text: Background Puerto Rico’s Territorial Status and Residents’ Status Puerto Rico is the most populous U.S. territory with approximately 3.3 million residents. 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. Individuals born in Puerto Rico are U.S. citizens and can migrate freely to the states. Hurricane Maria On September 20, 2017, Hurricane Maria, a category 4 storm, devastated Puerto Rico and left nearly all its residents without potable running water and electricity. In addition, the existing infrastructure for cellular and wireless service was rendered virtually useless, hampering communication. Four months after Hurricane Maria, more than a third of Puerto Rico’s energy customers remained without power. The lack of power and communication impeded residents’ ability to return to work. According to the Federal Emergency Management Agency (FEMA), rebuilding will take years. Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) 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. The Oversight Board is comprised of seven members appointed by the President of the United States from a list of recommendations from House and Senate Leadership and one ex- officio member designated by the Governor of 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. Government Assessment of Puerto Rico’s Economic Condition Under Puerto Rico law, the Puerto Rico Planning Board (Planning Board) has the legal responsibility of developing an economic outlook and a detailed analysis of the economy, including gross domestic product (GDP), and producing an annual Economic Report to the governor and to the legislature. The Planning Board Chairperson releases GDP measures only after approval from the governor’s office, according to Planning Board officials. The Department of Commerce’s Bureau of Economic Analysis (BEA) produces economic accounts statistics that enable government and business decision-makers, researchers, and the American public to follow and understand the performance of the nation’s economy. To do this, BEA collects source data, conducts research and analysis, develops and implements estimation methodologies, and disseminates statistics to the public. BEA calculates GDP for the United States, including for the territories of American Samoa, Guam, the U.S. Virgin Islands and the Commonwealth of the Northern Mariana Islands. Since 2009 the Department of the Interior’s Office of Insular Affairs has reimbursed BEA for estimating and publishing GDP for these territories. This office carries out the administrative responsibilities of the Secretary of the Interior and the Assistant Secretary for Insular Areas by coordinating federal policy for these territories, but does not for Puerto Rico. Census in cooperation with the Department of Labor’s Bureau of Labor Statistics (BLS) produces the Current Population Survey (CPS), which provides statistics on work, earnings, and education. CPS is one of the oldest, largest, and most well-recognized surveys in the United States, according to Census. In addition to being the primary source of monthly labor force statistics, the CPS is used to collect data for a variety of other studies that provide information on economic and social well-being factors. The CPS does not collect or report data for Puerto Rico or any of the other U.S. territories. Census also produces the American Community Survey (ACS). It is an ongoing survey that provides national information on a yearly basis that includes information for the States, as well as for Puerto Rico. The ACS includes data on jobs and occupations, educational attainment, veterans, whether people own or rent their homes, and other topics. Information from the survey generates data that help determine how more than $675 billion in federal and state funds are distributed each year. Federal Labor Laws DOL’s Wage and Hour Division (WHD) administers the wage, hour, and child labor provisions of the Fair Labor Standards Act of 1938 (as amended) that sets the minimum wage and overtime pay standards applicable to most U.S. workers. The Fair Labor Standards Act (FLSA) requires employers to compensate employees who are covered by the act and not specifically exempt from its provisions, at least federal minimum wage (currently $7.25 per hour) and with premium pay (at one- and-one-half the regular rate) for overtime hours worked in excess of 40 hours in a workweek. There are a number of exemptions from the requirements of the FLSA. For example, employees working in a “bona fide executive, administrative, or professional capacity” (EAP) are not entitled to premium pay for overtime. The FLSA was enacted to address problems associated with substandard working conditions by, in part, establishing a floor on wages and a ceiling on hours, beyond which the employer is required to pay extra wages. With a requirement for overtime pay, employers would either have to hire more workers or assume extra wage costs in order to achieve the same amount of work. Employees would be assured additional pay to compensate them for the burden of a workweek in excess of 40 hours. The Minimum Wage Study Commission of 1981 justified the EAP exemption in part because these employees are associated with higher base pay, higher promotion potential, and greater job security than most of the U.S. labor force. For employers and employees, the practical effects of the exempt employee classification can be important. An exempt employee may be required to work as many hours as it takes to complete a task. Although this may be more than 40 hours per week, the employee will not be entitled to overtime pay. Thus, an exempt financial manager may be required to