PUERTO RICO

Factors Contributing 

to the Debt Crisis 

and Potential 

Federal Actions 

to Address Them

Report to Congressional Committees

May 2018

GAO-18-387

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-18-387, a report to 

Congressional Committees

May 2018

PUERTO RICO

Factors Contributing to the Debt Crisis and Potential 

Federal Actions to Address Them 

What GAO Found

The factors that contributed to Puerto Rico’s financial condition and levels of debt 

relate to (1) the Puerto Rico government running persistent annual deficits—

where expenses exceed revenues—and (2) its use of debt to cope with deficits. 

Based on a literature review and interviews with current and former Puerto Rico 

officials, federal officials, and other relevant experts, GAO identified factors that 

contributed to Puerto Rico’s persistent deficits:

• The Puerto Rico government’s inadequate financial management and 

oversight practices. For example, the Puerto Rico government frequently 

overestimated the amount of revenue it would collect and Puerto Rico’s 

agencies regularly spent more than the amounts Puerto Rico’s legislature 

appropriated for a given fiscal year.

• Policy decisions by Puerto Rico’s government. For example, Puerto Rico

borrowed funds to balance budgets and insufficiently addressed public 

pension funding shortfalls.

• Puerto Rico’s prolonged economic contraction. Examples of factors 

contributing to the contraction include outmigration and the resulting 

diminished labor force, and the high cost of importing goods and energy.

Additional factors enabled Puerto Rico to use debt to finance its deficits, such as 

high demand for Puerto Rico debt. One cause of high demand was that under 

federal law, income from Puerto Rico bonds generally receives more favorable 

tax treatment than income from bonds issued by states and their localities.

Based on an assessment of relevant literature and input from current and former 

Puerto Rico officials, federal officials, and other relevant experts, GAO identified 

three potential federal actions that may help address some of these factors. GAO

also identified considerations for policymakers related to these actions.

• Modify the tax exempt status for Puerto Rico municipal debt. Making 

interest income from Puerto Rico bonds earned by investors residing outside 

of Puerto Rico subject to applicable state and local taxes could lower 

demand for Puerto Rico debt. However, reduced demand could hinder 

Puerto Rico’s ability to borrow funds for capital investments or liquidity. 

• Apply federal investor protection laws to Puerto Rico. Requiring Puerto 

Rico investment companies to disclose risks with Puerto Rico bonds and 

adhere to other requirements could lower demand for the bonds. However, 

this action could also limit Puerto Rico’s ability to borrow funds. 

• Modify the Securities and Exchange Commission’s (SEC) authority over 

municipal bond disclosure requirements. SEC could be allowed to require 

timely disclosure of materials—such as audited financial statements—

associated with municipal bonds. Over the past decade, Puerto Rico often

failed to provide timely audited financial statements related to its municipal 

bonds. Timely disclosure could help investors make informed decisions 

about investing in municipal bonds. However, a broad requirement could 

place additional burdens on all U.S. municipal issuers, such as the costs of 

standardizing reporting.

View GAO-18-387. For more information, 

contact Heather Krause at (202) 512-6806 or 

krauseh@gao.gov.

Why GAO Did This Study

Puerto Rico has roughly $70 billion in 

outstanding debt and $50 billion in 

unfunded pension liabilities and since 

August 2015 has defaulted on over 

$1.5 billion in debt. The effects of 

Hurricanes Irma and Maria will further 

affect Puerto Rico’s ability to repay its 

debt, as well as its economic condition. 

In response to Puerto Rico’s fiscal 

crisis, Congress passed the Puerto 

Rico Oversight, Management, and 

Economic Security Act (PROMESA) in 

2016, which included a provision for 

GAO to review Puerto Rico’s debt. 

This report describes the factors that 

contributed to Puerto Rico’s financial 

condition and levels of debt and federal 

actions that could address these

factors. Consistent with PROMESA, 

GAO focused on actions that would not 

increase the federal deficit. 

To address these objectives, GAO 

reviewed documents and interviewed 

officials from the Puerto Rico and 

federal governments and conducted a 

review of relevant literature. GAO also 

interviewed former Puerto Rico officials 

and experts in Puerto Rico’s economy, 

the municipal securities markets, and 

state and territorial budgeting, financial 

management, and debt practices, as 

well as officials from the Financial

Oversight and Management Board for 

Puerto Rico (created by PROMESA).

GAO is not making recommendations 

based on the federal actions identified 

because policymakers would need to 

consider challenges and tradeoffs 

related to implementation.

The Puerto Rico government generally 

agreed with the factors we identified 

and provided additional information. 

GAO incorporated technical comments 

from SEC as appropriate.
Page i GAO-18-387 Puerto Rico Debt

Letter 1

Background 4

Officials and Experts Cited Various Factors as Contributing to 

Puerto Rico’s Financial Condition and Levels of Debt 15

Actions That Could Address Factors that Contributed to Puerto 

Rico’s Unsustainable Debt Levels 38

Agency Comments and Third Party Views 46

Appendix I Objectives, Scope, and Methodology 48

Appendix II Comments from the Government of Puerto Rico 51

Appendix III GAO Contact and Staff Acknowledgments 57

Figures

Figure 1: Real Gross Domestic Product (GDP) and 

Gross National Product (GNP) Growth in Puerto Rico 7

Figure 2: Puerto Rico’s Government Revenue and Expenses, 

Fiscal Years 2002 to 2014 9

Figure 3: Breakdown of Expenses for Puerto Rico’s Primary 

Government, Fiscal Year 2014 10

Figure 4: Breakdown of Expenses for Puerto Rico’s Component 

Units, Fiscal Year 2014 11

Figure 5: Puerto Rico’s Public Debt, Gross Domestic Product

(GDP), and Gross National Product (GNP), 

Fiscal Years 2002 to 2014 13

Figure 6: Puerto Rico’s Public Debt, Fiscal Year 2014 14

Figure 7: Puerto Rico’s Estimated vs. Actual General Fund 

Revenues, Fiscal Years 2002 to 2014 17

Figure 8: Puerto Rico’s Appropriated vs. Actual General Fund 

Expenses, Fiscal Years 2002 to 2014 20

Figure 9: Puerto Rico’s Population by Age Group, 

2010 versus 2016 28

Figure 10: Average Electricity Prices in Puerto Rico and the 

United States, August 2017 31

Contents
Page ii GAO-18-387 Puerto Rico Debt

Figure 11: Puerto Rico Government Development Bank (GDB) 

Total Assets and Loans to Puerto Rico Agencies and 

Public Corporations 37
Page iii GAO-18-387 Puerto Rico Debt

Abbreviations

1940 Act Investment Company Act of 1940 

BEA Bureau of Economic Analysis

BLS Bureau of Labor Statistics 

CDA Continuing Disclosure Agreement 

Census U.S. Census Bureau 

COFINA Puerto Rico Sales Tax Financing 

Corporation 

Congressional Task Force Congressional Task Force on Economic 

Growth in Puerto Rico 

FAFAA Fiscal Agency and Financial Advisory 

Authority 

GDB Government Development Bank for 

Puerto Rico 

GDP Gross Domestic Product 

GNP Gross National Product 

Hacienda Puerto Rico Department of Treasury 

IRS Internal Revenue Service 

OGP Puerto Rico Office of Management 

and Budget 

Oversight Board Financial Oversight and Management Board

Board for Puerto Rico 

PPACA The Patient Protection and Affordable 

Care Act 

PREPA Puerto Rico Electric Power Authority

PROMESA Puerto Rico Oversight, Management, 

and Economic Stability Act 

SEC Securities and Exchange Commission 

SSI Supplemental Security Income

Treasury U.S. Department of the Treasury
Page iv GAO-18-387 Puerto Rico Debt

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-18-387 Puerto Rico Debt

441 G St. N.W.

Washington, DC 20548

May 9, 2018

The Honorable Lisa Murkowski

Chairman

The Honorable Maria Cantwell

Ranking Member

Committee on Energy and Natural Resources

United States Senate

The Honorable Rob Bishop

Chairman

The Honorable Raul Grijalva

Ranking Member

Committee on Natural Resources

House of Representatives

Puerto Rico has roughly $70 billion in outstanding public debt and $50 

billion in unfunded pension liabilities and, since August 2015, has 

defaulted on over $1.5 billion in debt payments. In a 2006 report, we 

highlighted Puerto Rico’s weakening fiscal condition, noting that Puerto 

Rico had experienced a steady, decade-long increase in debt.1 In 2014, 

we reported that Puerto Rico had accumulated debt representing a much 

larger share of personal income than in any U.S. state.2

In September 2017, Hurricanes Irma and Maria made landfall on Puerto 

Rico. The effects of these hurricanes, which caused loss of life, significant 

 1

GAO, Puerto Rico: Fiscal Relations with the Federal Government and Economic Trends 

during the Phaseout of the Possessions Tax Credit, GAO-06-541 (Washington, D.C.: May 

19, 2006).

2

GAO, Puerto Rico: Information of How Statehood Would Potentially Affect Selected 

Federal Programs and Revenue Sources, GAO-14-31 (Washington, D.C.: Mar. 4, 2014).

Letter
Page 2 GAO-18-387 Puerto Rico Debt

displacements, and substantial damage in Puerto Rico, will further affect 

Puerto Rico’s ability to repay its debt, as well as its economic condition.3

In response to Puerto Rico’s long-term fiscal crisis, Congress passed and 

the President signed the Puerto Rico Oversight, Management, and 

Economic Stability Act (PROMESA) in June 2016.4 PROMESA 

established a structure for oversight of Puerto Rico’s fiscal affairs and a 

process for Puerto Rico to restructure its debts. As required by 

PROMESA, in October 2017 we reported on public debt and fiscal issues 

in Puerto Rico and other territories.5 We reported that Puerto Rico’s total 

public debt outstanding per capita had almost doubled since fiscal year 

2005, and that Puerto Rico’s outlook on repaying its debt depended on 

the outcomes of its debt restructuring process.

PROMESA also included a provision for us to examine factors 

contributing to the debt crisis and federal actions for preventing a future 

one.6 This report describes (1) the factors that contributed to Puerto 

Rico’s financial condition and levels of debt and (2) federal actions that 

could address the factors that contributed to Puerto Rico’s financial 

condition and levels of debt. Consistent with PROMESA, we focused on 

actions that would not increase the federal deficit.

To describe the factors that contributed to Puerto Rico’s financial 

condition and levels of debt, we collected and reviewed Puerto Rico 

government documents on its financial condition and on its processes for 

budget development and execution, debt issuance, and financial 

management. We also conducted a literature review and collected data 

from a non-generalizable sample of 20 large bond prospectuses issued 

 3

Previous U.S. natural disasters such as Hurricane Katrina had significant adverse effects 

on the economies of the regions that they affected, including significant outmigration. In 

the year following Hurricane Katrina, the Gulf Coast experienced a number of challenges 

to the growth of its economy, including decreased gross state product, rise in 

unemployment, increased outmigration and decreased housing units, decline in personal 

income, and decline in state tax revenue. U.S. Department of Commerce, Economic and 

Statistics Administration, The Gulf Coast: Economic Impact & Recovery One Year after 

the Hurricanes (Washington, D.C.: Oct. 2006).

4

Pub. L. No. 114-187, 130 Stat. 549 (June 30, 2016).

5

GAO, U.S. Territories: Public Debt Outlook, GAO-18-160 (Washington, D.C.: Oct. 2, 

2017). 

6

PROMESA, § 410.
Page 3 GAO-18-387 Puerto Rico Debt

by Puerto Rico agencies and public corporations between 2000 and 

2017.

To describe federal actions that could address the factors that contributed 

to Puerto Rico’s financial condition and levels of debt, we reviewed 

documents from the U.S. Department of the Treasury (Treasury) and the 

Securities and Exchange Commission (SEC), and our past reports on 

Puerto Rico, and conducted a literature review. Consistent with the 

provision in PROMESA that was the statutory requirement for this work, 

we focused on actions that were non-fiscal in nature—that is, actions that 

would not increase the federal deficit.7

For both objectives, we also interviewed current Puerto Rico officials from 

several agencies—the Puerto Rico Department of Treasury (known by its 

Spanish name Hacienda), Government Development Bank for Puerto 

Rico (GDB), the Puerto Rico Office of Management and Budget (Spanish 

acronym OGP), Fiscal Agency and Financial Advisory Authority (FAFAA), 

and the Puerto Rico Electric Power Authority (PREPA). We also 

interviewed 13 former Puerto Rico officials that held leadership positions 

at Hacienda, GDB, or OGP, or a combination thereof. These former 

officials served between 1997 and 2016 for various gubernatorial 

administrations associated with the two political parties in Puerto Rico 

that held the governorship during that period. We also interviewed 

officials from Treasury, SEC, the Federal Reserve Bank of New York, and 

the Financial Oversight and Management Board for Puerto Rico (created 

by PROMESA). Additionally, we conducted another 13 interviews with 

experts on Puerto Rico’s economy, the municipal securities markets, 

state and territorial budgeting and debt management—including credit 

rating agencies—and with select industry groups in Puerto Rico. We 

selected the experts we interviewed based on their professional 

knowledge closely aligning with our engagement objectives, as 

demonstrated through published articles, congressional testimonies, and 

 7

Consistent with PROMESA, we excluded from our scope actions that: (1) were fiscal in 

nature, (2) could be taken by the Puerto Rico government, (3) could infringe upon Puerto 

Rico’s sovereignty and constitutional parameters, and (4) could imperil America’s 

homeland and national security. We also omitted from our scope actions that could 

promote economic growth in Puerto Rico, as these actions address debt levels in Puerto 

Rico only indirectly, in that economic growth can increase a government’s tax revenues 

and thus may limit or prevent indebtedness. A congressional task force report also already 

recommended actions for Congress, executive agencies, and the Puerto Rico government 

for fostering economic growth in Puerto Rico. See Congressional Task Force on 

Economic Growth in Puerto Rico, Report to the House and Senate (December 20, 2016).
Page 4 GAO-18-387 Puerto Rico Debt

referrals from agency officials or other experts. For additional details on 

our scope and methodology, see appendix I.

