Puerto Rico fiscal plan may hurt the most vulnerable

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Part III of five-part series "Austerity on the Island"

While arguably necessary in the long-term, the Puerto Rico Oversight Board’s austerity may be painful to many residents.

Puerto Rico’s residents are especially vulnerable, with 44.9% living in poverty, compared with 13.4% of the U.S. populace who are under the poverty line. According to the Puerto Rico Institute of Statistics a third of the island's residents are “food insecure.”

The board’s first fiscal plan, adopted in March 2017, specified that effects on the budget of measures cutting spending would be 1.85 times that of tax revenue measures. That plan covered fiscal years 2017 through 2026. The latest fiscal plan, adopted in May, indicated that the spending cuts would be expected to create 5.33 times the effect of the revenue measures. The plan covered fiscal year 2018 to fiscal year 2024.

At points the board has rejected the use of the term “austerity” to describe its actions. Rather, it has said the fiscal plan’s increases in taxes and fees would be to “right-rate” them. Similarly, it has said the plan’s cuts in departmental spending would be to “right-size” them. Yet the cuts to spending and increases to taxes meet the definition of “austerity.”

Though such austerity may be at least somewhat necessary, scholars tell us it has a social cost.

David Stuckler and Sanjay Basu argued in 2013 that austerity policies lead to suicides, deaths, and poor health. In an opinion piece in the New York Times titled “How Austerity Kills,” they said in the Great Recession, “Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity.”

After the collapse of the Soviet Union from 1989 to 1991 those countries that followed a “shock therapy” programs of transition to the free market, like Russia, Kazakhstan, Estonia, Latvia, and Lithuania had the worst rises in suicides, heart attacks and alcohol-related deaths. Belarus, Poland and Slovenia took a gradualist approach and had better health outcomes, Stuckler and Basu said.

“Like the fall of the Soviet Union, the 1997 Asian financial crisis offers case studies — in effect, a natural experiment — worth examining,” Stuckler and Basu said. “Thailand and Indonesia, which submitted to harsh austerity plans imposed by the International Monetary Fund, experienced mass hunger and sharp increases in deaths from infectious disease, while Malaysia, which resisted the IMF’s advice, maintained the health of its citizens.”

In his book “Austerity: The History of a Dangerous Idea,” economist Mark Blyth said when government services are cut to balance budgets, it is those on the bottom 40% of the economic ladder who are generally hurt.

By contrast in their book, “Austerity: When it Works and When It Doesn’t,” by Alberto Alesina and two other economists, say that many governments can make cuts to spending without hurting the poor.

Many observers have raised concerns about the impact of the Puerto Rico board’s social policies.

In a March 2017 paper posted to the site of the Center for a New Economy, Policy Director Sergio Marxuach said that economists have varying models about the negative economic impacts of spending cuts and tax increases on economic activity. He said the board’s then current 10-year fiscal plan would lead to reductions in the island’s gross national product of between 11.5% and 18.2%, depending on which model one used. “This in an economy that has already contracted about 14% since 2006,” Marxuach said.

The board disagrees with Marxuach’s economic predictions. They say that the fiscal adjustments will have a negative impact. However, “stabilization is a precondition of growth,” Oversight Board Executive Director Jaresko said. The positive economic impact of federal aid will outweigh the negative effects of the fiscal adjustments, she said.

The board has mandated increases in revenues through measures to improve tax-paying compliance and through tax increases on gaming, tobacco, licenses and other things, and by introducing taxes on medical marijuana and Airbnb rentals. None of these are broad-scale increases on the poor. However, a greater percentage of low income people than high income people smoke, so the tobacco increase will hit them disproportionately. Other poor people will have a hard time paying the increased fines and license and permit costs.

The board’s spending cuts are more likely to incur pain on residents. The agencies expected to experience the biggest cuts from fiscal 2019 to fiscal year 2024 are K-12 Education with $2.226 billion and Corrections with $665 million. Current fiscal year General Fund spending totals $2.4 billion for K-12 education and $396 million for corrections.

