EXHIBIT S

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Exhibit S Page 1 of 121
Restoring Growth 

and Prosperity

June 29, 2018

As Certified by The Financial Oversight and 

Management Board for Puerto Rico 

New Fiscal Plan for Puerto Rico

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Exhibit S Page 2 of 121
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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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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

OCFO Office of the CFO

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

PRDE Puerto Rico Department of Education

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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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...................................................................................................21

Long-term projections and Debt Sustainability Analysis (DSA) ........................................ 25

Macroeconomic, revenue and expenditure projections ......................................................... 25

Debt Sustainability Analysis (DSA)......................................................................................... 28

PART III: Restoring growth to the Island ......................................................................34

Human capital & welfare reform........................................................................................... 35

Current state of human capital and welfare laws ................................................................... 35

Future vision for the Puerto Rican human capital and welfare reform ................................ 39

Structural reform initiatives for human capital and welfare reform..................................... 39

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

Ease of Doing Business reform .............................................................................................. 43

Current state of business regulation and investment attraction ........................................... 43

Future vision for Ease of Doing Business ............................................................................... 45

Core initiatives to improve the ease of doing business .......................................................... 46

Implementation and enforcement of Ease of Doing Business reform .................................. 48

Energy and power regulatory reform................................................................................... 49

9.1 Current and future state of energy regulation ............................................................................ 50

9.2 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

PART IV: Transforming government to better serve the Island .................................... 57

Office of the CFO..................................................................................................................... 58

Responsibilities and actions of the OCFO .............................................................................. 59

Implementation and enforcement plan ...................................................................................61

Agency efficiencies................................................................................................................. 66

Changes to agency operational expenditures ......................................................................... 66

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

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

Compensation-related initiatives ............................................................................................ 69

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New Commonwealth Fiscal Plan

Department of Education (PRDE) ........................................................................................... 71

Department of Health (DOH)...................................................................................................76

Department of Public Safety (DPS)......................................................................................... 78

Department of Corrections and Rehabilitation (DCR) ...........................................................81

Hacienda / Office of the CFO (OCFO) .................................................................................... 84

Department of Economic Development (DDEC) ................................................................... 86

Legislative Assembly and the General Court of Justice .........................................................88

All other agencies .....................................................................................................................88

Implementation plan ............................................................................................................... 89

Healthcare reform ................................................................................................................. 90

Current State of Puerto Rico’s Medicaid program ................................................................. 90

Future vision for healthcare reform .........................................................................................91

Key initiatives for healthcare reform ...................................................................................... 92

Implementation plan ................................................................................................................97

Tax compliance and fees enhancement.................................................................................97

Current state and future vision for tax revenue collection .....................................................97

Administrative tax initiatives to increase revenue collections .............................................. 98

Implementation and enforcement of tax initiatives.............................................................. 101

Reduction in appropriations to UPR and municipalities ................................................. 102

Current state and vision for Commonwealth appropriations.............................................. 102

Key initiatives to reduce appropriations ................................................................................103

Implementation plan ............................................................................................................. 106

Pension reform..................................................................................................................... 106

Current state of and required changes to pension reform................................................... 106

Proposed pension reform initiatives ..................................................................................... 109

Implementation plan .............................................................................................................. 112

Implementation..................................................................................................................... 112

Governor’s Fiscal and Economic Working Group (GFEWG) ............................................... 112

Agency Program Management Offices (PMOs)..................................................................... 112

FOMB and GFEWG implementation collaboration.............................................................. 113

PART V. Conclusion .....................................................................................................114

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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. This New Fiscal Plan for the Commonwealth of 

Puerto Rico (the “New Fiscal Plan”) details some of those necessary 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, would have given 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 also would have 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 within five years, 

regaining access to the capital markets, and restoring economic opportunity for the Island.

Unfortunately, the Legislature failed to rise to the challenge because it did not pass the most 

critical structural reform – turning Puerto Rico into an at-will employment jurisdiction – as 

the previous versions of the New Fiscal Plan required. Therefore, unless Puerto Rico adopts 

meaningful structural reforms in addition to those contained in the New Fiscal Plan, Puerto 

Rico will not be able to overcome the problems that have plagued Puerto Rico’s economy for 

over a decade, and the Government will have lost its window of opportunity to restore fiscal 

sustainability, regain access to capital markets, and achieve long-term economic growth and 

prosperity for the people of Puerto Rico. 

* * *

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 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 – an amount 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 significantly larger than 

 

1 The World Bank Group

2 American Community Survey and Center for Economic and Policy Research

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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 structural decline

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

primary 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 13.3% this fiscal year. On the other hand, over $60 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.

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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. None of 

these reforms or measures is more critical than human capital and welfare reform to improve 

Puerto Rico’s historically dismal labor participation rate. 

Structural reforms

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

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

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

by 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 0.30% by FY2022 due 

to EITC and labor reforms, and by an additional 0.26% from FY2033-2058 from longterm 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, importing and transporting goods, registering 

property, and obtaining permits. These reforms are projected to drive a 0.65% uptick 

in overall growth by FY2023. 

▪ 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):

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▪ 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”).

▪ 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, while instituting an independent 

scholarship fund for low-income UPR students

▪ 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, more incentives to enter the formal labor 

market, an improved regulatory and permitting environment, and a more effective and 

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efficient public sector, will enable companies to grow and prosper, leading to more and better 

jobs for residents and a stronger tax base for the Government.

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 sustainable economy. The best time to implement 

these reforms and 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 structural decline 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 

multiple, 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.In the same year, Puerto Rico 

passed Law 80, which instituted protections against wrongful discharge for Puerto Rican 

workers, and mandated severance for firms attempting to remove employees. This law made 

Puerto Rico’s labor market significantly more rigid and placed it out of step with the prevailing 

labor markets in the mainland U.S. (especially markets with which Puerto Rico competes for 

companies and talent, such as Florida). 

In 1996, 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. 

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 neither 

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New Commonwealth Fiscal Plan

promoted growth nor treated companies equitably. Furthermore, generous Government 

transfer programs, in addition to Federal transfer programs, boosted incentives to resulted in 

many workers choosing not to work, or to receive benefits and work in the informal economy 

without 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 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 pledging 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 

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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 

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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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, INCLUSIVE OF DISASTER RELIEF SPENDING

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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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 fiscal consolidation measures and structural reforms (discussed in Section 4.2).

These factors result in a 13.3% 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. Projected inflation rates (Exhibit 7) serve as 

proxy for the GNP deflator yielding nominal GNP growth rates of -11.6 to 7.7% each year, while 

real GNP grows in the range of -13.3 to 6.1% each year. 

EXHIBIT 7: ANNUAL INFLATION RATE

 

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

yet distinct inter-related components of past hurricanes, exogenous developments, and economic policies on growth and 

inflation

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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 on the Island

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 refurbishment of the capital stock on the Island. The New Fiscal Plan 

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

significant infusion of federal and private monies, 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 in total,

from Federal and private sources, will be disbursed in the reconstruction effort.

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 the 

Commonwealth’s share of the cost of disaster relief funding (states often must match 

some portion of Federal public assistance spend5). 

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 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%

5 The New Fiscal Plan only contemplates cost share paid for by the Commonwealth (and UPR), not PREPA / PRASA or 

HTA.

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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.6

■ 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 FEMA 

 

6 The New Fiscal Plan does not account for Operations and Administration funding, which only flows to federal agencies. 

Rather, it looks at funds that are spent for reconstruction on-Island, though those funds could flow to firms that are local or 

external

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New Commonwealth Fiscal Plan

funding.7 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.8 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 streamline and transform the Government of Puerto Rico to a size appropriate for its 

population. Such policy actions, inescapably, will generate a contractionary impact on the 

economy in the short term, but 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, INCLUSIVE OF DISASTER 

RELIEF SPENDING

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

reforms implemented in Europe (e.g., Spain, Estonia), South America (e.g., Peru, Colombia), 

among other jurisdictions, utilities reform in Latin America, and broadly accepted metrics for 

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

 

7 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)

8 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

reform benchmarks broadly come from nations or jurisdictions without monetary policy 

options and high informal labor markets, like Puerto Rico. Labor, energy, and doing 

business, reforms are projected to increase GNP by 1.25 % by FY2023 (Exhibit 10). K12 education reforms add an additional 0.01% annual impact beginning in FY2033,

resulting in total GNP increase of 1.51% by FY2048.

9

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.10 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).

11 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.

