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Federal Funds At A Crossroads?

With a boost from Hurricane Georges, federal funds coming into Puerto Rico peaked at $17.3 billion in 1999, and leveled off to a still impressive $16.8 billion in 2000. Analysts fear anti-Navy sentiment may torpedo some of next year’s funds and hold back Puerto Rico’s economy.


June 21, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Pocketing a pretty penny: Puerto Rico received a total of $16.8 billion in federal funds last year. Projections for next year are clouded by the Vieques issue.

Total federal funding to Puerto Rico during fiscal year (FY) 2000 reached an impressive $16.8 billion–a figure equivalent to 40.5% of the island’s gross national product–according to the Consolidated Federal Funds Report issued by the U.S. Census Bureau. The report contains the most recent statistics available on federal funding to the states and territories.

The FY 2000 total was 3.3% less than the $17.3 million registered in FY 1999–when most of Hurricane Georges’ relief assistance came to the island–but 11.05% higher than the $15.1 billion received in FY 1998.

In the past five years alone, federal funds and other assistance–such as direct and guaranteed loans and insurance–injected into Puerto Rico’s economy totaled nearly $77.4 billion.

The federal fiscal year runs Oct. 1 through Sept. 30.

Last year’s amount includes $12.1 billion in direct expenditures and obligations–commonly referred to as "federal funds" because they constitute direct payments to individuals or the local government–and $4.7 billion in "other federal assistance"

including, among others things, direct loans for low income housing, education, farm operations, and water & sewerage systems, federal home mortgage insurance, and federal flood insurance. (See chart)

The level of federal funds Puerto Rico received in 1999 was unusually high. That year, the island received the largest chunk of Hurricane Georges relief assistance from the federal government. That year, direct federal expenditures, excluding loans and insurance, reached $13 billion, a 16.8% increase over the $11.1 billion received in 1998. In the last seven years, federal funds to the island have grown an average 4.7% per year. (See chart)

That growth rate is expected to taper off over the next five years. According to a Government Development Bank for Puerto Rico (GDB) report, the 12 largest federal funds programs to the island–representing 75% of the total–are expected to grow an average of only 4% per year in the next five years. (See table)

The projections are based on the formulas currently used to determine Puerto Rico’s participation in the federal assistance programs, which in many cases is considerably less than what states receive. Puerto Rico residents and companies do not pay federal income taxes as do residents and companies in the states.

Island residents and companies do pay, however, about $2 billion in Social Security contributions to the federal government. That means a net of $14.8 billion in total federal funding entered Puerto Rico’s economy in 2000.

Still, the actual level of federal funds to the island in future years cannot be determined with precision in advance because they are the result of the federal budget process, a partly political process highly dependant on the island’s good relations with both Congress and the White House.

"No one in Congress can tell for sure what we can expect for next year in terms of federal funds for Medicare," Puerto Rico Resident Commissioner Anibal Acevedo Vila told CARIBBEAN BUSINESS.

At almost $1.2 billion in 2000, Medicare is the third largest federal program in Puerto Rico, after Social Security ($3.9 billion), and the Nutritional Assistance Program ($1.3 billion).

Priorities for next year

Acevedo is confident there will not be a substantial reduction in federal funds for health programs in the federal budget for fiscal year 2002, which starts Oct. 1, 2001.

As a matter of fact, he feels they might increase. Both President George W. Bush and former Vice President Al Gore put forth specific healthcare proposals for the country during the presidential campaign.

According to Acevedo, there is a drug prescription proposal that would create a five-year fund–with an amount still undetermined–for the states to develop their own drug prescription programs.

"The problem with this," says Acevedo Vila, "is that after that five-year term, the states would have to assume the costs of the program." Whether or not Puerto Rico will be considered for participation in this program, "we still don’t know."

Medicaid, for which Puerto Rico received merely $177 million in 2000, is not under discussion at this moment and, according to Acevedo, it would be difficult to expand the island’s participation in this particular program.

