Wednesday, July 6, 2022

Puerto Rico Budget Requirements Signal Austerity, Lack of Economic Growth

By on February 8, 2019

Editor’s note: The following originally appeared in the Feb. 7 -13, 2019, issue of Caribbean Business.

The $8 billion limit imposed by the Financial Oversight & Management Board (FOMB) on the budget of Puerto Rico’s government could either mean the federal entity wants to stop “political expenditures” or is admitting it failed in predicting economic growth, several economists said.

In providing his opinion as an economist and not as president-elect of the Economists Association, Heriberto Martínez commented that the FOMB wants to invest less in “political expenditures” aimed at attracting votes and more in social investment. He noted that 2020 is also when Puerto Rico must start saving money for debt payments, so the proposed budget is a sign of austerity. The board’s letter comes amid claims that Raúl Maldonado, the island’s chief financial officer, gave contracts to firms in which his son worked when the CFO was previously the Treasury secretary.

“How can the government ask the people to make sacrifices when it is giving contracts out to appease political friends?” Martínez noted.

In a recent letter to Gov. Ricardo Rosselló, the FOMB established the government’s general fund revenue forecast at $8.03 billion for fiscal year (FY) 2020 and “other funds” revenue was forecast at $2.54 billion. The board then instructed the government to turn in a budget by March 22 that is in tune with the revenue forecast. The proposed budget is smaller than the current one which is of $8.79 billion.

The FOMB called for changes to “ensure alignment” with the fiscal plan for “uniform healthcare measures to include additional benchmark-based reductions for the Legislature, to apply standard executive branch rightsizing targets to the State Elections Commission, as well as to reflect on the privatization of WIPR by the end of the third quarter of the fiscal year.

If the government makes the changes contemplated by the fiscal plan, the FOMB said it will agree to reinvest those savings in the high-priority areas of public safety and education, to include, at minimum, a $500 payroll hike to police, a $500 payroll increase to teachers and directors, and a $500 salary hike to firefighters and equipment.

Christian Sobrino, director of the P.R. Fiscal Agency & Financial Advisory Authority, publicly said that the budget the FOMB was requesting was too small and would have an impact on essential services. The cap on expenditures is lower than what appears in the fiscal plan, which put them a little over $9 billion.

However, Martínez, as well as economist Antonio Fernós Sagebien, noted, in essence, that the government will have to make significant cuts in wasteful spending to comply with the budget, in part because economic conditions have taken a downturn.

Fernós Sagebien noted that since the commonwealth fiscal plan was approved last year, there have been significant changes that are deterring economic growth. In the fiscal plan, the FOMB predicted that the influx of federal funds and insurance claim payments would help jumpstart the economy. However, government officials have acknowledged that the disbursement of federal funds has been delayed in great measure by the partial federal government shutdown and by bureaucratic requirements imposed by federal agencies.

“That has not happened [the influx of federal funds and insurance claim payments]. The [FOMB] failed in their projections. We are getting much less in insurance claims and we also do not know when we will be getting federal funds, so the economy will not have the multiplying effect. I think they overestimated how soon we will be getting those funds,” said Fernós Sagebien, who is also a university professor.

Once the federal funds are disbursed, Fernós Sagebien said they will not arrive at once, but in stages with conditions imposed on their use.

The FOMB also asked the government for more transparency. For instance, it urged the removal of one-time FY 2019 appropriations included under “other income” in the certified FY 2019 budget. It also asked the government to remove certain FY 2019 appropriations where the board has insufficient visibility to ensure compliance with the fiscal plan.

If agencies provide sufficient supporting detail for these expenditures as part of the government’s March 22 budget submission, the costs will be added back to the agency’s budget target, the FOMB said. In that regard, Fernós Sagebien criticized that the Treasury Department is providing actual numbers and not estimated numbers down the line. “That takes away from transparency,” he said.

Martínez, on the other hand, said the fiscal plan calls for the establishment of certain funds, such as a Rainy Day Fund, and to start saving to eventually begin making debt payments.

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