 

9 The impact of educational / human capital structural reforms is 0.26% by FY2058

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

11 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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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 FY2018-23, in part 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 also help transform 

the deficit into a surplus for the life of the Fiscal Plan, as structural reforms will drive a 1.51% 

increase in growth (by FY58), and fiscal measures will drive ~$10.5 billion in savings and extra 

revenue by FY2023. However, even after fiscal measures and structural reforms and before

contractual debt service, there is an annual deficit reflected in the projection starting in 

FY2036, due insufficient structural reforms, including restrictive labor policies that prevent 

high growth. After contractual debt service, this deficit drops to much more severe annual 

deficit for all years of the plan (Exhibit 12).

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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.

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EXHIBIT 13: MAJOR REVENUE CATEGORIES 

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.12

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 were down ~3% as of February, relative to FY2017 

actuals.

13 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 has estimated that a marginal additional increase in

deductions in FY2018 will drive a $112 million negative variance.14 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).

15 As of February, corporate tax revenues were down ~11% FYTD relative 

to FY2017, and are projected to continue this trend. Finally, Hacienda has projected personal 

 

12 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

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

14 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

15 Hacienda historical reports

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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):16 As of February, SUT revenues were down ~9% FYTD relative 

to FY2017, but had 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 year-over-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 2018 trendline for other General Fund revenues is projected to continue in line with postMaria 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 relative to 2017 

actuals and adjusted for extraordinary events and Commonwealth policies on tax exemptions 

and holidays in response to the storm).17

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.18 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. 

 

16 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

17 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

18 As of February 2018

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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 

amount that is below 10% of costs. As of FY2018, this funding stream was capped at $359.2

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

expenditure growth.19

■ 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 $172 million.

■ 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 $296 million.

 

19 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). 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

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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 $4.1 billion and $4.8 billion of the allocated funding for core Medicaid 

expenditures.

20 It will continue to receive its annual CHIP,21 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).

EXHIBIT 15: MEDICAID EXPECTED FEDERAL FUND RECEIPTS

5.1.4 Other Federal Funding

In addition to Medicaid funding, Puerto Rico receives other federal funds, which cover both 

social benefits and operational expenditures. In the New Fiscal Plan, these funds have been 

modeled based on what types of costs they cover (e.g., benefits or operations) as well as the 

statutory formula that defines the size of Puerto Rico’s allotment. For example, while TANF 

funds are typically pass-through (e.g., none of these funds go to operational costs), some Title 

I education funds are used for operational purposes (e.g., teachers’ salaries, school supplies 

for programs for students with special needs, etc.). For the former, federal fund inflows and 

outflows mirror each other (as benefit needs decline, so do funds). For the latter, though 

 

20 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

21 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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inflows may decline, it does not necessarily mean expenditures decline as well – as 

expenditures are based on operations, not on benefits formulas. Meanwhile, while Head Start 

funds are allocated from the federal government based on the number of children living in 

poverty, PAN funds are provided through a block grant that is capped. The former, therefore, 

should change by population, while the latter should be consistent regardless of population 

size.

Baseline expenditure forecast

Over the next five years, baseline expenditures are set to increase over FY2018 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 

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. 

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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.22 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,23 along with an 

additional 1.1% observed in other post-disaster environments.24

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

INCLUDING PLATINO)

 

22 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/

23 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%

24 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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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.25 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.26 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 

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 Mayagüez. 

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 

 

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

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

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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, or $375 million over the 10 years of federal fund receipts). Thus, 

total cost share incurred by the Commonwealth is expected to be $870 million from FY2018-

FY2023. 

PROMESA related costs: Commonwealth PROMESA related 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). 

EXHIBIT 18: PROJECTED PROFESSIONAL FEES 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).

27 Restrictions on the use of 

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

 

27 IMF Bahamas Article IV report published March 22, 2018 

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LONG-TERM PROJECTIONS AND DEBT 

SUSTAINABILITY ANALYSIS (DSA)

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 influenced 

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

impact. Population is estimated to steadily decline at a rate of 1.2-1.3% from 2024 onwards.

Meanwhile, real growth reaches a trend of 0.2% 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 term28. 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,29 as do baseline appropriations after FY2023. 

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

 

28 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

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

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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).

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). 

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New Commonwealth Fiscal Plan

EXHIBIT 20: PROJECTED LONG-TERM SURPLUS / DEFICIT 

Meanwhile, the cumulative impact of structural reforms in the next 40 years drives over $100

billion, thereby generating much of the future surplus. Even with structural reforms, a deficit 

will emerge in 2036 in part due to the absence of comprehensive human capital and welfare

reform (Exhibit 21).

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

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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). Puerto Rico has 

approximately $45 billion of Net Tax-Supported debt and includes GO, PBA, COFINA, PRIFA, 

HTA, CCDA, ERS, PFC, and UPR. 

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).

EXHIBIT 22: US STATES AS COMPARABLES

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New Commonwealth Fiscal Plan

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

do pay 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’s residents 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, which 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,

30 67.9% below 

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

31

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).

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).

 

30 U.S. Census Bureau 2016 Estimate

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

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EXHIBIT 24: KEY DEBT RATIOS FOR TEN HIGHEST INDEBTED STATES

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.

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New Commonwealth Fiscal Plan

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 indebted 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.

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

STATE DEBT METRICS ($M)

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New Commonwealth Fiscal Plan

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 

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.

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New Commonwealth Fiscal Plan

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; it must

restructure its current excessive debt load to a sustainable level. As Puerto Rico seeks to regain 

cost-effective 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 welfare reforms will improve job creation, workforce participation,

and the well-being and self-sufficiency of welfare recipients, , resulting in a cumulative GNP 

impact of 0.30% 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, trading across borders, employment opportunities, and business vitality, resulting in 

a cumulative GNP impact of 0.65% 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,

information, and people across the Island. It has not been scored to provide a specific GNP 

uptick, yet undoubtedly contributes a consequential uptick in the Island’s long-term 

development.

If implemented immediately, the structural reforms are projected to result in a 

sustained 1.25% annual real GNP growth by FY2023. As shown below (Exhibit 28), 

these reforms equal approximately $50 billion in increased Commonwealth revenues over 30 

years (and over $100 billion over 40 years). In the long term, education reforms are 

projected to add an additional cumulative 0.26% to GNP growth, making total 

impact 1.41% by FY2048 and 1.51% by FY2058. The reforms are crucial to placing 

Puerto Rico on a path to long-term structural sustainability.

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EXHIBIT 28: IMPACT OF STRUCTURAL REFORMS OVER 30 YEARS

HUMAN CAPITAL & WELFARE REFORM

Current state of human capital and welfare laws

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 20.32 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%).33 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, Puerto Rico could improve labor 

market flexibility through repealing restrictive laws like Law 80 and creating labor conditions

more similar to those on the mainland, which would lead to increased labor force participation 

rates. If Puerto Rico’s labor force participation rate grew to match 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.

 

32 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

33 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

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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. 

Perhaps the biggest barrier to hiring in Puerto Rico is its lack of “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, Law 80 was passed in 1976 requiring employers to first prove 

“just cause” before dismissing employees. Law 80’s “just cause” requirement applies to any 

employees hired for an indeterminate period of time, as well as any employee with a tenure 

longer than twelve months. In addition, Law 80 mandates significant severance pay: 3 months’ 

base wages, plus two weeks’ additional wages for every year of the outgoing employee’s tenure.

The need to establish just cause can be costly for employers because it typically leads to

litigation, and many employers simply pay severance pay to an unsatisfactory employee to 

avoid a court dispute. Labor flexibility-reducing legislation like Law 80 can also have the 

additional effect of skewing investment to capital rather than labor, reducing the positive 

impact of any surplus on the labor market. 

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;34 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.35 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. However, the Island still is not an employment at-will 

jurisdiction, imposing costs and regulatory burdens that reduce employment, wages and 

economic opportunity.

 

34 RAND Corporation, 1992

35 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

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 

various incentives that inform the ways they engage with the labor market. 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.

36

Though few Puerto Rico residents receive all these benefits,37 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 

receive from government benefits.38 In this example, effective hourly pay (the amount received 

 

36 Burtless, Gary, and Orlando Sotomayor. "Labor supply and public transfers." In The Economy of Puerto Rico: Restoring 

Growth (2006): 82-151

37 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

38 Advantage Business Consulting. “Beneficios de las Personas Elegibles al TANF vs. Escenario de Salario Mínimo 

Federal.” Prepared for the Universidad Interamericana, May 2015

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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.39 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. Poor skill development is largely driven by low educational quality and 

attainment. Around 20% of Puerto Rico’s working age population has less than a high school 

diploma (compared to U.S. average of under 12%), and about 30% of that same population 

have a college degree, which is about 3% below the mainland average.40 Meanwhile, Puerto 

Rico’s public schools are underperforming. 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,41 while the remainder graduate below basic proficiency levels: in standardized 

tests, only about half perform at a basic level in Spanish,42 35% perform at a basic level in 

Mathematics, 35% perform at a basic level in English and 43% at a basic level in Science.43 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).44 These challenges 

 

39 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

40 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

41 Puerto Rico Department of Education Consolidated State Plan (ESSA), 2017; 

https://www2.ed.gov/admins/lead/account/stateplan17/prconsolidatedstateplanfinal.pdf

42 As of ESSA Consolidated State Plan 2017

43 “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.” Source: “Medición y Evaluación para la 

Transformación Académica de Puerto Rico (META-PR) 2015-2016 School Year,” PRDE (2016)

44 Programme for International Student Assessment (PISA) 2015 Assessment and Analytical Framework, The Organization 

for Economic Co-operation and Development, August 31, 2017

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contribute to Puerto Rico’s rate of youth unemployment, which is more than double the rate 

in the U.S. mainland.45

Puerto Rico has therefore not solved the supply or demand side issues with its labor market –

creating huge barriers to economic growth and sustainability for the Island. 

