Fiscal board calls for plan to curb loss of federal funding

The Financial Oversight and Management Board said Puerto Rico’s reliance on non-recurring federal emergency and stimulus funds has significantly shaped its fiscal landscape in recent years. As these funds are phased out, it is imperative for the government to develop a comprehensive roadmap to transition the island toward long-term fiscal responsibility, including financial sustainability.

By The Star Staff

The Financial Oversight and Management Board is urging the island government to develop a plan to curb the loss of federal funds, including the creation of a centralized office to keep tabs on the use of funding from Washington.

“Puerto Rico does not have a centralized financial management framework in place for reporting federal funds. This has led to various accounting, budgeting, and compliance challenges,” the oversight board said. “The lack of adequate tracking of federal fund usage across Puerto Rico may contribute to inefficiencies, such as potential duplication of benefits or disbursements that are difficult to fully account for. Also, the lack of visibility into the use of federal funds prevents the government from optimizing the deployment of its own resources, resulting in ineffective spending and federal fund utilization.”

Currently, federal funds, including one-time allocations to Puerto Rico, total $15.4 billion, representing 46.1% of the Certified Fiscal Year 2025 Commonwealth Budget.

In a letter dated April 28 to Orlando Rivera Berríos, executive director of the Office of Management and Budget, the oversight board said Puerto Rico’s reliance on non-recurring federal emergency and stimulus funds has significantly shaped its fiscal landscape in recent years. As these funds are phased out, it is imperative for the government to develop a comprehensive roadmap to transition Puerto Rico toward long-term fiscal responsibility, including financial sustainability, the board said.

The Puerto Rico Department of Education (PRDE) is the largest government agency on the island with a budget of $5.3 billion for fiscal year (FY) 2025 across all funding sources. Some 46% of PRDE’s FY 2025 budget is funded with federal funds.

Additionally, Plan Vital -- the commonwealth’s health insurance plan, a Medicaid program and one of its largest annual expenditures -- has a total program cost of around $4.6 billion per year, including federal contributions. Plan Vital plays a crucial role in Puerto Rico’s healthcare system, and as a result of the island’s income levels, covers nearly 43.5% of the population -- about 1.4 million people.

Under current federal law, beginning in October 2027, the commonwealth becomes responsible for a significantly higher share of Medicaid expenses, leading to a projected reduction in federal Medicaid support starting in FY 2028. As a result, unless federal law is changed, the commonwealth is projected to face a deficit of about $1.1 billion in FY 2029, the first full fiscal year to reflect the reduction, before any additional spending adjustments are made.

In the Certified FY 2025 Budget, the government covered some expenses with commonwealth revenues that were previously funded by non-recurring federal resources. This includes $230 million at the PRDE and $17 million at the Department of Public Safety for salary increases and operational costs, such as school transportation under PRDE. In addition, PRDE identified some $500 million of current expenses supported by non-recurring federal funds that could be at risk.

Furthermore, the island government faces an ongoing fiscal challenge because at least $290 million in operating expenditures are currently funded with one-time federal resources. Now, these must be covered annually from FY 2026 through FY 2029.

“Given this reality, it is critical that agencies conduct a thorough evaluation of their programs, establish a clear methodology for prioritizing needs, and reassess the scope of existing initiatives,” the oversight board notes in the letter. “This process will enable the Government to make informed decisions about which programs should continue receiving funding despite the loss of federal funding sources.”

A critical aspect of the transition to long-term fiscal responsibility is the ability to plan and project funding needs over the next five years, ensuring long-term sustainability remains a guiding principle of fiscal decision-making, the board noted. To achieve this, first the government must develop a well-defined strategy that outlines how it will address the financial and operational risks associated with the termination of non-recurring federal funding.

“A key component of this strategy is the development of a comprehensive, year-by-year financial plan that details how the Government will sustain recurring activities previously supported by non-recurring federal funds,” the oversight board said. “This plan should specify which programs will end, which will transition to permanent funding sources, where adjustments or reallocations may be necessary, and how financial reserves or contingency funds will be used to mitigate shortfalls.”

Additionally, ongoing financial monitoring and periodic reassessments should be built into the plan to allow for adjustments based on economic conditions, revenue performance, and evolving policy landscapes, the board said.

The government must also develop contingency plans if anticipated funding sources are not secured or are insufficient, the oversight board said. The plan should begin with a thorough risk assessment to identify financial vulnerabilities and dependencies, and it should also explore alternative funding options to cover potential gaps for a specific period. Non-recurring surplus funds are not a sustainable solution, the board noted.

The oversight board said that in the FY 2026 commonwealth budget process, it will continue to highlight the critical need to address the aforementioned challenges by identifying specific areas where the budget does not comply with fiscal requirements and outlining corrective actions necessary for alignment.