Puerto Rico - PROMESA Forecasts

I write to express my concerns with regards to the regressive policies that are contemplated within the recently approved Fiscal Plan for Puerto Rico with regards to the demography of the island, and the demographic assumptions that lie behind these models. Overall, the current fiscal plan contemplates the following measures (Page 17-Fiscal Reform Measures):

1. Revenue Enhancement

2. Government Right-sizing

3. Reduction in Healthcare Spending

4. Pension Reform

All of these are considered by migration researchers as push factors. Push factors are elements of that force an individual into migration. These are categorized as: social, economic, political and environmental. Among these past studies demonstrate that the proximate factors influence individuals more than the distant; for example lack of essential services such as health and safety (increased criminality), lack of basic resources (food, water, or a job) are factors that impact the decision process of an individual with regards to migration.

Without a doubt the regressive nature of the Fiscal Policies that are being considered will act as push factors for the population of Puerto Rico, on top of those that are already pushing the population towards the continental United States. In addition, these policies will also impact the immigration flow (return migration) which has been present to a lower extent during the past fifteen years. In the following sections I will be outlining how the fiscal policies may impact demographic indicators for Puerto Rico.

Revenue Enhancement

1. These measures do not affect the population in the same way (across the board) for example the adjustment of tobacco-related excise tax and property tax regimes will affect those in the lower socioeconomic status and those in the working class. These sectors of the population already carry the heavy burden of the structural adjustments experienced as a result of the 7% Sales Tax (IVU) and of the increase to 11.5% which was approved in 2015. Under this segment, it is worth to mention that the onset of outmigration in Puerto Rico is found within 2004-2005 the years in which the sales tax started to appear as a solution to the shortage of funds faced by the central government. During 2004, this was a topic of debate and discussion in the main political debates. For example, an increase of a hundred dollars ($100) does not impacts the working class or those who live below the poverty thresholds the same way it does to those in the higher income categories.

2. The measures to revise licenses, traffic fines, insurance fees, and other charges to adjust them with market trends will undoubtedly increase the costs for the aforementioned sectors of the population. This sector may find the increment towards the same levels as in the United States (market trends) as an added element towards the decision to out-migrate.

Government Right-Sizing

1. Puerto Rico has experienced inflation ever since data has been collected on this matter. Also, the island experienced a period of stagflation during the 2008-2013 period which highlighted the serious economic outlook of the economy. A stagnation or freeze in the salary levels for the 2018-2020 period paired with inflation will undoubtedly serve as factors for persons to leave the island. As the main provider of jobs, the effect of these policies will also affect future revenues from taxes and expected incomes. In addition, the increase in the salary of senators and representatives (legislative branch) were adjusted for inflation until the mid-years of the 2000-2010 decade. This should also be revised.

2. There is no doubt that the University system needs to be reformed, this however seems to be the wrong time to implement these policies. Usually, structural changes in the way in which schools are funded regularly employ a series of small adjustments towards a grand goal. The investment in the public education system and lower tuition costs has provided social mobility to thousands of Puerto Ricans. These continue to be the biggest human capital investment the island does on its own. Without a doubt if costs of education are paired with those of the private institutions thousands of Puerto Ricans will not have access to education, and resources to sustain themselves while completing their education (for lack of access to jobs).

3. It is concerning that the government has been subsidizing the operation of municipalities and private companies. In some municipalities the local government is the major if not the sole employer, which would also have implications in the employment outlook for these sectors of the population. Numerous economists have asked for the consolidation of municipalities, it is certainly puzzling that Puerto Rico (3,515 square miles) has 78 counties, and a state like Connecticut (5,542 square miles) has 8 counties and 3.6 million persons. These however have not left the discussion table or being approved as a policy. A comprehensive study of such policies was completed by economist Gabriel Figueroa Cintrón and is titled “Optimum size for county services: operational expenses in Puerto Rico” (Tamaño óptimo para la oferta de servicios municipales: el caso de los gastos operacionales en Puerto Rico). This work is available through the Department of Economics, University of Puerto Rico - Río Piedras. Any policies that will have impact in individuals will also accentuate the negative demographic and economic outlook for those who still live in Puerto Rico.

Reduction in Health Spending

1. Pay for value - It is important to reflect on what is the objective of the healthcare system, and stop seeing it as a business endeavor. MCOs (Managed Care Organization) and the Medical-Loss Ratio systems are profit driven policies which may not have patient’s health as first priority.

2. Improve Payment Integrity - this is certainly required and a MUST in any reform. Researchers from the University of Puerto Rico, Mayagüez Campus have already performed exploratory analysis and found numerous transactions being submitted two times, and even some that do not have any biological sense (i.e. male beneficiaries with obstetrics claims).