Future vision for the Puerto Rican human capital and 

welfare reform

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. 

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). 

Unfortunately, the Legislature has failed to pass the Labor Reform Package that 

was outlined in the April 19, 2018 version of the New Fiscal Plan and failed to 

repeal Law 80 that was required by the May 30, 2018 version of the New Fiscal 

Plan. Accordingly, while successful human capital and welfare reforms would have been

projected to generate approximately $39 billion in additional revenues by FY2048 and over 

~$320 million from FY2018-FY2023, the Legislature’s demonstrated noncompliance with the 

comprehensive labor reform requirements of previous fiscal plans has forced the removal of 

these projected revenues from the New Fiscal Plan.

46 As a result, the New Fiscal Plan projects 

that the human capital and welfare reforms that have been committed to will only generate 

0.3% growth for the Island by FY23, rather than 1% growth. 

Structural reform initiatives for human capital and 

welfare reform

Labor market reforms should increase the availability of jobs while increasing incentives and 

preparedness to work. To accomplish this broad-based reform, the Government must enact 

welfare reform measures 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 and improve employment readiness for jobseekers 

and students.

 

45 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

46 . Human capital and welfare reform as described in this Fiscal Plan is projected to result in total 0.3% GNP growth by 

FY2021 

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7.3.1 Welfare structure reforms

To implement the human capital and welfare 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 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)47 and provides increased opportunities for individuals to invest in their own 

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.48

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.

 

47 Hoynes and Patel 2015, http://www.taxpolicycenter.org/briefing-book/how-does-eitc-affect-poor-families

48 New York Federal Reserve Bank, 2014 

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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 

human capital and welfare reform package that the Oversight Board projects will create 

substantial growth over the next 30 years, the New Fiscal Plan requires that the Government

institute work requirements to qualify for PAN benefits. 

Starting in July 2019, able-bodied participants aged 18-59 will be subject to a work 

requirement; Puerto Rico must complete its application for the program by July 2018. Like 

mainland SNAP, in full implementation this work requirement must become effective after 

the individual has collected PAN benefits for three months. The work requirement may be 

satisfied with 80 hours per month of paid work, volunteer work, and/or qualified training and 

education. General exceptions would include those under age 18 or over age 60, parents with 

dependents under age 18, as well as those who are medically certified as physically or mentally 

unfit for employment. Children, even if their parents do not work, will continue to receive the 

benefit.

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 

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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 would improve conditions 

for low-income workers in the formal economy and reduce poverty.

7.3.2 Workforce development programs

Human capital and welfare reforms should increase supply and demand for jobs; to fully close 

the gap and implement the human capital and welfare 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

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

■ 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 

welfare reform

The New Fiscal Plan requires that EITC must be in effect by January 2019, and that the 

proposed PAN work requirements be included in the new PAN annual plan submitted July 1, 

2018 to Food and Nutritional Services, and by July 1, 2019, that full requirements will take 

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effect, subjecting beneficiaries to the work requirement after 3 months of benefit collection. A

qualified third-party analytical firm retained by the Government and acceptable to the FOMB 

must validate that these work requirements are being fully implemented. This third party will 

share equal information about its work with both the Government and FOMB.

EXHIBIT 30: HUMAN CAPITAL AND WELFARE 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 by reducing a variety of 

inefficiencies related to building, expanding and attracting businesses. Easier-to-navigate 

regulations, less complex and faster permitting processes, and other legal and regulatory 

changes can encourage new businesses to hire employees and invest in growth. To quantify a 

jurisdiction’s overall effectiveness in this regard, 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

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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:

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.49 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.50

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%,51 compared 

to 45.8% in the U.S.

Trading Across Borders (rank 64th, U.S. 36): Despite the advantage enjoyed by Puerto 

Rico through its link to the U.S., its trading across borders ranking is more in line with regional 

peers (e.g., Dominican Republic and Costa Rica are 59th and 73rd, respectively). This is largely 

due to lengthy border handling times, which total 48 hours on average compared to 1.5 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, in 2015-2016 Puerto Rico saw its 

number of jobs and establishments declining (before the effects of Maria),52 and it ranks 55th

overall in the World Economic Forum’s worldwide Travel & Tourism Competitiveness Index 

(while the U.S. rank is 6).53 Countries that 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.54 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.

 

49 The Guardian, “Puerto Rico’s Soaring Cost of Living,” 2015. https://www.theguardian.com/world/2015/jul/12/puerto-ricocost-of-living

50 All specific U.S. comparison based on New York City, as averages vary across the country

51 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

52 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

53 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

54 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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The Government has made important efforts recently to generate investment in the Island by 

creating the Destination Marketing Office (DMO) and Invest Puerto Rico (iPR) 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 beginning of FY2019, 

these entities will need clear goals and metrics to be most effective.

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 5755

■ 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 

■ Trading Across Borders: Move from 64 to at least 50

In addition, in line with best-in-class investment offices,56 by FY2023 iPR shall:

■ Create 54,000 new jobs (or average 9,000 new jobs per year)57

■ Lead 750 new capital investments (or average 150 per year)58

■ Achieve a $20 return in 10 years per dollar invested59

In line with best-in-class Caribbean tourism offices,60 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 employment61

■ Improve tourist service infrastructure score 0f 5.4 (2015) by 10% by improving number 

and quality of lodging services62

 

55 In line with the top ranked Latin American country in 2018

56 Offices reviewed include: Ireland’s Investment Development Agency (IDA), Enterprise Florida, JobsOhio, and Virginia’s 

Economic Development Partnership (VEDP)

57 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

58 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

59 VEDP estimates $23 return on each dollar invested in 10 years ($48 in 20 years). VEDP benchmark adjusted for PPP

60 Such as the Barbados Tourism Product Authority and the Bahamas Ministry of Tourism

61 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

62 10% improvement bring tourist service infrastructure in line with Barbados at 5.9 quality score, top ranked Caribbean 

nation

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■ Establish exit surveys to measure visitor satisfaction, length of stay and spend for tourists 

to highlight key areas of improvement and focus for DMO63

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) pursue core initiatives such as digitizing government 

services, reducing border handling times, and driving deregulation and 2) establish clear 

metrics and regular tracking / reporting for iPR and DMO.

8.3.1 Initiatives to improve ease of doing business rankings (e.g., digitize 

government services, 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).

 

63 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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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). 

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.

Improve trading across borders. Efficient movement of goods across borders is a critical 

element of economic competitiveness. Goods that arrive in Puerto Rico are subject to a mix of 

federal customs procedures if coming from another country (administered by U.S. Customs 

and Border Patrol, CBP), and local procedures (e.g., certain tax payments). In either case, 

downstream infrastructure challenges (e.g., in port ingress/egress capacity, internal 

transportation inefficiencies and lack of capacity, and power infrastructure), can have 

upstream impacts on the ability to quickly move goods in and out of the 

Commonwealth. According to the World Bank Doing Business Rankings, the typical time at 

import related to port or border handling in San Juan is 48 hours, relative to 1.5 hours in New 

York or Los Angeles. Improving the overall movement of goods requires an integrated effort 

that looks across transport infrastructure and programs at the border administered by the 

Government of Puerto Rico, along with close collaboration with the federal government 

(primarily CBP).

Domestic transport is also a major concern in Puerto Rico. Ports are spread across the Island 

with poor connectivity (e.g., between Ponce and San Juan), and the flow of goods across the 

Island’s major highways and big cities is slowed by infrastructure productivity 

inefficiencies. Reducing this barrier to the efficient transport of goods across the Island could 

have a significant effect on Puerto Rico’s economy, with various studies concluding that 

transportation improvements can lead to an uptick in growth64.

