EXHIBIT 1 

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Exhibit CW Certified Fiscal Plan (2018) Page 1 of 145
 

Restoring Growth 

and Prosperity 

April 19, 2018

As Certified by The Financial Oversight and 

Management Board for Puerto Rico 

New Fiscal Plan for Puerto Rico

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New Commonwealth Fiscal Plan 

DISCLAIMER 

The Financial Oversight and Management Board for Puerto Rico (the “FOMB,” or “Oversight Board”) has formulated this New 

Fiscal Plan based on, among other things, information obtained from the Commonwealth of Puerto Rico (the “Commonwealth,” 

or the “Government”). 

This document does not constitute an audit conducted in accordance with generally accepted auditing standards, an examination 

of internal controls or other attestation or review services in accordance with standards established by the American Institute of 

Certified Public Accountants or any other organization. Accordingly, the Oversight Board cannot express an opinion or any other 

form of assurance on the financial statements or any financial or other information or the internal controls of the Government and 

the information contained herein. 

This New Fiscal Plan is directed to the Governor and Legislature of Puerto Rico based on underlying data obtained from the 

Government. No representations or warranties, express or implied, are made by the Oversight Board with respect to such 

information. 

Any statements and assumptions contained in this document, whether forward-looking or historical, are not guarantees of future 

performance and involve certain risks, uncertainties, estimates and other assumptions made in this document. The economic 

and financial condition of the Government and its instrumentalities is affected by various legal, financial, social, economic, 

environmental, governmental and political factors. These factors can be very complex, may vary from one fiscal year to the next 

and are frequently the result of actions taken or not taken, not only by the Government, the Oversight Board, and other third-party 

entities such as the government of the United States. Examples of these factors include, but are not limited to: 

– Any future actions taken or not taken by the United States government related to Medicaid or the Affordable Care Act;

– The amount and timing of receipt of any distributions from the Federal Emergency Management Agency and private 

insurance companies to repair damage caused by Hurricanes María and Irma;

– The amount and timing of receipt of any amounts allocated to Puerto Rico and provided under the Community Disaster 

Loans Program;

– The amount and timing of receipt of any additional amounts appropriated by the United States government to address 

the funding gap described herein;

– The timeline for completion of the work being done by the Puerto Rico Electric Power Authority (“PREPA”) to repair 

PREPA’s electric system and infrastructure and the impact of any future developments or issues related to PREPA’s 

electric system and infrastructure on Puerto Rico’s economic growth;

– The impact of the measures described herein on outmigration; and

– The impact of the resolution of any pending litigation in the Title III cases

Because of the uncertainty and unpredictability of these factors, their impact cannot be included in the assumptions contained in 

this document. Future events and actual results may differ materially from any estimates, projections, or statements contained 

herein. Nothing in this document should be considered as an express or implied commitment to do or take, or to refrain from 

taking, any action by the Oversight Board, the Government, or any government instrumentality in the Government or an admission 

of any fact or future event. Nothing in this document shall be considered a solicitation, recommendation or advice to any person 

to participate, pursue or support a particular course of action or transaction, to purchase or sell any security, or to make any 

investment decision. 

By receiving this document, the recipient is deemed to have acknowledged the terms of these limitations. This document may 

contain capitalized terms that are not defined herein, or may contain terms that are discussed in other documents or that are 

commonly understood. You should make no assumptions about the meaning of capitalized terms that are not defined, and you 

should refer questions to the Oversight Board at comments@oversightboard.pr.gov should clarification be required. 

This New Fiscal Plan is based on what the Oversight Board believes is the best information currently available to it. To the extent 

the Oversight Board becomes aware of additional information after it certifies this New Fiscal Plan that the Oversight Board 

determines warrants a revision of this New Fiscal Plan, the Oversight Board will so revise it. 

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New Commonwealth Fiscal Plan 

List of Acronyms and Key Terms 

AACA 

AAFAF 

Automobile Accident Compensation Administration 

Puerto Rico Fiscal Agency and Financial Advisory Authority 

(Spanish acronym) 

ADEA Agricultural Enterprise Development Administration (Spanish acronym) 

Administration Administration of Governor Ricardo Rosselló 

ASEM Puerto Rico Medical Services Administration (Spanish acronym) 

ASES Puerto Rico Health Insurance Administration (Spanish acronym) 

BBB Request for supplemental Federal assistance submitted on November 13, 2017 by the Government entitled Build Back 

Better Puerto Rico 

CAFR Comprehensive Annual Financial Report 

CAGR Compound Annual Growth Rate 

Cardiovascular Cardiovascular Center Corporation of Puerto Rico and the Caribbean 

CDBG Community Development Bank Grant 

CDL Community Disaster Loan from the CDL program 

CFC Controlled Foreign Corporations 

CHIP Children’s Health Insurance Program (CHIP) 

COFINA Puerto Rico Sales Tax Financing Corporation (Spanish acronym) 

COSSEC Public Corporation for the Supervision and Deposit Insurance of Puerto Rico Cooperatives (Spanish acronym) 

CRRO 

DCR 

Central Recovery and Reconstruction Office 

Department of Corrections and Rehabilitation 

DB Defined Benefit pension plan 

DC Defined Contribution pension plan 

DDEC Puerto Rico Department of Economic Development Commerce (Spanish acronym) 

DMO Destination Marketing Office 

DOH Department of Health 

DOJ Department of Justice 

DOL Department of Labor 

DOT 

DPS 

Department of Transportation 

Department of Public Safety 

DSA Debt Sustainability Analysis 

EEI Electronic Export Information 

EITC Earned Income Tax Credit 

ERS Employee Retirement System 

FDI Foreign Direct Investment 

Federal Government The U.S. Federal Government 

FEMA Federal Emergency Management Agency 

FMAP Federal Medical Assistance Percentage (FMAP) 

FOMB Financial Oversight and Management Board for Puerto Rico 

FQHC Federally Qualified Health Center 

FYTD Fiscal-Year-To-Date 

GAO U.S. Government Accountability Office 

GDB Government Development Bank for Puerto Rico 

GDP Gross Domestic Product 

GF General Fund 

GFEWG Governor’s Fiscal and Economic Working Group 

GILTI Global Intangible Low Income Tax 

GNP Gross National Product 

GOSR State of New York’s Office of Storm Recovery 

Government Government of Puerto Rico 

Governor Governor Ricardo Rosselló 

Hacienda Puerto Rico Department of Treasury 

HHS U.S. Department of Health and Human Services 

HUD U.S. Department of Housing and Urban Development 

Hurricanes 

IFCU 

Hurricane Irma and Hurricane Maria 

Independently Forecasted Component Units 

IMF International Monetary Fund 

IPR Invest Puerto Rico 

Island Puerto Rico 

KPIs Key Performance Indicators 

LEA Local Education Agency 

March 2017 Fiscal 

Plan 

Fiscal Plan certified by the Financial Oversight and Management Board in March 2017, before Hurricanes Maria and Irma 

hit the Island 

MCOs Managed Care Organizations 

MFCU Medicaid Fraud Control Units 

Mi Salud Medicaid program in Puerto Rico 

MMIS Medicaid Management Information System 

NAP Nutrition Assistance Program (Spanish: Programa de Asistencia Nutricional, PAN) 

NRW Non-Resident Withholdings 

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New Commonwealth Fiscal Plan 

OMB Office of Management and Budget 

P3 Public Private Partnerships 

P3 Authority Public Private Partnership Authority 

PA Public Assistance 

Parties AAFAF and the Government 

PayGo New pensions program by which agencies and instrumentalities are responsible for paying their pensions obligations on an 

annual basis via a “PayGo Charge” 

PBA Public Building Administration 

Platino Medicare Advantage program that also provides Medicaid wraparound services equivalent to Mi Salud program 

PMO Program Management Office 

PMPM Per Member Per Month 

PRASA Puerto Rico Aqueduct and Sewer Authority 

PRCCDA Puerto Rico Convention Center District Authority 

PREC Puerto Rico Energy Commission 

PREMA Puerto Rico Emergency Management Agency 

PREPA Puerto Rico Electric and Power Authority 

PRHFA (or HFA) Puerto Rico Housing Finance Authority

PRHTA (or HTA) Puerto Rico Highway and Transportation AUTHORITY 

PRIDCO Puerto Rico Industrial Development Company 

PRITS Puerto Rico Information Technology Service 

PROMESA Puerto Rico Oversight, Management and Economic Stability Act 

PRTC Puerto Rico Tourism Corporation 

PSC Puerto Rico Public Service Commission 

RFQP Request for Proposal 

SCO 

SRF 

State Coordinating Officer 

Special Revenue Fund 

SR Structural Reform 

SUT Sales and Use Tax 

SIFC State Insurance Fund Corporation 

TANF Temporary Assistance for Needy Families 

UPR University of Puerto Rico 

WIOA Workforce Innovation and Opportunity Act 

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New Commonwealth Fiscal Plan 

Table of Contents 

Executive Summary ................................................................................................................................ 1

PART I: Context for Puerto Rico’s current economic and fiscal challenges ..................... 6

 Long-term economic trends in Puerto Rico ............................................................................. 6

 Enactment of PROMESA ........................................................................................................... 7

 Impact of Hurricanes Maria and Irma .................................................................................... 7

PART II. Puerto Rico’s path to fiscal and economic sustainability .................................. 9

 Macroeconomic and demographic trajectory post-Maria .................................................... 9

Disaster relief spending ............................................................................................................ 11

Impact of fiscal measures and structural reforms ................................................................... 13

Population projections .............................................................................................................. 14

 Fiscal Plan financial projections ............................................................................................. 15

Baseline revenue forecast ......................................................................................................... 16

Baseline expenditure forecast .................................................................................................. 20

 Long-term projections and Debt Sustainability Analysis .................................................... 24

Macroeconomic, revenue and expenditure projections ......................................................... 24

Debt Sustainability Analysis ..................................................................................................... 27

PART III: Restoring growth to the Island ...................................................................... 33

 Human capital & labor reform ............................................................................................... 34

Current state of labor and welfare laws and human capital .................................................. 34

Future vision for the Puerto Rican labor market .................................................................... 37

Structural reform initiatives to change labor conditions ....................................................... 38

Implementation and enforcement of human capital and labor reform ................................ 42

 Ease of doing business reform ............................................................................................... 44

Current state of business regulation and investment attraction ........................................... 44

Future vision for ease of doing business ................................................................................. 46

Core initiatives to improve the ease of doing business ...........................................................47

Implementation and enforcement of ease of doing business reform .................................... 48

 Energy and Power regulatory reform .................................................................................. 49

Current state of energy regulation .......................................................................................... 49

Future vision for energy regulator .......................................................................................... 50

Regulatory reform implementation and transition ................................................................. 51

 Infrastructure reform ........................................................................................................... 52

Current state of infrastructure and capital investment ......................................................... 53

Organizational structures and capabilities ............................................................................. 53

Prioritization and delivery ....................................................................................................... 54

Implementation of infrastructure reform ................................................................................ 55

 Reinvestment in Puerto Rico’s growth and prosperity ....................................................... 56

Source of reinvestment funds .................................................................................................. 56

Areas of reinvestment ............................................................................................................... 57

PART IV: Transforming Government to better serve the Island .................................... 60

 Office of the CFO ..................................................................................................................... 61

Responsibilities and actions of the OCFO .............................................................................. 62

Implementation plan ............................................................................................................... 64

 Agency efficiencies ................................................................................................................. 65

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New Commonwealth Fiscal Plan 

Changes to agency operational expenditures ......................................................................... 65

Approach to agency efficiency measures .................................................................................67

Ensuring enforcement of the agency efficiency expenditure reductions .............................. 68

Department of Education (PRDE) .......................................................................................... 69

Department of Health (DOH) ...................................................................................................74

Department of Public Safety (DPS) ..........................................................................................76

Department of Corrections and Rehabilitation (DCR) ...........................................................79

Hacienda / Office of the CFO (OCFO) ..................................................................................... 81

Department of Economic Development (DDEC) ................................................................... 83

Legislature, Courts, FOMB, AAFAF efficiencies and reinvestment ...................................... 85

All other agencies ..................................................................................................................... 86

Compensation-related initiatives ............................................................................................ 87

Implementation plan ............................................................................................................... 88

 Healthcare reform ................................................................................................................. 89

Current state of Puerto Rico’s Medicaid program .................................................................. 89

Future vision for healthcare reform ........................................................................................ 90

Key initiatives for healthcare reform ....................................................................................... 91

Implementation plan ............................................................................................................... 96

 Tax law initiatives ..................................................................................................................97

Current state of tax environment .............................................................................................97

Future vision for tax environment ...........................................................................................97

Proposed tax law initiatives ......................................................................................................97

Implementation and enforcement of tax law initiatives ........................................................ 98

 Tax compliance and fees enhancement .............................................................................. 100

Current state and future vision for tax revenue collection .................................................. 100

Administrative tax initiatives to increase revenue collections ............................................ 100

 Reduction in appropriations to UPR and municipalities .................................................. 105

Current state and vision for Commonwealth appropriations ............................................... 105

Key initiatives to reduce appropriations ................................................................................ 105

Implementation plan ............................................................................................................. 108

 Pension reform ..................................................................................................................... 109

Current state of and required changes to pension reform ................................................... 109

Proposed pension reform initiatives ....................................................................................... 111

Implementation plan .............................................................................................................. 114

 Implementation .................................................................................................................... 114

Governor’s Fiscal and Economic Working Group (GFEWG) ............................................... 114

Agency Program Management Offices (PMOs) ..................................................................... 114

PART V. Conclusion ..................................................................................................... 116

Appendix ...................................................................................................................... 117

 Model presentation .............................................................................................................. 117

Overview of entities covered by and excluded from the New Fiscal Plan ............................ 117

 Macroeconomic projections ................................................................................................ 120

Incorporation of historical macroeconomic indicators for Puerto Rico ............................. 120

 Financial projections ........................................................................................................... 121

Financial projection methodology ......................................................................................... 121

Detailed financial projections ................................................................................................. 122

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New Commonwealth Fiscal Plan 

 Structural reforms ............................................................................................................... 124

Human capital and labor reform ............................................................................................ 124

Infrastructure reform .............................................................................................................. 125

Ease of doing business reform ................................................................................................ 126

 Fiscal Measures .................................................................................................................... 127

Tax law initiatives .................................................................................................................... 127

Agency efficiency measures .................................................................................................... 129

 Comparing Fiscal Plans: March 2017 to April 2018 ......................................................... 135

Core presentational differences between Fiscal Plans .......................................................... 135

Baseline comparison ............................................................................................................... 135

Measures comparison ............................................................................................................. 136

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New Commonwealth Fiscal Plan 

EXECUTIVE SUMMARY

The people of Puerto Rico need and deserve plentiful good jobs, a dynamic and 

prosperous economy, affordable and reliable electricity, and an efficient and responsive public 

sector—but have not had any of these things for more than a decade. Instead, since 2005, the 

number of people living under the poverty level has increased, the economy has shrunk, 

electricity has remained expensive and unreliable, labor market regulations have remained 

burdensome—hindering job creation for the people—and the public sector has provided 

declining levels of service at a high cost to citizens. These problems predate Hurricanes Maria 

and Irma and will continue to plague Puerto Rico long after it recovers from the storms unless 

the necessary actions are taken, and taken now. This New Fiscal Plan for the 

Commonwealth of Puerto Rico (the “New Fiscal Plan”) details those actions. 

Based on many of the Governor’s proposals and much of the Governor’s proposed fiscal plan, 

this New Fiscal Plan provides a blueprint of the structural reforms and fiscal measures that, if 

implemented, will give Puerto Ricans what they need and deserve – a growing economy with 

more and better jobs, a twenty-first century electricity grid, resilient infrastructure, and an 

effective and efficient public sector. 

Full implementation of this New Fiscal Plan will also put Puerto Rico on the path to meeting 

the objectives laid out in the Puerto Rico Oversight, Management, and Economic Stability Act 

(PROMESA): achieving fiscal responsibility and balance, regaining access to the capital 

markets, and restoring economic opportunity for the Island. 

* * * 

Puerto Rico has been mired in an economic and demographic downward spiral 

for over a decade. The economy is $16 billion smaller in real terms and due to outmigration 

the population is nearly half a million smaller (largely due to outmigration) than it was in 2005 

– trends that, before Hurricane Maria, were projected to continue.1 Today, over 40% of the 

population lives below the poverty line, over 40% are dependent on Medicaid for healthcare, 

and over 10% of the population is projected to leave the Island in the next five years to seek a 

better life elsewhere.2 Meanwhile, the consolidated Commonwealth’s outstanding debt and 

pension liabilities have grown to over $120 billion, with more than $70 billion in financial debt 

and more than $50 billion in pension liability – almost twice the size of Puerto Rico’s economy. 

These pre-Maria problems are not new and temporary – they are long-standing and structural. 

For decades, the private sector was overly reliant on now expired Federal tax advantages while 

having to operate in a difficult business climate with poor infrastructure, especially expensive 

and unreliable electricity and transit systems, a public sector that is twice the size of the typical 

U.S. state yet often has provided poor service, and a labor force participation rate that is among 

the very lowest in the world. 

Puerto Rico has also had a budgeting problem for years, with actual revenues lower and actual 

expenses higher than projected, creating a growing general fund deficit (Exhibit 1). This 

general fund deficit is difficult to forecast with certainty, however, because of the protracted 

delays in issuing annual audited financial statements as well as lack of proper fiscal controls 

and poor financial management. Puerto Rico has also been in an economic recession for over 

a decade, which has meant an eroding tax base. Therefore, even before Maria, the primary 

 

1 The World Bank Group 

2 American Community Survey and Center for Economic and Policy Research 

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New Commonwealth Fiscal Plan 

deficit was growing consistently and considerably. To finance these primary deficits, Puerto 

Rico resorted to issuing debt which steadily became unsustainable. As the Oversight Board 

began its work, the Commonwealth was projected to run structural annual deficits exceeding 

$7 billion, or $3 billion before debt service. 

EXHIBIT 1: PROJECTED PRE-MARIA DEFICIT BEFORE MEASURES AND STRUCTURAL 

REFORMS (PRE- AND POST- CONTRACTUAL DEBT SERVICE) 

It was amidst these protracted demographic, fiscal, and debt crises that 

Hurricanes Maria and Irma hit the Island. Hurricane Maria has caused unprecedented 

and catastrophic damage to Puerto Rico, its people, and its businesses. According to current 

estimates, Hurricane Maria has created approximately $80 billion in damage, and is projected 

to cause a real decline to GNP of 13.2% this fiscal year. On the other hand, over $50 billion in 

Federal dollars is projected to be invested in helping Puerto Rico recover and rebuild from 

Hurricane Maria. The New Fiscal Plan is thus written assuming substantial and timely support 

from the Federal Government. This aid is projected to create temporary fiscal surpluses over 

the next several years, but will not change the underlying structural problems in Puerto Rico’s 

economy, which must be dealt with expeditiously. While Puerto Rico will likely experience a 

brief stimulus from Federal disaster relief funding and is benefiting from a temporary reprieve 

from debt service due to PROMESA and Title III, Puerto Rico must change its underlying 

economic foundations to prevent fiscal imbalances from inevitably returning. Only by 

attacking the structural problems plaguing Puerto Rico will it have laid the groundwork for a 

new, growing, resilient economy. 

Puerto Rico must urgently adopt a series of bold actions to improve its fiscal and 

economic trajectory. These reforms and measures are essential to restoring growth, 

opportunity, and prosperity to the people and businesses of Puerto Rico, and to making the 

Government of Puerto Rico more efficient, effective, and responsive to its citizens. Moreover, 

by adopting the most critical of these reforms and measures – labor reform – Puerto Rico can 

invest an additional $500 million over the next three years into the well-being of the people of 

Puerto Rico through targeted investments in healthcare and education so that they may have 

the opportunity for a better tomorrow. 

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New Commonwealth Fiscal Plan 

Structural reforms 

The New Fiscal Plan proposes a series of major reforms (“structural reforms”) to 

fundamentally improve the trajectory of the economy and drive growth (Exhibit 2): 

 Human capital and labor reform: promoting participation in the formal labor force 

through flexible labor regulations, creating incentives to work through Earned Income 

Tax Credit (EITC) benefits and welfare reform, and providing comprehensive 

workforce development opportunities. These measures are projected to increase 

economic growth by 1.00% by FY2022 due to EITC and labor reforms, and by an 

additional 0.16% from FY2033-2048 from long-term benefits of education and 

workforce development. 

 Ease of doing business reform: promoting economic activity and reducing the 

obstacles to starting and sustaining a business in Puerto Rico through comprehensive 

reform to improve ease of paying taxes, registering property, and obtaining permits. 

These reforms are projected to drive a 0.50% uptick in overall growth by FY2021. 

 Power sector reform: providing low-cost and reliable energy through the 

transformation of PREPA and establishment of an independent, expert, and wellfunded energy regulator. This is projected to increase growth by 0.30% starting in 

FY2020. 

 Infrastructure reform: prioritizing economically transformative capital investments 

with Federal funds, and launching new operational initiatives to reduce the impact of 

transportation delays. 

EXHIBIT 2: IMPACT OF STRUCTURAL REFORMS 

Fiscal measures 

The New Fiscal Plan proposes a set of fiscal actions the Government must take (“measures”) 

to increase Government revenues and reduce expenditures (Exhibit 3): 

 Enhancing tax compliance: Employing new technology and other innovative practices 

to broaden the tax base, reduce fraud, and improve fairness to boost overall tax 

revenues. 

 Right-rating taxes and fees: Adjusting existing taxes and fees to capture revenues from 

under-leveraged sources, such as the excise tax on crude oil (“CRUDITA”). 

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New Commonwealth Fiscal Plan 

 Tax law initiatives: reducing corporate, individual and sales and use tax rates, and 

eliminating non-revenue generating incentives and subsidies, while maintaining 

revenue neutrality. 

 Agency efficiencies: Consolidating agencies and deploying new management tools and 

practices to deliver better government services for substantially lower cost. 

 Comprehensive pension reform: Improving the financial stability of public employees’ 

retirement funds and ensuring payment of pensions. 

 Reduction of appropriations: Lowering the fiscal burden on the Commonwealth and

encouraging sound fiscal self-management by reducing appropriations to 

municipalities and the University of Puerto Rico. 

 Healthcare reform: Reducing healthcare cost inflation through a comprehensive new 

healthcare model that prioritizes quality, cost-effective care. 

 Office of the CFO: Instituting fiscal controls and accountability, reducing special 

revenue fund deficits, and improving governance, accountability, and transparency. 

EXHIBIT 3: IMPACT OF REVENUE AND EXPENSE MEASURES ON OWN REVENUES AND 

EXPENDITURES 

Implementing these structural reforms and fiscal measures, which will provide lowcost and reliable energy, robust infrastructure, flexible labor regulations, an improved 

regulatory and permitting environment, and a more effective and efficient public sector, will 

enable companies to grow and prosper, leading to more, better jobs for residents and a 

stronger tax base for the Government.

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New Commonwealth Fiscal Plan 

EXHIBIT 4: NEW FISCAL PLAN PROJECTED SURPLUS BEFORE AND AFTER MEASURES AND 

STRUCTURAL REFORMS 

Puerto Rico cannot afford to meet all its contractual debt obligations, even with 

aggressive implementation of these reforms and measures. Puerto Rico is 

committed to repaying an affordable and sustainable amount of its outstanding debt and to 

treating its creditors equitably; however, it needs a comprehensive restructuring of its debt – 

in addition to the adoption of pro-growth structural reforms – to have renewed access to the 

capital markets and to create the basis for a growing, sustainable economy. The best time to 

implement these reforms and to restructure the debt is while Puerto Rico has the temporary 

benefits of Federal disaster relief funding and a stay on debt service. Therefore, time is of the 

essence. The New Fiscal Plan calls for ambitious and immediate action to return opportunity 

and prosperity to Puerto Rico as soon as possible. 

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New Commonwealth Fiscal Plan 

PART I: Context for Puerto Rico’s current 

economic and fiscal challenges

LONG-TERM ECONOMIC TRENDS IN 

PUERTO RICO 

Before being hammered by the most powerful hurricane to strike the Island in almost a 

century, Puerto Rico’s economy had been in an acute recession for over a decade, the 

Government had defaulted on debt exceeding the size of Puerto Rico’s annual GNP, and nearly 

half of Puerto Ricans lived below the national poverty line. The reasons for these problems are 

vast, but the root causes stretch back 40 years. 

In the 1940s and 1950s, led by Operation Bootstrap, Puerto Rico’s economy grew rapidly and 

productivity increased by 5% per annum as it transitioned from an agricultural-led to a 

manufacturing-led economy. However, as economic performance began to decline in the 

1970s, the Federal Government adopted two significant policies to help Puerto Rico shore up 

its economy. 

First, transfer programs increased dramatically, particularly as Puerto Rico started receiving 

Nutritional Assistance Program (PAN) funding, eventually providing, in aggregate, a portion 

of residents’ personal income that was twice the U.S. mainland average. In addition to raising 

costs for the Puerto Rico budget, these programs at times created disincentives to work due to 

benefits that were high relative to wages available in the formal labor market. 

Second, in 1976, Section 936 of the Federal tax code was introduced to promote investments 

by companies that could transfer their “intangible assets” to Puerto Rico, and thereby shift 

profits to the Island. These Section 936 companies, which were mostly in pharmaceuticals and 

life sciences, became a pillar of Puerto Rico’s economy, creating valuable local supply chains, 

local banking deposits, and contributing substantial tax revenue. By 1996, however, Congress 

decided to end Section 936, gradually phasing it out by 2006. 

In the face of an anemic local private sector, the Government also expanded its employment 

to the point that by 2000, 30% of Puerto Rico’s jobs were in Government and a full 40% of 

workers with college degrees worked in the public sector. Large sectors like water, electricity 

and ports are still run by public corporations, and have consistently created a drain on the 

economy by delivering lower quality services at high costs while crowding out private 

investment. There is also pervasive cross-subsidization between the Government and public 

corporations and other parts of the public sector—such as free electricity to municipalities—

that obfuscates financial management and accountability. There is also a high degree of 

political interference in decisions that affect every aspect of Puerto Ricans’ lives. As a result, 

today Puerto Rico underperforms on all important measures of a modern economy, including 

educational attainment, cost of electricity, quality of water, tax compliance, and labor market 

participation. 

In order to promote the private sector, the Government undertook a broad tax incentives 

policy that led to a highly complex web of subsidies and special tax arrangements. These 

actions did not promote growth or treat companies equitably. Furthermore, generous 

Government transfer programs, in addition to Federal transfer programs, resulted in many 

workers choosing not to work, or to receive benefits and work in the informal economy without 

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New Commonwealth Fiscal Plan 

paying taxes. Tax compliance has never been adequate in Puerto Rico, and it became 

increasingly difficult in this environment. 

Government revenues suffered and became increasingly hard to forecast. To make up for this 

recurring and growing budgetary shortfall, the Commonwealth turned to the debt markets. 

Puerto Rico bonds found themselves into every corner of the U.S. bond market and, as investor 

appetite began to wane, the Government turned to securing new debt by various revenue 

streams. The result was a highly complex financial structure that limited transparency and 

financial accountability and management. 

When the Great Recession hit in 2008, Puerto Rico’s economy was already in a fragile fiscal 

and financial position. Since then, the economy has continued to worsen – Puerto Rico has 

seen its GNP shrink by 20%, labor participation has fallen to a record low of 38%, and the 

Island’s population has fallen by 10%. Today, Puerto Rico is much poorer relative to the U.S. 

than it was in 1970. 

ENACTMENT OF PROMESA

By 2016, Puerto Rico had accumulated over $50 billion in unfunded pension liabilities and 

over $70 billion of debt, and was facing an imminent default. Because Puerto Rico and its 

public corporations cannot take advantage of Chapter 9 of the U.S. Bankruptcy Code, and an 

attempt to create a territorial bankruptcy law was struck down by the U.S. Supreme Court, 

Congress stepped in to head off Puerto Rico’s financial and debt crisis by passing PROMESA, 

the Puerto Rico Oversight, Management, and Economic Stability Act. PROMESA imposed an 

automatic stay on Puerto Rico’s debt obligations and created the Financial Oversight and 

Management Board for Puerto Rico (the “FOMB” or “Oversight Board”). The Oversight Board 

is tasked with restructuring Puerto Rico’s staggering debt burden and restoring sustained 

economic growth to Puerto Rico so that the Government can achieve fiscal balance and access 

to the capital markets. 

Immediately after its formation, the Oversight Board began working with the Government of 

Puerto Rico to create a fiscal plan that would help the Government achieve fiscal responsibility 

and regain access to the capital markets. The outcome of this work was the Commonwealth 

Fiscal Plan that the Oversight Board certified on March 13, 2017 (the “March 2017 Certified 

Fiscal Plan”). A few months later, the Oversight Board filed for Title III for the Commonwealth 

Government, COFINA, HTA, ERS, and PREPA. 

In September 2017, just months after the certification of the March 2017 Fiscal Plan, 

Hurricanes Irma and Maria struck the Island, causing great devastation and fundamentally 

altering the Island’s macroeconomic reality. 

IMPACT OF HURRICANES MARIA AND 

IRMA 

On September 6, 2017 and September 20, 2017, Hurricanes Irma and Maria struck Puerto 

Rico, causing unprecedented humanitarian, economic, and infrastructure-related damages 

and upending the daily lives of Puerto Rico’s over 3 million residents. Thousands of residents 

were left homeless, basic utilities were completely shut down (and have taken months to 

become operational), and schools, hospitals, and businesses were destroyed. Tens of 

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8 

New Commonwealth Fiscal Plan 

thousands of Puerto Ricans fled the Island. The Federal Government’s response has become 

one of the largest and most complex disaster recovery efforts in U.S. history. 

The damage inflicted on Puerto Rico by Hurricane Maria required that the March 2017 

Certified Fiscal Plan be revised. Therefore, on October 31, 2017, the Oversight Board formally 

requested that the Governor submit a revised fiscal plan for the Commonwealth, as well as for 

its various instrumentalities. After months of hard work, engagement with stakeholders, and 

intense negotiations with the Government, the Oversight Board determined that this fiscal 

plan complies with the requirements of PROMESA, and accordingly, is proceeding to certify 

it as the New Fiscal Plan. 

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New Commonwealth Fiscal Plan 

PART II. Puerto Rico’s Path to Fiscal and 

Economic Sustainability 

MACROECONOMIC AND DEMOGRAPHIC 

TRAJECTORY POST-MARIA 

The New Fiscal Plan must grapple with how the shock of Hurricanes Irma and Maria will 

create a new economic reality for Puerto Rico in the years to come. Given this context, the New 

Fiscal Plan projects there will be macroeconomic volatility in the wake of the storms. In 

FY2018, there is projected to be a major decline in GNP, followed by a partial bounce-back in 

FY2019 due to disaster relief funding, then a return to slightly above trendline by FY2023 due 

to the impact of structural reforms. 

EXHIBIT 5: REAL GNP GROWTH RATE, BEFORE AND AFTER MEASURES AND STRUCTURAL 

REFORMS 

This trendline has similarities to the growth trendline faced by other jurisdictions that have 

suffered from major natural disasters (Exhibit 6). 

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New Commonwealth Fiscal Plan 

EXHIBIT 6: PUERTO RICO’S PROJECTED GROWTH TRAJECTORY COMPARED TO OTHER 

JURISDICTIONS AFTER NATURAL DISASTERS 

The economic outlook model, which forecasts GNP growth, primarily relies on a 

comprehensive data set on the Puerto Rican economy from 1965 to 2017. It includes dozens of 

variables that collectively describe the Puerto Rican economy (e.g., growth, population, capital 

stock, etc.),3 and is largely impacted by four major factors: a) the pre-hurricane trendline of 

Puerto Rico, b) short- and long-term impacts from the storm on economic activity and capital 

stock, c) the stimulative impact of disaster relief assistance (discussed in Section 4.1), and d) 

proposed measures and structural reforms (discussed in Section 4.2).

These factors result in a -13.2% decline in real GNP for FY2018, which is directionally in line 

with the Fiscal-Year-To-Date (FYTD) activity of the Puerto Rican Economic Activity Index 

(EAI) – a metric that historically tracks closely with GNP. From July to December of 2017, EAI 

was down 9.4% from the previous year. Inflation rates (Exhibit 7) increase the real GNP 

rate from 1.4-2.0% each year to reach the nominal GNP growth rate. 

EXHIBIT 7: ANNUAL INFLATION RATE 

 

3 The forecast relies on a 60-year comprehensive dataset applying statistical regressions to show the effects of multiple 

distinct but inter-related components of the hurricane and economic response, testing the relationships between dozens of 

variables, and isolating those that appear to have the strongest correlations 

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New Commonwealth Fiscal Plan 

Disaster relief spending 

Disaster spending tends to have a major stimulative effect on an economy post-crisis.4 In 

Puerto Rico, the level of public and private disaster relief spending is anticipated to be 

significant when compared to the overall size of the economy. Public and private disaster relief 

spending will impact the economy in two ways: 

■ Stimulative impact over the life of the plan caused by spending that is 

expected to be nearly 100% of the Island’s projected 2018 GNP. This stimulus 

can come in multiple forms such as construction companies hiring local, unemployed 

workers or workers from the mainland U.S. paying local withholding taxes and spending 

money for food and lodging. 

■ Expected improvement of the capital stock on the Island. The New Fiscal Plan 

factors in significant damage to capital stock that is repaired, in part, by this large infusion 

of capital, contributing to the bounce-back anticipated in FY2019 and for the bump in 

growth above pre-Maria trend thereafter. 

The New Fiscal Plan projects that ~$62 billion of disaster relief funding will enter 

the economy from Federal and private sources. It will be used for a mix of individual 

assistance (e.g., reconstruction of houses, personal expenses related to the hurricane such as 

clothing and supplies), public assistance (e.g., reconstruction of major infrastructure, 

roads, and schools), and to cover part of Puerto Rico’s share of the cost of disaster 

relief funding (states often must match some portion of Federal public assistance spend). 

Of that, ~$35 billion is estimated to be used for public assistance (between FEMA, CDBG, 

other Federal agencies, and Commonwealth match spend) ~$19 billion for individual 

assistance (between FEMA and CDBG funds), and ~$8 billion will be used for private 

and business insurance pay outs. Finally, $375 million in CDBG funding is estimated to 

be allocated to offset the Commonwealth’s expected cost-share requirements under 

Federal programs (which is ~$1.0 billion over six years). 

 

4 Relief aid after the Haitian Earthquake represented nearly 200% of overall GDP, providing a major economic “cushion” 

after the humanitarian disaster. In Grenada, disaster aid equaled about 2/3 of GDP at the time, and despite declines 

immediately after the hurricane, revenues returned to pre-storm levels after about two fiscal quarters and growth 

rebounded quickly. The year after Hurricane Ivan (2005) Grenada’s economy grew at a faster rate than any year since 

1985, at a clip of 12.5% 

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New Commonwealth Fiscal Plan 

EXHIBIT 8: PROJECTED PRIVATE AND PUBLIC DISASTER RELIEF FUNDING AND ROLL OUT 

The major sources of disaster relief funding are detailed below: 

■ FEMA Disaster Relief Fund (DRF): FEMA provides Individual Assistance to 

individuals and families who have sustained uncovered losses due to disasters. FEMA also 

provides public assistance for infrastructure projects and other permanent improvements. 

