EXHIBIT 31 

Case:17-03283-LTS Doc#:3126-31 Filed:05/23/18 Entered:05/23/18 11:45:37 Desc:

Exhibit Violation Notice from FOMB to Governor Page 1 of 9
PO Box 192018 San Juan, PR 00919-2018; www.oversightboard.pr.gov; comments@oversightboard.pr.gov

FINANCIAL OVERSIGHT AND MANAGEMENT BOARD

 FOR PUERTO RICO

 Members

Andrew G. Biggs

Carlos M. García

Arthur J. González

José R. González

Ana J. Matosantos

David A. Skeel, Jr.

 José B. Carrión III 

Chair Natalie A. Jaresko

Executive Director

BY ELECTRONIC MAIL 

May 10, 2018 

Honorable Ricardo A. Rosselló Nevares 

Governor of Puerto Rico 

La Fortaleza 

PO Box 9020082 

San Juan, PR 00902-0082 

Dear Governor Rosselló Nevares: 

This letter serves as a Notice of Violation pursuant to Section 202(c)(1)(B) of PROMESA that the 

Oversight Board has determined, in its sole discretion, that the proposed Commonwealth of Puerto 

Rico budget for fiscal year 2019, submitted to the Oversight Board on May 4, 2018, is not 

compliant with the New Fiscal Plan for Puerto Rico as certified by the Oversight Board on April 

19, 2018 (the “New Fiscal Plan”). The Oversight Board looks forward to reviewing a revised 

budget that it hopes it can determine is compliant with the New Fiscal Plan so that the Oversight 

Board can submit it to the Legislature on or before the deadlines set forth in this letter.

Background

At the Oversight Board’s eleventh public meeting, held on December 5, 2017, the Oversight Board 

outlined an approach to the FY19 integrated budget review process, including guiding principles 

and key milestones.

By letter dated December 12, 2017, the Oversight Board, pursuant to Section 202(a), set a schedule

for the Governor’s submission to the Oversight Board of the proposed budget for FY19, and 

requested that the budget be prepared in accordance with the principles provided by the Oversight 

Board. 

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Exhibit Violation Notice from FOMB to Governor Page 2 of 9
Hon. Ricardo A. Rosselló Nevares

May 10, 2018

Page 2 of 6

PO Box 192018 San Juan, PR 00919-2018; www.oversightboard.pr.gov; comments@oversightboard.pr.gov

By letter dated December 21, 2017, the Oversight Board provided a revised schedule for the FY19 

budget process due to the delay in the certification of the New Fiscal Plan. 

By letter dated January 5, 2018, the Oversight Board provided guidelines for Milestone 1 

(complete inventory listing), which was due on January 10, 2018.

By letter dated February 5, 2018, the Oversight Board provided guidelines for Milestone 2 

(proposed revenues), which was due on February 23, 2018.

By letter dated February 22, 2018, the Oversight Board provided a revised schedule for the FY19 

budget process due to the delay in the certification of the New Fiscal Plan. 

By letter dated April 24, 2018, the Oversight Board set deadlines for intermediate steps before the 

FY19 budget for the Commonwealth could be adopted and set May 4, 2018 as the date by which 

the Governor must provide his proposed budget and supporting details. These supporting details 

had to include a detailed reconciliation between the budget and the New Fiscal Plan, as well as 

budget to actual templates, which included key performance indicators for reporting postcertification. The Oversight Board also requested that all New Fiscal Plan attributes, including 

reserves, revenue and expenses measures, be incorporated into Milestone 4 (proposed expense 

budgets and reporting templates), and required that total expenditures be consistent with the New 

Fiscal Plan. Finally, the Oversight Board provided the revenue forecast as required by Section 

202(b).

By letters dated April 26, 2018 and May 2, 2018 (together, the “Guidance Letters”), the Oversight 

Board provided additional guidance regarding the development, approval, and certification of the 

budget in advance of the delivery of the materials required by Milestone 4. The Guidance Letters 

required the delivery of proposed expense budgets and reporting blueprints.

Government’s Submission

The Government’s submitted budget is not compliant with the New Fiscal Plan, and it does not 

meet the requirements set forth by the Oversight Board in its correspondence with the Government. 

The Oversight Board requires substantial revisions and additional information from the 

Government before it could approve the Government’s proposed budget and submit it to the 

Legislature.

Pursuant to Section 104(c), we request all outstanding information in our correspondence with the 

Government as outlined above. This will enable the Oversight Board to review the proposed 

budget in its entirety and determine its compliance with the New Fiscal Plan.

