Design for Failure: The 78 municipalities in Puerto Rico

ABRE Puerto Rico recently launched the Fiscal Health Index of the municipalities of Puerto Rico. (http://abretumunicipio.org/). This digital tool uses thirteen (13) indicators with information derived from the audited financial statements, which the organization has been publishing since 2015, shedding light (systematically) on municipal finances.

Although this year saw great improvements with fiscal indicators in the short term, this does not change the long-term financial position of municipalities in Puerto Rico. Even after a good fiscal year, about half of the municipalities still have a negative fund balance, and almost half still depend on central government revenues. In municipalities such as Las Marías, more than 80% of operational revenues come from the central government. Around 65% of municipalities still have a negative (restricted) net financial position.
Some people insist that it's all the fault of the central government and the austerity measures imposed by the Fiscal Board, or the economic crisis in Puerto Rico. This surely has had an influence in municipal finances, but the fiscal and economic crisis has affected the entire government, not just municipalities. In addition, ABREPR began publishing its index in 2015, using 2013 financial statements and the financial situation was unstable in most municipalities back then as well. By way of example, for fiscal year 2013, 64% of municipalities ran a revenue shortfall in their general fund, 90% had negative net assets (unreserved) and 43 municipalities maintained accumulated deficits in their generated fund. This was all before the GDB bankruptcy and the new Fiscal Board.

Likewise, there are municipalities with good fiscal health, even under the economic and fiscal conditions in Puerto Rico. Municipios such as Fajardo, Cayey, Barranquitas and Isabela are constantly in the top positions in the Index, while Ponce, Cabo Rojo and  Yauco are among the worst always. This is why the ABREPR Index is so valuable, because it evaluates all municipalities in a standardized manner using the same indicators.

Context: the scope of municipal government
Some in Puerto Rico also argue that municipalities are primarily responsible for essential and direct services to citizens. In the United States, municipal governments do administer most of the essential services, from public schools to airport operations. In Puerto Rico, however, it is quite the opposite. Policing, prisons, public schools, utilities, ports, airports, roads, public transport and health care are funded and operated by the Island’s central government. Thus, municipalities in Puerto Rico have far fewer responsibilities than municipalities in the United States, but here they get all the property tax, which in the Mainland funds much of the public education system.  And while most municipalities have a police force, it is the state police who is mostly responsible for security in Puerto Rico.

Every year these 78 municipalities spend more than $2.3 billion from their general fund, more than what the central government spends on public schools or the public health program for the poor. Excluding San Juan and some municipalities that run a large hospital or school, or have a large municipal police force like Carolina or Guaynabo, much of the municipal expenditure goes to streets and sanitation, facilities and administration. Although there are small municipalities that operate a health clinic or Diagnostic and Treatment Center (CDT), part of the operation is funded by the Department of Health, which subsidizes 36 CDT's across the island at an annual cost of nearly $16 million. The vast majority of these subsidies have been distributed since the early 2000’s, but no assessment of the effectiveness or necessity of the service has been done since then.

Some argue that the cuts of the central government would affect these CDT’s and, consequently, the health of residents of rural and poor areas in Puerto Rico.  However, many of these CDT’s are close to Centros 330. These federally funded and regulated health centers are available for residents in high-poverty areas, regardless of their health insurance and typically offer free or low-cost services. There are currently 95 clinics in 67 municipalities on the island serving more than 400,000 residents of Puerto Rico each year. The 330 centers do not receive state budget allocations and must meet the standards of the Primary Health Resources and Services Administration as well as the Primary Health Negotiated, both federal entities. Therefore, it is hard to concede that closing these CDT’s would remove access to health services in those areas.

We are not saying that municipalities do trivial things, they provide some direct services to citizens or complement services of the central government.   As well, during the recent natural disasters they demonstrated their value in the response.   But the fact of the matter is that in Puerto Rico essential services (for better or worse) are provided by the central government and, with few exceptions, much of the general fund spending of municipalities goes to administration, building maintenance and streets and sanitation.

Therefore, citizens and elected officials should reflect on whether any of the $2 billion in annual municipal expenditure (equivalent to 25% of the central government’s budget)  should be  allocated for other purposes, such as the government’s health plan, the University of Puerto Rico or the public school system. Similarly, if the strongest argument for 78 municipal governments is that it enhances disaster response, can all municipal governments be replaced by an emergency manager at every municipio? It would certainly cost much less than the $2.3 billion it costs to operate 78 municipalities in Puerto Rico.

Context: the cost to the central government
Unfortunately, the impact of the 78-municipality structure goes beyond their fiscal woes. Much of the cost of this framework falls on the central government, as municipal governments drive the cost of regional government services. Let’s give a couple of examples. The Medicaid program is responsible for declaring eligible citizens seeking coverage under the Government’s Health Plan. The Government of Puerto Rico invests a significant amount of these funds in administration. For fiscal year 2016, a total of $24.2 million of the program was spent in maintaining eligibility offices across the island. At the time ABREPR did the analysis there were a total of 82 Medicaid eligibility offices throughout Puerto Rico. When you compare to other states, it is very evident the excess of offices and positions in Puerto Rico.

