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The Economic and Financial Crisis in Puerto Rico: a Packet of Background Documents

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The Economic and Financial Crisis in Puerto Rico: a Packet of Background Documents THE ECONOMIC AND FINANCIAL CRISIS IN PUERTO RICO: A PACKET OF BACKGROUND DOCUMENTS This packet of background documents will provide the reader with some insights on the current debacle—the economic and financial crisis—in Puerto Rico and on what should be done once the debt crisis has been resolved. It includes materials prepared by independent researchers/analysts as well as the report of the bipartisan Congressional task force, established under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), enacted on June 30, 2016. In addition to the ―Introduction and Oversight‖ on the following pages,* the packet includes the following items, which can be obtained online as indicated: 1. ―Puerto Rico: Continuing Socio-Economic Deterioration and the Need for Change‖ (October 2012) [will be available in late May at http://jdintl.econ.queensu.ca/discussion-papers/] 2. ―Puerto Rico‘s Economic Debacle: Correctly Blame Washington‖ (April 2016) [will be available in late May at http://jdintl.econ.queensu.ca/discussion-papers/] 3. ―Should the U.S. Government Do More? Why Puerto Rico‘s Economic Conditions Matters to the United States‖ (February 2017) [will be available in late May at http://jdintl.econ.queensu.ca/discussion-papers/] 4. ―Making Puerto Rico a State: A Win-Win Opportunity‖ (April 2017) [will be available in late May at http://jdintl.econ.queensu.ca/discussion-papers/] 5. ―Reviving the Puerto Rican Economy Requires A Big Push of Public Infrastructure Investment‖ (August 2016) [https://www.finance.senate.gov/imo/media/doc/Arthur%20MacEwan%20and%20J.%20Tomas% 20Hexner%20(Submission%205).pdf] 6. ―Puerto Rico: Quantifying Federal Expenditures‖ (August 2016) [https://www.finance.senate.gov/imo/media/doc/Arthur%20MacEwan%20and%20J.%20Tomas% 20Hexner%20(Submission%204).pdf] 7. Congressional Task Force on Economic Growth in Puerto Rico: Report to the House and Senate (December 2016) [https://www.finance.senate.gov/imo/media/doc/Bipartisan%20Congressional%20Task%20Force %20on%20Economic%20Growth%20in%20Puerto%20Rico%20Releases%20Final%20Report.pd f] 1 The Economic and Financial Crisis in Puerto Rico: A Packet of Background Documents Volume I J. Tomas Hexner President of Hex, Inc. Founder and director, Science Initiative Group at the Institute for Advanced Study at Princeton, New Jersey Arthur MacEwan Professor Emeritus of Economics at the University of Massachusetts Boston Other Authors Development Discussion Paper: 2017-16 ABSTRACT This packet of background documents will provide the reader with some insights on the current debacle—the economic and financial crisis—in Puerto Rico and on what should be done once the debt crisis has been resolved. It includes materials prepared by independent researchers/analysts as well as the report of the bipartisan Congressional task force established under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), enacted on June 30, 2016. In addition to this ―Introduction and Oversight,‖ the packet includes the items listed on the cover page; the sites where each can be obtained online are also on the cover page.* JEL classification: O1, O2, Z32 2 THE ECONOMIC AND FINANCIAL CRISIS IN PUERTO RICO: A PACKET OF BACKGROUND DOCUMENTS Volume I 1. ―Puerto Rico: Continuing Socio-Economic Deterioration and the Need for Change‖ by J. Tomas Hexner and Arthur MacEwan - October 2012 2. ―Puerto Rico‘s Economic Debacle: Correctly Blame Washington‖ by J. Tomas Hexner and Arthur MacEwan - April 2016 3. ―Should the U.S. Government Do More? Why Puerto Rico‘s Economic Conditions Matters to the United States‖ by J. Tomas Hexner and Arthur MacEwan - February 2017 4. ―Making Puerto Rico a State: A Win-Win Opportunity Working‖ by J. Tomas Hexner and Arthur MacEwan - April 2017 5. ―Reviving the Puerto Rican Economy Requires A Big Push of Public Infrastructure Investment‖ by J. Tomas Hexner and Arthur MacEwan - August 2016 6. ―Puerto Rico: Quantifying Federal Expenditures‖ by J. Tomas Hexner and Arthur MacEwan - August 2016 7. Congressional Task Force on Economic Growth in Puerto Rico: Report to the House and Senate - December 2016 3 INTRODUCTION AND OVERVIEW By 2012, if not earlier, the emerging economic crisis of the Puerto Rican economy was there for all to see. The first item in this packet, ―Puerto Rico: Continuing Socio-Economic Deterioration and the Need for Change,‖ was released in October of that year and describes the dire situation in some detail. The Puerto Rican recession, still ongoing in 2017, was in its sixth year, the unemployment rate had risen to 15.2% even while the labor force participation rate had fallen to 41.8%, gross domestic fixed investment had dropped to 15.1% of GNP (from 28.6% in 2000), and Puerto Ricans by the tens of thousands were departing to the states in search of employment