In addition to improving infrastructure productivity, Puerto Rico can focus on improving 

accessibility for foreign and mainland companies, and easing the process of moving goods into 

and out of the Island. While the scope of what some other countries have done to improve 

border conditions is beyond the scope of what Puerto Rico is responsible for, many of the same 

principles apply. For instance, from 2012 to 2018, El Salvador streamlined its processes, 

invested in increased automation technologies, and pinpointed areas of inefficiency at its 

borders where additional staff were added. During those same years, El Salvador's trading 

across borders ranking rose 26 spots65.

Puerto Rico can use some of these strategies (e.g., automation, staff augmentation where 

needed, and research into specific areas of inefficiency) in tax collection and other areas where 

Commonwealth officials take full responsibility. By combining these principles with a robust 

collaborative effort in engaging the U.S. Port Authority and CBP, Puerto Rico could achieve its 

 

64 In California, the Mercatus Center out of George Mason University found that a 10% reduction in congestion in one of the 

state’s urban centers corresponded to a 0.25% GDP increase and 0.18% wage growth. In New Zealand, the country’s 

Institute of Economic Research estimated that measures to bring the roads in Auckland (New Zealand’s largest urban 

center) to their intended capacity during the work week could boost the city’s GDP by 1-1.4%. They also estimated that the 

benefit to the labor market could be an increase in employment of between 0.17-0.27%, and an increase in real wages of 

0.31-0.48%

65 http://www.doingbusiness.org/Reforms/Overview/Topic/Trading-across-Borders, and “Doing Business 2018: Reforming to 

Create Jobs” by the World Bank Group

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New Commonwealth Fiscal Plan

goal of halving the gap between its current trading across borders ranking and that of the 

mainland United States.

8.3.2 Invest Puerto Rico (iPR) and the Destination Marketing Office (DMO)

The Government should plan to make iPR 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. 

iPR 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, iPR 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.66 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 31).

 

66 For example, utilizing the Tourism Satellite Account tool leveraging economic tourism data

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New Commonwealth Fiscal Plan

EXHIBIT 31: EASE OF DOING BUSINESS IMPLEMENTATION TIMELINE

ENERGY AND POWER REGULATORY 

REFORM67

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 required and will additionally 

support the success of the power sector 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. Furthermore, the long-term sustainability of Puerto Rico’s energy sector 

depends on having a strong, independent, and professional regulator. 

 

67 Although the FOMB does not consider and has not considered anything in the New Fiscal Plan as a “recommendation” 

pursuant to Section 205(a), to the extent that the Government of Puerto Rico considers or has considered anything in this 

Chapter a “recommendation” pursuant to Section 205(a), the FOMB hereby incorporates it into the New Fiscal Plan 

pursuant to Section 201(b)(1)(K)

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9.1 Current and future state of energy regulation

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 public monopoly provider. 

Under a future transformed power sector in Puerto Rico, PREC or a new regulator will 

continue to have these responsibilities as it applies to regulating, monitoring, and enforcing 

the energy policy of the Commonwealth of Puerto Rico, acting as the regulator for all 

participants in the energy sector.

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 should 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),regular rate cases at two- or three-year intervals or through a 

formulaic rate mechanism and/or flexible rate case intervals consistent with the Fiscal Plan.

9.1.1 Structure of and funding for the Puerto Rico Energy Commission 

In line with best practices for regulatory commissions (e.g. California Public Utilities 

Commission, Hawaii Public Utilities Commission, New York Public Services Commission), the 

PREC 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 professional civil servant 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 dollars68, which is 

roughly equivalent to a surcharge of $0.0015 per kWh. 

9.1.2 Mandate and authorities for the strengthened regulator

To be effective, the regulator must have a clear mandate to deliver reliable, safe power at an 

affordable cost. The tools and authorities that the 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, 

 

68 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

■ 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

9.2 Regulatory reform implementation and transition

To enable the power sector transformation, the transition to a stronger regulatory structure 

must occur immediately. 

The details of the future-state regulatory framework should be designed by a working group 

comprised of experienced, professional, and impartial organizations and individuals.

However, during the transition period before the transformation takes place, 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, but in no way is binding on 

the IRP. 

■ 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 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:

■ 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.

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New Commonwealth Fiscal Plan

■ Budget and rate-making: The regulator authorizes bridge rate (likely formula based) in 

line with the budget as certified by the Oversight Board 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, energy storage and 

distributed generation development during the transition period.

During the transition period it is critical that the regulator maintains sufficient capabilities 

and staff to continue to regulate the power sector. 

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 32: 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. In particular, poor transport infrastructure has 

contributed to congestion and thus impacted the ease of doing business on the Island. The 

capital investments enabled by post-Maria Federal recovery funding offers a unique 

opportunity to make transformational investments that support economic development. This

moment is 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 201469, 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 roads70. Urban congestion is a particular problem in San Juan and on major 

highways. San Juan is in the top 15% of most congested cities worldwide, according to the 2017 

INRIX Traffic Scorecard. It incurs daily delays of ~54,000 hours on average, costing ~$165 

million annually in commuter cost, without including the impact of congestion on the 

transport of goods, or the costs of unreliability or lack of safety.

Improving traffic on major highways along which goods travel, such as PR-52 and PR-18, is 

critical to enhancing growth. A 25% reduction in congestion can reduce travel cost by over 6% 

(NCHRP Report 463). Investments to reduce congestion should prioritize the most 

economically important trips, or in provide alternative travel capacity to enable access despite 

congestion (Sweet, 2013). Targeted investments, such as “smart intersections”, dynamic tolls 

and reversible lanes using movable barriers will reduce delays on key routes and journeys, and 

facilitate economic growth71. 

Meanwhile, there are several critical elements that Puerto Rico should include 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. As 

such, 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 based on leading practices 

used in many jurisdictions, including New Jersey, Louisiana, New York and New Zealand, to 

ensure higher accountability, transparency and coordination of disaster recovery efforts. 

 

69 Puerto Rico Planning Board

70 U.S. Bureau of Transportation Statistics

71 See, Jamal Haidar, “The impact of business regulatory reforms on economic growth,” Journal of the Japanese and 

International Economies, Vol 26, 2012, pp. 285-307. In addition, there are several studies that review the impact of 

decongestion of roads on growth. Two examples are: New Zealand Institute of Economic Research, Benefits from 

Auckland road decongestion, July 2017, and Clifford Winston and Quentin Karpilow, A New Route to Increasing Economic 

Growth Reducing Highway Congestion with Autonomous Vehicles, Mercatus Working Paper, January 2017

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New Commonwealth Fiscal Plan

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. New York and New Jersey

received ~$10 billion in 428 funding post Hurricane Sandy, which decreased their 

vulnerability and helped ensure that capital dollars spent then did not simply have to be respent 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

■ Coordinating and channeling 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; and utilizing Title V 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)

■ Provide 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 33).

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New Commonwealth Fiscal Plan

EXHIBIT 33: INFRASTRUCTURE IMPLEMENTATION PLAN

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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 11). 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 12). 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 $1,576 million in run-rate savings by FY2023.

Healthcare Reform (Chapter 13). 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 $839 million in run-rate savings by FY2023, projected to grow with 

healthcare inflation.

Tax Compliance and Fees Enhancement (Chapter 14). 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 $533 million by FY2023.

Reduction of Appropriations (Chapter 15). 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 16). 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 $206 billion over the next 40 years (Exhibit 34).

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New Commonwealth Fiscal Plan

EXHIBIT 34: SAVINGS AND INCREASES IN REVENUES DUE TO IMPACTS FROM FISCAL 

MEASURES

OFFICE OF THE CFO72

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

 

72 Although the FOMB does not consider and has not considered anything in the New Fiscal Plan as a “recommendation” 

pursuant to Section 205(a), to the extent that the Government of Puerto Rico considers or has considered anything in this 

Chapter a “recommendation” pursuant to Section 205(a), the FOMB hereby incorporates it into the New Fiscal Plan 

pursuant to Section 201(b)(1)(K)

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New Commonwealth Fiscal Plan

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

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

11.1.1 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, GDB73, 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.

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

 

73 Scheduled to be liquidatd

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New Commonwealth Fiscal Plan

■ 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

■ 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 35).

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New Commonwealth Fiscal Plan

EXHIBIT 35: SAVINGS GENERATED FROM ELIMINATION OF SPECIAL REVENUE FUND 

DEFICIT

F) Improve timeliness of CAFR and financial reporting

■ 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 and enforcement 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 

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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 36).

EXHIBIT 36: OCFO IMPLEMENTATION TIMELINE

11.2.1 Enforcement of the budget 

The budget is an important tool that ensures the New Fiscal Plan targets can be achieved. As 

a result, the following items represent requirements to ensure the budget is a robust document 

for driving change.

