Starting this July, Puerto Rico will have a budget process that will allow people to have more accurate information on how the government is spending every dollar they pay in taxes, said Governor Ricardo Rosselló Nevares.
In the coming weeks, Rosselló will present a budget with three-year projections, that is the result of a year-long work by the Fiscal Agency and Financial Advisory Authority (FAFAA) and the Strategic Planning Office at La Fortaleza. This new budget will allocate funds to agencies and programs, and will require them to comply with specific metrics known as performance-based budgets.
In an interview with El Nuevo Día, the governor admitted that the adoption of this model was not discussed with the Oversight Board.
However, both Rosselló Nevares and Christian Sobrino Vega, head of the FAFAA, assured that this new methodology is compatible with the Board’s transparency goals related to public spending and it is in line with the fiscal discipline established in PROMESA.
"This is a dramatic change," Rosselló Nevares said, noting that the ongoing process will provide "unprecedented visibility" on how different government agencies use the funds they receive.
So far - and although legislators and government officials boasted for that they had adopted the best practices to ensure the use of public funds and a balanced management between revenues and spending – the Puerto Rican budget process has usually allocated resources to three major items: payroll expenses, non-payroll expenses and capital improvements, explained Sobrino.
However, according to Rosselló Nevares, "that exercise" of packages, did not allow to know whether the funds granted were used to provide proper services to the people or to comply with the public policy of the island.
Budget processes between 2001 and 2012 ended up in Puerto Rico issuing some $ 42 billion in debt - almost half of the island's gross domestic product - and despite such an injection of capital, the government accumulated budget deficits for $ 22 billion, according to economist Joaquín Villamil.
The budget reform driven by Rosselló Nevares would change the way government allocates funds to different programs, placing public policy goals and performance metrics at the core of the decision-making process.
Rosselló Nevares said that the new budget model would allow, for example, to check whether funds for charter schools are enough to meet the objectives of that program or to determine how much the Bureau of Forensic Sciences needs to operate according to that agency´s standards and tasks.
"There were countless allocations and no one really knew what they were for,” said the governor, adding that four decades ago, the budget process followed by Puerto Rico was an example for other jurisdictions and that now it is "obsolete".
If Rosselló Nevares' transformative effort succeeded, it would be the first time that Puerto Rico would establish a direct relationship between projected public policy objectives - whether to promote bilingual education in schools or improve services to the medically indigent - and the funds allocated.
What is a performance-based budget?
This methodology based on performance is not new. In fact, according to literature on the subject, reports from the U.S. Government Accountability Office (GAO) and the National Conference of State Legislatures (NCSL), this budget model has been applied, since the mid twentieth century, in multiple U.S. jurisdictions. And like that of "zero-based" budgeting (where government officials are required to justify the money they request, including the existence of each program), the performance-based budget methodology has advantages and disadvantages.
For the NCSL, for example, a performance-based budget offers legislators the opportunity to allocate resources based on compliance criteria in a program. According to the NCSL almost half of state legislatures have some form of budget allocation based on the effectiveness of each initiative.
But, on the opposite side, according to the NCSL, legislatures that approve budgets depend on the fact that the data proving that metrics were met are accurate and truthful. Besides, the priorities of the Executive branch may be different than the interests of the legislators.
The Rosselló Nevares administration resorted to the Institute for State Effectiveness (ISE), for this non-profit -that promotes accountability, citizen participation in fiscal matters and the provision of public services- to offer technical support on the subject.
ISE co-founder Clare Lockhart, and Andrew Laing, part of the organization team, were with Rosselló Nevares during the interview with El Nuevo Día.
For Iris Santos, in charge of Strategic Planning at La Fortaleza, ISE will collaborate and assist the island in the design of the platform and the metric framework that will serve to draft the budget.
The budget for fiscal year 2020
The Board´s schedule establishes that the budget for fiscal year 2020 must be submitted on March 22 and should be certified no later than June 28. Last Friday, the government was to send its revised projections to the Board.
Rosselló Nevares did not unveil numbers regarding the operational budget for the next fiscal year or when it would be published.
Neither did he mention the cost to implement this new budget model, but Sobrino Vega stressed that, unlike other cases when the government hires computer programs from a tech company, the platform for this model is being designed with internal resources and it will be government-owned.
On the other hand, the governor did not mention if the next budget will be balanced, and if it will include public debt payments. "It will be balanced according to the principles and laws applicable under local law and PROMESA," said Rosselló Nevares.
According to sources, after the setback the Board suffered in the Boston First Circuit of Appeals, it is unlikely to reach the approval of an adjustment plan for the central government under Title III Court this year.
On February 15, the federal appellate court concluded that the current Board is unconstitutional because its members did not receive the U.S. Senate advice and consent.
Days before that decision, according to sources, Judge Barbara Houser - who presides over Title III Mediation Team - suspended mediation sessions with creditors since neither the Board nor bondholders groups seemed willing to reach an agreement and also due to allegations of illegality outlined by the fiscal entity and the Unsecured Creditors Committee (UCC).
In this scenario, Rosselló Nevares - who will seek reelection next year - would end his first term without having paid a penny to constitutional bondholders. And, as a result, whoever takes office the next four years will have to work with a budget that includes the payment of public debt and allocate the difference for pensions, public services and permanent improvements.
This, according to the priorities established through the performance-based budget and with the exception of the Sales Tax Financing Corporation (Cofina, Spanish acronym) and the Government Development Bank (GDB) debts, already renegotiated under PROMESA.
The new budget
The governor specified that the current budget will offer a broader and more detailed view on government spending, a change that will give more flexibility to the heads of agencies and that, instead of providing “a picture" of what enters the Treasury and will be spent the next 12 months, would allow to see "a movie" with historical costs and above all, what certain public services will require in the future.
Rosselló Nevares explained that once the budget is submitted to the Legislature, it will include an analysis on how much money has been spent on each government program over the last 10 years, how much would be allocated according to public policy objectives established for fiscal year 2019- 20 and a three-year projection.
Once a year, the budget will go through an evaluation process to determine the adjustments necessary.
To questions from El Nuevo Día regarding measures to be applied if the budget is not complied with or incentives if funds were used effectively, Santos argued that this process would be in force starting with fiscal year 2021 budget.
Sobrino Vega said that since there have been no changes in government accounting standards, the budget will continue to display allocations for each government agency as well as a detail of the sources of income.
"One of the things that will stand out is that the budget for capital improvements was reduced by 70 percent, in the last 10 years," said Sobrino, revealing data that could explain the collapse in the Puerto Rican infrastructure after Hurricane María hit the island in September 2017.
Sobrino Vega stressed that, until now, the development of the fiscal plan required by the Board and the budget were two parallel, unconnected processes.
This new budget model will allow to integrate both instruments, that he noted, would contribute to comply with PROMESA´s requirements for balanced budgets.