Bush Budget Had Good And Bad Surprises for Acevedo, Puerto Rico

February 7, 2003
Copyright © 2003 THE PUERTO RICO HERALD. All Rights Reserved.

. .. Bush Budget Had Good And Bad Surprises for Acevedo, Puerto Rico

President Bush sent his proposed budget for the fiscal year that begins October 1, 2003 to Congress this week. Two major provisions regarding Puerto Rico in the fiscal year 2004 budget were a surprise to the territory’s Resident Commissioner, Anibal Acevedo Vila ("commonwealth" party/D). And of these, one was bad and the other was good for the Commonwealth, as well as its sole delegate in the U.S. House of Representatives.

The Bad Surprise

The bad surprise was a $1.397 billion request for the Puerto Rico Nutrition Assistance Program, the special program providing food for low-income residents that the Commonwealth gets in lieu of Food Stamps. The amount was only $2 million more than the estimate for the current fiscal year, fiscal year 2003. Last year, Acevedo predicted that the 2004 amount would be $58 million more than the amount for 2003.

Acevedo made the prediction in announcing a congressional agreement on the legislation that continued the program for another five years (although he erroneously announced that it continued the program for another 10). He projected the $58 million 2004 increase by estimating that the legislation would increase food aid for the territory’s low-income population by $680 million over five years.

Acevedo revised this total on December 29 to project a $541.5 million increase over the five years. And he continued to anticipate a major increase the day before Bush’s budget was released. However, the U.S. Food and Nutrition Service (FNS) and the President’s Office of Management and Budget (OMB) interpreted the law to only require a $10 million increase in fiscal year 2003 and to require no new increases after that.

How could Acevedo have been so wrong about the increase -- especially since he is a member of the House Agriculture Committee, which has jurisdiction over the law?

For one, Acevedo wrongly claimed that the new law added an annual inflation adjustment to the grant. Most of the increase he projected was due to the ‘indexing’ provision. But the fact is that the annual adjustment had been a part of the law for more than a decade.

This misleading claim was compounded by the inflation rate that Acevedo used to calculate future grants -- four percent. This rate is almost double the rate that FNS has used in most recent years. Additionally, FNS is projecting only a .1% rate this year.

Acevedo was also wrong about the increase because he interpreted the law to require an annual $10 million increase in addition to the inflation adjustment. The law, however, makes no mention of such an increase.

A statement by the final congressional negotiators of the law referred to an annual increase of "approximately $10 million." But it also said the purpose was to bring the amount of the grant up to $1.395 billion this fiscal year. This made any intent for there to be future $10 million increases -- which were not reflected in the legislation -- unclear at best.

FNS officials say they implemented the statement of intent, as well as the law, by increasing the originally projected amount for this year from $1.377 billion to $1.395 billion.

Adding to the problem of Acevedo reading the law differently than FNS and OMB officials, was Acevedo’s failure to raise the issue with them. Officials confirm that they never heard from the Resident Commissioner or any other representative of Governor Sila Calderon ("commonwealth" party/no national party) on the funding.

In fact, Acevedo did not even check the funding in the Bush budget after the President sent the proposal to Congress. Reporters made him aware of it.

As the week drew to a close, Acevedo was still trying to find out what happened and giving reporters varying -- and erroneous -- explanations.

In June, FNS will re-estimate the $2 million inflation increase estimate. So there is a chance that the amount will get a little closer to the $58 million Acevedo projected.

The Good Surprise

Acevedo was also surprised by a proposal to continue in calendar years 2004 and 2005 the transfer to Puerto Rico of $2.75 for each ‘proof gallon’ of rum produced in Puerto Rico and rum produced in foreign countries that is brought into the U.S. The proposal would provide the territorial treasury with an estimated $57 million in fiscal year 2004 alone.

Although an extension has been a priority for Acevedo and the Calderon Administration, neither he nor any other official had apparently been working with Bush Administration officials on it.

Rum and other liquors are taxed at the rate of $13.50 per proof gallon -- a measurement that is based on the alcoholic content of the liquor. The federal government has long given Puerto Rico and the U.S. Virgin Islands $10.50 per proof gallon of the collections.

A proposal that President Clinton made in 1997 resulted in a temporary increase in the transfer to $13.25 per proof gallon. This additional $2.75 rate expires at the end of this calendar year.

Without the extension, Bush’s budget projects that Puerto Rico will receive $307 million in transfers in fiscal year 2004, down from $355 million this fiscal year.

Acevedo did not learn of the Bush proposal until he was contacted by reporters after Bush’s budget was received by members of Congress.

An issue that Senate Finance Committee members plan to raise when they consider the proposal is whether the Calderon Administration is fulfilling the territorial government’s commitment to give 50 cents per proof gallon of the revenue to the Puerto Rico Conservation Trust.

The commitment was made by Calderon’s predecessor, Pedro Rossello (statehood party/D). He made the pledge in working with the Clinton Administration to develop Clinton’s proposed higher rate of transfers.

Transfers to the Trust have reportedly lagged during the Calderon Administration, prompting concern among leaders of the Finance Committee. The Trust is a joint creation of the federal Interior Department and Puerto Rico’s territorial government.

An issue that Finance Committee members planned to raise was taken off the agenda last week. This occurred when the Coors beer company said that it would drop its effort have the entire rum tax transfer withheld unless the Calderon Administration changes its beer tax. The tax applies to companies based in the States but not companies based in Puerto Rico.

