from taxes, perhaps by moving activity to the informal sector, or perhaps by halting the activity altogether. either way, collecting the necessary revenue requires rates to be even higher on activities that remain in the base, reinforcing the problem. typically, comprehensive reform is necessary to break the cycle by simultaneously broadening the tax base and reducing rates across a range of taxes. such a reform would likely produce a significant bonus in terms of faster economic growth, particularly in the formal sector. a third step would be to improve the commonwealth ’ s financial reporting. puerto rico ’ s unique status means that it is one of few jurisdictions whose finances are not regularly surveyed by a public agency. the u. s. census bureau reports annually on mainland state finances and the international monetary fund generally reports on the finances of nations. these surveys provide significant transparency into the finances of those entities, which is invaluable for policymakers and citizens wishing to understand, monitor and exert control and discipline over the fiscal policies of their governments. they may also serve the purpose of increasing investor understanding of how the commonwealth ’ s finances compare to other governments. new york city ’ s experience in the 1970s shows the value of better financial reporting. prior to the city ’ s fiscal crisis in 1975 through 1977, new york had relatively poor financial reporting practices. as part of its recovery from that crisis, and a condition of accessing credit, the city ’ s reporting improved dramatically and has since won several awards. along with those improvements, the city ’ s access to credit markets steadily improved. economic research indicates that more transparent budgets are associated with lower public sector funding costs. a fourth step would be to look for ways to strengthen the performance of public corporations. a major difference between puerto rico ’ s balance sheet and those of the states is the presence of large, heavily indebted, corporate - like entities that continue to lose money and increase borrowing. for any financial reform agenda to be successful, it must confront this issue head on. key elements of a successful reform strategy might include strengthening the public corporations ’ financial standing and controlling the future flow of liabilities. bis central bankers ’ speeches puerto rico could also seek out the opportunity to benefit from outside management expertise, including the wide experiences of u. s. mainland states. an independent regulator for utilities is the norm throughout mainland states. by leveraging the expertise and reputation of existing independent regulatory agencies, puerto rico may improve the efficiency of its public corporations while reassuring investors. as a fifth step

to the puerto rico economy. our earlier report cited low labor force participation among younger and less educated workers as one important factor limiting the island ’ s competitiveness. since that report, overall labor force participation has continued to decline. the unemployment rate on the island has consistently exceeded the rate on the mainland by several percentage points. although the rate has fallen by more than a full percentage point year to date, the gap with the mainland remains wide. moreover, poor labor market opportunities for many workers have contributed to a significant increase in the rate of outmigration of puerto rico ’ s residents, accelerating the island ’ s population decline. the prolonged period of weak economic growth has compounded puerto rico ’ s fiscal problems : puerto rico ’ s public sector debt has been on an upward trend for a decade. the stagnation of the economy and persistent fiscal deficits underlie this debt buildup. the level of outstanding debt as a percentage of the island ’ s annual gnp, a ratio used by many fiscal analysts, rose from about 60 percent in 2000 to more than 100 percent in 2013. debt ratios in this range can inhibit economic growth in that they generally lead to higher financing costs, which in turn, can lead to constraints on access to further financing. the recent downgrading of puerto rico ’ s public debt to non - investment grade was a clear signal that the current fiscal situation poses serious risks to the island ’ s economic future. steps toward fiscal sustainability next, i will discuss the buildup of puerto rico ’ s public debt and then provide some thoughts on ways to improve the island ’ s fiscal health. to open this discussion, it is worth noting some key features of puerto rico ’ s fiscal institutional environment. the commonwealth has a close relationship with the u. s. government which, in many ways, is analogous to that of a mainland state. puerto rico shares a common market and a common currency with the u. s. mainland leading to strong economic interdependencies. federal aid is a major source of revenue for the commonwealth and puerto rican residents participate in large u. s. social insurance programs such as social security and medicare. in addition, puerto rican debt trades as a municipal security in the u. s. capital markets, and much of the interest earned on this debt is exempt from local, state and federal income taxes, regardless of where in the u. s. the investor lives. and like all but one state, vermont, puerto rico has a self - imposed