A summary of items that remain outstanding are included below. Please refer to the Appendix of 

this letter for a status update on compliance with the full set of requirements established by the 

Oversight Board. 

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Exhibit Violation Notice from FOMB to Governor Page 3 of 9
Hon. Ricardo A. Rosselló Nevares

May 10, 2018

Page 3 of 6

PO Box 192018 San Juan, PR 00919-2018; www.oversightboard.pr.gov; comments@oversightboard.pr.gov

Preliminary Status Update of Materials Not Submitted

The following materials required by the Oversight Board were not provided or included with the 

proposed budget submitted by the Government:1

FY19 Consolidated 

Budget

A detailed budget of expenses for FY19 consistent with the New 

Fiscal Plan. From the General Fund material provided, these 

items, among others, appear inconsistent with the New Fiscal 

Plan:

- No inclusion of UPR and Workforce Development

reinvestments generated from comprehensive labor reform

- Lack of a Commonwealth appropriation to ASES 

- Inclusion of additional reserves beyond the $130 mm 

emergency reserve in the Fiscal Plan

- Inclusion of $100 mm to municipalities for regionalization 

of services, which is separate from $176 mm in Fiscal Plan

appropriations and not included in the Fiscal Plan

- Inclusion of Christmas Bonus payments to employees

- $3.5 mm for State Revolving Funds instead of $114 mm

enumerated in the Fiscal Plan 

- $33 mm for Police employees inclusion of Social Security 

payments

- No inclusion of $132 mm of unallocated CapEx

- Utility payments that are inconsistent with projections

- No agency holdbacks of 5% as its own concept of spend

- Incorrect appropriations

FY19 General Fund 

Budget Resolutions

Supporting detail for the General Fund resolution

Control language, including reporting, holdback, and accounts 

payables, sent by the Oversight Board in our letters to you

Preliminary budget balances by concept of spend by agency

 

1 Preliminary observations of violations identified as of May 9, 2018, include inconsistencies 

with the Fiscal Plan, incomplete submission, guidance not followed and missing support. 

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Exhibit Violation Notice from FOMB to Governor Page 4 of 9
Hon. Ricardo A. Rosselló Nevares

May 10, 2018

Page 4 of 6

PO Box 192018 San Juan, PR 00919-2018; www.oversightboard.pr.gov; comments@oversightboard.pr.gov

FY19 Budget to Fiscal 

Plan Reconciliation

A reconciliation of the budget to the Fiscal Plan for expenditures 

with explanations of any variance 

Underlying 

Assumptions, 

Supporting Detail and 

Documentation

Supporting documents evidencing underlying assumptions for the 

FY19 Consolidated Budget

Reporting Templates Preliminary draft versions of reporting templates. These were due 

as part of Milestone 4 Deliverables, with blueprints to be finalized 

within 30 days after year end (July 30, 2018)

Expense Measures by 

Agency/Public 

Corporation 

Insufficient information has been provided to assess whether the

Governor’s FY19 Budget resolutions include FOMB’s detailed 

mapping of the measures to each instrumentality for use in 

developing the fiscal year 2019 budget, including reinvestments 

afforded by expense measures and rightsizing measures by 

personnel and non-personnel cost categories

Conclusion

The Oversight Board recognizes the hard work required to fulfill the FY19 budget milestones, and 

appreciates the Government’s leadership in proposing a budget for FY19. However, the Oversight 

Board takes exception to the allegation that “the FOMB did not consult with the Governor or 

Puerto Rico’s Legislature in devising the schedule” for development of budgets pursuant to Section

202(a). There was significant collaboration and discussion between the Oversight Board, the 

Government, and our respective advisors in the preparation of the information requested. From 

December 2017 to April 2018, the Oversight Board shared more than seven letters on the topic 

with various Government officials. Moreover, the Oversight Board met in person dozens of times 

with members of OMB, AAFAF and Hacienda (as well as their advisors) to consult on the 

proposed schedule for the development of budgets. The Oversight Board also met separately with 

members of the Legislature to consult on the proposed schedule for the development of budgets. 

* * *

Pursuant to Section 202(c)(1)(B), please submit a budget that corrects the violations described in 

this letter no later than 12:00pm on May 15, 2018. 

We are committed to reviewing the revised submission promptly and believe this deadline provides 

the Government with adequate time to submit a budget that is compliant with the New Fiscal Plan 

and to provide the requested information and documentation.

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Hon. Ricardo A. Rosselló Nevares

May 10, 2018

Page 5 of 6

PO Box 192018 San Juan, PR 00919-2018; www.oversightboard.pr.gov; comments@oversightboard.pr.gov

Sincerely, 

Natalie A. Jaresko

José B. Carrión 

Andrew G. Biggs

Carlos M. García

Arthur J. González

José R. González

Ana J. Matosantos

David A. Skeel, Jr.

