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Puerto Rico’s Economy Is Poised for a Double Jolt in 2022

Jan. 6, 2022, 9:00 AM

After more than four years, Puerto Rico is set to emerge from its record bankruptcy in the early part of 2022. While it slashes tens of billions of dollars in debt and shakes off the stigma of default, the U.S. territory could get a further boost: The “Build Back Better” spending package could increase its federal Medicaid funding permanently and, for the first time, extend Supplemental Security Income for the elderly and disabled to U.S. territories.

Antonio Weiss, a senior fellow at the Harvard Kennedy School who led the U.S. Treasury Department’s work on Promesa, the 2016 federal law that allowed Puerto Rico to reduce debt through bankruptcy, says there’s now reason for optimism and “to think more about investment and the future economy of Puerto Rico in a way that hasn’t been possible for decades.”

Under Build Back Better, Puerto Rico would receive almost $3 billion in Medicaid funding in 2023, and qualifying residents would get a total of as much as $2.5 billion of SSI assistance every year. The Medicaid funding bump is significant because the federal government is currently required to cover only 55% of Puerto Rico’s Medicaid costs, a lower share than for any U.S. state. Congress has passed temporary fixes before, but a permanent boost to Medicaid funding would enable the island of 3.2 million to improve its health-care system and modestly expand its Medicaid programs, according to Javier Balmaceda, a senior policy analyst at the Center on Budget and Policy Priorities, a nonpartisan Washington think tank.

Additionally, as many as 400,000 Puerto Ricans may qualify for SSI assistance, according to Balmaceda. It would mean that “for the first time in nearly 50 years, Puerto Rico would have access to a really important economic security program in the country,” he says. The poverty rate on the island is almost 44%.

Build Back Better passed the House of Representatives on Nov. 19 but was thrown into jeopardy in the Senate after Joe Manchin, a West Virginia Democrat and a key swing vote, said he would not support it. Senate Majority Leader Chuck Schumer has vowed to bring a revised version to the floor for a vote as soon as this month.

Although Manchin has raised concerns about the overall size of Build Back Better, he hasn’t specifically sought to cut into its Medicaid provisions, according to two senior Democratic aides familiar with the discussions. Even a slimmed-down version of the legislation is expected to include Medicaid funding for Puerto Rico.

Democrats haven’t debated a fallback measure, the aides say. Still, there’s bipartisan support for ensuring U.S. territories don’t run out of Medicaid money. Representative Cathy McMorris Rodgersof Washington and Representative Frank Pallone of New Jersey—the respective Republican and Democratic leaders of the House Energy and Commerce Committee—reached a deal earlier this year on a five-year extension of Medicaid funding at higher than statutory levels; the deal was abandoned to advance Build Back Better. A Republican committee aide said they’d welcome a return to that agreement.

Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York may rule as soon as this month on Puerto Rico’s debt adjustment deal. If approved, it will cut $33 billion of debt and other obligations including slashing $22 billion of bonds down to $7.4 billion. Under the deal, Puerto Rico will pay no more than $1.15 billion in principal and interest annually on general obligation bonds and sales tax debt, down from as much as $3.9 billion, and will give investors a portion of any surplus sales tax revenue.

The plan gives the government confidence to invest in quality-of-life programs and other initiatives, says Natalie Jaresko, executive director of Puerto Rico’s financial oversight board, which manages the bankruptcy process. “Now that we know it’s $1.15 billion, we know that everything else we earn we can use for public education, public safety, public health, and pension trusts,” she says.

The commonwealth’s May 2017 bankruptcy followed years of borrowing to cover operating expenses, economic contraction, and population decline as residents left to find work on the mainland. After that, the devastation left by Hurricane Maria in September 2017, as well as political turmoil followed by the Covid-19 pandemic, stalled efforts to emerge from the largest debt restructuring ever in the $4 trillion municipal bond market.

The lengthy process involved years of negotiations among Puerto Rico’s federally appointed financial oversight board, hedge funds, mutual funds, bond-insurance companies, and labor groups, pushing Puerto Rico’s bankruptcy costs for lawyers and outside advisers to more than $1 billion.

The workout plan is also intended to help fix the commonwealth’s pension system—which owes current and future retirees an estimated $55 billion—by establishing a reserve fund to which Puerto Rico will contribute annually. Still, Puerto Rico lawmakers may continue to struggle to balance budgets, since the commonwealth must allocate about $2.3 billion each year in pension payments to retired public workers. Its Medicaid costs may increase if Congress fails to approve Build Back Better.

Puerto Rico is anticipating surpluses in the near term, thanks to Federal Emergency Management Agency funds and Covid aid. Officials expect a combined 0.4% of economic growth this year through fiscal year 2026. But the commonwealth could face deficits again by 2036, according to its current multiyear fiscal plan, even if lawmakers implement changes to make it easier to do business on the island and programs to expand workforce participation.

“We need to come up with a medium- to longer-term plan to grow the economy,” says Sergio Marxuach, the policy director at the Center for a New Economy, a San Juan-based research institute that analyzes the commonwealth’s finances. Puerto Rico’s ability to pay debt service once it’s out of bankruptcy depends on the economy growing after federal disaster aid and pandemic funds dry up.

“It really isn’t in the interest of the creditors to demand too much of Puerto Rico,” Joseph Stiglitz, a professor of economics at Columbia University, said in San Juan on Nov. 30 at a Center for a New Economy conference. “Because then Puerto Rico won’t grow, and then the creditors won’t get back as much.” —With Jim Wyss and Erik Wasson


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To contact the authors of this story:
Michelle Kaske in New York at mkaske@bloomberg.net

Alexander Ruoff in Washington at aruoff2@bloomberg.net

To contact the editor responsible for this story:
Amanda Kolson Hurley at ahurley21@bloomberg.net

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