We still don't know what the future holds for Puerto Rico. There have been numerous studies and articles describing the situation and desperate and possibly, as Forbes described, leading to a humanitarian crisis. We know what the problem is but what are the possible solutions. Remember the game of Battleship where you would call out your opponents position in an attempt to sink their ships? We can describe the situation between Puerto Rico and bond holders in his manner.
Goal = Balanced Budget
Possible Solutions:
1) Raise Revenue to balance budget
The government can raise revenue by increasing the amount of taxes collected. There are a variety of ways to do this but almost all will lead to an exodus of residents from the island. An eroding tax base will lead to an incurable problem. Raising taxes is not a long term solution to the problem.
2) The budget can be balanced by increasing revenues, reducing costs, and usually the combination of both. Cost cutting is the best way for Puerto Rico to balance the budget and pay bond holders. Since the government has already increased taxes, witnessed an erosion of tax base, they should cut costs to demonstrate government austerity and restore confidence to all involved.
Governor Padilla has atleast taken a realistic approach that the debt cannot be paid and unless restructuring occurs there will not be a meeting of obligations. He had also increased taxes and reduced some government services in an effort to balance the budget.
Opportunities: Padilla had already ordered an end to marajuana related prosecutions stating it was costing the territory millions a year in administration. This can also be a revenue producer for the island should the laws become favorable to the medical marajuana industry. This kind of cost cutting is a good example of measures that can be taken. Any unnecessary cost should be cut if there is not a clear positive benefit.
If the territory makes an effort to increase economic efficiency then bond holders may be able to compromise. For example of the government shows austerity by changing the laws of the general obligation fund GOF to meet financial obligations they are showing a real desire to balance the budget.
Certain agencies are already facing pay freezes for the uncertain future. Given that the entry level salary is almost minimum wage and dramatically increases in years 2-4, this had a dramatic impact on the population. Unfortunately, this is a step in the right direction.
Palmas Del Mar (October 2014)
