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Uncle Sam’s Billions

Almost One-Third Of The Local Government’s Budget Will Come From Washington This Year


August 14, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Federal largess: Total federal funds to Puerto Rico topped $18.5 billion in 2002, with federal grants making up an increasingly larger share of local government agencies’ budgets.

At least $4.1 billion in federal grants to Puerto Rico will pump up the local government’s General Fund by 49% this year. In fact, more than 30% of the central government’s operating budget, not counting the budgets of public corporations, will be paid by Uncle Sam.

Thirty-five percent of the local Education Department’s budget, 50% of the Health Department’s, 93% of the Public Housing Administration’s, and 95% of the Family Socioeconomic Administration’s will come directly from Washington—no strings attached.

Even smaller agencies will get a big boost from federal largess. Federal funds make up more than half of the budget of the Administration of Energy Affairs and 35% of that of the Women’s Advocate Office.

The $8.27 billion General Fund is the commonwealth’s operating budget. Mostly nurtured by local taxes, it pays the salaries of teachers, police, secretaries, drivers, social workers, and other public employees attached to more than 100 government entities. Rent, utilities, and suppliers are also paid from the General Fund.

When the $4.1 billion in federal grants is added to the budget for fiscal year 2004, the amount the local government has for services to the people of Puerto Rico swells to $12.4 billion. Combining special state funds and other sources of income brings the total operating budget to around $13.3 billion.

More than 30% of the operating budget comes from federal grants. This doesn’t include bond issues that finance capital improvements and the budgets of public corporations, which generate their own revenue, though some also receive federal funds.

In some agencies, such as the Public Housing Administration (PHA), federal funds cover more than 90% of the operating budget. After all, the PHA was created to administer federal housing funds.

Federal funds make up 35% of the Education Department’s $2.8 billion consolidated budget, including special state funds, federal funds, and capital improvements. The amount contributed to the education budget is a substantial $875.9 million, according to the Office of Management & Budget.

And there’s more to come. By the 2006-2007 school year, Puerto Rico can count on $540 million in Title I education funds, double the amount received in 2001-2002.

This isn’t an ordinary increase, but a move toward putting Puerto Rico on a par with the 50 states in funding for needy elementary and secondary students. According to U.S. poverty levels, that would include most of the school districts on the island. Congress approved that Puerto Rico receive 100% of the Title I formula grant by fiscal 2006, gradually raising the amount each year from the 75% share the island had been receiving before 2002.

"Puerto Rico has been fairly treated," said Resident Commissioner Anibal Acevedo Vila, Puerto Rico’s nonvoting member of Congress and the Popular Democratic Party candidate for governor in the 2004 elections.

In addition, both houses of Congress have included Puerto Rico in new federal legislation that proposes a prescription-medicine benefit for those receiving Medicare. The legislation, which could go into effect in 2008, would mean further benefits for 500,000 seniors in Puerto Rico, the resident commissioner said.

Besides $4 billion to the central government, another $800 million in federal funds is expected to flow to public corporations, such as the Highway & Transportation Authority and the electric power and water companies, bringing the total to an estimated $4.87 billion for fiscal 2004. That compares with $4.59 billion in federal grants spent last year and $4.10 billion the year before, according to the OMB. These totals include unspent funds carried over from prior years.

Estimates of federal funds are used for the local budget because the difference between the federal fiscal year, Oct. 1 to Sept 30, and the commonwealth government’s fiscal year, July 1 to June 30, determines when the funds actually arrive. The federal fiscal year for 2003 hasn’t yet closed while Puerto Rico’s fiscal 2004 began on July 1.

Actually, federal grants don’t make up most of the federal spending on Puerto Rico. Grants to Puerto Rico compose one-third of approximately $14 billion in direct federal spending on the island. When all federal financial assistance is considered, the grand total for 2002 (federal fiscal year) was $18.5 billion. Most of the additional $4 billion is insurance coverage; $900 million for guaranteeing mortgages; and $3 billion in flood insurance, a contingency obligation.

