Honorable Kenneth D. McClintock
Secretary of State of Puerto Rico
Remarks at the
The America’s Minority Leadership Global Summit 2011
The Government of Puerto Rico’s Response
to the Financial and Economic Crisis
Key Largo, Florida
August 13, 2011
First, I would like to thank Doug Mayorga, Founder and National Director of The Minority Chamber of Commerce, for having invited me to appear before you today. I am honored by the invitation and quite pleased to have come across friends in government and business some of whom date back from the time that, as a legislator, I had roles to play in the Council of State Governments (CSG) and the Parliamentary Conference of the Americas (COPA).
Congratulations are also in order to Doug —who, by the way, grew-up in Puerto Rico. He has done a great job in developing the Chamber into an influential business and professional organization not only across the United States but also in Latin America focusing on the importance of multicultural markets.
¿Didn’t you know that Doug grew-up in Puerto Rico? Then you might be also surprised to learn that the Florida Keys were discovered by a Puerto Rican… I am speaking, of course, of Juan Ponce De León who, while being Governor of Puerto Rico, set out from the Island on an expedition in search for the Fountain of Youth.
To those of you who are looking at me in disbelief, you are right… Ponce De León was born in Spain, just as I was born in London. But… should place of birth disqualify Ponce De León or McClintock as a Puerto Rican? Of course not! He was, after all, the first Governor of Puerto Rico as I am its 22nd Secretary of State…
Not convinced? Think of California… Of the 38 governors of California, 29 were born in other states and two were born in Europe… Who would say that Arnold Schwarzenegger is not a “real citizen” of “Cahl-ifoh-nia”?
There you have it… a historical tidbit that you may not have known about the Florida Keys.
Now, seriously, let me share with you the perspective of Puerto Rico on meeting the challenges presented by a global financial crisis and a worldwide economic recession.
These are difficult times to do what is needed the most: attract investment and create jobs —and the competition is fierce among state and local governments— but we are confident about what Puerto Rico has to
offer with its unique political, geographical and cultural attributes.
Located at the crossroads of the Americas, and with bilingual and bicultural U.S. citizens, Puerto Rico is not only where the United States and Latin America meet but also where the United States becomes a Caribbean nation.
Puerto Rico has been a territory of the United States since 1898 and, together with the 50 States of the Union and the District of Columbia, comprises the Customs Area of the United States —the only U.S. territory having this attribute.
I see a large representation of Colombian entrepreneurs at the Summit and before you ask… Yes, Puerto Rico is a part of the United States and investing or doing business in the Island may qualify you for an E-1 Treaty Trader Visa or E-2 Treaty Investor Visa.
Puerto Rico’s participation in the U.S. market —together with our cultural and geographic attributes— position our Islands as an ideal platform to export to Latin America and to capture the growing Hispanic market in the United States.
To reach Hispanic customers in the United States, and Latin American customers in Central and South America, one needs not only to speak Spanish but also to understand how Hispanics and Latin Americans think. Puerto Ricans are not only bilingual but also bicultural. Culturally and linguistically, Puerto Rican bankers, accountants, and other service professionals are completely comfortable doing business virtually anywhere in the Americas: from Anchorage to Antofagasta, putting Puerto Rico in an advantageous position of facilitating access to most markets in the Western Hemisphere.
Because of these attributes, no jurisdiction of the United States is better equipped than Puerto Rico to reach those markets. And we are ready to do business too… because we have managed to accomplish one of the most impressive turnarounds out of the financial crisis with which many states of the Union are just starting to handle.
Let’s take brief look back at the enormous challenges we confronted two years ago.
When Governor-elect Luis Fortuño appointed me to head his Transition Committee, we suspected we would inherit a deficit of no less than $800 million and no more than $1.2 billion. By the time we were sworn in on January 2, 2009, we had discovered that the deficit —$3.3 billion— was the largest in the Nation —far bigger proportionately than California’s. We were spending $1.45 for every dollar of revenue. As you know, there is not one business that can operate with such a deficit.
Furthermore, in January 2009, Puerto Rico had more public sector employees than any other state except for California and New York —a bloated bureaucracy that our taxpayers simply could not afford.
