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Getting Down To Dollars And Cents

As a state, Puerto Rico could receive over $40 billion a year in federal funds, more than double the amount it currently receives


October 28, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Puerto Rico’s political status has remained unresolved for far too long, at an economic, political, and social cost to its people. Up to now, political parties and others have addressed the status issue from an emotional perspective—for example, whether we will be able to participate in Miss Universe or have a Puerto Rico Olympic team.

For six months, CARIBBEAN BUSINESS, with a staff of researchers and economists assigned exclusively to the task, has researched the economic and political impact on Puerto Rico of the various political-status alternatives, examining over 50 years of commonwealth and presenting the options proposed under a new form of commonwealth, independence, free association, and statehood. The goal was to put emotional and political issues aside and determine which of the status alternatives would provide the most economic benefits to the residents and the government of Puerto Rico.

When CARIBBEAN BUSINESS got down to the dollars and cents of each of the status alternatives, we found that only through statehood would Puerto Rico be able to share on equal terms the economic benefits and growth that the U.S., the wealthiest nation in the world, provides the citizens of its 50 states. While the other status forms examined and presented in the "What if?" series published in CARIBBEAN BUSINESS these past three months may seek to continue some form of a relationship with the U.S., only statehood can guarantee permanent and equal access to the nation politically and economically.

Puerto Rico will reap greater economic benefits

Between 1994 and 2003, Puerto Rico received approximately $120 billion from the federal government, $14.66 billion in federal fiscal year (FY) 2003 alone. These federal funds have been instrumental in the island’s economic and social development, substantially improving the quality of life of those who reside in Puerto Rico. But lack of full and proportionate participation in a substantial number of federal programs, whereby funds are channeled to individuals, corporations, and state and municipal governments, has limited Puerto Rico’s potential development and the well-being of the U.S. citizens who reside on the island.

Complete access to and participation in these federal programs, however, require full participation in the U.S. political process, something Puerto Rico has been denied in its 106-year relationship with the mainland U.S. The lack of full political and economic integration has prevented Puerto Rico from fully benefiting from the billions of dollars distributed by the federal government each year and from the multiplier effect these funds would have on the economy. Full participation, however, can be achieved only through proportionate representation in the U.S. Congress and the right to vote for president.

How much is distributed in federal funds?

In federal FY 2003, according to the Consolidated Federal Funds Report released in October 2004, the federal government’s domestic expenditures or obligations totaled $2.1 trillion, and federal assistance through loans and insurance programs added up to an additional $966 billion. In Puerto Rico, federal expenditures totaled $14.66 billion, excluding $4.9 billion in federal assistance from loans, loan guarantees, and insurance coverage. Total federal funds and programs in Puerto Rico added up to over $19.5 billion in 2003.

From 1994 to 2003, Puerto Rico received $119.09 billion in federal expenditures, excluding loans, loan guarantees, and insurance programs. Although these numbers are certainly substantial, they also present a dismal picture of the commonwealth’s reality when compared with the states. Consider the following:

