Puerto Rico, which emerged from a record bankruptcy last year, may face budget deficits as soon as fiscal 2028 as the commonwealth’s spending plan depends on uncertain federal Medicaid funding.
(Bloomberg) — Puerto Rico, which emerged from a record bankruptcy last year, may face budget deficits as soon as fiscal 2028 as the commonwealth’s spending plan depends on uncertain federal Medicaid funding.
The island’s federally-appointed financial oversight board released Puerto Rico’s multi-year fiscal plan on Wednesday after approving it on Monday. Puerto Rico needs economic growth and better financial management that avoids overspending, Robert Mujica, the board’s executive director, told reporters.
“Any discussion and solutions of Puerto Rico’s critical issues will have to remain within that fiscal framework to prevent Puerto Rico from rolling back into crisis and even worse — bankruptcy,” Mujica said.
While court-ordered restructuring allowed Puerto Rico to slash its debt and stabilize its pension fund, the island needs balanced budgets to regain market access. It would also eventually end the oversight board’s tenure, a move most Puerto Ricans would welcome.
Restructuring Costs
Bankruptcy right-sized the commonwealth’s obligations, but at a price. Puerto Rico and its authorities have racked up $1.2 billion through June 30, 2022 in professional fees to lawyers and outside financial consultants as part of the workouts, according to the fiscal plan.
Keeping spending in line with revenue collections will be challenging if the federal government fails to maintain Puerto Rico’s Medicaid funding at current levels, which are set to end in September 2027, according to the fiscal plan.
Federal coronavirus aid and Federal Emergency Management Agency funds helped boost Puerto Rico’s economy in the past few years. Island officials need to continue that growth once those federal monies are gone, Mujica said.
The fiscal plan estimates Puerto Rico’s economy will shrink by a combined 0.9% this fiscal year and next and remain flat in fiscal 2025. A 0.3% increase is projected for fiscal 2026.
Unreliable Power
“You do not have any economic development on the island unless you have reliable electricity and a reliable power system,” he said.
Puerto Rico’s Electric Power Authority, the island’s main supplier of electricity, is still working through its nearly six-year bankruptcy. Luma Energy, a US-Canadian consortium, operates the power grid and is using FEMA money to modernize the system, which suffers from chronic blackouts.
The fiscal plan also seeks to reform Puerto Rico’s complex tax structure to increase transparency and enforcement and reduce administrative costs.
“Effective revenue systems are based on taxes that generate sufficient revenue to fund needed public expenditures, are simple to administer, are transparent, are perceived as fair and equitable, and encourage economic efficiency and growth,” according to the fiscal plan.
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