CC: Christian Sobrino Vega

Gerardo Portela Franco 

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Hon. Ricardo A. Rosselló Nevares

May 10, 2018

Page 6 of 6

PO Box 192018 San Juan, PR 00919-2018; www.oversightboard.pr.gov; comments@oversightboard.pr.gov

Appendix

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Puerto Rico Milestones Checklist - Commonwealth

Guideline Description Date Received Status Violation

1 Provide a detailed budget of expenses for FY19 that is consistent with the trajectory for the primary fiscal balance in the Fiscal Plan, using the same basis of accounting 

used to prepare the Fiscal Plan (modified accrual basis of accounting) and in accordance with the accounting policies used to prepare the audited financial statements of 

the Commonwealth. If the basis of accounting is different than modified accrual, please confirm the basis of accounting being used. 

Outstanding Incomplete submission

2 Provide a reconciliation of the budget to the Fiscal Plan for expenditures with explanations of any variance. However, it is not expected that total expenditures would 

deviate from Fiscal Plan submitted and approved. To the extent the budget changes after May 4, provide the updated reconciliation in excel within five business days of the 

update and no later than eight business days before certification of the FY19 budget. 

Outstanding Incomplete submission

3 Provide additional detail on expenditures: Outstanding Incomplete submission

3a Where available, provide a comparison of expenditures to prior two budgets and to prior two years of actuals (where available) and latest twelve (“LTM”) months ending 

December 31, 2017 of actuals and explain key differences. If the actuals for the prior two years or LTM period, are just draft versions, indicate so when providing the 

information

Outstanding Incomplete submission

3b Provide support for FY19 expenditures estimates by major expenditure category by agency and by fund, including key economic, demographic, policy and other 

assumptions affecting expenditure trends, and comparisons to historical periods. To the extent these differ significantly from those used in the Fiscal Plan, please explain 

significant differences and provide explanations for these differences. 

Outstanding Incomplete submission

3c Provide breakdown of major categories of total revenues and expenditures by month and by quarter, so that the sums across months and quarters equal total revenues 

and expenditures in the proposed annual budget. Please identify underlying assumptions driving the monthly budgets (ie. seasonality, historical patterns, etc.). Prepare 

detailed monthly cash flow projections for the budget period and a reconciliation between cash flow projections and the monthly breakdown described above

Outstanding Incomplete submission

4 Provide greater transparency of payroll related expenses: Outstanding Incomplete submission

4a Provide projected employment levels (‘full time employees’, ‘transitory employees’ and ‘at will employees’[1]) by agency/public corporation. Please provide key terms of 

collective bargaining agreements and other labor related costs (including benefits, early retirement programs, etc.) for FY19 that are consistent with the Fiscal Plan. 

Please provide a comparison with projected and actual numbers in FY18. 

Outstanding Incomplete submission

4b Provide details of transitory employee levels by agency (headcount and cost), not included above, and in total. Outstanding Incomplete submission

4c Provide details of vacant positions, frozen positions (per Acts 70, 211 and any other early retirement programs). Please provide a comparison with projected numbers of 

FY18. 

Outstanding Incomplete submission

4d d. Provide details of Christmas Bonus amounts included as part of the payroll appropriations for each agency. Outstanding Incomplete submission

4e e. Provide savings/costs estimates for Law 70, Law 211 and/or VTP by agency and confirm where they are located in the budget. Identify any other ongoing/new incentive 

programs and impact in the FY19 Budget by agency/public corporation. 

Outstanding Incomplete submission

4f Provide details of personnel service contracts by agency (headcount and cost) and in total. Please provide a comparison with actual numbers in FY18. Outstanding Incomplete submission

5 Identify all reserves within the Budget and provide a reconciliation back to the Fiscal Plan to evidence consistency between both. Identify restrictions and/or requirements 

around each reserve and where FOMB approval is required to access. Provide reporting blueprint for reserve balances, identifying major categories of usage, dates used 

and nature of each expense. Provide a contingency plan to ensure provision of critical services in the event that reserves set aside are insufficient. 

Outstanding Incomplete submission

6 Include Paygo contributions related to the pension plan in excess of asset balance, consistent with the Fiscal Plan. Provide a detailed analysis of the Paygo calculation and 

components by retirement system, agency and fund, including: Retirement Benefits, Special Laws, Other Benefits, Expected Asset Sales, Contributions from entities 

outside of budget, Admin Costs

Outstanding Incomplete submission

7 Provide for reasonable and necessary capital expenditures consistent with the Fiscal Plan. Please provide detail in FY19 budget document and justification for large 

capex. Please provide comparison of FY19 budgeted expenses to FY18 actual expenses incurred. Please provide 3-5 year capex plan (if applicable). Provide separate 

breakouts and descriptions by project of the nature of the capex where the capex is expected to be funded by a third party source such as FEMA. 

