CNE: Fiscal Plan structural reforms won’t generate growth Puerto Rico needs
The Center for a New Economy has taken a look at the impact of the Fiscal Plan for Fiscal Year 2022 in structural reforms, debt restructuring, Medicaid, pensions, and the University of Puerto Rico, concluding, among other things, that structural plans will not generate the growth that Puerto Rico requires.
Sergio M. Marxuach, public policy director of the San Juan-based think-tank and editor of its monthly publication, the “CNE Review,” said “we should learn from past experiences that brought us to this financial and fiscal crisis.”
“Expected unrestricted surpluses at the end of the next five fiscal years are estimated to average $190 million per year, which means, the government of Puerto Rico has very little leeway if actual revenues are substantially below expectations, expenses significantly exceed the budgeted amount, or a combination of both lower revenues or higher expenses occurs,” said Marxuach.
The Fiscal Plan for Fiscal ’22, just like previous iterations, incorporates the effects of structural reforms in the areas of human capital and welfare benefits, K-12 education, ease of doing business, the energy sector, and infrastructure that, according to the Financial Oversight and Management Board for Puerto Rico “will enable Puerto Rico to begin to grow again based on competitiveness, countering the negative growth trajectory that has plagued the Island for over a decade, and reducing the dependence on federal funds to stimulate economic development.”
However, Marxuach said the structural reforms that the Oversight Board favored and set forth in the Fiscal Plan are “second-order issues and will not generate the economic growth Puerto Rico requires, both for increasing the living standards of its people and to pay off its restructured debt, unless they are embedded or framed within a larger economic strategy or vision.”
The Plan of Adjustment decreases the government’s obligations by approximately 48%, without considering potential recoveries through payment on the Contingent Value Instruments.
“Total debt relief, then, is significant but not as high as the Oversight Board claims, nor is it as low or trivial as the detractors of the plan allege,” Marxuach said.
Perhaps more important, from an annual budgeting perspective, the Plan of Adjustment reduces General Obligation debt service considerably from a pre-PROMESA annual average of $1.33 billion to a post-restructuring annual average of $666 million. Total GO/Sales Tax Financing Corp. (COFINA, in Spanish) debt service never exceeds $1.15 billion, or approximately 1.6% of Fiscal ’21 GNP, during the next 30 years, he said.
“Also noteworthy, the 2022 Fiscal Plan does not anticipate the Commonwealth borrowing for any purpose over the next five years,”he said in the report.
As for healthcare, in September 2021, the Centers for Medicare and Medicaid Services (“CMS”) issued an interpretation of the Medicaid funding cap provision for Puerto Rico that, among other things, increased the allotted cap for Fiscal ’22 to $2.943 billion.
While the Oversight Board has said it considers the CMS administrative interpretation to be a “long-term solution for Medicaid funding for the Commonwealth,” the CNE disagrees for the following reasons:
- The CMS letter is not a binding administrative order, rule, regulation, or law. Therefore, this policy could be reversed or withdrawn at any time.
- The administrative interpretation does not, and cannot, change the Federal Medical Assistance Percentage (55% FMAP), which could result in the government having to cut back benefits or reduce other spending to pay for the Medicaid program if the CMS interpretation is reversed.
“The reduction in the amount required to be budgeted for Medicaid has ‘liberated’ approximately $800 million which has enabled the legislative assembly to revert to its old profligate ways. In our opinion, those funds could have been put to better use by creating a budget stabilization fund or to restore, at least partially, the General Fund allocation for the University of Puerto Rico,” according to the report.
Regarding pensions for public employees, the Fiscal Plan has been amended to reflect certain reforms made to Puerto Rico’s retirement plans.
Total pension costs (PayGo plus trust deposits) during the Fiscal ’22-Fiscal ’31 period will average more than $3 billion per year. This means pension-related payments will be the largest single General Fund expenditure item during this 10-year period, he said.
“To be clear, we are not arguing in favor of reducing pensions. We do want to highlight, though, that this $3 billion per year is the cost we are paying now due to decades of mismanagement, for the many years government agencies failed to make the required pension contributions, and for the multiple times that the central government ‘borrowed’ from the retirement fund and never repaid the ‘loan’,” said Marxuach.
UPR budget slashed by half
The budget includes an allocation for the University of Puerto Rico that comes from the government’s General Fund, which has been reduced by $445 million, or 48%.
“It is difficult to understand this massive reduction in the General Fund appropriation for the most important higher education institution in Puerto Rico. Some argue that the budgetary reduction is justified by the reduction in student enrollment,” said Marxuach.
“However, a quick look at the data demonstrates this is a false statement. According to data released by the UPR, student enrollment has decreased from 46,325 during Fiscal ’17 to 35,623 during Fiscal ’22, a reduction of 23%. The 48% reduction in General Fund appropriations is, therefore, completely disproportionate to the decline in enrollment,” he said.
If the Oversight Board is really counting on improving human capital in Puerto Rico as an engine for growth in the future, then dismantling the UPR is “outright counterproductive,” said Marxuach.
“Therefore, we recommend that, if the projected savings in the contribution to the operation of the Medicaid program are in fact realized, at least a portion of the funds that become available be allocated to the University of Puerto Rico,” the economist said.