work 60 hours a week and be paid a set weekly salary. On the other hand, a nonexempt bookkeeper may be required to work 60 hours per week, but must be paid for 20 hours of overtime, in addition to a set weekly salary. The FLSA authorizes DOL to define EAP exemptions. Balancing the competing interests of expanding exemptions and restricting them, DOL regulations establish specific tests that must be met before an employee may be classified as an EAP and exempt from overtime. In general, there are three tests: Salary Basis Test. The employee must be paid on a salary basis, rather than an hourly basis. This means that the employee must be paid at least the guaranteed amount, regardless of the number of hours actually worked and the quality or quantity of worked performed. Salary Level Test. The employee must meet a minimum salary level that indicates managerial or professional status. Duties Test. The employee must have duties and responsibilities associated with an exempt EAP position. In 2003, DOL reviewed the regulations for EAP exemptions in response to a GAO recommendation. Based on its review, in 2004 DOL increased the minimum “salary level” threshold for an employee to be exempt from receiving overtime pay to $23,660. In May 2016, DOL again updated minimum the salary level threshold for EAP employees to be exempt from receiving overtime pay to $47,476 in the 2016 Overtime Rule (see fig. 1). Status of the 2016 Overtime Rule In July 2015, DOL proposed updating the overtime regulations relating to the EAP exemption, and published a notice of proposed rulemaking. After receiving approximately 294,000 comments, the Secretary of Labor published the final rule on May 23, 2016 (2016 Overtime Rule). The major changes included increasing the salary level threshold from $455 per week ($23,660 annually) to $913 per week ($47,476 annually) and providing an automatic update to the salary level every 3 years. DOL estimated that about 4.2 million EAP employees in the states would become newly entitled to overtime pay under the revised salary level threshold. At the time of publication, the 2016 Overtime Rule would have applied to Puerto Rico; however, on June 30, 2016, prior to the rule’s effective date of December 1, 2016, PROMESA was enacted which, in part, delayed the applicability of this rule to Puerto Rico. Prior to the 2016 Overtime Rule going into effect, several states and various business groups challenged the rule in the Federal District Court of the Eastern District of Texas. On November 22, 2016, this court issued a nationwide preliminary injunction preventing DOL from implementing and enforcing the 2016 Overtime Rule for the duration of the case. In the interim, the 2004 Overtime Rule salary level threshold for EAP employees of $23,660 remained in effect. In July 2017, DOL published a Request for Information to gather additional information to begin the rulemaking process to replace and update the overtime regulations. In August 2017, the district court determined that the 2016 Overtime Rule was unlawful and ordered it invalidated. In October 2017, DOL filed a motion to appeal that ruling with the Fifth Circuit Court of Appeals. In November 2017, DOL filed a motion to stay the appeal pending the outcome of its rulemaking, and the Fifth Circuit granted this motion. DOL’s comment period for the Request for Information ended on September 25, 2017, and the agency currently is reviewing submissions. DOL plans to publish a Notice of Proposed Rulemaking on the salary level threshold for EAP employees in October 2018. Meanwhile, the 2004 Overtime Rule continues to remain in effect as of today, while the appeal and rulemaking are pending. Puerto Rico’s Labor Laws In addition to FLSA, workers and employers in Puerto Rico may be subject to various other federal, Puerto Rican, and local labor laws or regulations depending on eligibility, exemptions, and other limitations. In some cases, including sick leave, vacation leave, mandatory meal period, weekly day of rest, and maternity leave, these laws may be more generous to workers than federal law, according to Puerto Rico Department of Labor officials. Sick leave. Non-exempt employees in Puerto Rico are entitled to accrue at least 1 day of paid sick leave after working at least 130 hours per month. Vacation leave. Non-exempt employees in Puerto Rico are entitled to accrue paid vacation after working at least 130 hours per month. Non- exempt employees hired before January 26, 2017, are entitled to a minimum monthly vacation leave accrual rate of one-and-a-quarter days. Non-exempt employees hired on or after January 26, 2017, are entitled to a minimum monthly vacation leave accrual rate of a half- day during the first year of service; three-quarters of a day after the first year of service up to the fifth year of service; 1 day after the fifth year of service up to the fifteenth year of service; and one-and-a- quarter days after the fifteenth year of service. However, in the case of Puerto Rico resident employers who have less than 12 employees, the minimum monthly vacation leave accrual rate is a half-day. Mandatory meal period. Non-exempt employees in Puerto Rico are entitled to a mandatory meal period between the third and sixth consecutive hour of work. In general, any employer that employs or allows an employee to work during the meal period is required to pay said period or fraction thereof at a pay rate equal to twice or one and one-half times the regular pay rate, as applicable. Weekly day of rest. Non-exempt employees in Puerto Rico are entitled to a mandatory weekly day of rest for every six consecutive days of work. Work performed during