  • In 2003, Mississippi, the poorest state in the nation, with a population one million less than that of Puerto Rico and less than 20% of the population living below the federal poverty level, received over $21.7 billion in federal funds, or $7.1 billion more than Puerto Rico. On a per capita basis, the difference is more dramatic: Mississippi got $7,545.47, almost twice as much as the $3,780.10 Puerto Rico received. Yet, Mississippi had an average per capita income of $23,448, compared with Puerto Rico’s $11,279.
  • Had Puerto Rico received in 2003 the same amount as Mississippi on a per capita basis, the amount of federal expenditures on the island would have climbed to over $29.2 billion, twice the $14.6 billion received. Because it has a larger number of families living below the poverty level, Puerto Rico could possibly receive more than $14.6 billion in additional federal funds.
  • This potential additional amount of federal expenditures doesn’t take into account other types of federal assistance, which, using the same per capita basis as in Mississippi, would have meant over $6 billion more in loans, loan guarantees, and insurance coverage.
  • By not receiving equal treatment as states and not having created enough jobs when it comes to federal funds, Puerto Rico and its residents are missing out on at least an additional $14.6 billion a year. As a state, Puerto Rico could get or benefit from many of these additional funds. This situation of forgone federal funds and assistance has been going on for decades, and it has cost the island hundreds of billions of dollars.
  • Our inability to proportionally access this source of funds has been detrimental to our economic growth and development, our accumulation of wealth, and our quality of life, and the impact will be felt in Puerto Rico for generations to come.
  • Had Puerto Rico received the same per capita federal expenditures as Mississippi just in the past 10 years, it would have represented an additional $112 billion in federal funds. That is approximately $30,000 for each man, woman, and child in Puerto Rico during the past decade, or more than $100,000 for each family on the island.
  • More disconcerting is that the gap between the actual federal funds received on the island and those received in Mississippi has been widening over the past 10 years. In 1994, the difference was $4.74 billion; by 2003, that difference had increased to $7.08 billion, or by $2.34 billion. Under these circumstances, Puerto Rico will never be able to catch up; instead, it will continue to fall further behind in its participation in federal funds.
  • Just last year, this differential represented $3,765.37 on a per capita basis. On a per capita basis, Puerto Rico got $3,780.10 in 2003, compared with Mississippi’s $7,545.47. That is over $11,000 a year for a family of three.

Funds P.R. receives compared with similarly populated states

Puerto Rico’s situation in comparison with Mississippi, the poorest state, isn’t an isolated case. It is the same when the island is compared with states that have comparable populations. In 2003, for example:

  • Colorado, with a population of 4.5 million, received $28.87 billion, or $14.21 billion more than Puerto Rico.
  • Connecticut, with a population of 3.5 million, received $28.59 billion, or $13.93 billion more.
  • Kentucky, with a population of 4.1 million, received $31.15 billion, or $16.49 billion more.
  • South Carolina, also with a population of 4.1 million, received $28.03 billion, or $13.37 billion more.
  • In 2003, on a per capita basis, Puerto Rico received $3,780.10, which is $2,565 less than Colorado’s $6,345, $4,479 less than Connecticut’s $8,209, $3,785 less than Kentucky’s $7,565, and $2,981 less than South Carolina’s $6,761.
  • From 1994 to 2003, these states with similar populations as Puerto Rico’s have benefited from substantially greater funds than the island. For example, Colorado received $223.04 billion, or $103.94 billion more than Puerto Rico; Connecticut received $205.48 billion, or $86.38 billion more; Kentucky $232.98 billion, or $113.88 billion more; and South Carolina $214.37 billion, or $95.27 billion more. Even Mississippi, with a population one million less than Puerto Rico’s, received $172.18 billion, or $53.08 billion more.

A closer look at federal funding

Federal expenditures consist of five major categories: direct payments to individuals for retirement and disability, direct payments to individuals other than for retirement and disability, grants, procurement contracts, and federal government salaries and wages. In Puerto Rico, these payments have been distributed as follows:

