Oversight board stresses need for robust fiscal guardrails to avoid another bankruptcy

The Financial Oversight and Management Board, in its recent report to Congress, cautions that without robust fiscal guardrails, Puerto Rico risks reverting to the chronic deficits that previously contributed to its financial crisis.

By THE STAR STAFF

Although the Financial Oversight and Management Board is winding down its supervision over Puerto Rico’s finances, officials have cautioned that, without robust fiscal guardrails, the island risks reverting to the chronic deficits that previously contributed to its financial crisis.

The information is detailed in the oversight board’s two-volume report recently submitted to Congress.

The report emphasizes the need for adopting modified accrual accounting practices to ensure that government spending aligns with revenue. Although Executive Order OE-2025-011 mandates agencies to create responsible budgets and promote fiscal sustainability, the progress has been inconsistent. Notably, the government has failed to implement uniform financial reporting standards across all entities, with the latest audited financial statements dating back to fiscal year 2022.

Timely audits are crucial for achieving transparency and regaining access to credit markets, as required by the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, for the conclusion of federal oversight. The Government Accountability Office has pointed out that delays in financial reporting hinder investors’ ability to accurately assess risk. To rebuild confidence, Puerto Rico needs to deliver audited financial statements within six months after the fiscal year ends, address ongoing audit deficiencies, and adhere to municipal market disclosure standards.

Despite Puerto Rico successfully restructuring a significant portion of its $72 billion debt, the oversight board warns that achieving genuine fiscal independence hinges on transparency, accountability and structural balance. The board is advocating for legislative reforms aimed at instituting multi-year financial planning, consensus revenue forecasting, and strict debt management policies. Without those measures, officials warn that Puerto Rico’s hard-earned stability could be jeopardized.

To facilitate the efforts, Puerto Rico must establish a centralized executive budget office endowed with comprehensive statutory authority over forecasting, budget development, and financial planning — responsibilities that are currently fragmented across various agencies.

Moreover, the island’s future credibility in the credit markets relies on disciplined adherence to debt policies that respect constitutional limits. The government should expand its Debt Management Policy to encompass early-warning systems and monitoring mechanisms, including fiscal indicators and affordability metrics, the oversight board said.

The board emphasizes the importance of centralizing budgetary authority and oversight within the government, along with clear statutory powers over economic and revenue forecasting and financial planning. Such centralization, it said, is vital for enhancing flexibility, accountability and efficiency.

The oversight board went on to note that the island Legislature, in collaboration with the executive branch, should enact a comprehensive budget reform package that includes statutory reforms for improved budget and fiscal plan timelines, requirements and legal frameworks. The reforms should feature consensus forecasting, detailed appropriation levels, and clear legislative and budget oversight functions.

Focus on education reform

The board in the report specifically identified significant deficiencies in the budgeting practices of the Puerto Rico Department of Education (DE). Those issues pose threats to the island’s fiscal stability and educational outcomes, it said. DE, which is the island’s largest government agency, oversees a recurring General Fund budget of some $2 billion and has also received over $7 billion in temporary federal aid in recent years. Despite this influx of funds, the board notes that the department has been underspending, is experiencing stagnant academic performance, and is distributing funds inequitably among schools. Enrollment has dramatically decreased from 365,000 students in 2017 to just over 231,000 in 2026, even as the agency’s General Fund allocation has increased by 17% during the same period.

The oversight board also warns that an overreliance on non-recurring federal stimulus -- such as the $4.6 billion allocated for COVID-19 relief -- has obscured underlying structural weaknesses at the DE. As those funds dwindle, recurring expenses such as payroll and maintenance are returning to the General Fund, heightening the risk of budget imbalances.

In response to those challenges, the oversight board is advocating for a shift to student-based budgeting (SBB) by fiscal year 2027. That method of reform would replace the existing top-down budgeting model with a formula that allocates resources based on student enrollment and specific needs, such as grade level or special education requirements. Proponents of SBB assert that the approach would promote equitable funding, enhance transparency and provide school leaders with greater flexibility.

The board is collaborating with the central government and education stakeholders to design and implement the new system, emphasizing that its success will depend on political will and effective leadership. The report underscores that a commitment from the commonwealth is essential for progress in education budget reform, asserting that federal oversight cannot replace local governance.