The Resident Commissioner told CARIBBEAN BUSINESS; "There are no threats on the table regarding the Nutrition Assistance Program (PAN by its Spanish acronym), but it is true that agriculture is one of the areas less likely to be reformed or receive a funding increase." Last year, Puerto Rico received $1.3 billion in nutritional assistance, which the local Family Department distributes through checks and electronic benefits transfers to eligible beneficiaries.

"Although we don’t expect drastic budget reductions, we do know that agriculture is not one of President Bush’s priorities," said Acevedo Vila. "But this is an area that will remain uncertain until late summer."

According to Acevedo, projects that have already received budgetary allocations--like the Urban Train (UT), for instance--will continue receiving the assigned funds. He anticipated the UT would get a $75 million allocation, the same as last year’s. Last week, however, of the $75 million request for this project in Puerto Rico in the President’s budget, Congress approved only $40 million. The move may signal a disposition by Congress to start cutting back on discretionary spending to Puerto Rico.

Social security reform is another area that commanded attention in last year’s presidential campaign. But Acevedo said it’s unlikely that any reform plan would affect next year’s social security budget. In 2000, Social Security beneficiaries in Puerto Rico received retirement and disability payments totaling $3.9 billion. That’s twice the approximately $2 billion Puerto Rico residents and companies in Puerto Rico pay into the Social Security fund each year.

Education is another area that is a priority in Congress for both Democrats and Republicans. Acevedo feels confident that there will be an increase in federal funds in education for Pell Grant programs. Last year, the island received $423 million under this program.

Early last month, however, the U.S. House Resources Committee Chairman James Hansen (R., Utah) said he would study the $1.2 billion that the island receives in total federal education programs each year, in response to the local proposal to eliminate English as an official language.

Hansen had previously submitted a bill to eliminate the annual rebate to the local government of nearly $250 million in the excise taxes the federal Treasury collects on Puerto Rican rum sold in the U.S.

Federal funds and the Vieques issue

Hansen’s views on federal funding to Puerto Rico, along with those of Senator James Inhofe (R., Okla.) have received considerable attention in the local press because of their strong pro-defense stance in the ongoing U.S. Navy-Vieques situation. Both have harshly criticized the government of Puerto Rico–first under Gov. Pedro Rossello and now, perhaps more harshly, under Gov. Sila Calderon–for what they perceive to be Puerto Rico’s unwillingness to contribute to the national defense effort.

Acevedo Vila does not lose sleep over it. He says only Hansen and Inhofe have expressed themselves against Puerto Rico. "Although the threat is still there and we have to face it, I believe there are good signs in the U.S. Senate regarding Puerto Rico. Up to this point, no one has slammed the door in our face," Acevedo Vila said.

"Whatever the final decision regarding Vieques, it will depend on the attitude that the White House assumes towards Puerto Rico and I don’t foresee an attitude of discrimination or punishment," said the Resident Commissioner.

That may be about to change. Last week President Bush announced that the Navy will end its exercises on Vieques "within a reasonable time." Although no details had come forward from the Pentagon at press time, the President’s words were widely interpreted to mean that the Navy would leave Vieques no later than May 2003, thus making academic the November referendum that had been scheduled to poll Vieques residents on the issue, in accordance with former President Clinton directives and subsequent congressional legislation.

Following the announcement, Republicans on Capitol Hill–including Senate Armed Services Committee ranking member John Warner (R., Va.), Inhofe, House Armed Services Committee Chairman Bob Stump (R., Ariz.) and Hansen–lashed out at the President’s decision warning of dire consequences if and when it goes through.

Warner and Inhofe are now in the minority in a Democrat-controlled Senate. But Hansen, who is House Resources Committee chairman, controls a great deal of the agenda that affects Puerto Rico, including federal funding. Last week, following President Bush’s announcement, he was quoted in the local press saying that there will be an end to Puerto Rico’s "welfare state" if the Navy finally loses Vieques.

Asked if the eventual withdrawal of the U.S. Navy from Vieques could represent a decrease in federal funds to Puerto Rico, Acevedo Vila said, "That is a threat from those who defend the Navy. But opinions in Congress are mixed and the Democrats will not permit such action."