and better economic lives.1 The Puerto Rican government was building an unsustainable level of public debt. In 2012, public debt stood at $64.8 billion, 95% as large as GNP, up from the already high of 69% of GNP when the recession emerged in 2006. The 2012 public debt amounted to $17,763 per person, greater than the per capita personal income that year of $16,966.2 What‘s more, the government was failing to meet its obligations to public pension funds, building up tens of billions of dollars debt to those funds. Since the onset of the recession, the Puerto Rican governments attempted to deal with its extreme debt burden and the weakening economy—which meant weakening tax collections—by austerity measures cutting government employment and expenditures. Between 2005, when the decline first * This ―Introduction and Overview‖ will be available in late May online at http://jdintl.econ.queensu.ca/discussion- papers/. 1 Unless otherwise indicated, data in this report are from Junta de Planificación, Informe Económico al Gobernador Puerto Rico, various years. 2 The ratios of debt to personal income and population are much larger than the similar ratios for any state. For example, in 2012, all states had debt to personal income ratios less than 10%, and in 2016 no state had a higher debt per capita than Connecticut, for which the figure was $6,155. (Debt per capita figures are not readily available for 2012.) The state figures are from Moody‘s Investor Services, State Debt Medians 2016, 6 May 2016. 4 appeared, and 2012, real government final consumption spending fell by 12% and dropped from 18.35% of GNP to 15.84% of GNP, even as GNP was falling. Thus, the government actions were contributing to the decline. Not surprisingly, bond rating agencies, which had already downgraded Puerto Rican bonds, downgraded them further by the end of 2012. Yet, beyond the bond companies and active bond investors, in the states little attention was given to the rising Puerto Rican economic and financial crisis. Front Page News By 2015 and 2016, however, Puerto Rico‘s economic debacle was front page news, and details and analysis were regular features on business pages. Not much had changed in Puerto Rico beyond simply continuation of the decline. GNP (inflation adjusted) fell by 3.6% between 2012 and 2016, and the Government Development Bank‘s Economic Activity Index fell by close to 8%. The unemployment rate did come down to 11.8% in 2016, but the labor force participation rate had dropped to 40.2. And the exodus had continued, with a population drop of 223 thousand, 6.1%, in this four year period. The public debt was virtually the same in 2016 as in 2012, as Puerto Rico had been largely excluded from the bond market, but the government‘s ability to pay continued to fall. What had changed, however, was the recognition that the Puerto Rican government was unlikely to repay its debts. In late June, 2015, Puerto Rico‘s Governor Alejandro García Padilla announced, ―The debt is not payable. There is no other option. I would love to have an easier option. This is not politics, this is math." A Puerto Rican default would be costly for several U.S. investment funds and many U.S. individual investors and could bring instability to the whole municipal bond market. Under this financial threat, as well as the emerging financial crisis in Puerto Rico itself and the impact of Puerto Rican migration to the states (focused especially in a few states), Congress began to pay 5 attention. The outcome was the enactment on June 30, 2016 of the Puerto Rico Oversight, Management, and Economic Stability Act—PROMESA. As described by the Speaker of the House, Representative Paul Ryan, the Act ―addresses the fiscal crisis in Puerto Rico and prevents a bailout for the island… The goals of PROMESA are to protect American taxpayers, stop Puerto Rico‘s debt crisis from becoming a major humanitarian disaster, and put Puerto Rico on a path to recovery.‖3 PROMESA established an Oversight Board to in effect control the Puerto Rican government‘s fiscal policy. It also created a Revitalization Coordinator, appointed by the Governor from a list of nominees provided by the Oversight Board. The Coordinator would have control over the selection and implementation of infrastructure projects, which are seen in PROMESA as an important foundation of economic recovery. As to the public debt, PROMESA provided for the Puerto Rican government and the creditors to undertake negotiations to restructure the debt. And, most important, PROMESA established a temporary stay on litigation by creditors concerning payment on their bonds against the Puerto Rican government. Originally, this stay would have last until February 15, 2017. However, the termination of the stay was extended by the Oversight Board to May 1, 2017. Furthermore, if voluntary negotiations did not reach a resolution of the situation, Title III of PROMESA provided the possibility for Puerto Rico to enter a bankruptcy-type situation.
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