Remarks by Luis G. Fortuño, Governor of Puerto Rico
To the Strategas 5th Annual Global Macro Conference
New York, NY
March 24, 2011
Good evening. It is great to be with you all, and to have the opportunity to share the story of the fiscal and economic reconstruction process we have underway in Puerto Rico.
Ohio…Wisconsin…New York… New Jersey, and the list goes on.
These states have seized headlines of late as they grapple with the fiscal and economic challenges of our time – those facing our federal government and governments throughout the world.
Puerto Rico has a unique story to tell in this global narrative. Because our tough work on these issues began over two years ago, Puerto Rico is now ahead of the curve and is increasingly seen in policy and economic circles as a model case for the rest of the country to follow.
Through the tough decisions we made early in my Administration, we are addressing an inherited fiscal crisis that was the worst in the nation.
Tonight I want to share with you how we changed our fiscal course in Puerto Rico – from inheriting a government near bankruptcy just over two years ago, to today, when the rating agencies are responding to our reforms with positive actions on our credit.
When I took office two years ago, we had been experiencing the deepest recession since the 1930s, a recession that began two full years before it began in the rest of the country.
Puerto Rico’s economy wasn’t particularly healthy even before the official onset of the recession.
However, this economic slump was never acknowledged by the previous government, which consistently over-estimated economic growth and tax receipts -- with the gap growing over time.
Predicting economic growth despite contrary evidence was one of many ways the government avoided confronting the growing structural deficit.
The details are grim. During this “overheating” period, which were the years prior to the outbreak of the recession in Puerto Rico in 2006, government expenses had been increasing 8 percent annually, while revenues increased only 2 percent.
One group that definitely became leery of lending to the government was the bondholders. Both Moody’s and S&P downgraded Puerto Rico’s bond ratings to one step above junk.
After I was elected in November of 2008 and before I was sworn in, it was actually during the transition that my team and I discovered the true extent of the fiscal abyss we faced.
And it was far worse than anything that had been disclosed to the public by my predecessors.
As Governor-elect, I flew here to New York to meet with the rating agencies to avoid a downgrade of our bonds to junk and to ask for time for us to act.
When I took the oath of office, our deficit stood at $3.3 billion. Proportionally speaking, it was the largest state budget deficit in the country, representing 44 percent of revenues.
My team discovered that we didn’t have the money to meet our first payroll. We had to take out a loan to pay it.
We immediately enacted fiscal emergency legislation, with the support of our Legislature, requiring serious spending cuts. And we established a Fiscal Restructuring and Stabilization Board to help lead the effort.
In just two years, we have cut government expenses by almost 20 percent.
I started with my own salary. I took a 10 percent pay cut and my agency heads took a 5 percent cut.
We froze all salaries for two fiscal years, and reduced political appointments by 30 percent.
We cut government operating expenses 10 percent, including official vehicles, cell phones, and credit cards. I pay for my own cell phone.
We reduced the number of government agencies through consolidation and dramatically increased the number of services that could be provided online.
Because payroll expenses were dominating 70 percent of our budget, we had no choice but to shrink the government employee ranks by 23,000 through a combination of voluntary and mandatory measures.
Our over bloated and costly government payroll was the result of the irresponsible hiring and unchecked benefit increases approved by past administrations while the fiscal situation was deteriorating.
In addition to payroll, like many states, we’re also tackling the challenge of funding our retirement system.
On the positive side, we are among the few jurisdictions that eliminated defined benefit plans, instead moving all future employees to a performance-based defined contribution plan. So we have eliminated the risk of widening actuarial deficits.
We are now working to achieve a permanent solution to the unfunded liability challenge presented by our pension system.
We didn’t shy away from the tough decisions. In just two years, our progress is clear and compelling on both the fiscal and economic side.
We have cut expenses and brought down the budget deficit from 44 percent to 11 percent of revenues. That includes reducing payroll expenses by $935 million or 17 percent of total government payroll. We are now on course to balance our budget before the end of my first term.
We’ve reduced our deficit proportionally more than any other state or territory. In a ranking of all the states by budget deficit, as a percentage of revenues, we started off dead last. Now, we are ranked 20th in the country and closing in.
The rating agencies have noticed.
Last April, Moody’s increased Puerto Rico general obligation bond ratings by three notches to A3 from Baa3, the highest improvement given to any of the 34 states whose ratings it upgraded, and the highest for Puerto Rico in 35 years.
In November, Standard & Poor’s raised from “stable” to “positive” its outlook on Puerto Rico’s credit - the first positive credit review on record since 1983.
Fitch Ratings recently assigned a BBB + rating with a stable outlook to the general obligations of the Government of Puerto Rico.
And earlier this month, Standard & Poor again looked at Puerto Rico and upgraded its rating for Puerto Rico’s general obligation debt improving it from BBB- to BBB, the first upgrade S&P has given Puerto Rico’s credit in 28 years.
These positive actions not only take into account fiscal progress, but also the new direction we’re taking on our overall economic front.
Because while we’ve been putting our fiscal house in order, we’ve also been changing the course of Puerto Rico’s economic future.
Through our Strategic Model for a New Economy, the government has formulated a vision for Puerto Rico and specific actions to achieve it. It is the most comprehensive economic development program Puerto Rico has had in decades, and details specific actions in the short and long term to grow the economy.
It is based on performance metrics that measure growth in the economy, competitiveness and job creation.
Through this framework, we have been implementing a pro-growth reform agenda supported by a series of key public policy reforms.
We addressed a tax code that was putting our businesses at a competitive disadvantage.
Puerto Rico, as a U.S. territory, has a code that is close to a mirror image of the Internal Revenue Code. We faced the same challenge presented by the federal code in that high taxes – especially on the corporate side –hindered our competitiveness.
