As promised, here's another examination of "Ley 7" and the layoffs it authorizes. Before jumping into that pit of despair, let me share with you a small warning. With tempers rising on both sides of this issue, it looks like either side could lose control at any moment. If I were you, I'd steer clear of any areas were active protests are happening or planned to happen. I would also suggest everyone review the following safety guidelines available here and here. I'm not a prophet, but I got a real bad feeling about this one.
Between a huge budget deficit and an angry mob
Let's begin by setting up the assumptions for this situation. First, the main problem we have, just like 40 or more other states, is a major budget deficit. Many people like to complicate this issue, but it is quite simple. Think of your family's finances as if it were the government. If you're like most households, both Mom and Dad work and together earn, let's say $50,000 a year. If, at the end of the year, you've paid all your bills and you have some of the $50K left, you have a surplus. However, in the case of the Puerto Rican government, it's the end of the year, you've spent your $50K, but you still owe $3.5 billion. That's a deficit.
The difference between our families and the government, is that they are allowed to have that deficit. However, bills are bills, they have to get paid, so our government is able to use a variety of financial tricks, which allow them to borrow the money they need to pay all of their bills.
The most popular trick is issuing a bond. And a bond is a formal contract to repay borrowed money with interest at fixed intervals. For example, an investor "buys" a Puerto Rico Government bond, for which the investor receives an "IOU" from Puerto Rico for their initial investment plus interest in 5 years.
Here's where the credit rating agencies come in. Moodys and Standards and Poor are the most powerful of these agencies. They grade financial investments by their belief that the issuer of the bond will be able to successfully repay those investments. The higher the rating, the lower the interest rate the bond issuer must promise. A lower rating means that the issuer has a higher risk of not being able to pay back the IOU. As with most investments, the higher the risk, the higher return on the investment. In the case of a bond, it means a higher interest rate. Another way of looking at low bond ratings, is that it ultimately costs the issuer more money to borrow the money. (Which for an institution that is already having a budget problem, is not a good thing)
Finally, just to be clear, the Puerto Rico government's budget didn't grow $3.5 billion since January, when Luis Fortuño became governor. This is the budget and deficit he inherited when he took his oath of office. The budget has been growing through many administrations both Red and Blue.
But what's different now? While the deficit has been growing through all of these administrations, our credit ratings have been dropping. The last two administrations, however, have faced a new threat. Moodys and S&P have been aggressively threatening the reduction of Puerto Rico's bonds to "junk" status. The last time this threat occurred, in 2006, Ex-Governer Anibal Acevedo Vila closed the government. He did this hoping that it would be enough action to demonstrate that Puerto Rico was managing their budget and deficit. Much wailing and gnashing of teeth were heard back then, as there is now.
The limits of credibility
While many people accuse Fortuño's administration of falsifying the budget and deficit numbers, all I can say is that it seems improbable. It seems that way for two reasons:
- There was a deficit problem three years ago under the administration of Acevedo Vila. Billion dollar deficits don't disappear quickly. So if there was a problem then, there is a high probability that the problem still exists. Plus, given the over-estimates Hacienda has been making, the problem is probably bigger.
- "El Cuco" in this here story are the credit agencies. In order for them to make their evaluations, I can only assume that they have access to Puerto Rico's complete financial picture. So while politicians may be able to stretch the truth before their constituents and local media, I find it very difficult to believe that Moodys and S&P would risk their reputation by not conducting a complete financial audit. Since they are pressing the issue, I'm inclined to believe that we have a "bona fide" budget crisis.
So now we finally come to "Ley 7." As the captain of this sinking ship, Governor Fortuño is a desperate man. He must provides answers to the credit agencies and demonstrate action that will improve Puerto Rico's budget crisis. During his short nine months in office, I can assure you that this has been his number one challenge. Unfortunately, during those long nine months, very few options have been identified which can fix our budget deficit, and all of them include layoffs.
Since he doesn't have any other options, Governor Fortuño has to do whatever he can, because, "El Cuco" is demanding results. As with any other company that is looking to cut expenses, the easiest and most direct way is to reduce payroll. Enter "Ley 7."
Now to make matters more desperate for the Governor, unions are organizing, universities are closing, a general work stoppage is planned, and a general strike is looming. All of which are aimed at the Governor revoking "Ley 7".
Here's where it gets really squishy. Let's say that "La Colación Todo Puerto Rico por Puerto Rico" is successful. They accomplish the impossible, and get the governor to revoke "Ley 7." What do they pretend that we tell "El Cuco?" What do we tell them to keep them from lowering our bonds to junk status? Nothing, that's what they have to offer "El Cuco." And believe me, "El Cuco" will not say: "¡Ay Bendito! the people of Puerto Rico have banded together to reject a plan that might have helped them fix their budget crisis, let's let them slide for another year."
No my dear readers, "El Cuco" has no heart; only hard cold facts, numbers on a page, are the only thing that can make any lasting impressions. All "El Cuco" wants to hear is how our government is going to reduce its' budget deficit and see those plans in action. And yes it is heart breaking, and yes it is bad for our short term economy, and yes it will make many thousands of people's lives more difficult, but in the end, with great sadness, "El Cuco" doesn't care. We do, and that's what makes this situation even more heartbreaking.
All I can hope for is that these manifestations are conducted with strict adherence to the principles of non-violent disobedience and the utmost respect for the rule of law; from the government, the police, and anyone else who has the unfortunate task of defending "Ley 7", protecting the peace, and the law, may they act with great restraint, patience, and compassion. May the seeds which have been sown within "La Colación Todo Puerto Rico por Puerto Rico" grow to unite us all to work together, identify new solutions, and weather the storm that must pass. May we find ways to share in the sacrifices necessary to calm "El Cuco," so that we all can survive with our dignity in tact.
Flickr Creative Commons Contributor: Mark Berry - Photographer & Graphic Designer