Puerto Rico board approves General Fund with 3.4% more spending

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The Puerto Rico Oversight Board approved a fiscal year 2020 budget with 3.4% more spending than in the previous year but 5.9% less spending than the budget the local legislature approved.

The budget includes an additional $242 million for public safety, $65 million for education, and $58 million for health.

While the Puerto Rico legislature approved a budget on Sunday for $9.62 billion, the Puerto Rico Oversight, Management, and Economic Stability Act makes the board’s $9.05 billion budget the legally valid budget.

The board’s fiscal year 2019 budget didn’t anticipate the payment of the annual Christmas bonus to employees but Gov. Ricardo Rosselló paid it anyway.

In a press conference call on Monday, board Executive Director Natalie Jaresko said she anticipated that wouldn’t happen this time because the board’s fiscal 2020 budget is much more “granular” in its spending specifications. The budget sets outs a variety of categories for personnel spending. One of them is for the Christmas bonus, which is specified as receiving $0.

“Forgoing the Christmas bonus, while finally recognizing the poor optics around maintaining such a program, results in modest savings,” said Howard Cure, director of municipal research at Evercore.

“The commonwealth still needs to reduce headcount through actual efficiency studies rather than just waiting for personnel cuts through attrition,” he said. Ultimately these studies should lead to layoffs, he said.

In addition to approving a General Fund for the fiscal year that started Monday and runs to June 30, 2020, the board also approved Special Revenue Funds and Federal Funds budgets. The former has been increased by more than 30%, primarily by the inclusion of previously unbudgeted expenses. The latter declined by more than 17% because of expected reductions to federal spending on Medicaid on the island.

“It should also be noted that healthcare costs still are a burden to Puerto Rico as the federal government continues to underfund many medical programs that should receive more aid based on the high poverty level," Cure said. "The healthcare costs will continue to plague the commonwealth and there really should be a more equitable federal funding formula.”

Through all three budgets, the board is allocating $4.3 billion for healthcare, $2.9 billion for education, $2.6 billion for pay-as-you-go pension funding, and $1.1 billion for public safety.

The board is projecting that the three budgets will have $22.8 billion in revenues this fiscal year but spend just $20.2 billion. The extra $2.6 billion is for the planned pension trust, post-bankruptcy debt service, and projected future deficits. Jaresko said that the board now expects Puerto Rico to run a deficit by around fiscal year 2031.

Last week the Puerto Rico Treasury said it was projecting fiscal year 2019 General Fund revenues will come in 33.6% higher than the board had projected in June 2018. The Bond Buyer asked Jaresko Monday how the board’s fiscal 2031 and beyond deficit projection could be trusted when it has proved to be so far off the mark for this past fiscal year.

Jaresko questioned the 33.6% figure but acknowledged that the board had been more pessimistic about revenues than has been the case. Several factors in the short-term affect revenues and it’s hard to predict these, she said. But the board has been quite accurate in its evaluation of long-term trends, she said. The board expects that Medicaid costs to increase faster than the rate of inflation and this is one reason it is projecting annual deficits in the 2030s and 2040s.

The board’s projections of fiscal 2019 revenues were first made only a few months after Hurricane Maria, the board explained in an email Monday. Even in June 2018, it had little information about revenues in fiscal year 2018 on which to base its projections for fiscal year 2019.

The board anticipates that there will be $437 million for Puerto Rico Sales Tax Finance Corp. (COFINA) debt service and $159 million for Government Development Bank for Puerto Rico debt service in fiscal 2020.

In addition to the central government budgets, this weekend the board also certified fiscal 2020 budgets for the Puerto Rico Electric Power Authority, University of Puerto Rico, Puerto Rico Aqueduct and Sewer Authority, and Puerto Rico Highways and Transportation Authority. The budget allocates a total of $6.22 billion for these public instrumentalities.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Electric Power Authority Puerto Rico Aqueduct & Sewer Authority Puerto Rico Highway & Transportation Authority Puerto Rico Sales Tax Financing Corp (COFINA) Government Development Bank for Puerto Rico Puerto Rico