‘One day after President Obama signed H.R. 5278, known by its Spanish acronym PROMESA, as a legislative tool to begin fixing Puerto Rico’s fiscal and economic problems, the government of Puerto Rico finally published the audited financials that the US Congress had been asking for since early last year. More than a year late, the audited financial report gives us a clear indication of the financial position of the government after fiscal year 2013-2014, and the prognosis of our public finances are not good. The reports show us a government that cannot keep its future promises, spending too much and not collecting enough revenue to keep functioning. Furthermore it reveals in the short term this is a liquidity crisis (cash flow problem) rather than a solvency crisis (not enough assets to cover the liabilities).
The audited financial reports include a statement of net position for governmental and business type activities, which encompasses the entirety of commonwealth assets, the basic services it provides, deferred outflows of resources, and liabilities and deferred inflows of resources. All appear to be deteriorating.
The report reveals that for fiscal year 2012-2013, the net position was a deficit of $47.7 billion while in fiscal year 2013-2014, the net position was a deficit of $50.4 billion, an increase of over $2.7 billion. This increase in the deficit position is due to higher operating expenses outstripping operational revenues, and because of increases in the commonwealth’s liabilities, such as bonds and notes, net pension obligations, legal claims, etc. The expenses of the commonwealth’s governmental activities, which includes the general fund budget,federal transfers and COFINA funds were $20.8 billion, compared with $17.8 billion in revenues, despite a growth in revenues by $1.6 billion, leaving a deficit of $2 billion. This deficit has been filled by more and more debt, as the report highlights: “For more than a decade, the Commonwealth had significant deficiencies of revenues under expenditures (including debt services) that were mainly funded through issuances of bonds and lines of credits.”
In the general fund budget, which funds the operations of the three branches of government, expenses were $9.2 billion, excluding the servicing of general obligation debts, while revenue was $8.7 billion. This represents a 7% decline in the original budgeted revenue figures. Moreover, the expenditure of $9.2 billion is approximately $400 million less than budgeted by the government, but it represents an increase of around $228 million from the last fiscal year budget. If the debt service payments of around $700 million are added, it leaves a large gap of $1.2 billion within the general fund budget.
The report correctly states the difficulty of bringing the deficit under control: “The Commonwealth’s ability to continue reducing the deficit will depend in part on its ability to continue increasing revenue and reducing expenditures in the face of rising debt service and pension obligations, which in turn depends on a number of factors, including improvements in general economic conditions.”
The most startling part of the report is the severity of the upcoming pension system crisis. The report states that the employee retirement system, the judicial retirement system and the teacher’s retirement system will run out of funds between 2018 and 2019, meaning the assets they currently have cannot meet the obligations of the system, making the pension system insolvent. This may force the pension system into a “pay as you go” approach, as neither current employees nor the government are contributing enough to meet the cost of future payouts. It is important to point out that the financial statements still claimed a positive net position to the pension funds of $1.8 billion in 2014.‘