The UPR’s Certified Fiscal Plan or the Shredding of Puerto Rico’s Social Contract
Published on August 16, 2021 / Leer en español
Introduction
The modern social contract in developed societies can be defined as the collective provision of at least some minimum level of public safety, housing, education, and health care, and protections for people of all ages, and people with disabilities.
In the case of Puerto Rico, it has included access to higher education through the operation of a relatively large public university system. For more than a century, the University of Puerto Rico (“UPR”) has provided affordable access to high-quality education to thousands of Puerto Ricans. According to the most recent version of the UPR’s Fiscal Plan, the university currently offers 32 associate degrees, 231 bachelor’s degrees, 118 master’s degrees, 15 graduate certificates, 7 professional-level degrees, 35 doctoral degrees, and many continuing education courses and programs and, as of February 2021, it had approximately 4,500 professors and researchers, and 46,000 students.
The development of this important institution has been financed mostly by Puerto Rican taxpayers through the years. In 1966, the Puerto Rico Legislative Assembly enacted a law mandating that a little bit less than 10% of Puerto Rico’s General Fund be transferred to the UPR every year. In this sense, then, the public support of higher education can be said to have been embedded in Puerto Rico’s social contract for a long time now.
During the last 40 years, though, the UPR has faced increasingly serious administrative, financial, and managerial challenges. These problems became acute with the filing of the Commonwealth’s bankruptcy petition under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”) in 2017. At that time, the Fiscal Oversight and Management Board for Puerto Rico (“FOMB”) treated the University as a “covered entity” for purposes of PROMESA and has developed several Fiscal Plans for the UPR. In doing so, the FOMB has jumpstarted the most thorough restructuring of the UPR in more than half a century.
In this analysis, we will take a brief look at some of the most important aspects of the Fiscal Plan for the UPR certified on May 27, 2021.
Reduction of General Fund Appropriations 
Perhaps the most radical change implemented by the FOMB has been the reduction of General Fund appropriations for the UPR, from $911 million ($872 million from the General Fund pursuant to the 1966 formula plus $39 million from other General Fund sources) in fiscal year 2017 to $466 million ($407 million from the General Fund plus $59 million from other special appropriations), a reduction of $445 million, or 48%, for fiscal year 2022. These cuts have been a direct hit to the financial viability of the University, have wreaked havoc on the University’s operations, and weakened the institution’s capacity to carry out its social mission. It also means that the FOMB, an unelected body, has radically and unilaterally changed the terms of the Puerto Rican social contract.
The FOMB makes several arguments in support of cutting General Fund appropriations to the UPR. Among these we find the following: (1) state governments in the U.S. provide only around 20 to 30% of state universities’ operating budgets, while in the UPR it was approximately 69% in FY2017; (2) enrollment has decreased due to migration and low birth rates; and (3) the FOMB sought to “lower the financial burden on the Commonwealth” and “encourage sound fiscal management” at the UPR.
None of these stated reasons, however, justify the massive cut to the UPR’s main source of revenue. First, it is not clear to us why U.S. public universities should be the benchmark to measure the UPR’s financial structure nor does the FOMB provide an explanation. But even if we assume this is the right benchmark, it is difficult to generalize an operating model from them, given that each state funds its public university in different ways. Also, many state universities in the U.S. generate significant revenues from large sports programs (especially basketball and football) and merchandising agreements with sportswear companies. An option that is probably not available to the UPR.
Second, it is true that enrollment has declined, but massively cutting funding for higher education is a singularly myopic way of addressing this problem. For example, couldn’t the enrollment shortfall be at least partially offset by attracting students from the U.S. and Latin America? How about offering degree programs to older adults that need to sharpen or upgrade their skills as they postpone retirement due to higher life expectancy?
Finally, the UPR plays a key role in Puerto Rico’s economic development, which is the only way, over the long term, to truly stabilize the central government finances. Yet, the FOMB has sought short-term fiscal balance over the long-term viability of Puerto Rico’s economy. A less damaging alternative, for example, would have been to leave the core General Fund allocation at the FY2017 level of $872 million and increase it only by the annual rate of inflation. This formula would have stabilized the Commonwealth’s contribution to the UPR without generating turmoil at the University.
Tuition Increases
The FOMB seeks to partially offset the reduction in General Fund appropriations with a significant tuition increase. According to the FOMB, “for most of the last half decade, annual undergraduate tuition (for 28 credit hours) and fees hovered around $4,086, 19% less expensive than comparable universities in Puerto Rico and 49% lower than the average in-state annual cost at US public 4-year universities.”