We conducted this performance audit from January 2017 to May 2018 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Puerto Rico, which has approximately 3.3 million residents according to 

U.S. Census Bureau (Census) estimates, is the largest and most 

populous territory of the United States.8 As a territory, Puerto Rico is 

subject to congressional authority, though Congress has granted it broad 

authority over matters of internal governance—notably, by approving 

Puerto Rico’s constitution in 1952.

9 Individuals born in Puerto Rico are 

U.S. citizens and can migrate freely to the states.

Puerto Rico and its residents are generally subject to the same federal 

laws as the states and their residents, except in cases where specific 

exemptions have been made, such as with certain federal programs. For 

example, Puerto Rico residents generally have full access to Social 

Security and unemployment insurance; however, for some programs, 

such as Medicaid, federal funding in Puerto Rico is restricted as 

compared to funding in the states.10

Residents of Puerto Rico are exempt from paying federal income tax on 

income from sources in Puerto Rico.11 Residents are required to pay 

federal income tax on income from sources outside of Puerto Rico. They 

are also required to pay federal employment taxes, such as Social 

 8

Census estimate as of July 1, 2017. 

9

Pub. L. No. 82-447, 66 Stat. 327 (July 3, 1952).

10For information on how certain federal programs and tax laws differ in Puerto Rico 

versus the states, see GAO-14-31. 

1126 U.S.C. §933.

Background

Application of Federal 

Laws in Puerto Rico
Page 5 GAO-18-387 Puerto Rico Debt

Security and Medicare taxes, on their income regardless of where it was 

earned. Puerto Rico residents are also ineligible for certain federal tax 

credits.12

Corporations located in Puerto Rico are generally subject to the same 

federal tax laws as corporations located in a foreign country. Corporations 

in Puerto Rico are generally exempt from federal taxes on profits except 

as such profits are effectively connected to a trade or business in the 

states, and so long as those profits remain held outside of the states. 

Additionally, these corporations were subject to a withholding tax on 

certain investment income from the United States not connected to a 

trade or business. Under the 2017 Public Law 115-97, starting in 2018 

U.S. corporations that are shareholders in foreign corporations, such as 

those organized under Puerto Rico law, generally do not owe tax on 

dividends received from those foreign corporations.13 Prior to this law, 

dividend payments to U.S. corporate shareholders were considered 

taxable interest for the U.S. parent corporation.

Prior to 1996, a federal corporate income tax credit—the possessions tax 

credit—was available to certain U.S. corporations that located in Puerto 

Rico. In general, the credit equaled the full amount of federal tax liability 

related to an eligible corporation’s income from its operations in a 

possession—including Puerto Rico—effectively making such income taxfree.

14 In 1996, the tax credit was repealed, although corporations that 

 12For example, residents of Puerto Rico are ineligible for the Earned Income Tax Credit, 

and are only eligible for the Child Tax Credit if they have three or more children.

13Pub. L. No. 115-97, § 14101(a), 131 Stat. 2054, 2189 (Dec. 22, 2017).

14The Tax Reform Act of 1976 established the possessions tax credit under section 936 of 

the Internal Revenue Code with the purpose of assisting U.S. possessions in obtaining 

employment-producing investments by U.S. corporations. The credit effectively exempted 

two kinds of income from U.S. taxation: 1) income from the active conduct of a trade or 

business in a possession, or from the sale or exchange of substantially all of the assets 

used by the corporation in the active conduct of such trade or business, and 2) certain 

income earned from financial investments in U.S. possessions or certain foreign countries, 

if they were generated from an active business in a possession, and were reinvested in 

the same possession.
Page 6 GAO-18-387 Puerto Rico Debt

were existing credit claimants were eligible to claim credits through 

2005.15

Puerto Rico’s economy is in a prolonged period of economic contraction.

According to data from Puerto Rico’s government, Puerto Rico’s economy 

grew in the 1990s and early 2000s. However, between 2005 and 2016—

the latest year for which data were available as of March 1, 2018—Puerto 

Rico’s economy experienced year-over-year declines in real output in all 

but two years, as measured by real gross domestic product (GDP). From 

2005 to 2016, Puerto Rico’s real GDP fell by more than 9 percent (from 

$82.8 billion to $75.0 billion in 2005 dollars).16 Puerto Rico’s gross 

national product (GNP) followed a similar pattern over the same period, 

declining by more than 11 percent from 2005 to 2016 (from $53.8 billion 

to $47.7 billion in 2005 dollars).17 Figure 1 shows Puerto Rico’s real GDP 

and GNP growth rates from 1991 through 2016.

 15Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1601, 110 Stat. 

1755, 1827–1833 (Aug. 20, 1996). The possessions tax credit was criticized on the 

grounds that the associated revenue cost was high compared to the employment it 

generated and because a large share of the benefits of the credit was not reaped by 

Puerto Rico residents.

16Real GDP and GNP data from Puerto Rico’s Planning Board were provided in 1954 

dollars, which we normalized to 2005 dollars. We did not independently verify the 

accuracy of the data. Many of the methods used by Puerto Rico’s Planning Board for 

national economic accounts are outdated and do not follow the internationally agreed 

upon System of National Accounts standards. The System of National Accounts is the 

internationally agreed standard set of recommendations on how to compile measures of 

economic activity. In 2011, the U.S. Bureau of Economic Analysis (BEA) made a series of 

recommendations to improve Puerto Rico’s national economic accounts and BEA 

provided assistance with this process.

17Puerto Rico’s GDP measures the value of goods and services produced inside the 

territory, including production by foreign companies operating in Puerto Rico. In contrast, 

Puerto Rico’s GNP measures the value of goods and services produced by Puerto Ricans 

regardless of where they live, and excludes production by foreign companies. In Puerto 

Rico, GDP has consistently been greater than GNP, which means that production by 

foreign companies in Puerto Rico is larger than production by Puerto Ricans living outside 

the territory.

Puerto Rico’s Economy 

and Labor Force
Page 7 GAO-18-387 Puerto Rico Debt

Figure 1: Real Gross Domestic Product (GDP) and Gross National Product (GNP) Growth in Puerto Rico

Note: GDP measures the value of goods and services produced inside a country, or for the purposes 

of this report, a territory. In contrast, GNP measures the value of goods and services produced by its 

residents. GNP includes production from residents abroad and excludes production by foreign 

companies in a country or territory. 2016 was the most recent year for which data were available as of 

March 1, 2018.

The decline in Puerto Rico’s output has, in more recent years, occurred in 

conjunction with a decline in Puerto Rico’s population. According to 
Page 8 GAO-18-387 Puerto Rico Debt

Census estimates, Puerto Rico’s population declined from a high of 

approximately 3.8 million people in 2004 to 3.3 million people in 2017, a 

decline of 12.8 percent.18 This population loss closely matched the 

decline in real output. From 2004 to 2016, Puerto Rico’s real GNP fell by 

9.5 percent, while its real GNP per capita increased by 1.6 percent over 

the same time period.

In addition to Puerto Rico’s declining population, the territory also has a 

lower share of employed persons compared to the United States as a 

whole. As of 2017, approximately 37 percent of Puerto Rico residents 

were employed compared to approximately 60 percent for the United 

States as a whole. Puerto Rico’s employment-to-population ratio reached 

highs in 2005 and 2006 when it was approximately 43 percent, according 

to data from the Federal Reserve Bank of St. Louis. According to data 

from the Bureau of Labor Statistics (BLS), between 2005 and 2017, 

Puerto Rico’s unemployment rate fluctuated between 10.2 percent and 

17.0 percent, with an average of 13.1 percent. During the same period, 

the nationwide unemployment rate fluctuated between 4.1 percent and 

10.0 percent, with an average of 6.5 percent. These factors have 

combined to leave Puerto Rico with a small and declining labor force. 

From January 2006 to December 2017—the latest month for which data 

were available as of March 1, 2018—Puerto Rico’s labor force decreased 

from approximately 1.4 million persons to 1.1 million persons, according 

to data from BLS.

Puerto Rico’s government has operated with a deficit—where expenses 

exceed revenues—in each fiscal year since 2002, and its deficits grew 

over time (see figure 2).19

 18This decline was prior to the effect of Hurricanes Irma and Maria in September 2017. 

Though it is still too early to know with certainty what the effect of the hurricanes will be on 

Puerto Rico’s population, some experts believe that the hurricanes would likely accelerate 

Puerto Rico’s population loss. 

19Puerto Rico’s fiscal year is from July 1 to June 30.

Puerto Rico Government 

Financial Condition
Page 9 GAO-18-387 Puerto Rico Debt

Figure 2: Puerto Rico’s Government Revenue and Expenses, Fiscal Years 2002 to 

2014

Note: Puerto Rico has not yet released its audited financial statements for fiscal years 2015, 2016, 

and 2017. According to current Puerto Rico officials, the Puerto Rico government plans to release its 

audited financial statements for fiscal years 2015 and 2016 by the end of June 2018. These officials 

also stated that the Puerto Rico government has not yet set a timeline for releasing audited financial 

statements for fiscal year 2017.

Puerto Rico’s governmental activities can be divided among the primary 

government and component units. Puerto Rico’s primary government 

provides and funds services such as public safety, education, health care, 

and economic development. Puerto Rico’s component units are legally 

separate entities for which its government is nonetheless financially 

accountable, and provide services such as public transportation, 

highways, electricity, and water.20

 20Unless otherwise noted, financial data on Puerto Rico’s government refers to its primary 

government and component units combined.
Page 10 GAO-18-387 Puerto Rico Debt

In fiscal year 2014, the latest for which audited financial data are 

available, the Puerto Rico government collected $32.5 billion in revenue, 

of which $19.3 billion was collected by the primary government, and 

$13.2 billion was collected by the component units. That year Puerto 

Rico’s government spent $38.7 billion, of which $22.0 billion was spent 

directly by the primary government, while $16.7 billion was spent by the 

government’s various component units. The Puerto Rico Electric Power 

Authority (PREPA), which operates the territory’s electricity generation 

and distribution infrastructure, represented the largest component unit 

expenditure in fiscal year 2014. Figures 3 and 4 show a breakdown of 

expenses for Puerto Rico’s primary government and its component units, 

respectively.

Figure 3: Breakdown of Expenses for Puerto Rico’s Primary Government, Fiscal Year 2014

Note: Puerto Rico has not yet released its audited financial statements for fiscal years 2015, 2016, 

and 2017. According to current Puerto Rico officials, the Puerto Rico government plans to release its 

audited financial statements for fiscal years 2015 and 2016 by the end of June 2018. These officials 

also stated that the Puerto Rico government has not yet set a timeline for releasing audited financial 

statements for fiscal year 2017.
Page 11 GAO-18-387 Puerto Rico Debt

Figure 4: Breakdown of Expenses for Puerto Rico’s Component Units, Fiscal Year 2014 

Note: Puerto Rico has not yet released its audited financial statements for fiscal years 2015, 2016, 

and 2017. According to current Puerto Rico officials, the Puerto Rico government plans to release its 

audited financial statements for fiscal years 2015 and 2016 by the end of June 2018. These officials 

also stated that the Puerto Rico government has not yet set a timeline for releasing audited financial 

statements for fiscal year 2017.

Puerto Rico’s government spending accounts for more than a third of the 

territory’s GDP. In fiscal year 2014—the latest year for which audited 

spending data were available as of March 1, 2018—primary government 

expenditures of $22.0 billion represented 21 percent of the territory’s 

GDP. Including component spending, total public expenditures were 

$38.7 billion, which represented 38 percent of the territory’s GDP. By 

comparison, our prior work has shown that in 2014, total state and local 

government expenditures represented about 14 percent of GDP for the 

United States as a whole, excluding territories.21 Federal government 

 21GAO, Fiscal Outlook: State and Local Fiscal Model, accessed February 27, 2018, 

https://www.gao.gov/fiscal_outlook/state_local_fiscal_model/overview#t=1.
Page 12 GAO-18-387 Puerto Rico Debt

expenditures were 20 percent of GDP for the United States as a whole in 

2014.

