Dear President Dudley:
Although it is a longstanding policy of the Federal Reserve not to intervene in the finances of state and local governments, it may be time to reconsider this policy in the case of Puerto Rico. A member of your board of directors, Richard Carrión the CEO and Chairman of Banco Popular de Puerto Rico, wrote to The Economist about the state of Puerto Rico’s finances:
You said that the effect on economic activity by new levies on businesses would negate half of the expected increase in revenues, but you overlooked easily available data showing that net government revenues were $350 million during the first fourth months of the current fiscal year, $120 million higher than forecast.
Mr. Carrión is correct about Puerto Rico’s success in increasing tax collections, but its economy continues to contract. From Reuters:
Monthly data from the Government Development Bank tracking employment, gasoline sales and other indicators on the island declined 5.2 percent in September and 5.4 percent in October from a year earlier.
Through October, Puerto Rico’s economy has shrunk by 5.3 percent in the fiscal year that began July 1, according to the GDB’s Economic Activity Index.