How Did the Spanish Language Contribute to the Financial Demise of Puerto Rico?

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Tax Policy

From 2000 to 2008 Puerto Rico's public debt more than doubled. Its public debt is 70 percent of Gross Domestic Product, but exceeds 100 percent when its retirement system deficit is included. In this article, Carlos Romero of Post and Romero discusses how an interpretation of an unofficial Spanish version of Puerto Rico's constitution may have contributed to its financial crisis.

Carlos Romero

By Carlos A. Romero, Jr.

Carlos A. Romero Jr. is a partner in the firm Post & Romero based in Coral Gables. His practice encompasses a wide range of private and public clients with projects in and out of United States and multi-forum litigation. He has been an arbitrator and is on the roster of many well-known arbitration organizations. He has been representing clients touching upon tax laws applicable to Puerto Rico since the early 1980's.

The Commonwealth of Puerto Rico has acknowledged that public debt exploded from about $26 billion in 2000 to $60 billion in 2008 reflecting the practice of deficit financing. [See Fiscal Plan, dated February 29, 2017, Puerto Rico Fiscal Agency And Financial Advisory Authority , at 11.] As this practice continued thereafter, the Commonwealth of Puerto Rico amassed an outstanding bond debt in excess of $73 today. In addition, the government is facing a combined unfunded actuarial deficit in excess of $34 billion (as of June 2013) for the state government retirement systems for all state employees. [Quarterly Report dated July 17, 2014 of The Commonwealth of Puerto Rico relating to issuance of General Obligation Bonds of 2014, Series A, at page 48.] Today, that deficit is approaching $40 billion. [See www.tradingeconomics.com by World Bank. The situation is bleak. Gross domestic product from 2011 to 2015 has ranged from around $100 billion to $103.1 billion. The public debt comprised about 70% of GDP, but inclusion of the retirement system deficit of $35 billion mushrooms the global debt to about 105% of GDP.] This debt, by the way, excludes many stand-alone agencies like the electric power and water authorities, although having authority to issue bonds, are facing financial stress and insolvency. Any hope of repayment of the bonds and satisfying current pension deficit is unlikely; as long as estimated revenues for the current fiscal year 2017 is between $9 billion and $9.3 billion coupled with a deficit, and as long as future annual revenues are not expected to exceed $10 billion any time soon.

Walked Off Cliff

If someone told you that the Commonwealth of Puerto Rico walked off the cliff and plunged into its financial bankruptcy, because someone used the unofficial Spanish version-instead of the official English version-of the Constitution of Puerto Rico; you would not believe it. Perhaps after you read this article, you will think otherwise.

Although the die was cast during the Constitutional Convention of Puerto Rico, the Secretary of Justice of Puerto Rico set the wheels in motion in 1974 with an opinion issued to the Government Development Bank of Fomento of Puerto Rico. The key word “revenues” appearing in key official English federal legislation was translated once as “rentas totales” and subsequently as “recursos totales”. This second translation triggered the avalanche.

Relied on Spanish Translation of Constitution

In 1974, Mr. Francisco de Jesus Schuck, then Secretary of Justice of Puerto Rico, issued an opinion to the Government Development Bank of Puerto Rico. The question was whether account receivables arising from taxes imposed in prior fiscal years constituted “recursos” as that term is used in Section 7, Article VI of the Constitution of Puerto Rico. PR Attorney General Op. no. 1974-15, May 12, 1974. The Secretary, instead of interpreting the official English text of federal legislation, relied upon a Spanish translation. The following table sets forth, and compares, the unofficial Spanish text of relied upon by the Secretary and the official English text ignored by the Secretary.