"More than half of the people who own a home wouldn’t own homes if it weren’t for federal programs—[loans available under] the Fair Housing Act (FHA), Department of Veterans Affairs (VA), Rural Development, Farmers Home," said former Gov. Carlos Romero Barcelo, who was resident commissioner from 1993 to 2000. Student loans also figure in the additional-assistance category, amounting to about $98 million in 2002.

The lion’s share of Uncle Sam’s billions goes to individuals who have paid into federal programs, served in the military, or work for the federal government. Another portion benefits companies awarded contracts with the Defense Department or other federal agencies. All told, these payments topped $8 billion in 2002 and included Social Security retirement and disability checks, Medicare payments, Pell educational grants, and the salaries of postal workers and other federal employees.

Social Security pensions and certain other benefits can be considered owed to the recipients in Puerto Rico. Workers and their employers, for instance, pay federal Social Security taxes, and employers also pay unemployment insurance. Still, after subtracting the $2.9 billion paid into federal programs, the island ended up with more than $6 billion net in fiscal 2002, according to the Puerto Rico Planning Board.

The federal payments fatten the wallets of individuals and private companies. When they spend, it fuels the island’s economy. Even more than in the States, consumer spending drives the Puerto Rico economy.

Previous Commonwealth budgets also benefited from a heavy dose of federal grants. From fiscal 1996 to 2003, federal grants added more than $30 billion to local government spending.

In good times and in bad, federal grants provide the Puerto Rico government and its economy with a steady flow of cash. Approximately 80% of the federal monies received are continuing grants, based on a formula prescribed by law or regulation. Most of the remainder is made up of project grants whose funding is fixed over a period of time or for the duration of a project.

According to the latest U.S. Census Bureau statistics, grants to the island jumped 10% from federal FY 2001 to 2002. A boost in education and health funds bolstered funding growth that has averaged 3.6% since 1993.

Not surprisingly, 80% of the grant money goes to poor and low-income households. Indeed, government has a duty to protect the needy and improve their standard of living. According to the U.S. Census Bureau, 48% of the island’s residents live below the poverty line, compared with an average 12% of the U.S. population.

Despite the years of government subsidies, Puerto Rico has less than half the per capita personal income of, say, Arkansas and Mississippi, two of the poorest states on the U.S. mainland.

At the current rate, it will take Puerto Rico 35 years to reduce poverty to the average level in the U.S. today, according to economist Santos Negron Diaz, former chief economist of the Government Development Bank. He bases his projection on Puerto Rico’s progress from 1989 to 1999, in which the poor population decreased 10.6 percentage points.

Education is still seen as a key to success. Rather, lack of education assures failure. Title I was created to support those students most at risk of failing.

"Title I is the most important education grant," said Acevedo Vila. Because of the high number of people living below the U.S. poverty line, most of the 1,538 public schools in the island’s 84 school zones are eligible for funding. In federal fiscal 2002, Puerto Rico received about $270 million, distributed among 1,468 public schools and 219 private schools, including American Military Academy in Guaynabo, Colegio Ponceño Inc., and Colegio Presbiteriano de San Sebastian.

Title I grants finance teacher salaries, equipment, teaching materials, and workshops to stimulate parents’ involvement in their children’s education. The various programs have guidelines for the use of the funds. In Puerto Rico, the benefits extend to 533,617 elementary and high-school students, averaging $510 a student.

Clearly, the rise and fall of program funds is dictated by federal policies, set by the U.S. president and the U.S. Congress. The Bush initiative to pump more money into education, for instance, contributed heavily to Puerto Rico’s gains.

The Puerto Rico Planning Board projects that federal funds in general will grow between 5% and 6% this fiscal year. Part of the expected increase will come from the availability of millions of federal dollars that had been frozen because deficiencies were found in agency audits.

Spread among the entire government, including public corporations, federal funds amount to 20% of the $23.35 billion consolidated budget. Here’s who gets the biggest slice of Uncle Sam’s apple pie.

