5.26.2007

PR: Careening towards an abyss as dark and deep as the Puerto Rico Trench

Puerto Rico's economic disaster has again been confirmed with this week's announcement that the island's general obligation debt was downgraded to near junk status. The island will now pay significantly more when it refinances $1.5 billion in bonds next week and for a long time to come without immediate reforms.

Stagnant employment growth, a 10.1% official unemployment rate and a projected decline in economic production this year have limited Puerto Rico's efforts to boost revenue after implementing a new 5.5% sales tax. The island government's debt load, already high by S&P's standards at $5,789 per person, will probably increase.

What measures is Puerto Rico taking to dig itself out of this deep hole? It appears not much. If anything, it looks like the plan will ensure a greater fiscal mess into the distant future.

Below is the Puerto Rico government's plan of inaction. Consider what would happen if you tried any of this with your finances.

- While its massive spending (including municipalities and authorities) is estimated at about $28 billion this year, the government's fiscal plan calls for finding savings of only $605 million, or a measely 2 percent in spending.

- It seeks to raise revenues from a series of undisclosed temporary taxes.

- It plans to delay payments to suppliers

- It will put off repayment of a loan by the Government Development Bank.

Wow!

Now consider the fiscal condition of some of Puerto Rico's mainland competitors. Miami has a AA- bond rating. Phoenix has an awesome AAA rating. Sprawling Los Angeles has a AA rating. And New York City's is AA-. All are of investment grade.

It's so unfortunate that Puerto Rico's political leaders are asleep at the wheel as the island's economy hurls towards an abyss as deep and dark as the Puerto Rico Trench.