• The Department of the Treasury will remit to the Legislative Branch and its 

components, to the Judiciary, to the University of Puerto Rico, and to the non-profit 

entities that receive funds from this Resolution, monthly and in advance, the budgetary 

allotments corresponding to one twelfth of the annual allocation provided in the 

budget resolution for each entity. Such one-twelfth monthly allocation to each entity 

(except with respect to the Judiciary) shall be subject to the five percent (5%) 

withholding during the first three quarters of this fiscal year.

• The Director of the Office of Management and Budget (“OMB”) may authorize the 

disbursement of up to ninety-five percent (95%) of each appropriation during the first 

three quarters of this fiscal year. The Director of OMB shall withhold the remaining 

five percent (5%) of each appropriation until after the end of the third quarter of this 

fiscal year. Such withheld percentage of each appropriation shall only be disbursed 

during the fourth quarter of this fiscal year if the first 6 months of actual revenues 

reported to the Oversight Board reach the Government’s monthly revenue projections 

for that period and subject to the prior approval of the Director of OMB. If actual 

revenues for the first 6 months of the fiscal year fail to reach the Government’s monthly 

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revenue projections for that period, the amount of the withheld percentage of each 

appropriation that may be encumbered shall be reduced proportionally according to 

the negative budget variance between projected and actual revenues. 

• No later than 45 days after the closing of each quarter of a fiscal year, the Secretary of 

Treasury shall revise the projected net revenues of the General Fund for the current 

fiscal year (the “Quarterly Revision”) and notify the revision to the Director of the 

OMB, the Governor and the Oversight Board. The Quarterly Revision shall project 

future revenues based on actual revenues, and include revisions to the assumptions 

used to generate the General Fund’s net revenue projections.

• All appropriations authorized in any prior fiscal year payable from the General Fund, 

including appropriations without a specific fiscal year, are hereby eliminated and no 

disbursement of public funds may be covered by such appropriations, except: (1) 

appropriations without a specific fiscal year to carry out permanent improvements that 

have been accounted for and kept on the books; and (2) the portion of the 

appropriations authorized for fiscal year 2018 that have been encumbered on or before 

June 30, 2018, which shall be kept in the books for 60 days after the termination of 

fiscal year 2018 and after those 60 days no amount shall be drawn against such portion 

for any reason. This restriction on the use of appropriations of prior fiscal years shall 

not apply to: (1) programs financed in whole or in part with federal funds; or (2) orders 

by the United States district court with jurisdiction over all matters under Title III of 

PROMESA. 

• Any power of OMB, the Fiscal Agency and Financial Advisory Authority (“AAFAF”, by 

its Spanish acronym) or the Department of the Treasury, including the authorities 

granted under Act 230-1974, as amended, known as the "Puerto Rico Government 

Accounting Act" (“Act 230”), to authorize the reprogramming or extension of 

appropriations of prior fiscal years is hereby suspended. Notwithstanding this section, 

the appropriations approved in the budget certified by the Oversight Board may be 

modified or reprogrammed with the approval of the Oversight Board. 

• In conjunction with the reports that the Governor must submit to the Oversight Board 

no later than 15 days after the last day of each quarter of the fiscal year pursuant to 

section 203 of PROMESA, the Executive Director of AAFAF and the Director of the 

OMB will certify to the Oversight Board that no appropriation of any previous fiscal 

year (except for appropriations covered by the exceptions authorized in the budget) 

has been used to cover any expense

• As requested by the Governor, the Fiscal Plan includes the enrollment of police under 

the age of 40 in Social Security beginning in FY19 instead of FY20, once necessary 

changes to their pension programs have been implemented. The appropriation in the 

amount of $37.4 million included in the Fiscal Plan shall remain unencumbered and 

under the custody of OMB until police officers under the age of 40 are covered by Social 

Security in accordance with Section 16.2.3 of the New Fiscal Plan for Puerto Rico 

certified by the Oversight Board, including: (i) implementation of a defined 

contribution retirement plan for police officers; (ii) an employee contribution of not 

more than 2.3% for police officers under the age of 40 as of June 30, 2018 or hired 

after such date; and (iii) the Social Security Reserve funds are only used to cover the 

employer’s share of the Federal Insurance Contributions Tax (FICA) that corresponds 

to the police officers enrolled in Social Security. When the aforementioned conditions 

are satisfied, OMB shall transfer the Social Security Reserve to the Department of 

Public Safety.

• The emergency reserve in the amount of $130,000,000 (the “Emergency Reserve”), 

required by the New Fiscal Plan certified by the Oversight Board in the custody of the 

OMB established in the budget resolution, may not be used to cover any allocation or 

expense whatsoever without the approval of the Oversight Board. 

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• In conjunction with the reports that the Governor must submit to the Oversight Board 

not later than 15 days after the last day of each quarter of the fiscal year according to 

Section 203 of PROMESA, the Executive Director of AAFAF and the Director of OMB 

will certify to the Oversight Board that no amount of the (i) Social Security Reserve or 

(ii) Emergency Reserve has been used unless the Executive Director of AAFAF and the 

Director of OMB certify to the Oversight Board that the corresponding conditions 

described in above have been satisfied.

• As a rule, necessary for the responsible disbursement of budgetary allocations for 

operating and other expenses, during the term of the budget resolution, OMB may 

withhold from any of the allocations to the agencies of the Executive Branch the 

amounts necessary to pay for the pay-go contribution, unemployment insurance, or 

taxes withheld from their employees, when OMB determines that such a withholding 

is necessary to ensure compliance with these obligations by the agencies concerned. 

Any such amounts withheld by OMB shall solely be reprogrammed to pay the 

corresponding outstanding obligations related to paygo contributions, unemployment 

insurance, or taxes withheld from employees.

• The public agencies and instrumentalities, public corporations, and municipalities, 

with the approval of the Office of Management and Budget, in accordance with current 

legislation, are authorized to formalize agreements with the Federal Government, 

other public agencies and instrumentalities, public corporations, or municipalities for 

the rendering of services based on contracts or the matching of municipal funds and 

those included in the budget resolution. 

• The Office of Management and Budget and the Department of the Treasury are 

authorized to establish the necessary mechanisms to ensure that when implementing 

the concept of mobility, pursuant to the provisions of Law 8-2017, as amended, known 

as the “Puerto Rico Human Resources Management and Transformation in the 

Government Act,” the corresponding transfer of funds allocated to payroll and related 

costs of said employee are to be carried out simultaneously.

• On or before August 1, 2018, the Government, in conjunction with the Oversight Board, 

will develop a work schedule for the Government to present and certify to the Oversight 

Board: (1) monthly reports of actual cash revenues, actual cash expenses, and cash flow 

for each government agency; (2) monthly and quarterly reports detailing actual versus 

projected budget results of each government agency based on a modified accrual basis 

as well; (3) monthly and quarterly reporting on central government payroll, headcount 

and attendance, third party accounts payable, invoice processing key performance 

indicators, tax credits, disaster-related funding and paygo; (4) monthly monitoring by 

each government agency of key performance indicators for each of the fiscal reform 

measures; and (5) quarterly reports on macroeconomic performance. Notwithstanding 

the foregoing, during the period in which the above work schedule is developed, the 

Government will present and certify to the Oversight Board all reports on liquidity or 

expenses that it can generate based on available financial information. The reports 

required under this Section are in addition to the reports that the Governor must 

submit to the Oversight Board under Section 203 of PROMESA.

• If during the fiscal year the government fails to comply with the liquidity and budgetary 

savings measures required by the New Fiscal Plan for Puerto Rico certified by the 

Oversight Board, the Government shall take all necessary corrective action, including 

the measures provided in PROMESA sections 203 and 204.

• The Secretary of Treasury, the Treasurer and Executive Directors of each agency or 

Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the 

Oversight Board, and the Director of the OMB shall be responsible for not spending or 

encumbering during fiscal year 2019 any amount that exceeds the appropriations 

authorized for such year. This prohibition applies to every appropriation set forth in 

the budget resolution, including appropriations for payroll and related costs. Any 

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violation of this prohibition shall constitute a violation of the budget resoution and Act 

230-1974.

• On or before July 31, 2018, the Director of OMB shall submit to the Oversight Board a 

copy of the budget certified by the Oversight Board in the budget format managed by 

OMB known as the “Sabana file”. The Sabana file shall be in Excel and identify both 

the General Fund budget and non-General Fund budgets within the Government’s 

PRIFAS and other accounting systems, including detailed budget appropriations and 

allocations by agency, instrumentality, public corporation, fund type and concept of 

spend.

• For the avoidance of doubt, any reference within the budget to AAFAF, the Department 

of Treasury, or OMB, or any of their respective officers, shall apply to any successor 

thereof. 

• The budget resolution shall be adopted both in English and Spanish. If in the 

interpretation or application of the resolution any conflict arises as between the 

English and Spanish texts, the English text shall govern.

