Fiscal board informs gov’t that FY 2026 budget violates PROMESA

The Financial Oversight and Management Board for Puerto Rico

By The Star Staff

The Financial Oversight and Management Board communicated to the Puerto Rican government on Monday that its proposed budget for fiscal year (FY) 2026 is in violation of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).

The oversight board expressed concerns that the budget for the upcoming fiscal year, which begins July 1, is confronting several significant challenges, particularly as Puerto Rico’s economy is still in the process of recovering from the devastating impacts of various natural disasters (such as hurricanes and earthquakes) and the economic fallout from the COVID-19 pandemic. While there had been signs of recovery, recent data indicates that economic growth has begun to stall, and the government is also facing a decline in federal funding.

The oversight board elaborated on the situation by stating: “During the budget review process, the Government was formally notified of the termination or alteration of expiration dates for certain federal funding programs that have been critically important to Puerto Rico’s finances.”

Currently, about 50% of the government’s budget for fiscal year 2025 is dependent on federal funds, and the full implications of recent and potential future shifts in federal policies, including funding amounts, on both Puerto Rico’s financial circumstances and its overall economy, remain to be fully understood, the board noted.

The oversight board highlighted the necessity for the government to conduct a thorough assessment of the new fiscal landscape. Such an assessment, it said, should detail the potential ramifications on each affected government agency and outline a strategic plan to address and mitigate the risks associated with anticipated reductions in federal funding.

“Puerto Rico does not possess the fiscal capacity to replace all federal funds that may be lost,” the oversight board asserted, underscoring the urgent need for realistic budgeting.

The oversight board’s 67-page letter outlined and detailed numerous changes that must be made to the government’s budget to ensure compliance with the law. In the Certified Commonwealth Budget for fiscal year 2025, the government had started the process of replacing certain expenses -- once supported by one-time federal funds -- with resources from the commonwealth itself. That includes a substantial allocation of $230 million designated for the Puerto Rico Department of Education (PRDE). However, this transition of funding is still ongoing. When the oversight board conducted an in-depth review of the Proposed FY26 Commonwealth Budget, it identified an additional $45 million in funding requirements to support expenses that were previously covered by soon-to-expire federal funds. Moreover, the PRDE has indicated that some $500 million of its expenses have been supported by non-recurring federal funds, placing these expenses at risk of not being funded in the future.

The oversight board emphasized the critical importance of finding budgetary solutions to these issues.

“It is imperative to prioritize the resources Puerto Rico has available for crafting the General Fund budget within the Proposed FY26 Commonwealth Budget,” the board said. “Due to the government’s ongoing reliance on federal funding and the uncertainty surrounding both non-recurring and recurring federal allocations -- stemming from shifting federal policies -- there might be a need to reassess overall spending levels and resource allocation strategies both prior to and subsequent to the certification of the Commonwealth budget.”

The oversight board further noted that “[a]s a principle, non-recurring funds are not to be used as substitutes for recurring funds, which highlights the necessity for the Government to develop an effective plan for sustainable fiscal management moving forward.”

In addition to the Proposed FY26 Commonwealth Budget, the island government made further proposals for additional initiatives, initially valued at $777 million, for the oversight board’s consideration. Those initiatives were intended to be funded through available reserves and incorporated into the Proposed FY26 Commonwealth Budget. However, following a review, the proposals were ultimately reduced to $584 million.

Responding to the government’s funding request, the board also made the decision to lower the commonwealth budget targets from $13.2 billion to $13 billion. The adjustment was made due to the reallocation of a portion of the Rum Cover-Over revenues paid to rum producers, which shifted from the General Fund to the Special Revenue Funds.

Furthermore, the FY26 Revised Budget Targets included reallocations of appropriated funds from reserve accounts under the management of the Office of Management and Budget and the Treasury Department, specifically to finance certain proposed budget increases. The comprehensive restructuring of the budget reflects the complex interplay between federal funding dynamics, local fiscal realities, and the urgent need for a strategic response to ensure the financial stability of Puerto Rico, the oversight board said.