Puerto Rico’s total public debt as a share of its economy has grown over 

time. In 2002, the value of its debt was 42 percent of the territory’s GDP, 

and 67 percent of its GNP. Both of these ratios grew over time such that 

by 2014, Puerto Rico’s total public debt was 66 percent of the territory’s 

GDP and 99 percent of its GNP. Figure 5 compares Puerto Rico’s total 

public debt to its GDP and GNP, in both aggregate and per capita.22

 22For further detail on Puerto Rico’s public debt between fiscal years 2005 and 2017, see 

GAO-18-160.

Puerto Rico Debt
Page 13 GAO-18-387 Puerto Rico Debt

Figure 5: Puerto Rico’s Public Debt, Gross Domestic Product (GDP), and Gross National Product (GNP), Fiscal Years 2002 to 

2014

Note: Puerto Rico has not yet released its audited financial statements for fiscal years 2015, 2016, 

and 2017. According to current Puerto Rico officials, the Puerto Rico government plans to release its 

audited financial statements for fiscal years 2015 and 2016 by the end of June 2018. These officials 

also stated that the Puerto Rico government has not yet set a timeline for releasing audited financial 

statements for fiscal year 2017.

As of the end of fiscal year 2014, the last year for which Puerto Rico 

issued audited financial statements, Puerto Rico had $67.8 billion in net 

public debt outstanding, or $68.1 billion excluding accounting adjustments 

that are not attributed in the financial statements to specific agencies. Of 

the $68.1 billion, $40.6 billion was owed by Puerto Rico’s primary

government, and $27.6 billion was owed by its component units, as 

shown in figure 6 (these amounts do not sum to $68.1 billion because of 

rounding).
Page 14 GAO-18-387 Puerto Rico Debt

Figure 6: Puerto Rico’s Public Debt, Fiscal Year 2014

Note: The $68.1 billion in total gross public debt excludes about $300 million in accounting 

adjustments that are not attributed in the financial statements to specific agencies; net public debt 

was $67.8 billion. Primary government and component unit debt amounts do not sum to total public 

debt due to rounding. Puerto Rico has not yet released its audited financial statements for fiscal years 

2015, 2016, and 2017. According to current Puerto Rico officials, the Puerto Rico government plans 

to release its audited financial statements for fiscal years 2015 and 2016 by the end of June 

2018. These officials also stated that the Puerto Rico government has not yet set a timeline for 

releasing audited financial statements for fiscal year 2017.

The growth of Puerto Rico’s total debt resulted in greater annual debt 

servicing obligations. In fiscal year 2002, it cost Puerto Rico $2.7 billion to 

service its debt, representing about 12 percent of Puerto Rico’s $21.6 

billion in total public revenue for that year. By fiscal year 2014, Puerto 

Rico’s annual debt service cost rose to $5.0 billion, representing just over 

15 percent of Puerto Rico’s $32.5 billion in total public revenue for that 

year. Following years of expenditures that exceeded revenue, and a 

growing debt burden, in August 2015, Puerto Rico failed to make a

scheduled bond payment. Since then, Puerto Rico has defaulted on over 

$1.5 billion in debt.

In June 2016, Congress enacted and the President signed PROMESA in 

response to Puerto Rico’s fiscal crisis. PROMESA established a Financial 

Oversight and Management Board for Puerto Rico (Oversight Board), and 

granted it broad powers of fiscal and budgetary control over Puerto Rico. 

PROMESA also established a mechanism through which the Oversight 

Board could petition U.S. courts on Puerto Rico’s behalf to restructure 

debt. Under federal bankruptcy laws, Puerto Rico is otherwise prohibited 
Page 15 GAO-18-387 Puerto Rico Debt

from authorizing its municipalities and instrumentalities from petitioning 

U.S. courts to restructure debt. The Oversight Board petitioned the U.S. 

courts to restructure debt on behalf of Puerto Rico’s Highways and 

Transportation Authority and the Government Employees Retirement 

System on May 21, 2017 and on behalf of PREPA on July 2, 2017.

In addition to its debt obligations, Puerto Rico also faces a large financial 

burden from its pension obligations for public employees. Puerto Rico’s 

public pension systems had unfunded liabilities of approximately $49 

billion as of the end of fiscal year 2015, the most recent year for which 

data are available.23 Unfunded pension liabilities are similar to other kinds 

of debt because they constitute a promise to make a future payment or 

provide a benefit.24

Based on interviews with current and former Puerto Rico officials, federal 

officials, and other relevant experts, as well as a review of relevant 

literature, the factors that contributed to Puerto Rico’s financial condition 

and levels of debt related to: (1) Puerto Rico’s government running 

persistent deficits and (2) its use of debt to cope with deficits.

As previously mentioned, Puerto Rico’s government has operated with a 

deficit in all years since 2002, and deficits grew over time. To cope with 

its deficits, Puerto Rico’s government issued debt to finance operations, 

rather than reduce its fiscal gap by cutting spending, raising taxes, or 

both. Through interviews with current and former Puerto Rico officials; 

federal officials; experts in Puerto Rico’s economy, the municipal 

securities markets, and state and local budgeting and debt management; 

as well as a review of relevant literature, we identified three groups of 

 23Puerto Rico also reported a $2 billion of unfunded retiree medical liabilities at the end of 

fiscal year 2015. In general, U.S. states’ and localities’ pension plans face challenges over 

the long term due to the gap between assets and liabilities. See GAO, State and Local 

Governments’ Fiscal Outlook: 2016 Update, GAO-17-213SP (Washington, D.C.: Dec 8, 

2016). 

24Financial economic theory informs the premise that a promise to make a future payment 

of benefits is similar to a promise to pay off any other kind of debt (such as a bond).

Pension Obligations

Officials and Experts 

Cited Various Factors 

as Contributing to 

Puerto Rico’s 

Financial Condition 

and Levels of Debt

Factors that Contributed to 

Puerto Rico’s Persistent 

Deficits
Page 16 GAO-18-387 Puerto Rico Debt

factors that contributed to Puerto Rico’s persistent deficits: (1) inadequate 

financial management and oversight practices, (2) policy decisions, and 

(3) prolonged economic contraction. Some of the factors in these groups 

may be interrelated.

According to current and former Puerto Rico officials and experts in 

Puerto Rico’s economy and the municipal securities markets, Puerto 

Rico’s government lacked adequate budgetary and other controls for 

effective financial management and oversight. This lack of effective 

practices and controls resulted in Puerto Rico’s government: 1) 

overestimating the amount of revenue it would collect and 2) spending in 

excess of appropriated amounts.25

Overestimating Revenue Collection

As part of its budget process the Puerto Rico government estimates the 

amount of revenues it will collect for the coming fiscal year, which informs 

how much the government then appropriates to agencies. Former Puerto 

Rico officials and experts in Puerto Rico’s economy told us that when the 

Puerto Rico government developed its annual budget, it frequently 

overestimated the amount of revenues it would collect in the coming year. 

According to experts in state and local budgeting, revenue estimation is a 

complex process for any government and, in particular, during periods of 

recession. However, from our analysis of Puerto Rico’s annual financial 

statements from 2002 to 2014, we found that Puerto Rico overestimated 

revenue in eight of thirteen years, as shown in figure 7. In certain fiscal 

years Puerto Rico overestimated revenues by a substantial amount. For 

 25Puerto Rico may have other financial control deficiencies we did not explore in depth. 

For example, according to current Puerto Rico government officials, past practices of the 

Puerto Rico government indicate an insufficient understanding of liquidity within its 

agencies and public corporations. Puerto Rico’s Fiscal Agency and Financial Advisory 

Authority (FAFAA) has been conducting a comprehensive evaluation of the cash balances 

of the Government of Puerto Rico and all of its instrumentalities, including some public 

corporations, and governmental agencies. On December 18, 2017, FAFAA released a 

report with the preliminary results of this evaluation, disclosing approximately $6.9 billion 

in balances spread across 800 bank accounts. The Oversight Board has since hired an 

independent forensic analysis team to obtain a full account of the liquidity of the Puerto 

Rico government and all its instrumentalities and entities.

Inadequate Financial 

Management and Oversight 

Practices
Page 17 GAO-18-387 Puerto Rico Debt

example, in fiscal years 2008 and 2009, Puerto Rico overestimated 

general fund revenue by 10 percent and 19 percent, respectively.26

Figure 7: Puerto Rico’s Estimated vs. Actual General Fund Revenues, Fiscal Years 

2002 to 2014

Note: Puerto Rico has not yet released its audited financial statements for fiscal years 2015, 2016, 

and 2017. According to current Puerto Rico officials, the Puerto Rico government plans to release its 

audited financial statements for fiscal years 2015 and 2016 by the end of June 2018. The officials 

also stated that the Puerto Rico government has not yet set a timeline for releasing audited financial 

statements for fiscal year 2017.

 26Puerto Rico’s general fund is the main source of funding for Puerto Rico’s primary 

government. The $9.2 billion in general fund expenses for budgeted resources for fiscal 

year 2014 represented 42 percent of all primary government expenses of $22 billion for 

that year. The U.S. economy as a whole was in recession for 2008 and much of 2009. 
Page 18 GAO-18-387 Puerto Rico Debt

Overly optimistic revenue estimates allowed Puerto Rico’s legislature—

with approval from the governor—to increase appropriations to agencies 

in most years while also passing balanced budgets. When actual revenue 

fell short of the revenue estimates—and expenses were not adjusted 

accordingly—Puerto Rico’s General Fund operated with a deficit. Absent 

adequate revenues or reserves to pay its expenses, Puerto Rico then 

issued debt.27

Current and former Puerto Rico government officials described various 

possible reasons why Puerto Rico overestimated revenue in its budget 

process.

• Departures from historical economic trends may have made it difficult 

for Puerto Rico to accurately project economic growth, a key variable 

Puerto Rico uses in estimating revenue. The Puerto Rico Planning

Board has legal responsibility for preparing an annual economic report 

that includes economic growth projections. The Puerto Rico 

Department of Treasury (known by its Spanish name Hacienda) uses 

those projections to develop revenue estimates for the Governor’s 

proposed budget, which Puerto Rico’s legislature considers when 

adopting a final budget. According to former Puerto Rico government 

officials, the Planning Board historically has based its economic 

growth projections on projected U.S. economic growth and global oil 

prices. From 1990 through 2005, both Puerto Rico and the United 

States as a whole experienced similar economic growth, each 

growing by an average of between 3 and 3.5 percent per year during 

the same time period. However, since 2006 Puerto Rico’s economy 

has performed worse than that of the United States as a whole. Also, 

oil prices rose in 2004 and remained at high levels until 2014, a 

change that the Planning Board did not foresee when developing its 

economic growth estimates. Current Puerto Rico officials also noted 

that population declines took place at a faster rate than expected, 

which they said led to less tax revenue than estimated.

• According to experts in state and local financial management, a best 

practice to limit political influence in the development of revenue 

estimates is to exclude elected officials from the estimation process. 

However, according to former Puerto Rico government officials, 

political actors were involved in the revenue estimating process. For 

 27Sometimes state and local governments put a portion of their annual revenues into a 

reserve fund for future use—for example, to fund expenses when they experience 

revenue shortfalls.
Page 19 GAO-18-387 Puerto Rico Debt

example, some former officials told us that elected officials from the 

legislature exerted pressure on Hacienda to adopt optimistic revenue 

estimates.

According to a former Hacienda official and reports on Puerto Rico’s fiscal 

situation, to entice corporate investment, Puerto Rico made agreements 

with specific corporations to reduce their tax rates.28 The former official 

explained that Puerto Rico’s government did not maintain a 

comprehensive inventory of these agreements, nor their terms and 

details, and as a result, Hacienda officials were unable to take these 

agreements into account when they estimated revenues.

Former Puerto Rico officials also told us that Hacienda sometimes 

factored into its revenue estimates expected revenue gains from 

measures designed to improve tax collection, for example targeted audit 

efforts or allocation of resources for tax administration. However, these 

measures did not always result in increased revenue, according to the 

former officials. Treasury officials and former Puerto Rico officials also 

told us that, in general, Puerto Rico had difficulty collecting tax revenue.

Persistent Spending in Excess of Appropriated Amounts

Puerto Rico’s agencies regularly spent more than the amounts Puerto 

Rico’s legislature appropriated for a given fiscal year. From our analysis 

of Puerto Rico’s annual financial statements, we found that Puerto Rico 

spent in excess of appropriated general fund amounts in nine of the 

thirteen most recent years for which data were available, as shown in 

figure 8. For the nine years when Puerto Rico spent in excess of 

appropriated amounts, actual spending exceeded appropriated amounts 

by an average of 5.6 percent, or $459 million, annually.

 28Some states also make tax agreements with corporations to attract investment. 
Page 20 GAO-18-387 Puerto Rico Debt

Figure 8: Puerto Rico’s Appropriated vs. Actual General Fund Expenses, Fiscal 

Years 2002 to 2014

Note: Puerto Rico has not yet released its audited financial statements for fiscal years 2015, 2016, 

and 2017. According to current officials, the Puerto Rico government plans to release its audited 

financial statements for fiscal years 2015 and 2016 by the end of June 2018. These officials also 

stated that the Puerto Rico government has not yet set a timeline for releasing audited financial 

statements for fiscal year 2017.