• If any clause, paragraph, subparagraph, sentence, word, letter, article, provision, 

section, subsection, title, chapter, subchapter, heading, or part of the budget resolution

is annulled or declared unconstitutional, the resolution, decision, or judgment entered 

to that effect will not affect, harm, or invalidate the remainder of the resolution. The 

effect of such judgment will be limited to the clause, paragraph, subparagraph, 

sentence, word, letter, article, provision, section, subsection, title, chapter, subchapter, 

heading, or part thereof that has been annulled or declared unconstitutional. If the 

application to a person or circumstance of any clause, paragraph, subparagraph, 

sentence, word, article, provision, section, subsection, title, chapter, subchapter, 

heading, or part of the resolution is invalidated or declared unconstitutional, the 

decision, opinion, or judgment entered to that effect will not affect or invalidate the 

application of the remainder of the resolution to those persons or circumstances in 

which it can validly apply. It is the express and unequivocal will of this Legislature that

the courts enforce the provisions and the application of the resolution to the greatest 

extent possible, even if any of its parts is set aside, annulled, invalidated, prejudiced, 

or declared unconstitutional, or even if its application to any person or circumstance 

is annulled, invalidated, or declared unconstitutional. This Legislature would have 

approved the resolution regardless of the finding of severability that the Court may 

make.

• The Director of OMB, the Secretary of Treasury, the Executive Director of AAFAF, and 

any successor thereof, shall each be responsible for enforcing compliance of the budget 

as certified by the Oversight Board. For the avoidance of doubt, such government 

officials shall each be responsible for complying with the accountability controls 

existing under Puerto Rico law as of the date hereof, including Act 230-1974, as 

amended, known as the Puerto Rico Government Accounting Act.

• On or before July 31 of each year, the Governor shall provide to the Oversight Board 

budget projections of revenues and expenditures for each quarter of a fiscal year, 

which must be consistent with the corresponding budget certified by the Oversight 

Board (the “Quarterly Budget”). The Quarterly Budget shall be provided to the 

Oversight Board in Excel format and include detailed allocations by agency, public 

corporation, fund type and concept of spend. Together with the report that the 

Governor must provide under Section 203 of PROMESA not later than 15 days after 

the last day of each quarter, the Governor shall provide a quarterly variance analysis 

that is consistent with modified accrual accounting.

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AGENCY EFFICIENCIES74

Changes to agency operational expenditures 

The Government has approximately ~116,500 employees75 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)76. 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 state 

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)77. In fact, Puerto Rico remains an outlier in terms of the 

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”)78, which 

places Puerto Rico in the top 10th percentile of U.S. states for public sector employment79.

Therefore, the right-sized Government of the future should wherever possible 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.

80 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 37, total savings from agency-specific personnel and non-personnel measures are 

shown, as well as Government-wide compensation-related measures which will ensure 

 

74 Although the FOMB does not consider and has not considered anything in the New Fiscal Plan as a “recommendation” 

pursuant to Section 205(a), to the extent that the Government of Puerto Rico considers or has considered anything in this 

Chapter a “recommendation” pursuant to Section 205(a), the FOMB hereby incorporates it into the New Fiscal Plan 

pursuant to Section 201(b)(1)(K)

75 Excludes transitory employees

76 Excludes agencies which currently have $0 operating budget and no employees

77 United States Census Bureau

78 Puerto Rico Economic Analysis Report 2015-2016 (PR Department of Labor and Human Resources)

79 Gallup, “Gov’t. Employment Ranges from 38% in D.C. to 12% in Ohio”

80 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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properly-resourced compensation through continuing a payroll freeze and standardizing 

healthcare benefits.

EXHIBIT 37: SUMMARY OF AGENCY EFFICIENCIES IMPACT

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 38 shows the future agency groupings and potential independent agencies proposed 

by the Government.

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EXHIBIT 38: 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).

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 Oversight Board 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 displaying 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 Oversight Board will automatically reduce the budget 

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for the corresponding grouping for the following fiscal year in the amount equal to the 

unrealized agency efficiency savings. In particular, if the Oversight Board 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 39).

EXHIBIT 39: SAVINGS TARGETS FOR AGENCY EFFICIENCIES

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. 

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 

$262.4 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 

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average of $487 per month in medical benefits, whereas employees of the State Elections 

Commission receive only $90 per month81. 

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 $45.8 million in run-rate savings by FY2023.

82

Reducing additional outsized non-salary compensation paid to employees

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 ~$67 million in run-rate savings by FY2019.

Total savings from compensation-related measures must reach a run-rate of $375.0 million 

per year beginning in FY2023. 

Annual savings targets are summarized below (Exhibit 40).

 

81 Analysis of active, non-transitory government employees not supported by Federal Funds; data provided within January 

2018 Government attrition model 

82 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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EXHIBIT 40: COMPENSATION-RELATED MEASURES SUMMARY OF IMPACT

Department of Education (PRDE)

12.5.1 Current state and future vision for the Department of Education

Throughout the last decade, PRDE has encountered longstanding challenges which have 

contributed to 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),83 the number 

of schools and teachers has not decreased proportionally (with only about a 30% reduction in 

public schools since 1990).84 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 

through a series of education efficacy and efficiency measures as well as targeted 

reinvestment in student and teacher outcomes.

12.5.2 PRDE Efficiency measures

PRDE must achieve $54 million in net personnel savings and $7 million in non-personnel 

savings in FY2019, excluding any savings accrued from the elimination of the Special Revenue 

 

83 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

84 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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Fund deficit and implementation of the uniform healthcare measure. Refer to Exhibit 41 for 

annual personnel and non-personnel savings that must be achieved through FY2023. 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 $471 million in run-rate savings inclusive of 

funds needed for requisite reinvestments to increase quality.

EXHIBIT 41: 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,85 and announced plans to close another 283 schools after SY2017-18.86

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 

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. 

 

85 Puerto Rico Department of Education Report “Schools Closed FY 2017.” Accessed January 2018

86 Puerto Rico Department of Education Press Release, March 2018

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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 12.2). 

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 $197.2 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 (detailed below).

Right-sizing regional and center level structure

Rather than function as a single Local Education Agency (LEA), PRDE shall create regional 

LEAs (Exhibit 42).

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EXHIBIT 42: 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.87

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.

12.5.3 Reinvestment in education 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 

growth by FY2048 and keep growing thereafter (see Section 4.2 for further discussion of GNP 

 

87 Oversight Board Listening Session, Secretary Julia Keleher, “On the Road to Transformation” November 30, 2017

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impact). As a result, it is important that some of the savings from education measures are 

reinvested to drive student and teacher outcomes. PRDE will drive two such initiatives, both 

funded through reinvesting right-sizing savings:

1. Teacher development and retention

2. New educational materials such as textbooks 

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.88 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. 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 teachers89 and $23,000 annual salary increase for 

directors90 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.91

New educational materials including 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 

 

88 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

89 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.

90 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.

91 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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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.

Department of Health (DOH)

12.6.1 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 43). 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 43: AGENCIES INCLUDED IN FUTURE STATE DOH

12.6.2 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 $33.1 million in personnel savings and 

$13.3 million in non-personnel savings in FY2019, excluding any savings accrued from the 

elimination of the Special Revenue Fund deficit. Refer to Exhibit 44 for annual personnel 

and non-personnel savings that must be achieved through FY2023.

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EXHIBIT 44: 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 nonCase:17-03283-LTS Doc#:3734-19 Filed:08/03/18 Entered:08/03/18 13:49:22 Desc:

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payroll spend through procurement efficiency could amount to $22 million run-rate savings 

by FY2023.

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 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)

12.7.1 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 45: 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, most 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.”92

Puerto Rico’s current level of violent crime is 7,643 crimes per year, based on FBI reporting 

 

92 https://ucr.fbi.gov/crime-in-the-u.s/2010/crime-in-the-u.s.-2010/violent-crime 

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from 2016. However, Puerto Rico currently spends more on police per violent crime 

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 201893. 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 abuse94.

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.

12.7.2 Efficiency measures for DPS

DPS must achieve $20.5 million in net personnel savings and $5.9 million in non-personnel 

savings in FY2019, excluding any savings accrued from the elimination of the Special Revenue 

Fund deficit. Refer to Exhibit 46 for annual personnel and non-personnel savings that must 

be achieved through FY2023. 

 

93 Time, 2017

94 “Natural Disasters and Social Order”, International Journal of Mass Emergencies and Disasters

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EXHIBIT 46: 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

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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. 

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 Rico95.

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 functions96. 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. mainland97, 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 earlier in this Chapter, these measures to standardize employee healthcare 

and decrease non-personnel spend through procurement optimization (e.g., police fleet 

vehicles) should lead to $3.5 million and $19.1 million in annual savings by FY2023 for 

uniform healthcare and non-personnel spend, respectively.