the day of rest is considered overtime and requires extraordinary compensation, regardless of the total number of hours that the non-exempt employee worked in the preceding 6 days. Maternity leave. Pregnant women in Puerto Rico are entitled to paid maternity leave 4 weeks before and 4 weeks after childbirth. Working mothers may opt to take only 1 week of pre-natal leave and extend post-natal leave up to 7 weeks. Women who adopt a child 5 years old or younger are entitled to 8 weeks of maternity leave. Possessions Tax Credit The Tax Reform Act of 1976 created the possessions tax credit to assist Puerto Rico and other insular areas in obtaining employment-producing investments. The credit effectively reduced federal taxes on income earned by qualifying U.S. corporations from operations in U.S. insular areas. However, the credit was repealed in 1996, but existing claimants were allowed to continue to use the credit during a 10-year phaseout period ending in 2006. In 2006, we reported that U.S. corporations claiming the credit dominated Puerto Rico’s manufacturing sector in the late 1990s and that after the tax credit began to phase out in 1996, the activities of these corporations decreased significantly. Unreliable Economic Data Make Conditions in Puerto Rico Difficult to Evaluate Prior to Hurricane Maria, Puerto Rico Had Already Experienced Prolonged Economic Decline Overall Economic Decline Puerto Rico Planning Board (Planning Board) data show that Puerto Rico has been in an economic decline for more than a decade. From 2005 to 2016, Puerto Rico’s GDP decreased by over 9 percent, after adjusting for inflation. Beginning in 2006, Puerto Rico’s economy experienced declines in real output in 9 of the next 11 years, as measured by real GDP (see fig. 2). While we have concerns about the precision of the Planning Board’s real GDP measure from year to year, as discussed later, we are confident in the downward direction of growth. Puerto Rico officials described the economic contraction as a downward spiral, where negative economic growth spurred outmigration by skilled workers, leading to decreased tax revenue and thereby increasing public debt per capita. This, in turn, they said decreases new investment and the cycle repeats. Five Main Factors that Contributed to Puerto Rico’s Economic Condition In May 2018, GAO reported on five main factors it identified through discussions with officials and experts and a review of literature. The factors were: Outmigration and diminished labor force. Some experts tied Puerto Rico’s negative economic growth to a steady decline in its population and labor force since 2005. According to Census data, Puerto Rico’s aging population means there are proportionally fewer individuals of working age. Regulatory challenges of doing business in Puerto Rico. Some experts cited the high cost to businesses of complying with Puerto Rico’s regulations, such as the permitting process for new businesses, and federal laws, such as the minimum wage law. High cost of importing goods and energy. Many of the goods used by businesses in Puerto Rico must be imported, significantly increasing their costs and in turn the cost of doing business. Petroleum, the main source of electronical energy generation, is a good whose high cost was particularly consequential to Puerto Rico’s economic struggles, according to Puerto Rico government officials, experts, and a literature reviews. Phaseout of the possessions tax credit. The loss of the tax credit was been cited by some as a potential cause of Puerto Rico’s economic decline since 2006; however, there was no consensus as to the magnitude. Banking and housing struggles. Puerto Rico’s banks have struggled and several have closed. Puerto Rico’s housing prices peaked in 2009, but fell 25 percent by January 2017, according to Federal Housing Finance Agency data. In our May 2018 report examining the Puerto Rico debt crises, we spoke with officials and experts, and conducted a literature review, and identified five main factors contributing to Puerto Rico’s current economic condition: outmigration and a diminished labor force; regulatory challenges of doing business in Puerto Rico; the high cost of importing goods and energy; the phaseout of the possessions tax credit; and banking and housing struggles (see sidebar). Hurricane Maria’s Economic Impact Puerto Rico was already experiencing a long economic contraction when Hurricane Maria made landfall in September 2017. Previous U.S. natural disasters, such as Hurricane Katrina in the Gulf Coast, have had significant adverse impacts on the economies of the affected regions, including significant outmigration. Immediately following Hurricane Katrina, the Gulf Coast experienced a number of challenges to its economy including a rise in unemployment; an increase in outmigration and decrease in housing units; a decline in state tax revenue; and a decline in imports and exports. Puerto Rico may experience similar challenges. For example, a February 2018 Federal Reserve Bank of New York press briefing on the impact of Hurricanes Maria and Irma characterized the 4 percent local job losses in Puerto Rico as substantial. Further, the briefing indicated that the true economic cost may be understated because some workers who are still employed likely suffered a drop in income, there may be unmeasured effects on the informal economy, and the value people place on quality of life issues are not measured. The substantial damage to the territory also accelerated outmigration and will likely worsen its economic condition. A January 2018 report from the Puerto Rico government identified the 2017 hurricanes as having a