According to state and local budget experts, it is highly unusual for state 

government agencies to spend beyond appropriated amounts. According 

to current and former Puerto Rico officials and experts in state and local 

budgets, various factors contributed to Puerto Rico agencies spending in 

excess of appropriated amounts:

• Puerto Rico’s government enabled its agencies to access additional 

funds without seeking additional appropriations. State and local 

budget experts told us that states typically require an agency at risk of 

exceeding its appropriation to go back to the legislature with clear 

justification to ask for a supplemental appropriation. Though a similar 

process exists in Puerto Rico, current and former Puerto Rico officials 
Page 21 GAO-18-387 Puerto Rico Debt

told us that the Puerto Rico government worked with agencies to 

facilitate spending beyond appropriated amounts rather than requiring 

the agency to seek supplemental appropriations through the official 

process. According to other current Puerto Rico government officials, 

if an agency attempts to disburse funds in excess of its annual 

appropriation, the Puerto Rico Office of Management and Budget 

(Spanish acronym OGP) may deny its requests, or approve the 

funding by drawing down on a reserve account that is established 

annually as part of the budget process. In the latter instances, the 

agency must justify the additional expenses to OGP, and then OGP 

evaluates the request and funding available. According to current 

Puerto Rico government officials, OGP has written procedures to 

handle these requests, which are reviewed by a committee for final 

evaluation and approval. However, they did not provide us the 

procedures when we asked for them. 

• Some of Puerto Rico’s agencies’ funds are not channeled through 

Hacienda accounts. Hacienda is in charge of managing cash, 

including collecting funds from, and disbursing funds to, agencies. 

OGP is charged with monitoring Puerto Rico agencies to ensure they 

do not spend more than is appropriated to them. Because funds for 

some Puerto Rico agencies are not channeled through Hacienda 

accounts, they are therefore not visible within OGP’s and Hacienda’s 

central accounting systems.29 As a result, OGP and Hacienda could 

not directly monitor all agencies’ accounts to track expenses and to 

verify the availability of appropriated funds, which limited their ability 

to control overspending at the agency level.

• The accounting systems some Puerto Rico agencies use are not 

compatible with OGP’s and Hacienda’s accounting systems. For 

example, Puerto Rico’s Department of Health and Department of 

Education use newer versions of the accounting system currently in 

use at OGP and Hacienda. As a result, OGP and Hacienda at times 

must take extra steps to reconcile financial information from these 

agencies for reporting and oversight purposes, rather than through 

automated reporting functions within OGP and Hacienda systems. 

This reconciliation causes delays in accessing data, which may 

prevent officials within OGP and Hacienda from having 

comprehensive financial information in time to make informed 

financial decisions. For example, if officials do not have a complete 

 29For example, according to current and former Puerto Rico government officials, funding 

for the Police Department (which comprises 9 percent of general fund expenses) was not 

channeled through Hacienda accounts, until recently. 
Page 22 GAO-18-387 Puerto Rico Debt

and current record of revenues and expenses, they cannot monitor 

budgeted amounts versus actual expenditures, nor can they 

accurately anticipate budget overruns or revenue shortfalls to make 

mid-year budget adjustments.

• Former Puerto Rico officials told us that some agencies do not record 

invoices from, or process amounts due to, government vendors in the 

year the expenses are incurred because they do not have funds on 

hand to make payments after they exceed annually appropriated 

funds.30 Instead, agencies save invoices to record as current 

expenses in the following year. This practice distorts expenses from 

year to year. According to current Hacienda officials, this practice 

occurs, in part, because the Puerto Rico government lacks a 

centralized accounts payable system to capture information from 

agencies and public corporations. Without this system, neither 

Hacienda nor other agencies know exactly how much the government 

owes to its suppliers.

Former Puerto Rico officials; experts on Puerto Rico’s economy, state 

and local budgeting, and debt management; and related literature cited 

policy decisions by Puerto Rico’s government as one of the factors 

contributing to Puerto Rico’s persistent deficits. Specific examples of 

policy decisions that either increased or sustained expenses or weakened 

revenue collection include: 1) allowing the use of debt proceeds to 

balance budgets, 2) insufficiently addressing public pension funding 

shortfalls, 3) inadequately managing PREPA’s financial condition, and 4) 

expanding health care coverage.

• Allowing the use of debt proceeds to balance budgets. Puerto 

Rico’s government made decisions that contributed to the 

accumulation of unsustainable debt despite constitutional controls 

designed to prevent that occurrence. In 1974, Puerto Rico’s Attorney 

General issued a broad interpretation of the balanced budget clause 

in Puerto Rico’s constitution that allowed Puerto Rico to borrow funds 

 30According to current Puerto Rico officials, Puerto Rico’s agencies are responsible for 

receiving and approving invoices and vouchers for later payment by Hacienda.

Policy Decisions
Page 23 GAO-18-387 Puerto Rico Debt

through bond issuances to balance its budget.31 In the following 

years, Puerto Rico’s government chose to use bonds to balance 

Puerto Rico’s budget.32 According to experts in state and local 

budgeting, the use of long-term debt to address operating deficits is 

unusual. As we previously reported, ratings agencies described the 

use of debt to finance operations as a “red flag” in the case of Puerto 

Rico.33 Further, in 2006, the Puerto Rico government created the 

Puerto Rico Sales Tax Financing Corporation (known by its Spanish 

acronym COFINA) as a means to issue bonds that originally was 

intended to repay debt, but by 2009 was used to finance operations. 

COFINA was backed by a new sales and use tax that the government 

 31The legal framework for a balanced budget dates back to Section 34 of the 1917 JonesShafroth Act, which states that “No appropriation shall be made, nor any expenditure 

authorized by the legislature, whereby the expenditure of the Government of Porto Rico 

during any fiscal year shall exceed the total revenue then provided for by law and 

applicable for such appropriation or expenditure, including any available surplus in the 

treasury, unless the legislature making such appropriation shall provide for levying a 

sufficient tax to pay such appropriation or expenditure within such fiscal year.” A provision 

in Puerto Rico’s Constitution, which was approved in 1952, contains similar language in 

English: The appropriations made for any fiscal year shall not exceed the total revenues, 

including available surplus, estimated for said fiscal year unless the imposition of taxes 

sufficient to cover said appropriations is provided by law. P.R. Const., art. VI, §7. The 

Spanish translation of the Constitution, however, translated revenues as “recursos” which 

can also be interpreted to mean resources. A 1974 ruling by Puerto Rico’s attorney 

general clarified the legal meaning of “recursos” to a broader general definition of 

resources available to the government, including proceeds of bond issuances. P.R. Op. 

Sec. Just. 1974-15, 1974 WL, 326062, Opiniones del Secretario de Justicia de Puerto 

Rico, May 21, 1974.

32Both appropriation laws and laws authorizing the issuance of bonds have to be 

approved by the Puerto Rico legislature and signed by the Governor.

33GAO-18-160.
Page 24 GAO-18-387 Puerto Rico Debt

excluded from the calculation of debt when ensuring compliance with 

its constitutional debt limit.34

• Insufficiently addressing public pension funding shortfalls.

Puerto Rico attempted to reform its public pension systems various 

times. However, these reforms were not followed by scheduled 

government contributions to pension plans and ultimately the reforms 

did not address funding shortfalls. In 2000, Puerto Rico shifted its 

public pension systems from a defined benefit to a defined 

contribution plan for newly hired employees in an attempt to reduce 

further growth in unfunded pension liabilities.35 Though Puerto Rico’s 

government no longer needed to make contributions to the defined 

benefit plan for newly hired employees who were under the defined 

contribution plan, they did not make scheduled contributions to fund 

pension liabilities for those hired prior to 2000. As a result, in 2008, 

Puerto Rico’s Employees Retirement System—the largest of Puerto 

Rico’s public pension systems—issued pension bonds to reduce the 

system’s unfunded liabilities, fund benefit payments, and invest the 

bond proceeds. According to a former Puerto Rico official, the 

investments did not produce expected gains. In 2011 and 2013, the 

Puerto Rico government enacted additional reform of the Employees 

Retirement System to address its deteriorating solvency, including 

such changes as increased statutory rates for employer contributions, 

 34In 1961 Puerto Rico amended its constitution to include a limit on debt service payment 

at 15 percent of average annual internal revenue. Internal revenue in Puerto Rico mainly 

includes income, property, and excise taxes. The language of the 1961 amendment notes 

that the borrowing limit applies to “bonds or notes for the payment of which the full faith 

credit and taxing power of the Commonwealth shall be pledged.” General obligation bonds 

are issued by the Puerto Rican government, payable from its general funds, and are said 

to carry the full faith and credit of Puerto Rico. Revenue bonds do not explicitly carry the 

full faith and credit of Puerto Rico, but are instead tied to specific agencies and revenue 

sources. According to a description of public debt provided by GDB, sales and use tax 

revenues pledged for COFINA debt are excluded from the government’s definition of 

available resources for payment of debt service, although this characterization has been 

challenged in recent litigation. See e.g., Lex Claims, LLC v. Fin. Oversight & Mgmt. Bd., 

853 F.3d 548 (1st Cir. 2017). A portion of the tax generated through COFINA is used to 

repay COFINA debt.

35In defined benefit plans, workers’ benefits are typically calculated using a formula that 

includes the number of years an employee has worked for an employer and, often, the 

employee’s earnings in years prior to retirement. In defined contribution plans, workers 

accumulate savings through contributions to an individual account.
Page 25 GAO-18-387 Puerto Rico Debt

increased employee contributions, and an increased retirement age 

for participants.36

Puerto Rico’s public pension systems remain largely unfunded. As of 

the end of fiscal year 2015, the most current year for which complete

data are available, Puerto Rico’s public pension systems had assets 

of $777 million out of a total pension liability of $49.6 billion.37 Puerto 

Rico’s resulting public pension system funding ratio (the ratio of 

assets to liabilities) of 1.6 percent for that year was very low, 

compared to the average ratio of 72 percent for public employee 

pension systems in the states.38

• Inadequately managing PREPA’s financial condition. According 

current and former Puerto Rico government officials and experts on 

Puerto Rico’s economy, a number of decisions negatively affected 

PREPA’s financial condition. First, PREPA did not update or improve 

its electric generation and transmission systems, which hampered 

their performance and led to increased production costs. Likewise, 

PREPA did not fully pass on cost increases to consumers. PREPA 

has not adjusted its base rate, designed to cover PREPA’s operating 

expenses and debt service, since 1989.39 To cope with cost 

increases, PREPA issued debt to finance operations rather than 

increase the base rate costs to consumers, according to current and 

former Puerto Rico officials.

 36According to a 2013 report by the Government Development Bank for Puerto Rico, 

absent reform, the retirement system’s assets would have been depleted by fiscal year 

2019, and the government and other employers would have been required to provide 

funds to make up for subsequent cash funding shortfalls. GDB projected that the 

retirement system’s gross assets would no longer be depleted after reforms. See 

Government Development Bank for Puerto Rico, Commonwealth of Puerto Rico, Financial 

Information and Operating Data Report (Puerto Rico: Oct. 18, 2013). 

37Government Development Bank for Puerto Rico, Commonwealth of Puerto Rico, 

Financial Information and Operating Data Report (Puerto Rico: Dec. 18, 2016). Reports 

for Puerto Rico’s three public pension systems were not available for 2017, as of March 1, 

2018. For 2016, net pension liabilities for the Teacher’s Retirement System and Judiciary 

Retirement System increased from 2015 by $2.3 billion and $74 million, respectively. Data 

for the Public Employees Retirement System were not available for 2016.

38For funding ratio for state public employee pension plans for 2015, see Pew Charitable 

Trust: Measuring the Fiscal Heath of State Pension Plans, accessed January 16, 2018, 

http://www.pewtrusts.org/en/research-and-analysis/analysis/2017/07/19/measuring-thefiscal-health-of-state-pension-plans.

39PREPA charges consumers based on three rates: 1) a base rate designed to cover 

operating expenses and debts, 2) an adjustment charge for fluctuations in fuel expenses, 

and 3) a purchased power charge. PREPA passes through both the fuel adjustment and 

purchased power charges to customers on a monthly basis. 
Page 26 GAO-18-387 Puerto Rico Debt

• Expanding health care coverage. Puerto Rico residents that meet 

certain eligibility criteria can qualify for Medicaid. Puerto Rico has 

historically opted to insure some categories of individuals that it is not 

required to cover under federal law to receive matching federal 

Medicaid funding.40 Depending on the category of individual, Puerto 

Rico partially or solely paid for the additional coverage.41 Likewise, 

federal funding for Puerto Rico’s Medicaid program is lower than what 

it would be if Puerto Rico were treated in the same way as the 

states—for example, its statutory federal matching rate is lower than it 

would be if it were a state.42 In 2014, we estimated that if Puerto Rico 

had been treated as a state in 2011, federal spending on Medicaid in 

Puerto Rico would have ranged from $1.1 billion to $2.1 billion, as 

compared to actual federal spending of $685 million.43

 40To determine Medicaid eligibility, Puerto Rico uses a local poverty level, which is lower 

than the federal poverty level used by states.