  • Federal direct payments to individuals for retirement and disability accounted for almost $5.48 billion in Puerto Rico in 2003, or $1.44 billion less than in Mississippi, which received $6.92 billion. This was the case even though the state’s population is much smaller than Puerto Rico’s, (2,881,281 compared to 3,878,532 in 2003).
  • If the same per capita retirement disability benefits received by Mississippi residents in 2003 had been received in Puerto Rico, it would have represented an additional $3.84 billion, or a total $9.32 billion, for the people of Puerto Rico.
  • Higher income levels for Puerto Rico’s workers would entail additional contributions to the Social Security system and, therefore, individuals would receive greater retirement benefits.
  • The increase in federal expenditures for Social Security wouldn’t be immediate, since it is partly dependent on increased levels of employment and income. Nevertheless, through statehood, Puerto Rico would be able to achieve a higher labor participation rate and higher employment levels, as has been the case in the States. For example, in July 2003, Mississippi, with one million fewer people, provided employment to 1,332,000, or over 100,000 more jobs than Puerto Rico’s 1,225,100.
  • Commonwealth, with all its fiscal autonomy, tax incentives such as Internal Revenue Code sections 931, 936, and 30A, and others, has still been unable to create the proportionate level of employment the states have achieved.
  • In 2003, the disparity in job creation in Puerto Rico was evident compared with similarly populated states. Connecticut, with 395,160 fewer people, employed 515,700 more; South Carolina, with 268,620 more people, created 665,000 more jobs; Kentucky, with 239,295 more people, had 641,400 more jobs; and Colorado, with 672,156 more people, created 1,133,200 more jobs.
  • States with populations similar to Puerto Rico’s all received substantially greater retirement and disability benefits, including Social Security benefits. In 2003, Connecticut received $7.54 billion and South Carolina $10.10 billion. Kentucky and Colorado obtained $10.16 billion and $8.37 billion, respectively. Puerto Rico, meanwhile, received only $5.48 billion.
  • More jobs translate into more income, and more income means additional contributions to Social Security and, therefore, more retirement and disability benefits. In 2003, these benefits represented $4.72 billion in earned benefits by Puerto Rico residents in Social Security payments.
  • During the past 10 years, Puerto Rico employees and employers contributed $19.24 billion in federal Social Security taxes, but island residents received much more than we contributed. Social Security beneficiaries received $36.53 billion, for a net gain of $17.29 billion for Puerto Rico’s residents and economy.
  • Puerto Rico is ineligible to receive any funds from Supplemental Security Income (SSI), which is also included in this category. SSI is a federal cash-assistance program that provides monthly payments to low-income elderly, blind, and disabled citizens—people who in most cases don’t pay federal taxes.
  • While U.S. citizens residing in Puerto Rico aren’t eligible for SSI, residents in Mississippi received almost $569 million in SSI payments from the federal government in 2003; a similar per capita allocation to Puerto Rico would have meant over $765 million in 2003.
  • Yet, almost half (48.2%) of Puerto Rico’s population lives below the federal poverty level, compared with only 19.9% in Mississippi. That state’s per capita income is also more than double that of Puerto Rico; therefore, the potential benefits to the poor residing in Puerto Rico if it were a state, and thus eligible to receive SSI benefits, would be substantially more.
  • Federal expenditures also include other direct payments to individuals such as Medicare, earned income tax credits, unemployment compensation, food stamps, housing assistance, agricultural assistance, and federal employees’ life and health insurance. In this category, U.S. citizens in Puerto Rico received almost $2.85 billion in 2003, while the residents of Mississippi received $4.90 billion, or over $2 billion more.
  • Equivalency with Mississippi in Puerto Rico’s per capita allocation of other direct payments would have represented an additional $3.75 billion, or a total $6.6 billion in one year. Since this category includes a substantial number of public assistance programs, it should also be noted that Puerto Rico’s low per capita income of $11,279, compared with Mississippi’s $23,448, and higher poverty levels would generate greater per capita allocations to Puerto Rico.
  • States with similar populations also received larger amounts of other direct payment to individuals than Puerto Rico in 2003. Connecticut, with the highest per capita income in the nation, got $5.66 billion. South Carolina, with per capita income of $26,132, or more than twice Puerto Rico’s, received $5.48 billion. The same situation is evident in comparison with Kentucky and Colorado, which received $6.11 billion and $5.01 billion, respectively.