significant impact on the economy and projected that the population will decline by 10 percent over the next 2 years and could decline by nearly 20 percent over the next 5 years as people leave the island due to poor economic conditions. Initial data from the U.S. Bureau of Transportation Statistics show that 92,284 more people flew out of Puerto Rico with one- way tickets than flew into Puerto Rico in October 2017, the first full month after Hurricane Maria. That number represents a 255 percent increase over similar statistics in August 2017 and a 1,195 percent increase over October 2016 (see fig. 3). By December 2017, 17,281 more people flew out of Puerto Rico with one-way tickets than flew into Puerto Rico. This is 149 percent increase over similar statistics for December 2016. While the extent to which citizens of Puerto Rico may return to the territory is unclear, the initial outmigration could prolong negative economic growth. Methods Currently Used To Measure Puerto Rico’s Economy Are Outdated and Lead to Unreliable Measures Measuring GDP in Puerto Rico Outdated methods for measuring GDP make it difficult for the Puerto Rico government to fully analyze specific economic needs and develop long- range plans. There is no federal statistical measure of Puerto Rico’s GDP. The U.S. Census’ Economic Census of Island Areas provides some limited insights into Puerto Rico’s economic performance by industry, including revenue, payroll, employee count, and inventories. The Economic Census of Island Areas is updated every 5 years, but does not include total GDP. Instead, each year, BEA calculates GDP for four other territories and is reimbursed by the Department of the Interior’s Office of Insular Affairs for the estimation and publication of this information. In contrast, Puerto Rico’s Planning Board calculates GDP, but its methods are outdated and therefore unreliable, as they do not provide a precise measure of economic activity. Specifically, a 2011 White House Task Force Report examining Puerto Rico’s economic challenges found the Planning Board’s methods were outdated because they did not follow the same standards used for the rest of the United States. The Task Force also found that the methodology was not in line with modern statistical techniques, resulting in a less precise measure of Puerto Rico’s economic activity. Accurately calculating GDP is necessary to adequately measure total output of goods and services in Puerto Rico. GDP is also useful in measuring productivity and conducting monetary policy, and may be used to develop and apply appropriate policies for promoting economic growth. For example, a reliable and timely measure of GDP helps government officials calculate more accurate projections of tax revenue. The Planning Board’s method for calculating GDP does not effectively adjust for inflation because, the methodology uses a fixed-weighted index method that assumes the structure of the economy—what is being produced and prices of what is being produced relative to each other—is roughly constant over time. Further, the Planning Board is using this method to report inflation adjusted GDP based on the prices in a 1978 “market basket”—a fixed set of goods and services that people buy for day-to-day living. The Planning Board then uses 1954 as the reference year in its inflation adjustment to report GDP based on the price of goods and services. Consequently, the Planning Board’s real GDP measure may not be accurately adjusted to reflect current purchasing patterns and inflation in the prices of purchased products. BEA provides Puerto Rico’s Planning Board with some support in its calculation of GDP, but does not verify the accuracy of the calculation. In response to the 2011 White House Task Force findings, BEA began providing technical assistance and support to the Planning Board in updating its methods to adjust GDP for inflation and developed a report with recommendations for updating economic accounts. BEA found that the Planning Board’s methods did not comply with the internationally agreed upon standards for compiling measures of economic activity. Officials said that BEA was helping the Planning Board update its methods; however, a change in the level of communication slowed the update from 2013 through 2014. As a result, the Planning Board continued to use the same outdated methods. In January 2017, the Planning Board and BEA signed an agreement to modernize Puerto Rico’s economic accounts and align them with international guidelines. The agreement also tasked the Planning Board with providing deliverables in regular intervals beginning in spring 2017, including publication of alternative estimates of GDP that implement steps towards modernization. BEA officials told us that they are providing support to the Planning Board, and Planning Board officials told us they are working on updating the methodology. However, as of March 2018, the Planning Board had not yet produced all of the agreement deliverables, including publication of alternative GDP estimates. Given the impact of Hurricane Maria, it may be challenging for Puerto Rico to modernize its GDP measures. Planning Board officials told us in August 2017 that they were working to update their GDP methodology, so that it is similar to the one used by BEA, and that they would be updating to a 2007 “market basket.” Board officials said the new GDP figures were expected to be completed in December 2017. Their release was delayed in the aftermath of Hurricane Maria, but officials said they now expect to release GDP measures using the new methodology in summer 2018. Officials added that they plan to continue publishing GDP