Not all Democrats agree.

"Vieques is an essential part of the national security right now. I would not be surprised if there are changes in the Puerto Rico/U.S. relationship based on the actions taken by the Puerto Rico government to prevent military training," Jeffrey Farrow, former co-chair of the White House Interagency Working Group on Puerto Rico, a.k.a., former president Bill Clinton’s top adviser on Puerto Rico, told CARIBBEAN BUSINESS.

He said that while the new Democratic majority in the Senate will surely do their best to block any proposals to take away existing federal assistance to the island, he agreed that it would not make sense to give Puerto Rico additional assistance if the Navy has to leave Vieques.

Of the total $16.8 billion in federal funds and other assistance Puerto Rico received in 2000, more than $1 billion went to defense or defense related expenditures including veterans compensation ($357 million), military retirement & disability payments ($84 million), vocational rehabilitation and other assistance to disabled veterans ($31 million), Department of Defense procurement contracts ($289 million); and salaries & wages of military and civilian Department of Defense employees in Puerto Rico ($253 million).

Former Resident Commissioner Carlos Romero Barcelo believes there’s much more at stake. He thinks that uncertainty regarding the Vieques issue could lead to independence for Puerto Rico. "And that, of course, would have a very strong impact on the island’s economy," he told CARIBBEAN BUSINESS.

Romero warns of the implications. "If Puerto Rico becomes an independent republic, federal funds for Social Security, for example, will stop flowing. The people who already benefit from it will probably continue receiving those benefits; but beyond that, the government of Puerto Rico will have to deal with the situation," said Romero.

Both Romero and Acevedo Vila agreed that the President of the United States has the power to make a decision over the Vieques issue.

"He [Bush] has the power to decide because Puerto Rico is a U.S. territory," said Romero. "The final decision on the Vieques issue is on the President’s hands," added Acevedo Vila.

A bang for the buck

Over the last decade, total federal funds to Puerto Rico have hovered consistently around an average of 44% of Puerto Rico’s gross domestic product. As a percentage of the island’s government budget, however, Uncle Sam’s contribution has grown in importance. Of the Commonwealth’s $20 billion budget for fiscal year 2001, a full fifth, or $4 billion, came from federal funds.

According to the Government of Puerto Rico’s Office of Management and Budget, in the last 10 years, the percentage of the Commonwealth’s consolidated budget that came from federal funds has grown from only 7.3% in 1992 to 20% in 2001.

Romero believes many people in Puerto Rico don’t understand the impact federal funds have on the island’s economy.

"For example, we receive $1.2 billion in nutritional assistance checks. Imagine what the impact on the local economy would be if we stop receiving these funds. There would be a larger number of families with fewer economic resources; many food stores would close and unemployment would also increase," said Romero. "Puerto Ricans pay $2 billion in Social Security every year and receive almost twice that amount in that particular category."

According to Romero, many in Congress have the impression that the Puerto Rico government "wants money, but doesn’t want to cooperate with national defense."

Farrow shared this opinion saying there is an increasing feeling in Congress of ‘why should we assist them [Puerto Rico] more if they don’t want to help?’


Breakdown of federal funds to Puerto Rico by category (FY 2000)

Retirement and disability payments
Social Security
Federal retirement and disability payments
Veterans benefit payments
All other
Other direct payments
Other direct payments for individuals
Unemployment compensation benefit payments
Excess earned income tax credits
Lower income housing assistance —

Section 8 moderate rehabilitation

All other
Direct payments other than for individuals
Grant awards
Highway planning and construction
Family support payments to states (AFDC+TANF) *
Medical assistance program (Medicaid)
Other (includes Nutrition Assistance Program)
Procurement contract awards
Salaries and wages
United States Postal Service (USPS)
Other federal assistance
Direct loans
Guaranteed loans
Grand total
Direct expenditures or obligations
Other federal assistance

* AFDC = Aid to families with Dependant Children

TANF = Temporary Assistance for Needy Families

Source: U.S. Census Bureau

This Caribbean Business article appears courtesy of Casiano Communications.
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