Again, at first glance, this may sound like a good argument. But it fails when we take into account Puerto Rico’s socioeconomic characteristics. Average income per capita in Puerto Rico is approximately one-third of the U.S. average and about 50% of that of the lowest-ranked state, while the poverty rate is over three times the U.S.’s rate. Given those statistics, it makes sense that tuition at the UPR is “49% lower than the average in-state annual cost at US public 4-year universities.” To be fair, the Fiscal Plan includes an internal scholarship fund to meet the financial aid needs of at least some of the neediest students. Nonetheless, the higher tuition and fees may discourage students from low-income households from even applying as they may not be aware of their financial options.
Furthermore, the comparison with several private universities in Puerto Rico is inapposite for two reasons. First, the UPR is by far the island’s most important research institution of higher learning, managing 79 separate research centers across the university system. Private institutions on the island fall significantly behind the UPR in this respect. In addition, this comparison obviates the UPR’s social mission, namely the collective provision of access to affordable higher education, which is at the core of any public university and is not the case with private colleges and universities.
Savings Through Attrition
The FOMB also seeks to generate significant savings (over $100 million per year) by (1) “reducing non-faculty personnel through attrition, enabled by combination of administrative consolidation across campuses, other process efficiencies”; and (2) “reducing the number of trust and senior administrative positions by about 300”. At the same time, the Fiscal Plan calls for increasing faculty by 3% per year throughout the Fiscal Plan period.
While there appears to be general agreement among the faculty and students that the UPR is too bureaucratic and significant administrative reforms should be implemented, it is not clear to us from reading the Fiscal Plan how the FOMB settled on its objectives for the reduction by attrition of non-faculty personnel and increasing faculty during the next five years. In our view, this process should be designed and led by University administrators and not imposed by actors external to the UPR. In addition, these two objectives may be in conflict if not balanced correctly. To the extent that professors have to devote an increasing share of their time to administrative duties, they are less available to teach and carry out research
Pension Liabilities
According to the Fiscal Plan, the UPR has accrued pension liabilities of $3.2 billion, of which $1.8 billion, or 56%, is unfunded. University management has already determined to close the existing defined benefit plan as of December 31, 2021, and offer a new defined contribution plan to all non-vested and new employees. Vested employees and retirees (approximately 88% of beneficiaries) will see no impact on their benefits, while non-vested and new employees will be required to contribute 8.5% of their salary, with an additional 4.5% match provided by the UPR, to the new defined contribution plan.
Even after implementing this rather drastic measure, the UPR would still be required to identify an additional $66 million to fund the plan in FY22. In order to avoid further revenue increases or expense reductions to adequately fund the defined benefit plan, the Fiscal Plan presents two options: (1) “freeze and move to a Defined Contribution Plan with no reduction in accrued benefits”; or (2) “freeze and move to Defined Contribution Plan coupled with a reduction in accrued benefits”. According to the FOMB, option 2 “is the most beneficial to the UPR in terms of liability risk.” There is no analysis, however, of how such a change would affect the retirement decision of professors who are close to or at retirement age.
In the end, the FOMB passes the buck to the University’s management to make the decision. This is an area, however, where the UPR could benefit from the FOMB’s access to specialized consultants, who perhaps could develop some other, less disrupting alternatives.
Conclusion
According to Minouche Shafik, Director of the London School of Economics, a modern social contract “provides minimum protections to all, shares some risks collectively, and asks everyone to contribute as much as they can for as long as they can.” The Fiscal Plan for the UPR unilaterally changes a significant part of our social contract, redistributing the risk and responsibility of providing such education away from the state and toward the individual. Furthermore, this renegotiation of the terms of the social contract is being imposed by an unelected board of technocrats.
We don’t seek to minimize the difficulty of this issue. The question of how to finance public education is complex, especially at the tertiary level, as it generates both public and private benefits. We also understand the need for restructuring the UPR’s operations and addressing its long-standing administrative, financial, and management problems. Yet, what the FOMB is proposing is not the way. Changes like the ones set forth in the UPR Fiscal Plan cannot simply be crammed down on society by a group of technocrats, no matter how well-intentioned. There will be resistance and social conflict.
During the Thatcher years in Britain, the phrase “there is no alternative” became so popular among government ministers that the press gave it its own acronym: TINA. We are hearing that phrase a lot lately in Puerto Rico, especially in the context of the UPR. Historians who have looked back and analyzed that period, though, have concluded that it was never true. There is always an alternative, what is usually lacking is the will.