  • Included in this category (other direct payments to individuals) are the federal expenditures for excess earned income tax credit (EITC). This is a refundable credit for low-income working individuals and families in the states; as such, it isn’t available in Puerto Rico. Income and family size determine the amount of the EITC. When the EITC exceeds the amount of taxes owed, it results in a tax refund to the filers who claim and qualify for the credit. Residents of Mississippi, with more than double Puerto Rico’s per capita income, received almost $700 million in EITC in 2003. The lower per capita income and larger population in Puerto Rico would make the absolute amount received by island residents much larger than Mississippi’s.
  • In 2003, federal grants to Puerto Rico, including those from the Nutritional Assistance Program (PAN by its Spanish acronym), totaled almost $4.81 billion. Mississippi, without a food-stamp grant (in the states, the food-stamp program isn’t capped, as is the case in Puerto Rico, and is treated as a direct payment to individuals), got almost $5.32 billion, or over $510 million more.
  • Even taking into consideration as part of this category the approximately $1.4 billion that the commonwealth government received from PAN, all of the similarly populated states reviewed surpassed Puerto Rico’s allocation in the grant category of federal spending.
  • If Puerto Rico, with a larger population than Mississippi’s, had received equal treatment as a state on a per capita basis, grants would have represented an additional $2.35 billion, or a total $7.16 billion, for Puerto Rico.
  • According to the Puerto Rico Planning Board, the commonwealth government has received $25.73 billion, excluding PAN, in federal grants during the past 10 years. This amount represented 28% of all net revenues of the commonwealth government, of $92.02 billion. Without these federal grants, the commonwealth government would collapse. Since Puerto Rico isn’t a state and doesn’t have any real power in Congress, continuation of these federal grants to the island is completely beyond the local government’s control. Congress can allocate them, take them away, or reduce them when it wants.
  • In the past 10 years, federal grants represented a larger proportion of the commonwealth’s revenues than any other revenue category. For example, federal grants were higher than the $20.62 billion collected by the commonwealth government in individual income taxes, higher than the $15.37 billion collected from corporate income taxes, and higher than the $13.82 billion collected in excise taxes (arbitrios>).
  • In 2003, federal procurement contracts awarded to businesses in Puerto Rico totaled $561 million, or over $2 billion less than in Mississippi. With the closing of Naval Station Roosevelt Roads, this amount is expected to have declined substantially in FY 2004. The same per capita allocation to Puerto Rico as Mississippi’s would have represented $2.97 billion more for the local economy or $3.53 billion. Connecticut received $8.48 billion, South Carolina $3.61 billion, Kentucky $5.11 billion, and Colorado $5.14 billion. The importance of these expenditures can’t be understated, as they go directly toward the private sector and generate income, employment, and additional tax revenues at the local and federal levels.
  • Proportional congressional representation provided by statehood of two senators and five or six members of Congress—all with voting power and sitting on many congressional committees—would be instrumental in propitiating additional expenditures in this category. Increases in procurement contracts would provide more sources of income for the private sector, creating additional job opportunities for the population.
  • In 2003, the federal government spent $1 billion less in Puerto Rico for federal employees’ salaries and wages than it did in Mississippi: $968 million in Puerto Rico vs. $1.96 billion in Mississippi. The same per capita expenditures in federal salaries and wages as Mississippi could have represented $2.65 billion to Puerto Rico’s economy, an increase of almost $1.7 billion.
  • Additional federal government employment would bolster the island during slower business cycles through higher-wage jobs and greater employment stability. Federal civilian layoffs aren’t as prominent during business downturns as private-sector layoffs. Jurisdictions with a greater proportion of federal employment may perform better than others during economic downturns. More federal offices in Puerto Rico would also mean better attention to our needs.
  • In 2003, federal expenditures for salaries and wages in Connecticut, South Carolina, Kentucky, and Colorado were $1.51 billion, $2.86 billion, $3.1 billion, and $4.32 billion, respectively—all substantially higher than Puerto Rico’s allocation of $968 million.
  • The U.S. government also provides additional assistance that includes loans and insurance programs. During 2003, the federal government provided $154 million in direct loans in Puerto Rico, compared with $1.64 billion in Mississippi.
  • Through federal loan guarantees, assistance to Puerto Rico amounted to $1.26 billion, compared with $1.78 billion in Mississippi. The federal government also provides insurance programs, such as flood insurance, crop insurance, and life insurance for veterans. In Mississippi, the volume of coverage provided was $1.65 billion higher than the $3.54 billion provided in Puerto Rico.