Even before being sworn-in, the Governor had to meet with Wall Street credit agencies to plead for some breathing space before they downgraded us into becoming the first state government in the United States to hit junk-bond status —a hole from which it would take us well over a decade to emerge. Within two days after being sworn in, Governor Fortuño began making rather painful but necessary decisions that other state governments, the Federal governments and foreign countries have later taken.
We have cut spending by $2 billion and to do that we were forced to lay off 12,656 employees —nearly 7% of our workforce.
During the past two years, we have brought down that 45% deficit to a more manageable 11%, on our way to achieve a balanced budget by next year.
However, recognizing the fiscal and economic crisis are not solved with spending cuts alone, Governor Fortuño began turning Puerto Rico in a much more attractive business location.
We have enacted the most effective Public Private Partnership Law in the Nation, if not the world. Learning from the mistakes of others, we have created a specialized Public Private Partnership Authority. We have partnered with our Legislature from day one, with two of the Authority’s board members representing that branch of government, and thus avoided the final legislative ratification process that has killed so many P3 alternatives, such as the Pennsylvania Turnpike concession. We have five ongoing P3 initiatives: a 100-school building and modernization program, water system customer service improvements, private operation of our tollway highway system, electric generating plant conversion, and the private operation and development of the Caribbean’s largest airport.
We have streamlined our red-tape laden permitting process, which now boils down to one single comprehensive permit from one single agency.
We have enacted several energy incentives laws, promoting green jobs, a new mega casino law, as well as many other pro-business initiatives.
As everywhere, our real estate market was stagnant and property values decreased —although nowhere near as South Florida’s but a decrease nonetheless. To spur housing sales in September 2010 Governor Fortuño put in place an unprecedented incentives program that has helped to reduce our unsold real estate inventory. So if you want a nice beachside Caribbean property in the U.S. at a good price, with subsidized closing costs, reduced or no property taxes for 5 years, and no capital gains you still have until October 31st to take advantage of our incentives. There's an extensive write-up on this program in today's Wall Street Journal.
Recently, Governor Fortuño enacted the biggest, most comprehensive, fairest, and most beneficial tax reform in the history of Puerto Rico which is already leaving more than $1.2 billion dollars in the taxpayer’s pockets. It includes a 7 to 15% tax cut retroactive to January 1, 2010, and future tax cuts totaling 50% for individuals and 30% for businesses in the next 5 years.
I believe I mentioned that Governor-elect Fortuño asked Wall Street for some breathing space so he could try saving Puerto Rico from falling into the abyss of junk bond status. Well… he did it!
When Governor Fortuño took office Puerto Rico’s Moody’s rating for Puerto Rico’s credit was Baa3, or one notch above junk bond status. In June 2010 Moody’s recalibrated the rating of Puerto Rico general obligation bonds by three notches to A3 —the highest level the Island had achieved in more than 35 years. The three-notch hike was also the highest improvement Moody’s gave to any of the 34 states whose ratings it upgraded, with California being the only other state to enjoy a three-notch improvement.
On December 2010, Standard and Poor’s changed its outlook on Puerto Rico’s credit to “positive” —the first time to do so in over a quarter century, since 1983. And also on December 2010 Moody’s reported that in October 2010 Puerto Rico had its best economic month in 4 years.
We have certainly rescued Puerto Rico’s credit. Through this accomplishment we have not only saved our taxpayers millions of dollars, but we have also saved the jobs and protected the homes, IRA accounts, and savings of tens of thousands of citizens the value of which would have plummeted if Puerto Rico had gone bankrupt.
In fact, I am pleased to say that in matters of managing well the taxpayer’s money, we are ahead of 31 States. At the beginning of our administration, the $3.3 billion deficit that we inherited was the worse among the 50 States and Puerto Rico. Today, we rank 20th. Thirty-one states now have deficits that are worse than ours. And for the fiscal year that began a month ago, we will rank 15th among all the states and Puerto Rico.
Why is it important that governments manage well their budgets? First, because governments should respect the taxpayer. And second, because it allows governments to do more of the things it should do such as hire special education teachers, pay overtime to police officers, provide help to single-mothers, repair highways, and so on…
As you will remember, during the first two years, due to the enormous deficit we inherited, we had to cut back government expenses. But for the fiscal year that begins next July 1st things are already doing better. Although we still have a deficit, we have slightly more resources in order to provide citizens with more and better basic services —particularly in the areas of public safety, health and education, which have the highest priority.