Targeting the poor

By far the largest federal grant to the island is the Nutritional Assistance Program (PAN by its Spanish acronym), which helps poor and lower-income families and individuals purchase groceries. One of every four residents buys food with a piece of plastic backed by PAN. The cash program, unique to Puerto Rico, is an alternative to the Food Stamp Program for the States, which also targets those below the poverty line. The amount received depends on income and family size.

The Family Socioeconomic Administration derives around 90% of its funds from a U.S. Department of Agriculture grant. The amount of funding has grown from $1.04 billion in 1993 to $1.35 billion in 2002, a 30% gain, just about keeping up with inflation. The program has been in effect for Puerto Rico since 1973, pumping more than $25 billion into the local economy over three decades.

In federal fiscal 2001, PAN paid an average of $94 a month to each of the 1.07 million people qualifying for assistance in Puerto Rico. That compares to $74.79 a month in food stamps per person nationwide.

The Family Socioeconomic Administration also manages $129 million from two other federal programs: Temporary Assistance for Needy Families and Family Support Payments. Family support payments are made to needy aged, blind, or disabled people for food, shelter, and other daily necessities. In federal fiscal 2001, these assistance payments were made to approximately 457,744 recipients, according to the federal government.

All told, about 95% of the Family Socioeconomic Administration’s $1.58 billion budget for this year comes from the federal government. Of course, most of the funds are distributed to the beneficiaries of the federal programs. The Administration for Children & Families (Adfan by its Spanish acronym) in part administers the fourth-largest grant, Head Start, now under fire by the Bush administration.

The $225 million yearly is also distributed among municipalities and private nonprofit organizations. Larger municipalities, such as Bayamon and Ponce, receive funds directly from the Health & Human Services Department. The Family Department manages about $115 million of the allocation.

"Head Start is more than a preschool program," said Acevedo Vila. "It’s an integrated program that takes in health, nutrition, and intervention with the family."

More than 35,000 children from low-income families on the island attend more than 700 Head Start centers.

Adfan administers other federal child-care programs. Total federal funding for the agency is an estimated $232.5 million, 67% of the $348.6 million budget.

A big housing bill

Federal housing assistance amounted to some $675 million in 2002.

The Public Housing Administration manages the 323 public housing projects, in which 226,000 residents live. The PHA’s budget for this year is $223.8 million, with a little more than $200 million, or 92.9%, coming from federal funds.

An additional $151.2 million has been earmarked by the feds for modernizing and revitalizing the facilities, a sum which makes up 98.7% of the PHA’s capital improvements budget.

The single largest housing program, Section 8, subsidized rent payments in Puerto Rico to the tune of $260 million. This amount is split between the central government and the municipalities, which have their own PHAs that administer Section 8.

Labor & Human Resources

Puerto Rico, whose unemployment rate, at 12%, is twice the U.S. rate, also benefits from about $200 million in job training & employment programs under the federal Workforce Investment Act (WIA). The funds are distributed by the local Human Resources & Occupational Development Council, administrator of $203.9 million in WIA funds.

As part of the Puerto Rico Government Reorganization Act of 1995, the Vocational & Rehabilitation Administration was placed under the Labor Department. Almost 75% of its $89.3 million operating budget comes from federal grants.


The Health Department also derives more than half its operating budget from federal grants. Out of a $580.4 million budget (this may increase if the agency gets money for its smart health card), $309.9 million is federal grants.

The best-known grant is the Women Infants & Children (WIC) program, which benefits pregnant women, nursing mothers, infants, and children up to age five by providing vouchers for the purchase of supplemental foods from retail establishments approved by the Health Department. Close to 220,000 are enrolled, 79% of them infants and children. Food retailers also benefit from serving this segment of the population; the department has approved 700 commercial establishments. In 2002, the WIC grant totaled $167 million.


More than 35% of Education’s $2.8 billion consolidated budget is derived from federal funds, the biggest being the Title I grant. The education budget counts on federal funds to train teachers and buy equipment and materials within the restrictions of the programs.