So we exacted the largest across-the-board tax cuts at the individual and corporate level in Puerto Rico history.
Starting January 1 of this year, we cut the top corporate rate from 41 percent to 30 percent. In 2014, that top rate will drop further to 25 percent. The previous seven-tier corporate bracket has been flattened, into first three, and then two lowered rates.
For individuals, tax rates are dropping an average of 25 percent this year, increasing to a nearly 50 percent reduction over six years.
To ensure that we sustain fiscal responsibility, individual tax reductions for years 2014 through 2016 will be contingent on the government meeting targeted goals to guarantee that we continue to balance our budget.
Thus, we are making the taxpayer the watchdog for fiscal discipline, and ensuring government keeps that discipline.
In addition, 1 percent of the budget in 2014, and 1.5 percent in 2015 and 2016 will be deposited into a fiscal reserve fund, providing a “rainy day” fund to make sure we never again sink into the financial hole from which we’ve managed to emerge.
In addition to tax reform, we have instituted other significant planks in our economic reform agenda to promote growth and create jobs.
We enacted one of the most advanced and aggressive Public-Private Partnership law in the country to encourage greater private investment and bring competition and efficiencies to schools, roads, airports, energy, water facilities and other public infrastructure.
This has been the model for much new infrastructure around the world, with the conspicuous exception of the United States.
Through our P3 program, we’re currently in the process of moving forward $3.5 billion in infrastructure projects.
That includes the full concession of major toll roads and of our main airport, and the modernization of 100 public schools throughout the Island, among other major infrastructure projects.
We have some of the highest energy costs in the nation and rely on imported oil for almost 70 percent of our power generation. So we have begun a comprehensive energy program to dramatically reduce our dependence on oil, in favor of natural gas and renewable energy.
By 2012, we are working to shift Puerto Rico’s fuel mix from 69 percent petroleum to 72 percent natural gas. Vía Verde, or “Green Way,” as our natural gas project is known, will reduce fuel costs by double digit percentages.
We are further diversifying our fuel mix to include renewable sources such as solar, wind and waste-to-energy. Renewable energy projects are bringing with them hundreds of millions of dollars in new investment in Puerto Rico and the creation of thousands of new jobs in our economy.
We launched the best housing market incentives in the country – available to residents and non-residents through June of this year.
We’re seeing a double digit spike in housing sales in Puerto Rico, because these incentives include:
-ZERO property taxes for five years for new residential properties purchased during this special window
-ZERO recording fees and
-ZERO capital gains tax obligation, with no expiration date.
Purchases of existing properties benefit from 50 percent exemption on recording fees and a 50 percent exemption on capital gains.
People who buy either a new or existing property to rent during this time frame, are also eligible for ZERO tax obligation for 10 years on net rental income.
To all of you, let me say this: this is the best time to buy a second home or investment property in Puerto Rico.
We are also merging government agencies to cut duplications, and streamlining operations to be quick, agile and efficient so that government red tape doesn’t get in the way of entrepreneurship and job creation.
A perfect example is the government permitting process. We had government agencies issuing 28 different permits. Now we have 1 permit to do business.
In cases not requiring detailed evaluations, the new system has resulted in an 85 percent reduction in the permit granting and approval process. And for major projects involving site and land use consultations, a process that could take three to five years is now down to a maximum of 180 days.
On the tourism front, we enacted a comprehensive incentives package to attract the development of world-class tourism projects, and that strategy is already bearing fruit.
New luxury resorts such as the St. Regis Bahia Beach Resort in Río Grande and the W Resort in Vieques are important new additions to our portfolio.
Construction is currently underway for the six-star Dorado Beach Ritz Reserve. We currently have 11 projects under evaluation with more than 1,300 additional rooms and a total investment of almost $900 million.
Earlier this month, I signed into law a new Film Incentives Law designed to make Puerto Rico’s current production incentives among the most attractive in the industry, as well as promote the development of state-of-the-art media infrastructure, including high-capacity studios.
Over 60 productions have taken advantage of Puerto Rico’s current incentive program, including Disney’s “Pirates of the Caribbean 4,” Universal Picture’s “Fast 5” and Warner Brothers’ “The Losers,” and we’re expanding our ability to attract both Hollywood and international productions.
We are also positioning ourselves to make Puerto Rico a hub for global shipping. The expansion of and our proximity to the Panama Canal provides us a unique opportunity, so we are readying our Port of the Americas to be a world class international trans-shipment port.
We have installed super Post-Panamax cranes and dredged a shipping channel that can handle the world’s largest cargo freighters.
In the future, cargo ships leaving from Singapore could head east instead of west, passing through the Panama Canal on to Puerto Rico, with goods destined for both the Eastern Seaboard and Latin American markets – and even Europe by way of Rotterdam.
This route would allow freight from Asia to bypass chokepoints along the western route, made more volatile by piracy off the Somali coast and unrest in North Africa.
Today, the government of Puerto Rico is fully engaged in serious economic reform. We have reduced government payroll, slashed bloated budgets, and introduced bold reforms of entrenched government programs that promise to re-ignite economic growth.
My advice to other Governors facing the same challenges has been: Don’t wait and don’t blink. Make the tough decisions early and stick to them with courage, because at the end of the day, people are expecting leadership.
In my case, I have found that some may not like every decision, but they will respect you for doing what is right and what you said you would do.
And by pursuing long-term reforms that hold the promise of dramatically improving the island’s economic position in the coming decades, Puerto Rico is sending an unmistakable message to companies and investors that the island is permanently changing its business environment for the better.
By scaling back the size of government while at the same time reducing tax rates, simplifying the tax code, increasing private investment in infrastructure, and diversifying our energy sources, I am convinced that we have the right equation for an economic renaissance in Puerto Rico.
Thank you all very much.