Importance of federal spending

Federal funds are important not only to help U.S. citizens in Puerto Rico to get out of poverty, to help the needy, and to improve their quality of life, but also to accumulate private capital, which encourages investment and economic growth. To achieve economic growth in Puerto Rico, investment in physical and human capital is required.

Although not every additional dollar coming into Puerto Rico’s economy has the same economic impact, new dollars do have a multiplier effect on the local economy. They generate additional economic activity and jobs. The person who receives the federal dollar gives it to someone else in payment for goods and services; this second person then spends the money, creating additional economic activity. Federal grants channeled to the commonwealth government provide the preconditions necessary for physical and human capital development.

A precondition for the continued growth of the private sector is public investment in the construction of the physical infrastructure and in the adequate maintenance of the existing infrastructure. This investment allows local companies to grow, produce goods and services at lower costs, increase profits, expand businesses, hire more workers, and generate more income and employment growth. Additional spending in the economy would improve Puerto Rico’s business climate and attract new investment, not only from local investors but also from abroad.

Under statehood, Puerto Rico would be able to access the additional funds needed for the adequate development of the physical and human capital required for long-term economic growth. The costs involved are too high for the private sector to adequately meet the physical and human requirements for capital accumulation. Entrepreneurs won’t risk capital to invest in repairing roads and highways. Private corporations can’t assume all of the cost of educating workers and all of the costs needed to develop new technologies.

The federal government assists state governments by contributing to these investments on behalf of the public good. Under commonwealth, however, Puerto Rico’s federal contributions to economic growth have fallen substantially short of those to the 50 states. Federal contributions to the states keep growing larger than those to Puerto Rico. The result is that the economic gap between Puerto Rico and even the poorest state of the union, Mississippi is growing wider.

Statehood would bring the same stability to the island as it has to the 50 states and help to end the uncertainty for investors considering the island. Statehood not only would stimulate the Puerto Rico economy to grow faster through full integration with the U.S. economy and political system, but also would remove uncertainties regarding Puerto Rico’s status and political risk profile, making the island a full and complete part of the U.S. in the eyes of investors.

With complete political and economic integration, long-term personal and collective prosperity equivalent to that in the states would be achieved. The disparity between federal spending in Puerto Rico and that in the 50 states has contributed to our lagging behind all of them, and we have been falling even further behind in the past few decades.

Statehood provided billions of dollars in free advertisement to Hawaii when it became a state 1959, creating what is referred to as the Hawaiian Boom. Hundreds of new companies jumped at the opportunity to do business and invest in the newborn state; property values multiplied; and millions of new tourists were lured to the islands. New investment in business and property didn’t just come from the U.S. mainland but from Asia as well. Local businesses expanded and thrived. The scenario wouldn’t be different in Puerto Rico should it become a state, as investment would flow not only from the U.S. mainland but also from Latin America and Europe.

Political representation

On Tuesday, Nov. 2, 2004, over 120 million U.S. citizens in the States will exercise their constitutional right to vote for the U.S. president, 435 members of the House of Representatives, 34 senators (approximately one-third of the Senate is elected every two years to a six-year term), and many state government officials. Voters will decide who will govern their future socially, politically, and economically.

On that same day, Puerto Rico will elect a governor for the next four years, a resident commissioner, legislators, mayors, and hundreds of other local officials. The U.S. citizens who reside on the island, however, won’t be able to vote for any elected officials in the U.S. federal government, although the decisions of these elected officials, particularly the president and the members of Congress, can have an impact on almost every aspect of Puerto Rico’s well-being.

Although Hispanics are the nation’s largest minority, approximately 40 million strong, not counting the people who reside in Puerto Rico, there are only 16 million eligible Hispanic voters in the States, out of which only seven million are expected to vote in the 2004 general election. If stateside Puerto Ricans registered and participated in the electoral process at the same rate their counterparts on the island do, it would mean over four million additional votes including Puerto Rico. Furthermore, if Puerto Ricans on the island were allowed to participate in U.S. mainland elections, the Hispanic vote in the U.S. would increase by almost 30%.

As U.S. citizens, all Puerto Ricans are eligible to vote in U.S. elections as soon as they move from the island to the mainland. Hispanics from Latin American or other foreign countries, on the other hand, must wait years after they relocate to the U.S. and obtain their citizenship before they are allowed to vote.

However, if a Puerto Rican who has spent his or her entire life residing on the U.S. mainland and participated in every U.S. election since becoming eligible to vote relocates to Puerto Rico, his or her right to vote is immediately taken away. The same Puerto Rican who resides in any of the 50 states and relocates almost anywhere in the world—say, for employment reasons—has the right to obtain an absentee ballot from the state he or she previously resided in and can participate in elections in the U.S.