■ HUD Community Development Block Grant- Disaster Recovery (CDBG-DR): 

Based on a housing recovery plan, HUD provides CDBG-DR funding that can be used for 

assistance to individuals (e.g., housing repair) and public assistance (e.g., infrastructure 

development), or can also be used by the Government for certain operational costs (e.g., 

to cover their disaster relief funding match.) The supplemental appropriation included in 

the Bipartisan Budget Act of 2018 stipulated that at least ~$2 billion be used to repair the 

Island’s electric infrastructure (Public Assistance).

■ Private insurance funding: Large personal property and casualty losses have been 

incurred in the aftermath of Hurricane Maria. Early analysis of data from the Office of 

the Insurance Commissioner of Puerto Rico, adjusted for self-insured and other types of 

coverage, was used to determine the amount that will be paid out to individuals and 

businesses for major damages.

Disaster roll out for FEMA funds, CDBG funds, and private spending have been projected 

separately: 

■ Roll out of Public Assistance and private insurance funds. It is estimated to take 

time for the Puerto Rican Government to meet the requirements necessary to access 

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New Commonwealth Fiscal Plan 

FEMA funding.5 As a result, projected roll out declines over time and is spread out as 

shown in Exhibit 8. 

■ Roll out of CDBG. It is estimated to be even slower given the length of time typically 

needed for the application and disbursement process. As a result, projected roll out is 

spread out over time, as shown in Exhibit 8. 

In assessing impact of disaster relief funding on the economy of Puerto Rico, it is important to 

isolate what portion of the disaster relief funding directly affects the local economy and what 

portion flows to entities off-Island. The Plan estimates that, on a weighted average basis, 

12.5% of funds will directly impact the local economy.6 This figure is estimated using 

a weighted individual and public assistance (FEMA and non-FEMA) and is supported by 

history of previous FEMA spending. 

GNP is projected to rebound quickly in FY2019 in large part due to disaster relief funding, and 

this has a direct positive influence across most revenue categories. 

Impact of fiscal measures and structural reforms 

By optimizing revenue collection and reducing government-wide expenses, fiscal measures

seek to revitalize and transform the Government of Puerto Rico. However, given the impact 

on public spending, there is a contractionary impact on the economy in the short term. These 

measures are necessary to drive fiscal sustainability in the long term. In fact, they drive 

significantly more in savings than revenues lost due to economic contraction. In addition, the 

economic contraction from cost-saving measures is limited in the long-term, while such 

measures are critical for providing long-term financial stability. The macroeconomic impact 

of the measures is summarized in Exhibit 9 below. 

EXHIBIT 9: MACROECONOMIC IMPACT OF FISCAL MEASURES 

The timing and impact of structural reforms are based on work done by the IMF on similar 

reforms implemented in Europe, utilities reform in Latin America, and broadly accepted 

metrics for measuring improvement in the World Bank’s Ease of Doing Business Rankings. 

Structural reform benchmarks broadly come from nations or jurisdictions without monetary 

policy options, like Puerto Rico. Examples used include Eurozone nations, U.S. states, or 

 

5 According to FEMA and Government reports, FEMA spend in Puerto Rico has been slower than anticipated in 2018. It has 

also been slower in Puerto Rico than in other natural disasters to which FEMA has responded in 2018 (Economist, 2018)

6 Estimated using local contracts (e.g., PREPA contract representing public project assistance and a multi-unit residential 

construction project representing Individual Assistance, which were estimated to have a 10% and 17% pass-through on 

the economy, respectively). Maintenance and repair of projects related to individual assistance have less specialized 

requirements and can expect a larger pass through from direct labor. Historical FEMA spending and the percentage of 

DHS contracts awarded to local Puerto Rican firms supported this figure 

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New Commonwealth Fiscal Plan 

countries that had currencies pegged to the United States Dollar – and therefore lack monetary 

flexibility as does Puerto Rico. Labor, energy, and doing business, reforms are 

projected to increase GNP by 1.80% by FY2022 (Exhibit 10). K-12 education reforms

add an additional 0.01% annual impact beginning in FY2033, resulting in total GNP increase 

of 1.96% by FY2048.7

EXHIBIT 10: MACROECONOMIC IMPACT OF STRUCTURAL REFORMS 

Population projections 

In the past five years, Puerto Rico’s population has trended downward by 1-2% every year as 

residents have left to seek opportunities elsewhere and birth rates have declined.8 This trend 

accelerated after the storm, as many lost houses, jobs and loved ones. While some of these 

people are projected to return as the Island rebuilds, population is still projected to decline 

over the period of the New Fiscal Plan – by ~12% over five years (Exhibit 11).9 Much of this 

is based on estimated net departures in FY2018, while in the long term, population is projected 

to continue to decline, but at a rate closer to pre-hurricane trends. One key element of the 

population projection is the assumption that the low historical rate of immigration into Puerto 

Rico will continue. 

 

7 The impact of educational / human capital structural reforms is 0.28% by FY2060 

8 Federal Reserve Bank of St. Louis Economic Research (FRED) 

9 The New Fiscal Plan adopts demographic projections calculated by the Oversight Board’s demographer. The projections 

were initially presented in an Oversight Board listening session held on November 16, 2017 and have since been updated 

to incorporate the latest available migration data and economic growth projections, as well as real-time estimates of 

population loss since the hurricane (e.g. net airplane departures) 

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New Commonwealth Fiscal Plan 

EXHIBIT 11: PROJECTED POPULATION CHANGE 

FISCAL PLAN FINANCIAL PROJECTIONS 

Before measures and structural reforms (“baseline forecast”), there is a pre-contractual debt 

service surplus in FY2018-20, due to revenues buoyed by a positive macroeconomic trajectory 

resulting from the massive disaster relief funding stimulus, as well as significant Federal 

Medicaid funding. Over the long term, in the baseline forecast this surplus is not sustainable, 

as Federal disaster relief funding slows down, Supplemental Medicaid funding phases out, Act 

154 and Non-Resident Withholding revenues decline, and pensions and healthcare 

expenditures rise. Without major Government action, the Island would suffer an annual 

primary deficit of over $1.9 billion starting in FY2021. 

Fiscal measures and structural reforms contained in the New Fiscal Plan will transform the 

deficit into a surplus for the life of the Fiscal Plan, as structural reforms will drive a 1.80% 

increase in growth, and fiscal measures will drive ~$12 billion in savings and extra revenue by 

FY2023. After fiscal measures and structural reforms and before contractual debt service, 

there is an annual surplus starting in FY2018. After contractual debt service, however, this 

drops to an annual deficit for all years of the plan (Exhibit 12). 

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New Commonwealth Fiscal Plan 

EXHIBIT 12: PROJECTED DEFICIT / SURPLUS PRE- AND POST-MEASURES AND STRUCTURAL 

REFORMS 

Baseline revenue forecast 

Major tax revenue streams (Exhibit 13) include non-export sector General Fund revenues 

(including individual, corporate, and sales and use taxes) and export sector revenues 

(including Act 154 excise taxes paid by multinationals operating on the Island, and NonResident Withholdings), as well as Federal funding. 

EXHIBIT 13: MAJOR REVENUE CATEGORIES 

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New Commonwealth Fiscal Plan 

5.1.1 Non-export sector General Fund revenue projections 

In the aftermath of the hurricanes, actual tax receipts have been closely monitored to measure 

the near-term fiscal impact. Using these actuals and other inputs, the New Fiscal Plan projects 

a drop of ~14% in General Fund revenues in FY2018, adjusted for one-off events.10 

Individual income taxes: Individual income taxes are concentrated, with 78.2% of 

revenues coming from the 8.7% of returns reporting income above $60,000 per year. 

Revenues from individual income tax are down ~3% FYTD as of February, relative to FY2017 

actuals11. This likely reflects most of the impact of the hurricane on wage earnings, but it is 

possible that estimated tax payments (e.g., by self-employed or high net worth individuals) are 

running ahead of where they will be at year end, at which point there could be large refund 

claims. To account for this risk, Hacienda estimates that a marginal additional increase in 

deductions in FY2018 will drive a $112 million negative variance.12 With this $112 million in 

extra deductions, income tax revenues for FY2018 are projected to be ~8% lower than in 

FY2017 when adjusted for extraordinary items. 

Corporate income taxes: There is also concentration in tax receipts among the largest 

corporations operating in Puerto Rico (e.g., ~29% of corporate income tax is paid by 20 

corporate taxpayers).13 Corporate tax revenues are down ~11% FYTD relative to FY2017, and 

are projected to continue this trend. Finally, Hacienda is projecting personal property, 

casualty, and business interruption losses will result in a $102 million marginal fall in 

corporate tax revenues. The current trendline, in addition to these deductions, results in an 

adjusted year over year decline of 18.6% from FY2017. 

Sales and use taxes (SUT):14 SUT revenues are down ~9% FYTD relative to FY2017, but 

have fallen 14.3% since the hurricane – a trend that is projected to apply to the rest of the fiscal 

year. Unlike income taxes, where monthly cash flows can only help approximate annual tax 

liabilities, sales and use taxes are collected throughout the year and remitted on a regular basis 

(varies depending on size of taxpayer). Emergency measures taken by the Government 

immediately after the hurricanes account for ~$100 million in losses, while outmigration, 

business closures, and general disruption (e.g., due to power outages) will likely account for 

the rest of the drop. The application of this base trend through June 2018 results in a yearover-year decline of ~10.4% from FY2017 (inclusive of non-General Fund SUT funds such as 

CINE, FAM, and COFINA). 

Other General Fund Revenue (Motor Vehicles, Alcoholic Beverages, Cigarettes): 

The trendline for other General Fund revenues is projected to continue in line with post-Maria 

actuals to date, resulting in a 2.2% increase for alcoholic beverages, a 25.4% increase for 

cigarettes, a 14.3% decline for motor vehicles, and a 28% decline for “other general fund 

revenues” which includes fees/penalties and dividend taxes (all figures are adjusted for 

 

10 The New Fiscal Plan estimates for income taxes and SUT for FY2018 are based on actuals through February 2018, with 

the five-month post-storm average trend line continuing through the end of the fiscal year. Additional adjustments are 

included for income taxes and corporate taxes due to the expected deductions for unreimbursed property damage 

11 All actuals are adjusted to normalize for extraordinary non-recurring item 

12 This calculation is based on casualty and personal property loss estimates from Hurricane Georges, and the impact is 

intensified (by about 4x) to account for the increased severity of Maria. Hacienda’s analysis here would result in ~20% 

increase in tax refunds/ deductions, which is in-line with the impact seen on U.S. Federal tax refunds in 2001 and 2008, in 

the aftermath of two large economic recessions 

13 Hacienda historical reports 

14 All analyses for the purposes of the New Fiscal Plan are all-inclusive of sales and use tax revenues. Monthly and 

quarterly general fund SUT trends are variable due to differences in year over year timing of when COFINA and other caps 

are hit 

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New Commonwealth Fiscal Plan 

extraordinary events and Commonwealth policies on tax exemptions and holidays in response 

to the storm).15 

5.1.2 Export sector revenue projections 

Act 154 and Non-Resident Withholding (NRW) tax revenues have proven to be far less resilient 

than other types of revenues after the hurricane.16 For FY2018, Act 154 is expected to decline 

~15%, and NRW revenues are projected to decline ~15%. Both revenue types are concentrated 

in a small number of multinational corporations, and the absence of payments from large 

payers in previous years has had an impact on the overall trendline of these revenues. From 

FY2017 to FY2023, Hacienda estimates that ~51% of Act 154 and 28% of NRW revenues will 

erode (Exhibit 14) due to the combination of Federal tax reform (reducing Puerto Rico’s 

attractiveness as a low tax jurisdiction for multinationals) and hurricane impacts (creating 

challenges restoring manufacturing operations and exporting). In some cases, these 

disruptions revealed concentration risk in Puerto Rico that manufacturers may consider in 

making future business continuity plans. 

EXHIBIT 14: PROJECTED ACT 154 AND NON-RESIDENT WITHHOLDING (NRW) REVENUES 

5.1.3 Medicaid Federal funding 

In the steady state, Medicaid costs are typically funded primarily by the Commonwealth, as 

there is a cap on available Federal funding. Yearly Federal funding streams for the 

Commonwealth are the following, projected based on current law and statutory growth rates: 

■ Standard annual Federal Medicaid funding. Although Puerto Rico has a 55% 

Federal matching assistance percentage (FMAP), this amount is capped each year at an 

 

15 While these numbers are not adjusted for deductions, they are adjusted for what Hacienda views to be “one-off events.” 

For example, Hacienda removed $13M from cigarette taxes in Nov. 17 due to non-recurring promotions offered by gas 

stations and convenience stores, and removed $18.3M from motor vehicle taxes due to a spike in car sales promotions 

16 As of February 2018 

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New Commonwealth Fiscal Plan 

amount that is below 10% of costs. As of FY2018, this funding stream was capped at under 

$400 million, and though the cap grows each year, it does not keep pace with healthcare 

expenditure growth.17 

■ Children’s Health Insurance Program (CHIP) funding. CHIP funding is not 

subject to a Federal cap. It also has a higher FMAP at 91.5%, though this Federal cost share 

is projected to decrease in FY2020 with the expiration of the Affordable Care Act’s 

temporary increase. In FY2018, this amount totaled $172M. 

■ Each year, funds are passed directly through to the Department of Health, totaling 

$200 million out of the annual Federal funds available for Medicaid. This funds Federally 

Qualified Health Centers (Centros 330, “FQHC”) and Medicaid Operations. 

In FY2018, however, the available share of Federal funds is much higher due to several Federal 

fund sources. Additional Federal funding is provided in FY2018 by remaining Affordable 

Care Act (ACA) block grant funds (approximately $598 million as of the beginning of the 

fiscal year) and supplemental FY2017 Omnibus Federal funding of $296M. 

In addition, in February 2018 the Bipartisan Budget Act of 2018 (BBA) allocated a 

supplemental $4.8 billion of Federal funding to Puerto Rico Medicaid, for use between 

January 2018 and September 2019. Per CMS guidance, this funding is estimated to apply only 

as a reimbursement for eligible populations (i.e., Federally funded Medicaid expenses). The 

Puerto Rico Health Insurance Administration (ASES) will spend as much of the allocation as 

possible before drawing down any remaining ACA funds, which can resume use from 

September 30, 2019 until expiration in December 31, 2019. 

Depending on the exact parameters of eligible spending (e.g., if Commonwealth-funded 

populations and/or some dual-eligible CHIP members are eligible), ASES will be able to 

absorb between $4.2 billion and $4.8 billion of the allocated funding for core Medicaid 

expenditures.18 It will continue to receive its annual CHIP,19 FQHC, and DOH Medicaid 

operations funding. 

Exhibit 15 outlines expected Medicaid Federal fund receipts. Starting in FY2020, 

Supplemental funding is projected to phase out. This funding cliff indicates the imperative and 

urgent need to implement cost-saving measures to reduce long-term Medicaid costs (Medicaid 

expenditures are discussed in detail in Section 5.2.2).

 

17 According to the Social Security Act, the cap grows by the medical component of CPI-U as reported by BLS each year. 

From FY2011-FY2016, this growth averaged 2.9%. This inflation rate differs from the healthcare inflation index for 

Medicaid and Medicare used elsewhere in this New Fiscal Plan (7.1% from FY2018-FY2023, and 5.6-4.7% in the longterm, as discussed in the Appendix). Instead, the medical component of CPI-U includes other factors that lower the 

inflation rate by approximately 3-5 percentage-points, meaning the increase in the Federal funding cap will not keep up 

with actual increases in expenditures 

18 Current assumption is that only Federally funded Medicaid beneficiaries (excluding all CHIP and Commonwealth 

members) are eligible for reimbursement using BBA funds. These beneficiaries represent approximately 80% of total MCO 

disbursements, 100% of Platino premiums, all administrative costs, and less any cost-saving measures (described in 

Chapter 14) that reduce reimbursable spend during the timeframe 

19 CHIP funding will continue at 91.5% FMAP until expiration of the ACA enhanced FMAP in September 2019. At that point, 

FMAP will return to 68.5% pre-ACA level, according to §2101(a) of the Affordable Care Act which amended §2105(b) of 

the Social Security Act 

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New Commonwealth Fiscal Plan 

EXHIBIT 15: MEDICAID EXPECTED FEDERAL FUND RECEIPTS

Baseline expenditure forecast 

Over the next five years, baseline expenditures are set to increase over FY2017 due to inflation 

and increases in Medicaid and pensions costs (Exhibit 16). 

EXHIBIT 16: MAJOR EXPENDITURE CATEGORIES 

5.2.1 Payroll expenses and non-payroll operating expenditures 

Payroll expenses: The expenditure model holds payroll constant at the FY2018 approved 

budget levels based on the Fiscal Plan Compliance Act. Payroll projections do not assume 

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New Commonwealth Fiscal Plan 

reductions from either attrition or absenteeism, as reductions would need to be met with limits 

on rehiring to truly capture any cost savings – therefore, any workforce reductions will be 

captured only through fiscal measures. Further, whereas the March 2017 Fiscal Plan included 

a payroll freeze through FY2019 (which is reflected in the baseline), the extension of this 

payroll freeze is proposed by the New Fiscal Plan and will therefore be counted as a measure. 

After FY2019, all figures are projected to grow by Puerto Rican inflation. 

Non-Personnel Operating Expenses: Like payroll expenses, non-personnel operating 

expenses are projected to be frozen FY2018-FY2019 by the March 2017 Fiscal Plan measures, 

with costs growing by inflation thereafter. Utility costs are based on the historical cost of 

government payments for utilities-related costs. 

5.2.2 Medicaid costs 

Medicaid costs are projected to reach over $3.6 billion annually by FY2023 (Exhibit 17). 

These costs are primarily driven by the cost per member per month (PMPM) and the number 

of people enrolled in Medicaid (Federal and Commonwealth), CHIP, and Platino dual eligible 

programs. Other categories also contribute, including health-related expenses (e.g., HIV and 

Pulmonary programs) and program administration, bringing total expenditures to $3.7 billion 

by FY2023. 

In the short term, Hurricane Maria is expected to affect both PMPM and enrollment, as 

evidenced by historical post-disaster environments. From August (pre-Maria) to March 2018, 

actual enrollment data has indicated nearly a 5% increase in enrollment, as residents face 

higher rates of utilization and struggle to fulfill basic needs. Other post-disaster areas have 

exhibited a similar spike in proportion of population enrolled in Medicaid but have shown that 

enrollment soon declines back to trend.20 Similarly, the proportion of Puerto Ricans enrolled 

in Medicaid is expected to slightly drop after a time. As the overall population of Puerto Rico 

decreases, the Mi Salud population will decline concurrently, but will likely lag overall 

outmigration trends by a year due to the time needed for individuals to switch to a new plan 

once they have left the Island. 

PMPM costs are projected to grow at 7.1% annually. This rate combines normal healthcare 

cost inflation rate of 6.0% experienced in Puerto Rico before the storm,21 along with an 

additional 1.1% observed in other post-disaster environments.22

 

20 Analysis included effect of Hurricane Katrina on Medicaid population in New Orleans. Directly following the storm, the 

proportion of overall population on Medicaid spiked, but declined beginning a year after the hurricane. Source Louisiana 

Department of Health and Hospitals, Bureau of Health Services Financing. “Louisiana Medicaid Annual Report,” 2005-

2009, http://dhh.louisiana.gov/index.cfm/newsroom/detail/1699/ 

21 From 2011-2016, the CAGR for PMPM inflation in Puerto Rico averaged about 6.6% (ASES analysis of historical PMPM 

rates). Milliman actuarial analysis projects a 5-7% PMPM inflation rate from FY2018-FY2020 and 4-6% PMPM inflation 

rate from 4-6% 

22 NBER working paper 22272 analyzing fiscal effects of hurricanes on healthcare costs. Table 7, Panel B coefficient for 

implied effect after 7.5 years spread year over year; Took the value of the implied effect after 7.5 years (0.085); Divided 

this by the number of years (7.5); Provided the change year over year = 0.085/7.5 = 0.0113; Then, interpreted the 

coefficient; Given the y variable is logged, the interpretation is: (change year over year) * (100%) = % change year over 

year, generating a 1.13% change projected year over year. Deryugina, Tatyana. “The Fiscal Cost of Hurricanes: Disaster 

Aid Versus Social Insurance.” National Bureau of Economic Research, May 2016

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New Commonwealth Fiscal Plan 

EXHIBIT 17: PROJECTIONS FOR MI SALUD BASELINE PMPM AND ENROLLMENT (NOT 

INCLUDING PLATINO) 

Other costs, which include HIV/PDP, Health Insurance Provider Fee, Air Ambulance, MC21 

Administrative Fee, Super Utilizers, and Pulmonary, among others, are projected to grow at 

the rate of Puerto Rico inflation. 

Expenditures for the Platino dual eligible program were estimated using a consistent $10 

PMPM over FY2018-FY2023, representing payment for wrap-around services supplementing 

main Medicare coverage. Enrollment is projected to be affected similarly to Medicaid 

enrollment, though with less fluctuation in actual proportion of population enrolled.23 Platino 

costs are expected to total $29 million in FY2018 and decline slightly to $28 million by 

FY2023. 

5.2.3 Other costs 

Appropriations: Baseline municipal appropriations are projected to remain constant at 

~$220 million from FY2018-FY2023, with the exception of a one-time allotment to 

municipalities as a result of Hurricanes Irma and Maria, which is to be provided in FY2018 for 

the amount of $78 million, and which will be allocated on the same basis as the existing 

municipality subsidies. The University of Puerto Rico appropriation baseline is $708 million 

in FY2018 and remains ~$717 million from FY2019-FY2023. 

Pension costs: Projections rely on demographic estimations for Employees’ Retirement 

System (ERS), Teachers’ Retirement System (TRS), and Judicial Retirement System (JRS) 

populations and benefit obligations, and include updated data and actuarial projections for 

regular TRS and JRS benefits (extrapolated to update estimates for ERS). From FY2018-

FY2023, costs are projected to grow slowly but remain approximately $2.3 billion for the New 

Fiscal Plan period.24 Starting in FY2018 ERS pension benefits have been paid on a pay-as-yougo basis, given that the majority of the liquid assets in the retirement system have been 

depleted. 

Capital expenditures: Centrally funded maintenance and capital expenditures of the 

Commonwealth (excluding PREPA, PRASA, HTA self-funded capex/one-time transfers) is 

 

23 Projected based on a smaller observed spike in actual enrollment from pre- to post-Maria relative to Medicaid spike 

24 Projections for pension expenses are provided by Pension Trustee Advisors (PTA) calculations 

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New Commonwealth Fiscal Plan 

expected to be $400 million annually. Of this, $124 million will be appropriated to HTA and 

UPR, with the remaining $276 million for use by the Commonwealth. The capital expenditure 

costs are lower in the short-term because of the large disaster relief funding allocations from 

the Federal Government and from Puerto Rican cost match. HTA’s capital expenditure funds 

will be used to support reconstruction, maintenance, traffic reduction, completion of the 

strategic network, and P3-related expenditures. UPR’s capital expenditure funds will support, 

among other projects, Phase III of the large Molecular Sciences building, Building restoration 

at Rio Piedras, and the development of a major campus building at Mayaguez. 

Independently Forecasted Component Units (IFCUs): IFCUs in the New Fiscal Plan 

include Puerto Rico Industrial Development Company, Public Buildings Authority, Ports 

Authority, State Insurance Fund Corporation, Medical Services Administration, Tourism 

Company, Health Insurance Administration, Cardiovascular Center, Housing Finance 

Authority, Department of Agriculture, Integrated Transport Authority, AAFAF, and 

Convention Center Authority. From FY2018-FY2023, IFCU payroll expenditures are projected 

to be ~$600 million annually. Non-payroll operating expenditures are projected to remain at 

~$1.1 billion annually. 

Cost share of disaster relief funding: Federal funds for public assistance typically require 

a local match from the entity receiving them (anywhere from 10-25% of funds). In the case of 

Puerto Rico, the New Fiscal Plan projects that the Commonwealth will need to cover an 

estimated 10% of Federal public assistance funds, amounting to $1.1 billion from FY2018-

FY2023. However, a certain portion of this is expected to be covered by CDBG funds (e.g., 25% 

of the initial $1.5 billion allocated from HUD in February, which would amount to ~$188 

million from FY2018-FY2023). Thus, total cost share incurred by the Commonwealth is 

expected to be $870 million from FY2018-FY2023. 

Title III costs: Commonwealth Title III expenses are projected to be $1.5 billion for FY2018 

to FY2023, comprised of professional fees (approximately $1.1 billion over six years) and 

funding for the Oversight Board ($430 million over six years). The estimate for professional 

fees was developed, in conjunction with the Government, by analyzing FY2018 run-rate 

billings based on available information and soliciting input from certain professionals. Fees 

were benchmarked versus comparable restructuring situations that yield an average 

professional-fee-to-funded-debt ratio of 1.89% relative to 1.65% projected for the 

Commonwealth (Exhibit 18). 

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New Commonwealth Fiscal Plan 

EXHIBIT 18: PROJECTED TITLE III COSTS RELATIVE TO OTHER MAJOR RESTRUCTURINGS 

Emergency reserve: The Commonwealth must establish an emergency reserve of $1.3 

billion, or ~2.0% of FY2018 GNP, by reserving $130 million per year for 10 years. The 

methodology supporting this reserve is informed by guidance provided to The Bahamas, 

another Caribbean island, by the International Monetary Fund in defining an adequate 

emergency reserve (2-4% of GNP, accumulated at 1⁄2% per year).25 Restrictions on the use of 

this fund must ensure that it is a true emergency reserve. 

LONG TERM PROJECTIONS AND DEBT 

SUSTAINABILITY ANALYSIS 

While the New Fiscal Plan emphasizes the period from FY2018-FY2023, the Plan’s core goal 

is to put Puerto Rico on a path towards long-term fiscal balance. The Government’s existing 

bonded debt also is long-term, with final maturities on some credits extending out 40 years 

from today to FY2058. Accordingly, long-term projections are an important component in 

evaluating the Fiscal Plan’s implementation and in the resulting Debt Sustainability Analysis 

(DSA). 

Macroeconomic, revenue and expenditure projections 

Most macroeconomic trends are forecast to continue their current trajectories through the 

next 40 years, and slowly revert toward the pre-hurricane trend line as the impact of the 

hurricane (and the disaster relief funding) begin to wane. Population for example, is 

 

25 IMF Bahamas Article IV report published March 22, 2018 

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New Commonwealth Fiscal Plan 

influenced by GNP, death and birth rates, and net migration, with the latter having the most 

significant impact. Population reaches a run-rate of negative 0.5% by FY2048. Meanwhile, 

real growth reaches a trend of 0.7% by FY2048 after fiscal measures, aid, and structural 

reforms. Inflation on the other hand, settles at a run-rate of 1.94% as it is expected to converge 

to mainland forecasts. 

Most revenues are projected to grow with nominal GNP in the long term26. This includes SUT, 

Corporate Income Tax, Personal Income Tax, Non-Resident Withholding not paid by Act 154 

entities and most General Fund revenues. Exceptions include: 

■ Alcoholic beverages and cigarette-related tax revenues, which are expected to grow 

by inflation and population. This assumption is supported both by relatively constant 

alcohol consumption in growing economies along with long-term decline in cigarette 

consumption both in Puerto Rico and in the U.S. mainland. 

■ Rum excise on off-shore shipments, is expected to grow by mainland population and 

is partially driven by the statutory waterfall by which rum excise taxes are paid into the 

general fund. 

■ Non-Resident Withholding (NRW) and Act 154 revenues, which will face further 

decline due to additional patent expiry risk and US tax ruling related risks. This risk is 

reflected in a $100 million per year annual step-down beginning in FY2028 through 

FY2031 in Act 154 revenues as patent expiry is anticipated to accelerate in this period. 

NRW payments made by Act 154 payers are projected to follow this same trajectory. Both 

remain flat at ~35% and ~60% of their FY2018 levels, respectively, after this “step-down” 

period ends in FY2031. 

Federal funds behave differently and grow based on historical and statutory appropriations. 

Medicaid is the most significant form of Federal funding and standard Medicaid matching 

funds grow by the medical services component of CPI-U, CHIP funding grows proportional to 

CHIP cost growth, Municipal intra-governmental transfers remain constant, and prescription 

drug rebates grows proportional to healthcare costs and population. 

Just as most revenues grow by GNP, payroll, non-payroll operating expenditures and 

utilities all grow by standard inflation,27 as do baseline appropriations after FY2023. 

Meanwhile, capital expenditures are anticipated to rise to 1.9% of GNP by FY2034, as 

Puerto Rico must sustain a higher level of maintenance and rely on its own funding for capital 

investments (rather than disaster relief funding). Medicaid premiums also grow at a faster 

pace than standard inflation, and instead grow by healthcare inflation (linear decline to 4.6% 

in long term) and population growth. Non-premium costs, such as administrative and “other” 

Medicaid costs grow by standard inflation in the long-term. 

The long-term macroeconomic projections show trends for the key metrics shown below 

(Exhibit 19). 

 

26 This methodology is consistent with general IMF forecasting approaches and is intended to capture the overall change in 

consumption, investment and production within the economy 

27 Due to constraints on adding additional costs beyond inflation-related adjustments 

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New Commonwealth Fiscal Plan 

EXHIBIT 19: 40 YEAR FINANCIAL PROJECTIONS 

Without sustained fiscal measures and aggressive structural reforms, there would be a 

significant deficit over 30 years. However, expenditure measures are set to increase with 

inflation (and healthcare with long-term health inflation), while revenues are expected to grow 

with GNP – thus, both help reduce the deficit (Exhibit 20). 

EXHIBIT 20: PROJECTED LONG-TERM SURPLUS / DEFICIT 

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New Commonwealth Fiscal Plan 

Meanwhile, the cumulative impact of structural reforms in the long-term drives over $80-90 

billion, thereby generating much of the future surplus. Without such structural reforms, there 

would be deficits by FY2029 (Exhibit 21). 

EXHIBIT 21: ANNUAL GAP/SURPLUS BASED ON IMPACT OF STRUCTURAL REFORMS 

Debt Sustainability Analysis (DSA) 

The DSA is intended to provide a framework for assessing the long-term capacity of the 

Government to pay debt service on its bonded debt. Debt levels post-restructuring need to be 

sustainable over the long-term and consistent with both a minimal risk of default on the 

restructured debt and a recovery of market access for future new money capital borrowings 

for ongoing infrastructure investment. The analysis begins with the selection of the most 

appropriate peer group against which to benchmark Puerto Rico. The DSA then applies rating 

agency metrics for that benchmark group to Puerto Rico to arrive at an assessment of what 

debt levels are sustainable in light of the long-term projections and the peer metrics. Net TaxSupported debt is defined as debt payable from statewide taxes and other general resources, 

net of obligations that are self-supporting from pledged sources other than state taxes or 

operating resources (such as utility or local government revenues). 

U.S. States as peer comparables. For many reasons, U.S. states are the most appropriate 

comparison group to use in benchmarking sustainable debt levels for Puerto Rico. Like U.S. 

states, Puerto Rico does not control its own currency, has no access to IMF restructuring 

support programs or similar international sovereign relief funding packages, and traditionally 

has been reliant on access to the same long-term municipal bond market used by the U.S. 

states to finance their capital needs. Puerto Rico’s bonds also are rated by the same rating 

agency analyst groups that assign ratings to U.S. states, not by foreign sovereign bond rating 

analysts. For these and other reasons, Puerto Rico has more similarities to U.S. states than to 

sovereign nations. By virtually any measure tracked by the rating agencies, Puerto Rico’s 

existing debt levels are a clear outlier relative to these U.S. state peers (Exhibit 22). 

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New Commonwealth Fiscal Plan 

EXHIBIT 22: US STATES AS COMPARABLES 

While some observers note that Puerto Rico residents do not pay Federal income taxes, they 

do pay full Social Security and Medicare taxes, and the low per capita income levels would 

place most Puerto Ricans in a tax bracket where they would otherwise pay little or no Federal 

income tax anyhow. Meanwhile, Federal reimbursement levels provided to Puerto Rico for the 

largest Commonwealth spending programs (including Medicaid and transportation), are 

capped at levels well below the FMAP and Federal Highway reimbursement levels provided to 

comparably sized and wealthier states. Puerto Rico residents also pay graduated income taxes 

to Puerto Rico at brackets comparable to the Federal income tax rates, thereby providing funds 

needed to provide services to the Puerto Rico resident population that is far poorer than the 

population of any U.S. state. Yet Puerto Rico receives less Federal support. The most recent 

U.S. Census Bureau estimate of per capita income in Puerto Rico was $11,688,28 67.9% below 

the lowest U.S. state and 76.8% below average U.S. state 2017 per capita income.29

In general, foreign sovereigns are not the closest comparable to use in determining Puerto 

Rico’s debt sustainability levels given the reasons described above; but of foreign sovereigns, 

smaller European Union countries offer the closest comparator. Like Puerto Rico, these E.U. 

nations also lack their own currency and monetary policy levers, although they can and do 

access IMF financial support. Puerto Rico’s current debt levels are also an outlier when 

compared to these E.U. sovereigns (Exhibit 23). 

 

28 U.S. Census Bureau 2016 Estimate 

29 U.S. Bureau of Economic Analysis in the March 22, 2018 release 

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New Commonwealth Fiscal Plan 

EXHIBIT 23: EU SOVEREIGNS AS COMPARABLES 

Metrics for debt sustainability. Viewing U.S. states as the most comparable group for 

benchmarking Puerto Rico, the DSA uses the metrics in the May 2017 Moody’s Investors 

Service report “U.S. State Government Debt Analysis” to develop a range of levels for 

sustainable debt capacity, including maximum annual debt service levels for Puerto Rico on 

its restructured existing debt. The key debt ratios for the ten lowest indebted states, the ten 

highest indebted states, and the mean for all U.S. states are shown below (Exhibit 24).

EXHIBIT 24: KEY DEBT RATIOS FOR TEN LOWEST INDEBTED STATES 

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New Commonwealth Fiscal Plan 

Exhibit 25 uses the long-term 30-year macroeconomic forecast to determine a range of 

implied debt capacity based on the debt metrics of the average U.S. state. The debt capacity 

ranges shown are based off the following four methodologies: (i) Debt to Own Source 

Revenues, (ii) Debt per Capita, (iii) Debt to State Personal Income and (iv) Debt to GDP. 

Implied debt capacity and expected growth in debt capacity must be sufficient to cover both 

restructured debt and future debt issuance. The 5-year average capacity statistics represent 

the average par amount between the four methodologies of an implied 5%, 30-year level debt 

service structure. 