A comprehensive assessment of the Puerto Rico Healthcare Reform was completed by me in 2012 and the conclusion was that the reform had failed to comply with the motivations that led to its approval. The study is available upon request, or through the Department of Economics, University of Puerto Rico - Río Piedras (Transformaciones de los servicios médico-hospitalarios públicos en Puerto Rico 1993-2010).

Based on an assessment of policy goals by 2010,

1. Government spending had not reduced,

2. The government still acted as a provider of services and,

3. Preventive medicine was not implemented as required worsening the economic outlook and demand for such services (shortage).

Any policies that aim to reform the system should reflect on the past experiences in order to not allow the same mistakes to be repeated. The main element in consideration should be the reliance on future federal funds, which are not guaranteed until the laws are enacted. Also any worsening of the health systems conditions may serve as push factors for purposes of out-migration for those living in Puerto Rico.

Pension Reform

1. Adjust Retirement Benefits - it needs to be clear what thresholds will be used to consider somebody in the lowest pension bracket. Also The board should study how many pensions were increased based on the beneficiary assuming an administrative position during the last three years of service in order to get a higher pension.

2. Humanitarian Implications of Teachers and Police Pensions - most Puerto Ricans do not accumulate wealth during their life. Research indicates that most live paycheck-to-paycheck, lack of funds for pension systems will undoubtedly drive Puerto Ricans out of the island, and may drive retirees back into the workforce.

IMPACT OF DEMOGRAPHIC ASSUMPTIONS

The Oversight Board and the economists that have work diligently in the revenue projections have ignored the most crucial component of any economic system, the people. The assumptions for Population Growth which are key within the Macroeconomic factors (Page 15 - Commonwealth Fiscal Plan) are surprising and do not reflect the demographic outlook for the population of Puerto Rico. The assumption of a stable growth factor does not match the trends published by the Puerto Rico Institute of Statistics or the U.S. Census Bureau. I have produced

The demographic assumptions behind the models have measurable repercussions, especially when this information is used to aid policy and decision making processes. In 2010, Puerto Rico faced the same situation with regards to population estimates/projections that did not reflect the reality of the island. Based on these models the Population of Puerto Rico would grow from 3.8 million to 4 million by 2010. The following figure illustrates the 2000-2010 experience with regards to models that do not reflect current demographic trends. In this case, a careful examination of the Puerto Rico Community Survey as well as the 2010 U.S. Census counts told demographers that on 2004 the population of Puerto Rico started decreasing. This reduction accelerated from 2004 onward, which are not reflected in the assumptions of the economic models that sustain the fiscal plans and the economic projections derived from them.

In my opinion, the policies outlined within the Fiscal Plan will have repercussions with regards to the population of Puerto Rico.

In addition, these models do not contemplate a fundamental truth to the demographic situation for Puerto Rico, the free flow of Puerto Ricans from the island to the mainland U.S. and any other U.S. territory. These flawed assumptions will spell out the subsequent failure of the Fiscal Plan as it was approved.

A clear example is that in order for the population to remain at the -0.2 growth rate scenario the demographic processes indicators would have needed to be stable in reference to the 2010 levels. This is not the reality, based on recent indicators:

1. Puerto Rico no longer enjoys the benefit of a positive natural balance. In 2016, the number of births was lower than the number of deaths. Natural growth or natural balance was the factor that kept a lid on population decrease, as it served as counterweight to the negative net migration which became the main driving force for the negative population growth experienced for the 2000-2010 period.

2. The state of demographic processes of Puerto Rico is one of non-beneficial momentum. A clear example emerges from the aforementioned indicator. Demographers had projected that the natural growth would end by 2017 and 2018, but this happened in 2016.

I have produced a set of Population Projections that contemplate the stabilization of mortality, reduction of births and acceleration of migration within the assumptions. These are available without cost as a working paper through the Puerto Rico Institute of Statistics[1]. Based on these conservative projections the population of Puerto Rico will reduce 3% between 2015 and 2020.

Based on the aforementioned data and studies, it is puzzling to see the assumptions of stable population decline in the Fiscal Plan’s economic model, when in reality the trends are likely to worsen in the coming years and as a result of those policies.

I am therefore asking you and the rest of the Oversight Board to grant me a turn in the next meeting and provide me an opportunity to discuss 1) official and independently developed population projections, and 2) demographic implications of the aforementioned fiscal policies that will be implemented as part of the Fiscal Plan which was approved on March 13, 2017.