
the 1st Circuit.39
Congress could amend the Bankruptcy Code to remove this exclusion, thus enabling the Puerto
Rican government to allow its municipalities or other instrumentalities to file applications, and
thus enter a well-established process for restructuring public debts. Resident Commissioner
Pierluisi introduced H.R. 870 on March 16, 2015, which would allow Puerto Rico access to
chapter 9.40 Governor García-Padilla has also called for giving Puerto Rico access to chapter 9.41
Some hedge funds and other holders of Puerto Rican bonds, however, have opposed including the
island in chapter 9.4247 On July 6, 2015, the U.S. Court of Appeals for the 1st
Circuit affirmed the lower court’s ruling that federal bankruptcy provisions48 preempted Puerto
Rico’s ability to employ its own restructuring law.49
42
Joseph A. Whitt, Jr., “The Mexican Peso Crisis,” Federal Reserve Bank of Atlanta Economic Review,
January/February 1996, https://www.frbatlanta.org/filelegacydocs/J_whi811.pdf.
43
Jesse H. Jones, Fifty Billion Dollars: My Thirteen Years with the RFC (New York: Macmillan, 1951), p. 179.
44
Medicaid is a joint federal-state program that provides access to health care for low-income persons and includes
some long-term health care benefits.
45
CRS Report R43847, Medicaid’s Federal Medical Assistance Percentage (FMAP), FY2016, by Alison Mitchell. The
maximum statutory matching rate is 83%. Mississippi has the highest matching rate (74.17%).
46
11 U.S.C. §101(52). Also see CRS Legal Sidebar WSLG1289, Fiscal Distress in Puerto Rico: Two Legislative
Approaches, by Carol A. Pettit.
47
The consolidated cases are Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico and BlueMountain
Capital Management, LLC v. García-Padilla (case 3:14-cv-01569). The February 6, 2015, opinion and order is here:
http://www.noticel.com/uploads/gallery/documents/ed648d7e7839c5b66e556b14d3c639b3.pdf.
48
11 U.S.C. § 903(1).
49
Franklin California Tax-Free Trust et al. v. Commonwealth of Puerto Rico and Puerto Rico Electric Power Authority
et al.; opinion, docket items 15-1218, 15-1221, 15-1271, 15-1272 (consolidated), July 6, 2015,
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Congress could amend the Bankruptcy Code to permit Puerto Rico to allow its municipalities
(which include instrumentalities and subdivisions of the territory) to enter into chapter 9 and
proceed with a well-established process for restructuring public debts. To that end, Resident
Commissioner Pierluisi introduced H.R. 870 on March 16, 2015.50 Governor García-Padilla has
also called for giving Puerto Rico access to chapter 9.51 Some hedge funds and other holders of
Puerto Rican bonds, however, have opposed including the island in chapter 9.52 Interests of hedge
funds with major holdings of general obligation (GO) bonds, however, may differ from those of
funds holding bonds of the island’s public corporations that are not secured by a general
obligation of the Puerto Rican government.53
Structural Reforms in the Medium and Long Term
Congress could also encourage the Puerto Rican government to pursue economic development
strategies more in line with the island’s economic comparative advantages rather than its tax
advantages. Puerto Rico has long relied on special provisions in the U.S. tax code and in its own
tax laws to stimulate investment. Many of the tax advantages available to corporations or
subsidiaries located in Puerto Rico, such as Internal Revenue Code Section 936, which until it
was phased out between 1996 and 2005, essentially exempted income of U.S. firms operating in
U.S. possessions, have reduced the U.S. Treasury’s receipts.43 At present, the54 The IRS’s unwillingness
to to
challenge the creditability of Puerto Rico’s Act 154 taxes against U.S. tax liability provides
37
11 U.S.C. §101(52). Also see CRS Legal Sidebar WSLG1289, Fiscal Distress in Puerto Rico: Two Legislative
Approaches, by Carol A. Pettit.
38
The consolidated cases are Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico and BlueMountain
Capital Management, LLC v. García-Padilla (case 3:14-cv-01569). The February 6, 2015, opinion and order is here:
http://www.noticel.com/uploads/gallery/documents/ed648d7e7839c5b66e556b14d3c639b3.pdf.