How is this possible? Why do we have this year a little more resources than last year? Well, it is simple. The economy is improving. We have been seeing it in all the economic indicators.
The Government Development Bank’s (GDB) Index of Economic Activity (IEA) had the second consecutive monthly increase since October 2010.
Between May 6, 2011 and June 6, 2011, a total of 1,477 new corporations were organized which means a 33% increase when compared with the same time period in 2010. As of yesterday, those numbers had doubled to over 2,900 new corporations.
Retail sales increased by nearly 2% and auto sales increased by over 17% from last year, which indicate that consumer confidence has improved.
As The Wall Street Journal reports this morning, from September 2010 to April 2010 sales of new residential properties increased by 75% and sales of existing properties increased by over 12%.
Exports increased by 14.8% and imports by 3.3% from last year which suggests an improvement in the manufacturing sector.
In April 2011 the unemployment rate showed an interannual decrease of 0.7% bringing it down to 16.2%.
From August 2010 to April 2011 non-agricultural employment increased by 9,000 jobs —the first employment increase since 2006 when the recession began.
In May 2011 we observed an interannual reduction of 14% in bankruptcy filings —the second consecutive month with a reduction.
From January to May 2011 hotel occupation increased by 3.83% to 77.08% when compared to the same period last year.
In 2010 the volume of air passengers increased 4% and the volume of homeport cruise passengers increased over 21% to 545,000 —the highest level in five years.
…and these are only some of the economic indicators.
In fact, the Planning Board’s official projections indicate that this fiscal year our economy will grow for the first time in five years, since our government was shut down in 2006, long before Minnessota.
As a result, Treasury collections will be higher. Although we have lowered taxes to leave more money in tax payers’ pockets, the General Fund net revenue projection for this fiscal year is 6.4% higher than the previous fiscal year.
Part of that revenue increase is due to a temporary excise tax on offshore companies, which now enables them to contribute a little more to our economic recovery, without affecting their operations or the jobs they create in Puerto Rico, as confirmed by a ruling recently issued by federal Department of Treasury.
We will also see a 20% increase in sales and use tax (SUT) and excise tax revenues related to commercial activity. Why? Precisely because the economy is improving… the consumer is already feeling more confident about the fact that things are getting better. And now consumers feel that they can buy a new car, purchase home appliances, or make some home repairs.
Despite all of these successes, last Monday we suffered a minor setback… Moody’s downgraded the general obligation rating of Puerto Rico one notch from A3 to Baa1 due to the severely underfunded retirement systems for government employees that we inherited from the two previous administrations —which we are now in the process of reforming. A negative outlook was also given because of the potential impact the financial situation of the government pension systems may have on the general fund and the concern that the needed reforms might be challenging for the Government of Puerto Rico —actually, any government— to undertake.
Because of this recalibration, some have questioned our unwavering commitment to reducing the government deficit, controlling spending, and adhering to conservative revenue estimation practices. But sometimes setbacks put in perspective how far we have advanced. Had we not taken the difficult decisions we took, at the time we took them, Puerto Rico’s credit rating would have now hit junk bond status with disastrous consequences. We are standing at a comfortably safe distance from the abyss that others are facing. Even with this downward adjustment our credit rating by Moody’s is still two levels or categories above what we encountered when our administration came into office.
Has Moody’s recent downward adjustment affected the confidence of investors in Puerto Rico? Absolutely not. As Ricardo Faerman, President of CEO-América mentioned earlier today, last Wednesday the Government Development Bank of Puerto Rico successfully sold more than $1 billion in bonds –$756 million for 21st Century Schools sold in the local market and $304 million of Public Buildings Authority bonds sold in the stateside market. Actually, the sale was oversubscribed by nearly $200 million because the Government Development Bank received requests for purchases of $950 million for the originally scheduled sale of $756 million. This is undoubtedly a vote of confidence.
Puerto Rico’s credit continues to be at the highest level it has been in decades thanks to the actions our administration has taken to straighten our finances and lead our economy towards a sustainable recovery.
I hope that you are already convinced that now is the time to take a look at opportunities in this U.S. miracle within Latin America and the Caribbean which is fast becoming an example on how to turn an economy around.
I could go on, but will conclude my remarks here so that we can have some time for questions and answers.
Thank you very much.
