Puerto Rico’s new draft fiscal plan banks on reforms, federal recovery funding
Debt service postponed; includes measures to attract business, stem outmigration
SAN JUAN – The Puerto Rico government submitted yet another revised fiscal for the bankrupt island. It does not include debt service payments over the next five years, despite a surplus of $12 billion, bolstered by stimulus from federal disaster recovery funds and the implementation of fiscal measures and structural reforms.
The document, which was submitted to the island’s Financial Oversight and Management Board for certification, is dated March 10 and is the sixth version of draft and final versions produced since January 2018. It is also the first revision to the fiscal plan since the government restructured the debt of the now-shuttered Government Development Bank and the Puerto Rico Sales Tax Financing Corp.’s (Cofina by its Spanish acronym) $17 billion debt.
The debt adjustment plan for Cofina went into effect Feb. 12. It granted Cofina ownership of 53.6% of the island’s sales tax and the commonwealth 46.3%. Cofina’s portion will be used to fund debt-service payments on new Cofina bonds distributed under the plan.
Before the measures and structural reforms, the government projects a surplus through fiscal year 2024, in part from revenue stemming from the massive disaster relief funding, totaling $77.6 billion, from diverse sources slated to be received between fiscal years 2018 and 2032.
These sources include $45.8 billion in federal public assistance, about $15 billion in Community Development Block Grant (CDBG) program funds between fiscal years 2020 and 2025; $2.5 billion in Federal Emergency Management Agency (FEMA) individual assistance that ends next year; $8 billion from private insurance claim payments; and $5 billion in other federal funding.
The stimulus brought about by the injection of federal funds will come about in multiple forms such as construction companies hiring unemployed local workers and from an influx of stateside workers spending money for food and lodging on the island. The revised fiscal plan projects $81 billion in disaster relief funding will be disbursed for reconstruction efforts.
Federal funding drop
Over the long term, however, the baseline forecast is not sustainable as federal disaster relief slows down, supplemental Medicaid funding phases out, Act 154 companies and non-resident withholding revenue declines, and pension and healthcare expenditures rise. Fiscal measures and structural reforms help produce a cumulative surplus through 2024. Structural reforms will drive a 1.21% growth and fiscal measures are expected to result in $7.5 billion in savings.
As in previous fiscal plans, the revised plan expects the island’s population to drop from the current 3.1 million to about 2.9 million in fiscal 2024.
Among the structural reforms the plan says can drive growth into the economy are the Earned Income Tax Credit; work requirements established for the nutritional assistance program; education initiatives established by the Workforce Innovation and Opportunity Act; improving of “the ease of Doing Business”; and fewer occupational licensing requirements to foster a more open market.
In addition, the government will move its processes online through its Unified Information System, as well as improve the ease of registering property and paying taxes. It also will deregulate the so-called Condominium Law to attract investment by rental residents and increase the population.
In addition to the structural reforms, the government says it is implementing fiscal measures to reduce costs and improve the quality of services. These include the creation of the chief financial officer position to oversee island resources; consolidating agencies; healthcare reform; and tax reform that includes compliance and fee enhancement initiatives to generate $574 million in revenue.
An addition to the revised fiscal plan is an expense for proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), the bankruptcy-like process that a federal judge is overseeing for Puerto Rico’s $70 billion debt. To date, related expenses have surpassed $300 million.