41As in the states, Puerto Rico must provide coverage to certain mandatory categories of 

individuals to qualify for matching federal Medicaid contributions and may cover optional 

categories of individuals and qualify for additional matching federal Medicaid contributions. 

Historically, Puerto Rico has extended Medicaid coverage to certain optional categories of 

individuals. Also, prior to the enactment of the Patient Protection and Affordable Care Act 

(PPACA), Puerto Rico solely funded health care coverage for other categories of 

individuals that were not eligible for Medicaid, such as certain childless, non-elderly, nondisabled adults. PPACA allowed Puerto Rico to extend Medicaid eligibility to such adults 

who met income eligibility criteria.

42Puerto Rico’s federal matching assistance percentage for Medicaid is set by statute at 

55 percent. 42 U.S.C. § 1396(b). The federal share would be 83 percent if it were 

calculated in the same way as for the states. Also, the federal contribution to Puerto Rico’s 

Medicaid program generally is limited by statute, although additional funding above this 

limit has been provided in the past. See 42 U.S.C. § 1308. PPACA authorized a $6.3 

billion increase in Medicaid funding for the territories between July 1, 2011, and 

September 30, 2019. In GAO-14-31, we reported that Puerto Rico qualified for $5.5 billion 

of this additional funding, according to the Centers for Medicare and Medicaid Services. 

The Consolidated Appropriations Act, 2017, provided an additional $296 million in 

Medicaid funding for Puerto Rico. 42 U.S.C. § 1308(g)(5)). Any unobligated funds of the 

$5.5 billion from PPACA were rescinded through this Act. Additionally, the Bipartisan 

Budget Act of 2018 authorized a $3.6 billion increase in Medicaid funding for Puerto Rico, 

through September 30, 2019, and Puerto Rico can also receive another $1.2 billion if it 

meets certain conditions related to data reporting and program integrity. The Act also 

increased the federal share of Medicaid spending in Puerto Rico to 100 percent during the 

period through which additional Medicaid funds are available. 

43GAO-14-31. 
Page 27 GAO-18-387 Puerto Rico Debt

As described previously, Puerto Rico’s economy is in a prolonged period 

of economic contraction. Hurricanes Irma and Maria have further stressed 

Puerto Rico’s economy. Federal officials, current and former Puerto Rico 

officials, and other experts on Puerto Rico’s economy we interviewed told 

us that Puerto Rico’s struggling economy has contributed to its recurring 

deficit and the resulting debt crisis.44 Through interviews with these 

officials and experts, and a literature review, we identified five main 

factors that have contributed to Puerto Rico’s weak economic 

performance: 1) Puerto Rico’s outmigration and diminished labor force, 2) 

regulatory challenges of doing business in Puerto Rico, 3) the high cost of 

importing goods and energy, 4) the phaseout of the possessions tax 

credit, and 5) banking and housing struggles. Some factors are internal to 

Puerto Rico, while other factors relate to the effect of federal policies on 

Puerto Rico.

Puerto Rico’s Outmigration and Diminished Labor Force

Current and former Puerto Rico government officials and other experts on 

Puerto Rico’s economy told us that Puerto Rico’s outmigration has been a 

cause and effect of Puerto Rico’s economic struggles. They told us that 

when confronted with Puerto Rico’s struggling economy, many of Puerto 

Rico’s capable workers left Puerto Rico for work opportunities elsewhere 

in the United States. Current Puerto Rico officials also described 

outmigration as the result of disparate treatment under federal laws and 

programs, as Puerto Rico residents are able to migrate to the states and, 

upon moving, may newly qualify for additional federal benefits.45 This 

outmigration, in addition to other demographic changes and workforce 

characteristics, has left Puerto Rico with a diminished workforce.

As previously mentioned, Puerto Rico’s population and labor force have 

both been declining since 2005. Though negative net migration has 

persisted since the late-1990s, starting in 2005 annual negative net 

 44We previously reported that, in general, state and local tax revenue increases during 

periods of economic expansion and decreases during periods of economic contraction. 

See GAO, State and Local Governments: Knowledge of Past Recessions Can Inform 

Future Federal Fiscal Assistance, GAO-11-401 (Washington, D.C.: Mar. 31, 2011).

45For example, a Puerto Rico resident could move to a state and newly qualify for 

Supplemental Security Income (SSI), a federal program that provides monthly cash 

assistance to people who are disabled, blind, or age 65 or over and lack sufficient income 

and resources to maintain a standard of living at the established federal minimum income 

level. Currently, Puerto Rico residents are not eligible for SSI, although they are eligible 

for a similar program that provides much smaller monthly benefits. See GAO-14-31.

Prolonged Economic 

Contraction
Page 28 GAO-18-387 Puerto Rico Debt

migration in Puerto Rico grew significantly, finally outpacing the territory’s 

natural population growth and leading to net population declines.

Puerto Rico’s population has also been aging over this time period, 

meaning that there are proportionally fewer individuals of working age. 

According to Census data, between 2010 and 2016, the share of Puerto 

Rico residents under the age of 18 fell by about 4 percentage points, 

while the share of Puerto Rico residents over the age of 65 grew by about 

4 percentage points, as shown in figure 9.

Figure 9: Puerto Rico’s Population by Age Group, 2010 versus 2016

Puerto Rico’s changing demographics may have contributed to lower 

labor force participation; however, low labor force participation rates have 

persisted since the 1970s. We previously reported possible explanations 

for the low labor force participation rates, including that a relatively large 
Page 29 GAO-18-387 Puerto Rico Debt

share of Puerto Rico residents work in the informal, or underground, 

economy.46

Regulatory Challenges of Doing Business in Puerto Rico

Former Puerto Rico officials and experts on Puerto Rico’s economy cited 

the high cost to businesses of complying with Puerto Rico regulations and 

federal laws as one possible reason for Puerto Rico’s weak economic 

performance. Specifically, some experts on Puerto Rico’s economy cited 

the Puerto Rico government’s burdensome regulations and permitting 

processes for new businesses, and the associated costs of complying 

with the permitting process as a challenge. Local regulations pertaining to 

other worker benefits, such as overtime and paid leave, also raise the 

costs of hiring employees in Puerto Rico.

Experts on Puerto Rico’s economy also told us that the federal minimum 

wage potentially reduced employment in Puerto Rico, though there was 

some disagreement among experts as to whether or not the federal 

minimum wage contributed significantly to Puerto Rico’s economic 

struggles.47 Some told us that the minimum wage made Puerto Rico a 

more expensive place to do business than other nearby locations, such 

as the Dominican Republic. Other experts told us that lowering the federal 

minimum wage would not help Puerto Rico’s economy, given that if the 

minimum wage were lower than in the states, many more workers would 

leave Puerto Rico for the states.

Former Puerto Rico officials and experts on Puerto Rico’s economy told 

us businesses looking to avoid either minimum wage requirements or the 

burdens of complying with Puerto Rico government taxes and regulations 

may have opted to hire workers from the informal labor market to bypass 

these regulations. By its very nature, it is difficult to measure the size and 

scope of informal economies, but because of the unrecognized 

 46See GAO-06-541. The informal, or underground, economy refers to economic activity 

that is not captured by official government records and thus is not reflected in national 

income and labor market statistics.

47Workers in Puerto Rico are subject to the same $7.25 per hour federal minimum wage 

as workers in the states; however, typical wages in Puerto Rico are much lower than 

those in the states. According to Census data, as of 2016, Puerto Rico’s median annual

income was $20,078. This was less than half the median income of the lowest income 

state (Mississippi), which had a median annual income of $41,754. In March 2017, Puerto 

Rico’s Governor signed an executive order raising the minimum wage for central 

government workers from $7.25 to $8.25 an hour.
Page 30 GAO-18-387 Puerto Rico Debt

contributions of this sector, some experts on Puerto Rico’s economy told 

us that Puerto Rico’s economy was not struggling as much as the official 

numbers suggested.48 Still, because the government is not collecting 

income taxes from these workers, the informal economy affects Puerto 

Rico’s ability to generate revenues and fund government services.

High Cost of Importing Goods and Energy

As an island, many of the goods consumed in Puerto Rico need to be 

shipped in, which can significantly increase the cost of such goods. This 

constraint affects not only consumer goods, but also intermediary goods, 

which adds to the cost of doing business in Puerto Rico. Experts on 

Puerto Rico’s economy we spoke with told us that the high cost of goods 

on the island may hinder the territory’s economy by deterring businesses, 

which may target other locations where operating costs are lower.

Current and former Puerto Rico government officials and other experts on 

Puerto Rico’s economy told us that the Jones Act raised the cost of 

importing goods, including oil, to Puerto Rico, and likely had a negative 

effect on Puerto Rico’s economy.49 The Jones Act requires that maritime 

transport of cargo between ports in the United States be carried by 

vessels that are owned by U.S. citizens and registered under the U.S. 

flag. The law further requires that such vessels be built in the United 

States and manned by predominantly U.S. citizen crews. According to 

current and former Puerto Rico officials, and other experts on Puerto 

Rico’s economy, complying with this law raised the cost of goods and 

energy—given Puerto Rico’s reliance on importing oil to generate 

electricity—for businesses operating in Puerto Rico.

Current and former Puerto Rico government officials and experts on 

Puerto Rico’s economy we spoke with, as well as literature we reviewed, 

identified electricity as one good whose high cost was particularly 

consequential to Puerto Rico’s economic struggles. Figure 10 shows that 

 48These discussions occurred prior to Hurricanes Irma and Maria. The long-term effects of 

these hurricanes on Puerto Rico’s formal and informal economy are still uncertain.

49Section 27 of the Merchant Marine Act of 1920, Pub. L. No. 66-261, 41 Stat. 988, 999 

(June 5, 1920), codified, as amended, at 46 U.S.C. § 55102. We previously reported on 

the possible effects of modifying the application of the Jones Act in Puerto Rico and found 

that the effects of any modification would be highly uncertain, and that various trade-offs 

could materialize depending on how the Act was modified. See GAO, Puerto Rico: 

Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones 

Act, GAO-13-260 (Washington, D.C.: Mar. 4, 2013).
Page 31 GAO-18-387 Puerto Rico Debt

average electricity prices in Puerto Rico for residential, commercial, and 

industrial customers were significantly higher than the U.S. average, and 

this difference was most pronounced for commercial and industrial 

uses.50 The overall difference between Puerto Rico’s electricity prices and 

the U.S. average was even greater in recent years when the price of oil 

was higher. For example, in 2011, the average retail price for Puerto Rico 

was 27.9 cents per kilowatt hour, which was more than two and a half 

times the U.S. average of 9.9 cents per kilowatt hour.

Figure 10: Average Electricity Prices in Puerto Rico and the United States, August 

2017

One reason that electricity is more expensive in Puerto Rico is that Puerto 

Rico uses petroleum as its primary source of energy to generate its 

electricity. According to the U.S. Energy Information Administration, in 

2016, energy from petroleum made up 47 percent of Puerto Rico’s 

electricity, followed by 34 percent from natural gas, 17 percent from coal, 

 50In 2017, Puerto Rico had higher retail electricity prices than any state, other than Hawaii. 
Page 32 GAO-18-387 Puerto Rico Debt

and 2 percent from renewable sources. This reliance on petroleum makes 

Puerto Rico’s electricity prices particularly vulnerable to fluctuations in oil 

prices in the international markets. Even when global oil prices fell, as 

they did in recent years, Puerto Rico’s electricity remained expensive for 

a number of reasons. For example, as previously discussed, many of 

Puerto Rico’s electrical plants do not utilize the most up-to-date 

technology, which makes them less efficient, and drives up costs.51

Phaseout of the Possessions Tax Credit

Some current and former Puerto Rico government officials and other 

experts on Puerto Rico’s economy we spoke with cited the phaseout of 

the possessions tax credit as a potential cause of Puerto Rico’s economic 

struggles; however, there was no consensus as to the magnitude of its 

effect.52 Some former officials and experts told us that the coincidence of 

the end of the phaseout period and the start of Puerto Rico’s economic 

contraction, in 2006, was evidence that the phaseout led to the 

contraction. However, other former officials and experts noted that the 

phaseout of the credit occurred over a 10 year period, but Puerto Rico’s 

economy continued growing through 2005. Others noted that the 

phaseout coincided with the growth of globalization, and that even with 

the tax credit, Puerto Rico’s manufacturing sector may still have not been 

competitive with manufacturing in other parts of the world, such as East 

Asia.

According to Internal Revenue Service (IRS) Statistics of Income data, 

prior to the phaseout, in 1995, there were 440 companies that filed for the 

possessions tax credit, reporting over $40 billion in gross income. Among 

these companies, manufacturing firms in Puerto Rico employed over 

100,000 workers, who earned approximately $2.7 billion in compensation, 

according to the estimates. By 2005, the final year of the phaseout period, 

157 companies filed for the credit, reporting $18 billion in gross income.

 51PREPA’s January 2018 draft energy sector transformation plan includes goals of 

achieving low-cost energy and increasing generation from renewable sources.

