Saturday, February 6, 2016

A Federal Fiscal Board is a great opportunity for Puerto Rico to regain its government's institutional capacity

The Benefits of a Federal Fiscal Board for Puerto Rico
by Jose Oyola,
El Nuevo Día, February 3, 2016

Politicians and analysts have expressed outrage at the congressional proposal to establish a Fiscal Control Board. It is true that the Board will temporarily reduce Puerto Rico's fiscal autonomy, but it is also a great opportunity to regain its government's institutional capacity, lost beginning in the 1970s.

According to Congressman Sean Duffy: "I do not care the name the Legislature wants to give to a park, I do not want the Council to get into that. I designed it to be limited to the collection of taxes, finance and budget. That's where the problem lies."

Governors in Puerto Rico know what needs to be done to strengthen the capacity to collect taxes and have published timely financial statements in the past. Not so long ago the Legislature approved honest, balanced budgets. If we know how to do them, why we need a Fiscal Board to carry out these three essential components of good governance?

The Board will provide two essential elements to overcome the crisis: credibility and capacity to act. Local politicians lost their credibility and ability to implement transparent and fair fiscal measures, adjusted to Puerto Rico's new economic reality. The credibility of the Fiscal Board is necessary to regain the confidence of investors in the Government of Puerto Rico and convince them to provide the essential financing to overcome its current liquidity crisis.

The ability to act will allow the Board to make budget adjustments quickly, fairly and transparently. Major changes the Board will be able to implement quickly include increasing revenues without raising taxes, reducing the enormous tax evasion. There is consensus that the local Treasury, known as Hacienda, needs a significant increase in its budget and a qualitative change in its organizational structure, but it can not complete its ongoing modernization without the support of a Federal Control Board, for at least five years.

The Control Board will help restore fiscal and financial transparency by establishing standards and assigning resources to promptly publish the audited financial statements, no later than six months after the end of each fiscal year.

The Board will restore access to capital markets, regaining the reputation painstakingly built under the

Administrations of Rexford Tugwell and Luis Munoz Marin. Puerto Rico will be known again as an issuer who honors fully its existing and new obligations. This change in financial policy would be enough to open capital markets and allow a successful, consensual debt restructuring.

The Board will radically change the unhealthy fiscal rules that have existed in Puerto Rico for decades, which allow inflated revenue estimates to "balance" budgets. The Board will establish budgetary rules that will help the Governor and the Legislature to develop realistic estimates of revenue and expenditure, which will by certified by external experts.

The Board will eliminate the practice of overestimating income before the start of a fiscal year, as happened with the $9,800 million budget in fiscal 2015. The Board will not approve borrowings to finance structural operating deficits.

The Board will establish rules to prevent future secretaries of Hacienda to "give away the house," negotiating temporary tax breaks to large taxpayers in order to balance current deficits with future revenues.

The Board can not do everything. Its main objective will not be to prepare a detailed economic development plan. But the Board will have an immediate impact on economic growth, removing the uncertainty on the financial and fiscal sustainability of the government, which is main cause of the high cost of interest on the public debt. There will be an immediate effect on fiscal health, reducing the cost of servicing the debt, freeing up resources for economic development.

Dr. Jose Oyola,  is Advisor On Public Debt Management Auditing