Future Retirement Success
  • Politics
  • Business
  • Investing
  • Stocks
  • Politics
  • Business
  • Investing
  • Stocks

Future Retirement Success

Investing

To Reach Statehood, Puerto Rico Should Improve its Financial Practices

by January 2, 2024
January 2, 2024
To Reach Statehood, Puerto Rico Should Improve its Financial Practices

Marc Joffe

With bankruptcy largely (but not totally) in the rearview mirror, Puerto Rico’s leaders are turning their focus once again to the island’s status. Many favor statehood, but that will require building support in Washington, DC. To increase the chance of Congress, the president, and states agreeing to admit Puerto Rico, the governor and legislature should consider a variety of pro‐​market fiscal reforms.

Mainland‐​based fiscal conservatives may be concerned about admitting a new state that does not have good credit. The last time one of the fifty states defaulted on a bond was ninety years ago. Indeed, there is no state bankruptcy process, and a lot of domestic opposition to creating one, so a future State of Puerto Rico should be fully out of bankruptcy court and able to avoid future bankruptcies on its own.

Puerto Rico required a bankruptcy process because it accumulated too much debt. By contrast, the fifty states have relatively little debt relative to their GDP. States generally do not borrow to cover operational costs, because 49 out of 50 of them have constitutional balanced budget requirements.

The 1952 Puerto Rico territorial constitution was also supposed to have a balanced budget requirement, but it was effectively voided due to a translation error. While the English version of the constitution limited Commonwealth expenditures to “total revenue,” this was translated as “recorsos totales” rather than “ingresos totales”. That led to a 1974 Attorney General opinion authorizing Puerto Rico to “balance” its operational budget with bond proceeds.

In the aftermath of the bankruptcy, Puerto Rico should amend its constitution to make clear that expenditures cannot exceed tax revenues, service charges, and grant funds. No other category of receipt should be considered when determining whether the Commonwealth’s budget is balanced.

The legislature could also consider other constitutional reforms to improve Puerto Rico’s fiscal sustainability. For example, South Carolina’s constitution requires a seven percent general fund reserve, while Colorado limits spending growth to the rate of population increase and price inflation combined.

Constitutional reform will increase the possibility of Puerto Rico being able to return to the municipal bond market, as potential investors see fiscal responsibility measures baked into the Commonwealth’s foundational document. Puerto Rico needs to become creditworthy because that is a requirement for winding down the Oversight Board and returning to normal governance.

Another financial practice watched by the bond market is the timeliness with which issuers produce their audited financial statements. On this score, Puerto Rico needs to improve. While most states produced their 2021 audits within 250 days of fiscal year‐​end, Puerto Rico took 712 days.

The 2022 audit may appear in January, about 570 days after the fiscal year ended. This is an improvement but still worse than the vast majority of states, and longer than normally required by the federal government (nine months) and municipal bond market practice (six months). The Treasury Department should continue efforts to accelerate Commonwealth financial reporting while ensuring that auditors have the necessary information to render a clean opinion.

Further, Puerto Rico needs to fully conclude the current bankruptcy process by reaching an agreement with a larger group of PREPA (Puerto Rico Electric Power Authority) creditors. A recent plan of adjustment offered an average recovery of 25 cents on the dollar, with some creditors potentially receiving as little as 12.5 cents. While PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act) supporters, like this author, recognized that lenders would have to take a haircut, the current plan amounts to a scalping.

Since institutional investors in the municipal bond market will be among those determining whether Puerto Rico is once again creditworthy and thus able to emerge from oversight, it is not in the Commonwealth’s long‐​term interest to alienate them. Instead, the legislature should find more money to settle with PREPA (Puerto Rico Electric Power Authority) creditors by cutting other spending or using reserves.

Finally, the Commonwealth should actively monitor the credit of municipios and state‐​owned enterprises. Defaults and bankruptcies among these entities will cast a pall on public credit across the island and should be avoided through early identification and intervention. North Carolina, Ohio, New York, and Michigan offer various models of local government oversight. The monitoring effort could be reduced by streamlining the Commonwealth’s public sector through consolidation of smaller municipios and privatizing more state‐​owned enterprises.

Since passing PROMESA, the US federal government has provided extensive hurricane relief and pandemic‐​related funding. It is now up to Puerto Rico to improve its financial practices to show that it can be a solvent member of the union, able to shoulder the responsibilities normally expected of US states.

This article originally appeared in Spanish in the Puerto Rico newspaper El Nuevo Día on December 29, 2023.

0
FacebookTwitterGoogle +Pinterest
previous post
Recent Articles Highlight Jones Act Contributions to Offshore Wind Difficulties
next post
Technology Shares PLUNGE to Kick Off 2024

You may also like

It Is Time for the Fed to Cut...

July 15, 2024

With Fewer People, Puerto Rico Should Consider Municipal...

May 15, 2023

Kamala Harris and the PRO Act: A Bad...

November 4, 2024

Itinerant Baseball Team May “Need” More Taxpayer Funds

December 9, 2024

Most People Want Teacher-Led Prayer in Public Schools—It’s...

June 26, 2025

The Xylazine Scourge Widens

July 17, 2024

Bankruptcy — Gradually, Then Suddenly?

September 6, 2023

Glacier Northwest v. Teamsters: The Supreme Court Gets...

June 1, 2023

A New, Depressing Survey on Inflation

July 21, 2023

Modi Is Down, But Not Out

June 5, 2024

    Get free access to all of the retirement secrets and income strategies from our experts! or Join The Exclusive Subscription Today And Get the Premium Articles Acess for Free

    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • How Staff Can Strengthen HIPAA Compliance and Security

      June 29, 2025
    • Lotus denies plans to close Hethel factory amid US expansion talks

      June 29, 2025
    • Top university degrees lose sway as tech employers prioritise job-ready skills

      June 29, 2025
    • Government urges supermarkets to make healthy food more appealing in bid to tackle obesity crisis

      June 29, 2025
    • Senate Republicans ram Trump’s ‘big, beautiful bill’ through key test vote

      June 29, 2025
    • Chief Justice Roberts sounds alarm on dangerous rhetoric aimed at judges from politicians

      June 29, 2025

    Categories

    • Business (8,334)
    • Investing (2,081)
    • Politics (15,853)
    • Stocks (3,177)
    • About us
    • Privacy Policy
    • Terms & Conditions

    Disclaimer: futureretirementsuccess.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2025 futureretirementsuccess.com | All Rights Reserved