52In 2006, we reported that U.S. corporations claiming the possessions tax credit 

dominated Puerto Rico’s manufacturing sector into the late 1990s and that after the tax 

credit began to phase out in 1996, the activity of these corporations decreased 

significantly. We also reported that a variety of data indicated that much of the decline in 

corporations taking advantage of the credit was offset by growth in other corporations, so 

that some measures of aggregate activity remained close to their 1997 levels.
Page 33 GAO-18-387 Puerto Rico Debt

Companies taking advantage of the possessions tax credit provided 

Puerto Rico with capital. For example, in a 1993 report, we found that 

companies that claimed the credit provided Puerto Rico with between $9 

billion and $10 billion in financial institution deposits between 1984 and 

1991.53 Puerto Rico’s government provided incentives for these 

companies to keep their cash in Puerto Rican banks in order to avoid 

paying taxes to Puerto Rico. This arrangement provided capital that could 

be used for economic development within Puerto Rico. Several experts 

that we spoke with told us Puerto Rico is undercapitalized, which makes it 

difficult for businesses to develop. In addition, the effect of Hurricanes in 

September 2017 caused significant damage to physical capital in Puerto 

Rico.

Banking and Housing Struggles

Current and former Puerto Rico officials and experts on Puerto Rico’s 

economy told us that Puerto Rico’s prolonged economic struggles have 

been, in part, exacerbated by struggles in Puerto Rico’s banking and 

housing sectors. According to data from the Federal Housing Finance 

Agency, Puerto Rico’s housing prices peaked in 2009, but have since 

fallen 25 percent as of January 2017. Puerto Rico’s banks have also 

struggled, as several have shut down entirely. As a consequence of the 

struggles in Puerto Rico’s banking and housing sectors, Puerto Rico has 

less capital, which may inhibit economic growth, according to some 

experts on Puerto Rico’s economy.

To cope with its persistent deficits, Puerto Rico issued debt to finance 

operations. In reviewing 20 of Puerto Rico’s largest bond issuances from 

2000 to 2017, totaling around $31 billion, we found that 16 were issued 

exclusively to repay or refinance existing debt and to fund operations.54

According to ratings agency officials and experts in state and local 

government, states rarely issue debt to fund operations, and many states 

prohibit this practice. According to former Puerto Rico officials and 

experts on Puerto Rico’s economy, high demand for Puerto Rico debt and 

the Government Development Bank for Puerto Rico (GDB) facilitating 

 53GAO, Tax Policy: Puerto Rico and the Section 936 Tax Credit, GAO/GGD-93-109 

(Washington, D.C.: June 1993).

54Three bond issuances were used for a combination of repayment and refinancing 

existing debt, funding for operations, and capital projects. Only one issuance was 

exclusively dedicated to new capital projects. 

Factors that Enabled 

Puerto Rico to Use Debt to 

Finance Operations
Page 34 GAO-18-387 Puerto Rico Debt

rising debt levels enabled Puerto Rico to continue to use debt to finance 

operations.

Puerto Rico issued a relatively large amount of debt, given the size of its 

population. Based on an analysis of fiscal year 2014 comprehensive 

annual financial reports of the 50 states and Puerto Rico, Puerto Rico had 

the second highest amount of outstanding debt among states and 

territories,55 while its population falls between the 29th and 30th most 

populous states. By comparison, California, the state with the largest 

amount of outstanding debt, is the most populated state.56 Various factors 

drove demand for Puerto Rico municipal bonds, even as the 

government’s financial condition deteriorated.

• Triple tax exemption: According to a former Puerto Rico official, 

Federal Reserve Bank of New York officials, and an expert on Puerto 

Rico’s economy, Puerto Rico’s municipal bonds were attractive to 

investors because interest on the bonds was not subjected to federal, 

state, or local taxes, regardless of where the investors resided.57 In

contrast, investors may be required to pay state or local taxes on 

interest income earned from municipal securities issued by a state or 

municipality in which they do not reside.

• Investment grade bond ratings: Puerto Rico maintained investment 

grade bond ratings until February 2014, even as its financial condition 

was deteriorating.58 Credit ratings inform investment decisions by both 

institutional investors and broker dealers. According to a current 

Puerto Rico official and an expert on Puerto Rico’s economy, 

investment grade ratings for Puerto Rico municipal bonds may have 

 55Debt data from Mercatus Center at George Washington University, Ranking the States 

by Fiscal Condition 2016 Edition (Arlington, Virginia: June 2016).

56Population estimates are according to Census as of July 1, 2017.

5748 U.S.C. § 745—Tax Exempt Bonds—states that all bonds issued by the Government 

of Puerto Rico, or by its authority, shall be exempt from taxation by the Government of the 

United States, or by the Government of Puerto Rico or of any political or municipal 

subdivision thereof, or by any State, Territory, or possession, or by any county, 

municipality, or other municipal subdivision of any State, Territory, or possession of the 

United States, or by the District of Columbia. 

58In February 2014, three rating agencies downgraded Puerto Rico’s general obligation 

debt to speculative, or noninvestment grade, because of concerns over Puerto Rico’s 

reliance on market access for liquidity and the use of deficit financing.

High Demand for Puerto Rico 

Debt
Page 35 GAO-18-387 Puerto Rico Debt

driven demand for these securities in the states.59 Based on 

interviews with ratings agency officials and a review of rating agency 

criteria, we found that Puerto Rico may have maintained its 

investment grade rating for two reasons. First, Puerto Rico could not 

seek debt restructuring under federal bankruptcy laws, prior to the 

passage of PROMESA in 2016. According to rating agency officials, 

bonds with assumed bankruptcy protection tend to rate higher than 

those without such protection. Second, legal frameworks that prioritize 

debt service are often viewed as positive for credit ratings, according 

to rating agency criteria. In the event that the Puerto Rico government 

does not have sufficient resources to meet appropriations for a given 

fiscal year, Puerto Rico’s constitution requires that the government 

pay interest and amortization on the public debt before disbursing 

funds for other purposes in accordance with the order of priorities 

established by law.60 The prior Puerto Rico Governor cited this 

constitutional provision as providing the authority to redirect revenue 

streams from certain entities to the payment of general obligation 

debt.61 This redirection of revenue streams is commonly known as a 

clawback.62

• Lack of transparency on its financial condition: Municipal market 

analysts told us that untimely financial information made it difficult for 

institutional and individual investors to assess Puerto Rico’s financial 

condition, which may have resulted in investors not being able to fully 

take the investment risks into account when purchasing Puerto Rico 

debt. According to one report, between 2010 and 2016 municipal 

issuers issued their audited financial statements an average of 200 

days after the end of their fiscal years.63 However, between fiscal 

years 2002 and 2014, Puerto Rico issued its statements an average 

of 386 days after the end of its fiscal year, according to our analysis of 

Puerto Rico’s audited financial statements. Moreover, Puerto Rico 

 59Puerto Rico’s issued $3.5 billion in general obligation bonds in March 2014, after the 

February downgrade. This issuance attracted largely non-traditional investors such as 

hedge funds and paid a very high interest rate.

60P.R. Const., art. VI, § 8.

61P.R. Executive Order OE-2015-046 (Nov. 30, 2015).

62For some agencies, such as Puerto Rico’s Highway and Transportation Authority and 

the Puerto Rico Industrial Financing Authority, revenue clawbacks limited their ability to 

satisfy their own obligations to lenders.

63Municipal Securities Rulemaking Board, Timing of Annual Disclosures by Issuers of 

Municipal Securities (Washington, D.C.: Feb. 2017).
Page 36 GAO-18-387 Puerto Rico Debt

had not issued its fiscal years 2015 and 2016 audited financial 

statements as of March 1, 2018, or 975 and 609 days after the end of 

those fiscal years, respectively.64

• Estate tax structures: Puerto Rico residents had incentive to invest in 

municipal bonds issued in Puerto Rico over those issued in the United 

States because of federal and Puerto Rico estate tax structures. 

Current and former Puerto Rico officials told us that this incentive 

drove demand among Puerto Rico residents for bonds issued in 

Puerto Rico. For federal estate tax purposes, Puerto Rico residents 

are generally considered non-U.S. residents and non-citizens for all of 

their U.S.-based property, including investments.65 Estates of Puerto 

Rico residents are required to pay the prevailing federal estate tax—

which ranges from 18 percent to 40 percent depending on the size of 

an estate—for any U.S.-based property valued over $60,000.66 In 

contrast, prior to 2017, all Puerto Rico-based property was only 

subject to the Puerto Rico estate tax of 10 percent. Puerto Rico’s 

estate tax was repealed in 2017.

In addition to financing from the municipal bond markets, GDB also 

provided an intragovernmental source of financing. Prior to April 2016, 

GDB acted as a fiscal agent, trustee of funds, and intergovernmental 

lender for the Government of Puerto Rico.67 GDB issued loans to Puerto 

Rico’s government agencies and public corporations to support their 

operations. GDB provided loans to government entities valued at up to 60 

 64According to current Puerto Rico officials, reasons for the late financial statements 

include challenges related to Hacienda needing to reassess the value of GDB deposits 

that were reflected in Puerto Rico component units’ audited financial statements—which 

are prepared earlier than the comprehensive audited financial statements and by different 

auditors—when no assets backed the deposits; translation challenges; and trying to 

adhere to new accounting standards.

6526 U.S.C. § 2209.

6626 U.S.C. §§ 2001, 2101.

67Prior to April 2016, GDB performed the following roles for the Puerto Rico Government 

and its entities: (1) fiscal agent, paying agent, financial advisor, and reporting agent; (2) 

depositary and trustee of funds; and (3) lender of money, with and without security, to the 

government, its entities, or to external parties including persons, firms, corporations or 

organizations. In April 2016, these responsibilities were transferred to the Fiscal Agency 

and Financial Advisory Authority (FAFAA), which was newly created under the Puerto 

Rico Emergency Moratorium and Financial Rehabilitation Act. FAFAA’s powers were 

further expanded in January 2017 by the current governor to include collaboration with the 

Oversight Board as well as responsibility for negotiations with creditors regarding the debt 

of Puerto Rico’s government and its entities.

Puerto Rico’s Government 

Development Bank Facilitated 

Rising Debt Levels
Page 37 GAO-18-387 Puerto Rico Debt

percent of GDB’s total assets, as shown in Figure 11. In general, these 

entities did not fulfill the terms of their borrowing agreements with GDB, 

while they independently accessed the municipal bond market. 

Additionally, according to GDB’s audited financial statements, GDB did 

not reflect loan losses in its audited financial statements until 2014 

because it presumed that Puerto Rico’s legislature would repay loans 

through the general fund or appropriations, as generally required by the 

acts that approved such loans.

Figure 11: Puerto Rico Government Development Bank (GDB) Total Assets and 

Loans to Puerto Rico Agencies and Public Corporations

Note: Loans to public corporations are presented as net of allowance for loan losses. Puerto Rico has 

not yet released its audited financial statements for fiscal years 2015, 2016 and 2017. According to 

current Puerto Rico officials, the Puerto Rico government plans to release its audited financial 

statements for fiscal years 2015 and 2016 by the end of June 2018. These officials also stated that 

the Puerto Rico government has not yet set a timeline for releasing audited financial statements for 

fiscal year 2017.
Page 38 GAO-18-387 Puerto Rico Debt

Facing non-repayment of public sector loans, GDB took on debt to 

maintain liquidity. According to GDB documents, repayment of amounts 

owed to GDB was a main reason for the creation of the Puerto Rico Sales 

Tax Financing Corporation (COFINA), an entity backed by a new sales 

tax, through which Puerto Rico issued some of its debt. Though initially 

intended as a means to repay GDB and other debt, COFINA bonds were 

also used to finance operations.

Through our interviews and an assessment of relevant literature, we 

identified three potential federal actions that could help address some of 

the factors that contributed to unsustainable indebtedness in Puerto Rico. 

Consistent with the provision in PROMESA that was the statutory 

requirement for this work, we focused on actions that were non-fiscal in 

nature—that is, actions that would not increase the federal deficit. There 

are tradeoffs for policymakers to consider when deciding whether or how 

to implement any policy. For each action, we describe a specific 

challenge as it relates to debt accumulation in Puerto Rico, identify a 

possible federal response to the challenge, and describe other 

considerations for policymakers.

To help address the factors that contributed to the high demand for 

Puerto Rico debt relative to other municipal debt, legislative and 

executive branch policymakers could further ensure that municipal 

securities issuers provide timely, ongoing, and complete disclosure 

materials to bondholders and the public. Specifically, Congress could 

authorize SEC to establish requirements for municipal issuers on the 

timing, frequency, and content of initial and continuing disclosure 

materials.68

In general, the municipal securities market is less regulated and 

transparent than other capital markets, such as equity markets. For 

example, SEC’s authority to directly establish or enforce initial and 

continuing disclosure requirements for issuers—including those in Puerto 

 68Initial disclosure is information provided to investors when securities are issued, 

primarily in an official statement. Continuing disclosure is information provided to investors 

in the secondary market, where these securities are bought and sold after issuance, and 

can include financial statements and other financial and operating information. SEC 

proposed this legislative change in a 2012 report. See SEC, Report on the Municipal 

Securities Market (Washington D.C.: July 2012).

