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Federal funds in Puerto Rico: How do they add up?

The federal government annually spends an average of more than $6,200 per citizen in the 50 states, but less than $3,400 for each U.S. citizen in Puerto Rico. CARIBBEAN BUSINESS takes an in-depth look into this disparity and into the future of federal funding.


June 27, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Still the lowest, but gaining ground: Puerto Rico has achieved parity in more federal programs; resolution of Vieques issue should improve outlook

The controversy over Navy training in Vieques has been at center stage in Puerto Rico’s federal agenda for more than three years. But Resident Commissioner Anibal Acevedo Vila and top Calderon Administration officials now believe a favorable resolution to the controversy is imminent, and are looking forward to opening a new chapter in Puerto Rico’s federal relations.

Even some of the administration’s leading detractors say they expect that the drive toward closure on the Vieques issue–which will probably be advanced significantly by the findings of a Center for Naval Analysis study identifying alternative training sites and by presidential support for the selection of a substitute–will invariably help the island make new advances in its federal affairs agenda.

Acevedo Vila candidly admits he has had to scramble more than once since assuming office in January 2001 to avoid punitive action against Puerto Rico because of the Calderon Administration’s insistence on the cessation of naval weapons training in Vieques. But he says those attempts have indeed been quashed and that, according to all indications he has received, the Bush Administration will deliver on the presidential promise to end Navy training in Vieques next year.

"The only piece missing right now is the public release of the results of–and the follow-up on–the Center for Naval Analysis study," Acevedo Vila told CARIBBEAN BUSINESS in an exclusive interview.

One of Acevedo Vila’s most assiduous critics, Senate Minority Leader Kenneth McClintock, agrees that the final resolution of the Vieques controversy should open a new chapter on Puerto Rico’s federal affairs. "Congress basically operates from crisis to crisis, and once the [Vieques] exercises end, Congress will rapidly forget the issue," McClintock said.

Unresolved issues

Jeffrey Farrow, former White House point man on Puerto Rico, said the nearly all-consuming attention on Vieques the past several years has set back a number of long-standing federal issues that have a major impact on Puerto Rico.

"The Medicare issue, for example, was crowded out," Farrow said. Before the Vieques issue erupted in 1999, he pointed out, the Clinton Administration–in partnership with Resident Commissioner Carlos Romero Barcelo and Governor Pedro Rossello–had succeeded in raising the Medicare rates received by island hospitals.

Though Puerto Rico is treated like the 50 states in most respects regarding Medicare, it is the only U.S. jurisdiction with a different reimbursement rate for hospital services.

Prior to the 1998 rate increase, Puerto Rico’s reimbursement formula was 25% of the national rate and 75% local cost factors. The 1998 change to 50% of the national rate and 50% local cost factors was seen as a step toward further improvement in 2000, when the Clinton Administration proposed a Puerto Rico formula of 75% of the national rate and 25% local cost factors.

However, in 2000, then Senate Majority Leader Trent Lott of Mississippi blocked the Clinton Administration’s proposal. Farrow thinks that since Congress is likely to enact legislation providing for new prescription-drug benefits for senior citizens before the November elections, there may be another opportunity to revisit the issue of the reimbursement formula.

Easier going in the Senate

According to former Resident Commissioner Carlos Romero Barcelo–a Democrat who faced a Republican-controlled Senate during most of his years of service in Washington–Puerto Rico matters also are likely to find a more sympathetic shoulder in the current Democratic-controlled Senate. He pointed out that the island has cultivated friendships with many influential Democrats, such as Senators Ted Kennedy, Christopher Dodd, and Hillary Rodham Clinton, who are now in key positions of leadership.

It is thanks in large part to the good graces of the Democratic-controlled Senate, Romero Barcelo said, that Acevedo Vila was able to successfully follow up on an effort Romero Barcelo had long championed–state-like treatment for Puerto Rico’s children in the U.S. Department of Education’s Title I program. The island had previously received only 75% of what would be state-like funding.

According to Acevedo Vila, who acknowledged Romero Barcelo’s efforts on the issue, the approval of state-like treatment for Puerto Rico in what constitutes the federal government’s single largest educational funding program means the island will see its Title I funding increase by $83 million for fiscal year (FY) 2003. In the next six years, the island’s educational system is projected to receive more than $540 million in Title I funds.

Over half a million island children will benefit, since over 1,500 Puerto Rico schools (96% of all schools) receive Title I funds.

Acevedo Vila is particularly proud of an educational and agriculture-related achievement of his sole authorship: the approval of an amendment to this year’s farm bill that allows Puerto Rico to give preferential treatment to Puerto Rico products for its school cafeterias. "Only Hawaii had that ability before," said Acevedo Vila.

As a result of the new provision, Acevedo Vila says it is predicted that in two to three years, the purchase of Puerto Rico agricultural products will more than double, from the current $15 million yearly to approximately $39 million.

