Revised Puerto Rico fiscal plan doesn’t guarantee projected revenues
SAN JUAN – The administration of Puerto Rico Gov. Ricardo Rosselló has submitted yet another revised fiscal plan that concludes the government will have a $3.4 billion surplus through fiscal year 2023, using as a base more than $70 billion in federal and private aid, after government-transformation initiatives and structural reforms are put in place.
However, a disclaimer on the latest fiscal plan does not guarantee the information on projected future revenues because of problems with the current available information.
“The Government has had to rely upon preliminary information and unaudited financials for 2015, 2016 and 2017, in addition to the inherent complexities resulting from a prolonged period of a lack of financial transparency. As such, Fafaa [the Fiscal Agency & Financial Advisory Authority] and the Government have made certain assumptions that may materially change once those financial statements are fully audited,” the plan states.
The government last month turned over to the Financial Oversight & Management Board a revised five-year fiscal plan to account for the negative impact of Hurricane Maria’s marked effect on the economy, which contained a $3 billion gap and relied on $57 billion in federal aid and insurance claims. The fiscal oversight board sought additional revisions, in essence, to provide more detailed information.
The plan merely defers the so-called healthcare cliff to 2020, does not allocate money to pay debt and does not reduce pensions as the fiscal board had requested.
Maria’s landfall in September worsened an already fragile infrastructure and economy. Over the six-year period, the government went from a $4.8 billion cash-flow surplus reported in the March 13, 2017 certified fiscal plan to a surplus of $3.4 billion.
“Increased federal support, positive impacts from reconstruction spend[ing] and structural reforms offset the negative impacts of the hurricanes and increased spend[ing] related to Title III costs. A contributing factor to the situation is a general lack of access to traditional capital markets to fund growth and rebuilding efforts, in the short term, this has been partially mitigated by increased federal support,” the document reads.
The plan relies on $49.1 billion in federal assistance the administration expects to receive over the next five years and $21 billion in private insurance claims.
“Due to the passing of the Bipartisan Budget Act of 2018 on Feb. 2, 2018, and other granted federal funding, $12.8 billion of supplemental appropriations are included,” the plan further says.
The estimated allocation for Puerto Rico is divided into $11.7 billion for community development block grant funds and $1.1 billion in supplemental Community Development Block Grant Program funds. The government’s cost-share is estimated at $1.4 billion, excluding the amounts related to Puerto Rico’s Electric Power (Prepa) and Aqueduct & Sewer (Prasa) authorities, which are addressed in their respective fiscal plans. “Puerto Rico is requesting a cost-share adjustment for FEMA’s [Federal Emergency Management Agency] programs under the Stafford Act to 100% federal. To the extent the cost-share is not entirely eliminated, the Government has requested authorization to use CDBG-DR [Community Development Block Grant-Disaster Recovery] funds to cover the cost-share match requirements. Historically, either FEMA or Congress has authorized a 100% federal cost-share for catastrophic disasters such as in hurricanes Andrew and Katrina,” the plan says.
The plan still includes an 11 percent drop in the baseline real gross national product (GNP) for fiscal 2018, but for fiscal 2019, the plan estimates an 8.4 percent growth in the GNP. Previously, the growth was 7 percent.
The growth will continue through 2023, and is estimated at 3.5 percent in 2020, 2.3 percent in 2021 and 2.1 percent in 2023.
Revenue growth is negative-19.8 percent this year, but it is estimated to grow by 10.2 percent in 2019; by 5.1 percent in 2020; 3.8 percent in 2021; 3.3 percent in 2022; and by 3.5 percent in 2023.
Although the fiscal board had advised the government to avoid phasing out incentives before cutting taxes, the government is moving on with plans for its proposed tax reform, which maintains proposed cuts for individuals and corporations at less than 30 percent. The plan also maintains a proposed repeal of the business-to-business tax and the cut to the prepared food tax to 6 percent. The plan also calls for the implementation of the tax reform by December.
The plan moves on with a proposed repeal of subsidies to municipalities and the University of Puerto Rico (UPR), but makes changes to its healthcare reform.
From fiscal 2018 to fiscal 2020, the expense baseline assumes $4.8 billion in federal support, deferring the healthcare cliff and providing incremental liquidity of $1.8 billion in fiscal 2018, $2.4 billion in fiscal 2019, $600 million in fiscal 2020.
“The cliff reappears in fiscal year 2020 and is equal to the approximately 55 percent average…would be the federal funding reimbursement for healthcare insurance premiums and claims less remaining grants,” the plan reads.
In the area of labor, the commonwealth appears to have dismissed fiscal board suggestions to make additional labor law changes to ease doing business in Puerto Rico.
The Human Capital Reform contained in the plan seeks to create a “thriving” private sector that can provide jobs for residents and an “intelligent welfare structure” to promote work.
Employer-directed measures from Act 4 of 2017, the Labor Reform Act, reduced the economic and legal burdens that may slow or discourage job creation, the plan says. It continues to rely on the implementation of the Earned-Income Tax Credit as a benefit for working people and to reduce welfare rolls.
The plan moves on with the “regionalization of services” to help municipalities achieve “economies of scale.” The strategy focuses on transitioning toward a “county structure where counties” take a prominent role in the administration of essential services currently performed by the commonwealth government or at the municipal level.
Implementing a shared-services approach at the county level will provide better management and utilization of services by reducing “redundancy and bureaucracy,” according to the plan. A county support fund of $100 million a year, with a sunset in fiscal 2023, is being considered an investment to incentivize and enable a smooth transition into the new county structure, the plan adds.
Regarding infrastructure, about $400 million a year will be invested over the next five fiscal years– $275 million in the central government, $85 million in the Highways & Transportation Authority (HTA) and $40 million in the UPR.
The plan also includes a fiscal board-recommended emergency fund in the form of a $130 million annual reserve.