Actions That Could 

Address Factors that 

Contributed to Puerto 

Rico’s Unsustainable 

Debt Levels

Action 1: Modify SEC’s 

Authority over Municipal 

Securities Disclosure 

Requirements

Challenge
Page 39 GAO-18-387 Puerto Rico Debt

Rico—is limited.69 SEC requires that underwriters (sellers of municipal 

securities) reasonably determine that issuers have undertaken continuing 

disclosure agreements (CDA) to publicly disclose ongoing annual 

financial information, operating data, and notices of material events.

70

However, federal securities laws do not provide SEC with the authority to 

impose penalties on municipal issuers for noncompliance with CDAs, 

which may limit any incentive for issuers to comply with SEC disclosure 

and reporting guidance.71 As a result, SEC has limited ability to compel 

issuers to provide continuing disclosure information.

As previously discussed, the Puerto Rico government often issued its 

audited financial statements in an untimely manner, thus failing to meet 

its contractual obligations to provide continuing disclosures for securities 

it issued. SEC could not directly impose any consequences on Puerto 

Rico’s government for failing to adhere to the terms of, or enforce 

compliance with, the CDAs. Additionally, as previously discussed, 

municipal market analysts told us that untimely financial information made 

it difficult for institutional and individual investors to assess Puerto Rico’s 

financial condition.

Timely disclosure of information would help investors make informed 

decisions about investing in municipal securities and help protect them 

against fraud involving the securities. These disclosures would be made 

to investors at the time of purchasing securities and throughout the term 

of the security, including when material changes to an issuer’s financial 

condition occur. According to SEC staff, enhanced authority could prompt 

more municipal issuers to disclose financial information, including audited 

financial statements, in a timelier manner. For example, SEC staff said 

that if the agency had required that issuers provide timely financial 

 69According to a 1975 Senate report, congressional reasons for the decision to limit direct 

regulation of issuers included respect for the rights of state governments to access the 

capital markets, concerns about the costs of regulation for state and local government 

issuers, and the perceived lack of abuses in the municipal market that would justify such 

an incursion on the states’ prerogatives. S. Rep. No. 94-75 (1975). 

70According to SEC, if an issuer does not comply with the terms of a continuing disclosure 

agreement, an underwriter may refuse to participate in a future bond offering with that 

issuer and bondholders may bring lawsuits against the issuers. 

71In 2012, we reported that SEC could use its antifraud authority to encourage issuers to 

comply with their continuing disclosure agreements. See GAO, Municipal Securities: 

Options for Improving Continuing Disclosure, GAO-12-698 (Washington, D.C. July 19, 

2012). SEC staff also told us that the agency has used its antifraud authority to indirectly 

enforce the terms of continuing disclosure agreements.

Addressing the Challenge
Page 40 GAO-18-387 Puerto Rico Debt

statements at the time of issuing a municipal security, this may have 

precluded Puerto Rico from issuing its $3.5 billion general obligation bond 

in 2014. However, any rulemaking SEC would or could take as a result of

enhanced authority would depend on a number of factors, such as 

compliance with other SEC guidance and related laws.

Since this action would apply to all U.S. municipal securities issuers, it 

has policy and implementation implications that extend well beyond 

Puerto Rico. For example, establishing and enforcing initial and 

continuing disclosure requirements for municipal securities issuers could 

place additional burdens on state and local issuers, and not all municipal 

issuers use standardized accounting and financial reporting methods. As 

a result, state and local governments may need to spend resources to 

adjust financial reporting systems to meet standardized reporting 

requirements. However, in a 2012 report proposing this action, SEC said 

it could mitigate this burden by considering content and frequency 

requirements that take into account, and possibly vary by, the size and 

nature of the municipal issuer, the frequency of issuance of securities, the 

type of municipal securities offered, and the amount of outstanding 

securities.

To help address the factors that contributed to the high demand for 

Puerto Rico debt relative to other municipal debt, Congress could ensure 

that investors residing in Puerto Rico receive the same federal investor 

protections as investors residing in states. Specifically, Congress could 

subject all investment companies in Puerto Rico to the Investment 

Company Act of 1940, as amended (1940 Act). In recent years, the 

House and Senate separately have passed legislation that would achieve 

this action.72 

Certain investment companies in Puerto Rico and other territories—

specifically, those whose securities are sold solely to the residents of the 

territory in which they are located—are exempt from the 1940 Act’s 

 72For example, during the 115th Congress, the House passed H.R. 1366 on May 1, 2017 

and the Senate passed S.484 on September 11, 2017 and S.2155 on March 14, 2018. All 

three bills would subject all investment companies in Puerto Rico to the 1940 Act.

Other Considerations

Action 2: Apply Federal 

Investor Protection Laws 

to Puerto Rico

Challenge
Page 41 GAO-18-387 Puerto Rico Debt

requirements.73 The 1940 Act regulates investment companies, such as 

mutual funds that invest in securities of other issuers and issue their own 

securities to the investing public. It imposes several requirements on 

investment companies intended to protect investors. For example, it 

requires that investment companies register with SEC and disclose 

information to investors about the businesses and risks of the companies 

in which they invest, and the characteristics of the securities that they 

issue. It also restricts investment companies from engaging in certain 

types of transactions, such as purchasing municipal securities 

underwritten by affiliated companies.74

According to a former Puerto Rico official, some broker-dealers in Puerto 

Rico underwrote Puerto Rico municipal securities issuances and 

investment companies managed by affiliated companies of these 

underwriters purchased the securities, packaged them into funds, and 

marketed the funds to investors residing in Puerto Rico. This practice 

would be prohibited or restricted for investment companies subject to the 

1940 Act, as it might result in investment companies not acting in the best 

interests of their investors.

If all Puerto Rico investment companies had been subject to the 1940 

Act, they would have been prohibited or restricted from investing in 

Puerto Rico municipal bonds underwritten by affiliated companies. Also, 

these investment companies may have further disclosed the risks 

involved in Puerto Rico municipal bonds to Puerto Rico investors.75 As a 

result, demand for Puerto Rico municipal bonds from Puerto Rico

investment companies and residents may have been lower had the 1940 

Act requirements applied to all Puerto Rico investment companies, and it 

 73The financial institutions excluded from the 1940 Act are those organized or otherwise 

created under the laws of and having its principal office and place of business in Puerto 

Rico or other territories. 15 U.S.C. § 80a-6(a)(1). According to a House Financial Services 

Committee report, in 1940, it was prohibitively expensive and logistically difficult for U.S. 

officials to travel to, and inspect investment companies in, Puerto Rico given its 

geographic location. This reason may no longer be valid, given modern means of 

transportation.

74In general, an affiliated company includes an entity that controls, is controlled by, or is 

under common control with the investment company. 15 U.S.C. § 80a-2(a)(2), (3).

75According to SEC staff, even though certain Puerto Rico investment companies are not 

subject to the 1940 Act, they are subject to Puerto Rico investment company laws. 

According to the staff, these laws are modeled, to some extent, on the 1940 Act. However, 

the staff did not know the extent of any disclosure requirements within those laws, as they 

do not administer Puerto Rico’s laws. 

Addressing the Challenge
Page 42 GAO-18-387 Puerto Rico Debt

may have been more difficult for the Puerto Rico government to issue 

debt to finance deficits.

SEC staff told us that industry groups had raised objections to extending 

the 1940 Act provisions to all investment companies in Puerto Rico. 

These industry groups noted that, among other things, certain investment 

companies would have difficulty meeting the 1940 Act’s leverage and 

asset coverage requirements and adhering to some restrictions on 

affiliated transactions. However, SEC staff noted that under certain

legislation that passed the House or Senate separately, as described 

above, Puerto Rico investment companies would have three years to 

come into compliance if they were newly subject to the 1940 Act. Further, 

under that legislation, after three years, investment companies in Puerto 

Rico could also request an additional three years to come into 

compliance. Regarding affiliated company restrictions, SEC has 

previously waived some requirements for investment companies if they 

are unable to obtain financing by selling securities to unaffiliated parties 

with an agreement to repurchase those securities at a higher price in the 

future, known as repurchase agreements. According to SEC staff, SEC 

would consider allowing companies in Puerto Rico to enter into reverse

repurchase agreements with their affiliates if the 1940 Act applied to 

them.

To help address the factors that contributed to the high demand for 

Puerto Rico debt relative to other municipal debt, Congress could remove 

the triple tax exemption for Puerto Rico’s municipal securities. This action 

would mean that interest income from Puerto Rico municipal securities 

earned by investors residing outside of Puerto Rico could be taxed by 

states and local governments, while still being exempt from federal 

income taxes, similar to the current tax treatment of municipal bond 

income in the states.76

As mentioned previously, former Puerto Rico officials and experts in 

municipal securities told us that the triple tax exemption fueled investor 

demand and enabled Puerto Rico to continue issuing bonds despite 

deteriorating financial conditions.77 Some of the demand for Puerto Rico 

 76Some states and municipalities do not levy state and local personal income taxes, 

respectively.

77The relatively higher return on Puerto Rico bonds compared to bonds issued in the 

states may have also driven demand for Puerto Rico bonds.

Other Considerations

Action 3: Modify the Tax 

Exemption Status for 

Puerto Rico Municipal 

Securities

Challenge
Page 43 GAO-18-387 Puerto Rico Debt

municipal securities came from certain U.S. municipal bond funds. These 

funds concentrated their investments in one state to sell to investors 

within that state, but also included Puerto Rico bonds in their portfolios. 

Puerto Rico bond yields generally were higher than state bonds yields, 

according to industry experts.78 When added to a fund, the higher yields 

from Puerto Rico bonds would increase the overall return on investment 

yield of a fund.

Modifying the triple tax exemption for Puerto Rico’s municipal securities 

might result in reduced demand for Puerto Rico’s debt. In response to 

reduced demand for its debt, Puerto Rico’s government may need to 

address any projected operating deficits by decreasing spending, raising 

revenues, or both.

According to U.S. Treasury officials, this action could increase the 

proportionate share of investors in Puerto Rico debt that reside in Puerto 

Rico, because of reduced demand from investors in the states. In the 

event of a future debt crisis, this could result in a concentration of 

financial losses within Puerto Rico. Also, debt financing allows 

governments to make needed capital investments and provides liquidity 

to governments, and can be a more stable funding source to manage 

fiscal stress. Reduced market demand for Puerto Rico’s bonds could 

make access to debt financing difficult, as the Puerto Rico bond market 

may not support the Puerto Rico government’s future borrowing at 

reasonable interest rates, according to Treasury officials.79 Alternately, a 

variant of this action would be to retain the triple tax exemption for Puerto 

Rico debt only for bonds related to capital investments rather than for 

deficit financing, according to Treasury officials.80

 78For example, one municipal bond fund that invested in Maryland municipal securities 

held 37.5 percent of its net assets in Puerto Rico and other territorial municipal bonds as 

of March 31, 2017. SEC staff told us that they had reached out to some mutual funds to 

ensure they were disclosing their Puerto Rico municipal bond holdings appropriately, but 

that the agency did not otherwise identify problems.

79One purpose of the Oversight Board is to provide Puerto Rico a method for accessing 

capital markets; it terminates upon a certification that Puerto Rico has access to capital 

markets at reasonable rates to meet its borrowing needs, among other things. 

80Currently, a securities issuer’s bond counsel—a legal counsel retained by the issuer to 

confirm that the bonds have been validly issued, among other things—already certifies 

whether or not the bonds are tax exempt. According to Treasury officials, an issuer’s bond 

counsel could also be required to certify how Puerto Rico intended to use bond proceeds.

Addressing the Challenge

Other Considerations
Page 44 GAO-18-387 Puerto Rico Debt

Various provisions in PROMESA were intended to help Puerto Rico 

improve its fiscal condition. PROMESA requires that the Oversight Board 

certify fiscal plans for achieving fiscal responsibility and access to capital 

markets. The intent of the fiscal plans is to eliminate Puerto Rico’s 

structural deficits; create independent revenue estimates for the budget 

process; and improve Puerto Rico’s fiscal governance, accountability, and 

controls, among other things. From March 2017 to April 2017, the 

Oversight Board certified the fiscal plans the Government of Puerto Rico 

developed for the primary government and certain component units, such 

as PREPA. As a result of the effects of Hurricanes Irma and Maria, the 

Oversight Board requested that the Government develop updated fiscal 

plans. Although the Government of Puerto Rico developed and submitted 

updated fiscal plans, the Oversight Board did not certify them, with the 

exception of the plan for GDB. Instead, in April 2018, the Oversight Board 

certified fiscal plans it developed itself, as PROMESA allows.81

PROMESA also requires the Oversight Board to determine whether or not 

Puerto Rico’s annual budgets, developed by the Governor, comply with 

the fiscal plans prior to being submitted to Puerto Rico’s legislature for 

approval.