39
Matthew Perlman, Puerto Rico Asks 1st Circ. to Revive Restructuring Law,” Law360, April 30, 2015;
http://www.law360.com/articles/650201/puerto-rico-asks-1st-circ-to-revive-restructuring-law.
40
Resident Commissioner Pierluisi introduced H.R. 5305 in the 113th Congress to the same end.
41
Governor García Padilla, Mensaje del Gobernador (Message of the Governor), June 29, 2015; text in Spanish
available here: http://www.elnuevodia.com/noticias/politica/nota/
mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico-2066574/.
42indirect support for the island’s public finances that is nearly offset by the loss of revenues
foregone by the U.S. Treasury. Puerto Rico’s Act 20 and Act 22, which provide certain tax
exemptions to wealthy persons who establish residency in Puerto Rico, may also affect U.S.
Treasury receipts.
Congress could also consider options that might address structural issues that may have hindered
Puerto Rico’s economic growth. Congress could consider several regulatory policies, such as
Jones Act restrictions on shipping between Puerto Rico and the mainland. Congress has already
waived Jones Act requirements for the U.S. Virgin Islands and could extend that waiver to Puerto
Rico.55 Several past studies have noted that labor participation rates for Puerto Rico are well
below those on the mainland. Some have suggested that social insurance or minimum wage
legislation may play a role in discouraging employment outside the underground economy.
(...continued)
http://media.ca1.uscourts.gov/pdf.opinions/15-1218P-01A.pdf.
50
Resident Commissioner Pierluisi introduced H.R. 5305, a similar bill, in the 113th Congress.
51
Governor García Padilla, Mensaje del Gobernador (Message of the Governor), June 29, 2015.
52
Testimony of Thomas Mayer, Partner of Kramer Levin Naftalis and Frankel LLP, in U.S. Congress, House
Committee on the Judiciary, H.R. 870, the “Puerto Rico Chapter 9 Uniformity Act of 2015,” 114th Cong., 1st sess.,
February 26, 2015; http://judiciary.house.gov/?a=Files.Serve&File_id=B7832791-B261-4FD8-ADC4-5A4117A52339.
43
CRS Report RS20695, The Puerto Rican Economic Activity Tax Credit: Current Proposals and Scheduled Phaseout,
by David Brumbaugh (out of print; available upon request).
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indirect support for the island’s public finances that is nearly offset by the loss of revenues
foregone by the U.S. Treasury. Puerto Rico’s Act 20 and Act 22, which provide certain tax
exemptions to wealthy persons who establish residency in Puerto Rico, may also affect U.S.
Treasury receipts.
Congress could also consider options that might address structural issues that may have hindered
Puerto Rico’s economic growth. For instance, Congress could consider several regulatory
policies, such as Jones Act restrictions on shipping between Puerto Rico and the mainland.
Congress has already waived Jones Act requirements for the U.S. Virgin Islands and could extend
that waiver to Puerto Rico.44 Several past studies have noted that labor participation rates for
Puerto Rico are well below those on the mainland. Some have suggested that social insurance or
minimum wage legislation may play a role in discouraging employment outside the underground
economy.
Author Contact Information
D. Andrew Austin
Analyst in Economic Policy
aaustin@crs.loc.gov, 7-6552
44
CRS Report R43653, Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues, by John
Frittelli.
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53
See Michael Corkery, “Let Us Help You, Hedge Funds Tell Puerto Rico,” New York Times, September 12, 2014,
http://dealbook.nytimes.com/2014/09/12/puerto-rico-finds-it-has-new-friends-in-hedge-funds/.
54
CRS Report RS20695, The Puerto Rican Economic Activity Tax Credit: Current Proposals and Scheduled Phaseout,
by David Brumbaugh (out of print; available upon request).
55
CRS Report R43653, Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues, by John
Frittelli.
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Author Contact Information
D. Andrew Austin
Analyst in Economic Policy
aaustin@crs.loc.gov, 7-6552
Congressional Research Service
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