Municipal Funding

Municipalities are at the forefront of providing services to Puerto Rico families, businesses, and the community overall. That is why financially stable and sustainable municipalities are crucial for providing the services residents need and deserve.

The certified Fiscal Plan for Puerto Rico and the certified Fiscal Plan for the Municipal Revenues Collection Center (CRIM) provide adequate funding for municipal services and establish a roadmap for achieving fiscal responsibility through more efficient spending, economic development, and maximization of federal funds.

The Oversight Board continues to provide support to help municipalities achieve fiscal responsibility, including through improved local revenue collection, more efficient spending measures, economic development, and maximization of federal funds through the launch of three municipal incentive funds supported in the Certified Fiscal Plan for Puerto Rico.

Note: Due to rounding, numbers presented may not add up precisely to the totals provided

The Commonwealth Transfer of $88m in FY22 and $44m in FY23 is directly appropriated to municipalities through the Municipal Equalization Fund. Municipalities
The Equalization Fund includes 35% of the net annual income from the Additional Lottery System (“Electronic Lottery”) estimated at $48m in the 2022 CRIM Fiscal Plan
The Act 53-2021 Extraordinary Waste Fund was established in 2021 a sub-fund of the Equalization Fund to receives an amount equal to 42% of the prior year 1.03% State Redemption Fund tax; proceeds must be used for waste disposal and recycling programs.
Cost Sharing Incentive of $66m includes $22m in FY23 in appropriations from municipal consolidation funds for cost-sharing incentives. Shown together with the of unused funds from $22m in FY21 and $22m in FY22 allocations, or $66m in total
$40m represents funding relief provided to municipalities from federal changes to the FMAP percentage which reduces the statutory, baseline contribution to ASES required under Act 72-1993
Projected Sales & Use Tax (SUT) disbursed into the Municiapl Adminsitration Fund (FAM) equal to 0.5% of SUT and allocated to the Municipal Redemtion Fund (20%), Municipal Development Fund (20%), and Municipal Improvemewnt Fund (10%)
Represents the annual run rate of $331 million in projected incremental collections from CRIM’s operational initiatives to improve taxpayer compliance through updates to the tax roll and improved collection efforts; CRIM implementation delays now target the full amount realized by FY26 after system and resource constraints during FY21-FY22
Federal Funding includes $1.98 billion of stimulus segmented into three tranches of funds: $1,546m in Federal Stimulus Funds from the ARP Act awarded directly to municipalities in Puerto Rico.; $387m from CARES Act. See Appendix 2 in the CRIM fiscal plan for a detailed breakdown of both amounts; and $50m allocated in FY23 from the State Fiscal Recovery Fund. State Fiscal Recovery Fund program details can be found here: https://www.aafaf.pr.gov/wp-content/uploads/Municipal-Strengthening-Fund-Program-Guidelines-final.pdf

Funding Puerto Rico’s Municipalities

In the current fiscal year (FY2023), which began on July 1, 2022, Puerto Rico’s municipalities will have more funding available than ever before: approximately $2.7 billion from tax revenue, subsidies from the Puerto Rico central government, and stimulus and recovery funding from the U.S. government. The current fiscal year’s financial support for municipalities includes:

$44 million to be allocated to the municipalities through the municipal equalization fund
$58 million through the recently created Extraordinary Waste Fund in Act 53-2021
$40 million in one-time Oversight Board authorized economic support to help offset rising costs
$22 million from the fiscal plan’s municipal consolidation incentive, complementing an additional $44 million of similar funding from prior years that municipalities have not utilized but that remains available to them
$40 million of financial relief because federal Medicaid funding is higher than initially forecast, reducing municipal contributions to ASES in accordance with the ASES Municipal relief formula

Municipalities also receive 1.5% of the Sales and Use Tax collected in Puerto Rico, including through the Municipal Improvement Fund (MIF). The funds are distributed by the Puerto Rico Legislature. The Oversight Board asked the Government to provide regular updates of the MIF’s balance, certification of all transactions and disbursements from the MIF and of any pending requests for the distribution of MIF funds. In addition, municipalities receive funds from the Puerto Rico Electronic Lottery.

Map of fundings by Municipalities

Additional Financial Resources for Municipalities

In 2020, the Fiscal Plan created the Municipal Services Consolidation Fund to support municipalities as they implement more efficient service models. The Fiscal Plan had also created two additional funds to support road maintenance and school maintenance, though both funds have since been closed.