EXHIBIT 25: IMPLIED NET TAX-SUPPORTED DEBT CAPACITY RANGE BASED ON AVERAGE 

U.S. STATE ($M) 

Exhibit 26 uses the long-term 30-year macroeconomic forecast to determine a range of 

implied debt capacity based on the debt metrics of the 10 highest U.S. states. The debt capacity 

ranges shown are based off the following four methodologies: (i) Debt Service to Own Source 

Revenues, (ii) Debt per Capita, (iii) Debt to State Personal Income and (iv) Debt to GDP. 

Implied debt capacity and expected growth in debt capacity must be sufficient to cover both 

restructured debt and future debt issuance. The 5-year average capacity statistics represent 

the average par amount between the four methodologies of an implied 5%, 30-year level debt 

service structure. 

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New Commonwealth Fiscal Plan 

EXHIBIT 26: IMPLIED NET TAX-SUPPORTED DEBT CAPACITY RANGE BASED ON TOP-10 U.S. 

STATE DEBT METRICS ($M) 

The illustrative implied levels of the Government’s restructured debt in the previous chart are 

calculated by applying the Net Tax Supported Debt ratios of the “top ten” U.S. states (in terms 

of debt load) to Puerto Rico’s future projected GDP, population and Own-Source 

Revenues. Debt Service to Own Source Revenue figures are derived assuming debt service of 

a long-term level debt service structure, with a 5% average coupon. It is important to note that 

Moody’s has issued proposed new U.S. state rating criteria that update traditional “Debt 

Service Ratio” (Debt service/Own Source Revenues) to a “Fixed Costs/State Own Source 

Revenues” ratio that encompasses both debt and pension expense, a shift that makes the New 

Fiscal Plan’s pension-related measures all the more important to see fully implemented. 

Maximum annual debt service cap on restructured fixed payment debt. The 

implied debt capacity and expected growth in debt capacity must be sufficient to cover both 

the payments due on the restructured debt and all payments due on future new money 

borrowings. Accordingly, the aggregate debt service due on all fixed payment debt issued in 

the restructuring of the Government’s existing tax-supported debt should be capped at a 

maximum annual debt service (“MADs”) level. The cap would be derived from the U.S. state 

rating metrics, and specifically from what Moody’s calls the “Debt Service Ratio.” The Debt 

Service Ratio is the ratio of total payments due in a year on all existing net tax-supported debt 

over that state government’s own-source revenues (i.e., excluding Federal transfer payments) 

in that year. 

The Moody’s report indicates that the average Debt Ratio for the all U.S. states is 4.4%. The 

Moody’s report indicates that the average Debt Ratio for the top 10 most indebted states is 

8.8%. To the extent either of these Debt Ratios is used to set a MADs cap on the restructured 

debt and the Primary Surplus is below the MADs level, then the debt service due on fixed 

payment debt would need to be set at the lower of the amount available for debt service or the 

MADs limit. 

Any additional cash flow above the MADs cap applied to the restructured fixed payment debt 

that is generated over the long-term from successful implementation of the New Fiscal Plan 

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New Commonwealth Fiscal Plan 

could be dedicated to a combination of contingent “growth bond” payments to legacy bond 

creditors, debt service due on future new money borrowings needed to fund Puerto Rico’s 

infrastructure investments and additional “PayGo” capital investment to reduce the 

Government’s historically out-sized reliance on borrowing to fund its needs, among other 

purposes. 

Debt sustainability analysis. Exhibit 27 below calculates implied debt capacity based on 

a range of interest rates and Fiscal Plan implementation risk factors under an assumed 

illustrative 30-year term and level debt service. The implementation risk factor is calculated 

by reducing the amount of projected cash flow available per year for debt service by a certain 

percentage. For example, a 20% implementation risk factor case would use only 80% of the 

projected cash flow available to pay debt service on fixed payment debt. 

EXHIBIT 27: IMPLIED DEBT CAPACITY BASED ON RANGE OF INTEREST RATES AND 

IMPLEMENTATION RISK FACTORS ($M) 

Restoration of cost effective market access. Ultimately, the Government must develop 

and adhere to structurally balanced budgets reflecting ongoing fiscal discipline, timely 

publication of audited financial statements and related disclosure information and restructure 

its current excessive debt load to a sustainable level. As Puerto Rico seeks to regain costeffective capital markets access, rating analysts and investors will demand that the 

Commonwealth demonstrate improvement in all four core areas of creditworthiness identified 

by Moody’s: the economy, government finances, governance and “fixed cost” debt and pension 

expenses. Together, these and other measures outlined in the New Fiscal Plan can chart a path 

to restoring Puerto Rico’s market access. 

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New Commonwealth Fiscal Plan 

PART III: Restoring growth to the Island

A sustainable fiscal and economic turnaround depends entirely on comprehensive structural 

reforms to the economy of Puerto Rico. Only such reforms can drive growth in the economy, 

reversing the negative trend growth over the last 10 years and enabling the Island to become 

a vibrant and productive economy going forward. To reverse the negative economic trends, 

the Government must pursue reforms in the following areas: 

Human capital and workforce reforms will improve workforce participation, well-being 

and self-sufficiency of welfare recipients, and preparedness of adults and youth for a long and 

fulfilling career, resulting in a cumulative GNP impact of 1.00% by FY2023. The impact is 

enhanced in the long-term as K-12 education reforms begin adding an additional 0.01% GNP 

impact per year, resulting in an additional 0.16% uptick by FY2048 that continues growing in 

outer years (to 0.28% by FY2060). 

Ease of doing business reforms will improve conditions for economic activity and job 

creation, employment opportunities, and business vitality, resulting in cumulative GNP 

impact of 0.5% by FY2023. 

Power sector reforms will improve availability and affordability of energy for families and 

businesses, resulting in 0.30% cumulative GNP impact by FY2023. 

Infrastructure reform and capital investment will improve the flow of goods, services, 

and people across the Island. It has not been scored to provide a specific GNP uptick, yet is 

undoubtedly a consequential uptick in the Island’s long-term development. 

If implemented immediately, the structural reforms are projected to result in a 

sustained 1.80% annual real GNP growth by FY2023. As shown below (Exhibit 28), 

these reforms equal approximately $80-90 billion in increased Commonwealth revenues over 

30 years. In the long term, education reforms are projected to add an additional 

cumulative 0.16% to GNP growth, making total impact 1.96% by FY2048. The 

reforms are crucial to placing Puerto Rico on a path to long-term structural sustainability. 

EXHIBIT 28: IMPACT OF STRUCTURAL REFORMS OVER 30 YEARS 

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New Commonwealth Fiscal Plan 

HUMAN CAPITAL & LABOR REFORM 

Current state of labor / welfare laws and human capital 

Puerto Rico faces immense challenges with formal labor force participation and preparedness. 

The Island’s formal labor force participation rate is only ~40%, far from the U.S. mainland 

average (63%) or even the lowest-ranked U.S. state (West Virginia, 53%), and well below other 

Caribbean islands. In fact, according to World Bank data, Puerto Rico’s formal labor force 

participation rate is currently 7th lowest in the world and has never ranked higher than the 

bottom 20.30 Puerto Rico’s youth unemployment rate is 23.8%, almost double the world 

average (13.8%) and more than double the U.S. average (10%).31 Low labor force participation 

in Puerto Rico is a function of neither Hurricane Maria nor the economic downturn that began 

in 2006; rather, low rates of employment are a long-term structural problem that can be 

addressed only through significant changes to public policy. 

Unless Puerto Rico substantially increases its labor force participation and employment, 

incomes will always fall far below mainland states and outmigration will continue to draw 

Puerto Ricans away from the island of their birth. However, if Puerto Rico increased its labor 

force participation rate even to that of the lowest U.S. state, incomes would rise, poverty would 

decline, and the budgetary deficit would improve. While many other reforms are 

important to making these improvements, increasing labor force participation 

may be the single most important reform for long-term economic well-being in 

Puerto Rico.

7.1.1 Labor laws 

Puerto Rico’s historically low levels of formal labor force participation cannot be attributed to 

any single factor, but a range of public policies have served to reduce employment on the 

Island. Puerto Rico has by far the most generous mandated employer benefits in the U.S., 

which increase the cost of hiring employees. Unlike Puerto Rico, no mainland states mandate 

any paid vacation and few mandate even a modest amount of sick leave. No state requires 

employers to pay a Christmas bonus. Thus, it can be more expensive to employ a low-wage 

worker in Puerto Rico than on the mainland, making Puerto Rico less competitive in laborintensive sectors such as tourism. 

Economists have documented that when employers are required to provide an employee 

benefit, those employers will tend to recoup the costs of those benefits by reducing the wages 

paid to employees.32 When employers are prevented from reducing wages to offset costs of 

 

30 Puerto Rico ranking has never surpassed 215th out of the 232 countries, states, and territories tracked by The World Bank 

Group since The World Bank Group began collecting data in 1990 

31 The World Bank Group, 2017, via International Labour Organization, ILOSTAT database. Data retrieved in March 2017. 

https://data.worldbank.org/indicator/SL.UEM.1524.ZS

32 This has been shown to be true with employer-paid Social Security taxes, health coverage, maternity leave, and other 

benefits. For instance, the Congressional Budget Office and the Social Security Administration both assume that an 

increase in Social Security payroll taxes levied on employers would result in a roughly dollar-for-dollar reduction in 

employee wages. Likewise, when the Affordable Care Act (“Obamacare”) was projected to reduce the rate of growth of 

employer health care costs, the Social Security and Medicare Trustees assumed that this would be reflected in increased 

wages paid to employees. Gruber and Krueger (1991) found that employer costs for workers compensation insurance are 

largely shifted to employees via lower wages. Gruber (1994) found that when employers were required to provide 

maternity health benefits to employees, wages for employees declined by a similar amount. Prada et al (2017) found that 

when Chile required employers to provide free child care, wages for women declined by 9 to 20 percent. Kolstad and 

Kowalski (2016) found that when Massachusetts required employers to provide health insurance, wages for employees 

declined by an amount similar to the health premiums paid by employers. (Gruber, Jonathan, and Alan B. Krueger. "The 

incidence of mandated employer-provided insurance: Lessons from workers' compensation insurance." Tax policy and the 

economy 5 (1991): 111-143. Gruber, Jonathan. "The incidence of mandated maternity benefits." The American economic 

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35 

New Commonwealth Fiscal Plan 

mandated benefits, as may be the case with a minimum wage worker, they may choose to 

reduce the number of workers they hire. Thus, it is reasonable to assume that Puerto Rico’s 

high levels of mandated employer-paid benefits reduce both wages and employment relative 

to a scenario in which such benefits were not required. 

Likewise, there is evidence that employer benefit costs can increase the size of the informal 

labor market, where income is not reported and such benefits need not be provided.33 About 

one quarter of Puerto Rican workers participate in the informal economy according to 

Estudios Técnicos, substantially higher than any mainland state.34

In addition to costly mandatory employer-provided benefits, Puerto Rico lacks “at-will 

employment,” which would make it easier for employers to dismiss unsatisfactory employees. 

While there are variations in labor laws among the 50 mainland states, 49 of them adopt some 

form of at-will employment. In Puerto Rico, employers generally must first prove “just cause” 

before dismissing employees. This can produce litigation, and many employers simply pay 

severance pay to an unsatisfactory employee to avoid a court dispute. 

While some employees benefit from Puerto Rico’s lack of at-will employment, this policy 

makes it more costly and risky not only to dismiss, but also to hire, an employee. There is 

evidence that such job protections lower employment opportunities. For example, studies 

have found that laws preventing unfair dismissal caused reductions in employment, 

particularly in labor-intensive industries;35 and in U.S. states, a recent study found that 

expanding unfair dismissal protections caused employers to shift away from using less-skilled 

workers and toward greater use of capital investments and more-skilled labor. When Colombia 

reduced the cost of dismissing workers, unemployment fell and the size of the informal labor 

force declined.36 In a 2003 book on labor laws in Latin America and the Caribbean, Nobel 

Prize-winning economist James Heckman concluded that 

“mandated benefits reduce employment and... job security regulations have a 

substantial impact on the distribution of employment and on turnover rates. The 

most adverse impact of regulation is on youth, marginal workers, and unskilled 

workers. Insiders and entrenched workers gain from regulation but outsiders suffer. 

As a consequence, job security regulations promote inequality among demographic 

groups.” 

The Government has recently made strides to improve labor market conditions with the Labor 

and Flexibility Act (Act 4-2017) in January 2017, which added flexibility to overtime 

regulations and increased work requirements to become eligible for Christmas Bonus and 

severance pay, among other reforms. Notwithstanding such reforms, Puerto Rico’s labor laws 

remain by far the most burdensome in the U.S. The Island still requires a Christmas bonus 

and severance payouts, mandates 27 days of paid leave per year, and is not an employment at-

 

review (1994): 622-641. Prada, María F., Graciana Rucci, and Sergio S. Urzúa. The effect of mandated child care on 

female wages in Chile. No. w21080. National Bureau of Economic Research, 2015. Kolstad, Jonathan T., and Amanda E. 

Kowalski. "Mandate-based health reform and the labor market: Evidence from the Massachusetts reform." Journal of 

health economics 47 (2016): 81-106.) 

33 Kugler et al (2017) found that a reduction in employer payroll taxes in Colombia reduced the size of the country’s informal 

labor market. Kugler, Adriana, Maurice Kugler, and Luis Omar Herrera Prada. “Do payroll tax breaks stimulate formality? 

Evidence from Colombia’s reform.” No. w23308. National Bureau of Economic Research, 2017 

34 Estudios Técnicos, Inc, “The Informal Economy in Puerto Rico,” August 9, 2012 

35 RAND Corporation, 1992 

36 Kugler (2004). See Dertouzos, James N., and Lynn A. Karoly. “Labor market responses to employer liability.” Rand 

Corporation, 1992; Autor, David H., William R. Kerr, and Adriana D. Kugler. "Does Employment Protection Reduce 

Productivity? Evidence from U.S. States." The Economic Journal (2007): F189-F217; Heckman, James. Law and 

employment: Lessons from Latin America and the Caribbean. No. w10129. National Bureau of Economic Research, 2003; 

Kugler, Adriana D. "The effect of job security regulations on labor market flexibility. Evidence from the Colombian Labor 

Market Reform." In Law and Employment: Lessons from Latin America and the Caribbean, pp. 183-228. University of 

Chicago Press, 2004 

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New Commonwealth Fiscal Plan 

will jurisdiction, imposing costs and regulatory burdens that reduce employment, wages and 

economic opportunity. 

7.1.2 Welfare policies 

In addition to the Island’s labor laws, Puerto Rico residents may also face disincentives to 

participate in the formal labor market due to rules attached to various welfare benefits, 

including the Nutritional Assistance Program (PAN), Mi Salud (Medicaid), Section 8 public 

housing, TANF, WIC, and other programs. 

These benefits are sometimes stereotyped with a claim that “welfare pays more than work.” 

While this may be true in isolated cases, the broader problem occurs when welfare 

beneficiaries work in the formal sector and receive earnings, which triggers a reduction in their 

benefits. The phase-out of government transfer benefits as earned income increases acts as a 

tax to disincentivize formal employment, as effective hourly wage (income received by working 

minus the loss of benefits) can be substantially lower than the formal hourly wage received. 

For many citizens, working in the informal sector and collecting transfer benefits can often 

result in higher effective income than working in the formal sector. 

While transfer benefits in Puerto Rico are not more generous than on the mainland in dollar 

terms, they are more generous relative to generally lower earnings on the Island. When 

benefits are phased out as a beneficiary works, loss of benefits may be larger relative to 

earnings than for a mainland worker. This can serve as a greater disincentive to work than on 

the mainland. 

It is difficult to quantify how large such disincentive effects may be due to limitations on the 

data available. Different individuals entitled to different sets of benefits are thus faced with 

different incentives should they work. It is reasonable to conclude that for many welfare 

beneficiaries, formal sector work may sometimes do little to increase household incomes. 

For individuals receiving food stamps, Mi Salud, TANF and public housing, it often makes 

little financial sense to work at the minimum wage in the formal sector. For a full-time 

minimum wage worker the loss of benefits will offset most or all income received from work, 

leaving the household no better off.37

Though few Puerto Rico residents receive all these benefits,38 even receipt of a single type of 

benefits can alter incentives to engage in the formal workforce. For instance, a single mother 

with two children and annual income below $4,900 is eligible to receive approximately $4,229 

in annual PAN (“food stamp”) benefits. But should that individual work 35 hours per week at 

the minimum wage, her annual earnings of $12,180 would cause her to lose eligibility for food 

stamps. Net of taxes on her earnings, working full-time would increase her household’s annual 

income by only $7,002, equivalent to an hourly wage of only $3.86. Under those conditions, 

some individuals may choose not to work in the formal labor market. 

Even when TANF and Section 8 housing benefits are excluded, monthly income paid to a 

minimum wage worker with two children is only $329 greater than what he or she could 

 

37 Burtless, Gary, and Orlando Sotomayor. "Labor supply and public transfers." In The Economy of Puerto Rico: Restoring 

Growth (2006): 82-151 

38 See Héctor R. Cordero-Guzmán, “The production and reproduction of poverty in Puerto Rico,” in Nazario, Carmen R., ed. 

Poverty in Puerto Rico: A Socioeconomic and Demographic Analysis with Data from the Puerto Rico Community Survey 

(2014). Inter American University of Puerto Rico, Metro Campus, 2016. Cordero. Notes that the number of TANF 

beneficiaries in Puerto Rico is relatively modest and many, due to age or disability, are unlikely to work under any 

conditions 

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37 

New Commonwealth Fiscal Plan 

receive from government benefits.39 In this example, effective hourly pay (the amount received 

from working more than what the individual could receive from government benefits without 

working) is only about $2.35. 

Mainland states face many of these same incentive issues, which they address in two ways. 

First, residents of mainland states are eligible for the Federal Earned Income Tax Credit 

(EITC), which provides a partial refund against Federal income taxes for eligible low-income 

workers. Many states supplement the Federal EITC to increase benefits to recipients. By 

increasing the reward to work, the EITC has been shown to increase labor force 

participation.40 However, because Puerto Rico residents do not pay Federal income taxes they 

are not currently eligible for the Federal EITC. 

Likewise, the Federal Government requires that food stamp programs on the mainland 

(Supplemental Nutrition Assistance Program, “SNAP”) contain a work requirement. In 

general, working-age SNAP beneficiaries on the mainland must register for work, cannot turn 

down a job if offered, and may be required by the state to attend education or work training 

classes. In addition, Federal law requires that non-disabled adults without dependents must 

work, attend education, or volunteer at least 20 hours per week to maintain eligibility for 

benefits. 

Puerto Rico’s labor and welfare laws may help explain why, despite the Island’s natural beauty, 

attractions and ease of access from the U.S. market, employment in tourism-related industries 

is low. According to the Federal Bureau of Labor Statistics (BLS), Puerto Rico employs only 

80,000 individuals in the leisure and hospitality industries – 10,000 fewer tourism-related 

jobs than the state of Nebraska, which both lacks Puerto Rico’s natural assets and has an 

overall population over one-third smaller than Puerto Rico. 

7.1.3 Workforce preparedness 

Finally, Puerto Rico’s potential workforce is also not well prepared to fill jobs currently needed 

by the economy, according to a report by the Federal Reserve Bank of New York.41 For 

example, reconstruction efforts in the wake of Maria rely heavily on external contractors from 

the mainland U.S., as the skills needed are not readily available on the Island. Puerto Rico 

currently does not ensure proper skill development for youth and adults to fill high-demand 

roles based on current economic needs. 

Puerto Rico has therefore not solved the supply or demand side issues with its labor market – 

a huge barrier to economic growth and sustainability for the Island. 

Future vision for the Puerto Rican labor market 

Changes to labor and welfare laws are controversial. It is difficult to ask Puerto Rican residents 

to give up benefits and job protections when, through the economic downturn and then 

Hurricane Maria, they already have lost so much. Nevertheless, dramatic changes to Puerto 

Rico’s labor market policies are necessary to provide opportunity for a greater standard of 

living at home, reversing the Island’s history of high poverty, constrained budgets, and 

pressure for young Puerto Ricans to leave their home for the mainland. 

 

39 Advantage Business Consulting. “Beneficios de las Personas Elegibles al TANF vs. Escenario de Salario Mínimo 

Federal.” Prepared for the Universidad Interamericana, May 2015 

40 See Eissa, Nada, and Jeffrey B. Liebman. "Labor supply response to the earned income tax credit." The Quarterly Journal 

of Economics 111, no. 2 (1996): 605-637 

41 Federal Reserve Bank of New York, “An Update on the Competitiveness of Puerto Rico’s Economy.” July 31, 2014. 

https://www.newyorkfed.org/medialibrary/media/outreach-and-education/puerto-rico/2014/Puerto-Rico-Report-2014.pdf

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New Commonwealth Fiscal Plan 

The New Fiscal Plan builds upon policies proposed by Governor Rosselló in the Government’s 

Draft Fiscal Plan Submission in March 2018, but with several substantial adjustments. 

To ensure Puerto Rico can provide opportunities for its people for years to come, structural 

reforms must make it easier to hire, encourage workforce participation, and enhance student 

outcomes and workforce development opportunities to ensure a pipeline of prepared and 

appropriately-skilled individuals. The Government should aim to increase the labor force 

participation rate to 47% and reduce the youth unemployment rate to 20.2% by 

FY2023. In both cases, these results would roughly halve the current gap between Puerto 

Rico and the lowest U.S. state (West Virginia). 

By achieving these goals, the Government should increase household incomes, cut the poverty 

rate and reduce incentives to emigrate to the mainland. Moreover, successful labor market 

reforms are projected to approximately $50 billion in additional revenues by FY2048 and over 

~$460 million from FY2018-23, which is an approximately $330 million increase in surplus 

over the limited labor reform package proposed by the Rosselló Administration.42 Therefore, 

by implementing the labor market reforms contained in the New Fiscal Plan, the Government 

of Puerto Rico will be able to reinvest over the next three years into the well-being of the people 

of Puerto Rico through improved healthcare outcomes and investment in education and youth 

workforce development programs (discussed in Chapter 11) to drive growth. 

Structural reform initiatives to change labor conditions 

Labor market reforms will increase the availability of jobs while increasing incentives and 

preparedness to work. To accomplish this broad-based reform, the Government must 

implement flexible labor regulations, reform welfare including an earned income tax credit 

(EITC) for low-income workers and a work requirement for able-bodied PAN beneficiaries, 

and implement programs to develop critical skills in the workforce. 

7.3.1 Flexible labor regulations 

To reduce the cost to hire and encourage job creation, including movement of informal jobs to 

the formal economy, Puerto Rico must become an employment at-will jurisdiction, reduce 

mandated paid leave (including sick leave and vacation pay) by 50%, and make the Christmas 

Bonus voluntary for employers. 

■ At-will employment (in place by January 1, 2019): 49 out of 50 U.S. states are 

employment-at will jurisdictions, giving employers the flexibility to dismiss an employee 

without having to first prove just cause. Matching this policy will lower the cost and risk of 

hiring in Puerto Rico. 

■ Reduction of mandated paid leave, including sick leave and vacation pay 

(effective immediately): Most U.S. states do not mandate any vacation or sick leave. 

The Government shall halve mandated vacation and sick leave, resulting in 14 days per 

year of vacation and sick leave in a move to align worker protections with typical mainland 

labor policies. Paid maternity leave under current law will be retained. 

■ No mandated Christmas bonuses (eliminated by January 1, 2019): The current 

requirement to pay an annual Christmas bonus to employees must be eliminated. 

Employers may continue to pay bonuses on a voluntary basis, as is the case on the 

mainland. 

 

42 Government proposed labor reform package creates 0.25% GNP growth total beginning in FY2021. Comprehensive labor 

reform as described in this Fiscal Plan is projected to result in total 1.0% GNP growth by FY2022 

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New Commonwealth Fiscal Plan 

Unlike Act 4, in order to achieve the growth projected by this New Fiscal Plan, the above 

proposals must apply to all workers, current and future hires, equally. These programs should 

reduce friction in the labor market and reduce the cost of hiring workers in Puerto Rico. 

7.3.2 Minimum wage increase 

To offset some of the reduced protections and compensation for employees in Puerto Rico, 

these reforms can be accompanied by a modest increase in the minimum wage for workers 25 

and over. Under the proposal, the minimum wage would increase by $0.25 per hour, effective 

as soon as the Christmas bonus is made voluntary. Workers under age 25 would remain at the 

Federal minimum wage of $7.25 to increase opportunities for youth to gain valuable 

experience and skills in the workforce and avoid worsening the high youth unemployment 

rate. Small employers as defined by Act 120-2014 are also exempt from the increase. 

Additional increases in minimum wage should be implemented under the following 

conditions: 

■ For all workers 25 years old and over, an additional $0.25 per hour if Puerto Rico’s labor 

participation rate exceeds 45% as measured by BLS; 

■ For all workers 25 years old and over, an additional $0.25 per hour if Puerto Rico’s labor 

participation rate exceeds 50% as measured by BLS; and 

■ For all workers 25 years old and over, an additional $0.25 per hour if Puerto Rico’s labor 

participation rate exceeds 55% as measured by BLS. 

This timeline and conditions ensures that minimum wage increases occur at a pace and under 

conditions in which a higher minimum wage will not adversely affect job opportunities for 

lower-income workers. 

7.3.3 Welfare structure reforms 

To implement the labor reform package, address labor market challenges and encourage 

residents to participate in the formal labor market, the Government must launch an Earned 

Income Tax Credit (EITC) program by January of 2019, raising pay for formal laborers. The 

Government also must institute a work requirement for the Nutrition Assistance Program 

(PAN) by July 1, 2018, with no transition period (e.g., full requirements regarding work will 

begin in July). 

Earned Income Tax Credit (EITC) 

The EITC is a benefit for working people with low to moderate income. To qualify, people must 

meet certain requirements and file a tax return, even if they do not owe any tax. The EITC 

reduces the amount of taxes owed and may result in a cash refund if the benefit is higher than 

owed taxes. 

Since welfare reform in 1996, the EITC has become the cornerstone of anti-poverty policy in 

the United States. It has refocused the U.S. safety net on working families, dramatically 

increasing employment among single women with children and removing more children from 

poverty than any other program. In the U.S., this translates to approximately 6.5 million 

people (half of whom are children) lifted out of poverty. Further, the EITC improves 

employment rates (a $1,000 increase in EITC benefit has been tied to a 7.3 percent increase 

in employment)43 and provides increased opportunities for individuals to invest in their own 

 

43 Hoynes and Patel 2015, http://www.taxpolicycenter.org/briefing-book/how-does-eitc-affect-poor-families 

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New Commonwealth Fiscal Plan 

futures with education, training, childcare, or other costs that improve longer-term outlook. 

It has proven a powerful incentive to transition into the formal labor force and file taxes. 

From 2006 to 2014, Puerto Rico had a Worker’s Tax Credit, which was later discontinued due 

to its ineffective application and as a cost saving measure. This prior Work Credit applied to 

45% of all tax filers at a cost of $152 million in its last year of implementation. It was smaller 

than Federal EITC programs ($150-450 versus ~$2,000 average credit), and did not eliminate 

high implicit tax rates on low-income employees or do enough to incentivize formal 

employment.44

In Puerto Rico, implementation of the new EITC should be similar to the Federal EITC but 

adjusted to the relative wages of the Island. Eligible recipients should receive credits according 

to their marital, family, and earned income. As earnings increase, the benefit should increase 

up to a specified cap; at the cap, it would plateau and eventually decrease at the phase-out 

income level until it reaches $0 (Exhibit 29), resulting in an average benefit of $525.30 per 

individual per year. This structure diminishes the “benefits cliff” many face as their earned 

income increases, rewarding citizens who participate in the formal economy. 

EXHIBIT 29 EITC BENEFIT FORMULA 

For example, a single mother with two children working at minimum wage for 35 hours per 

week earns approximately $12,180 annually. With EITC, she can qualify for up to $1,500 in 

additional take-home pay per year, effectively raising the minimum wage by more than 12%. 

The EITC program would cost approximately $200 million per year, but the program will raise 

formal labor force participation significantly, providing a positive return on the investment. 

The EITC must be implemented no later than FY2019. 

PAN Work requirement 

While PAN, Puerto Rico’s largest welfare program, is similar to the mainland SNAP, it is 

funded and administered separately and does not include a work requirement. As part of the 

labor reform package that the Oversight Board projects will create substantial growth over the 

 

44 New York Federal Reserve Bank, 2014 

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New Commonwealth Fiscal Plan 

next 30 years, the New Fiscal Plan requires that the Government institute work requirements 

to qualify for PAN benefits. 

In FY2019, able-bodied participants aged 18-59 will be subject to a work requirement 

(children, even if their parents do not work, will continue to receive the benefit). Like mainland 

SNAP, in full implementation this work requirement must become effective after the 

individual has collected PAN benefits for three months. General exceptions would include 

those under age 18 or over the age of 60, parents with dependents under age 18, as well as 

those who are medically certified as physically or mentally unfit for employment. Paid work, 

voluntary work, training and education, and job searching (under the time limit) must qualify 

as work. 

Any program savings derived from the PAN work requirement must be redistributed to 

working beneficiaries, effectively increasing take-home pay for workers. The increased worker 

benefit shall take place through an expansion of the Earned Income Disregard, which will 

increase the amount of earned income eligible recipients can exclude in calculating the amount 

of benefits they can claim. For example, a family of four currently receiving PAN will lose the 

benefit after exceeding a maximum annual income of $5,904. By creating a sliding scale after 

this amount, or allowing families to exclude a certain amount of earned income from this 

calculation, Puerto Rico can ensure no one is disadvantaged by seeking work in the formal 

economy and that no families lose benefits prematurely. 

The increase in PAN benefits for workers combined with the EITC and modest minimum wage 

increases would improve conditions for low-income workers in the formal economy and 

reduce poverty. 

The proposed PAN work requirements must be included in the new PAN annual plan 

submitted July 1, 2018 to Food and Nutritional Services. It will be phased in over two years. 

Beginning in FY2019, beneficiaries will be subject to the work requirement after 6 months of 

benefits. By FY2020, the full requirements will take effect, subjecting beneficiaries to the work 

requirement after 3 months of benefit collection. 

7.3.4 Workforce development programs 

Labor and welfare reforms should increase supply and demand for jobs; to fully close the gap 

and implement the labor reform package, however, the Government must launch specific 

efforts to ensure that its future workforce is prepared with critical skills. 

Workforce Innovation and Opportunity Act (WIOA) 

First, the Government must update the WIOA State Plan to focus its programs and incentives 

on high-priority sectors and capabilities (e.g., aerospace, software development, and creative 

services). WIOA is the primary way in which the Federal Government invests in adult 

education and workforce development, and it is designed to help jobseekers access 

employment, education, and support services to succeed in the labor market, and to match 

employers with the skilled workers they need. The Government must broaden the list of core 

industries that qualify under WIOA, and focus on high impact economic sectors to provide a 

skilled workforce that meets the needs of employers in each specific region. It shall integrate 

this WIOA program with the broader promotional efforts of the Department of Economic 

Development and Commerce (DDEC). For example, an MOE Agreement with the Puerto Rico 

Department of Labor and Human Resources shall establish an apprenticeship program aiming 

to impact innovative industries and post-Maria labor market needs. 

Youth development initiatives 

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New Commonwealth Fiscal Plan 

In addition to WIOA, the Government should help develop critical skills in the workforce 

through multiple proposed initiatives, including: 

■ Youth development: Investment in STEM through targeted teacher professional 

development and related programs; apprenticeship programs through partnership with 

universities and local businesses; opportunities for work-based learning and business 

programs; occupational opportunities and certification programs (funded through 

reinvestment in additional surplus achieved through comprehensive labor reform) 

■ Higher education: Curriculum development grants and scholarships for UPR students 

focused on high-impact sectors, e.g., the IT industry and Computer Science. 

■ Current labor market: Apprenticeship Programs through collaboration with the 

private sector; training & certification programs focused on the areas of reconstruction 

efforts; creation of a job council to coordinate development and employment opportunities 

for youth and the unemployed 

By pursuing aggressive reforms to incentivize job creation and formal labor market 

participation, and to improve the overall quality of human capital in Puerto Rico, the 

Government will fundamentally transform the Island’s labor market for the better. 

Implementation and enforcement of human capital and

labor reform

The New Fiscal Plan is built on the assumption that, by no later than May 31, 2018, the 

Legislative Assembly of Puerto Rico will pass the Labor Reform Package and present it to the 

Governor of Puerto Rico for his signature (the “Condition”). 

The Labor Reform Package is defined as all bills, whether new Commonwealth legislation or 

amendments to existing Commonwealth legislation, that are necessary and proper to 

effectuate the Labor Reform Agenda. The Labor Reform Agenda is defined as the following 

policies and reforms: 

■ Institution of at-will employment (effective by January 1st, 2019) 

■ Reduction of mandated paid leave, including 50% reduction in sick leave and vacation 

pay (effective immediately) 

■ Shift of Christmas bonus from mandatory to voluntary status (by January 1st, 2019) 

■ Earned Income Tax Credit (starting July 1st, 2018) 

■ Increase minimum wage for workers 25 and over by $0.25 per hour (effective with 

Christmas Bonus elimination) 

■ PAN work requirement and work bonus (effective by January 1st, 2019) 

The Labor Reform Agenda is projected to generate short-term revenue of ~$460 million 

through FY2023. This represents an approximately $330 million increase in revenues over the 

labor reform package initially proposed by the Government over the period covered by the 

New Fiscal Plan (the “Labor Reform Surplus;” Exhibit 30). In the long term, the Labor 

Reform Agenda will drive substantial economic growth and ~$50 billion in surplus. 

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New Commonwealth Fiscal Plan 

EXHIBIT 30: LABOR REFORM SURPLUS FOR REINVESTMENT 

If the Condition is met, the Labor Reform Surplus shall be used to fund initiatives led by the 

Government to reinvest in the people of Puerto Rico that improve the Island’s health outcomes 

and provide the education and workforce development some Puerto Ricans will need to be 

prepared for newly created jobs (see Chapter 11 for more details): 

• Reinvestment in ensuring success of healthcare reforms totaling $353M 

• Reinvestment in K-12 education and human capital development programs such as 

STEM grants and K-12 STEM training, totaling $160M 

While reinvestment will total over $500 million over three years, due to macroeconomic 

trends and Federal funds flows affecting reinvestment and measures, these funds spent will 

decrease the total 6-year surplus by only ~$330 million (equivalent to the Labor Reform 

Surplus). The reinvestments are crucial to the overall success of structural reforms and create 

long-term economic growth in the economy. 

If, for any reason, the Oversight Board determines in its sole discretion that the Condition has 

not been met, and the Oversight Board has not determined in its sole discretion to modify the 

Condition (the “Consequence”), then the Labor Reform Surplus will not be available and these 

reinvestment opportunities will not be made. 