Department of Corrections and Rehabilitation (DCR)

12.8.1 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. 

 

95 Connecticut Office of the State Comptroller; census data 2014; FBI Crime Justice Information Services

96 The report is expected to be completed mid-2018

97 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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EXHIBIT 47: LIST OF AGENCIES IN DCR GROUPING

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.98 Additionally, Puerto Rico’s prisons are underutilized: 

while most U.S. state prison systems are near 100% utilization99, 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. 

12.8.2 Efficiency measures for DCR

DCR must achieve $13.1 million in personnel savings and $8.4 million in non-personnel 

savings in FY2019, excluding any savings accrued from the elimination of the Special Revenue 

Fund deficit and implementation of the uniform healthcare measure. Refer to Exhibit 48 for 

annual personnel and non-personnel savings that must be achieved through FY2023. 

EXHIBIT 48: DCR SUMMARY OF MEASURES IMPACT

 

98 NASBO, FBI, BJS databases

99 Census data, 2014; Bureau of Justice Statistics, 2014

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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 

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 reductions100. 

Five prisons are slated for closure in FY2018,

101 and their prisoners have already been 

relocated to other prisons. Two additional prisons are expected to be closed in FY2019, and 

two more in FY2020. 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.102 Bringing this per-inmate spend in line 

with the 50th percentile of U.S. states would generate annual savings of ~$23 million by 

FY2023.

103 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.

 

100 Census data, 2014; Bureau of Justice Statistics, 2014

101 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

102 Source: Pew data 2011, normalized for GDP PPP and inflated to 2017 dollars based on CPI data (2011-2017 

compounded inflation rate of 10%)

103 Pew data, 2011

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Hacienda / Office of the CFO (OCFO)

12.9.1 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 

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 49: 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.

12.9.2 Efficiency measures for Hacienda / Office of the CFO

Hacienda / OCFO must achieve $7.4 million in personnel savings and $12.5 million in nonpersonnel savings in FY2019, excluding any savings accrued from the elimination of the 

Special Revenue Fund deficit and implementation of the uniform healthcare measure. Refer 

to Exhibit 50 for annual personnel and non-personnel savings that must be achieved through 

FY2023.

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EXHIBIT 50: HACIENDA/ OFFICE OF THE CFO SUMMARY OF MEASURES IMPACT

Transform Hacienda to improve efficiencies

Hacienda itself must attain an overall 15% net reduction in costs (approximately $33

million), which is 25% gross (approximately $54 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.104 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 ~$22 million to be reinvested in compliance activities, this 

measure amounts to $32.6 million in annual net savings by FY2023.

Reduce non-Treasury back-office and non-personnel

 

104 National Audit Office, “Reducing Costs in HM Revenue & Customs,” 2011

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Overall back office and non-personnel savings targets are detailed in Section 12.2, 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 $5 million in annual savings by FY2023.

AAFAF reductions in spend

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 $6 million per year by FY2023.

Department of Economic Development (DDEC)

12.10.1 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 

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 51).

EXHIBIT 51: 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. 

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12.10.2 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 $5.7 million in personnel savings and $10.6 million in non-personnel 

savings in FY2019, excluding any savings accrued from the elimination of the Special Revenue 

Fund deficit and implementation of the uniform healthcare measure. Refer to Exhibit 52 for 

annual personnel and non-personnel savings that must be achieved through FY2023. 

EXHIBIT 52: 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

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A government analysis identified a redundancy in service of back-office personnel across 

DDEC.105 DDEC could consolidate back-office operations of the newly-merged agencies 

as detailed in Section 12.2, leading to $12.0 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 earlier in Chapter 12. These initiatives must lead to 

$34.0 million run-rate savings by FY2023.

Legislative Assembly and the General Court of Justice

The current size of the Puerto Rican Legislative Assembly is significantly larger than 

comparable legislatures in U.S. mainland states, even when accounting for the demands of 

full-time legislatures and excluding the money that the Legislature spends on supporting nonprofit organizations. Reductions to the size and funding of the Legislature are necessary to 

bring it in line with benchmarks and optimize government funds. Hence, the Legislature will 

experience right-sizing measures proportional to those experienced by all agencies in the 

Executive Branch.

The General Court of Justice is similarly over U.S. mainland cost benchmarks, and will 

therefore also experience rightsizing measures equivalent to a 10% reduction in their annual 

budget.

All other agencies

The following agency groupings were evaluated using a top-down approach which primarily 

relied on the levers and initiatives highlighted earlier in Chapter 12. 

Exhibit 53 shows the summary of the savings that each agency must achieve.

 

105 DDEC analysis, 2018 

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EXHIBIT 53: PROPOSED SAVINGS TARGETS FOR OTHER AGENCY GROUPINGS

12.12.1 Importance of enabling agencies that promote public integrity and 

transparency

There is wide agreement that to drive a successful fiscal transformation within the 

Government of Puerto Rico, it will be important to promote public integrity and 

transparency at every turn. Within the Government, several agencies are dedicated to 

maintaining oversight and fiscal responsibility; namely, the Office of the Comptroller and the 

Office of Government Ethics. In line with the priorities of the Governor, the functioning of 

these agencies is critical to achieving the goals and ensuring the long-term sustainability of 

the fiscal plan. Accordingly, the budgets for the Office of the Comptroller and the Office of 

Government Ethics will not be affected by agency-specific right-sizing measures.

Implementation plan

Exhibit 54 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 54: 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.106 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).

107

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,108 and higher rates of adults 

reporting fair or poor health.109 At the same time, 72 of Puerto Rico’s 78 municipalities are 

 

106 Kaiser Family Foundation, “Medicaid State Fact Sheets: Percent of People Covered by Medicaid/CHIP, 2015” 

107 CDC (Centers for Disease Control and Prevention), “BRFSS Prevalence and Trends Data,” 2015-2016. Behavioral Risk 

Factor Surveillance System

108 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)

109 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,”110 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).111

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

 

110 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

111 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 FY2020, 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 ~$839 million by FY2023 (off 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%.

Exhibit 55 provides an overview of the core savings measures.

EXHIBIT 55: MI SALUD BASELINE SPEND AND MEASURES

13.3.1 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 

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 

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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,112better 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.113ASES 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,114 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.115

Reduce inpatient length of stay. Puerto Rico’s inpatient length of stay is 1.5 times the U.S. 

average.116 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.

13.3.2 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 

drugs. Even after ASES-negotiated some prescription drug cost reduction measures,117

 

112 Thomas Huelskoetter, Center for American Progress, “Hurricane Katrina’s Health Care Legacy” (August 15, 2015)

113 Patient-Centered Primary Care Collaborative, “Benefits of Implementing the Primary Care Medical Home

A Review of Cost & Quality Results, 2012” (Sept 2012)

114 JEL Consulting analysis (Dec 30, 2106) of ASES data and Puerto Rico Community Survey, Public Use Microdata, 2014. 

Estimates exclude Platino beneficiaries

115 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

116 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

117 FY2018 Milliman Actuarial Certification

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pharmacy costs grew 14% annually from FY2016 to FY2018 in Puerto Rico,118 compared to 6% 

per year in U.S. Medicaid programs.119

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.

13.3.3 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.120 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).121

13.3.4 Enrollment verification 

In addition to overpayment for eligible beneficiaries, ASES faces a 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 

 

118 Ibid

119 Express Scripts 2016 Drug Trend Report

120 GAO “Medicaid and CHIP Increased Funding in U.S. Territories Merits Improved Program Integrity Efforts,” April 2016

121 MACPAC, “Medicaid and CHIP in Puerto Rico,” report, February 2018

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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.122 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.

13.3.5 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.

123

13.3.6 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%.124 In FY2019, ASES plans to improve this 

MLR to 92% (8% leftover for administration and profits).

125

13.3.7 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.

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 

 

122 Ballori Group estimate

123 FY2018 Milliman Actuarial Certification

124 FY2016 rate analysis; FY2018 Milliman Actuarial Certification

125 Communication with ASES, Nov 21, 2017

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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 payments126 are related to the following categories 

of benefits coverage that at least one other state or territory does not cover:127

EXHIBIT 56: OPTIONAL BENEFITS PROVIDED BY PUERTO RICO BUT NOT OTHER 

STATES/TERRITORIES

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.

 

126 When adding back in the $0.59 PMPM attributable to CHIP coverage that would not be subject to reductions or cost 

sharing

127 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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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 57).

