Governor Ricardo Rosselló Nevares’s plan to overcome the fiscal crisis traces a path full of privatizations, labor adjustments, service reductions, elimination of subsidies, and substantial increases in taxes, licenses, and insurance premiums.
In strictly financial terms, the Governor proposes expense reductions that—if approved by the Oversight Board—would reach an average of $1.975 billion per year, tax increases by $1.291 billion a year, and a 66% reduction in the government’s public debt service.
This last amount represents a greater reduction to the debt service than the one proposed to bondholders less than two years ago, which was rejected by the Government’s creditors.
The most significant cutbacks are associated with the merger of government functions and service privatization or “outsourcing”. To go more into detail, the Fiscal Plan presented by Rosselló Nevares on Tuesday night contemplates delegating services to the private sector, including ground and maritime public transportation services, highways, maintenance of public buildings, government parking lots, seaport and airport operations, the fines system for vehicles and drivers, and the issuance of identification cards provided by the Department of Transportation and Public Works (DTOP, by its Spanish acronym).
According to the Fiscal Plan, all of these initiatives would imply a reduction in expenses of approximately $850 million.
Subsidies Are Eliminated.
The document keeps the Oversight Board’s initial proposal to cut $300 million from the funds transferred from the central Government to the University of Puerto Rico.
This is added to a $100-million reduction to government subsidies to the private sector through the Internal Revenue Code and the elimination of a $350-million contribution the State makes every year to the municipalities.
On the one hand, the Fiscal Plan suggests that, to alleviate the cutback, the UPR must initiate a process of administrative consolidation, specialize the campuses, reduce payroll expenses, establish a system of income-based tuition fees, and increase the services offered to the rest of the government.
On the other hand, the formula for municipalities entails an increase in personal and real estate property taxes. The goal is to add $426 million per year in revenues through the tax increase. The central Government would keep around $76 million of this new income, and the rest would be distributed among the municipalities to substitute the subsidy.
As part of this process, the Fiscal Plan contemplates a public-private partnership to operate the Municipal Revenue Collection Center (CRIM, by its Spanish acronym) system to collect on personal and real estate property taxes.
Reformulating Mi Salud.
The Mi Salud program would also suffer substantial cutbacks under the plan designed by the Governor. The foreseen savings are estimated at $300 million, and they would imply a significant change to the basic benefits in the Government Health Plan (GHP).
With these changes, Mi Salud beneficiaries would not have access to benefits like prescription drugs, dental services, prosthetic devices, optometry, hospice care, and certain therapies.
The GHP regions would also be eliminated, allowing patients to choose the service providers they wish, thus even promoting competition between the offerings from the insurance companies participating in the system. Other initiatives seek to modify the list of preferred medications, standardize provider fees, reduce administrative profits, and investigate provider fraud and abuse.
Changes to the Pensions.
Meanwhile, the proposals submitted to the Oversight Board—which controls Puerto Rico’s finances—include a reduction of $89 million in payments to retirees. The Plan stipulates that pensions of up to $2,000 per month should not suffer significant changes. The ones affected would be those exceeding that amount. The effect will be “progressive”—that is, the higher the pension, the larger the reduction.
For example, a monthly pension of $2,500 could be reduced by 6%, which equals $150. Meanwhile, those who receive pension checks of over $10,000 a month will see a reduction of 24%, which means $2,400 less per month.
The proposal is substantially different from the one presented by the Oversight Board, which suggested cutting 10% (or $200 million) from the three main government retirement systems.
The other side of the fiscal balance seeks an increase in government revenues by almost $1.3 billion per year. The breakdown includes extending the Sales and Use Tax (IVU, by its Spanish acronym) to online sales, reformulating the 4% tax paid by foreign corporations, and increasing corporate taxes.
These increases are separate from the increase in personal and real estate property taxes that would be used to fund the municipalities.
The Plan does not provide details on the corporate tax increase, and it does not explain the change to the foreign corporations tax, although it does mention a series of alternatives.
The Plan also specifies another group of increases in licenses, fines, and insurance premiums, many of which have a direct impact on most Puerto Ricans and the business sector.
For example, the costs of motor vehicle licenses, traffic fines, and permits—like those issued by the Department of Health and the Firefighters Corps—will go up by 10%. In addition, premiums for insurance policies, like those offered by the Automobile Accident Compensation Administration (ACAA, by its Spanish acronym), will suffer a 5% increase.
Defining the Essentials.
Another issue addressed by the Fiscal Plan is the Government’s definition of what constitutes essential services. This discussion is key to determine which programs, services, or initiatives should be protected and which may be cut back as part of the adjustment to government expenses.
Governor Rosselló Nevares’s proposal lists 20 types of services that he understands should be considered essential in the areas of health, education, justice, security, and public infrastructure.
For example, the Plan proposes protecting services to prevent, diagnose, and treat health issues. It also stipulates that programs to investigate and prevent crime, as well as the emergency response systems, should be safeguarded.
In addition, the administration of public buildings, the issuance of permits, the collection and disbursement system, the basic functions of the Executive and Legislative branches, road maintenance, information systems, the power grid, and the drinking water supply system are all deemed indispensable.
The Final Balance.
With all the proposed changes, the Government would stop paying $35.1 billion from the debt service over the next 10 years. In fact, it would only contribute around $11.6 billion for the payment of long-term obligations to bondholders. This last number, however, could increase to $27.8 billion if Congress grants parity in Medicaid and Medicare funds.
These estimates are based on a budget deficit of $55.2 billion for the 10-year period covered by the Plan. In per-year terms, this is an average deficit of $5.52 billion.
This projection for the Government’s budget deficit is much lower than the $67.5 billion contemplated in the Fiscal Plan presented by former Governor Alejandro García Padilla at the end of last year.
The document justifies this change in projections by claiming that the fiscal initiatives taken during the first 60 days of this term provide for a 2% increase in the gross national product over a 10-year period. This increase in economic activity, in theory, would alleviate the Government’s budget deficit.