Outstanding Incomplete submission

8 Provide amounts and descriptions of all new expenditure measures included in the budget and reconcile to measures identified in the Fiscal Plan. Please ensure 

measures can be mapped by agency by concept of spend, and by fund and that they can be measured and success tracked from July 1 onwards. 

Outstanding Incomplete submission

9 Identify one-time revenues and expenditures and provide amounts and descriptions of each stream of revenue and expenditure. Outstanding Incomplete submission

10 Provide for costs, such as legal and other expenses, associated with the process of debt restructuring and collection of debts, this should include underlying support for 

legal and other professional fees included in the budget, including historical actual professional fees by professional firm incurred in FY18 and submitted as part of the fee 

examination process. Identify total legal/professional fees paid by the Commonwealth on behalf of other agencies/instrumentalities in prior year. Legal and professional 

costs should include: Non-Title III expenses related to the government and FOMB and Title III expenses related to all parties (including assumptions underlying budgeted 

expenses)

Outstanding Incomplete submission

11 Where applicable for FY19 Budget, Provide for the costs associated with Office of the Chief Financial Officer (“OCFO”) to comply with all the financial reporting 

requirements of PROMESA and as identified in the Fiscal Plan. Provide underlying support for budgeted costs. 

Outstanding Incomplete submission

12 Reaffirm that the Government is in compliance with the requirement that appropriations are not being carried over from prior fiscal periods and/or are subject to 

restrictions identified in Budget resolutions:

Outstanding Incomplete submission

12a Identify if there are any exceptions to complying with the resolutions and explain why. Outstanding Incomplete submission

12b Provide a total balance of outstanding encumbered amounts as at year end, and confirm amount that has been included as part of the budget. Please provide on an 

agency by agency basis, where information is available.

Outstanding Incomplete submission

13 Please outline next steps and timeline to move all accounting of payables/accruals outside of the system into the Government’s accounting system. Outstanding Incomplete submission

14 Identify potential risks and opportunities within the budget and mitigating factors steps the Government is taking to reduce risk and maximize the opportunity on each. Outstanding Incomplete submission

15 Provide the detail of spending by program, including the comparison of FY19 budget to projected FY17 expenses and YTD FY18 expenditures. Outstanding Incomplete submission

16 Provide reporting templates and additional information as requested below. Outstanding Incomplete submission

16a Provide consolidated Budget to Actual blueprint reporting templates, identifying the following where applicable: Outstanding Incomplete submission

16a(i) Agency numbers and names Outstanding Incomplete submission

16a(ii) Budgeted expenditures for each type of fund per agency (General Fund, Special Revenue Funds, Federal Funds, Other Income) Outstanding Incomplete submission

16a(iii) Actual expenditures for each type of fund per agency (General Fund, Special Revenue Funds, Federal Funds, Other Income) Outstanding Incomplete submission

16a(iv) Annual budgets split into monthly budgets for the year Outstanding Incomplete submission

16a(v) Expenditures to be reported on a periodic basis as well as a cumulative basis Outstanding Incomplete submission

16a(vi) Assumption underlying budgets Outstanding Incomplete submission

16a(vii) Materiality thresholds that will guide requirements for further explanations for significant variances Outstanding Incomplete submission

16a(viii) Explanations for key variances Outstanding Incomplete submission

16a(ix) Names of individuals responsible for providing reporting on a regular basis (including contact names, email addresses and numbers) Outstanding Incomplete submission

16a(x) A calendar/timeline for the year identifying timing for ongoing reporting on a monthly basis Outstanding Incomplete submission

16b Provide templates for additional reporting, including: Outstanding Incomplete submission

16b(i) Reporting on measures identified as part of the Fiscal Plan Outstanding Incomplete submission

16b(ii) Other specific reporting requirements identified as part of the Fiscal Plan (including, but not limited to, reporting on liquidity, payroll/headcount/attendance, Paygo) Outstanding Incomplete submission

16b(iii) Summary Budget to Actual (“B2A”) report on Consolidated Budget Outstanding Incomplete submission

16b(iv) Emergency-related Federal Funding requested/drawn (including FEMA and non-FEMA funds) Outstanding Incomplete submission

16b(v) Annual tax expenditure report (“TER”) requirement Outstanding Incomplete submission

17 Provide unique account string for all possible combinations of fund, agency, concept, program, budget year. Submit draft of combinations to Hacienda prior to budget 

certification for necessary PRIFAS programming and testing in preparation of certified Budget upload on July 1. 