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New Commonwealth Fiscal Plan 

EXHIBIT 31: LABOR REFORM IMPLEMENTATION TIMELINE 

EASE OF DOING BUSINESS REFORM 

Current state of business regulation and investment

attraction 

One of the strongest means of increasing economic growth is through improving the ease of 

starting and expanding a business. A commerce environment with easier-to-navigate 

regulations, permits, and other legal requirements is friendlier to new businesses that can 

provide jobs, tax revenue, and economic stimulus. To quantify a jurisdiction’s overall 

effectiveness at maintaining the optimal level of business regulation, the World Bank created 

the Doing Business Index, which ranks 190 countries and entities worldwide on several core 

indicators. Countries and territories that have been able to meaningfully improve their ranking 

have shown real growth. For example, when the Republic of Georgia improved its ranking 

from #98 in 2006 to #8 by 2014, output per capita increased by 66% and business density 

tripled. Meanwhile, ease of doing business remains an area in which Puerto Rico has much 

room for improvement. 

In the 2018 Ease of Doing Business Report, Puerto Rico was ranked 64th. This represents a 9-

point decline from 2017 and is 58 spots lower than the U.S., which ranks 6th overall. There are 

some areas of strength: Puerto Rico placed 6th for Getting Credit and 9th for Resolving 

Insolvencies. It has also made recent efforts to digitize government services to improve speed 

and accessibility, having digitized 27% of licenses transferred to the Unified Information 

System (SUI, a central and digital location for applications for licenses, incentives, 

autonomous municipalities, etc.) as of August 2017. However, when compared to the 

mainland, Puerto Rico has several areas for improvement, in particular: 

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New Commonwealth Fiscal Plan 

Getting Electricity (rank 69, U.S. 49): Energy costs remain a major inhibitor to operating 

large-scale business efficiently on the Island. Electric bills for similar amounts of electricity 

can cost twice as much in Puerto Rico as it would in the U.S. mainland.45 Puerto Rico’s low 

ranking is also driven largely by low reliability of supply and transparency of tariff index -- 

rated a 4 (on a 0 to 8 scale) by the World Bank, compared to 8 in the U.S.46

Dealing with Construction Permits (rank 138, U.S. 36): It takes 22 procedures and 

165 days to get a construction permit in Puerto Rico, compared to 5 procedures and 89 days 

in the U.S. Obtaining a permit in Puerto Rico costs 6.2% of total future value of the permit 

(0.3% in U.S.). Despite these challenges, Puerto Rico is already strong in its building quality 

control index (12 on a 0-15 scale, compared to 8 for the U.S.). 

Registering Property (rank 153, U.S. 37): It takes 191 days to register property in Puerto 

Rico, compared to 12 days in the U.S. 

Paying Taxes (rank 161, U.S. 36): Puerto Rico requires 16 payments per year (11 in U.S.), 

and it takes 218 hours per year to prepare, file, and pay the corporate income tax (175 in U.S.). 

Puerto Rico also has a comparatively high total tax and contribution rate at 63.4%,47 compared 

to 45.8% in the U.S. 

In addition to needing to improve its overall business regulatory climate, Puerto Rico is lagging 

in its ability to attract investment and tourism. For example, Puerto Rico regularly had 

declining numbers of jobs and establishments created in 2015-2016 (before the effects of 

Maria),48 and ranks 55th overall in the World Economic Forum’s worldwide Travel & Tourism 

Competitiveness Index (while the U.S. rank is 6).49

Countries who have focused on improving investment and tourism have seen great success. 

When Ireland created its Industrial Development Authority (IDA), it transformed Ireland into 

a popular location for new investments.50 Ireland is now home to 9/10 of the world’s top 

pharmaceutical and software companies. Meanwhile, when Barbados created its Tourism 

Product Authority in 2014, it began generating returns as soon as 1-2 years later: travel and 

tourism direct contribution to GDP increased by 5.4% in 2015 and 10.3% in 2016; and direct 

contribution of tourism to employment increased by 4.3% in 2015 and 9.8% in 2016. 

The Government has made important efforts recently to generate investment in the Island by 

creating the Destination Marketing Office (DMO) and Invest Puerto Rico (InvestPR) in 2017, 

with the goal of incentivizing foreign direct investment (FDI), private sector investment and 

tourism. However, while there are plans to operationalize both by the end of FY2018, these 

entities will need clear goals and metrics to be most effective. 

 

45 The Guardian, “Puerto Rico’s Soaring Cost of Living,” 2015. https://www.theguardian.com/world/2015/jul/12/puerto-ricocost-of-living 

46 All specific U.S. comparison based on New York City, as averages vary across the country 

47 The total tax rate measures the amount of taxes and mandatory contributions payable by the business in the second year 

of operation, expressed as a share of commercial profits. 

48 Puerto Rico Department of Labor and Human Resources, Bureau of Labor Statistics. “Puerto Rico Economic Analysis 

Report 2015-2016.” https://www.doleta.gov/performance/results/AnnualReports/docs/2017_State_Plans/ 

Economic_Reports/Puerto%20Rico/PR%20Economic%20Analysis.pdf 

49 As of 2015, latest available information for Puerto Rico. Puerto Rico was not included in World Economic Forum’s 2017 

report due to insufficient data 

50 In 2016, the IDA supported 60,000 jobs in 2016 at a cost of ~€9,000 per job sustained, and U.S. companies had invested 

~€240 billion in FDI in the country 

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New Commonwealth Fiscal Plan 

Future vision for ease of doing business 

Puerto Rico should achieve a best-in-class business environment by taking 

targeted steps to improve rankings in key identified Doing Business Index 

indicators by FY2023, with the goal of closing the gap with the mainland U.S. by at least 50% 

from its 2018 rankings: 

■ Overall: Move from 64 to at least 5751

■ Getting Electricity: Move from 69 to at least 59 

■ Construction Permits: Move from 138 to at least 87 

■ Registering Property: Move from 153 to at least 95 

■ Paying Taxes: Move from 161 to at least 99 

In addition, in line with best-in-class investment offices,52 by FY2023 InvestPR shall:

■ Create 54,000 new jobs (or average 9,000 new jobs per year)53

■ Lead 750 new capital investments (or average 150 per year)54

■ Achieve a $20 return in 10 years per dollar invested55

In line with best-in-class Caribbean tourism offices,56 by FY2023 DMO should close 

Puerto Rico’s distance with the highest ranked Latin American country and 

therefore:

■ Improve World Bank Travel & Tourism Competitiveness Index ranking to at least 43, 

closing the distance to the highest ranked Latin American country in 2018 

■ Drive 5% annual growth in direct contribution of tourism to GDP and 5% annual growth 

in direct contribution to employment57

■ Improve tourist service infrastructure score 0f 5.4 (2015) by 10% by improving number 

and quality of lodging services58

■ Establish exit surveys to measure visitor satisfaction, length of stay and spend for tourists 

to highlight key areas of improvement and focus for DMO59

 

51 In line with the top ranked Latin American country in 2018

52 Offices reviewed include: Ireland’s Investment Development Agency (IDA), Enterprise Florida, JobsOhio, and Virginia’s 

Economic Development Partnership (VEDP) 

53 Average of number of jobs created by IDA annually from 2005-2009 equaled 9,700/year. In five years, the U.S. was able 

to recreate all the jobs lost in the Great Recession, but this was in an environment of economic recovery and population 

growth. 15% is a more reasonable target for Puerto Rico 

54 Best practice examples: VEDP had 375 new investments in 2015; IDA had 244 total approved investments in 2016; VEDP 

tracked 320 companies counseled or participating in trade events 

55 VEDP estimates $23 return on each dollar invested in 10 years ($48 in 20 years). VEDP benchmark adjusted for PPP 

56 Such as the Barbados Tourism Product Authority and the Bahamas Ministry of Tourism 

57 Current state: 2.7% direct contribution to GDP and 2.1% of total employment as of 2016. Puerto Rico has historically seen 

an annual 4% growth rate in travel & tourism’s direct contribution to GDP and 4.6% growth rate in travel & tourism’s direct 

contribution to employment (2017). World Travel & Tourism Council, “Travel & Tourism Economic Impact 2017 – Puerto 

Rico.” Barbados set up its Tourism Product Authority in 2014; in 2015, the country saw a 5.4% increase in travel & tourism 

direct contribution to GDP and 4.3% increase in direct contribution to employment; in 2016, 10.3% increase in tourism 

GDP and 9.8% increase in tourism employment 

58 10% improvement bring tourist service infrastructure in line with Barbados at 5.9 quality score, top ranked Caribbean 

nation 

59 For example, The Bahamas Ministry of Tourism uses high quality exit surveys to track and respond to visitor satisfaction 

and tourist habits 

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New Commonwealth Fiscal Plan 

Core initiatives to improve the ease of doing business 

To improve its Ease of Doing Business Rankings and overall tourism and investment 

outcomes, the Government should 1) digitize government services and drive deregulation and 

2) establish clear metrics and regular tracking / reporting for InvestPR and DMO. 

8.3.1 Digitize government services and drive de-regulation 

While the Government has made major strides on digitization to date with the creation of the 

SUI, it must do more work to catch up to the mainland on key metrics that measure the time 

and energy expended to register, run, or expand a business. 

Digitize Unified Information System (SUI). In addition to migrating government 

processes toward a streamlined and/or “one-stop shop” processes on SUI, the Government 

should move forms online to whatever extent is possible. This involves decoupling all nonrelated procedures from permitting, centralizing and digitizing permits. The Government 

should target 100% integration into SUI by end of 2018 for the following metrics: Licenses 

integrated into SUI; cases filed in SUI; cases issued in SUI; concerned entities integrated into 

SUI; and autonomous Municipalities integrated into SUI. 

Reduce occupational licensing. Reducing occupational licensing requirements can 

encourage activity in the formal labor market. Therefore, the Government should take 

inventory of all occupational licensing requirements and undertake reforms to reduce 

unnecessary regulations, creating a more open labor market. It will also consider joining 

stateside agreements to recognize licenses obtained in other states, such as the Compact for 

the Temporary Licensure of Professionals. Such an agreement enables professionals with 

licenses from other states to enter the Puerto Rican labor market without undue barriers. 

Deregulate on-Island freights. Reducing the cost of transporting consumer goods and 

holding inventory will improve the service of carriers and shippers (thereby enhancing 

competition) and lower the overall cost of doing business on the Island. 

Deregulate condominium law. Currently, condominium laws discourage investment in 

real property by requiring unanimous approval by all title owners in the condominium to 

execute a project. Deregulation can promote the development of investments by rental 

residents, increase population density and accelerate decision-making. 

Improve construction permitting. Streamline the process for business permitting and 

registrations by creating a streamlined, digitized one-stop-shop system for business processes, 

expanding on work initiated under Act 19. Construction permits specifically required a drastic 

reduction in the time required (particularly the 120 days, or 73% of total time, due to Municipal 

evaluation), and processes/procedures (reducing 22 procedures to at most 10). Finally, to 

reduce cost of receiving a construction permit, the Government should evaluate its municipal 

construction tax (80% of total cost). 

Improve ease of registering property. Streamline and digitize the property registry 

system to reduce delays from the Property Registry Agency. Also, improve geographic 

coverage and transparency of information on the registry system.

Improve ease of paying taxes. Develop e-payment system for taxation wherever possible 

to reduce time taken to file corporate and sales tax to Hacienda. To reduce total tax rate, 

evaluate the municipal construction tax (in accordance with Construction Permits initiative 

above). 

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New Commonwealth Fiscal Plan 

Improve access to reliable and affordable electricity. In addition to the above 

streamlining and digitization initiatives for receiving permits, see Chapter 9 (Energy and 

Power Regulatory Reform) for further structural reforms to improve reliability.

8.3.2 Invest Puerto Rico (InvestPR) and the Destination Marketing Office (DMO) 

The Government should plan to make InvestPR and DMO fully operationalized by the end of 

FY2018, and to ensure effectiveness, each organization shall set specific targets and a plan to 

evaluate progress. 

InvestPR should begin tracking data (both inputs and outcomes) to inform decision-making 

– for example, to predict and assess project ROI before providing funds or discontinue projects 

that are not driving results based on formalized project tracking. Further, InvestPR should 

publish quarterly or annual reports, addressing key metrics and any underperformance; hold 

regular (e.g., quarterly) Board meetings; and track/course-correct projects on an ongoing 

basis, including incorporating feedback from investors and data trends. 

DMO should track tourism statistics in Puerto Rico and compare to other tourism industries 

worldwide.60 To determine its own standing, it should conduct regular visitors’ surveys to 

assess satisfaction and quality of tourism services and strive for continuous improvement. 

Further, DMO should publish quarterly or annual reports addressing key metrics and any 

underperformance and should also update on targets, course-correct, and incorporate visitor 

feedback on an ongoing basis. 

Implementation and enforcement of ease of doing 

business reform 

To achieve the New Fiscal Plan’s growth projections, ease of doing business reforms must be 

implemented immediately, with targeted operationalization of most initiatives by FY2019 

(Exhibit 32). 

 

60 For example, utilizing the Tourism Satellite Account tool leveraging economic tourism data 

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New Commonwealth Fiscal Plan 

EXHIBIT 32: EASE OF DOING BUSINESS IMPLEMENTATION TIMELINE 

ENERGY AND POWER REGULATORY 

REFORM 

Over the next five years, the power sector in Puerto Rico must be transformed and modernized 

to support the delivery of reliable and affordable power. The Commonwealth must implement 

regulatory reform to enable a successful transformation and the resulting growth that the New 

Fiscal Plan projects. As detailed in the New Fiscal Plan for PREPA, the goal of the 

transformation of the power sector is to provide the citizens of Puerto Rico with low-cost, 

reliable, and resilient power delivered by an efficient and financially sustainable utility. The 

pillars of this transformation include restructuring the power generation mix to leverage lowcost sources of power, rebuilding and modernizing the power grid, implementing an 

operational cost transformation, executing a large-scale capital investment program with 

Federal funds and private sector investments, restructuring the power industry by bringing in 

private operators, and establishing a new rate structure to allocate costs fairly and equitably 

across customers. 

A strong and independent regulator of the power sector is needed for the success of the 

transformation. Clear oversight authority should provide certainty throughout the process and 

should provide potential investors with confidence in the appropriateness of rate structures 

and the overall stability of the power sector in Puerto Rico. 

Current state of energy regulation 

Currently, the regulatory structure in Puerto Rico does not support the pillars of the 

transformation. The current regulator of the power sector in Puerto Rico is the Puerto Rico 

Energy Commission (PREC). The PREC has the responsibility to “regulate, monitor and 

enforce the energy public policy of the Commonwealth of Puerto Rico” as provided by a single 

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New Commonwealth Fiscal Plan 

public monopoly provider, which is not consistent with the goals of the PREPA 

transformation. 

Future vision for energy regulator 

The ideal regulator for Puerto Rico can be modelled off the traditional Public Utilities 

Commission model used to oversee mainland U.S. utilities. The regulator would be 

independent of the Government and operate under public service ethics and conduct rules. 

The regulator should have autonomy in decision-making and the authority to approve the 

Integrated Resource Plan (IRP) and regular rate cases at two- or three-year intervals, 

consistent with the Fiscal Plan. 

9.2.1 Structure of and funding for the new regulator 

In line with best practices for regulatory commissions (e.g. California Public Utilities 

Commission, Hawaii Public Utilities Commission, New York Public Services Commission), the 

regulator should be headed by 5 commissioners who serve staggered 6-year terms. The 

commissioners should be appointed based on their technical credentials, with the 

appointment potentially subjected to oversight by an expert panel, for example through a 

candidate list. All commissioners should deliberate and vote on all cases, though some 

commissioners may decide to take on “lead” roles in some cases. The commissioners should 

be supported in their oversight role by a staff that has utility expertise. The roles of advisory 

and advocacy staff should be strictly separated to better support both fairness and due process. 

All commission decisions in adjudicatory proceedings should comply with the traditional 

requirements of administrative procedure. Separate from the regulator, there should also be 

an independent ratepayer advocate. This role could potentially be filled by the Oficina 

Independiente de Protección al Consumidor (OIPC). 

The new regulator should be funded by the same mechanism as mainland regulators, with 

financing provided through rates, as independent funding for a strong regulator should be the 

best ROI for customers to protect their interests, increase transparency, and reduce system 

costs. Dedicated funding for power sector regulation should be prescribed in the charter 

legislation. The rate should be increased after the transformation to better reflect the 

additional duties the regulator will have and to bring Puerto Rico in line with other similar 

jurisdictions. The regulator will need an annual budget of $20-$30 million dollars61, which is 

roughly equivalent to a surcharge of $0.0015 per kWh. In addition to funding from rates, the 

regulator could also be funded through charges and fees for certain types of filings that 

increase regulatory costs, for example IRP and general rate cases. Finally, funding for 

additional expert analysis or outside review should be held in segregated accounts to keep 

reserves for these purposes. 

9.2.2 Mandate and authorities for the new regulator 

To be effective, the new regulator must have a clear mandate to deliver reliable, safe power at 

an affordable cost. The tools and authorities that the future state energy regulator should have 

to enforce this mandate are as follows: 

■ Approval of the rate case developed by the utility operator, including ability to mandate 

target rates and the use of rate structure and design tools that create predictability, 

 

61 Estimate in line with other jurisdictions; the Hawaii Public Utilities Commission had revenues of $19M in FY2017 to serve a 

population of 1.4 million. $5 million annual funding is assumed for the future state energy regulator in the Commonwealth 

budget; the New Fiscal Plan for PREPA assumes $15 million annual funding through rates beginning in 2020 

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New Commonwealth Fiscal Plan 

minimize risk and “rate shock”, and create incentives to support equitability, economic 

development, and economically efficient rate designs 

■ Evaluation of utility operator performance incentive and total compensation structure, 

including a reasonable, market-based return on equity 

■ Approval of an updated IRP, which will guide generation and capacity needs, including 

approval of purchased power agreement and other contract terms and Certificate of Public 

Convenience and Necessity (CPCN) regulation for individual generators 

■ Post-transformation, approval of any issuance of new debt or equity, and any 

reorganization or material disposition of assets 

■ Support for and integration of renewables, distributed generation and new energy 

technologies as appropriate and consistent with the PREPA Fiscal Plan (e.g., through IRP 

process and enforcement of applicable renewable portfolio standards) 

■ Mechanisms providing for efficient enforcement of final orders and determinations 

■ Solicitation of input from public related to rates, IRP, and transformation process, with 

such input to be shared with the Oversight Board while it is in existence 

Regulatory reform implementation and transition 

To enable the power sector transformation, the transition to a new regulatory structure must 

occur immediately, with an amendment to the PREC Organic Act providing that the Public 

Services Commission shall not have the authority to hear appeals of the Energy Bureau and 

cannot engage in any substantive review of its work. This is needed to ensure that the structure 

and funding of the Energy Bureau are established before bids are solicited for the transaction. 

The Energy Bureau’s authority and funding should have a transition period to account for the 

Oversight Board’s authority pre-transformation, which will continue until PREPA exits Title 

III. During this transition period, the Governor will appoint new regulatory commissioners, 

and the regulator’s funding can be lower than the future state (e.g. in line with PREC’s current 

budget but with IRP funded separately), as the Oversight Board will perform some oversight 

responsibilities. 

During the transition period, the role of the Oversight Board with respect to energy sector 

regulation should be as follows based on its rights, powers, and duties in PROMESA: 

■ IRP: The Oversight Board approves revenue requirements and expenditures, including a 

capital plan, in the New Fiscal Plan for PREPA. Given the IRP process will be significantly 

more detailed and have access to additional data, the capital plan and revenue 

requirements in the transformation section of the new Fiscal Plan for PREPA should be 

one of the scenarios tested and considered in the IRP process. 

■ Budget and rate-making: The Oversight Board also approves a yearly budget that aligns 

with the fiscal plan and thus should align with revenue requirements and expenditures. 

■ Utility debt: The Oversight Board approves issuance of new debt and restructuring of 

existing debt through the Plan of Adjustment for PREPA. 

■ Transformation: As part of the Title III proceedings for PREPA, the Oversight Board 

approves contract amendments and terminations, entering into new contracts (including 

any concession agreements) and asset sales. 

The role of the regulator during the transition period should be as follows: 

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New Commonwealth Fiscal Plan 

■ IRP: The regulator will approve the IRP. The IRP should test the scenario and alternatives 

in the Fiscal Plan to achieve the principles of affordable, reliable and secure power. 

■ The regulator should ensure that the IRP process is open and transparent so that third 

parties can understand inputs and methodologies behind each scenario and be able to 

participate and attend hearings to understand tradeoffs and decisions driving approval of 

the final capital plan and revenue requirement. 

■ Budget and rate-making: the regulator authorizes bridge rate (likely formula based) in 

line with certified budget to support PREPA during the transition to a new rate structure. 

■ Utility debt: No additional authorities because debt service implied by the current rate 

case will be superseded by the Oversight Board-approved budget and Plan of Adjustment. 

■ Other: The regulator will hear cases pertaining to microgrids and distributed generation 

development during the transition period. 

Following the transition period, the regulator should be fully funded with the powers and 

authorities outlined in Section 9.2.2. The Oversight Board shall retain its powers as long as 

PREPA remains a covered entity under PROMESA. 

Regulatory reform is necessary for the successful transformation of the power sector and 

PREPA which should generate significant savings to the Commonwealth through the lowering 

of PREPA costs per kilowatt hour to an aspiration rate of under 20 cents per kWh by FY2023. 

EXHIBIT 33: COMMONWEALTH SAVINGS FROM LOWER PREPA COSTS 

INFRASTRUCTURE REFORM 

Relative to the mainland U.S., Puerto Rico’s infrastructure outcomes rank near the bottom in 

quality and operating performance. The capital investments enabled by post-Maria Federal 

recovery funding offers a unique opportunity to make transformational investments that 

support economic development. The moment is even more unique as FEMA has expanded 

overall flexibility and willingness to support more transformational investments under Section 

428 (under Title IV of the Stafford Act). 

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New Commonwealth Fiscal Plan 

Current state of infrastructure and capital investment 

Infrastructure investment as a percentage of GDP has decreased from 3.3% in 2000 to 1.4% 

in 201462, indicating a lack of recent experience in large-scale building. The Government also 

has a history of failed large-scale projects. For example, Tren Urbano was scheduled to open 

on July 1, 2001 after beginning construction in 1996; it finally opened in 2005 and the budget 

for the project increased more than 60%, from $1.38 billion to $2.25B. 

In addition to the challenges with infrastructure delivery and maintenance, the poor state of 

transport related infrastructure is a key constraint on mobility. Puerto Rico is ranked 51st out 

of 52 (states + DC + PR) for quality of roads and is ranked 45th out of 52 (states + DC + PR) 

for congestion of roads63. Urban congestion is a particular problem in San Juan, costing the 

average commuter $1,150 annually, on par with cities such as Atlanta and Miami. The situation 

is likely even worse, however, as these costs only measure the cost of time delays, not the costs 

of unreliability or safety. Reducing these negative impacts and improving mobility through 

targeted investments and better operational responses is vital to improving the free flow of 

goods and commuters to promote economic development. 

Puerto Rico is also not well positioned to capitalize on the rapid growth of IT businesses across 

the U.S. Only 60.6% of Puerto Ricans have access to wired broadband at 25mpbs or faster and 

only 0.7% of Puerto Ricans have access to 1 gigabit broadband. 

There are several critical elements that Puerto Rico should include in order to capitalize on the 

transformational opportunity afforded by historic Federal capital funding. 

a) Build organizational structures and capabilities in government to prioritize and 

deliver projects faster and at lower cost; 

b) Prioritize projects with the highest long-term benefit-cost ratios taking account 

a variety of monetizable and non-monetizable benefits; and 

c) Systematically leverage private sector capabilities to improve overall public 

outcomes 

Organizational structures and capabilities 

When creating a reconstruction plan, it is imperative to build a central capability with the skills 

and mandate to design an overall recovery portfolio and oversee efficient project delivery. The 

Government created the Central Recovery and Reconstruction Office (CRRO) as a Division of 

the P3 Authority to lead the coordination, development, and execution of long term recovery 

and reconstruction efforts. The CRRO has been created following leading practices used in 

many jurisdictions, including New Jersey, Louisiana, New York and New Zealand, to ensure 

higher net benefits, accountability, transparency and coordination of the disaster recovery 

efforts expected by residents of Puerto Rico and U.S. taxpayers. 

The CRRO should commit itself to a decision-making framework that incorporates not only 

the degree of damage, but also the future level of service required from the asset and future 

risks to that asset, when deciding how that asset should be rebuilt. 

NYC and NJ received ~$10 billion in 428 funding post Hurricane Sandy, that decreased their 

vulnerability, and helped ensure that capital dollars spent today, did not simply have to be re-

 

62 Puerto Rico Planning Board 

63 U.S. Bureau of Transportation Statistics 

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New Commonwealth Fiscal Plan 

spent cleaning up after the next storm. The CRRO should aggressively pursue next level 

resiliency activities with Federal dollars, to ensure that Puerto Rico’s critical assets are 

sufficiently protected from future hazards. 

Specific CRRO activities should include: 

■ Developing, presenting and administering recovery action plans 

■ Financing, executing and effecting infrastructure projects related to recovery efforts. 

■ Monitoring contracting for compliance and effectiveness purposes. 

■ Implementing and enforce checks and balances for procurement and approval of contracts 

and payments. 

■ Deploying a proven grant-management software and provide external visibility via 

frequent status updates to its public website. 

■ Coordinate and channel all efforts and activities of the Government related to recovery 

efforts. 

Prioritization and delivery 

The Government should employ infrastructure delivery best practices (e.g. prioritization of 

projects for economic impact, fast-track permitting, procurement reform). These best 

practices improve efficiency and transparency and should be applied to all areas of 

infrastructure expenditure of the Commonwealth including: reconstruction, construction and 

maintenance of government owned assets, and procurement of infrastructure through public 

corporations and Public-Private Partnerships (P3s). 

The Government should pursue five sub-strategies: 

Set Commonwealth infrastructure priorities to guide investment. 

■ Set target outcomes to guide prioritization of projects. 

■ Develop clear, systematic cost-benefit analysis and quantitative scoring to prioritize 

projects based on return on public investment and the ability to implement. 

Accelerate the pre-construction process. 

■ Identify opportunities for local review and permitting, for as many projects as possible, to 

avoid Federal delays. 

■ For projects requiring local review, revisit existing process to reduce hurdles, and ease of 

meeting them, wherever possible. 

■ Where Federal approval is needed, focus on: 

– Clarifying decision rights and confirm process with all major stakeholders 

– Harmonizing local processes to match Federal processes and seeking waivers where 

applicable 

– Ensuring transparency and clarity from Federal Government on where projects are in 

the pipeline 

– Utilizing Title 5 of PROMESA 

Build sustainable funding models and financing strategies. 

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New Commonwealth Fiscal Plan 

■ Leverage external capital, by expanding PPPs and access to Federal credit (e.g., TIFIA) and 

grant (e.g., INFRA) programs 

■ Increase bankability, and eligibility for participation in a PPP by deploying: 

– Monetary and non-monetary incentives (e.g., recyclability of proceeds from asset 

monetization, including monetization of Government-owned real estate to support the 

revenue models for PPPs) 

Support to de-risk greenfield investment (e.g., reduction of early stage demand risk) 

Promote procurement and delivery best practices. For projects that receive 

Commonwealth funding, ensure such projects: 

– Develop an aligned owner organization with streamlined processes (e.g., early 

procurement involvement, accountable owner team oversight) 

– Build an effective contracting strategy (e.g., tailored bidding process and pricing 

models, change order management tools) 

– Utilize advanced procurement tools and approaches (e.g., rigorous clean sheet models, 

quantified view of Total Cost of Ownership drivers)

– Implement lean construction and digital techniques 

Build the infrastructure of tomorrow. 

■ Identify innovative technologies (e.g., automotive transformations, drones, new tunnel 

creation methods, the Internet of Things) and develop a strategy to actively promote them 

(e.g., AV pilot test zones), or at least find a way to not stifle their development (e.g., job 

trainings for displaced workers) 

■ Critically evaluate major new investments against future trends, to avoid disruption by 

innovation (e.g., avoid the buildout of excessive parking given increase in shared mobility 

and growth of autonomous vehicles in airports) 

Implementation of infrastructure reform

The implementation timeline for infrastructure reform can be found below (Exhibit 34). 

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New Commonwealth Fiscal Plan 

EXHIBIT 34: INFRASTRUCTURE IMPLEMENTATION PLAN 

REINVESTMENT IN PUERTO RICO’S 

GROWTH AND PROSPERITY 

Not only are the structural and fiscal reforms essential to Puerto Rico’s long-term economic 

prosperity and sustainability, but they also create the space for strategic 

reinvestments of over $1 billion in Puerto Rico right now. Implementing the labor 

reforms will generate additional surpluses the next few years that enable the Government of 

Puerto Rico to invest in healthcare and education initiatives that will directly and immediately 

benefit the people of Puerto Rico and contribute to their future growth and well-being. Rightsizing the Legislature and Judiciary to be more in line with U.S. state benchmarks and 

reducing the budgets of AAFAF and the FOMB will enable the creation of an independent 

endowment for needs-based scholarships at UPR, further reinvesting in a crown jewel of 

Puerto Rico. Finally, the Government’s ambitious reforms to the Department of Education 

enable it to reinvest money in areas such as higher teacher salaries to attract and retain talent 

and new textbooks, which will improve the social welfare and growth prospects of Puerto 

Rico’s children who are the Island’s future. 

Source of reinvestment funds 

Reinvestment funds come from three primary sources: reinvestment of Education measures 

savings (see Section 13.4); cuts to AAFAF and agencies outside of the executive branch (e.g., 

Legislature, Courts, the Oversight Board, see Section 13.10); and the additional revenues 

created by comprehensive Labor Reform Agenda (see Section 7.4). Exhibit 35 shows the size 

of reinvestment funds from each source. 

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New Commonwealth Fiscal Plan 

EXHIBIT 35: SOURCES OF REINVESTMENT FUNDS 

Areas of reinvestment 

Funds will be reinvested in key areas to drive long-term growth and sustainability: education, 

higher education, and youth workforce development, and healthcare. 

EXHIBIT 36: AREAS OF REINVESTMENT 

11.2.1 Reinvestment in health outcomes 

Reinvestment in ensuring success of healthcare reforms total $353 million from FY2018-

FY2020, funded through increased revenues generate through labor reforms. Healthcare 

reinvestment is aimed at improving health outcomes for citizens who are most in need. Such 

expenditures will drive improved quality of life for Medicaid recipients and serve to control 

long term costs. Reinvestment areas include: 

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New Commonwealth Fiscal Plan 

1. Reducing risk of having to implement measures that negatively impact the health of 

citizens, e.g., cost sharing or evaluation of benefits package, that might have otherwise 

been necessary to reach savings targets from the new healthcare model 

2. Maximizing effectiveness of the MMIS and MFCU systems under development, for 

example, investing in high-capability analytics to get the most out of the systems for 

controlling costs 

3. Creating a sustainable healthcare infrastructure, e.g., investing in healthcare IT systems 

and telemedicine that will improve healthcare coverage in rural and less accessible areas 

4. Developing value-based care models in conjunction with MCOs that will reduce long-term 

costs; for example, ensuring necessary infrastructure in place to implement Diagnosis 

Related Groups (DRG)64 and High Cost, High Need (HCHN) coordination models 

5. One-time preventative care and population-wide screening programs 

11.2.2 Reinvestment in K-12 education 

Education initiatives are aimed at improving K-12 outcomes, and therefore improve the 

outlook for a future generation of Puerto Rican citizens. The initiatives are funded through 

reinvesting reductions to PRDE expenditures through fiscal measures.

Teacher salaries that approach mainland comparators

Teachers in Puerto Rico have not received a pay raise in nearly a decade, while salaries on the 

mainland consistently increase in keep up with cost of living. Salaries are significantly lower 

than mainland comparators, causing Puerto Rico to lose out on opportunities to attract and 

retain talent in its teacher and administrator positions. The Government will implement a 

$1,500 annual salary increase for teachers65 and $23,000 annual salary increase for 

directors66 to begin closing this gap, although the gap remains large, and incentivize retention 

of highest quality teachers. 

These teacher-focused reforms will be funded through reinvestment of right-sizing measures 

and are factored in to the measures overall savings as described above. Such reforms will have 

dramatic impact on student outcomes not only in school but beyond, as they enter the 

workforce and lead a new generation in Puerto Rico.67

New textbooks 

Teachers are currently limited in their ability to provide the best educational opportunities 

because of the limited resources available, including up-to-date textbooks. Therefore, $75 per 

student (FY2019-FY2021) will be invested in procuring new textbooks, or $21-24 million each 

year as one-time costs. This will be funded through reinvestment of non-payroll savings 

created by measures, and is factored into the measure savings as described above. 

 

64 Practice model that drives hospital billing practices (i.e., avoiding unnecessary rehospitalizations), and incentivizes 

hospitals to improve systems and quality outcomes, which results in provide accountability 

65 In 2016, mainland U.S. teachers earned an average salary of over $58,000 (U.S. Department of Commerce, Bureau of 

Economic Analysis, National Income and Product Accounts, table 6.6D, August 2016). The average salary for a teacher in 

Puerto Rico (less benefits) is approximately $32,000 per year. An increase of $1,500 per year would bring average 

teacher salary to $33,500, still approximately 42% lower than the mainland U.S. 

66 Directors in Puerto Rico currently receive a salary of $42,000. The mainland benchmark for Elementary, Middle, and High 

School Principals is approximately $92,500 per year (Bureau of Labor Statistics 2018). An increase of $23,000 per year 

would bring average director salary to $65,000 in Puerto Rico, still approximately 30% lower than the mainland U.S. 

67 For example, reducing teacher absenteeism, which was found to reduce 4th-graders’ math test scores by 3.2% of a 

standard deviation for every additional 10 days of teacher absence, could create a step change in student proficiency 

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New Commonwealth Fiscal Plan 

11.2.3 Reinvestment in workforce readiness and skill development 

According to a report by the Federal Reserve Bank of New York, many of Puerto Rico’s 

employment challenges result from a skill mismatch.68 Education-to-employment programs 

can help ensure there are youth trained to fill such vacancies. Therefore, in partnership with 

the private sector, PRDE must implement relevant curriculum and workforce initiatives based 

on local market opportunities (dependent on the job needs and industry focus of a particular 

region) — with a focus on commitments from employers to hire students from the program 

upon completion.69 These programs for youth development, some of which will fall under the 

HIRED Program as proposed by the Government, will be funded through the funds made 

possible by the implementation of the Labor Reform Surplus (See Chapter 7). They will total 

$160 million across FY2019 and FY2020, and will include initiatives such as: 

■ Grants for STEM related programs (Cybersecurity education, Robotics) 

■ Training K-12 teachers to teach computer science and IT courses 

■ Baby Bonds and Apprenticeship programs 

■ Other workforce development oriented investments 

With these reforms, the Puerto Rican public education system will become more streamlined 

and drive better outcomes. Operating efficiencies will enable PRDE to funnel money directly 

to where it is needed, such as for quality teachers and teacher development, resources such as 

textbooks, and workforce development. This will result in improved student achievement at a 

lower cost overall. Any additional funds that are not used for workforce development and the 

HIRED Program will be used for investing in K-12 educational materials, such as classroom 

technology and school Internet connectivity. 