Coors gave up the effort when Acevedo began to tell Puerto Ricans that the company was denying funds for important local programs.

No Surprise

$8 Million for Clean Water - Bush’s budget contained one other new proposal regarding Puerto Rico, but it was no surprise. It had been announced by the White House in advance.

The proposal would make a special $8 million grant to improve the Metropolitano water system in San Juan. An OMB document stated that the improvements would bring water that serves 1.4 million people up to federal health standards.

The White House took the unusual step of announcing the grant to ensure that the Calderon Administration did not try to claim credit for it. The Rossello Administration had initially sought special assistance for the territory’s water system.

Tren Urbano – The President’s spending plan also proposed $43.5 million for further construction work on the commuter rail system that is being built in Bayamon, Guaynabo, and San Juan. The funding is not really a new proposal since it is part of a $307 million special assistance commitment made by Clinton in response to a request by Rossello and his Transportation Secretary, Carlos Pesquera. Pesquera is now president of Puerto Rico’s statehood party.

Customs Transfer – The other special assistance for Puerto Rico included in Bush’s budget is the regular transfer to the territorial treasury of Customs collections. The transfer is estimated at $89 million in fiscal year 2004.

Investment Incentive – Bush’s budget proposed extending a number of expiring provisions of tax law and hundreds of millions of dollars worth of other tax cuts, but it did not propose replacing the credits that companies based in the States can take against taxes on their territorial income.

Replacing these credits, which are provided under tax code sections 936 and 30A, is Calderon’s top federal priority. The governor is seeking an amendment to tax code section 956 that would permanently exempt from taxation profits that companies based in the States earn in territories.

Acevedo told reporters before the budget was released that he did not expect the proposal to be included. The issue was mentioned, however. An OMB document estimated that the current credits would deny the federal treasury $2.24 billion next fiscal year. It also noted that the credits expire at the end of calendar year 2005.

Education Aid – A provision of the budget that would give Puerto Rico a significant but expected increase in funding raises the allocation for educating needy children in the territory’s elementary and secondary schools. Funds for this purpose would increase from $373 million this year to $402 million next year.

Funding for Puerto Rico in the ‘Title I’ program is increasing under the 2001 No Child Left Behind education law. The law includes a proposal that Clinton made in response to requests of Acevedo’s predecessor, Carlos Romero Barcelo (statehood party/D), that is phasing in State-like funding for Puerto Rico in the program. The proposal was included in the law due to the efforts of Senators Edward Kennedy (D-MA) and Christopher Dodd (D-CT) and Representative George Miller (D-CA).

Puerto Rico previously received funding under the program based on a special formula that provided it at about three-quarters of the rate that applies in the States. Under the law, Puerto Rico’s funding increased from $318 million in fiscal year 2002.

Medicare – Bush’s budget may have improved the opportunity for enactment of another Clinton proposal for Puerto Rico. The proposal would change the formula for Medicare payments for hospital services in Puerto Rico from 50% of the rates that apply elsewhere in the country and 50% local cost factors to 75% national rates/25% local costs. This would increase Puerto Rico payments an estimated $37.5 million a year.

Bush’s budget proposes a major reform of the Medicare program. Members of the Congress have been working on the issue since Clinton proposed a reform in 2000 that included the Puerto Rico formula change. Partisan differences unrelated to the Puerto Rico proposal have prevented a reform bill from passing.

Bush’s proposal, although controversial, could prompt the Congress to finally reach a compromise on the issue. If so, there is a good chance that the Puerto Rico formula change will be included. It was supported in 2000 by several key Republicans as well as Democrats and only failed to be accepted because of the opposition of then Senate Majority Leader Trent Lott (R-MS). Lott works closely with Calderon on Puerto Rico issues.

The Clinton proposal was made in response to lobbying by Romero and the Puerto Rico Hospital Association. It was the second formula change proposed by Clinton. The first changed the formula from 25% national rates/75% local costs and changed the calculation of the local costs. It increased Puerto Rico payments $50 million a year.

Other Programs

Figures from Bush’s budget showed that:

  • Puerto Rico receives substantial funding in some other national programs in which it is treated like a State;
  • Puerto Rico receives inequitable funding in programs where it is not treated like a State; and
  • There is no consistency or coherence in funding major federal programs in the territory.

Fiscal Year 2004 funding for Puerto Rico in these programs is listed below along with the Puerto Rico percentage of Bush’s national budget for the programs.

School Lunch - $124,689,000 - 1.87%

Women, Infants, Children Nutrition - $185,440,000 - 3.79%

Special Education - $84,643,000 - .92%

Vocational Rehabilitation - $67,327,000 - 2.52%

State Children’s-Health Insurance - $30,297,000 - .95%

Medicaid - $201,400,000 - .12%

Temporary Assistance for Needy Families - $71,562,000- .43%

Child Support Enforcement - $26,752,000 - .6%

Child Care Block Grant - $45,182,000 - 2.15%

Child Care Fund - 0

Head Start - $244,276,000 - 3.58%

Foster Care - $10,018,000 - .2%

Public Housing Operating Subsidy - $104,578,000 - 2.93%

Housing Choice Vouchers - $160,279,000 -1.18%

Public Housing Capital Fund - $143,145,000 - 6.15%

Community Development Block Grant - $68,911,000 - 2.22%

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