Puerto Rico’s economy continued to recover in fiscal year 2023, and its fiscal situation continued to stabilize following the Oversight Board’s successful reduction in debt payments. Focusing on fiscal discipline, through responsible budgeting, kept spending in line with revenues to prevent the Government from falling back into deficit.
Stabilization, however, is not enough to move Puerto Rico forward, and it is not enough to fulfill the Oversight Board’s mandate under PROMESA. To achieve fiscal responsibility, the elected Government and covered instrumentalities must continue to implement the structural reforms set forth in the Fiscal Plans for Puerto Rico. In addition, the Governor, the Legislature and the covered instrumentalities must operate within existing budgets and submit future budgets for certification by the Oversight Board that are compliant with the respective Fiscal Plans.
Puerto Rico’s future depends on true reform and lasting change to create a solid foundation of sustainable economic growth. Achieving these permanent and sustainable reforms is my focus as Executive Director.
The Fiscal Plan defines critical reforms and initiatives to improve the ease of doing business, upgrade infrastructure, and prepare the workforce to compete for the jobs of the future. This Annual Report provides an overview of the Fiscal Plan priorities for each of the covered entities.
The Fiscal Plan also defines the necessary improvements to systems and procedures that provide the foundation for strong fiscal management. Appropriate spending discipline is still needed to preserve and institutionalize recent success. Strong fiscal management and long-term financial stability are both needed to prevent Puerto Rico from falling back into old habits of overpromising and overspending that resulted in the Island’s bankruptcy.
The budget process is an example of both necessary reform and the beginning of change. Many months of deliberation between the elected Government and the Oversight Board go into the preparation of budgets. For fiscal year 2023, the Legislature failed to submit a budget to the Oversight Board. In addition, the Government continued its practice of adding incremental expenses throughout the year without identifying resources to fund those costs. Only because of the Oversight Board’s review and scoring, and subsequent work with the Government to identify funding, were the costs of these laws offset within the fiscal year 2023 certified budget.
For fiscal year 2024, that began on July 1, 2023, the Governor and the Legislature worked with the Oversight Board to establish a budget for the Commonwealth that is compliant with the Fiscal Plan. Both branches of the Government approved and submitted the budget to the Oversight Board for certification – a significant step towards achieving fiscal responsibility.
The Oversight Board will continue to work hand in hand with the Government to ensure future budgets are on time, compliant with the Fiscal Plan, and provide a path to satisfying PROMESA’s requirements for the Oversight Board’s termination. The Oversight Board will also continue to work toward the same goal with Puerto Rico’s instrumentalities. Unfortunately, the Puerto Rico Aqueduct and Sewer Authority (PRASA) informed the Oversight Board in June 2023 that it would not submit a revised proposed budget for fiscal year 2024. As a result, the Oversight Board had to develop and certify as compliant its own version of a budget for PRASA.
The Government and covered instrumentalities also made substantial progress on implementing certain key structural reforms. For example, the elements of the energy transformation required by the Fiscal Plans for the Commonwealth and Puerto Rico Electric Power Authority (PREPA), and Puerto Rico’s Act 17-2019 are being implemented. Private operators are incentivized to improve Puerto Rico’s grid and power generation over time. In addition, the Puerto Rico Energy Bureau (PREB), the independent regulator, approved the budgets for the energy system ahead of the Oversight Board’s certification, further strengthening regulatory independence. This progress doesn’t mean the transformation is complete. Energy is still not reliable, but the transformation is providing a foundation for a system that can and will improve. The Annual Report provides greater detail about this transformation and its success.
Other critical reforms have yet to be executed. We must find long-term solutions for the challenges the University of Puerto Rico (UPR) faces. The Oversight Board, and the leadership of the UPR and the UPR Governing Board have set up a working group with experts from a broad range of disciplines, such as higher education, economic development, and the private sector to develop strategic initiatives focused on academic excellence, economic development, and fiscal sustainability.
Puerto Rico needs to reform its dramatically underperforming public school system . Puerto Rico’s children deserve a public school system that prepares them for a world of opportunity and a demanding job market. The Oversight Board will work with the Puerto Rico Department of Education and the U.S. Department of Education to reform public school education.