11.2.4 Reinvestment in a UPR scholarship fund 

Finally, the General Court of Justice, Legislative Assembly, AAFAF, and the Oversight Board 

will also undergo expenditure reductions relative to projected budgets. The reductions are 

based on comparative benchmarking in the cases of the Legislative Assembly and General 

Court of Justice (e.g., benchmarking against other full-time legislatures in the U.S.), and a 

~50% reduction compared to the average reductions to other agencies in the cases of AAFAF 

and the Oversight Board. 

The proceeds of the savings from these cuts, in addition to those made to AAFAF – which are 

projected to total $60-65 million a year beginning in FY2019 – will be used to reinvest in 

students at UPR. Specifically, the savings will fund an independently managed endowment for 

needs-based scholarships for students at UPR. 

 

68 New York Fed, 2014 

69 Ibid 

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New Commonwealth Fiscal Plan 

PART IV: Transforming Government to better 

serve the Island

In addition to structural reforms, the Government must also implement fiscal measures to 

create a sustainable fiscal future for Puerto Rico. Fiscal reforms should reduce costs while 

maintaining or improving the quality of important services. The wide range of government 

efficiency initiatives shall target an increase in revenues through new and more efficient 

collections activities, while decreasing government expenditures by ensuring reasonable usage 

of resources. The measures include the following: 

Office of the CFO (Chapter 12). The Office of the CFO, a function of Hacienda, (“OCFO”), 

will also be responsible for – and crucial to achieving – a variety of reforms to ensure the 

responsible financial stewardship of the Island’s resources. For example, through fiscal 

controls and accountability, the OCFO shall provide oversight to reduce historical Special 

Revenue Fund (SRF) deficits and drive $72 million in run-rate savings by FY2023. 

Agency Efficiencies (Chapter 13). A new model for government operations will “right-size” 

the Government through agency consolidation and reduction and/or elimination of 

government services. It includes comprehensive reform initiatives in the Departments of 

Education, Health, Public Safety, Corrections, Hacienda / OCFO, and Economic Development, 

as well as consolidations and reductions within the long tail of other agencies. Agency 

efficiency measures must result in $1,618 million in run-rate savings by FY2023 (or $1,554 

million after the UPR scholarship fund investment).

Healthcare Reform (Chapter 14). Healthcare measures seek to reduce the rate of healthcare 

cost inflation through a comprehensive new healthcare model that prioritizes quality relative 

to cost, and must result in $840 million in run-rate savings by FY2023, projected to grow with 

healthcare inflation. 

Tax Law Initiatives (Chapter 15). Tax law initiatives reduce corporate, individual and sales 

and use tax rates, and eliminate non-revenue generating incentives and subsidies, while 

maintaining revenue neutrality, to improve Puerto Rico’s tax fairness. 

Tax Compliance and Fees Enhancement (Chapter 16). Tax compliance initiatives 

involve employing technology and other innovative practices, as well as implementing new 

taxes, to capture revenue from under-leveraged sources. These initiatives must increase runrate revenues by $549 million by FY2023. 

Reduction of Appropriations (Chapter 17). The central Government will decrease 

appropriations granted to municipalities and UPR, which must result in $451 million in runrate savings by FY2023. 

Pensions Reform (Chapter 18). Improvements to the financial stability of public employees’ 

retirement funds must result in $185 million of run-rate savings by FY2023. 

Together, these measures are crucial to the structural balance of Puerto Rico’s economy, and 

are projected to result in over $142 billion in increased revenues and reduced expenditures 

over the next 30 years (Exhibit 37). 

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New Commonwealth Fiscal Plan 

EXHIBIT 37: SAVINGS AND INCREASES IN REVENUES DUE TO IMPACTS FROM FISCAL 

MEASURES 

OFFICE OF THE CFO 

One of the highest priorities of the Government transformation will be the implementation of 

the transformed Office of the CFO. Despite attempts to better coordinate Puerto Rico’s fiscal 

functions through Executive Orders OE-2013-007 and OE-2017-033, among other actions, the 

Government’s current financial management functions remain decentralized, fragmented, 

obsolete, and in need of improvement. This must be solved by the establishment of a strong, 

centralized Office of the Chief Financial Officer for Puerto Rico (“OCFO”), as proposed by the 

Governor, into the executive branch of Government. 

By centralizing all financial management functions, the OCFO will improve fiscal governance 

and forecasting, increase transparency, substantiate accountability, heighten internal 

controls, and improve stakeholder confidence in Puerto Rico’s financial management. Most 

importantly, it will enable the Government to achieve fiscal responsibility and restore access 

to the capital markets, two cornerstones of PROMESA. 

Core objectives of the OCFO must be as follows: 

A) Centralize treasury and liquidity management 

B) Enhance budget development process and improve monitoring / performance tracking 

C) Drive standardization and integration of financial IT systems 

D) Ensure compliance with procurement, contracts, pensions, and human resources 

management policies 

E) Reduce special revenue funds deficits through enhanced control mechanisms and 

oversight 

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New Commonwealth Fiscal Plan 

F) Improve timeliness of CAFR (Comprehensive Annual Financial Report) and financial 

reporting 

G) Centralize and validate management of funds, debt, and other financial transactions 

Responsibilities and actions of the OCFO 

12.1.1 Responsibilities 

To carry out the above objectives, the OCFO must be endowed with the following 

responsibilities: 

■ The OCFO shall act as the central authority over finance, budget, HR, audit, 

procurement, cash management, and debt issuance for all entities that receive support 

from the General Fund or otherwise depend on the Government’s taxing authority 

■ The OCFO shall have the ability to remove any fiscal officer for violations of, or noncompliance with, the law, including failure to provide timely and accurate fiscal and 

financial information 

■ The OCFO shall oversee the transition to modified accrual accounting standards 

To enable this level of centralized control, these functions must be consolidated under a single 

individual. The Governor has proposed that this person be the Chief Financial Officer, who 

will oversee the OCFO/Hacienda. Other offices can be merged into Hacienda and subsequently 

eliminated to create Hacienda / OCFO. These agencies include, but are not limited to: Treasury 

(consolidated, not eliminated), OMB, GDB70, AAFAF, OATRH, and GSA. All other fiscal 

functions of any departments, agencies, and instrumentalities that receive support from the 

General Fund or otherwise rely on the Central Government’s taxing authority would all fall 

under the OCFO’s authority. 

12.1.2 Actions 

A) Centralize treasury and liquidity management 

■ Enforce and manage a consolidated treasury single account for the Government; this 

involves consolidating visibility and control of all Government bank accounts, including 

CU accounts at private banks and creating a true Treasury Single Account. All other 

public entities should maintain zero balance sweep accounts 

■ Serve as the sole authority for new bank account creation and closure, as well as ongoing 

and ad-hoc liquidity reporting, monitoring and analysis. It must rationalize this bank 

account portfolio, optimize cash pooling/daily cash sweeps and treasury operations, and 

implement uniform accounts payable and disbursement prioritization policies, processes 

and reports 

B) Enhance budget development process and improve monitoring and 

performance tracking 

■ Comply with the recently established Oversight Board budget guidelines and timeline to 

develop a budget that is consistent with the New Fiscal Plan and easily traceable to the 

New Fiscal Plan and the audited financials 

■ Forecast and managing receipts seasonality 

 

70 Scheduled to be liquidated 

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New Commonwealth Fiscal Plan 

■ Oversee all tax decrees and tax agreements issues 

■ Operationalize the budget in the financial system to ensure consistency between accounts 

and facilitate monitoring of those accounts 

■ Estimate, protect, and enhance collections and revenue streams, and establish budgetary 

priorities and oversight, including effective expense controls and procurement reform 

C) Drive standardization and integration of financial IT systems 

■ Drive the comprehensive upgrade and standardization of accounting and IT systems 

across all agencies 

D) Ensure compliance with procurement, contracts, pensions, and human 

resources management policies 

■ Certify all contracts, bills, invoices, payrolls, and other evidences of claims, demands or 

charges related to the central Government and all entities reliant on the Government’s 

taxing authority, including prescribing forms of receipts, vouchers, bills and claims to be 

used by all agencies 

■ Manage centralized insurance procurement and policy management 

■ Oversee human resources as well as all governmental payroll operations and all 

government-related financial transactions. The office must have the sole responsibility 

within the Government for reforming personnel policies, including the renegotiation of 

existing collective bargaining agreements (“CBAs”) consistent with the New Fiscal Plan 

objective to achieve budget savings and efficiencies and enhanced delivery of 

governmental services and be the one to negotiate all future CBAs to achieve the same 

ongoing results 

■ Implement uniform time and attendance processes, and payroll controls and reporting 

E) Reduce special revenue fund deficits through enhanced control mechanisms 

and oversight. Implement an additional measure to ensure responsible stewardship of 

Puerto Rico’s SRF. Additionally, all dedicated revenue streams attributable to SRF must 

have their funds first deposited in the newly established Treasury Single Account. In this 

process, it will ensure a balance between current SRF revenues and expenses to align with 

the legislative mandate that SRFs cannot outspend their resources (Exhibit 38).

EXHIBIT 38: SAVINGS GENERATED FROM ELIMINATION OF SPECIAL REVENUE FUND 

DEFICIT 

F) Improve timeliness of CAFR and financial reporting

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New Commonwealth Fiscal Plan 

■ Establish a clear timeline to publish the FY2015, FY2016, and FY2017 CAFRs and 

manage it to completion as soon as possible 

■ Implement a new process for the publishing of the FY2018 and subsequent CAFRs within 

the established regulatory timeframes, and drive improvements in the process and 

quality of the data provided. All releases should implement the modified-accrual basis of 

accounting as required in PROMESA and leverage the new forecasting, e-settlement, and 

analytics capabilities to support all OCFO functions 

■ Enact measures implementation impact forecasting and reporting 

■ Supervise property tax assessment reforms, preparing tax maps, and providing notice of 

taxes and special assessments 

G) Centralize and validate management of funds, transactions, and other 

financial transactions 

■ Maintain custody of all public funds, investments, and cash. It must administer cash 

management programs to invest surplus cash 

■ Facilitate long-term and short-term borrowing programs 

■ Maintain control and accountability over all funds, property, and other assets controlled 

or managed by the Government, and oversee all tax decrees and tax agreements issued 

■ Publish an annual Tax Expenditure Report that identifies and quantifies all tax 

expenditures (including all tax exclusions, exemptions, adjustments, deductions, 

subtractions, credits, abatements, deferrals, rebates and special rules.) 

Implementation plan 

While Executive Orders can facilitate some of the initial reforms required, the OCFO’s 

authorities should ultimately be established through a comprehensive statutory overhaul. 

Such legislation must conform to the New Fiscal Plan and PROMESA. 

As part of the implementation of the OCFO, public reporting of the Government’s data 

regarding finances and budget will be critical to improve fiscal governance, accountability, and 

internal controls. On a monthly basis, the Government must report publicly on data through 

the close of the prior month (e.g., April 30th report includes data through March 31st). In 

addition, Government contracts and change orders in their entirety shall be publicly available 

online on the Comptroller’s website beginning on September 30th, 2018. 

Implementation of measures – and the required timeline for fiscal reporting – under the 

stewardship of the OCFO will be as shown below (Exhibit 39). 

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New Commonwealth Fiscal Plan 

EXHIBIT 39: OCFO IMPLEMENTATION TIMELINE 

AGENCY EFFICIENCIES 

Changes to agency operational expenditures 

The Government has approximately ~116,500 employees71 across 114 Executive Branch 

government agencies, as well as agencies within the Legislative and Judicial branches 

(excluding large instrumentalities, e.g., PREPA, PRASA, HTA UPR, COSSEC, GDB)72. With a 

total FY2018 budget of over $8.6 billion, these agencies now utilize personnel and nonpersonnel resources that are outsized compared to the actual service needs of 

the people of Puerto Rico. Compared with states serving similar populations, Puerto Rico 

remains an outlier in terms of sheer number of agencies: for example, Iowa has only 36 stage 

agencies and Connecticut has 78. In addition, there are countless examples of subpar service 

delivery across the Government. For instance, despite having 5+ agencies primarily 

dedicated towards the financial stewardship of the Island, the Government has been unable to 

report consistently accurate financial statements on a timely basis. In addition, Puerto Rico’s 

education system has consistently delivered unsatisfactory student outcomes, including 

below-U.S. mainland graduation rates and standardized test scores are far below basic 

proficiency. 

The level of governmental spending in Puerto Rico has not seen any significant decline in 

recent years even though Puerto Rico’s population fell by 12% from 2007 to 2017 (prior to 

Hurricanes Irma and Maria)73. In fact, Puerto Rico remains an outlier in terms of the 

 

71 Excludes transitory employees 

72 Excludes agencies which currently have $0 operating budget and no employees 

73 United States Census Bureau 

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New Commonwealth Fiscal Plan 

number of citizens employed by the state government, with between 25-30% of those 

currently employed working for the government (e.g., in a “governmental position”)74, which 

places Puerto Rico in the top 10th percentile of U.S. states for public sector employment75. 

Therefore, the right-sized Government of the future should reflect mainland U.S. benchmarks 

in terms of both number of agencies and size of agencies themselves to deliver services in 

as efficient a manner as possible. As part of the Governor’s new Government model, the 

Government should consolidate the 114 agencies into 22 groupings and a number of 

independent agencies.

76 In some cases, the consolidations are designed to better focus the 

competing efforts of multiple agencies, such as the Economic Development grouping which 

will consolidate ten agencies into one. In other cases, the consolidations should serve to move 

services closer to citizens, such as the Healthcare and Social Services groupings which will 

consolidate access points to important services like Medicaid. Furthermore, in cases where 

agencies will be left independent, fiscal measures will be applied to improve the quality of the 

underlying services, especially in the case of PRDE. 

In Exhibit 40, total savings from agency-specific personnel and non-personnel measures are 

shown, as well as Government-wide, compensation-related measures which will ensure 

properly-resourced compensation through continuing a payroll freeze, standardizing 

healthcare benefits, and eliminating the Christmas bonus. 

EXHIBIT 40: SUMMARY OF AGENCY EFFICIENCIES IMPACT 

 

74 Puerto Rico Economic Analysis Report 2015-2016 (PR Department of Labor and Human Resources) 

75 Gallup, “Gov’t. Employment Ranges from 38% in D.C. to 12% in Ohio” 

76 To date, 18 agencies have not yet been allocated within individual groupings. The Government proposes that these 

agencies will either remain independent or fit in within one of the existing 23 groupings so as to limit the total number of 

agencies to no more than 35 

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New Commonwealth Fiscal Plan 

Approach to agency efficiency measures 

There are several actions that have been applied to each agency to achieve these targets: 

■ First, some agencies will be closed completely if their function and programs are 

not required, resulting in a 100 percent personnel and non-personnel savings for all nonFederal funded expenditures after a 2-3-year wind-down period (a minimum of 50% 

savings must be achieved no later than year 2). 

■ Other agencies must be merged when benchmarking and best practices determine 

that activities across agencies could be better served through a single mission and 

management to eliminate redundancies, and/or where economies of scale make shared 

services more economical without reducing quality of service. 

■ A small subset of agencies will be left independent but made more efficient

through a series of streamlining efforts related to both personnel and operations, allowing 

the agency to provide existing services at a lower cost to taxpayers. 

Exhibit 41 shows the future agency groupings and potential independent agencies proposed 

by the Government. The Appendix includes further details on individual agencies within 

each grouping. 

EXHIBIT 41: OVERVIEW OF NEW AGENCY GROUPINGS 

In addition, the Government proposed 5 agencies for closure: Model Forest; Culebra 

Conservation and Development Authority; Company for the Integral Development of 

Cantera's Peninsula; Economic Development Bank; and the Industrial, Tourist, Education, 

Medical, and Environmental Control Facilities Financing Authority (AFICA). 

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New Commonwealth Fiscal Plan 

Ensuring enforcement of the agency efficiency 

expenditure reductions 

If, after any fiscal quarter the projected agency efficiency savings for any grouping is not 

realized, the shortfall from that fiscal quarter will be added to the agency efficiency savings 

target for the corresponding grouping for the following quarter. 

The Government shall produce a quarterly performance report, which shall be 

submitted to the FOMB within 45 days of each fiscal quarter end, demonstrating the agency 

efficiency savings that have been realized, broken down by grouping and broken down 

between payroll and non-payroll savings, and measuring the performance of the realized 

agency efficiency savings for each grouping against the projections as set forth herein. 

If, based on the quarterly performance reports and any other information the Oversight 

Board deems appropriate, the Oversight Board concludes there is underperformance in 

agency efficiency savings for any grouping, the Oversight Board will take measures to 

enforce reductions in the amount of unrealized savings in the following fiscal 

quarter for the corresponding grouping. 

If, after the third fiscal quarter of any fiscal year there remains unrealized agency efficiency 

savings for any grouping relative to the projected agency efficiency savings in the New Fiscal 

Plan for the applicable fiscal year, the FOMB will automatically reduce the budget for the 

corresponding grouping for the following fiscal year in the amount equal to the unrealized 

agency efficiency savings. 

If the FOMB determines that there is material underperformance in agency efficiency 

savings relative to the projections set forth in the New Fiscal Plan, intentional workforce 

reductions will be necessary to meet the agency efficiency savings targets set forth herein. 

As part of the rightsizing effort, all consolidated agency groupings shall perform a 

thorough review of the agencies within the grouping and submit a proposal for 

integration no later than the end of the fourth quarter of FY2018. The proposal must 

include a detailed description of changes that demonstrate an ability to hit the fiscal targets 

articulated for each grouping, which will likely be drawn primarily from the following 

initiatives: sharing of support services and systems integrations, elimination of duplication 

(e.g., asset base, contracts, procurement), standardizing organizational structures across 

agencies, aligning services delivery with citizen needs, and personnel reductions. 

The target savings methodologies are organized below (Exhibit 42).

EXHIBIT 42: SAVINGS TARGETS FOR AGENCY EFFICIENCIES

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New Commonwealth Fiscal Plan 

The New Fiscal Plan recognizes that detailed agency-specific initiatives may require flexibility 

in which initiatives are applied to which agencies. As a result, the levers outlined above are 

highlighted as examples to achieve savings through efficiencies rather than directing all 

initiatives be taken by all agencies. 

Department of Education (PRDE) 

13.4.1 Current state and future vision for the Department of Education 

Puerto Rico’s workforce participation challenges (described in Section 7.1) exacerbated by a 

lack of youth preparedness for the workforce. PRDE K-12 schools have shown declining 

performance over the past two decades. Today a quarter of students do not 

graduate high school at all,77 while the remainder graduate below basic 

proficiency levels: in standardized tests, only about half perform at a basic level in 

Spanish,78 35% perform at a basic level in Mathematics, 35% perform at a basic level in English 

and 43% at a basic level in Science.79 Of the 71 countries measured through OECD PISA scores, 

Puerto Rico scored 57th in reading (U.S. 24th), 63rd in science (U.S. 25th), and 65th in math 

(U.S. 40th).80 These challenges contribute to Puerto Rico’s rate of youth unemployment, which 

is more than double the rate in the U.S. mainland.81 

Throughout the last decade, PRDE has encountered longstanding challenges which have 

contributed to this low academic performance, including bureaucratic hurdles associated with 

operating as a single local education agency, inability to execute professional evaluations tied 

to quality outcomes in the classroom, and lack of a cohesive lasting strategy for academic 

improvement. 

In addition, PRDE, the largest agency in the central Government by spend, is outsized relative 

to need. While student enrollment has declined considerably over the past few decades (over 

50% decline since its peak in 1980, and by about 33% in the past decade alone),82 the number 

of schools and teachers has not decreased proportionally (with only about a 30% reduction in 

public schools since 1990).83 With an expected additional student decline of 14-16% over the 

next 6 years, PRDE has significant room to right-size its education system relative to number 

of students. Tightening its system will give PRDE the flexibility and funding to focus on 

improving the quality of education provided. 

To improve the capabilities and capacity of the Puerto Rican population, the Government will 

need to set high aspirations. PRDE aims to improve student academic achievement by

reducing the achievement gap by 12% annually on Puerto Rico proficiency tests, 

achieving 80% proficiency in Spanish, 73% in Mathematics, and 77% in English; and further, 

improving the graduation rate to 90% by FY2023. This mandate is not easy, but is attainable 

 

77 Puerto Rico Department of Education Consolidated State Plan (ESSA), 2017; 

https://www2.ed.gov/admins/lead/account/stateplan17/prconsolidatedstateplanfinal.pdf 

78 As of ESSA Consolidated State Plan 2017 

79 http://www.de.gobierno.pr/. “Basic level” is defined by National Assessment of Education Progress test administrator as 

“partial mastery of prerequisite knowledge and skills that are fundamental for proficient work at each grade” and is the 

bottom of three levels of achievement with the other levels being “proficient” and “advanced” 

80 Programme for International Student Assessment (PISA) 2015 Assessment and Analytical Framework, The Organization 

for Economic Co-operation and Development, August 31, 2017 

81 The World Bank Group, via International Labour Organization, ILOSTAT database. Data retrieved in March 2017. 

https://data.worldbank.org/indicator/SL.UEM.1524.ZS. https://data.worldbank.org/indicator/SL.UEM.1524.ZS 

82 Helen F. Ladd and Francisco L. Rivera-Batiz, “Education and Economic Development in Puerto Rico” The Puerto Rican 

Economy: Restoring Growth, Brookings Institution Press, Washington, D.C., 2006, 189-238 

83 There were 1,619 public schools in 1990 and 1,131 at the time of reporting. Oversight Board Listening Session, Secretary 

Julia Keleher, “On the Road to Transformation,” November 30, 2017 

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New Commonwealth Fiscal Plan 

through a series of education efficacy and efficiency measures as well as targeted 

reinvestment in student and teacher outcomes. 

13.4.2 PRDE Efficiency measures 

PRDE must achieve $53 million in net personnel savings and $6 million in non-personnel 

savings in FY19. Refer to Exhibit 43 for annual personnel and non-personnel savings that

must be achieved through FY23. To accomplish this, PRDE could consolidate its footprint 

(including schools, classes, teachers, and administration), modernize facilities, revise the 

curriculum, and equip teachers with what they need to succeed. Measures must generate 

$465.8 million in run-rate savings inclusive of funds needed for requisite reinvestments to 

increase quality. However, these savings are offset by $160 million in reinvested funds from 

increased revenue from labor reform for youth development programs and education 

materials (see Chapter 11). 

EXHIBIT 43: EDUCATION RIGHT-SIZING SUMMARY OF IMPACT 

Reducing non-payroll spend through consolidating the K-12 school footprint and 

procurement 

PRDE has closed over 480 schools (30% of K-12 schools) since 1990. After SY2016-17, PRDE 

closed 167 schools,84 and announced plans to close another 283 schools after SY2017-18.85

After an analysis of several factors including capacity, geographic and cultural characteristics, 

distance to neighboring schools, transportation costs, and facility quality, among others, the 

Government has determined that it will be able to close a total of 307 schools before FY2020, 

or an additional 24 schools beyond this summer’s planned closings, and it must do so. It 

 

84 Puerto Rico Department of Education Report “Schools Closed FY 2017.” Accessed January 2018 

85 Puerto Rico Department of Education Press Release, March 2018 

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New Commonwealth Fiscal Plan 

should target an average capacity of 330 students per school for each primary school and 700 

students per secondary school. 

Each school closure should save an estimated $47,000 annually by reduction of facility costs. 

Consolidation of schools will also enable higher quality outcomes at lower cost by enabling 

systems to invest in a smaller number of higher-performing schools. 

Independent of, but accelerated through, consolidations, PRDE procured spend should be 

reduced by approximately 10-15% through centralized procurement policies including 

strategic purchasing and demand controls (see full set of procurement levers in Section 13.2). 

Personnel optimization from school consolidation 

To date, school consolidations have not always led to proportional cost savings because they 

are often not accompanied with concurrent reductions in staff. Going forward, the number of 

school staff is expected to decline proportionally to the projected decrease in number of 

schools. For example, the number of school administration (principals, office staff, etc.), food 

service staff, facility maintenance staff, and other school-specific staff shall be scaled down 

accounting for a smaller number of schools. This should result in $124.8 million in savings by 

FY2023. 

Improving student-teacher ratio 

Puerto Rico’s student-teacher ratio is currently 11:1, compared to approximately 16:1 in many 

comparable districts on the mainland such as Miami-Dade County Public Schools in Florida. 

Puerto Rico’s student-teacher ratio will only continue to decrease with the projected student 

enrollment declines in the coming years. To address this, teacher staffing levels will be reduced 

to reach a target student-teacher ratio of 14:1. This ratio is slightly smaller than the mainland 

benchmark due to several constraints specific to Puerto Rico, such as its currently poor student 

outcomes and its extremely high proportion of special education students. These teacherfocused measures should achieve $194.5 million in run-rate savings by FY2023, inclusive of 

transition costs under workforce reduction policies (e.g., liquidation of vacation pay). The 

savings figure is also reduced to reflect additional investment in increased salary for remaining 

teachers (see Chapter 11). 

Right-sizing regional and center level structure 

Rather than function as a single Local Education Agency (LEA), PRDE shall create regional 

LEAs (Exhibit 44). 

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New Commonwealth Fiscal Plan 

EXHIBIT 44: LOCAL EDUCATIONAL AGENCIES FUTURE STATE REGIONS 

This new regional LEA model will be leaner while also decentralizing the administration of 

individual schools, putting decisions closer to students and families and improving outcomes. 

Developing and relying on local leadership must also allow PRDE’s central administrative 

structure to right-size to staffing levels comparable to state educational agencies (SEAs) in 

comparable mainland U.S. states. Currently, the central administration has one staff per 133 

students projected in FY2022; the 50th percentile of U.S. states is a ratio of 1:166. A 

decentralized model also decreases dependency on the secretary’s office for day-to-day 

decision making, building capabilities of second-line management at the regional level.86

Implementing the regional LEA model must allocate administrators more effectively for 

decision-making. The model shall decrease headcount requirements at the regional level and 

central level; further, allocation of administrators in less costly regional centers (as opposed 

to centrally) should enable cost savings on retained positions. Each regional office is expected 

to have capable leadership and staff to execute core functions, including operations, student 

services, accountability, and academic standards. This model results in a total of $37.6 million 

in run-rate savings each year from less costly regional positions and reduced central staff, 

while seeking to improve PRDE operations and student outcomes. 

13.4.3 Reinvestment in education and workforce outcomes 

The education of the children of Puerto Rico, and their successful entrance into the workforce, 

is a core goal of PRDE. Investment in education has also been shown to drive long-term 

economic growth – and in the case of Puerto Rico is projected to add 0.16% increase in GNP 

 

86 Oversight Board Listening Session, Secretary Julia Keleher, “On the Road to Transformation” November 30, 2017 

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New Commonwealth Fiscal Plan 

growth by FY48 and keep growing thereafter (see Section 4.1 for further discussion of GNP 

impact). As a result, it is important that some of the savings from education measures are 

reinvested to drive student, teacher, and workforce outcomes. PRDE will drive three such 

initiatives, each funded through a mixture of reinvesting right-sizing savings and creating a 

reinvestment fund using increased revenues from the Labor Reform Agenda: 

1. Teacher development and retention 

2. New educational materials such as textbooks 

3. Workforce readiness and skill development programs 

Teacher development and retention 

Teachers are considered one of the most determinative factors in student success in the 

classroom and standard of living beyond the classroom. For example, one U.S. study found 

that classes with an average-quality teacher had a lifetime income of $266,000 higher than 

classes with a poor-quality teacher in each year.87 Improved education through enhanced 

teacher quality is critical to the long-term success of the children of Puerto Rico and will help 

to lift a new generation of Puerto Rican citizens out of poverty. Recognizing this, PRDE has 

committed to transforming system practices related to attracting, retaining, and developing 

teachers and administrators: 

1. Providing increased opportunities for and higher quality of training (e.g., inclass; through leadership academies; STEM development through collaboration with 

universities) 

2. Creating opportunities for targeted skill development (e.g., instituting 

mentorship programs to enable coaching by experienced and high-performing teachers as 

a cost-neutral, and often high impact, initiative) 

3. Investing in teacher salaries that approach mainland comparators. As 

described in Section 11.2.2, the Government will implement a $1,500 annual salary 

increase for teachers and $23,000 annual salary increase for directors to close the gap with 

mainland comparators 

As discussed in Section 11.2.2, these teacher-focused reforms will be funded through 

reinvestment of right-sizing measures and will have a dramatic impact on near and long-term 

outcomes. 

New educational materials including new textbooks 

As discussed in Section 11.2.2, the Government will reinvest $75 per student (FY2019-FY2021) 

in procuring new textbooks, or $21-24 million each year as one-time costs. 

In addition, any remaining reinvestment funds remaining from the Labor Reform Agenda as 

described in Chapter 7 shall be used for necessary educational materials, such as necessary inclass technology and school Internet capabilities. 

Workforce readiness and skill development 

As discussed in Section 11.2.3, PRDE must implement curriculum and workforce initiatives 

based on local market opportunities to address the skill mismatch responsible for many of 

Puerto Rico’s employment challenges. With these reforms, the Puerto Rican public education 

system should become more streamlined and drive better outcomes, including improved 

student achievement at a lower cost overall. Any additional reinvestment funds directed at 

 

87 Raj Chetty, John N. Friedman, and Jonah E. Rockoff, “The Long-Term Impact of Teachers: Teacher Value-Added and 

Student Outcomes in Adulthood,” National Bureau of Economic Research, 2011 

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New Commonwealth Fiscal Plan 

PRDE via Labor Reform revenues will be used on other youth workforce development and 

readiness programs or necessary educational materials to improve student outcomes. 

Department of Health (DOH) 

13.5.1 Current state and future vision for the Department of Health 

Currently, the Government has several health-related agencies that are highly fragmented: 

three public corporations, three public hospitals, seven sub-secretaries, six regional offices, 

and eight program offices administering 64 Federally funded programs — all with their own 

support functions. Such fragmentation drives up cost and inefficiency, as each agency provides 

their own human capital management, procurement, and financial support. Citizen experience 

and care delivery also suffer as Puerto Ricans face multiple handovers of individual cases 

across frontline staff with fragmented focus. 

In the future state, the Governor has proposed that the Department of Health consolidate 7 

agencies with centralized support functions: The Department of Health (DOH); Medical 

Services Administration (ASEM); Health Insurance Administration (ASES); Mental Health 

and Addiction Services Administration; Puerto Rico and the Caribbean Cardiovascular Center 

Corporation; Comprehensive Cancer Center; and Center for Research, Education, and Medical 

Services for Diabetes (Exhibit 45). This new DOH should enable efficiencies while 

maintaining high quality public health. Consolidating these seven agencies should provide 

opportunity for right-sizing support functions, as well as centralizing procurement to provide 

savings on costly medical materials and equipment. 

EXHIBIT 45: AGENCIES INCLUDED IN FUTURE STATE DOH 

13.5.2 Efficiency measures for the Department of Health 

By bringing together seven major agencies to create the Department of Health (DOH), the 

Government must take advantage of personnel and non-personnel savings that can be 

achieved through consolidation. DOH must achieve $48.4 million in personnel savings and 

$12.8 million in non-personnel savings in FY19. Refer to Exhibit 46 for annual personnel 

and non-personnel savings that must be achieved through FY23. 

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EXHIBIT 46: DEPARTMENT OF HEALTH RIGHT-SIZING SUMMARY OF IMPACT 

Personnel optimization and centralization 

The Government should centralize and consolidate support functions, including finance, HR, 

legal, revenue cycle management, procurement, grants management, and epidemiology. 

Improved management and oversight of these functions, and workforce reductions associated 

with consolidation, must result in $76.9 million in run-rate personnel savings by FY2023. 

ASES and Medicaid consolidation and optimization 

Medicaid currently has 85 offices across 78 municipalities that can be consolidated into fewer, 

more strategic locations. Reducing the Medicaid office and regional hospital office structure 

will eliminate duplication of effort and redundancies –and allow the Department to provide 

more robust services at convenient locations. In addition, ASES will redesign the Medicaid 

eligibility and enrollment process (web based, MCO dependent, hospital responsibility, etc.) 

and encourage online services to improve data management. Best practices from the mainland 

include engagement of third-parties within hospitals to identify and enroll eligible patients 

into the Medicaid program. 

Consolidation of regional centers and Medicaid optimization should result in $500,000 in 

run-rate savings by FY2023. 

Supply chain management 

Due to the large volume of spending on procuring medical supplies and equipment, and the 

high cost of such materials, there is a significant opportunity to improve procurement 

efficiency through best practice supply and demand management, and better employing 

economies of scale. In FY2018, there was over $188 million in addressable non-payroll 

spending (excluding any hospital expenses) across all agencies. This measure to reduce nonpayroll spend through procurement efficiency could amount to $19.9 million run-rate savings 

by FY2023. 

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Hospital management transformation 

In addition to other agencies’ non-payroll savings, hospital transformation will likewise seek 

to improve procurement savings specifically for hospitals and health systems, which will focus 

on commodity standardization and sourcing, indirect spending (analyzing insourcing vs. 

outsourcing opportunities), and physician preference item optimization. 

Holistic hospital transformation efforts should also reduce payroll spend through clinical 

labor optimization, which is captured in the “personnel optimization” measure. For example, 

wages should be optimized to fair market value to reduce turnover and therefore 

temporary/overtime spend; and role/responsibilities should be optimized to skill level and 

wage rate. This measure would result in $11.4 million in run-rate savings by FY2023. 

Restructuring ASEM and Revenue Cycle Management 

ASEM is a public corporation originally created to serve as a central procurement office for 

government hospitals to create economies of scale for medical supplies, devices, and services. 

Throughout the years, rates, salaries, and services have increased at a higher rate than within 

the broader industry, and procurement processes have decentralized across the hospitals 

ASEM was created to serve. 

The focus areas of this measure include: 1) Establishing a centralized Medical Center including 

ASEM, University, Pediatric and Cardiovascular hospitals; 2) Identifying and establishing key 

hospitals across the Island; 3) Designing and implementing a referral system among key 

hospitals and clinics; and 4) Establishing a physician network. Improvements will be made to 

personnel, process, and technology. This measure would result in $12 million of run-rate 

savings by FY2023. 