Outstanding Incomplete submission

18 Provide a list of merged/deleted agencies and/or new additional agencies. Outstanding Incomplete submission

19 Provide preliminary draft budget resolutions to be submitted for Legislature for review and comment. 5/4/2018 Received Inconsistent with Certified Fiscal Plan

Incomplete submission

FOMB guidance not followed

Missing support

20 Provide all items above, where applicable (i.e. numerical inputs and outputs), in Excel. Outstanding Incomplete submission

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Puerto Rico Milestones Checklist - Public Corporations in the CW Budget

Guideline Description Date Received Status Violation

1 Provide a detailed budget of total expenditures defined in this document to include operating expenses and separately capital improvement plan (“CIP”) expenditures for 

FY19 that is consistent with the trajectory in the Fiscal Plan covers transactions conducted by all subsidiaries. There should be a detailed breakout of operating expenses.

Outstanding Incomplete submission

2 Provide a reconciliation of the budget to the Fiscal Plan with explanations of any variance. However, total expenditures should not deviate from the Fiscal Plan operating 

expenses and CIP submitted and approved. To the extent the budget changes after May 4, 2018 based upon specific information not known at that time, provide the 

updated reconciliation in excel within five business days of the update and no later than eight business days before certification of the FY19 budget. 

Outstanding Incomplete submission

3 Provide a comparison of expenditures to the prior two budgets (FY17 and FY18) and to the prior two years (FY16 and FY17) and year-to-date (“YTD”) from July 1, 2017 

through March 31, 2018 of actuals versus July 1, 2016 through March 31, 2017. Explain key differences by both $ and % differences for any variance over 10%. If the 

actuals for the prior two years or YTD period are draft versions, indicate so when providing the information. 

Outstanding Incomplete submission

4 Provide support for FY19 expenditures estimates by major expenditure category. To the extent these differ by over 10% from those used in the Fiscal Plan or in the prior 

two years (FY17 and FY18), explain significant differences and provide explanations for these differences. Identify expenditures that are related to recovery due to the 

Hurricanes and separately expenditures that are needed to continue to provide basic services. Identify potential risks and opportunities within the budget and mitigating 

steps being taken to reduce risks and maximize opportunities.

Outstanding Incomplete submission

5 Provide breakdown of major categories of total revenues and total expenditures by month and by quarter. The sums across months and quarters should equal total 

revenues and total expenditures in the proposed annual budget considering seasonality and other factors specific to the instrumentality / public corporation. 

Outstanding Incomplete submission

6 Provide accounts payable information as of March 31, 2018. For materiality purposes, this should include top 20 vendors and a total for all others. Outstanding Incomplete submission

7 Provide accounts receivable information as of March 31, 2018. This information should also include aging by days (0-30, 31-60, 60-89, 90+ or other aging report grouping 

currently utilized). Provide information on total allowance for doubtful accounts.

Outstanding Incomplete submission

8 Provide total projected full-time employee headcount and cost for FY19, and attendance report that is consistent with the format already in place. Please provide a 

comparison with actual numbers in FY17 and FY18. To the extent there are temporary employees, identify the total headcount and related costs.

Outstanding Incomplete submission

9 Provide amounts and descriptions of all new revenue and expenditure measures / initiatives included in the budget. There should be a clear mapping of the revenues, 

operating expenses and CIP, if any, to tracked line items in the budget so that the measures can be easily tracked and traced to specific line items. 

Outstanding Incomplete submission

10 Identify one-time revenues and expenditures and provide amounts and descriptions of each one time item. Outstanding Incomplete submission

11 Provide monthly and year-to-date blueprint budget to actuals (“B2A”) reporting templates, identifying the following where applicable: Outstanding Incomplete submission

12 Provide a schedule of total revenues, total expenses broken by fund type – general fund, federal fund, other fund – and, separately, capital improvement plan (“CIP”) 

expenditures, if applicable, that is not inconsistent with the trajectory in the Commonwealth Fiscal Plan, by completing the template provided. As outlined in the template, 

the schedule should include a comparison of revenues and expenditures to the prior two budgets (FY17 and FY18) and to the prior two years of draft unaudited actuals 

(FY16 and FY17). Report if there are no revenues and/or expenses this year.

Outstanding Incomplete submission

13 Provide all items above, where applicable (i.e. numerical inputs and outputs), in a letter sized print friendly excel format. Outstanding Incomplete submission

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