Unofficial Spanish text Official English text of the Constitution of the Commonwealth of Puerto Rico
Sección 7.- Las asignaciones hechas para un año económico no podrán exceder los recursos totales calculados para dicho año económico, a menos que no provea por ley para la imposición de contribuciones suficientes para cubrir dichas asignaciones. 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 Secretary issued an affirmative opinion. In his analysis, the Secretary cited notes from the hearings of the Constitutional Convention of Puerto Rico. The hearings were conducted and recorded in Spanish. The hearings traced and compared the federal legislative text of H.R. 9533 of 1917 and Section 7 of the then draft of the Constitution of Puerto Rico. [64 Stat. 951, H.R. 9533 approved on March 2, 1917, and known as the Puerto Rico Federal Relations Act of 1917 or the Jones Act of 1917, established a civil government for the island.]

By way of background, the United States Congress adopted legislation in July 3, 1950 to allow the island to draft and approve by popular vote of the residents of the island its own constitution. [64 Stat. 319, S. 3336 approved July 3, 1950.] On June 4, 1951, the people of Puerto Rico by vote agreed to the proposal and proceeded to elect delegates to a constitutional convention. The constitution approved by the constitutional convention then was submitted to a referendum in the island. On March 3, 1952, the island approved the constitutional convention. On April 22, 1952, President Truman approved the Puerto Rico Constitution and sent a letter to the United States Congress recommending its approval under the terms of the act of July 3, 1950. On July 3, 1952, President Truman signed H.J. Res. 430 to approve the Puerto Rico Constitution. [H.J. Res. 430 approved July 3, 1952, 66 Stat. 327, also known as Public Law 447.]

Against this background, the Secretary reviewed and relied on the notes of the hearings of the Constitutional Convention. The hearings analyzed the concept of “rentas totales” appearing in the federal act of 1917. Here are the unofficial Spanish and official English texts of the relevant portion of this act.

Unofficial Spanish text Official English text of H.R. 9533 (Jones Act of 1917)
Sección 34.- La Asamblea Legislativa no hará ninguna asignación ni autorizará ningún gasto, en virtud de la cual o del cual los gastos del Gobierno de Puerto Rico durante cualquier año económico excedan de las rentas totales provistas a la razón por ley y aplicables a dicha asignación o gasto, incluyendo cualquier superávit disponible en el Tesoro, a menos que la Asamblea Legislativa al hacer dicha asignación disponga la imposición de una contribución suficiente para pagar la mencionada asignación o gasto dentro del referido año económico. Section 34.- No appropriation shall be made, nor any expenditure authorized by the legislature, whereby the expenditure of the government of Porto Rico during any fiscal year shall exceed the total revenue then provided by law and applicable for such appropriation or expenditure, including any available surplus in the treasury, unless the legislature making such appropriation shall provide for levying a sufficient tax to pay such appropriation or expenditure within such fiscal year.

The notes of the convention noted that the concept of “total revenues” (translated as “rentas totales” in 1917 but as “recursos totales” in 1952) used in the 1917 act stated that government resources comprised at that time tax revenues and the surplus from prior years. The notes implied, without explanation, that the scope of “rentas totales” used in 1917 was more narrow then the scope of “recursos totales” used in 1951.

Spanish text of the notes at the Constitutional Convention quoting a delegate, Mr. Negrón López Author's English translation
El concepto de “rentas totales” que aparece en la Ley Jones expresa la idea que existía al tiempo de aprobarse esta ley, de que los recursos del gobierno consistían en los ingresos contributivos y en el superávit que pudiera haber de ejercicios económicos anteriores. The concept of “total revenues” that appears in the Jones Act expresses the idea that at the time of approving this act, then existed that government resources consisted in tax revenues and the surplus that was available from prior fiscal years.
Leap of Faith

The convention then took a leap of faith and concluded that in 1951 the “resources” included much more, not only the tax revenues and surplus of prior fiscal years but also nontax revenues (like sale of lands and properties, royalties, and revenues of public corporations), surplus generated by public corporations, federal aid or grants, the resources from bond emissions.