Department of Public Safety (DPS) 

13.6.1 Current state and future vision for DPS 

The Department of Public Safety (DPS) is an agency grouping which was approved by Puerto 

Rico’s Legislature in 2017 (Act 20), and includes six agencies responsible for ensuring the 

safety and security for all residents of the Island. The grouping includes the following 

agencies: 

EXHIBIT 47: LIST OF AGENCIES IN DPS GROUPING 

The largest agency by spend and personnel is the Police Department (~85% of total DPS 

spend). As a result, the majority of measures identified within the grouping apply to the Puerto 

Rico Police Department (PRPD). 

One of the PRPD’s main responsibilities is to manage violent crime, defined by the FBI as 

“murder and nonnegligent manslaughter, forcible rape, robbery, and aggravated assault.”88

Puerto Rico’s current level of violent crime is 7,643 crimes per year, based on FBI reporting 

from 2016. However, Puerto Rico currently spends more on police per violent crime 

 

88 https://ucr.fbi.gov/crime-in-the-u.s/2010/crime-in-the-u.s.-2010/violent-crime 

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New Commonwealth Fiscal Plan 

than most U.S. states, even after adjusting for differences in PPP; while the PRPD spends 

$97,939 per violent crime, the U.S. 50-state median level of spend is only $88,905. 

This elevated spend is partially because the rate of violent crime in Puerto Rico has 

been decreasing for the past 10 years without a simultaneous decrease in police 

officers. While there was an average of 258 incidences of violent crime per 100,000 citizens 

between 2007 and 2011, the rate of crime decreased to 242 per 100,000 between 2012 and 

2016. This decline likely continues into 2018, despite reports of a substantial uptick in crime 

following Irma and Maria. These contentions have been extrapolated from limited data 

collected following the Hurricanes. For instance, widespread headlines referring to an 100% 

increase in murder rates in Puerto Rico after the storm were drawn from only an 11-day 

window at the start of 201889. Furthermore, academic studies on crime following natural 

disasters find no empirical evidence of large, sustained elevations in violent crime, outside of 

some upticks in domestic and spousal abuse90. 

It is thus the time to take a closer look at the PRPD, not only due to the elevated spend and 

diminished violent crime rate, but also in conjunction with a 2013 consent decree agreement 

with the U.S. Department of Justice on reform measures, which compelled the PRPD to 

conduct a staffing allocation and resources study to assess the proper size of the police force. 

The Department is currently undergoing a transformative process to address the 

requirements under the agreement, and the measures within the New Fiscal Plan will 

complement these efforts. 

13.6.2 Efficiency measures for DPS 

DPS must achieve $33.7 million in net personnel savings and $5.6 million in non-personnel 

savings in FY19. Refer to Exhibit 48 for annual personnel and non-personnel savings that 

must be achieved through FY23. 

 

89 Time, 2017 

90 “Natural Disasters and Social Order”, International Journal of Mass Emergencies and Disasters 

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EXHIBIT 48: DPS SUMMARY OF MEASURES IMPACT 

Process improvements 

DPS should reduce administrative tasks and activities by leveraging modernization, 

including digitization of incidence reporting, automation of time and attendance, and 

consolidation of statistical reporting. Furthermore, DPS will streamline vehicle maintenance 

processes through superior scheduling and procurement protocols, which can reduce the need 

for vehicle maintenance staff. Process improvements would lead to $29.5 million in run-rate 

savings by FY2023. 

Civilianization of non-core tasks, including outsourcing towing 

DPS should replace sworn officers currently performing civilian duties—such as mechanics, 

radio operators, records and report keepers, area command statistics compilers, and 

maintenance workers—with less expensive civilian personnel. Additionally, DPS can 

outsource towing services to a third-party vendor to cover approximately ~93% of towing 

needs. These initiatives would lead to $5.8 million in run-rate savings by FY2023. 

Station, unit, and division consolidation and eliminations 

DPS should consolidate police stations, transit units, and specialized units to reduce 

the amount of administrative personnel required (e.g., station desk officers, station 

commanders and directors, stations auxiliary commanders and directors, and vehicle 

managers). Simultaneously, DPS should eliminate units and divisions which perform 

duplicative services already provided by other agencies within the Government (e.g., the 

Divers Unit, the Rescue Squad Division, and Mounted Divisions). These initiatives should 

jointly lead to $8.0 million run-rate savings by FY2023. 

Overtime efficiencies 

The Government spent approximately ~$50 million on overtime last year (excluding the 

outsized overtime needs resulting from Hurricane Maria). This level of overtime is 

considerably higher than the PPP-adjusted overtime for comparable police forces in U.S. 

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New Commonwealth Fiscal Plan 

mainland states. For instance, Connecticut, which has a similar population to Puerto Rico and 

a slightly-higher number of violent crimes (273 per 100,000 inhabitants vs. 224 per 100,000 

inhabitants in Puerto Rico), had PPP-adjusted overtime spend of only ~$28 million in 2017. 

This gap comes even though Connecticut’s total police spend per capita is ~$140 less than in 

Puerto Rico91. 

Through the levers identified in the above measures, in additional to general efficiencies in 

scheduling and overtime management, DPS can reduce paid overtime by 60%. Overtime 

efficiency efforts should lead to $30.0 million run-rate savings by FY2023. 

Sworn officers back fill and headcount/transitory reductions 

According to a Government analysis conducted in response to the PRPD’s ongoing consent 

decree adjudication under the U.S. Department of Justice, there is a need to redeploy sworn 

officers to fill capacity deficiencies in operational functions92. This redeployment 

will lead to a need for 644 additional officers to be deployed to the field. This measure will lead 

to $24.5 million run-rate additional costs by FY2023. Simultaneously, attrition and headcount 

reductions among non-sworn, regular DPS employees (~162 employees), as well as facilitating 

the departure of 50% of DPS transitory employees, can create $18.3 million in annual savings 

by FY2023. 

Salary increase 

To ensure that DPS continues to retain police officers, despite the presence of significantly 

higher-paying positions within police departments on the U.S. mainland93, DPS should 

institute a $1,500 annual raise for all sworn personnel by FY2019. This measure is expected to 

lead to $17.4 million run-rate additional costs by FY2023. 

Uniform healthcare and non-personnel spend 

As detailed in Section 13.2 and Section 13.12, these measures to standardize employee 

healthcare and decrease non-personnel spend through procurement optimization 

(e.g., police fleet vehicles) should lead to $13.2 million and $18.0 million in annual savings by 

FY2023 for uniform healthcare and non-personnel spend, respectively. 

Department of Corrections and Rehabilitation (DCR) 

13.7.1 Current state and future vision for DCR 

DCR manages the functions and policies of the Puerto Rican correctional system, including 

penal institutions and rehabilitation facilities, for men, women, and juveniles. The 

Correctional Health Department provides healthcare to the inmates under the jurisdiction of 

DCR. Their combined FY2018 budgets are $404M, and they include a total of 7,809 employees 

and 10,339 prisoners based on latest available data from OMB, leading to total spend of 

~$39,000 per prisoner. 

EXHIBIT 49: LIST OF AGENCIES IN DCR GROUPING 

 

91 Connecticut Office of the State Comptroller; census data 2014; FBI Crime Justice Information Services 

92 The report is expected to be completed mid-2018 

93 Current average salary for a sworn officer in Puerto Rico is $34,600, which is ~45% of U.S. median according to the Bureau 

of Labor Statistics (Police and Detectives) 

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DCR’s combined number of employees is much higher than the relative number 

of employees in peer prison systems within mainland U.S. states. While the reality 

of an aging prison system dependent on outdated technology necessitates a relatively higher 

number of employees, the actual number of employees is substantially higher than comparable 

benchmarks; whereas DCR’s current FTE-to-inmate ratio is 0.76, the 50th percentile of U.S. 

states has only 0.41 FTEs per inmate.94 Additionally, Puerto Rico’s prisons are underutilized: 

while most U.S. state prison systems are near 100% utilization95, Puerto Rican prison facilities 

are only 78% utilized due to declines in the prison population over the past decade that have 

not translated into reductions in government resources dedicated to prisons. 

By rightsizing Puerto Rico’s correctional facilities and FTE footprint to reflect 

changes in the prison population and improving procurement effectiveness on all corrections 

categories, the Government must achieve five-year cost savings of $395M. 

13.7.2 Efficiency measures for DCR 

DCR must achieve $11.4 million in personnel savings and $10.1 million in non-personnel 

savings in FY19. Refer to Exhibit 42 for annual personnel and non-personnel savings that 

must be achieved through FY23. 

EXHIBIT 50: DCR SUMMARY OF MEASURES IMPACT 

Facility consolidations 

To bring the system in line with the requirements of the population, DCR should close 9 

prisons, each with utilization at 65% or below to reach an overall system 

utilization of 93%, while still maintaining appropriate separation of different inmate risk 

profiles and populations, including men, women, and juveniles. These consolidations will 

 

94 NASBO, FBI, BJS databases 

95 Census data, 2014; Bureau of Justice Statistics, 2014 

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New Commonwealth Fiscal Plan 

provide the opportunity to capture both personnel and non-personnel savings 

through reduced operations. 

First, 40% of non-personnel operating expenses could be captured for each 

closed facility by consolidating physical footprint, winding down contracts, and other levers, 

with the remaining operating expenditures transferred to support population increases in 

other facilities and account for inability to reduce fixed costs. Personnel savings could be 

captured by reducing DCR FTEs per inmate to reach the U.S. median benchmark of 

0.41 FTEs per inmate through attrition and active workforce reductions96. 

Five prisons are slated for closure in FY2018,97 and their prisoners have already been relocated 

to other prisons. Two additional prisons are expected to be closed in FY2019, and two more in 

FY20. Implementation costs that are accounted for in savings calculations include 

transporting prisoners to other facilities, frictional costs of redundant personnel across 

prisons and inmates, among other initiatives. 

To further enable savings from consolidations and reduced FTEs, DCR may contemplate 

initiatives to actively reduce prison population as appropriate, such as early release with 

electronic monitoring, initiating programs to reduce recidivism like in-prison drug 

rehabilitation, and increased training and occupational programs. 

Non-personnel optimization 

DCR currently spends $64 million on procurement, costs that can be reduced through a 

variety of means, including leveraging the Federal General Services Administration, utilizing 

e-auctions, launching competitive Requests for Proposal (RFPs), centralizing purchasing to 

the greatest extent possible, and outsourcing/contracting responsibilities. Using benchmark 

savings percentages for major spend areas would result in ~$8 million potential savings 

opportunity, excluding correctional healthcare. 

For correctional healthcare, the Government currently spends ~$6,000 per inmate based 

on the terms of the Correctional Health Services Corporation contract. By comparison, the 50th

percentile of U.S. states spend $3,800 per inmate.98 Bringing this per-inmate spend in line 

with the 50th percentile of U.S. states would generate annual savings of ~$23 million by 

FY2022.99 The Government can unlock these savings by renegotiating existing contracts, 

launching competitive RFPs for other correctional healthcare providers that will provide terms 

more in-line with mainland spending practices, reconsidering level of service due to the 

currently declining prison population, and strategically evaluating insourcing options. 

Hacienda / Office of the CFO (OCFO) 

13.8.1 Current state and future vision for Hacienda / Office of the CFO 

Currently, the financial management functions—as well as basic administrative functions—of 

the Government are spread across several entities; for instance, the Office of Management and 

Budget is responsible for administering the Annual Budget of Puerto Rico, the General 

Services Administration is responsible for procurement processes, and ownership of other 

 

96 Census data, 2014; Bureau of Justice Statistics, 2014 

97 These are identified as prisons with prison populations of 0, based on latest data from DCR and Rehabilitation; they 

include: Esc. Ind. Mujeres Vega Alta, Hogar Adaptacion Soc. Vega Alta, Inst. Correccional Zarzal, Modular Detention Unit, 

and Vivienda Alterna Anexo 246 Ponce 

98 Source: Pew data 2011, normalized for GDP PPP and inflated to 2017 dollars based on CPI data (2011-2017 

compounded inflation rate of 10%) 

99 Pew data, 2011 

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New Commonwealth Fiscal Plan 

fiscal and payroll responsibilities are distributed across another four agencies. This 

distribution has led to historical problems for the Government, as the number of bank 

accounts, special revenue funds, and other untracked funding and expenditure streams have 

proliferated. Indeed, the lack of one office that has authority over all revenues and 

expenditures—and is also accountable for balancing the budget—has been a major barrier 

for the Commonwealth’s ability to regain its fiscal sustainability and publish 

accurate and timely financial reporting. 

As discussed above, consistent with the Governor’s proposal, the Commonwealth shall 

consolidate all financial management, HR and procurement activities under the 

OCFO. The OCFO will have authority and accountability over the following agencies, which 

could be consolidated or eliminated: 

EXHIBIT 51: LIST OF AGENCIES IN HACIENDA / OCFO GROUPING 

The OCFO must be responsible for all matters related to revenues and expenditures, and will 

be the key financial management agent. Hacienda, as the OCFO, will drive implementation of 

EITC, tax law initiatives, and new revenue-collecting initiatives (e.g., Internet sales tax 

collections). Already, Hacienda has advised the Oversight Board it has been working to launch 

several new initiatives to improve its enforcement effectiveness and increase the volume of 

revenues collected, such as through the SURI transition. 

13.8.2 Efficiency measures for Hacienda / Office of the CFO 

Hacienda / OCFO must achieve $6.9 million in personnel savings and $5.3 million in nonpersonnel savings in FY19. Refer to Exhibit 52 for annual personnel and non-personnel 

savings that must be achieved through FY23. 

EXHIBIT 52: HACIENDA/ OFFICE OF THE CFO SUMMARY OF MEASURES IMPACT 

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New Commonwealth Fiscal Plan 

Transform Hacienda to improve efficiencies 

Hacienda itself must attain an overall 15% net reduction in costs (approximately $24.5 

million), which is 25% gross (approximately $40 million) which is in line with the 

level of cuts seen in other Treasury Department transformations. For instance, a 

transformation within Her Majesty’s Revenue and Customers agency in the UK successfully 

cut costs by 25% over a five-year period through a series of management initiatives, including 

reducing IT costs, increasing operational efficiency, reducing the real estate footprint, and 

overall process improvement.100 Many of initiatives can be leveraged by Hacienda, in addition 

to reforms unique to Puerto Rico, including but not limited to: 

■ Partnerships with private banks to reduce real estate and personnel footprint (estimated 

to save approximately ~$20 million per year) 

■ Non-personnel spend (e.g., support service consolidation) and procurement optimization 

(estimated to save approximately ~$12 million per year) 

■ Initiatives related to digitization and general process and efficiency improvements 

While Hacienda must target gross reductions of 25%, 40% of these reductions (~$16 million) 

should be reinvested in compliance activities, providing the budget for hiring additional 

Hacienda employees needed to implement new compliance activities, as well as for technology 

investment. After subtracting the ~$16 million to be reinvested in compliance activities, this 

measure amounts to $24.5 million in annual net savings by FY2023. 

Reduce non-Treasury back-office and non-personnel 

Overall back office and non-personnel savings targets are detailed in Section 13.2, and 

include levers such as procurement optimization, consolidation of support functions, and 

similar initiatives. Back office savings must lead to $9 million run-rate savings by FY2023, and 

non-personnel savings must lead to $4 million in annual savings by FY2023. 

AAFAF reductions in spend to promote reinvestment

Unlike other entities within the Hacienda/OCFO, AAFAF will be subjected to a 7.5% cut 

(roughly ~50% of the level of cuts prescribed to other government agencies). These cuts must 

lead to savings of $1 million per year by FY2023, and will be reinvested (as described in 

Chapter 11). 

Department of Economic Development (DDEC) 

13.9.1 Current state and future vision for the Department of Economic 

Development 

DDEC includes a consortium of agencies critical to incentivizing and managing the 

economic recovery of Puerto Rico’s private sector following recent seismic changes to 

the marketplace, including the removal of Federal corporate tax incentives and the debilitating 

impact of Hurricanes Irma and Maria. To promote growth, DDEC is driven by a strategic 

economic plan to promote high-impact projects, reenergize existing industries, and promote 

new strategic initiatives. In addition, DDEC manages a variety of programs on the Island 

intended to promote Puerto Rican entrepreneurship, youth employment, and other critical 

economic development functions. In the aftermath of Hurricane Irma and Maria, these 

 

100 National Audit Office, “Reducing Costs in HM Revenue & Customs,” 2011 

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New Commonwealth Fiscal Plan 

programs will be crucial for the vitality of the Puerto Rican economy through increasing 

participation in the job market and attracting new business to the Island. 

The agencies to be consolidated are as shown below (Exhibit 53). 

EXHIBIT 53: LIST OF AGENCIES IN DDEC GROUPING 

The agencies within the grouping are responsible for a variety of efforts to maintain a robust 

economic marketplace within Puerto Rico, including supervising public policy, creating and 

retaining jobs, attracting capital investment, and promoting tourism. However, the diffusion 

of these weighty responsibilities across so many agencies has led to an inconsistent 

approach to overall economic development. For instance, the Government currently 

lacks a coherent development strategy between the existing incentives code and the initiatives 

pursued by agencies within DDEC, and until now there has been no single entity solely 

responsible for incentivizing foreign direct investment in Puerto Rico. 

Under the new grouping construct, DDEC should be better able to coordinate its efforts to 

spur economic development by providing clear goals and metrics for success. In addition, it 

will drive savings by reducing the back-office operations of the newly-consolidated agencies, 

pursuing digitization, procurement centralization and other efforts to reduce non-personnel 

spend, and reducing the number of front-line personnel to better reflect mainland standards 

for a right-sized economic development operation. 

13.9.2 Efficiency measures for DDEC 

The following stipulations will govern the future state of DDEC: 

■ The DDEC budget should include carve outs for the Destination Marketing Office 

and Invest Puerto Rico, as these institutions will perform complementary functions to 

DDEC 

■ Each entity within DDEC grouping should have clearly defined responsibilities and 

governance structures that limit costs moving forward and prevent overlapping duties 

among agencies in the grouping (e.g., specific marketing / promotion agency mission 

should be separate from the corporate development / retention agency) 

DDEC must achieve $5.8 million in personnel savings and $10.6 million in non-personnel 

savings in FY19. Refer to Exhibit 54 for annual personnel and non-personnel savings that 

must be achieved through FY23. 

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New Commonwealth Fiscal Plan 

EXHIBIT 54: DDEC SUMMARY OF MEASURES IMPACT 

Right-size the number of front-line employees 

Therefore, DDEC should reduce front-line personnel by 20% to ensure a streamlined, 

efficient organization, leading to $5.4 million in annual savings by FY2023. 

Right-size the number of back-office employees 

A government analysis identified a redundancy in service of back-office personnel across 

DDEC.101 DDEC could consolidate back-office operations of the newly-merged agencies 

as detailed in Section 13.2, leading to $12.1 million run-rate savings by FY2023. 

Optimize non-personnel spend 

DDEC must pursue a variety of initiatives to reduce non-personnel spend, primarily 

centered on procurement optimization and digitization of operations (e.g., digitizing the 

permit application process), as detailed in Section 13.2. These initiatives must lead to $33.9 

million run-rate savings by FY2023. 

Legislature, Courts, FOMB, AAFAF efficiencies and 

reinvestment 

As discussed in Section 11.2.4, the General Court of Justice, Legislative Assembly, AAFAF, and 

the Oversight Board must also undergo expenditure reductions to enable the creation of an 

independently managed endowment for needs-based scholarships for students at the 

University of Puerto Rico. The reductions for the Legislative Assembly and General Court of 

Justice are informed by benchmarking against other full-time legislatures and courts in U.S. 

states, while AAFAF and the Oversight Board will face a ~50% reduction compared to the 

average reductions to other agencies, as both entities will be necessary to oversee the 

 

101 DDEC analysis, 2018 

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New Commonwealth Fiscal Plan 

implementation of the New Fiscal Plan. In this way, these entities will share in the need to 

drive Government efficiency and drive reinvestment in the People of Puerto Rico. 

Savings must begin in FY2019 and total $62M, which must increase to $64 million by FY2023. 

They are detailed below (Exhibit 55). 

EXHIBIT 55: LEGISLATURE, COURTS, AAFAF, FOMB REINVESTMENT SAVINGS 

Savings from the Legislature must be applied to operational spend, not funding toward other 

entities. 

All other agencies 

The following agency groupings were evaluated using a top-down approach which primarily 

relied on the levers and initiatives highlighted in Section 13.1. 

Full details for each agency are provided in the appendix. Exhibit 56 shows the 

summary of the savings that each agency must achieve. 

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New Commonwealth Fiscal Plan 

EXHIBIT 56: PROPOSED SAVINGS TARGETS FOR OTHER AGENCY GROUPINGS 

Compensation-related initiatives 

Instituting a payroll freeze 

The Commonwealth Fiscal Plan certified in March 2017 included a measure to freeze all 

payroll expenses which became law in FY2018. However, the freeze was due to expire at the 

end of FY2019. To extend the savings from freezing payroll increases, the freeze must be 

continued through the duration of the New Fiscal Plan. This measure should amount to 

$276.6 million in annual savings by FY2023. 

Standardizing healthcare provided to government employees 

Medical insurance is a core benefit provided to all government employees. However, the 

degree of coverage varies widely across government agencies, with some employees receiving 

superior coverage compared to their peers. For instance, Port Authority employees receive an 

average of $487 per month in medical benefits, whereas employees of the State Elections 

Commission receive only $90 per month102. 

To ensure fairness and reduce expenses, the Government must standardize the health 

insurance received by each employee so that everyone receives $100 worth of benefits 

per month, or $1,200 per year. This initiative must be fully implemented by the start of 

FY2019, and should lead to $56.4 million in run-rate savings by FY2023.103

Reducing additional outsized non-salary compensation paid to employees 

 

102 Analysis of active, non-transitory government employees not supported by Federal Funds; data provided within January 

2018 Government attrition model 

103 This total excludes uniform healthcare savings from the PRDE and the DPS, both of which have been calculated 

independently and included in their respective sections of the New Fiscal Plan 

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New Commonwealth Fiscal Plan 

There are several policies that the Government must continue to enforce through the duration 

of the New Fiscal Plan that will impact personnel spend. These include: 

■ Asserting a hiring freeze with stringent requirements for backfilling positions left open by 

attrition or workforce reduction 

■ Limiting paid holidays to 15 days annually across all public employees 

■ Prohibiting carryover of sick and vacation days between fiscal years 

■ Prohibiting any future liquidation of sick and vacation days 

■ Eliminating the Christmas bonus for all public employees 

The hiring freeze policy is codified as law by the March 2017 Fiscal Plan, and the New Fiscal 

Plan continues to enforce that policy while requiring the Government to propose stringent 

requirements for the backfilling of any opened positions for approval to the Oversight Board. 

The other policy measures outlined above are codified as law in Act 26-2017, except for the 

elimination of the Christmas bonus. 

The fiscal impacts of these policies are captured in the baseline expenditures of the New Fiscal 

Plan, except for the elimination of the Christmas bonus. These policies must remain in place 

so as to not increase personnel expenditures for the Commonwealth. The elimination of the 

Christmas bonus is projected to lead to $69.9 million in run-rate savings by FY2019. 

Total savings from compensation-related measures must reach a run-rate of $402.9 million 

per year beginning in FY2023. Annual savings targets are summarized below (Exhibit 57). 

EXHIBIT 57: COMPENSATION-RELATED MEASURES SUMMARY OF IMPACT 

Implementation plan 

Exhibit 58 depicts the implementation timeline for agency efficiencies measures, with the 

understanding that more detailed implementation plans will be submitted for each agency 

grouping by the end of FY2018. 

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EXHIBIT 58: AGENCY EFFICIENCIES IMPLEMENTATION TIMELINE 

HEALTHCARE REFORM 

Current State of Puerto Rico’s Medicaid program

Prior to Maria, 46% of Puerto Ricans received their health coverage through the 

Commonwealth’s state-run insurance program, Mi Salud; this was the highest share of 

publicly-funded health insurance coverage in America, with the next highest state, West 

Virginia, covering only 29% of its population under public plans.104 In addition to its large 

coverage population, Puerto Rico lags mainland states in both health outcomes and access. 

Puerto Ricans face higher rates of chronic conditions like hypertension (11.3%-points higher 

than the U.S. mainland), diabetes (4.4%-points higher), and asthma (1.6%-points higher).105

Only 28% of the 62,000 Mi Salud members with diabetes and 17% of the 132,000 Mi Salud 

members with hypertension are in the respective disease management programs. Puerto Rico 

also has higher premature birth and infant mortality rates,106 and higher rates of adults 

reporting fair or poor health.107 At the same time, 72 of Puerto Rico’s 78 municipalities are 

 

104 Kaiser Family Foundation, “Medicaid State Fact Sheets: Percent of People Covered by Medicaid/CHIP, 2015” 

105 CDC (Centers for Disease Control and Prevention), “BRFSS Prevalence and Trends Data,” 2015-2016. Behavioral Risk 

Factor Surveillance System 

106 Puerto Rico infant mortality rate is 6.4 per 1000 (2016) vs. U.S. 5.8 per 1000; premature birth rate is 11.8% vs. 9.6% in 

U.S. “Puerto Rico,” World Factbook (Washington, DC: CIA) 

107 35.4% of Puerto Ricans report fair or poor health, versus 17.9% U.S. average, and 19.3% in Florida and 22.0% in 

Mississippi (two most comparable states). Table 3, Krista Perreira et al. Urban Institute. Jan 2017. “Environmental Scan of 

Puerto Rico’s Health Care Infrastructure” 

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deemed “medically underserved areas,”108 with 500 doctors leaving per year (pre-Maria). 

Puerto Rico has half the rate of specialists as compared to the mainland in critical fields (e.g., 

emergency physicians, neurosurgeons).109 

Mi Salud covers individuals through three primary funding sources: Federally-matched 

Medicaid, the Children’s Health Insurance Program (CHIP), and the Commonwealth’s selffunded insurance program for low-income adults who do not qualify for Federally-matched 

Medicaid. An additional 8% of the Puerto Rican population receives some benefits from Mi 

Salud as part of the Platino program, which supports Medicare recipients who also qualify for 

Medicaid (also known as “dual-eligible”). Annually, these programs collectively cost $2.77 

billion (as of FY2018), with the Commonwealth responsible for the vast majority of costs due 

to caps on Federal matching (see Section 5.1.3 for more information on Medicaid Federal 

funds). Puerto Rico faces real and growing challenges with rising healthcare costs, with 

premiums growing significantly faster than inflation. Even with some cost containment 

measures in place, per-member per-month (PMPM) disbursements rose 6.3% from FY2017 to 

FY2018. And based on national healthcare cost inflation trends plus increased post-hurricane 

need, Mi Salud PMPMs are projected to rise by nearly 40% over the next 6 years in the absence 

of additional measures. 

The Bipartisan Budget Act of 2018 (BBA 2018) provides the Commonwealth temporary relief 

from raising healthcare costs by expanding the amount of Federal reimbursement over the 

next 18 months. Starting in September 2019, however, the Commonwealth will hit a “Medicaid 

cliff” whereby it will be responsible for multi-billion-dollar annual healthcare expenditures 

unseen since before the passage of the Affordable Care Act provided additional Federal 

funding in 2011. It is crucial, therefore, that ASES take advantage of the additional runway 

provided by the BBA funding to put in place reforms that reduce long-term health expenditure 

growth rates. 

Future vision for healthcare reform

The future vision for the Puerto Rican healthcare system is to promote an overall healthier 

population through provision of high-quality services to all citizens in need. To do so, the 

Government has proposed targeting the following: 

1. Decrease the annual per-member cost growth rate to the median level of 

Medicaid growth rate by implementing value-based healthcare reforms, such as new 

payment models to incentivize care integration among providers 

2. Shift care from higher-cost to lower-cost channels; for example, reducing the 

number of emergency room visits and encouraging and enabling the role of primary care 

physicians in providing preventative care 

3. Drive better health outcomes for the population, indicated especially by reduced 

rates of chronic conditions among adults 

4. Coordinate healthcare initiatives in the community to promote efficiency of 

services and a community-wide focus on health 

 

108 Areas with a shortage of personal health services, e.g., areas or populations that have too few primary care providers, 

high infant mortality, high poverty, and/or high older adult population 

109 U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, “ASPE 

Issue Brief: Evidence Indicates a Range of Challenges for Puerto Rico Health Care System” (Jan 12, 2017) 

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Key initiatives for healthcare reform

Addressing Puerto Rico’s healthcare challenges while also reducing costs will require a 

portfolio of targeted actions in the short term (e.g., reducing waste and abuse) and long term 

(e.g., structural reforms to healthcare model to improve quality relative to cost). 

In early FY2018, ASES began efforts to reduce healthcare costs, including implementation of 

preliminary enrollment verification efforts with DCR and private insurers; standardization of 

fee schedules for providers; and prescription drug cost controls such as increased pharmacy 

discounts on branded drugs, mandatory dispensing of generic drugs, and changes to 

prescription coverage guidelines. 

Beginning in FY20, the Government must implement a new healthcare model, currently in 

development, through changes to how the Island’s managed care organizations (MCOs), are 

contracted and incentivized as the third-party administrators of Mi Salud. The new model’s 

savings must reach a run-rate annual savings of $840.2 million by FY2023 (off of the FY2022 

baseline of approximately $3.4 billion), a measure run-rate which is then projected to increase 

as the baseline expenditures increase at long-term healthcare inflation rate of 4-6%. However, 

this measure is offset by $353 million, made possible by the implementation of the Labor 

Reform Agenda, which will be invested in ensuring improved health outcomes that will reduce 

costs in the long-run (discussed in Chapter 11). 

Exhibit 59 provides an overview of the core savings measures. 

EXHIBIT 59: MI SALUD BASELINE SPEND AND MEASURES 

14.3.1 Pursue value based reforms to improve quality relative to cost of care 

Pursuing value-based improvement initiatives with demonstrated success can help reduce Mi 

Salud’s per-member per-month (PMPM) rates. Similar value-based programs have been 

piloted in other states, and typically save between 2-10% of costs. In Puerto Rico, value-based 

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reforms may result in somewhat lower than average savings due to the breadth of other savings 

measures being implemented simultaneously in Mi Salud, and unique post-Hurricane 

challenges such as a potential increase in behavioral health needs. Value-based reforms will 

be combined with a portfolio of other initiatives in the “new healthcare model” to achieve 

savings targets. This measure includes: 

Improved coordination of care. New approaches that emphasize care coordination and 

align incentives between patients, providers, and payors can produce improvements in health 

outcomes while lowering costs. Given the preponderance of chronic conditions and potential 

rising behavioral and mental health needs in the wake of Hurricane Maria,110 better access and 

coordination of mental health services will become increasingly important. Care coordination 

models like patient centered medical homes – which empower patients to work closely with a 

primary care provider to manage treatment plans across multiple care providers – have been 

quite effective at improving outcomes for members with chronic conditions.111ASES can serve 

as a coordination point for care organizations throughout the community, ranging from 

managed care organizations to education and faith-based community organizations. The new 

RFP issued by ASES is focused on developing such managed care programs for high cost, high 

need populations. 

Reduced Emergency Room (ER) visits. Puerto Rican’s utilize the ER 3 times as often as 

peers on the U.S. mainland,112 with estimates as high as 90% of ER visits occurring for nonemergency care that could be treated in lower cost settings. Successfully shifting unnecessary 

ER visits to lower-cost settings, such as primary care offices or urgent care, could save roughly 

$70-75 million annually, or 3% of total Mi Salud costs. Mi Salud could reduce ER utilization 

through several means, including patient education, increased ER co-pays, or changes to 

reimbursement policies.113

Reduce inpatient length of stay. Puerto Rico’s inpatient length of stay is 1.5 times the U.S. 

average.114 MCOs can incentivize reduced hospital readmissions and length of stay through 

improved discharge planning and increased staffing to manage weekend discharges. Some 

MCOs have already implemented such reforms in Puerto Rico. 

Adjusting MCO payment models. ASES is already considering many changes to MCO – 

provider payment models to promote greater accountability and better align care delivery to 

outcomes amongst providers. Best practice value-based payment models from other managed 

care settings include direct pay-for-performance quality bonuses, providing fixed payments 

for a ‘bundle’ of services required to treat a specific condition, and providing special incentives 

to care for members with high-cost needs, such as behavioral health. 

14.3.2 Reduce pharmacy spend 

Prescription drug coverage is the largest category of spend in Mi Salud, contributing 26% of 

the total cost in treating the average patient. Nearly half of this spend comes from specialty 

 

110 Thomas Huelskoetter, Center for American Progress, “Hurricane Katrina’s Health Care Legacy” (August 15, 2015) 

111 Patient-Centered Primary Care Collaborative, “Benefits of Implementing the Primary Care Medical Home 

A Review of Cost & Quality Results, 2012” (Sept 2012) 

112 JEL Consulting analysis (Dec 30, 2106) of ASES data and Puerto Rico Community Survey, Public Use Microdata, 2014. 

Estimates exclude Platino beneficiaries 

113 See, e.g., Schwartz et al. Copayment levels and their influence on patient behavior in the emergency room utilization in an 

HMO population. Journal of Managed Care Medicine. 2012; Wallace et al. How effective are copayments in reducing 

expenditures for low-income adult Medicaid beneficiaries? experience from the Oregon health plan. Health Services 

Research 2008; Lesley et al. Reducing frequent visits to the emergency department: a systematic review of interventions. 

PLOS. 2015 

114 As of 2014. JEL Consulting analysis (Dec 30, 2106) of ASES data and Puerto Rico Community Survey, Public Use 

Microdata, 2014. Estimates exclude Platino beneficiaries 

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New Commonwealth Fiscal Plan 

drugs. Even after ASES-negotiated some prescription drug cost reduction measures,115

pharmacy costs grew 14% annually from FY2016 to FY2018 in Puerto Rico,116 compared to 6% 

per year in U.S. Medicaid programs.117 

Puerto Rico faces structurally higher prices than the mainland because, unlike U.S. states, it 

cannot participate in the Federal Medicaid Drug Rebate Program (MDRP), and may only seek 

voluntary or supplemental rebates. That said, ASES can lower the cost of prescription drug 

coverage by replacing higher cost drugs with cheaper, equally effective alternatives, driving 

increased use of generics and imposing utilization controls. These initiatives resulted in 

negotiated savings of $4.31 PMPM in Mi Salud’s FY2018 contracts. However, to sustain these 

savings, MCOs must engage in ongoing monitoring and enforcement of policy changes to 

further refine drug coverage lists and utilization management policies due to changing 

prescription patterns. 

14.3.3 Reduce fraud, waste, and abuse (FWA) 

The U.S. Government Accountability Office found evidence that MCOs have not consistently 

reported improper payments to providers billing to the system. Further, it found that many 

MCOs face conflicts of interest in finding and eliminating fraud.118 Typical waste, fraud, and 

abuse reduction programs in other state Medicaid programs and health insurers have been 

able to achieve 1-3% cost savings. These savings have been reached through: pre-payment 

review (e.g., reviewing claims before payment to identify outliers / issues); auditing and 

enforcement units to investigate suspicious behavior; advanced analytics capabilities to review 

many actions to identify inefficient or fraudulent activities in post-payment review, such as 

identification of “impossibility” coding (e.g., billing for over 24 hours of service in one day), or 

frequently repeated or high value procedures; and long term policy or organizational 

transformation. 