Clearly, the impact of federal grants on health, education, and welfare in Puerto Rico is enormous.

Public corporations get a fair share of federal monies

This fiscal year, about $800 million in federal funds will pay for capital improvements of public corporations. A large chunk of federal funds to public corporations will go to finance infrastructure, mainly highways. The Highway & Transportation Authority is due to receive $183.4 million.

Mass transit is also on the federal money track. The Metropolitan Bus Authority will get $4 million to buy some 30 new buses. The local government must match these funds to expand the fleet.

The Health Insurance Administration (ASES by its Spanish acronym), a public corporation under the Treasury Department, will be granted $189.2 million to help finance the government’s health insurance plan for the needy. ASES negotiates health plans worth about $1.3 billion.

President Bush to the rescue

President Bush’s measure to help cash-strapped states cope with the crisis in Medicaid helped Puerto Rico balance two budgets.

Congress passed the $10 billion measure in May, granting Puerto Rico a tiny share of the federal financial rescue to the States. The onetime fiscal assistance garnered Puerto Rico $130 million over a two-year period.

Last fiscal year, $64.7 million was used to shore up the General Fund when tax collections faltered. This year, fiscal 2004, the federal payment will cover the salary increases from labor contracts.

As part of the fiscal-relief act, Puerto Rico will also receive almost $10 million for Medicaid over two years.

In Puerto Rico, the federal Medicaid grant is capped at around 15% of costs, said Resident Commissioner Anibal Acevedo Vila. That leaves the local government to pony up 85% of the tab for the health insurance program. For the States, Uncle Sam foots at least 50% of the bill, he added.

Cutting the Federal Pie

Total = $14.062 Billion

Federal Fiscal-Year 2002

Retirement & Disability Payments 37.56%

Grant Awards (PAN*, Education, Health & Others) 34.33%

Medicare, Pell Grants & Other Direct Payments 18.90%

Salaries & Wages (Civilian & Defense) 6.61%

Procurement Contract Awards (Nondefense & Defense) 2.60%

*PAN-Spanish acronym for Nutritional Assistance Program

Source: U.S. Census Bureau

Federal Grants to P.R.

In millions of dollars

Fiscal Year: Dollar Amount

2001: 4,092

2002: 4,366

2003: 4,523

2004: 4,913*

*Includes $122 million in unspent funds carried over from prior years and an additional $64.7 million from the federal fiscal relief grant enacted in May.

Source: P.R. Office of Management & Budget

Budget Assigned to the General Fund

In millions of dollars

Fiscal Year: Dollar Amount

2001: 7,410

2002: 7,521

2003: 7,843

2004: 8,265*

*General fund approved

Source: P.R. Office of Management & Budget

Top 10 Federal Grants

Federal Fiscal Year 2002

In millions of dollars

  • Nutritional assistance (PAN) $1,351
  • Title I grants to local education 273
  • Sector 8 Housing 260
  • Head Start 227
  • Workforce Investment Act (WIA) 203
  • Medical Assistance (Medicaid) 192
  • Special Supplemental Food 167
  • Program for Women, Infants & Children (WIC)
  • Public Housing 155
  • National School Lunch program 122
  • Teacher training 93

Source: Office of the Resident Commissioner and the U.S. Census Bureau

Federal Fiscal Year: Amount ($) / % Change

2002: 4,828 / 10.0

2001: 4,389 / 1.5

2000: 4,323 / -23.0

1999*: 5,613 / 32.4

1998: 4,240 / 6.2

1997: 3,992 / 4.4

1996: 3,826 / 1.4

1995: 3,775 / 5.1

1994: 3,592 / 3.1

1993: 3,483 / --

Disaster assistance for Hurricane Georges, which struck Puerto Rico in September 1998, gave total grants a boost in fiscal 1999.

Source: U.S. Census Bureau

This Caribbean Business article appears courtesy of Casiano Communications.
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