Spanish text of the notes at the Constitutional Convention quoting a delegate, Mr. Negrón López Author's English translation
Sin embargo, en las finanzas modernas, digo, en las finanzas del año 1951, este término de rentas totales, ya no abarca todo lo que abarcan los recursos totales del gobierno. Los recursos totales incluyen los ingresos contributivos o totales de índole general o de índole especial. Incluyen, además, cualquier superávit que pueda haber de años económicos, de ejercicios económicos anteriores; incluye ingresos no contributivos como el producto de la venta de propiedades, royalties, o regalías de corporaciones públicas hechas al Estado, sobrantes de beneficios obtenidos por corporaciones públicas, ayudas federales, los llamados grant [in] aids [sic] federales, y los recursos que se alleguen mediante la emisión de bonos, que es una de las maneras que tiene el Estado de levantar fondos para el desarrollo de su programa. However, in modern finances, I mean, in the finances of 1951, the term “total revenues”, no longer covers all that is covered by “total resources” of government. Total resources include tax revenues or totals from a general or specific type They include, also, any surplus that there could be from prior fiscal years, include nontax income like the proceeds of sale of properties, royalties from public corporations of the State, surplus from profits obtained by public corporations, federal assistance so-called grants or federal aid, and the resources that could be obtained from the emission of bonds, which is one of the ways that the State has to raise funds for the development of its program.
Revenues Included Bond Proceeds

The convention stretched the concept of “recursos totales” beyond recognition. It believed that government could include in “revenues” for budgetary purposes the proceeds raised from bond financing.

Based on these observations, the Secretary concluded that government could not only include in its budget account receivables from taxes past due but also use them as collateral to government finance and include the proceeds from the bond financing to balance the budget.

[The Secretary ignores whether the account receivables had been included as part of the budget in a prior year. For example, if these receivables were attributable to the estimated tax revenues of a prior year's budget, the receivables are part of the estimated revenue stream accounted in the prior year (that would be collected in the following year). Including again in a future year the same receivable (that arises from the estimated tax revenues included in a prior year budget) would lead to double counting. Worst yet, if the same receivable takes five years to collect, including the same receivable in each of five subsequent annual budgets would lead to multiple inclusion. To drive the point home by way of numbers, consider an estimated stream of tax revenue of $1 million included in the 2000 fiscal budget, which then became a $1 million tax receivable that was included in each of the annual budgets of 2001, 2002, 2003, 2004, and 2005. The same receivable would have been included five times and would have resulted in overstating budgetary revenues by $5 million in the aggregate.]

Spanish text of the Opinion from the Secretary Author's English translation
Es mi opinión, pues, que las contribuciones vencidas por cobrar, constituye un recurso del Estado. Las características de éstas son de mayor determinación y calculables en mayor detalle que contribuciones a imponerse, las cuales la propia Asamblea señala como recurso…Como todo activo o recurso éste puede ser financiado y el Estado puede utilizar el monto resultante de dicho financiamiento no solamente para el desarrollo de sus programas de Gobierno, sino también como recurso para confeccionar un presupuesto balanceado para el año fiscal entrante. It is my opinion, then, that the past due taxes constitute “resources” of the government. The characteristics of these are capable of being more determinable and computation in detail than taxes to be imposed, which the same Assembly [delegates of the Constitutional Convention] points out as being “a resource”. As every asset or resource, this one can be financed and the government may use the resulting amount of said financing not only to develop programs but also to balance the budget of the next fiscal year.
Never Read, Reviewed, Considered

In reaching this conclusion, the Secretary never read, reviewed, or considered the official English text of the Constitution of Puerto Rico, specifically Section 7, Article VI. Had he done so, he should have reached the opposite conclusion and could have averted the fiscal plunge.

Both section 34 of the act of 1917 and Section 7, Article VI of the Constitution of Puerto Rico were substantially similar and not dissimilar as the Secretary concluded. And there is no legislative history or letters in the Congressional record to support that the term “total revenues” under both statutes meant anything different than “revenues.”

