Government

Government

  • A new government will take over in January, under the Popular Democratic Party, as a result of November’s general elections.
  • The credit and fiscal situation of the central government suffers another blow, as Moody’s lower again the credit rating of its debt.

Overview

In July 25th, 1952 the Constitution of the Commonwealth of Puerto Rico was adopted and served as basis for the establishment of the government of Puerto Rico. The three bodies that share governing duties are: the Legislature which consists of a House of Representatives and a Senate; the Executive branch, composed by a governor and his cabinet; and the Judiciary, which consist of a Supreme Court and several lower courts. Puerto Rico also has local administrations, known as municipalities, with representatives elected every four years at the same time as the general elections. The island is divided into 78 municipalities, each headed by a Mayor and a Municipal Assembly.

Puerto Rico’s relationship with the United States is defined in the Federal Relations Statute of 1917. Under its terms, the federal government handles foreign relations, defense, and the postal, immigration and customs services. Puerto Rico trades in U.S. currency and is part of the U.S. domestic market. U.S. citizenship was extended to all inhabitants of the Island, and Puerto Ricans obtained the right to one representative –known as Resident Commissioner– in the U.S. Congress. This representative sits on the House where he has a voice, can vote in committee, but not in the floor. In 1952, a Constitution was enacted, which provides the legal and political framework for the local government.

The government and the economy

Besides constitutional and political differences with respect to the States, there are certain differences in the economic area, which makes the role of the government more important in Puerto Rico. One of the most visible one is that in employment. Historically, the share of government in total nonfarm employment has been high.¹ Although the share has declined somewhat during the past several years, it is today at a similar level to that in 2004. Although government employment had decreased over the last three years, it has been growing consistently since the last quarter of 2011.

Between 2008 and 2012, public employment declined by 32,000 jobs. This reduction accounted for 35% of the total job losses during the period. During 2012 (up to July), public employment increased from last year, to 252,600 jobs, a trend attributed to the elections.

Besides in employment, another indicator of importance is that government spending account for 16.4% of the island’s GNP, a share higher than that of gross fixed domestic investment (15%).²

Recent Developments

Fiscal year 2012 will end with a structural deficit of $1.5 billion and the incoming fiscal year 2013 will have a somewhat smaller budget (General Fund) with a deficit of some $333 million.³ Prospects for 2013 are uncertain since a major source of fiscal income, Law 154 taxes, will almost certainly decrease due to the fact that it s on a sliding scale that will end at “0” in 2016.

Government revenues had remained robust, as receipts from the special excise tax on foreign corporations increased more than expected, accounting for 18% of total net revenues. But there are worrying trends. During the first four months of the year, net revenues increased at an annual rate of only 3.6%, as receipts in April declined 11% from same month of 2011, including those from the special excise tax.

The other key issue is that of the public debt. The level of public debt has increased considerably, from $36.7 billion in 2005, to $64.3 billion in 2011, with the ratio of public debt to GNP rising to 100.3% from 68.3% in 2005. Debt payment will take 14% of the consolidated budget in fiscal 2013, translating into less money for other needed expenditures.

Outlook

The government will continue to face two key downside risks: the outlook on the negative side of its financial situation, and very low real economic growth.

The Government has managed so far to continue to place debt in the municipal-bond market, but at a higher yield, lately an average of 5.1%.

In early May of this year, Fitch degraded the classification of the bonds of the Housing Financing Authority, a subsidiary of the Government Development Bank, from A+ to A, still favorable but with a negative outlook. Then in early June, Standard & Poor’s, although maintaining its credit rating of BBB revised its outlook on Puerto Rico’s general obligations to negative from stable, based on what they consider is “a challenging economic and fiscal environment,” with the potential of delaying balanced budgets.

According to recent estimates from the P.R. Planning Board, after an accumulated contraction in real growth of 13% between 2007 and 2011, the economy is expected to move to positive territory with real GNP growth of 0.9% in fiscal 2012 and slightly higher to 1.1% in fiscal 2013. This growth would still not be sufficient to impact unemployment and government revenues. This means that fiscal uncertainty will remain.

1. Federal government excluded. One has to bear in mind that in Puerto Rico the central government has assumed certain social and economic responsibilities that the states have not. For instance in education, provision of key utilities, and in promoting economic development.

2. Data is for fiscal year 2011. Government expenditures do not include public investment, which is included in GFDI.

3. This is the part of the consolidated budget that corresponds to the central government. The total consolidated budget for fiscal 2013 will amount to $28.6 billion, about $1.3 billion less than in fiscal 2012.

4. A comparable Treasury is yielding 3.10%. Income from Puerto Ricans bonds is tax-exempt from federal, state and local taxes.

5. Fitch degrada los bonos de la Autoridad para el Financiamiento de la Vivienda, Sin Comillas (May 18, 2012).

6. Standard & Poor’s (2012). Outlook On Puerto Rico Revised To Negative From Stable On Budget Imbalance (June 6th)

7. P.R. Planning Board (2012). Perspectivas Para los Años Fiscales 2012 y 2013. San Juan (April).

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