Everyone needs savings. For a government, that’s called a reserve. Every government needs financial buffers that provide stability during periods of uncertainty.
Reserves help governments prepare for unexpected expenditures, for example repairs and emergency response after a natural disaster, and for significant revenue shortfalls, such as tax collections falling below budget forecast. By providing this cushion, reserves reduce the need for disruptive budget cuts or tax increases.
For Puerto Rico, too, adequately funding and structuring reserves is essential to maintaining continuity of critical public services and preparing for uncertainty. The strength of Puerto Rico’s reserves will help determine how quickly the government can respond to natural disasters or economic downturns and how effectively it can protect education, healthcare, and infrastructure when revenues decline unexpectedly.
In other words, reserves help keep the government’s budget stable and enable Puerto Rico to plan, not just react.
Progress Toward Fiscal Stability
Over the past several years, Puerto Rico has made significant progress toward financial stability. After 16 years of government deficits before PROMESA was enacted, government spending remained within Puerto Rico’s means and in line with revenue since the Oversight Board started certifying government budgets.
When the Oversight Board began its work in 2016, the government held so little cash it could only cover two weeks of expenses. The Government’s available cash has been rebuilt under the Oversight Board’s authority.
This and other Oversight Board actions also enabled the establishment of a $1.3 billion Emergency Reserve, a requirement established in the Fiscal Plan for Puerto Rico that the Oversight Board and the Government of Puerto Rico developed together. These emergency funds, based on guidance provided by the International Monetary Fund of 2% of Gross National Product (GNP), have been deployed many times over past years to quickly respond to subsequent natural disasters and emergencies declared by the government.
When Hurricane Maria struck, Puerto Rico did not have such reserves to respond quickly to the needs of the people. But, for example last May, the reserve was tabbed to respond to the flash floods, allowing the government to act quickly when it mattered most. Replenishing the reserve fund after the Government took money out to help a recovery is just as important, reflecting stronger financial management practices instilled by the Oversight Board.
The Emergency Reserve is becoming one part of a new, broader reserve framework. Another element of this framework is what is often called a “rainy-day fund.” This type of reserve used by many U.S. states is designed to help governments manage economic downturns and unanticipated drops in revenue. Typically, states fund these reserves using a share of prior year revenues, overall spending, or year-end surpluses.
Puerto Rico’s own Budget Stabilization Fund had not been funded. Strengthening this fund now, with the stability the Oversight Board has created and considering the economic and fiscal warning signs ahead, will help prepare for future fiscal challenges. The Oversight Board will work with the Government to establish the appropriate size in the budget.
According to the National Association of State Budget Officers (NASBO) states increased their rainy-day funds significantly between fiscal year 2019 and 2025. In 2019, total rainy-day funds as a percentage of total general fund spending was 9.1%, according to NASBO. In 2025, rainy day funds “more than double their fiscal 2019 amount in nominal dollars” and made up 13.3% of total general fund spending. “Looking at state-by-state historical data, all but two states ended fiscal 2025 with a larger rainy day fund balance than they held in fiscal 2019 (in nominal dollars) and 39 states held larger balances measured as a percentage of general fund spending in fiscal 2025 compared to fiscal 2019,” NASBO said.
How States Build Reserves: Best Practice
Healthy reserves are a critical practice among all U.S. states. During the Oversight Board’s symposium, A Better Plan: Symposium on Puerto Rico’s Fiscal Future – Budget Tools, Principles, and State Practices on April 15 in San Juan, budget directors from five U.S. states will discuss the critical elements of reserves, among other building blocks of an effective and responsible budget process.
How much a government should save in reserves isn’t one-size-fits-all. It depends on the risks it faces. Factors like how unpredictable revenues are exposed to natural disasters, and day-to-day cash needs all matter. While general benchmarks—like keeping enough reserves to cover about two months of spending—can be helpful, the best approach is to follow the Government Finance Officers Association’s (GFOA) recommendations and set reserves equivalent to two months of spending. An effective strategy would be to establish reserve levels based on the government’s risks, cash flow needs and realities.
Strong reserve systems aren’t just about how much money is set aside—they’re also about how they’re managed. Clear laws matter for defining when money is deposited, when it can be used, and how it must be replenished. The most effective governments fund their reserves consistently, using tools like year-end surpluses, portions of volatile revenues, or one-time windfalls to build and maintain these balances over time.
Reserves also play a major role in how investors and credit rating agencies view a government’s financial health. Higher reserve levels signal strength and stability. As a general rule, reserves equal to 15 % or more of annual revenues are considered strong, while levels below 5 % can raise concerns about financial vulnerability.
In short, strong reserves build confidence. They show that a government is prepared, disciplined, and able to manage through uncertainty. Weak reserves can signal risk and undermine trust and confidence.
Strategic Budgeting: Plan, Don’t React
The principle is simple: reserves are for stability, not to fund day-to-day spending.
Building reserves is part of a broader transition from crisis-driven budgeting to long-term planning. Instead of reacting to unexpected events, Puerto Rico must take a forward-looking approach—accounting for future obligations, potential changes in federal support, and risks such as pension costs, healthcare funding pressures, and other fiscal obligations.
Puerto Rico cannot control the global economy or the pace of federal stimulus. It can control how it budgets, spends, and prepares. Puerto Rico must institutionalize a comprehensive reserve policy framework that incorporates risk-based targets, rules-based governance, and disciplined funding mechanisms to ensure long-term fiscal resilience. With strategic, institutional budgeting, and the reserves that support it, Puerto Rico is ready for the next economic challenge, whenever it arrives.
