DORADO, PR—Yesterday afternoon, Standard and Poors decided to downgrade Puerto Rico’s general obligations bonds one notch to non-investment grade or “junk-bond status.” Most people I have talked to here on the island are quite concerned about the effects of such a downgrade in our standard of living, and many are outright depressed.
On the other hand, I am glad Puerto Rico’s bonds are finally classified as junk. I am not happy, but glad. The reason is simple: finally our politicians will be forced to do what they should have done decades ago – be fiscally responsible. And by fiscally responsible I mean achieving a truly balanced budget while paying off our debt, and actually following that budget.
Early last year I had come up with the following conclusion: our representative democracy has many great attributes but one major flaw. Politicians who spend more will be rewarded at the polls, regardless whether they are spending more than what the government is receiving in income.
On the other hand, people will always complain about fiscally responsible politicians – because being fiscally responsible may mean that, when the government’s income goes down, they may have to cut government programs and jobs, cancel infrastructure projects, or other unpleasant and painful actions. It is the classic case of “we get what we deserve.”
Now we have sunk so low that politicians will be forced to become fiscally responsible, not because it wins them votes, but because government will shut down if they do not change. Human nature is such that unless faced with pain, human beings do not tend to change, and right now, change is exactly what we need. We had to have an external entity to force their hand – the bond rating agency – an entity that created the environment for pain to exist. Only now can change truly occur.
The question is, once they do make the painful cuts, and our economy improves, what will ensure that they will not go get us back in this hole? I can only think of one thing: amend our constitution to close the loopholes that allowed them to increase the debt to these levels.
Article VI section 7 of Puerto Rico’s constitution mandates that a balanced budget be enacted (at least this is everyone’s interpretation of what it says there). The exact words are as follows:
Section 7. The appropriations made for any fiscal year shall not exceed the total revenues, including available surplus, estimated for said fiscal Year unless the imposition of taxes sufficient to cover said appropriations is provided by law.
The problem is that loopholes were identified years ago that allow for expenses far above a balanced budget requirement that have created what is now called “extra-constitutional debt”. Using accounting subterfuges to circumvent our constitution, politicians and investors alike have fostered the use of this mechanism as a limitless source of funds. But all “good” things always come to an end. I hope we put as much effort on getting ourselves out of this hole as we are in amending our constitution to prevent this from occurring again.
We have finally gotten to the point where we have found that the seemingly never-ending chasm does indeed end, and for that, I am glad.
Omar Pereira (@coachomar) is an award-winning manager, entrepreneur, investor coach and engineer with over 25 years of experience, who currently lives in Dorado, PR. In 2007 he founded Atlantis Investment Coaching, LLC (atlantiscoaching.com). Atlantis is a financial services firm that focuses on coaching its clients instead of selling investment products. As a result, clients learn how to effectively invest and manage their money prudently instead of following the industry lies that foster gambling and speculating. In 2008 he also founded Earthshine Corp. (earthshinecorp.com), a firm that plans, develops and implements innovative solutions for infrastructure projects throughout the Caribbean.