Official English text of Section 7 of Article VI of the Constitution of the Commonwealth of Puerto Rico Official English text of the act of 1917
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. Section 34.- No appropriation shall be made, nor any expenditure authorized by the legislature, whereby the expenditure of the government of Porto Rico during any fiscal year shall exceed the total revenue then provided by law and applicable for such appropriation or expenditure, including any available surplus in the treasury, unless the legislature making such appropriation shall provide for leying a sufficient tax to pay such appropriation or expenditure within such fiscal year.
Deficit Spending, Guru Accounting

Ever the Secretary opened in 1974 the door to deficit financing and “guru” accounting for inclusion of past due tax receivable to balance the budget, public debt grew rampant. He simply ignored the official English text, the federal history, and federal legislation. No Spanish translation can justifiably, legally, or constitutionally change history.

English Version of Constitution

A review of the historical steps of US Congressional approval of the Constitution of the Commonwealth of Puerto Rico allows for only one conclusion: that only the relevant text existed only in the English version as presented to and approved by the US Congress and President Truman. Neither the Constitutional Convention of Puerto Rico, the hearings of the Constitutional Convention, the referendum of the people of Puerto Rico, nor the opinion of the Secretary of Justice of Puerto Rico could ever preempt federal legislation. After the Constitutional Convention approved the Constitution for submission to the people of Puerto Rico to vote, the Resident Commissioner of Puerto Rico in the US Congress sent on February 12, 1952, a transmittal letter to the House of Representatives with a copy of the English version of the Constitution. [See Committee Print, Text of the Constitution of the Commonwealth of Puerto Rico Approved by the Constitutional Convention of Puerto Rico, February 6, 1952, submitted by Hon. A. Fernós-Isern, Resident Commissioner of Puerto Rico and President of the Constitutional Convention of Puerto Rico stating as follows: “When adopted by the people, the constitution will be submitted to the President and the Congress of the United States for final approval…The copy of the constitution which I am transmitting is the official English text.” Attached to the transmittal letter was the English version. No Spanish version was submitted to the committee.]

On March 3, 1952, by referendum, the people of Puerto Rico approved their Constitution. Then, on April 22, 1952, President Truman sent his transmittal letter to the US Congress confirming that the President concludes that all federal statutory requirements have been met and attaches a copy of the official text of the Constitution of Puerto Rico for approval by US Congress. [See Message from the President of the United States Transmitting the Constitution of the Commonwealth of Puerto Rico, Adopted by the People of Puerto Rico on March 3, 1952. Attached to the transmittal letter was the Constitution in English. No Spanish version was submitted to President Truman nor the US Congress.] Therefore, US Congress and the President approved only the English text, which has at all times since governed.

Finally, on July 3, 1952, the US Congress and President Truman approved H.R. Res. 430 and, thus, approved the Constitution of the Commonwealth of Puerto Rico that President Truman sent to US Congress.

[Public Law 447, 66 Stat. 327. It states in relevant part as follows:

Whereas the President of the United States has declared that the constitution of the Commonwealth of Puerto Rico conforms fully with the applicable provisions of such Act of July 3, 1950, and of the Constitution of the United States, that it contains a bill of rights, and provides for a republican form of government, and has transmitted the constitution of the Commonwealth of Puerto Rico to the Congress for approval; and Whereas the Congress has considered the constitution of the Commonwealth of Puerto Rico and has found it duly to conform to the above requirements… …is hereby approved by the Congress of the United States…[and certain listed exceptions were subsequently met]. ]

Spanish Version of Constitution

Thus, there is no basis for Mr. Negrón López of the Constitutional Convention to rely on the unofficial Spanish version to conclude (a) that the term “total revenues” used in the act of 1917 and Section 7, Article VI of the Constitution had different meanings or (b) that US Congress intended to expand the scope of “revenues” to include not only of past due tax receivables but also proceeds from bond financing to balance fiscal budgets. Although no one has suggested openly that the US Congress is bound by comments made by a delegate of the constitutional convention and were never submitted to the US Congress, the Secretary of Justice unilaterally reached in 1974 the desired goal-to balance the budget with deficit financing as needed. The Government of Puerto Rico, perhaps, could have invoked Article VII of the Constitution of Puerto Rico to amend Section 7 of Article VI, but it did not. Today this section has remained the same sixty five years later.

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