To combat FWA, ASES shall: 

■ Fully operationalize a Medicaid Fraud Control Unit (MFCU)—which it has already 

launched--outside of the MCOs to identify and prosecute fraudulent charges 

■ Establish a functional Medicaid Management Information System (MMIS) to track 

utilization, claims, and provide the data inputs for advanced analytics assessments to 

identify inappropriate spending; and 

■ Use data to obtain reimbursement for improper payments and to identify and eliminate 

the systematic causes that enabled the problematic activities in the first place. 

Puerto Rico does not currently have an operational MMIS or MFCU, but is in the process of 

developing and shall develop both programs. Successful operationalization of the MMIS will 

enable ASES to receive $1.2 billion of the BBA 2018 allocated funding, contingent upon 

establishment of methods to lower FWA and collect/report reliable information to the 

Transformed Medicaid Statistical Information System (T-MSIS).119

 

115 FY2018 Milliman Actuarial Certification 

116 Ibid 

117 Express Scripts 2016 Drug Trend Report 

118 GAO “Medicaid and CHIP Increased Funding in U.S. Territories Merits Improved Program Integrity Efforts,” April 2016 

119 MACPAC, “Medicaid and CHIP in Puerto Rico,” report, February 2018 

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New Commonwealth Fiscal Plan 

14.3.4 Enrollment verification 

In addition to overpayment for eligible beneficiaries, ASES faces a particular challenge in 

ensuring it is serving the proper beneficiaries—and preventing those who are ineligible from 

receiving benefits. Over-enrollment typically occurs when residents have private insurance, 

are in the corrections system, have moved to other states, or are deceased. Data system 

limitations (e.g., limited data sharing with other systems; manual dis-enrollment after 

eligibility expiration) mean that it often takes years to dis-enroll ineligible members, and many 

are never removed. Over enrollment could be identified through coordination of benefits, 

interagency data sharing, state-specific MOUs, and the national Public Assistance Reporting 

Information System (PARIS) and T-MSIS Medicaid interstate match. 

Pre-Maria, Mi Salud had an estimated 5% over-enrollment rate, translating to Mi Salud 

improperly paying for roughly 62,000 beneficiaries.120 Maria is likely to augment these 

challenges. Due to the hurricane, 12% of Puerto Rico’s population is expected to emigrate by 

FY2023, and it is estimated that a roughly proportionate number of Mi Salud members will 

also leave the Island. Given the limited data capabilities at present, without active efforts to 

dis-enroll those who leave and do not return, it is expected that ASES will continue to pay for 

these departing beneficiaries for a full year after they leave, resulting in Mi Salud reaching 10% 

over-enrollment in FY2018. 

14.3.5 Implement a uniform fee schedule for providers 

One way ASES has been able to put controls on spend growth is working with MCOs to 

implement a new fee schedule for providers. The updated schedule, which went into effect on 

July 1, 2017, provides 70% of Medicare reimbursement rates for each category of services, a 

sharp reduction for some specialty services on the Island (laboratory and radiology in 

particular), reducing PMPM by an estimated $3.52 in FY2018.121

14.3.6 Reduce administrative MCO costs through a single region model 

ASES can reduce MCO administrative costs by switching from the current system of nine 

regions, each with a single MCO provider, to a geographically unconstrained competitive 

system with multiple MCOs serving the entire Island. This new single region MCO model 

should produce increased economies of scale for administrative operations and will lower 

costs through greater competition and incentives to enforce efforts to lower the cost of care. 

ASES has already been moving the MCOs towards improved Medical Loss Ratios (MLRs), 

constraining the share of their PMPM costs not used for medical services. In the FY2016 

contract, 10% of the PMPM went to administrative costs and profits; in the FY2018 negotiated 

rates, administrative costs and profits fell to 8.6%.122 In FY2019, ASES plans to improve this 

MLR to 92% (8% leftover for administration and profits).123

14.3.7 Stop-gap levers to ensure achievement of savings targets 

As an extreme measure in cases where target run-rate savings are unachievable with the above 

measures, the following additional measures could be implemented to hit expenditure 

reduction targets. 

 

120 Ballori Group estimate 

121 FY2018 Milliman Actuarial Certification 

122 FY2016 rate analysis; FY2018 Milliman Actuarial Certification 

123 Communication with ASES, Nov 21, 2017 

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Require cost-sharing for the Medicaid and Commonwealth populations 

ASES could reduce healthcare spending by imposing cost sharing on specific services to disincentivize high-cost, low-impact behavior, such as visiting an ER for non-emergency services 

or using certain non-preferred drugs. Co-pays have been shown to reduce used of affected 

services, and therefore should not apply to preventive care or other areas that reduce net 

health system costs, such as family planning services. Any required co-pay shall be determined 

on a service-by-service basis to selectively disincentivize high-cost, low-impact activities; 

further, co-pays will be implemented progressively, scaled to member income while exempting 

those without income and CHIP members. 

Reduce coverage for select optional benefits 

Medicaid requires all states to cover certain services, such as hospital stays, physician visits, 

preventive health services, family planning, and pregnancy-related care. Other benefits are 

considered optional, including: prescription drugs; physical, occupational, and speech 

therapy; dental; podiatry; optometry and glasses; prosthetics; chiropractor services; private 

duty nursing; hospice; and respiratory care services. Some of these optional benefits are 

provided by every state (such as prescription drug coverage), while others are covered by fewer 

than half of states. 4.3% of total Mi Salud payments

124 are related to the following categories 

of benefits coverage that at least one other state or territory does not cover:125

EXHIBIT 60: OPTIONAL BENEFITS PROVIDED BY PUERTO RICO BUT NOT OTHER 

STATES/TERRITORIES 

 

124 When adding back in the $0.59 PMPM attributable to CHIP coverage that would not be subject to reductions or cost 

sharing 

125 Kaiser Family Foundation Medicaid Benefits Data Collection, Oct 1, 2012 data (latest available as of Nov 2017). 2 states 

do not cover prosthetics, while every state covers durable medical equipment and supplies. 33 states do not cover private 

duty nursing, while every state covers home health services. 20 states do not cover occupational therapy; data was not 

available on outpatient PT/OT/ST specifically. Puerto Rico data from FY2018 Milliman Actuarial Certification 

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As a result, another second stop-gap measure could be to reduce Mi Salud coverage for select 

optional benefits, either by eliminating some optional benefits, imposing various levels of costsharing for remaining benefits, or restricting access. Optional benefit coverage reductions 

would affect Medicaid and Commonwealth Mi Salud members, but not CHIP members. 

Reinvestment in health outcomes and infrastructure 

Over FY2018-FY2020, $353M can be reinvested in improving health outcomes, funding for 

which will be made possible by the implementation of the Labor Reform Agenda (See Chapter 

7). These reinvestment funds will be used in part to improve health outcomes in the 

community through preventative care, increased analytical capabilities, and a more reliable 

health infrastructure. These short-term investments to improve the long-term outlook of 

healthcare in Puerto Rico will significantly control skyrocketing long-term healthcare costs 

and contribute to the overall well-being of Puerto Rico’s residents. Reinvestment initiatives 

are detailed in Section 11.2.1.

Implementation plan 

Healthcare reform shall consist of specific measures (pay for value, reduction of drug costs, 

modification of benefits package, and FWA efforts) in FY2019 during the development of the 

new healthcare model. The new healthcare model shall take effect in FY2020 (Exhibit 61). 

EXHIBIT 61: HEALTHCARE REFORM IMPLEMENTATION TIMELINE 

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New Commonwealth Fiscal Plan 

TAX LAW INITIATIVES 

Current state of tax environment 

Puerto Rico’s current tax system suffers from its structural complexity, instability, internal 

inconsistency, inefficient administration and inadequate enforcement. This has fueled a 

culture of tax evasion, promoted by a lack of adequate enforcement personnel, technology and 

process. Top marginal tax rates are high relative to U.S. Federal and state taxes (e.g., 39% for 

corporations, and 11.5% for sales and use). Much of the Government’s revenue is also overly 

concentrated in collections from a handful of multi-national corporations. To compensate for 

this unevenness, the Government has issued an assortment of credits, deductions, and 

incentives that add to the system’s complexity and further erode the tax base. Limited audit 

and enforcement in recent years has also resulted in a “lack of fear” amongst tax filers, who 

assess that the likelihood of punishment is low and the ability to negotiate consensual 

settlement agreements if caught are high. 

In addition, Puerto Rico’s current patchwork process for awarding tax concessions, which 

averaged ~$251 million in annual exemptions between FY2009 and FY2013126, has not 

historically been aligned to a strategy for growth. Some evidence exists that exemptions within 

the tourist industry have led to positive returns on investment.127 However, not all incentives 

– one recent analysis of Puerto Rico’s corporate tax incentives revealed 50+ such exemptions 

within the economy128 – prove as profitable as the tourism incentives. 

Future vision for tax environment 

Prior to the hurricane, the Government was evaluating options for a reformed tax regime, and 

had taken steps to improve tax compliance and increase certain taxes and fees. In the wake of 

the hurricane, Puerto Rico will need to drive more formality and increased compliance within 

the tax base without losing revenues. Therefore, Puerto Rico should broaden the tax base while 

maintaining revenue neutrality to ensure that revenues are not unintentionally foregone. 

Proposed tax law initiatives 

The New Fiscal Plan includes a series of targeted tax law initiatives that focus on reducing 

income tax rates while broadening the tax base via the expansion of alternative minimum taxes 

(AMTs) and reduction of incentives to raise taxes on others. The tax law initiatives must be 

revenue-neutral, with multiple stabilizing mechanisms to offset any shortfalls in revenue. The 

plan: 

■ Reduces the corporate base tax from 20% to 19%, and the top rate from 39% to 31% 

■ Lowers individual income tax rates, including the top marginal rate to 31%, while reducing 

a series of exemptions and deductions such as the mortgage interest deduction 

■ Eliminates the B2B SUT by FY2020 

■ Reduces the tax rate on prepared foods transactions (e.g., at restaurants) paid for via 

electronic means from 11.5% to 7% 

 

126 Hacienda, Oficina de Asuntos Economicos Y Financieros (2013) 

127 An Estudios Técnicos cost-benefit analysis of tax credits within the hotel industry concluded there was a direct net benefit 

of $179M annually due to the tax credits, or $328M when including aggregate net benefit to the economy (“Cost-Benefit 

Analysis for the Tax Credits Provided to the Hotel Industry by the Government of Puerto Rico,” Estudios Técnicos (2017)) 

128 “Tax incentives in Puerto Rico”, DLA Piper (2017) 

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These initiatives must be financed by a variety of offsets, including: 

■ The creation of a minimum flat tax withholding at source regime for self-employed 

individuals and service based companies 

■ Expanded usage of corporate and individual alternative minimum taxes to broaden the tax 

base and combat excessive usage of deductions to lower tax liability 

■ Reduction in a series of deductions, credits, and cash grants 

These tax law initiatives do not address incentive corporations or the need to shift away from 

the Act 154-2010 tax to a broader, more progressive tax regime. The incentives also do not 

address the Government ’s need to reform its broader tax structure in response to the Federal 

Tax Reform legislation that was recently enacted. Both of these topics will need to be addressed 

in the future. 

The projected value of tax reductions and offsets are shown below (Exhibit 62). 

EXHIBIT 62: DETAILED TAX LAW INITIATIVES AND OFFSETS 

Implementation and enforcement of tax law initiatives 

15.4.1 Proposed implementation plan 

Implementation of the tax law initiatives must occur sequentially, with the Government 

ensuring that initiatives are paid for (e.g., through revenue generated from AMTs or incentive 

reductions) before rates are reduced. Exhibit 63 shows for the proposed implementation 

plan, including major legislative milestones. 

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EXHIBIT 63: TAX LAW INITIATIVES IMPLEMENTATION TIMELINE 

15.4.2 Creation of a tax expenditure report 

As part of implementation, the Government must regularly produce a tax expenditure report, 

which will include a comprehensive lists of revenue losses attributable to provisions of the 

Puerto Rican tax code that deviate from the tax structures benchmark law. The revenue loss 

could be due a special exclusion, deduction, exemption, credit, a preferential rate of tax, or a 

deferral of tax liability. Having a clear and accurate understanding of what the Government 

spends through tax expenditures is critical to ensuring that the expenditures are contributing 

to economic growth and opportunity. The first draft of tax expenditures budget must be 

provided to the Oversight Board by the end of calendar year 2018. 

15.4.3 Enforcement of revenue neutrality 

Enforcement mechanisms must be part of any tax initiative package to prevent a scenario 

where tax reductions for individual income tax, corporate income tax, B2B tax, and SUT on 

prepared foods (the “Proposed Tax Initiatives”) are not accompanied by sufficient offsetting 

revenue measures identified in the enabling legislation. Enforcement shall take the form of a 

fiscal responsibility test. There are historical precedents for this type of enforcement 

mechanism, including Act 1-2011 in Puerto Rico and California’s 2009 budget legislation. 

To meet this requirement, the Government must produce a quarterly performance report, 

which shall be submitted to the Oversight Board within 45 days after each quarter ends, 

measuring the performance of the Proposed Tax Initiatives and the offsetting revenue 

generation or cost reduction measures identified in any enabling legislation against 

projections set forth in the New Fiscal Plan. The implementing legislation shall include specific 

measures that will be triggered to restore revenue neutrality over the period covered by the 

New Fiscal Plan in the event that the Oversight Board determines there is a lack of revenue 

neutrality, based on the quarterly performance report or any other information or report. The 

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New Commonwealth Fiscal Plan 

implementing legislation must be constructed such that further legislative action is not 

required for these enforcement measures to take effect. Neutrality can only be reached on 

categories and legislation related to the Proposed Tax Initiatives themselves and cannot be 

reached via outperformance against the baseline, improvements in compliance, or a reduction 

in general expense categories. Additionally, automatic stabilizers must be enacted through 

legislative channels (see Appendix for legislative language and mechanisms) and reduction 

of taxes will be reversed in cases of non-compliance and failure to meet revenue neutrality. 

TAX COMPLIANCE AND FEES 

ENHANCEMENT 

Current state and future vision for tax revenue collection 

As described in the “Tax Law Initiatives” (see Chapter 15), Puerto Rico has suffered from low 

tax compliance due to an unevenness in who pays taxes and lack of fear among violators, 

leading to limited downside for non-compliance and high upside for tax avoidance. Due to 

its compliance and collections issues, the Commonwealth has not been able to 

drive as many revenues from taxes as it should each year. 

In response to these challenges, the Government reports it has already started implementing 

compliance-related changes within Hacienda. It is driving improvements in its culture and 

organization to boost enforcement capabilities, streamlining the process of filing taxes and 

reducing complexity in the system to lighten the burden of compliance on taxpayers. These 

efforts have already resulted in some success: in 2012, SUT compliance stood at 56%, and by 

2016 had improved by 12 percentage points, to 68% compliance.129 Moving forward, 

Commonwealth-commissioned tax reform report models estimate that Puerto Rico could 

reach 75% sales tax compliance.130

Administrative tax initiatives to increase revenue 

collections 

By driving administrative reform, the Commonwealth must increase revenues by $2,126 

million over six years, as shown below (Exhibit 64). 

 

129 Departamento de Hacienda, November 2016 

130 The report did not address how long it would take to reach this end state. “Commonwealth of Puerto Rico Tax Reform 

Assessment Project, Unified Tax Code of Puerto Rico: Tax Policy Implementation Options General Explanation of 

Principal Options” KPMG (October 31, 2014) 

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New Commonwealth Fiscal Plan 

EXHIBIT 64: REVENUE MEASURES SUMMARY OF IMPACT 

16.2.1 Improve compliance rate 

Given the progress to date in improving compliance rates and the ongoing gap to reach 

mainland performance, the Government must target a 5% net uplift in compliance 

by FY2022 – inclusive of implementation costs from reinvestment described in the 

“Hacienda / Office of the CFO” (see Chapter 12) – across the major tax lines (personal income 

tax, corporate income tax, and SUT). Such an improvement would also be in line with 

improvements seen in other tax transformations.131

Recent compliance efforts in the Commonwealth have largely focused on collections outreach 

activities, obtaining one-time back taxes owed through a collections call center, flexible 

payment plans, and a large corporate taxpayer-focused team (with a longer-term goal of 

establishing a permanent separate unit). In the future, emphasis should shift towards 

initiatives that promote a culture of compliance to boost voluntary payment. The goal 

should be to reduce the cost of compliance while simultaneously raising the cost of noncompliance, through a combination of an increased likelihood of being caught while not paying 

taxes owed and more effective and enforceable penalties.132 

■ Use new systems and processes to identify and remediate non-payment.

Hacienda will create a “premium return system” for individual and corporate taxpayers 

that enables taxpayers to claim certain deductions and exemptions only if their return is 

prepared by a certified public accountant following agreed upon procedures; the CPA’s 

review and certification of the return and supporting documentation as compliant with 

Puerto Rico’s tax laws would functionally serve as a “pre-audit,” reducing the likelihood of 

tax evasion and the need for a fuller review by Hacienda. 

■ Create a new culture internally and externally that shifts from the agency existing 

to serve the public (“Hacienda para servirle”) towards emphasis on Hacienda making sure 

everyone pays their taxes, but with as little friction as possible for the taxpayer and the 

agency. 

 

131 Analogous case studies include Panama, Jamaica, and Spain, which saw 1.0 to 2.5 percentage point increases in tax ratio 

relative to GDP through their comprehensive tax overhauls. Puerto Rico achieving a 5% uplift from compliance, along with 

the other measures on corporate tax reform and increased fees, would produce a 2.25 percentage point increase in tax 

ratio relative to GDP, in line with these case studies 

132 Xenia Velez presentation to the Oversight Board (Nov. 30, 2017), 3 

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New Commonwealth Fiscal Plan 

■ Reduce the complexity of the tax system and process of filing taxes to make it 

easier for individuals and businesses to pay their taxes correctly. Hacienda reports it plans 

to introduce pre-filled tax returns and fully digitize the tax filing system onto the Internal 

Revenue Unified System (SURI) platform that will enable easier filing, communication, 

and levying of penalties for late payment or non-payment. It must also ease the process of 

paying for licenses, stamps, and fees by shifting from a system of 64 agency payment 

centers to instead partner with retail banks, enabling taxpayers to pay their fees at any of 

200 private sector locations in various communities (and within four years, 1,000 

locations). 

■ Institute advanced analytics and broad-reach, low-touch correspondence 

audits. Small and medium taxpayers account for a significant share of the unpaid and 

underpaid taxes, but only a tiny fraction of these taxpayers receive full-scale audits due to 

the significant time and cost investment needed. While a traditional IRS audit costs an 

average of $2,278 per case, automated notices or letters can be executed for $52 to $274 

per case.133 Hacienda had begun a correspondence audit program prior to Hurricanes 

Irma and Maria, receiving such a strong response to the first batch of 1,000 letters that it 

overwhelmed the call center. This program helped contribute to $7.1 million of collections 

outreach revenues in the first 2 months of FY2018 (against a $1.4 million target),134 with 

half of those responding to the letters agreeing to pay the proposed penalty amount.135

Fully implementing data-driven tiered audits will enable Puerto Rico to reach a 

significantly larger share of nonpayers. 

■ Collecting SUT on Internet sales. Nationally, the percent of taxpayers voluntarily 

reporting and paying use tax on their income tax forms ranges from 0.2% to 10.2%,136

while nearly 80% of Americans shop online.137 Through legislation combining clickthrough nexus, affiliate nexus, and economic nexus, as well as voluntary agreements with 

major online retailers, the Government should be able to capture SUT on a much larger 

share of Internet sales.138 In fact, Hacienda has already announced an agreement with a 

large online retailer to charge Puerto Rico sales tax on sales of goods139. With Internet 

sales growing at ~15% annually, Internet sales tax presents an even more important 

opportunity going forward. 

Other best practices could be implemented as well. For example, Puerto Rico’s SUT currently 

requires separate Commonwealth and municipal filings, but the filings could be consolidated 

and the revenue forwarded from the Commonwealth to the municipalities to ease compliance 

burden.140 Similarly, multiple monthly SUT filings (up to 4 per month for importers) could be 

collapsed into one-time filings.141

 

133 IRS Enforcement Results, TIGTA Filing Season Audit, IRS Taxpayer Advocate, Team Analysis, GAO 

134 Hacienda, Fiscal Reforms August 2017 reporting 

135 Conversation with Hacienda, Dec 13, 2017 

136 http://www.house.leg.state.mn.us/hrd/pubs/usetax.pdf at 7 

137 Tech Crunch, 2016 

138 Click Through refers to a nexus between an out of state seller and the state, which enables them jurisdiction to collect 

taxes, created via an affiliate in the state that links to another "out-of-state" business via an affiliate program (i.e., they 

send sales your way, you give them a small cut of the profits). Economic nexus refers to the dollar amount spent by a 

consumer at a business, which provides sufficient local economic activity for the state to be able to collect taxes from that 

out-of-state seller. Affiliate nexus refers to out-of-state sellers with ties to local sellers, such as through parent or subsidiary 

arrangements, or local order fulfillment, which creates sufficient local ties to subject the out of state seller to local taxes. 

Voluntary agreements occur when corporations agree through individual negotiations with states to collect and remit sales 

tax directly to the state 

139 Caribbean Business, “Amazon to charge Puerto Rico sales tax” 

140 Isabel Hernandez presentation to the Oversight Board (Nov 30, 2017), 13 

141 Ibid 

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New Commonwealth Fiscal Plan 

Considering the post-hurricane limitations, additional compliance activities should be 

implemented beginning in FY2019, and would expect to see revenue impacts growing 

throughout FY2020and beyond. The impact would phase in over the course of 4 years given 

the need for training and movement of workers into Hacienda through the Single Employer 

Act (Law 8, 2017), establishment of new offices and processes, and gradual shift in public 

perception and voluntary compliance as a result of enforcement activities. However, certain 

levers, such as negotiation of voluntary sales tax agreements with major online retailers, aside 

from Amazon, could begin as early as the end of FY2018. 

16.2.2 Right-rate other taxes and fees 

Prior to Hurricane Maria, the Government reports it had already developed a plan to rightrate the following taxes and fees. These original plans, as well as any adjustments mutually 

agreed upon between the Government and the Oversight Board during implementation of the 

March 2017 Fiscal Plan, have been largely included in this New Fiscal Plan, except where 

explicitly noted below. 

Gaming tax. Legislation passed in 2017 that increased licenses and fees on mechanical and 

electronic gaming machines to $3,000 from $100. This was originally estimated to generate 

$~71 million in incremental revenues.142 Part of this calculation involved assumptions of 

improved enforcement improvements, as the Government has previously estimated it is losing 

approximately $170 million per year due to illegal machines that are not paying licensing fees. 

However, when factoring in the potential that a 2,900% increase in taxes on the machines 

could decrease total revenues from gaming – a change from 2017 forecasting – run-rate, 

incremental revenue from the gaming tax has now been reduced to approximately ~$50 

million per year by FY2023. 

Licenses and other fees. 2017 legislation enabled fee increases in miscellaneous categories. 

Hacienda will determine which exact fees are to be increased to meet these minimum 

thresholds, achieving an overall revenue increase of $62.7 million by FY2023.143 Categories 

are as follows: Charges for services; Fines; Insurance; Licenses; Permits; Rent; Royalties; 

Stamps; Other. 

Tobacco taxes. Legislation was passed in 2017 to increase specific tobacco taxes, including 

taxes on cigarettes, cigars, rolling tobacco, cigarette paper and tubes, chewing tobacco, snuff, 

electronic cigarettes, nicotine cartridges, and vaporizers. Accounting for one-time declines in 

use due to price-related elasticities after the new fees went into place,144 a $56 million per year 

increase in revenues due to the new taxes is projected. 

Medical marijuana tax. The Government has passed legislation to tax medical marijuana. 

Based on an estimated 29,000 patients, the Government can be expected to collect 

approximately $14 million per year in additional revenue through this initiative.145

Airbnb Tax. The Government has passed a law to apply a 7% hotel room tax to Airbnb 

rentals, resulting in a projected $4 million of annual revenue increases, based on annualization 

of the actual Airbnb tax receipts from before the hurricane.146

 

142 Based on an assumption of 23,000 gaming machines on which Hacienda is able to collect fees (http://www.oslpr.org/2017-

2020/leyes/pdf/ley-108-23-Ago-2017.pdf) 

143 Assumes an 80% capture rate on the $73M potential to account for potential elasticities in demand based on fee increases 

144 Based on an 18% decline, per Hacienda (April 5, 2017 calculations) 

145 $15M projected receipts, minus $1.5M of dedicated revenues for the medical marijuana council established in 2017-Act 42 

and controlled substances monitoring in 2017-Act 70

146 Hacienda August 2017 Revenue Scorecard, submitted Sept 15, 2017 

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New Commonwealth Fiscal Plan 

CRUDITA excise tax. Currently, the petroleum product excise tax (CRUDITA) generates 

$470 million in gross147 revenue each year for the Commonwealth, and rates are adjusted 

annually to reach the revenue target. As the Island faces a potential loss of revenues and 

shrinking export sector – coupled with the environmental considerations the Island is 

currently facing – the New Fiscal Plan proposes adding a measure to maintain a constant 

excise tax rate rather than adjusting it to target a fixed amount of tax revenue. This policy 

reform would align different categories of petroleum product revenue across the board, and 

allow each to grow based on real GNP rather than create a fragmented constellation of policies 

across taxes on gasoline, petroleum excise, gas oil, and diesel. The measure is projected to 

generate $31.1 million per year by FY2023. 

16.2.3 Implementation plan 

The following implementation plan details the continuation of the Commonwealth’s efforts to 

increase compliance, and imposes further details on key milestones in the process to rightrate taxes and fees. 

EXHIBIT 65: TAX COMPLIANCE AND FEES ENHANCEMENT IMPLEMENTATION TIMELINE 

 

147 Does not deduct funding provided by the Commonwealth to the Highways and Transportation Authority 

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New Commonwealth Fiscal Plan 

REDUCTION IN APPROPRIATIONS TO 

UPR AND MUNICIPALITIES 

Current state and vision for Commonwealth 

appropriations 

The central Government provides a range of appropriations to three main groups of recipients: 

The University of Puerto Rico, Puerto Rico’s 78 municipalities, and “other” recipients 

(typically private industry or non-profit institutions). “Other” appropriations are addressed 

within “Tax Law Initiatives” (see Chapter 15). 

Currently, UPR is 70% subsidized (~$708 million in annual appropriations) by state and local 

funds, compared to 25% average level of state/local subsidization of U.S. public 

universities148. UPR’s tuition is less than one-third of the U.S. public average even after 

adjusting for per-capita income, and UPR spends ~10% more per student on operational 

spend than the average public university. 

A reduction of the appropriation for UPR was determined in 2017 through a shared process 

with the Government to identify reasonable, sustainable reductions to the UPR appropriation 

that brought to closer to U.S. public university tuition and cost benchmarks. This reduction 

was included in the original March 2017 Fiscal Plan. 

Municipalities receive $220 million in annual appropriations from the Commonwealth, but 

despite this aid are operating at annual operating deficits of $260M.149 With more reductions 

on the horizon, municipalities must undergo substantial operating model changes, or else risk 

increasing their annual operating deficits to ~$500 million annually. In addition to reducing 

the appropriations to municipalities to drive fiscal discipline, the Commonwealth can support 

consolidations of municipal services to encourage efficiencies, such as through service 

provision collectives or streamlining the legal framework to remove barriers to collaboration. 

Key initiatives to reduce appropriations 

Reducing Commonwealth subsidies to municipalities and UPR must lead to annual savings of 

$451 million by FY2023. 

 

148 UPR, IPEDs, College Board 

149 V2A November 2016 

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New Commonwealth Fiscal Plan 

EXHIBIT 66: REDUCTION IN APPROPRIATIONS SUMMARY OF MEASURES IMPACT 

17.2.1 Reduce UPR appropriations to levels in line with funding of other U.S. public 

universities 

The New Fiscal Plan has maintained the March 2017 Fiscal Plan measures, less reductions to 

the appropriation that have already been factored into the FY2018 baseline, as well as 

reductions in addressable spend. 

Targeted measures to increase revenues and reduce expenditures will allow UPR to operate 

sustainably under a reduced Commonwealth subsidy. On the revenue side, these include 

modestly raising tuition using a means-based approach, e.g., creating a means-based 

scholarship fund in parallel, applying more aggressively for Federal grants (seeking to achieve 

funding equal to the level of 25th percentile of U.S. public universities), charging more dues 

and fees to students, applying for patents and other intellectual property, and continuing to 

provide trainings to the PRDE and the Government more broadly. 

As detailed in the New Fiscal Plan (see Chapter 11), the means-based scholarship fund 

described above will be supported by reductions to the budgets of the Oversight Board, 

General Court of Justice, Legislative Assembly, and AAFAF. These reductions shall generate 

$60-65 million annually in reinvestment funds starting in FY2019, and they will be used to 

help build up an endowment to pay for need-based scholarships for UPR students. This 

endowment is to be managed independently of the University. 

On the expense reduction side, measures from the latest plan include consolidating campuses, 

optimizing HR through reducing temporary and trust positions, improving procurement, 

reducing the cost of medical insurance, and reducing tuition exemptions and special 

scholarships. These include identifying campuses and programs for consolidations based on 

performance metrics, tying personnel savings to roles specifically consolidated with campus 

consolidations and service reductions, reducing UPR employee pensions in a manner similar 

to the Commonwealth (e.g., highest marginal cut is 25%), and multiplying this amount by the 

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New Commonwealth Fiscal Plan 

unfunded portion,150 and increasing tuition in future years to be roughly equivalent to Federal 

Pell grant less cost of living. 

These efforts to improve the operations of UPR will in turn allow the University to renew its 

operating model to provide the best outcomes for its students. These outcomes will include 

reduced time to degree, improved job placement, and higher standardized test scores, among 

others. A re-envisioned University, which focuses on areas of strengths and on improving 

outcomes for students, will ultimately prove to be a critical source of renewal for the Island, as 

it is a cornerstone of human capital development to propel growth in the economy. 

17.2.2 Reduce municipal appropriations & support through service consolidation 

and property registry / tax reform 

As stated above, to incentivize municipal operational changes, the Commonwealth must 

reduce the current level of municipal appropriations. Already in FY2018, the total municipal 

appropriation was reduced by $150 million, bringing the new baseline appropriations to 

~$220 million per year. Going forward from this current baseline, there must be a reduction 

of 20% in each successive year, holding appropriations constant at 80% of current levels 

starting in FY2022 before ultimately phasing out all subsidies in FY24. The slow ramp in 

reductions will allow the remaining funds to be used to fund shared service consolidations. 

Two levers in particular should enable municipalities to become solvent: municipal service 

consolidations and institution of property tax reform. 

Municipal service consolidations 

Consolidating services across multiple municipalities can help reduce cost by leveraging scale, 

especially in areas of services provided directly to citizens, including public works and 

infrastructure, public safety, family services, education, and housing. Prior to Hurricanes Irma 

and Maria, Estudios Técnicos estimated that operating expense reduction measures, in part 

from municipal service sharing, could result in a potential combined fiscal impact of ~$150-

$450M.151

The Commonwealth should pursue several initiatives to incentivize and streamline 

consolidation: 

■ Offer financial incentives (e.g., remaining municipal subsidy) for municipalities who hit 

targets 

■ Provide transparency into service performance by creating performance metrics and 

publishing the results, benchmarked against peer municipalities 

■ Develop and operate service provision collectives across counties 

■ Streamline legal frameworks to remove any barriers to collaboration between 

municipalities (e.g., liability issues); for example, the Government can pass legislation like 

New Jersey’s 2007 Uniform Shared Services and Consolidation Act to formalize 

accountability for pursuing shared services by placing the onus on local leadership152

Property tax reform 

In partnership with the Municipal Revenues Collection Center (CRIM), the municipalities 

should identify and register tens of thousands of non-registered properties to begin collecting 

 

150 Additionally, the UPR Fiscal Plan includes a 50% employer match (by UPR) on up to 2% of employee contribution 

151 “Estudio para evaluar la estructura municipal de Puerto Rico”, Estudios Técnicos (2016) 

152 New Jersey Department of Community Affairs, Shared Services – Working Together. April 2011. 

http://www.nj.gov/dca/divisions/dlgs/programs/shared_docs/sharedsvcsrefguide.pdf 

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New Commonwealth Fiscal Plan 

tax on them,153 and re-categorize misclassified properties (e.g., residential properties marked 

as commercial). Additionally, CRIM can streamline collection activities and use proven 

compliance practices, such as advanced analytics to identify non- or under-payment, to raise 

payment rates. Based on implementation planning discussions in August 2017, CRIM 

estimated these initiatives could produce:154

■ $150 million of increased revenue from raising property tax compliance from 68% to 85% 

■ $150-200 million from registering properties not on the rolls 

■ $500 million of capturable back property taxes owed (from $1.3 billion total owed) 

■ Lastly there is an additional, not yet sized, opportunity from reclassifying commercial 

properties incorrectly listed as residential and updating property valuations 

Implementation plan 

Given that reductions to UPR and municipal appropriations were already underway following 

certification of the original Fiscal Plan, implementation will include continuing the current 

reductions process. Simultaneously, both UPR and municipalities must begin undertaking 

initiatives to improve their operational stability and sustainability. 

EXHIBIT 67: REDUCTION IN APPROPRIATIONS IMPLEMENTATION TIMELINE 

 

153 Many homes in Puerto Rico have not been registered with the Government, which has led to difficulties for thousands in 

receiving assistance from FEMA’s Individual Housing Program. For example, as of mid-January 2018, 62% of the 1.1 

million applications for disaster assistance has been either rejected or were still “in-process”, often due to lacking 

registration and title deeds (“Majority of Claimants in Puerto Rico Still Await Assistance from FEMA, Many Found 

‘Ineligible’”, Caribbean Business) 

154 Meetings with CRIM leadership on July 19, 2017 

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New Commonwealth Fiscal Plan 

PENSION REFORM 

Current state of and required changes to pension reform

The Government operates three public employee retirement systems in Puerto Rico: the 

Employees’ Retirement System (ERS), the Teachers’ Retirement System (TRS), and the 

Judicial Retirement System (JRS). The plans have different tiers of benefit formulas, some of 

which are traditional defined benefit pensions based upon years of service and final salary, 

while others are hybrid cash balance plans. Under the hybrid cash balance plans, employees 

have notional accounts credited with contributions and interest, and upon retirement, benefits 

are payable as an annuity. Different benefit tiers apply to employees based upon the year in 

which they were hired. 

