Lessons from Puerto Rico
“We have a lot to learn from Puerto Rico,” Gov. Eddie Calvo said following the sister territory’s recent referendum, which yielded an overwhelming vote in favor of statehood.
It’s not just from Puerto Rico’s self-rule exercise that Guam is expected to learn a lesson. Puerto Rico is beset by an incredible crisis. The commonwealth government has amassed $73 billion in debt that it does not have the capacity to repay. Its infrastructure is crumbling and its health care system is ailing. Almost 70 percent of Puerto Ricans rely on either public health care programs.
Rather than blaming the feds or pleading its colonial status to justify its failures, — which, incidentally, is Guam’s favorite political balderdash when things go wrong—Puerto Rico Governor Ricardo Rosselló bravely accepts responsibility for his government’s overspending and borrowing its way into bankruptcy. Statehood is Puerto Rico’s salvation.
From economic standpoint, Governor Calvo said, Guam is in a much better position than Puerto Rico. In which case, he added, Guam voters can make decisions without duress.
But whether the governor is taking a cue from Puerto Rico’s cautionary tale is open to question. Now on his last term in office, Governor Calvo is making his new pitch for a $125-million bond borrowing and gross receipts tax raise to bankroll the Guam Memorial Hospital Authority capital improvement projects. He is proposing to raise the GRT from 4 percent to 4.75 percent, which we all know will be passed on by business owners to consumers.
In its Dec. 22, 2015 report, Fitch Ratings highlighted GovGuam’s binge borrowing legacy. The agency characterized Guam’s long-term liabilities as “exceptionally high”—a red flag that contributed to Fitch Ratings’ decision to demote the government of Guam’s $763.3-million business privilege bonds from A-minus to BB. “Guam has limited gap closing capacity and would likely experience fiscal distress in a moderate downturn. It has had difficulty reaching budgetary balance even during this extended period of economic expansion,” the rating agency said
Governor Calvo may continue to swagger about Guam’s strong economic growth but Fitch Ratings has warned that such blessing is negated by the government’s inability to sustain a structurally balanced budget due to a “very long trend of weak financial operations and high debt levels.”
Based on Guam Economic Development Authority’s September 2016 debt abstract, Guam’s total debt was pegged at $2.7 billion in all categories. Revenue bonds total $1.58 billion and a total of $1.119 billion in limited and general obligations bonds are subject to debt ceiling, which is equivalent to 10 percent of aggregate tax valuation of property in Guam.
Besides the limited and general bonds obligation, GovGuam has $148.5 million in debt not subject to debt ceiling, $87.1 million in principal toward the Tiyan lease agreement, and $171.1 million in previously approved financing that has yet to be borrowed — pushing the public debt to over $1.525 billion. The amount translates to approximately more than $9,500 debt per person on Guam.
While making frequent trips to the bond market, the government overlooks the potential funding sources that it can tap to meet its needs. These include the tax credits generously given away and the uncollected taxes that leak through the holes.
The Office of Public Accountability repeatedly reports GovGuam loses an average of $30 million a year to delinquent tax accounts. In its most recent audit, OPA noted that the Department of Revenue and Taxation lost out on $2.3 million in revenue simply because of its failure to act on bounced checks.
The ordinary taxpayer who has no background in economics has the simplest quick-fix to government deficit: quit spending money that you don’t have, dammit.
In its December report, Fitch Rating had two words for Guam: Puerto Rico.