Technical assistance is another area where the federal government has 

taken action to help Puerto Rico address its fiscal condition. In 2015, 

Congress first authorized Treasury to provide technical assistance to 

Puerto Rico, and has continued to reauthorize the technical assistance, 

most recently through September 30, 2018.82 For example, Treasury

officials told us that they helped Puerto Rico’s Planning Board develop a 

more accurate macroeconomic forecast, which should enable Hacienda 

 81PROMESA outlines three means by which a fiscal plan can be certified as compliant: (1) 

by the Oversight Board approving a plan submitted by the Governor, (2) by the Oversight 

Board developing its own plan, or (3) by the Oversight Board and the Governor jointly 

developing a plan. PROMESA, § 201(d)(2).

82Authorization was first provided in the Consolidated Appropriations Act, 2016. Pub. L. 

No. 114-113, div. E, 129 Stat. 2242, 2423 (Dec. 18, 2015). The most recent authorization 

was provided in the Consolidated Appropriations Act, 2018. Pub. L. No. 115-141, div. E, 

title I, 132 Stat. 348, ___ (Mar. 23, 2018).

Other Federal Actions 

Taken to Address Puerto 

Rico’s Fiscal Condition
Page 45 GAO-18-387 Puerto Rico Debt

to develop more accurate revenue estimates and receipt forecasts.83

Treasury officials also told us that the agency began helping Puerto Rico 

improve its collection of delinquent taxes—for example, by helping 

Hacienda develop an office dealing with Puerto Rico’s largest and most 

sophisticated taxpayers, which are often multinational corporations. With 

Puerto Rico focused on hurricane recovery efforts, Treasury and the 

Puerto Rico government are reassessing the types of assistance that 

Treasury might provide in the future, according to Treasury officials.

Current and former Puerto Rico government officials and experts on

Puerto Rico’s economy also told us that the federal government could 

further help Puerto Rico address its persistent deficits through federal 

policy changes that are fiscal in nature. For example, it could change 

select federal program funding rules—at a cost to the federal 

government—such as eliminating the cap on Medicaid funding and 

calculating the federal matching rate similar to how the rate is calculated 

in the states. Likewise, the Congressional Task Force on Economic 

Growth in Puerto Rico (Congressional Task Force), as established by 

PROMESA, issued a report in December 2016 that recommended 

changes to federal laws and programs that would spur sustainable longterm economic growth in Puerto Rico, among other recommendations.

In addition to federal actions that could address the factors that 

contributed to Puerto Rico’s fiscal condition and debt levels, the Puerto 

Rico government plans to take various actions. For example, according to 

current Puerto Rico officials and the Puerto Rico government’s April 2018 

fiscal plan, the government is:

• Planning to implement an integrated new information technology 

system for financial management, to include modernized revenue 

management and accounting and payroll systems. Hacienda officials 

stated that they are in the process of developing a project schedule 

for this long-term effort.

• Developing a new public healthcare model in which Puerto Rico’s 

government pays for basic services and patients pay for premium 

 83Despite these improvements, experts in Puerto Rico’s economy told us that other 

macroeconomic variables measured by the Planning Board, such as actual GDP, used 

outdated methods. A 2016 Congressional Task Force recommended that the Department 

of Commerce’s Bureau of Economic Analysis (BEA) calculate GDP for Puerto Rico as it 

does for the other territories; BEA’s strategic plan includes this objective.

Puerto Rico Plans to Take 

Actions to Address Its 

Fiscal Condition and Debt 

Levels
Page 46 GAO-18-387 Puerto Rico Debt

services. The government will begin implementing the new healthcare 

model in fiscal year 2019 and expects to achieve annual savings of 

$841 million by fiscal year 2023.

• Collaborating with the private sector for future infrastructure and 

service projects, including for reconstruction efforts related to 

Hurricanes Irma and Maria, which it expects will stimulate Puerto 

Rico’s weakened economy.

We also asked Puerto Rico officials about progress made toward 

addressing many of the factors we identified. However, they did not 

provide us this information.

We provided a draft of this report for review to Treasury, SEC, the

Federal Reserve Bank of New York, the Government of Puerto Rico, and 

the Oversight Board. Treasury and SEC provided technical comments, 

which we incorporated as appropriate. The Federal Reserve Bank of New 

York and the Oversight Board had no comments. 

We received written comments from the Government of Puerto Rico, 

which are reprinted in appendix II. In its comments, the Government of 

Puerto Rico generally agreed with the factors we identified that 

contributed to Puerto Rico’s financial condition and levels of debt. It also 

provided additional context on Puerto Rico’s accumulation of debt, such 

as Puerto Rico’s territorial status and its effect on federal programs in 

Puerto Rico and outmigration. 

The Government of Puerto Rico also noted that the federal actions we 

identified to address factors contributing to Puerto Rico’s unsustainable 

debt levels did not include potential actions that were fiscal in nature or 

that addressed Puerto Rico’s long-term economic viability. As we note in 

the report, we excluded fiscal actions from our scope, consistent with the 

provision in PROMESA that was the statutory requirement for this work. 

We excluded potential actions that could promote economic growth in 

Puerto Rico because these actions would address debt levels in Puerto 

Rico only indirectly and because the Congressional Task Force on 

Economic Growth in Puerto Rico already recommended actions for 

fostering economic growth in Puerto Rico in its December 2016 report.

We are sending copies of the report to the appropriate congressional 

committees, the Government of Puerto Rico, the Secretary of the 

Treasury, the Chairman of the Securities and Exchange Commission, and 

Agency Comments,

Third Party Views, 

and Our Evaluation
Page 47 GAO-18-387 Puerto Rico Debt

other interested parties. In addition, this report is available at no charge 

on the GAO website at http://gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-6806 or krauseh@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made key contributions to this report 

are listed in appendix III.

Heather Krause

Director, Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-18-387 Puerto Rico Debt

Our objectives were to describe (1) the factors that contributed to Puerto 

Rico’s financial condition and levels of debt; and (2) federal actions that 

could address the factors that contributed to Puerto Rico’s financial 

condition and levels of debt. Consistent with the provision in the Puerto 

Rico Oversight, Management, and Economic Stability Act (PROMESA) 

that was the statutory requirement for this work, we focused on actions 

that would not increase the federal deficit.

For both objectives we interviewed current Puerto Rico officials from 

several agencies—the Puerto Rico Department of Treasury (Hacienda in 

Spanish), Government Development Bank for Puerto Rico (GDB), the 

Puerto Rico Office of Management and Budget (Spanish acronym OGP), 

Fiscal Agency and Financial Advisory Authority (FAFAA), and the Puerto 

Rico Electric Power Authority. We also interviewed 13 former Puerto Rico 

officials that held leadership positions at Hacienda, GDB, or OGP, or a 

combination thereof. These former officials served between 1997 and 

2016 for various gubernatorial administrations associated with the two 

political parties in Puerto Rico that held the governorship during that 

period.1 We also interviewed officials from the U.S. Department of the 

Treasury (Treasury), the Securities and Exchange Commission (SEC), 

the Federal Reserve Bank of New York, and the Financial Oversight and 

Management Board for Puerto Rico (created by PROMESA). Additionally, 

we conducted another 13 interviews with experts on Puerto Rico’s 

economy, the municipal securities markets, state and territorial budgeting 

and debt management—including credit rating agencies—and with select 

industry groups in Puerto Rico. We selected the experts we interviewed 

based on their professional knowledge closely aligning with our 

engagement objectives, as demonstrated through published articles, 

congressional testimonies, and referrals from agency officials or other 

experts.

To describe the factors that contributed to Puerto Rico’s financial 

condition and levels of debt, we reviewed our prior work related to Puerto 

Rico’s financial condition and levels of public debt. We also collected and 

analyzed additional financial data from Puerto Rico’s audited financial 

statements for the fiscal years 2002 to 2014, the last year for which 

 1

The two political parties in Puerto Rico that held the governorship from 1997 to 2016 are 

the Popular Democratic Party and New Progressive Party. The current governor is from 

the New Progressive Party.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 49 GAO-18-387 Puerto Rico Debt

audited financial statements were available.2 To determine how the 

Puerto Rico government used bond proceeds, we reviewed a 

nongeneralizable sample of Puerto Rico bonds prospectuses issued 

between 2000 and 2017 from the Electronic Municipal Market Access 

database of the Municipal Securities Rulemaking Board.

We reviewed literature—including academic reports, congressional 

hearing transcripts, and credit rating agency reports—that described 

Puerto Rico’s economy and factors that contributed to Puerto Rico’s 

levels of debt. We also reviewed credit rating agency reports that 

described Puerto Rico’s municipal debt and the agencies’ methodologies 

for rating municipal debt. We also collected and reviewed Puerto Rico 

government documents related to budget formulation and execution, debt 

issuance, and financial management. We considered factors to include, 

but not be limited to, macroeconomic trends, federal policies, and actions 

taken by Puerto Rico government officials. Our review focused largely, 

though not exclusively, on conditions that contributed to the debt crisis 

during those years for which we collected financial data on Puerto Rico, 

fiscal years 2002 to 2014.3

Finally, we also conducted a thematic analysis of the summaries of our 

interviews to identify common patterns and ideas. Although these results 

are not generalizable to all current and former officials and experts with 

this subject-matter expertise, and do not necessarily represent the views 

of all the individuals we interviewed, the thematic analysis provided 

greater insight and considerations for the factors we identified.

 2

For each fiscal year, we found that Puerto Rico’s independent auditor issued an 

unmodified opinion for the primary government and component units on its audited 

financial statements, meaning that the auditor concluded that they were presented fairly, 

in all material respects, in accordance with generally accepted accounting principles. In 

the fiscal year 2014 audited financial statement, the independent auditor’s letter also 

referenced uncertainty about Puerto Rico’s primary government and certain component 

units’ ability to continue as a going concern. According to current Puerto Rico officials, the 

Puerto Rico government plans to release its audited financial statements for fiscal years 

2015 and 2016 by the end of June 2018. These officials also stated that the Puerto Rico 

government has not yet set a timeline for releasing audited financial statements for fiscal 

year 2017.

3

We decided to begin our review with fiscal year 2002 because beginning in that fiscal 

year, Puerto Rico began reporting financial information in conformity with several 

government accounting standards the Governmental Accounting Standards Board 

adopted in 1999. Information collected from consolidated audited financial statements 

prior to 2002 would not readily compare to information collected on or after 2002. 
Appendix I: Objectives, Scope, and 

Methodology

Page 50 GAO-18-387 Puerto Rico Debt

To describe federal actions that could address the factors that contributed 

to Puerto Rico’s financial condition and levels of debt, we reviewed our 

prior reports and documents from Treasury and SEC, conducted a 

literature review, and conducted various interviews. Specifically, we met 

with federal agencies with subject-matter expertise or whose scope of 

responsibilities related to these actions, as well as with current and former 

Puerto Rico officials and municipal securities experts. Consistent with 

PROMESA, we omitted from our scope: (1) actions that could increase 

the federal deficit (i.e., fiscal options), (2) actions that could be taken by 

the Puerto Rico government, (3) actions that could infringe upon Puerto 

Rico’s sovereignty and constitutional parameters, and (4) actions that 

would imperil America’s homeland and national security.4 We considered 

actions that could promote economic growth in Puerto Rico as outside of 

scope, as they could address debt levels in Puerto Rico indirectly, rather 

than directly, and because a study issued by the Congressional Task 

Force on Economic Growth in Puerto Rico already identified actions that 

Congress and executive agencies could take to foster economic growth in 

Puerto Rico.5 We also considered actions that could address Puerto 

Rico’s unfunded pension liability as outside of our scope. The actions we 

identified may also help avert future unsustainable debt levels in other 

territories; however, we did not assess whether and how each action 

would apply to other territories.

We conducted this performance audit from January 2017 to May 2018 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

 4

For example, we excluded from our scope changes to mandatory federal spending 

programs, for which federal spending is determined by rules for eligibility, benefit formulas, 

and other parameters. Examples of mandatory spending programs include Medicaid, 

Medicare, Social Security, and the Supplemental Nutrition Assistance Program. 

5

Economic growth can increase a government’s tax revenues and thus it may limit or 

prevent indebtedness. See Congressional Task Force on Economic Growth in Puerto 

Rico, Report to the House and Senate (December 20, 2016).
Appendix II: Comments from the Government 

of Puerto Rico

Page 51 GAO-18-387 Puerto Rico Debt

Appendix II: Comments from the 

Government of Puerto Rico
Appendix II: Comments from the Government 

of Puerto Rico

Page 52 GAO-18-387 Puerto Rico Debt
Appendix II: Comments from the Government 

of Puerto Rico

Page 53 GAO-18-387 Puerto Rico Debt
Appendix II: Comments from the Government 

of Puerto Rico

Page 54 GAO-18-387 Puerto Rico Debt
Appendix II: Comments from the Government 

of Puerto Rico

Page 55 GAO-18-387 Puerto Rico Debt
Appendix II: Comments from the Government 

of Puerto Rico

Page 56 GAO-18-387 Puerto Rico Debt
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 57 GAO-18-387 Puerto Rico Debt

Heather Krause, (202) 512-6806 or krauseh@gao.gov

In addition to the contact named above, Jeff Arkin (Assistant Director), 

Amy Radovich (Analyst in Charge), Pedro Almoguera, Karen Cassidy, 

Daniel Mahoney, A.J. Stephens, and Justin Snover made significant 

contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(101323)
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