Per the latest data available, each of the systems included the following liabilities155: 

■ ERS: 245,000 total covered (120,000 active employees, 125,000 retirees and other 

beneficiaries); with $1.7 billion in annual benefits and $38 billion in total actuarial liability 

■ TRS: 80,000 total covered (38,000 active employees, 42,000 retirees and other 

beneficiaries); with $0.8 billion in annual benefits and $18 billion in total actuarial liability 

■ JRS: 860 total covered (370 active employees, 490 retirees and other beneficiaries); with 

$28 million in annual benefits and $700 million in total actuarial liability 

All employees make contributions toward their benefits, albeit at different rates. 

Most regular government employees also participate in Social Security, which includes both 

employer and employee contributions; most teachers, judges, and police officers do not.156

EXHIBIT 68: PUBLIC EMPLOYEE RETIREMENT SYSTEMS OVERVIEW 

 

155 All liability estimates are as of July 1, 2016, and benefit estimates are for FY2018, but based on census data as of July 1, 

2015 

156 Exclusion dates back to decision to exclude state workers from Social Security Act in 1935; when states were allowed to 

extend coverage to state workers in the 1950s, some areas, including Puerto Rico, made the calculation that they could 

provide superior coverage through their own state pension plans. 

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New Commonwealth Fiscal Plan 

Over many decades, successive governments have failed to adequately fund these 

retirement plans, and today the ERS, TRS and JRS are nearly insolvent. In fact, 

PayGo expenditures to provide pension benefits have been increasing in recent years, and are 

expected to constitute between 1/4 and 1/5 of General Fund expenditures without further 

action, as detailed below (Exhibit 69). 

EXHIBIT 69: PAYGO EXPENDITURES COMPARED TO OVERALL GENERAL FUND 

EXPENDITURES, PRE-MEASURES 

These retirement plans will soon deplete the assets they use to pay benefits. Without action, 

this could lead to large benefit cuts for all retirees. Such benefit cuts would not only be 

devastating to current retirees and their families, but would adversely impact Puerto Rico’s 

economy as retirees spend virtually all their income on the Island. There must be adequate 

funding for pension systems, such that the retirement systems promise benefits 

Puerto Rico can afford and the Government funds the revised benefits. 

The Commonwealth has already taken critical steps toward a more stable pension system 

through legislation passed in August 2017 that transitioned to a new “PayGo” pension system, 

liquidating assets to help fund benefits owed under previous plans, froze the accrual of ERS 

benefits, and committed to moving all active ERS members into segregated true defined 

contribution (DC) retirement plans. However, there is room for further action to ensure the 

long-term sustainability of the pensions system; in addition, some of the current commitments 

have not yet been fulfilled (e.g., the transition to the new defined contribution system has not 

yet been completed). 

Therefore, Puerto Rico’s retirement system must be further reformed to reduce costs, restore 

the plans to financial sustainability, and maintain responsible benefit levels for current and 

future retirees. While overhauls will have a smaller impact in earlier years, the impact of 

pension reforms will amplify over time, leading to more than $11 billion in savings over a 30-

year period. Reductions to benefits must also be structured to protect lower-income 

retirees, who otherwise could become impoverished and therefore be forced to rely upon 

government “safety net” benefits. 

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New Commonwealth Fiscal Plan 

Pension reform will help restore both fiscal balance and promise for current and 

future retirees from government. 

Proposed pension reform initiatives 

Restructuring and stabilizing the pension system must lead to $732 million in savings over six 

years, as shown below (Exhibit 70). 

EXHIBIT 70: PENSIONS REFORM SUMMARY OF IMPACT 

18.2.1 Freeze DB benefits for JRS/TRS and enroll employees in a DC plan with 

segregated accounts 

TRS members hired prior to August 1, 2014 and JRS members hired prior to July 1, 2014 are 

currently accruing benefits under their defined benefit retirement plans. ERS members have 

already transitioned to hybrid cash balance plans (in 2000 and 2013), with a transition to DC 

accounts targeted for June/July 2018.157 To avoid creating future pension liabilities and to 

stabilize the system for the benefit of both taxpayers and future retirees, the JRS and TRS 

plans must be frozen as quickly as possible. Members will retain the benefits they have accrued 

to date, subject to the benefit reduction formula discussed below. Future benefits must be 

based on contributions and earnings in new defined contribution retirement accounts. This 

will result in consistent treatment across ERS, TRS, and JRS, where employees will contribute 

to segregated DC accounts rather than notional accounts. Going forward, employees should 

have the certainty that their contributions and investment returns will be safeguarded for the 

future, ensuring retirement security. 

Although in the early years the DB freeze savings are small ($0.8 million in FY2020), over 

time the freeze should produce significant savings ($50 million or more in FY2026 and 

growing further in later years to $700 million or more) and play a significant role in restoring 

the budget to long-term sustainability. The freeze will be implemented through the Plan of 

 

157 Estimate provided by AAFAF in February 2018 

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New Commonwealth Fiscal Plan 

Adjustment, and shall be slated to take effect starting in FY2020 so that needed changes can 

be implemented. 

18.2.2 10% pension benefit reduction 

Expenditures are being reduced throughout the Commonwealth’s budget and contractual debt 

service remains unaffordable. Retirement plan participants, like other unsecured 

claimholders, face a reduction in the amounts paid to them by the Commonwealth. A 10% 

average reduction in pensions is appropriate and necessary. The goal is a balanced approach 

to restore fiscal health to Puerto Rico while ensuring that cuts to retirement benefits occur in 

a progressive matter that protects any retirees from falling into poverty. The level of cuts to 

pension benefits is also in line with reductions in other government systems facing pension 

funding crises.158

Although the average benefit reduction will be 10%, there will be no reduction for those with 

combined retirement plan and Social Security benefits below the poverty level of $1,000 per 

month.159 This formula is equivalent to giving each beneficiary a reduction of 25% in the 

monthly benefits they receive more than $600 (for retirees who also receive Social Security), 

and $1,000 for those without Social Security160. These dollar figures will be adjusted in future 

years consistent with increases in the Federal poverty threshold. 

Under this approach, about 25% would receive no reduction in their benefits while 

and an additional 18% of retirees will experience a benefit reduction of 5% or less. 

About 60% of retirees will experience a benefit reduction of 10% or less, and over 80% of 

retirees will experience a benefit reduction of 15% or less. Very few retirees will have more 

than a 20% reduction, and none will have a reduction of 25% or more. 

This formula will also apply to benefits earned by current employees who have yet to retire. 

EXHIBIT 71: DISTRIBUTION OF BENEFIT REDUCTION 

 

158 For example, in Detroit and Rhode Island, pension cuts ranged from 0-30% across beneficiary categories 

159 Actuarial calculation show that the following approach will result in reductions averaging 10%: 

■ Determine the average monthly pension by adding the regular monthly pension amount, the special law pension, the 

healthcare bonus, and one-twelfth of the Christmas Bonus and Medicine Bonus; 

■ Reduce these monthly benefits by 25%; and 

■ Add back up to $150 per month ($250 per month for those who are not covered by Social Security) to reduce the 

effect of benefit reductions for those with the lowest benefits 

160 Reduction (not less than zero) = 25% x Benefit minus 25% x (1,000 if not in Social Security or $600 if in Social Security). 

For example, if ERS benefit (in Social Security) is $2,000, then reduction = 25% x 2,000 – 25% x $600 = $500 - $150 = 

$350

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New Commonwealth Fiscal Plan 

The 10% reduction shall take effect starting in FY2020 to have sufficient time to implement it 

following the Plan’s enactment. 

Because the poverty threshold is anticipated to increase faster than frozen pension benefits 

and the size of the frozen benefits will decline as the number of years accrued before the freeze 

decreases (when the youngest workers who still had DB plans begin to retire), the 10% target 

overall savings rate will fall over time (in the years beyond FY26), eventually reaching zero by 

about 2050. 

18.2.3 Enroll government workers in Social Security 

Currently, teachers, police officers, and judges do not participate in Social Security. They do 

not pay into the program, nor does the Government make a Social Security contribution on 

their behalf. Teachers, police officers and judges are also not eligible for benefits at retirement. 

Unlike other ERS members, teachers, police officers, and judges are entirely reliant on their 

government pensions for income in retirement. This places them at risk when government 

retirement plans are poorly funded. 

These groups are exempt from Social Security because of the “Section 218” agreement between 

the Commonwealth and the Social Security Administration, which stipulates that government 

employees may be exempt from Social Security if they participate in a “comparable” retirement 

plan such as one which includes total employee and employer contributions equal to at least 

7.5% of employee wages. 

Enrolling these workers in Social Security will provide them with diversified sources of income 

in retirement, and Social Security’s progressive benefit formula will provide a stronger safety 

net for lower-paid employees. Workers will typically earn greater retirement benefits under 

Social Security based on a 6.2% employee contribution and a 6.2% employer (government) 

match, than they would funded only with a 6.2% DC. For example, a typical full-career 

government employee retiring with a salary of $35,000 will be entitled to a Social Security 

benefit of approximately $16,000, in addition to the benefit the employee builds in their 

defined contribution retirement account. 

Therefore, police, teachers, and judges under the age of 40 shall be enrolled in Social Security. 

This can be accomplished without either an employee referendum or new Federal legislation 

by reducing pension contributions for government employees under the age of 40 to an 

amount lower than the 7.5% required by Section 218. This step will trigger mandatory 

enrollment in Social Security. Concurrently, lowering the pension contribution for younger 

workers will address the loss of take-home pay they would suffer by having to pay the 6.2% 

Social Security payroll tax. 

For example, teachers over the age of 40 will contribute 13.12% of their pay to their defined 

contribution plan. The changes to Social Security enrollment will create a second DC plan for 

teachers under 40, with a mandatory employee contribution rate of only 6.92% of their pay. 

Since this contribution rate is less than the requirement of a 7.5% contribution, these younger 

workers legally must be enrolled in Social Security. However, the 6.2% reduction in the 

pension contribution rate from 13.12% to 6.92% would protect these employees against any 

reduction in their take-home pay. 

Police, teachers, and judges over the age of 40 should be provided the option to enroll in Social 

Security at a later date. 

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Implementation plan 

While the new pensions measures will only go into effect starting on July 1, 2019, advance 

work will be necessary to prepare the systems for the JRS / TRS freeze and pensions 

reductions, as well as ensuring communications with all Puerto Rican pension recipients. 

EXHIBIT 72: IMPLEMENTATION PLAN 

IMPLEMENTATION 

Historically, the Government has suffered from inconsistent execution due in part to not 

having a defined, centralized project management structure. It has historically operated in 

silos, suffered staffing and coordination challenges, and has been limited by weak technology 

to report and keep track of expenses. To mitigate implementation risk, the Governor has 

established a centralized PMO structure. 

Governor’s Fiscal and Economic Working Group (GFEWG) 

Developing a centrally-run PMO is an important step toward ensuring the implementation 

and tracking of the core operational transformation and rightsizing measures that will achieve 

savings targets under the New Fiscal Plan. The GFEWG is the central PMO with defined 

reporting to the Governor of all economic and transformation measures. It is comprised of 

senior leadership, oversees Agency PMOs, and reports directly to the Governor. At the time of 

writing, the GFEWG has already been established and is preparing for implementation. 

Agency Program Management Offices (PMOs) 

Individual Agency PMOs should be established with direct reporting to the GFEWG. Each 

agency head shall be responsible for developing and implementing a PMO structure that best 

fits their respective agency while still meeting their agency grouping savings targets. Through 

this PMO structure, the Government is positioned to effectively manage and implement the 

Fiscal Plan. 

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■ The Agency PMOs are generally led by designated Agency Heads and report directly to the 

GFEWG 

■ Agency PMOs undertake the required work to implement initiatives 

■ The daily activities of PMOs are managed and undertaken by staff knowledgeable in the 

relevant subject matter areas, and assigned members meet regularly with PMO leadership 

to report on progress and facilitate necessary decision-making 

■ Agency PMOs shall be responsible for assembling a taskforce to: complete validation and 

definition of full scope of projects and priorities; finalize reporting tools and tracking 

responsibilities; and, perform ongoing weekly tracking and reporting. 

The PMOs should ensure continued implementation progress through robust tracking and 

reporting tools that foster growth in transparency and ownership, including: 

■ Project charters that establish the goals / structures of measures, identifies risks and 

obstacles, and establishes metrics and KPIs 

■ Implementation plans with detailed layouts of each activity required for accomplishing 

sub-measures, risks / mitigants for each activity, clear leaders and owners for each activity, 

and metric and KPIs. These should include a “live” calendar of updates and status of each 

measure. If an activity goes behind schedule, the workplan will reflect that the activity is 

still in progress. 

■ Implementation dashboard / tracker that provides a single snapshot of the entire 

transformation plan; allows management to know the status of each initiative in a distinct 

status: Complete; In Progress; Delays; Major Issues. Tracker will allow the Oversight 

Board to monitor progress and ensure enforcement of measures/ reforms in the New Fiscal 

Plan. 

■ Sub-measure dashboards that provide “zoomed in” views of a specific sub-measure, 

display progress with details / commentary on project status, include agreed upon 

milestones / dates to track progress, and provides mitigation plans 

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New Commonwealth Fiscal Plan 

PART V. Conclusion 

The New Fiscal Plan is the result of many months of work-sessions, dialogue, 

stakeholder engagement, research, and in-depth analysis. Across these activities, the 

Oversight Board and the Commonwealth Government collaborated to create a deep and rich 

fact base to underpin their work, and remained focused on creating an integrated approach to 

restoring fiscal sustainability and economic opportunity for future generations of Puerto 

Ricans. The starting point for this plan involved numerous structural inhibitors to growth, 

over $120 billion in outstanding debt and unfunded pension obligations, and the devastating 

impact from a historically destructive natural disaster. 

Yet in the aftermath of Hurricane Maria, Puerto Rico now has a unique economic 

growth opportunity. Reconstruction activity will provide economic buoyancy in the short 

term. PROMESA and Title III provide a temporary stay on Puerto Rico’s unsustainable debt 

service. During this period, the New Fiscal Plan lays out a series of practical, proven growthinducing structural reforms and investments, with a responsible set of fiscal measures to rightsize Government to the appropriate level. If these strategic choices are not made now, the 

structural challenges that have plagued the economy of Puerto Rico will not be addressed, and 

the Government will have lost its window to restore long-term opportunity to the people of 

Puerto Rico.

That is why the next step – implementation of these reforms and measures – is 

the most critical one. If implemented quickly and meaningfully, the New Fiscal Plan can 

turn around Puerto Rico’s economy and drive growth as Federal disaster relief funding slows 

and Puerto Rico returns to paying debt service. In the end, growth and expansion of 

opportunity are the keys to restoring fiscal sustainability, access to capital markets, and a 

brighter future for Puerto Rico.

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Appendix 

MODEL PRESENTATION 

Overview of entities covered by and excluded from the 

New Fiscal Plan 

The New Fiscal Plan addresses the finances of central government agencies, component 

units, and other agencies. Agencies for which an independent fiscal plan is being developed 

have not been consolidated into the New Fiscal Plan and are only represented to the extent 

they impact the Commonwealth (Exhibits 73-75).

EXHIBIT 73: MAJOR ENTITIES COVERED BY AND EXCLUDED FROM THE NEW FISCAL PLAN

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New Commonwealth Fiscal Plan 

EXHIBIT 74: LIST OF ENTITIES COVERED BY THE NEW FISCAL PLAN

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EXHIBIT 75: LIST OF ENTITIES EXCLUDED FROM THE NEW FISCAL PLAN

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MACROECONOMIC PROJECTIONS 

Incorporation of historical macroeconomic indicators for 

Puerto Rico 

While the New Fiscal Plan projects relatively steady growth after FY2018, the macroeconomic 

projections do not ignore the past macroeconomic trajectory of the Island. Historic economic 

performance remains a core driving factor for future projections, and without the 

implementation of structural reforms, the economy returns to the previous trendline once 

disaster spend begins to wane. As shown below (Exhibits 76-78), the nominal GNP of the 

Island continues to grow in the status quo, even while real output has shrunk considerably in 

the last decade. With current projections, the Island’s real output (which excludes elevated 

inflation) does not return to pre-hurricane levels until at least FY2023-FY2024. 

EXHIBIT 76: MACROECONOMIC TRENDLINE BEFORE AND AFTER HURRICANE MARIA

EXHIBIT 77: POPULATION DECLINE

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New Commonwealth Fiscal Plan 

EXHIBIT 78: PER CAPITA GNP GROWTH 

FINANCIAL PROJECTIONS 

Financial projection methodology 

Revenue and expense forecasts are largely driven by macroeconomic projections like Puerto 

Rico inflation and GNP forecasts. For certain critical line items (such as Component Unit 

revenues and expense, pension expenditures and capital expenditures), separate detailed 

forecasts were developed incorporating historical data and other bottom-up assumptions 

(Exhibit 79). 

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EXHIBIT 79: FINANCIAL PROJECTIONS METHODOLOGY 

Detailed financial projections 

The following section discusses the financial projections across each revenue and expense line 

item from FY2018-FY2023. They also discuss the trajectory of key macroeconomic indicators 

such as population and GNP per capita over the next five years. Most revenues track with the 

overall macroeconomic trajectory of the Island. Baseline expenditures remain relatively 

constant over the next five years before measures are applied, especially when social programs 

are excluded. This consistency is in large part due to freezes on various expenditures that have 

been put in place by the Government of Puerto Rico. Finally, the cumulative value of measures 

grows through FY2023 as there is full implementation of various revenue and expense fiscal 

measures. 

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EXHIBIT 80: MACROECONOMIC OVERVIEW OF PUERTO RICO, FY2018-FY2023 

Without fiscal and structural measures, the six-year deficit is expected to total $5.2 billion. 

After the application of fiscal measures, and the fiscal impact of structural reforms, the sixyear surplus becomes $6.7 billion. 

EXHIBIT 81: REVENUE BREAKDOWN SHOWS GRADUAL POST-HURRICANE RECOVERY 

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New Commonwealth Fiscal Plan 

General fund revenues are expected to increase from $8.1 billion to $8.4 billion between 

FY2018 and Fy2023, mainly due to GNP growth. Federal transfers (excluding disaster 

assistance) is expected to total ~$34 billion over the six-year period. 

EXHIBIT 82: POST-HURRICANE EXPENDITURES 

STRUCTURAL REFORMS 

Human capital and labor reform

States across the mainland U.S. have different approaches to labor market and welfare policy, 

including different employee protections, incentives for employers, or benefits to workers. 

California and Florida represent opposite ends of this spectrum of approaches, with California 

intervening more in the labor market while Florida requires little above what is required by 

the Federal Fair Labor Standards Act. At the same time, these two states allow for much freer 

and less regulated labor markets than Puerto Rico’s approach and both have significantly 

higher levels of employment, incomes and economic opportunity. 

California offers workers more protections and benefits than most states (e.g., mandated paid 

sick leave and multiple exemptions to employment at-will) while Florida offers very few (e.g., 

no guaranteed leave, no exceptions to employment at-will). California has one of the highest 

minimum wages in the country ($10.50/hour) while Florida offers a lower minimum wage 

($8.25/hour) yet does not require workers to pay state income tax. 

Despite these differences, Florida and California are closer in both labor market environment 

and outcomes than Puerto Rico: for example, both are employment at-will jurisdictions and 

have long-term work requirements in place for SNAP, while Puerto Rico has neither. Puerto 

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New Commonwealth Fiscal Plan 

Rico has more generous policies for “secondary benefits”: Florida requires none and California 

offers 24 hours (3 days) of paid sick leave, while Puerto Rico’s guarantees of a yearly Christmas 

bonus, severance pay, 27 days of paid time off, and maternity leave are far beyond those 

required by any mainland state. And while the minimum wage is higher in both California and 

Florida than Puerto Rico, Puerto Rico’s minimum wage is significantly more generous when 

compared to median wage on the Island (Exhibit 83). 

EXHIBIT 83: MINIMUM WAGES AND MEDIAN HOURLY WAGES 

California’s labor force participation rate is 62.3%, and Florida’s is 59.4%, versus 

approximately 40 percent in Puerto Rico.161 This difference implies that, relative to the size of 

the population, California and Florida have roughly 50% more individuals in the labor force 

than Puerto Rico. Put another way, if Puerto Rico increased its labor force participation rates 

to those of California or Florida, household incomes would rise by roughly 50% and poverty 

would plummet. 

Infrastructure reform

San Juan incurs daily delays of ~54,000 hours on average, with an hour of delay valued at 

$9.1. Assuming 260 working days, and 75% congestion levels on non-working days, 

congestion cost is ~$165M annually. 52% of the delay is concentrated on 26% of roads in 

downtown San Juan (including feeders), with a delay intensity of 264 hours/ mile compared 

to 193 hours/mile on average for minor road and arterials (Exhibit 84). 

 

161 U.S. Department of Labor, Bureau of Labor Statistics, “Local Area Unemployment Statistics,” March 23, 2018 

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New Commonwealth Fiscal Plan 

EXHIBIT 84: CONGESTION IN PUERTO RICO 

Ease of doing business reform

An analysis of Puerto Rico’s Ease of Doing Business rankings across all World Bank 

indicators shows which are most in need of targeted reforms for improvement (Exhibit 85). 

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EXHIBIT 85: PUERTO RICO’S EASE OF DOING BUSINESS RANKINGS COMPARED TO THE US 

FISCAL MEASURES 

Tax law initiatives 

24.1.1 Legislative enforcement of tax initiatives 

Legislative enforcement text should be as follows: 

To protect the financial and fiscal health of the Government of Puerto Rico, before any 

reduction to the regular tax rates for taxable years beginning after December 31, 2018, enter 

into effect, a fiscal responsibility test shall be carried out and must be included as a 

component in any enabling legislation related to revisions to the tax code. 

Fiscal responsibility test: shall be conducted, and the results shall be certified and 

submitted to the Oversight Board in a report before the Oversight Board certifies the budget 

of the Government of Puerto Rico for subsequent fiscal years beginning on July 1, 2019 

through July 1, 2025, respectively. Once compliance with the fiscal responsibility test for the 

applicable fiscal year is established, the additional tax reliefs legislated to take effect 

provided for the corresponding fiscal year may enter into effect. If the fiscal responsibility 

test is not met, the Government of Puerto Rico must enact new revenue sources sufficient to 

meet the applicable fiscal responsibility test thresholds or the tax relief proposed for the 

applicable year shall not enter into effect. 

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New Commonwealth Fiscal Plan 

New offsetting revenue measure test: if by the time the new budget year begins, and 

no alternative remedies have been identified that meet the criteria specified by the Oversight 

Board, then the reduction of taxes will be reversed. 

Outperformance against baseline revenue collections in categories unrelated to the tax 

initiatives, a reduction in general expenses categories, and general improvement in tax 

compliance, may not be used to compensate for underperformance in costs or 

underperformance in revenue measures that leads to a lack of revenue 

neutrality. 

Net tax cut to revenue measure test: the net amount of lost revenue from any reductions 

in tax rates must generally be less than or equal to the amount of offsetting revenue measures 

minus the amount of buffers and implementation risks specifically identified in any enabling 

legislation as indicated below: 

• Ninety-eight million ($98,000,000) dollars for the fiscal year beginning July 1, 2019 

• Seventy million ($70,000,000) dollars for the fiscal year beginning July 1, 2020 

• Three million ($3,000,000) dollars for the fiscal year beginning July 1, 2021 

• Negative one million (-$1,000,000) dollars for the fiscal year beginning July 1, 2022 

One million ($1,000,000) dollars for the fiscal year beginning July 1, 2023 

EXHIBIT 86: TAX POLICY CHANGE OFFSETS – TAX CREDIT AND CASH GRANT NET SAVINGS

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New Commonwealth Fiscal Plan 

Agency efficiency measures 

24.2.1 Addressable spend for agency efficiency measures 

Not all governmental agency was expected to be addressable through rightsizing initiatives. 

For instance, Federal funding to agencies which would disappear if it were not allocated to its 

current use were not targeted for reductions. Below is an overview of the approach used to 

determine which funds and cost concepts were addressable. 

EXHIBIT 87: ADDRESSABLE SPEND BASE FOR AGENCY EFFICIENCIES

The following cost concepts are assumed to be addressable for spend reductions within Agency 

Efficiencies (see Chapter 13). 

 Personnel expenses.

o Payroll and related costs (Nómina y costos relacionados)

 Non-personnel expenses.

o Materials and supplies (Materiales y suministros) 

o Purchase of equipment (Compra de equipo) 

o Transportation expenses (Gastos de transportación) 

o Other operating expenses (Otros gastos operacionales) 

o Purchased services (Servicios comprados) 

o Announcements and guidelines in media (Anuncios y pautas en medios) 

o Facilities and payments for public services (Facilidades y pagos por servicios 

públicos) 

o Professional services (Servicios profesionales) 

 Non-personnel expenses partially included. The following cost concept was 

determined to be a miscellaneous category that included a collection of both 

addressable and non-addressable spend. Therefore, while all category spend was 

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New Commonwealth Fiscal Plan 

included in the addressable spend baseline, only 50% of category spend was included 

in actual savings initiatives as a haircut to separate addressable and non-addressable 

spend 

o Enrolled assignments (asignaciones englobadas) 

 Non-personnel expenses included on a case-by-case basis. The following 

cost concepts were included as addressable spend, and individual decisions were made 

to determine whether each agency’s costs within those concepts were addressable 

within Agency Efficiencies, or whether they did not represent addressable spend (e.g., 

governmental transfer payments, tax incentives which were addressed via corporate 

tax reform, etc.) 

o Government entities (Entidades gubernamentales) 

o Contributions to non-governmental entities (Aportaciones a entidades no 

gubernamentales) 

o Donations, subsidies and distribution (Donativos, subsidios y distribuciones) 

 Out of scope. The following cost concepts were excluded from agency efficiencies for 

a variety of reasons (e.g., payments related to debt service or pensions, liquidity 

reserves, etc.) 

o Assignment pareo Federal funds (Asignación pareo fondos federales) 

o Budget reserve (Reserva presupuestaria) 

o Investment in permanent improvements (Inversión en mejoras permanentes) 

o Payment of pensions - pay as you go (Pago de pensiones - pay as you go) 

o Liquidity reserve (Reserva de liquidez) 

o Adjustment 

o Payment of the debt (Pago de la deuda) 

All expenses funded by the general fund and special revenue funds are assumed to be 

addressable provided they were expensed in the above addressable cost concepts (e.g., General 

Fund expenditures within “Purchased services”). 

Federal funds and own income were evaluated on a case-by-case basis for inclusion as 

addressable spend. In cases where Federal dollars were explicitly allocated to specific lineitems within the budget, those dollars were assumed to be non-addressable. However, in cases 

where those funds were fungible and could be applied to various expenses, those dollars were 

considered addressable within Agency Efficiencies. 

24.2.2 Agency efficiency measures 

Back-office or support function payroll savings come from finding efficiencies by 

reducing personnel in non-client facing functions in each agency. These positions include 

administrative roles such as finance, human resources, and information systems, as well as 

some facilities support. 

a. For standalone agencies, support service payroll savings are calculated at 15-20%, based 

on successful public-sector cases primarily involving digitization and process 

improvement, including the implementation of lean management practices. 

b. For newly merged agencies, back-office or support function payroll savings are calculated 

at 40-50%. The single consolidated agency will be able to use scale efficiencies through 

the combination of support services and elimination of duplicate functions and roles. The 

savings value is based on private sector examples of mergers and acquisitions and public 

sector examples of consolidations. 

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New Commonwealth Fiscal Plan 

c. In some cases, more savings can be captured when there is an agency-specific back office 

initiative that can be identified beyond standard optimization. 

Frontline payroll savings were identified using a tailored deep-dive for each major agency 

for both merged and standalone agencies. The approach involved a review of each program 

and service (both citizen-facing and intergovernmental) to determine if the service levels 

provided should continue and/or if specific services could be delivered more effectively (e.g., 

through process improvement, innovative tools and technology, organizational and delivery 

changes). For applicable programs, spending levels are benchmarked against appropriate peer 

governments (either state or Federal, or in some cases international examples). Additionally, 

macroeconomic analysis can be used to determine if lower payroll levels could serve the same 

number of citizens based on expected changes in demographics, workforce levels, and the 

economy. 

Non-personnel savings opportunities were expected to be largely driven through 

procurement and other streamlining efforts. Initiatives such as institutionalizing centralized 

demand controls, strategic category-level purchasing (e.g., leveraging Puerto Rico’s access to 

Federal GSA rates, purchasing through e-auctions, opening competitive RFPs), accounting for 

total cost of ownership, and enforcing contractual compliance could present large savings 

opportunities throughout the government. 

Standalone agencies can implement initiatives including strategic sourcing and IT 

rationalization to better leverage the procurement function at a lower cost. The digitization 

and process improvement savings initiatives mentioned in support services can apply to 

procurement as well. Public sector agencies using these methods have saved 20% on 

procurement spending. 

Newly merged agencies have an additional opportunity to save on operational costs, with 

achievable savings of 30%. In addition to the savings that a standalone agency can receive, 

consolidation of agencies should increase the leverage of Puerto Rican agencies in negotiating 

with the private sector, and bigger savings can be expected from duplication and combination 

of efforts. Merged agencies can also expect to find savings based on leveraging their smaller 

footprint, as well as lowering maintenance and facility costs. 

Agency-specific initiatives and targets 

The following exhibit details the baseline expenditure and total reduction, annually, for each 

of the agency groupings within Agency Efficiencies (see Chapter 13). 

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EXHIBIT 88: ADDRESSABLE BASELINE EXPENDITURES AND TOTAL REDUCTION PER AGENCY 

GROUPING162

Agency groupings are as shown below in Exhibit 89. 

 

162 Education reinvestment in teacher salaries, text books are baked into number 

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EXHIBIT 89: AGENCY GROUPINGS 

For each grouping, initiatives include: 

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New Commonwealth Fiscal Plan 

■ Front-line personnel reductions (by specific benchmark: unique benchmarks based on 

individual agency, as detailed in appendix, or by population) 

■ Back-office personnel reductions (by general benchmark: overarching benchmarks which 

apply to all agencies, as described in section 13.2)

■ Non-personnel optimization (by general benchmark) 

Specific agency groupings include individualized initiatives, including: 

■ Courts and Legislature: Reduce overall spend in line with mainland benchmarks (LA 

compared to full-time legislatures, GCJ compared to state judiciaries) 

■ Culture: Reduce Musical Arts and Stagecraft Corporation expenses (by specific 

benchmark) 

■ Environmental: Reduce solid waste G&A spend (by specific benchmark) 

■ Financial Oversight and Management Board: Reduce overall spend in line with 

~50% of the cuts prescribed to other agencies (same as reduction to AAFAF, which will 

also prove vital to implementing the New Fiscal Plan) 

■ Independent Agencies: Consolidate Port of the Americas into the Port of Ponce 

Closures 

Sole initiative will be to close all agencies. However, there will be no savings from the 

Economic Development Bank, and only ~68% of savings from the Culebra Conservation and 

Development of Cantera’s Peninsula will be achieved. 

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COMPARING FISCAL PLANS: MARCH 

2017 TO APRIL 2018 

Core presentational differences between fiscal plans 

EXHIBIT 90: KEY DIFFERENCES BETWEEN THE FISCAL PLANS 

 Baseline comparison 

There are some key macroeconomic differences between Certified Fiscal Plan from 2017 and 

the New Fiscal Plan. The clear majority of these differences are driven by the impacts of 

Hurricanes Maria and Irma on the Island’s population and economy. The most significant 

change is in the trajectory of the GNP growth rate. In the New Fiscal Plan, the growth is far 

more volatile, with major economic contractions expected in FY2018, followed by a bounce 

back in FY2019, with a gradual slowdown in the growth rate as disaster spend wanes. This 

unprecedented level of disaster relief funding entering the Puerto Rican economy due to 

Maria also leads to inflation levels above what was seen in the Certified Fiscal Plan from 

2017, for the majority of the time from FY2018- FY2023. Maria and Irma have also led to a 

large projected population exodus, especially in FY2018. 

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EXHIBIT 91: COMPARISON OF MAJOR MACRO ECONOMIC INDICATORS BETWEEN FISCAL 

PLANS 

Measures comparison 

While many measures were largely maintained from the Certified Fiscal Plan in 2017, in other 

cases there were changes to approach. Below is an explanation of key differences. 

Agency Efficiencies 

■ The Certified Fiscal Plan took an overall approach to all agency efficiency savings, breaking 

out reductions in personnel and non-personnel expenditures without aligning on agencyspecific targets 

■ The New Fiscal Plan has a detailed bottom-up approach which applies to every agency 

within the Executive, Legislative, and Judiciary Branches, as well as the Oversight Board

■ In addition, while the New Fiscal Plan adds an additional government-wide compensation 

measures which were not present in the Certified Fiscal Plan (elimination of the Christmas 

bonus, implementing uniform healthcare across all government agencies), it maintains the 

payroll freeze from the March 2017 Fiscal Plan. Additionally, uniform healthcare insurance 

is now a separate measure, rather than a potential initiative to reach the targeted personnel 

savings

Healthcare 

■ Healthcare savings from the March 2017 Fiscal Plan are largely maintained in the New 

Fiscal Plan, with the exception of FY2018 and FY2019, which have been adjusted to reflect 

the post-Maria reality 

Tax Compliance and Fees Enhancement 

■ The March 2017 Fiscal Plan included revenue-positive corporate tax reform, whereas in 

the New Fiscal Plan there is a new tax initiatives structural reform which is revenue neutral

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New Commonwealth Fiscal Plan 

■ The New Fiscal Plan largely maintains the tax compliance measures and adjustments to 

other taxes and fees from the March 2017 Fiscal Plan, based on adjustments to the targets 

mutually agreed upon between the Oversight Board and the Government during the 

implementation of the March 2017 Fiscal Plan 

Reduction in Appropriations to UPR and Municipalities

■ The March 2017 Fiscal Plan and New Fiscal Plan maintain the same reduction to UPR 

appropriations; however, the New Fiscal Plan accounts for reductions which have already 

taken place in FY2018 (e.g., they are accounted for within the baseline expenditures of the 

New Fiscal Plan)

■ The New Fiscal Plan largely maintains the reductions to the municipal appropriations from 

the March 2017 Fiscal Plan; however, the implementation ramp has been altered to reflect 

the post-Maria realities facing the municipalities

■ Reductions to “other appropriations” (e.g., to the private sector) were included within the 

agency efficiency measures in the March 2017 Fiscal Plan. Now, they are included within 

the Tax Law Initiatives (see Chapter 15). 

Pension Reform

■ The March 2017 Fiscal Plan included all the measures from the New Fiscal Plan except for 

the Social Security enrollment 

■ The conformed Fiscal Plan documents released in August 2017 included the additional 

Social Security enrollment, as well as adjustments to the above measures, which rendered 

the savings largely similar to the measures included in the New Fiscal Plan 

Special Revenue Funds deficit reduction (within OCFO) 

■ This is a new measure which was not included within the March 2017 Fiscal Plan

Case:17-03283-LTS Doc#:3126-1 Filed:05/23/18 Entered:05/23/18 11:45:37 Desc:

Exhibit CW Certified Fiscal Plan (2018) Page 145 of 145