Municipal Service Consolidation Fund
By consolidating services, municipalities will be able to significantly reduce costs and generate additional revenues through economic development and other potential initiatives. Municipalities that voluntarily consolidate services will be eligible to receive a one-time financial incentive upon certification of such action by the Oversight Board. To fund this initiative, the certified Fiscal Plan for Puerto Rico sets aside $22 million in each fiscal year through FY2023 for distribution among municipalities that complete service consolidations.
Road Maintenance Fund
Municipalities can be reimbursed for maintenance costs associated with their secondary and tertiary roads through coordination with the Department of Transportation and Public Works.
- This fund had $10 million available for more than 6,000 kilometers of road.
- $8.3 million was distributed to municipalities.
School Maintenance Fund
This fund reimbursed municipalities for maintenance costs associated with their Public Building Authority managed schools.
- This fund had $2.5 million available for 377 eligible schools.
- No municipality applied for access to this fund.

The Municipal Equalization Fund

Historically, Puerto Rico’s municipalities have relied heavily on financial subsidies from the central government. That structure does not encourage fiscal responsibility and stability and, considering the many challenges Puerto Rico faces, is unsustainable. U.S. Census data shows if spending and transfers for education-related purposes are excluded (which in Puerto Rico is financed by the central government), the average state provides a little more than 10% of funding for non-education related local functions – considerably less than in Puerto Rico.

The Fiscal Plan for Puerto Rico has for many years included the eventual phase out of central government subsidies to municipalities as an important step towards achieving fiscal responsibility and stability. Such subsidies have declined over several years to give municipalities ample time to prepare and work with neighboring municipalities to achieve efficiencies and cost savings through sharing services. The Oversight Board will continue its dialogue with the municipalities on key challenges they face and work to fulfill its mandate under PROMESA to help all of Puerto Rico achieve fiscal responsibility.

The decision to phase out Commonwealth financial transfers to municipalities has been a longstanding priority for the Government that predates PROMESA. The Fiscal Economic and Growth Plan, published by the Commonwealth in September 2015 explicitly called for the elimination of all General Fund-based municipal financial transfers, including direct budgetary subsidies, the property tax exoneration fund (included in Act 83-1991) and the municipal equalization fund (included in Act 80-1991).

The method for ensuring financially stable municipalities is not subsidies, but sustainable tax revenue and reducing cost by creating economies of scale through the consolidation of services. However, little has been done by the municipalities to implement strategies that would improve revenue, entice economic development, achieve efficiencies, and reduce wasteful spending. Mayors must act and adopt fiscally responsible measures rather than rely on continuous bailouts and subsidies.

To become fiscally sustainable, municipalities must urgently make significant changes, but many municipalities have resisted making changes to their model and do not appear to have plans to do so in the future, notwithstanding the demographic and financial challenges they face. Critical programs for the financial well-being of Puerto Rico’s municipalities, which play such an important role in the quality of life of Puerto Rico’s residents, depend on Mayor’s accepting their municipalities’ fiscal reality and making the changes necessary to ensure fiscal responsibility and sustainability going forward.

Property Tax Collection

Municipalities depend on property tax collections to fund the services they provide to residents. The existing property tax system in Puerto Rico is out of date. The people of Puerto Rico deserve, and the fiscal future of municipalities depends on, a modernized tax system based on the principles of fairness and equity.

As detailed below, CRIM, which collects property taxes on behalf of municipalities, must establish a program to improve tax collections on existing properties, reclassify properties that are currently erroneously categorized (residential vs. commercial), and pursue strategies to enhance collections.

The Oversight Board recommends broadening the tax base through comprehensive reforms, which fall into the following four categories of changes:

Reducing tax exemption and exonerations. The existing property tax system in Puerto Rico is based on antiquated, opaque, and distortionary exemptions and exonerations which create an inequitable tax system that does not incentivize productive activities.
Reassessing property values. Currently, taxes are calculated based on assessments of real estate values in 1957. Measuring the tax base by the true market value of properties would establish a more equitable distribution of property taxes reflecting the true value of property.
Reducing statutory tax rates. The statutory property tax rates of more than 10% are high and only viable because of the extreme undervaluation of property for tax purposes. As a result, the statutory rates translate into real effective tax rates substantially less than 1% for residential and commercial real property. Puerto Rico should improve the uniformity of the effective tax rate.
Differentiating tax rates by property type. In most U.S. state and municipal property tax systems, taxes vary by commercial, industrial, residential, and agricultural property. In Puerto Rico, much of the variation in effective rates is accomplished through exemptions and exonerations. To improve transparency, equity, and efficiency, Puerto Rico should vary tax rates across different types of property.