EXHIBIT 57: HEALTHCARE REFORM IMPLEMENTATION TIMELINE

TAX COMPLIANCE AND FEES 

ENHANCEMENT

Current state and future vision for tax revenue collection

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.128 Moving forward, 

 

128 Departamento de Hacienda, November 2016

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Commonwealth-commissioned tax reform report models estimate that Puerto Rico could 

reach 75% sales tax compliance.129

Administrative tax initiatives to increase revenue 

collections

By driving administrative reform, the Commonwealth must increase revenues by $2,092

million over six years, as shown below (Exhibit 58).

EXHIBIT 58: REVENUE MEASURES SUMMARY OF IMPACT

14.2.1 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 revenues due 

to enhanced 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.130

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.131

 

129 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)

130 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

131 Xenia Velez presentation to the Oversight Board (Nov. 30, 2017), 3

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■ 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. 

■ 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.132 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),133 with 

half of those responding to the letters agreeing to pay the proposed penalty amount.134

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%,135

while nearly 80% of Americans shop online.136 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.137 In fact, Hacienda has already announced an agreement with a 

 

132 IRS Enforcement Results, TIGTA Filing Season Audit, IRS Taxpayer Advocate, Team Analysis, GAO

133 Hacienda, Fiscal Reforms August 2017 reporting

134 Conversation with Hacienda, Dec 13, 2017

135 http://www.house.leg.state.mn.us/hrd/pubs/usetax.pdf at 7

136 Tech Crunch, 2016

137 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

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large online retailer to charge Puerto Rico sales tax on sales of goods138. 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.139 Similarly, multiple monthly SUT filings (up to 4 per month for importers) could be 

collapsed into one-time filings.

140

Considering the post-hurricane limitations, additional compliance activities should be 

implemented beginning in FY2019, and would expect to see revenue impacts growing 

throughout FY2020 and 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.

14.2.2 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.141 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 million by FY2023.

142 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 

 

138 Caribbean Business, “Amazon to charge Puerto Rico sales tax”

139 Isabel Hernandez presentation to the Oversight Board (Nov 30, 2017), 13

140 Ibid

141 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)

142 Assumes an 80% capture rate on the $73M potential to account for potential elasticities in demand based on fee increases

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use due to price-related elasticities after the new fees went into place,143 a ~$55 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.144

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.

145

CRUDITA excise tax. Currently, the petroleum product excise tax (CRUDITA) generates 

$470 million in gross146 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 ~$23 million per year by FY2023.

Implementation and enforcement of tax initiatives 

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.

14.3.1 Creation of a tax expenditure report and regular reporting

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.

In addition, 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 any 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.

 

143 Based on an 18% decline, per Hacienda (April 5, 2017 calculations)

144 $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

145 Hacienda August 2017 Revenue Scorecard, submitted Sept 15, 2017

146 Does not deduct funding provided by the Commonwealth to the Highways and Transportation Authority

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14.3.2 Principle of Revenue Neutrality 

Puerto Rico needs to drive toward more formality and increased compliance within the tax 

base, but it cannot lose revenues in the process. Therefore, any tax reform or tax law initiatives 

that the Government undertakes or pursues during the fiscal plan year must be revenue 

neutral. To ensure revenue neutrality, the implementation of any tax law initiatives must occur 

sequentially, with the Government ensuring that initiatives are paid for before rates are 

reduced.

EXHIBIT 59: TAX COMPLIANCE AND FEES ENHANCEMENT IMPLEMENTATION TIMELINE

REDUCTION IN APPROPRIATIONS TO 

UPR AND MUNICIPALITIES147

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).

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 

 

147 Although the FOMB does not consider and has not considered anything in the New Fiscal Plan as a “recommendation” 

pursuant to Section 205(a), to the extent that the Government of Puerto Rico considers or has considered anything in this 

Chapter a “recommendation” pursuant to Section 205(a), the FOMB hereby incorporates it into the New Fiscal Plan 

pursuant to Section 201(b)(1)(K)

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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 UPR 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 will lead to annual savings of 

$1,622 million by FY2023.

EXHIBIT 60: REDUCTION IN APPROPRIATIONS SUMMARY OF MEASURES IMPACT

 

148 UPR, IPEDs, College Board

149 V2A November 2016

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15.2.1 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.

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 

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. 

15.2.2 Establish independent scholarship fund for UPR

A means-based scholarship fund for UPR will be supported by reductions to the budgets of 

the Oversight Board, General Court of Justice, Legislative Assembly, and AAFAF. These 

reductions shall generate ~$34 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. Specifically, the savings will fund an independent endowment for needsbased scholarships for students at UPR, which will be managed by Hacienda (OCFO). The 

final total balance of the scholarship fund will be established once the rightsizing exercise is 

completed. 

15.2.3 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 

in each successive year, holding appropriations constant at roughly 55-60% of current levels 

starting in FY2022 before ultimately phasing out all subsidies in FY2024. 

 

150 Additionally, the UPR Fiscal Plan includes a 50% employer match (by UPR) on up to 2% of employee contribution 

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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 

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

 

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

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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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 61: REDUCTION IN APPROPRIATIONS IMPLEMENTATION TIMELINE

PENSION REFORM155

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. 

 

155 Although the FOMB does not consider and has not considered anything in the New Fiscal Plan as a “recommendation” 

pursuant to Section 205(a), to the extent that the Government of Puerto Rico considers or has considered anything in this 

Chapter a “recommendation” pursuant to Section 205(a), the FOMB hereby incorporates it into the New Fiscal Plan 

pursuant to Section 201(b)(1)(K)

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Per the latest data available, each of the systems included the following liabilities156:

■ 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.

157

EXHIBIT 62: PUBLIC EMPLOYEE RETIREMENT SYSTEMS OVERVIEW

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 63). 

 

156 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

157 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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EXHIBIT 63: 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. 

Pension reform will help restore both fiscal balance and promise for current and 

future retirees from government.

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Proposed pension reform initiatives 

Restructuring and stabilizing the pension system must lead to $732 million in savings over six 

years, as shown below (Exhibit 64).

EXHIBIT 64: PENSIONS REFORM SUMMARY OF IMPACT

16.2.1 Freeze DB accumulation 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.

158 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 by July 1, 2019. 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 

Adjustment, and shall be slated to take effect starting in FY2020 so that needed changes can 

be implemented.

 

158 Estimate provided by AAFAF in February 2018 

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16.2.2 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.159

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.160 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 Security161. These dollar figures will be adjusted in future 

years consistent with increases in the Federal poverty threshold.

Under this approach, about 25% of retirees would receive no reduction in their 

benefits and an additional 18% of retirees will experience a benefit reduction of 

5% or less. Therefore, in total, approximately 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 65: DISTRIBUTION OF BENEFIT REDUCTION

The 10% reduction shall take effect starting in FY2020 to have sufficient time to implement it 

following the Plan’s enactment. 

 

159 For example, in Detroit and Rhode Island, pension cuts ranged from 0-30% across beneficiary categories 

160 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

161 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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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 FY2026), eventually reaching zero 

by about 2050.

16.2.3 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. 

As requested by the Governor, the Fiscal Plan includes the enrollment of police under the age 

of 40 in Social Security beginning in FY19 instead of FY20, once necessary changes to their 

pension programs have been implemented. 

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 66: 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

FOMB and GFEWG implementation collaboration

The Oversight Board will play an active role in overseeing implementation of all aspects of the 

New Fiscal Plan. GFEWG must, in collaboration with AAFAF, provide the Oversight Board 

and its staff the information needed to effectively track status of key initiatives included in the 

plan, which is necessary to measure overall progress against the fiscal and budget objectives 

outlined in the plan.

For example, GFEWG will provide FOMB staff with key management artifacts on a timely 

basis, including:

• Implementation plans submitted by individual PMOs

• Progress reviews (including milestones and metrics) against key structural and 

fiscal measures

• Review of key implementation risks, including assessment of likelihood of realization, 

potential impact, and potential mitigations

Case:17-03283-LTS Doc#:3734-19 Filed:08/03/18 Entered:08/03/18 13:49:22 Desc:

Exhibit S Page 120 of 121
114

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. The New Fiscal Plan 

lays out a series of practical, proven growth-inducing structural reforms and investments, with a 

responsible set of fiscal measures to right-size Government to the appropriate level. 

But the next step – implementation of the reforms and measures – will always be the 

most critical one. Unfortunately, the Legislature failed to rise to the challenge of passing the 

comprehensive labor reform that Puerto Rico needs to achieve significant economic growth. Therefore, 

absent the adoption of meaningful structural reforms in addition to those contained in the New Fiscal 

Plan, 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. Only with sustained, robust economic-growth will Puerto Rico restore fiscal sustainability, regain 

access to capital markets, and provide a brighter future for the people of Puerto Rico.

Case:17-03283-LTS Doc#:3734-19 Filed:08/03/18 Entered:08/03/18 13:49:22 Desc:

Exhibit S Page 121 of 121