Puerto Rico also needs comprehensive tax reform. The Oversight Board will work with the Government to define and implement holistic tax reform. We will also engage with a broad group of stakeholders to identify solutions that meet Puerto Rico’s long-term needs.
Solutions to these challenges require deliberation and action. These challenges cannot be resolved without the input of the elected Government, government agencies, and other stakeholders. In the coming fiscal year, the Oversight Board will continue to foster dialogue with all stakeholders.
Before starting as Executive Director, the seven board members and I talked about the future of Puerto Rico and the priorities after bankruptcy. The outcome – and my mandate – was to focus on the following issues: long-term financial management; the energy sector; education; tax reform; and economic development. Puerto Rico needs to turn recovery into sustainable growth. We need an economy that provides opportunity for the people who live here and incentives for investors. Lastly, we need to complete the final major piece of Puerto Rico’s debt restructuring: the Plan of Adjustment for PREPA.
The new Fiscal Plan for the Commonwealth, which the Oversight Board certified in April, reflects these priorities. Ever since the Government and the Oversight Board created the first Fiscal Plan in 2017, it has been a statement of priorities. Establishing priorities requires making choices – sometimes difficult choices – to ensure that government expenses fit within expected financial resources.
This year’s Fiscal Plan is different. Many of the difficult choices are behind us. With Puerto Rico’s bankruptcy almost completed, this Fiscal Plan is focused on the choices and investments that will help restore growth and prosperity to the people of Puerto Rico after the long period of crisis and decline.
The Fiscal Plan prioritizes support for a high performing public sector by investing in the people, efficiency, effectiveness, and capacity of the Government to deliver more efficient and higher quality services. Puerto Rico still needs to implement many of the structural reforms. Puerto Rico has received an unprecedented infusion of federal funds in the form of disaster relief funding and COVID-19 stimulus funds. This one-time influx of federal funds has strengthened the economy in recent years.
This Annual Report provides, for the first time, an overview of those funds and their uses. PROMESA imposes certain limitations on the Oversight Board’s authority with respect to federal funds allocated to Puerto Rico. The Oversight Board does, however, monitor the flow of federal funds because the Fiscal Plan relies on the strategic disbursement of those funds.
Federal funds present an unprecedented opportunity if deployed efficiently and aligned with initiatives that will improve long-term growth. Nevertheless, like many economists and the businesspeople I have spoken to in recent months, the Oversight Board is concerned that those funds mask underlying persistent weakness in Puerto Rico’s long-term economic growth. Indeed, our analysis does not point to sustainable economic growth without these funds.
The road ahead is clear: Fulfilling the mandates of PROMESA to help Puerto Rico achieve fiscal responsibility, balanced budgets, and access to capital markets will require continued efforts to implement necessary reforms. The goal is a prosperous Puerto Rico. Economic growth is essential to support the government’s revenues, investments, pensions, and debt service.
Every investment, every reform, every initiative, and every law must be viewed through that lens.
When I took this job in January 2023, I saw the opportunity ahead very clearly. The opportunity to take this moment – the end of bankruptcy, the fiscal stability, and the economic stimulus – as the beginning of another era of growth, as the beginning of real change, the beginning of a period of success. Now is the time for the Oversight Board to take this opportunity to work with the Government and play as decisive a role after the bankruptcy as during the bankruptcy.
This is personal for me. My mother and father left Puerto Rico as children with their respective families at a time in Puerto Rico’s history known as the great migration – where many families left the island to find opportunity elsewhere.
It was a time when the island’s population saw a decline of over 20%, a time when many families on the island thought their only hope was to leave Puerto Rico to find good work and good education for their children elsewhere.
That was over 50 years ago. I return to Puerto Rico as a product of that era and it is now our responsibility to help create an environment where there is opportunity and investment right here, in Puerto Rico, where people want to stay in their communities and raise a family.
When this Oversight Board terminates, our work will have left a mark on Puerto Rico, our reforms will have changed Puerto Rico, and the mandate Congress gave us to help Puerto Rico achieve fiscal responsibility and regain access to capital markets will have been fulfilled.
I look forward to continuing to partner with elected leaders to create a Puerto Rico that regains the confidence of its people, and regains the confidence of those Puerto Ricans who left, so they can return to a Puerto Rico of opportunity.
