Monday, June 26, 2017

The Nuts and Bolts of ‘Plan SOS UPR’

By on June 18, 2017

By María S. Dávila and Rosario Fajardo

SAN JUAN — Now that the University of Puerto Rico (UPR) strike is over and classes have resumed, the hard work begins as the university is facing many uncertainties regarding its finances and the possibility of achieving fiscal sustainability. At the same time, as of presstime, there were not enough members on the UPR Governing Board to approve a fiscal plan.

After some failed attempts by the university administration to produce a viable fiscal plan, a group of 16 professors from different UPR campuses produced a proposal to tackle the financial challengers that the UPR is facing.

The document, “Sustainable Fiscal Plan for the UPR,” dubbed Plan SOS UPR, aims to address the looming budget cuts in the university’s coffers. The Financial Oversight & Management Board and central government are requiring a recurrent reduction of $500 million a year in the government’s direct budget allocation to the UPR.

(CB Graph)

The budget cuts are to be staggered over the next four years, with the proposed schedule as follows: a cut of $150 million in fiscal year 2018, increasing to $300 million in fiscal 2019, a cut of $450 million in fiscal 2020 and $500 million in subsequent fiscal years thereafter.

When the Plan SOS UPR was first unveiled, the assumption was that next fiscal year’s budget cut for the UPR would be $150 million, as the Office of Management & Budget had announced. However, when Gov. Ricardo Rosselló presented his budget for the next fiscal year, the cut for UPR had increased to $200 million, to the surprise of the university community.

While the group of UPR professors who worked on the SOS plan is calling for increased revenues and cost-reduction measures, they are also against the massive cuts to the university. “There is neither an economic or financial study nor a historical precedent in the United States that supports such an exorbitant cut in governmental support to a higher education public institution as the one purported for the UPR and accepted by previous fiscal plans,” states the English version of the document.

Three fiscal scenarios

The SOS plan analyzes three fiscal scenarios for the UPR. The first one is redistributing the “greater weight of government investment reduction to credits and private tax incentives.” In other words, rather than decrease its subsidies to the UPR, the government should reduce subsidies to the private sector, arguing that there is a plethora of “ineffective and useless tax credits and incentives” that have been draining resources.

Excluding municipalities, the document assumes that the private sector receives some $1.67 billion a year in tax credits and incentives. The first scenario of the SOS plan outlines reducing this figure incrementally in the next fiscal year by 25% (a cut of $411 million), reaching 56% (a cut of $932 million) by 2026.

The second scenario maintains the current $834 million a year in direct allocations, which has been frozen since 2014, and the third outlines the originally proposed $150 million cut for next year.

Revenue-enhancing measures

Likewise, while the document presents several “efficiency enhancing” proposals, the main thrust is focused on those that will bring additional revenues to the UPR. In total, the three main revenue-enhancing proposals project bringing in an additional $262 million a year, for the most conservative scenario, and $350 million annually for the more optimistic projection.

The three measures, proposed by UPR Mayagüez campus economics Prof. Edwin Irizarry Mora, are related to the island’s tax system.

The first would reassess property values in Puerto Rico and send 10% of the revenues collected from the property tax to the UPR. A second option would be for municipalities that have a UPR campus to send 12.5% of the proceeds of the tax to the UPR, while the remaining 68 municipalities would send the 10% rate. Between $40 million and $50 million a year could be garnered from this measure.

Government’s fiscal team explains UPR budget cuts

The second measure proposes that the UPR become a beneficiary of Act 154 of 2010, the 4% excise tax on multinationals operating in Puerto Rico. Irizarry argues for an increase of 0.5% to the current rate, with the new revenues forwarded to the academic institution. This could glean $230.4 million annually for the UPR. He also presents the possibility of increasing the excise tax by 0.33%, which could still bring the UPR an estimated $152 million a year.

“Two important points stand out concerning this proposal. First, that the current P.R. Legislature seems open to an increase in the tax percentage in Law 154. Second, that in the United States the idea of continuing to collect this tax in Puerto Rico was accepted, and that an increase like the one suggested here…would not [be] absurd to anyone,” Irizarry writes. “We should not forget that foreign corporations claim a credit for this tax they pay in Puerto Rico when filing federal income tax, so there will be no additional penalty over their net gains.”

As for the third measure, he suggests the UPR help the P.R. Treasury Department to collect outstanding debt in exchange for keeping 10% of the collected revenues. The professor estimates this measure could bring $70 million annually to the university.

In terms of “efficiency enhancing” measures, the focus is on administrative changes rather than touching direct academic services the university provides. For example, the SOS plan advocates reducing the budgets of the UPR’s Central Administration and Governing Board, as well as reducing operational costs and employee benefits. These measures are also contemplated in the UPR administration’s own proposals.

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