Most of these offices are for the exclusive use of the Medicaid program. That means that the other programs at the Department of Health also have their own offices with their respective employees as well. This applies to other central government agencies, who have administrative offices in almost all municipalities in Puerto Rico.

Another good example is correction facilities in Puerto Rico. The population of inmates has declined significantly since 2004. However, the Department Correction continues to operate around 30 prisons in Puerto Rico. An analysis by ABREPR in 2016 found a total of 2,300 beds available in various prisons, which represented 20% of beds in the system at that time, while a maximum of 5% availability is typically recommended.

One final example is with policing. The Police Department currently has more than 200 police facilities on the island. The problem with having so many police facilities is that increases the need for civilian and administrative posts in the police department. An analysis by ABREPR in 2016 found that there was no correlation between the number of police facilities and the incidence of crime in a municipality. Nor was there a correlation with the number of people living in the municipio. But when the government proposes to close a police facility in a municipality using a needs assessment, it is typically the mayor the main opponent of that decision.

The redundancy and duplication of the government’s regional services is quite evident. Why is that? When you talk to employees in these agencies or past government officials, they admit that many decisions are based on pressure from the mayors. The mayor talks to his district legislator and the legislator with Fortaleza and the head of the central agency. In most of these circumstances, the mayor gets his way. The success of mayors in influencing the central government operation is due to their prominent role in local electoral campaigns, as they spearhead the main party’s field operation during elections, the equivalent of "Get  Out  the  Vote  Efforts" in the United States.

To clarify, we are not saying that mayors lobby the central government for Machiavellian reasons, it is due to their desire to have government services close to their constituents. Unfortunately, that individual ambition of each mayor to bring programs and agency offices to their municipality has strained the central government, inflating administrative costs and leaving less money for the actual services.

Decentralize intelligently

Many argue now that mayors can better operate government services, but do we need 78 regional offices, one in each municipality? Is this how service delivery should be orchestrated in the government of Puerto Rico?

Which brings us to the last point on government operations and planning.  In a small island like Puerto Rico it should be relatively easy to plan and do development. However, we have 11 independent municipal permit offices, 5 in the metropolitan area, with different processes and rules. This creates a diverse and confusing set of plans and planning instruments, including Territorial Plans, with different nomenclature and sometimes conflicting objectives. With an economically integrated metropolitan area like the one we have in Puerto Rico, should we have separate and different permit offices in San Juan, Bayamón, Guaynabo, Caguas and Carolina?

In addition, every year there are 78 municipalities applying for federal funds for health, education and economic development that are typically aimed for a small geographical area. It is illusory to think that a municipal boundary in Puerto Rico has all the social and economic assets to successfully implement coherent and effective economic development strategies. But who is going to tell the mayor of Aguadilla to run a program that benefits residents of Aguada and Isabela? Or, how can a mayor coordinate an economic development plan that rests on assets from adjacent municipalities? The rigidity of 78 municipal governments makes it difficult to implement integrated economic development strategies and amplifies NIMBY problems (not in my backyard), where mayors oppose initiatives, they think affect their constituents, but are actually beneficial to the entire region where they are located. This affects the probability of a fair and equitable project implemented in a larger region because of a possible objection from a smaller municipality.

Towards the search for solutions: a model of efficiencies

ABREPR has been warning about the precarious situation of municipalities for several years, calling on the central government to rethink the municipal structure or change the financing model of municipalities. The county proposal set forth by former governor Rosello was a step in the right direction, although it didn’t have enough details on the proposal for us to make a full judgement. In principle, a proposal for counties could be beneficial for the people of Puerto Rico, but only if the current role of municipalities is substantially reduced and the central government delegates a portion of its responsibilities to the new county entity. Because a new administrative layer of counties will not do any good if you leave the existing municipal structure and central government services intact. Ideas for decentralizing central government services are welcome, but not under the existing 78 municipio structure. Beyond not having the economies of scale to be efficient with programs and services, the vast majority of municipalities do not have the administrative or financial capacity to operate schools, prisons or run utilities. They also don't have the scale within their municipal boundary to create and implement economic development plans that are realistic and effective.

The municipal government should not disappear as a legal or political entity, but functions and resources should be transferred to a regional entity that deals with important issues such as schools, security, health and economic development. An elected board could be set up to govern and administers affairs of each region. The mayor could continue to be elected, only with less power and reduced responsibilities. The regions can be created using regions created by the agencies as a baseline, and make adjustments using geospatial analysis to look for territorial and economic equivalents between municipalities.

Elected officials and political candidates should seize this opportunity and propose a new regional model of governance, one that’s strategic, citizen-focused and adjusted to the new fiscal reality of Puerto Rico.  Decentralization is a good idea, but decentralizing the central government to create 78 administrators, 78 secretaries of education, and 78 secretaries of economic development is not the solution. We must rethink the entire government structure.