Moreover, Acevedo Vila said the island’s federal educational funding is benefiting mightily from the congressional approval of an increase in Pell grants that boosts the island’s participation in that program by $44 million this year alone, from $538 million in FY 2002 to $582 million in FY 2003. He said the difference would represent an additional $250 on average per participating student.

Altogether, these developments mean that the island is experiencing its biggest increases in federal educational funding in the last 20 years–an 18.8% gain since FY 2001.

PAN approved through 2012

Another major boost in federal funding this year came in the form of the extension of the U.S. Department of Agriculture’s Nutritional Assistance Program for Puerto Rico, popularly known by its Spanish acronym PAN.

More than 400,000 families in Puerto Rico receive PAN funds directly, with an estimated impact on the island economy of $112 million monthly ($1.3 billion annually). Congressional approval of the PAN extension for Puerto Rico carried with it an annual hike of $10 million in funding on top of cost-of-living adjustments.

An additional $6 million in federal funding was included to modernize the Puerto Rico Family Department’s computer system to enhance the administration of the "Family Card" used by PAN beneficiaries.

As a result of the extension of PAN, Puerto Rico will see its PAN funding allocation grow by $65.8 million in FY 2003. Acevedo Vila said Pan funding will go from just under $1.3 billion in FY 2002 to over $2.0 billion in 2012.

How Puerto Rico stacks up

In terms of federal funding, Puerto Rico appears to be slowly closing the gap with comparably populated mainland states. However, the latest U.S. Census Bureau’s Consolidated Federal Funds Report for FY 2001 shows that the island still has a long way to go to reach state-like funding for the U.S. citizens of Puerto Rico.

The report shows that Puerto Rico received $17.8 billion in total federal assistance in FY 2001, 6.6% higher than the $16.7 billion received during FY 2000.

The island’s federal funding outpaced those of 15 states of the union (all of which have much smaller populations than Puerto Rico). It is when measured on a per capita basis that a clearer picture emerges. Per citizen, the island receives by far the lowest amount of federal funding in the U.S.

In terms of direct expenditures, in the 50 states the federal government annually spends an average of more than $6,200 per citizen. In Puerto Rico, however, the federal government directly spends less than $3,400 annually per citizen.

Direct expenditures or obligations, such as social assistance programs, social security payments, and program grants, accounted for $13.2 billion of Puerto Rico’s total federal funding share, while $4.6 billion took the form of federal insurance and loan program funds.

Increased Social Security, retirement, and veterans’ benefits accounted for more than $600 million of Puerto Rico’s year-to-year increase. Other direct federal funding to island residents–including Medicare and low-income housing assistance–reached $2.7 billion, up more than $400 million compared with the $2.2 billion provided in FY 2000.

Defense-spending quandary

Areas where the island lags farthest behind national averages in federal spending include Department of Defense (DOD) spending and federal personnel expenditures. For example, nationwide the Department of Defense spends an average of $903 per year, per citizen. In Puerto Rico, however, the DOD spends only $175 per year, per citizen.

Mari Carmen Aponte, Puerto Rico Federal Affairs Administration (PRFAA) executive director, told CARIBBEAN BUSINESS that with defense spending on the rise as a result of the war on terrorism, her agency is targeting the area for more attention. "We’re getting more focused on defense-related research and procurement opportunities," Aponte said. She also added that she expects resolution of the Vieques controversy to be a boon to the effort.

Aponte and her team of lobbyists and professional staff–led by PRFAA Federal Grants Division Chief Clair Cornell–have their work cut out for them if they are to reverse the defense-spending trend in Puerto Rico. The settlement of the Vieques issue may go a long way toward easing tensions in what has become an acutely strained Puerto Rico-Pentagon relationship in recent years, but it will come at a price.

The end of training in Vieques will involve a major scaling back–and possibly even the closure–of its support base, U.S. Naval Station Roosevelt Roads in Ceiba. According to Navy figures, Roosevelt Roads directly injects more than $300 million annually into the Puerto Rico economy. It employs more than 3,000 civilians and 2,500 military personnel.

U.S. Army South was also inadvertently caught up in the Vieques rumpus when congressional legislation in October 2000 put a moratorium on building construction at the then barely year-old U.S. Army South headquarters in Ft. Buchanan. The same legislation also stipulated that Army South would be moved to Roosevelt Roads if the Navy were to lose a federally sponsored referendum on Vieques.

A subsequent, ongoing Pentagon review of Army deployment strategies is also eyeing a probable move of Army South to the mainland, though a bipartisan effort in Puerto Rico has started to try to prevent its departure.

Defending the permanence of Army South’s base of operations in Puerto Rico, Acevedo Vila told CARIBBEAN BUSINESS that "the very name of Army South means that it should be in an area that serves the purposes of defending the principles of democracy in the area of Central and South America." In that context, Acevedo Vila added, "there’s no better location for Army South than Puerto Rico."

