A recent new arrival in the debate about public debt in Puerto Rico is the term constitutional debt and its counterpart, extra-constitutional debt. Although from a technical perspective these terms are not new and have been around for a long time in the specialized vocabulary of public administration, it was not until the fiscal and economic crisis early this century that use of the terms proliferated among the public and in the media. Constitutional debt refers to the public debt that has been issued under the dispositions of the Constitution of the Commonwealth of Puerto Rico, which stipulates that the Legislative Assembly cannot approve a government budget for a fiscal year that exceeds the revenues expected by the treasury. This budget must include, in addition to the ordinary expenses of the three branches of government, the obligations agreed to for payment of principle and interest on the existing public debt. In other words, money cannot be borrowed without sufficient public revenue to cover the government’s operations and fulfill its annual public debt obligations.

Extra-constitutional debt, on the contrary, is a financial obligation whose annual cost (interest, principle and other expenses) exceeds the state’s revenues. It is a debt that is issued without the ability to repay it, which requires extraordinary measures. To a certain degree, calling debt extra-constitutional disguises the fact that it is illegal. Extra-constitutional in this context is a synonym for unconstitutional, and therefore illegal. The technical complexity of the financial and accounting procedures used both in the global financial markets and in public government agencies, however, has allowed this constitutional limitation to be evaded without political cost. This evasion has been systematic in recent decades and the consequences for public administration are deep and lasting. For example, the implementation of the sales and use tax (IVU by its Spanish acronym) was accompanied by an official commitment to lending institutions that part of the revenues from the new tax would be reserved, for several years, to pay the public debt. This means that the island’s fiscal policy mortgaged the IVU tax revenue. It is common in the world of international finance for groups of investors (mostly global banks) to impose public polices on governments that are aimed at facilitating and ensuring payments of public debts. This pressure was apparent in Puerto Rico in 2009, when the government opted to reduce the public payroll by laying off employees as a means of paying the current and future public debt. In Europe, a political crisis of huge proportions has been unleashed in the Mediterranean countries of the European Union because of the pressures from investors due to the effects of the economic depression that has affected the entire continent since 2008. This pressure includes the imposition of austerity policies, privatization, and political reforms aimed at lowering labor costs and reducing the range of the state’s social services. To a certain point, some in Europe talk of a usurpation of traditional sovereign powers by global financial groups.

An argument that is used to justify Puerto Rico’s extra-constitutional debt is that the state may, through legislation, increase its revenues by imposing new taxes. In fact, the Constitution suggests that in the event that revenues are less than expected, for whatever reason, and a fiscal deficit results, the imposition of new sources of revenue is mandatory. This was the case during the 2005-2009 time period when a shortage of public funds that could not be hidden forced the imposition of a new tax, in this case the IVU.

The Constitution’s requirement that payment of the debt (interest and principle) have priority over other government spending, including the public payroll, is not limited to the constitutional debt, but also applies, in practice, to extra-constitutional debt. There is some confusion, however, in the public debate, about the definition of public debt and the applicability of the constitutional requirement. Public debt includes only the debt issued by the central government to pay for permanent improvements. The public corporations, which have borrowing authority, guarantee their debts through their own means, and not with operational funds of the government. Therefore, the financial obligations of the public corporations are exclusive to each corporation and are not formally included in the public debt, so the priority established in Article 6, Section 8 of the Constitution does not apply to them.

Author: Roberto Gándara Sánchez
Published: September 11, 2014.

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