Two senators and six representatives

There are currently no Hispanics in the U.S. Senate, and there hasn’t been one in over 25 years. Throughout U.S. history, there have been only three Hispanic senators, all of them from the state of New Mexico. In 2004, Cuban-born lawyer Mel Martinez from Florida, a former Bush cabinet member, is running for the seat of retiring Sen. Bob Graham. Although Martinez has the powerful Cuban vote, many observers believe his election will also depend on having the Florida Puerto Rican vote.

As a state, Puerto Rico would elect not one but two Hispanics to the U.S. Senate, who would represent not only the people on the island but also the more than 40 million Hispanics residing on the U.S. mainland. Adding relevance to the importance of these two Puerto Rican senators is that the U.S. Senate is presently divided almost evenly, with 51 Republicans, 48 Democrats, and an Independent who participates in the Democratic caucus.

Out of the 435 members of the House of Representatives (Puerto Rico’s resident commissioner isn’t included), there are only 24 Hispanics. Puerto Rico’s resident commissioner has no vote in the U.S. Congress. If Puerto Rico were to become a state, however, island voters could elect five or six members to the House, which is the same as or more than 26 states have. Instead of having a resident commissioner as the sole representative of all Puerto Ricans, we could have several members of Congress with different views and from various regions of the island, all working for Puerto Rico’s benefit.

Having six members of Congress and two senators would give Puerto Rico representation in the Democratic and Republican parties, allowing the island to influence the decisions of both. With five or six congressional representatives, Puerto Rico would be able to sit on many House committees, many of which consider bills that can have profound economic, political, and social repercussions for the island. These Puerto Rican congressional representatives would not only provide island residents with proportionate representation in Congress but would also create more equitable representation for all Hispanics on the U.S. mainland. This political power translates into economic power.

Electoral votes

Each of the 50 states has a number of electoral votes equivalent to the number of senators and representatives it sends to Congress. These electoral votes make up the Electoral College, for a total of 538: one for each of the 100 senators and 435 representatives, plus three allotted to the District of Columbia. To win the presidency, a candidate must obtain 270 electoral votes. Puerto Rico currently has no electoral votes. As a state, Puerto Rico would have seven or eight electoral votes for president and vice president of the U.S. (based on two senators and five or six representatives), more electoral votes than over half of the states have.

With seven or eight electoral votes, Puerto Rico would become an important campaign stop for the national parties’ leadership and presidential candidates, who would commit to helping the island, since its electoral votes would be important in presidential elections.

The additional advantages of statehood status when combined with the dollars and cents advantages of statehood to the residents of Puerto Rico will be covered in a later issue of CARIBBEAN BUSINESS.


Actual federal funds Puerto Rico received in fiscal year 2003: $19,617,536,000

As a state, Puerto Rico would have received (compared to Mississippi) per capita fiscal year 2003: $40,864,275,590

Additional federal funds Puerto Rico could have received as a state for fiscal year 2003: $21,246,739,590

The $21 billion more Puerto Rico could have received in 2003 in federal funds is more than the Treasury of the Commonwealth collected in income taxes from individuals and corporations in the same fiscal year.

Federal Funds Fiscal Years 1994-2003

Difference of how much more four states with comparable population to Puerto Rico received in federal funds during past 10 years.

State: Population / Example Just in FY Ending 2003 / Total Received Over 10 Years / 10 Years difference Received vs. P.R.

Colorado: 4,550,688 / $28,874,000,000 / $223,045,000,000 / $103,946,000,000

Connecticut: 3,483,372 / $28,595,000,000 / $205,488,000,000 / $86,389,000,000

Kentucky: 4,117,827 / $31,153,000,000 / $232,988,000,000 / $113,889,000,000

South Carolina: 4,147,152 / $28,038,000,000 / $214,376,000,000 / $95,277,000,000

Puerto Rico: 3,878,532 / $14,661,000,000 / $119,099,000,000 / --

The numbers are different for each of the 10 years, but for space consideration, we show only the 2003 numbers. However, the difference is the actual total of the 10 years.

Source: Consolidated Federal Funds Report for Fiscal Year 2003, U.S. Census Bureau, Issued September 2004.

Three charts are included below.

This Caribbean Business article appears courtesy of Casiano Communications.
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