Army South directly employs more than 1,200 people in Puerto Rico (503 military personnel and 755 civilians). Its annual contribution to the island’s economy is estimated at more than $160 million directly, with additional jobs and economic stimulus generated indirectly.

The situation is further complicated because the loss of Army South makes Ft. Buchanan itself more vulnerable to closure. Prior to the arrival of Army South in 1999, Ft. Buchanan–which on its own had around 400 military and civilian employees–came perilously close to being closed down on more than one occasion.

Relatively few federal employees

In addition to defense spending, Puerto Rico also continues to lag far behind comparably sized U.S. mainland jurisdictions when it comes to the number of federal workers. Former Resident Commissioner Romero Barcelo noted that this is another significant factor in per capita federal spending differences.

For example, according to the Census Bureau, in FY 2001 $866 million in wages were disbursed to defense and non-defense federal personnel in Puerto Rico (which has an estimated 2002 population of 4.0 million). However, federal expenditures on wages for federal employees in comparably populated states such as South Carolina and Kentucky were $2.5 billion and $2.8 billion, respectively.

"Puerto Rico is at least $1.5 billion below parity on this count alone," Romero Barcelo said. "Let’s suppose that an average federal job pays $30,000 annually. That means that parity would be the equivalent of an additional 50,000 well-paying jobs in Puerto Rico."


According to Acevedo Vila, the trend toward tying federal program funding to the accomplishment of uniform goals across the U.S. has helped Puerto Rico in its efforts to achieve parity in many federal programs.

"That was the gist of our argument to achieve parity in Title I funding, through President Bush’s ‘No child left behind’ education plan," Acevedo Vila said. The same argument is likely to be applied to welfare reform measures to be considered by Congress in the coming months.

Senate Minority Leader McClintock cautions, however, that Puerto Rico’s state-like treatment to date in various programs is only statutorily granted and not constitutionally protected. "For example, between 1973 and 1982, we had state-like treatment in the food stamp program," McClintock pointed out. "But then the Reagan administration decided to revoke it."

In the end, as Romero Barcelo sees it, the ability of Puerto Rico to receive its full share of federal allocations remains severely hampered by the island’s subordinate, disenfranchised political status.

Long-time Washington observers, however, say that after almost a decade of nonstop action and ambitious initiatives in Washington and San Juan (1989-1998), the status issue is essentially being laid to rest for a while. Neither Governor Calderon’s status dialogue commission nor President Bush’s status task force are expected to achieve any real traction on the issue, at least up through the 2004 election cycle.

As the commonwealth prepares to celebrate its 50th anniversary in July, Romero Barcelo says the passage of time will only prove to be an ally of statehood for the island. He believes that when Sections 936 and 30A of the U.S. Internal Revenue Code are finally phased out completely in 2005, it will become evident that the island does not need what he calls "the crutches" of additional federal tax incentives. Then Puerto Rico will be that much closer to full integration into the federal fiscal system.

In the meantime

Meanwhile, the Calderon Administration continues to push for amendments to Section 956 that would provide a new federal tax incentive for U.S.-controlled foreign corporations on the island.

Since being launched by the administration more than a year ago, however, the 956 effort has yet to receive the green light from committee chairmen with jurisdiction over tax matters in either the House or the Senate. Worse yet, it suffered a major setback in March when the Joint Committee on Taxation released a study showing its cost to the federal treasury to be more than three times what its proponents had initially argued.

Acevedo Vila, who is leading the administration’s 956 effort in Washington, says that he and 956 allies in the House and Senate are working, he said, to "fine tune" the proposal to ensure that the measure isn’t as costly as the Joint Committee report indicated. They will then move it forward as soon as another opportunity arises.

However, other administration leaders, such as Secretary of Economic Development and Commerce Ramon Cantero Frau, are now giving indications that the administration is reducing its focus on the 956 effort. "It would help give us a competitive advantage and reverse the overall trend in manufacturing employment, but if we don’t have other things in place, 956 by itself wouldn’t make us competitive," Cantero Frau told CARIBBEAN BUSINESS.

Tax experts such as attorney Ralph Sierra of the Sierra Serapion law firm believe the 956 effort has next to nil chances of approval. "So far, what they’ve proposed would actually be better than 936," Sierra contends. "And there’s not likely to be any more tax legislation this year."

Moreover, Sierra says a move is afoot by political heavyweights in both the House and the Senate–such as Congressman Scott McInnis (R-Col.), Congressman Richard Neal (D-Mass.), Senator Max Baucus (R-Mont.), and Senator Charles Grassley (D-Iowa)–to rein in tax-sheltering machinations by U.S. corporations, particularly U.S.-controlled foreign corporations.

"The current environment is just not favorable to 956," Sierra observed. He added that even prospects of a return to the earlier strategy of seeking the extension of Section 30A benefits don’t look promising, "unless there’s enough unemployment on the island to get Congress worried."

This Caribbean Business article appears courtesy of Casiano Communications.
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