The board, through its fiscal plan, has made an effort to minimize the spending cuts’ impact on the populace. In many circumstances the board plans to gain savings through reorganizing the provision of services rather than through cuts in services.

It’s unclear whether this approach in the best of circumstances could succeed in reducing spending as much as the board hopes. By the board’s own admission in its document “Commonwealth Fiscal Plan Risks” from September there is a real danger that the approach won’t be properly implemented.

In that document the board said there was a danger that municipalities and the University of Puerto Rico won’t make enough progress in reducing their costs, forcing the commonwealth government to continue to subsidize them. The document also mentions the possibility that “poor implementation and new federal benefit requirements” might make health care costs rise more quickly than projected.

According to the Urban Institute, 35.4% of Puerto Ricans report fair or poor health versus 17.9% of U.S. residents. So if the board was to go beyond structural approaches to cutting health care costs, it would be affecting an already suffering population.

In the fiscal plan the board acknowledges the possibility that its health care spending cut approach won’t lead to adequate savings. As a backup it suggests that the island’s Medicaid program, Vital, might end coverage of certain things that some other states don’t cover. Examples of these include dentistry, vision and hearing exams, prescription glasses, and physical therapy. Cuts of these things would certainly incur real pain in the populace.

Even the cuts to funding of the healthcare industry may harm provision of healthcare on the island. According to the U.S. Department of Health and Human Services, the island has half the per capita presence of critical field medical specialists compared to the mainland. According to the board, prior to Hurricane Maria in September 2017, 500 doctors per year were leaving the island.

On July 1, 2017, Puerto Rico reduced fees paid to medical providers and particularly specialists. This led some to leave the island for the continental U.S.

From January 2018 to September 2019 the federal government provided additional funding for Vital through the Bipartisan Budget Act of 2018, allowing Puerto Rico’s health administration to relax the reduction in medical fees “in response to a sharp increase in emigration of specialty providers that was hindering delivery of necessary care,” the board said in its May certified fiscal plan.

With the loss of that the act’s money, Puerto Rico’s government has increased its contribution to Vital to maintain the level of funding. In December that government got President Trump to approve two years of Medicaid funding, at a somewhat lower level than the local government had requested. The local government had also requested four years of funding.

Among the features of the approved funding will be continued payments to providers at levels equal to 70% of Medicare scheduled levels. Without this funding the payments would have gone to well below 70%.

If reimbursement levels go down again in two years or thereafter, the island may again experience rapid emigration of needed doctors. This is an example of how the board’s cuts to non-service items can end up having a harmful impact on services.

The board is also requiring cuts to pensions being paid to Puerto Rico retirees. While these are fairly modest at 8.5%, they do address all seniors being paid more than $1,200 a month in pensions. About 61% of retirees will see no cut because they make less than that. Most of the rest are paid less than $2,000 per month, so the cut will have a real impact.

According to the Gov. Alejandro García Padilla 2016 proposed fiscal plan, the average annual pension benefit per beneficiary in Puerto Rico was $14,112, compared with an average of $26,455 for public pensions across the U.S.

In April 2018, Center of a New Economy Policy Director Sergio Marxuach wrote of the deeper cuts in pensions that were then proposed: “The social effects are foreseeable: chronic illnesses become acute when spending on medicines is cut, increases in the poverty rate and malnutrition among the elderly segment of the population, there is an increase in people postponing retirement and the number of people who literally die working, an increase in the abandonment of the elderly and an eventual decline in life expectancy.”

In response, Jaresko said the board was seeking to avoid the social impacts described by Marxuach. Without some cuts there would be no pensions for anyone, she argued, adding that the board isn’t cutting pensions for people near the poverty level.

Given the retirees are unsecured creditors, the court won’t approve a plan of adjustment without cuts to pensions, she said. “The goal has been to do the minimum necessary [pension cuts] to get it approved.”

Next (on 12/27): What critics say the Oversight Board overlooked

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