measures using the old methodology along with the new one for trend comparisons. The Planning Board and BEA estimated the cost to the Puerto Rico government to modernize its GDP measure is $2 million — including staff time and computing infrastructure. A 2016 bi-partisan Congressional Task Force on Economic Growth in Puerto Rico (2016 Congressional Task Force) recommended BEA calculate GDP for Puerto Rico as it does for the states and other territories, and BEA’s long-term goals include this objective. Further, in February 2018, the Financial Oversight and Management Board for Puerto Rico recommended that the Governor of Puerto Rico support efforts to implement the Congressional Task Force recommendation. BEA officials told us one of the agency’s long-term goals is calculating GDP for Puerto Rico and they have discussed including Puerto Rico in its reporting of GDP. Officials noted that including Puerto Rico in GDP reporting would require additional funds similar to reimbursements it received for the other four territories’ calculations. BEA’s mission is to promote a better understanding of the entire U.S. economy by providing the most timely, relevant, and accurate economic accounts data in an objective and cost-effective manner. BEA has provided technical assistance and support for 6 years; however the Planning Board has not yet modernized its methods to report a reliable GDP measure, and BEA has not included Puerto Rico in its reporting efforts. Federal standards for internal control state that management should use quality information to achieve the entity’s objectives. The lack of a federal GDP measure for Puerto Rico makes it difficult to make reasoned policy recommendations, adds uncertainty around issues affecting Puerto Rico’s economy, and makes it more difficult to identify fiscal and economic recovery plan priorities. Without modernized GDP methods, it remains difficult to compare Puerto Rico’s GDP with the rest of the United States and the other four territories for which BEA calculates GDP. Finally, without such a measure of GDP, federal policy makers and private investors must rely on various and sometimes unreliable data sources to try to establish common facts about Puerto Rico’s economic condition—an impediment in reaching consensus, engaging in meaningful policy discourse, and investment. U.S. Government Labor Statistics for Puerto Rico Federal labor statistics for Puerto Rico are incomplete because the Current Population Survey (CPS) does not include Puerto Rico and four other U.S. territories, and the American Community Survey (ACS) primarily provides data on population and housing, rather than labor. PROMESA recognized this and recommended that Census consider the feasibility of including Puerto Rico, and the other territories in the CPS. Specifically, PROMESA suggested that Census conduct a study to determine the feasibility of expanding data collection to include Puerto Rico and the other four U.S. territories in the CPS and if necessary, request the funding required to conduct this feasibility study as part of its budget submission to Congress for fiscal year 2018. Census officials told us they estimate a feasibility study including all of the U.S. territories will cost $1.1 million in fiscal year 2018, but did not request funding. The 2016 Congressional Task Force also recommended that BLS and Census take reasonable steps to include the territories. Federal standards for internal control state that management should use quality information to achieve the entity’s objectives. CPS data are intended to provide a comprehensive body of labor data that can be used to keep the nation informed about the economic and social well-being of its people, but Census and BLS are unable to report on the economic and social well-being of a segment of the nation and its people. Census officials told us they are concerned about unduly burdening Puerto Rico citizens with data collection efforts that would provide state level estimates. However, Census has not studied the feasibility of including Puerto Rico in the CPS, which would inform officials’ decision on whether to include Puerto Rico and the other territories in the CPS. By conducting such a study, Census would better understand the tradeoffs of including or continuing to omit Puerto Rico from CPS, including the extent to which it can be considered in public policy decisions, such as the 2016 Overtime Rule. Increasing the Overtime Threshold Would Affect a Small Percentage of Workers in Puerto Rico and Could Affect Employment Conditions The 2016 Overtime Threshold Increase Would Likely Affect Less Than 5 Percent of the Workforce in Puerto Rico Our estimates suggest that a larger percentage (about 4.5 percent) of Puerto Rico’s total workforce would have been affected by the Overtime Rule than the states (about 2.6 percent), based on our analysis of ACS data and DOL’s analysis of CPS data. Specifically, DOL’s analysis estimated that of 159.9 million wage and salary workers in the states, about 4.2 million (or about 2.6 percent) might be directly affected by the 2016 Overtime Rule. In our analysis of the Overtime Rule for Puerto Rico, we estimated that about 47,250 (about 4.5 percent) of 1.06 million wage and salary workers in Puerto Rico would have been directly affected (see fig. 4). The lack of data from CPS on Puerto Rico and the effects of Hurricane Maria hinder our ability to fully assess the potential effect of the 2016 Overtime Rule on Puerto Rico. Instead, we used data from the 2015 5- year ACS to estimate the impact of the Overtime Rule on Puerto Rico. The ACS employment data lack multiple variables available in the CPS; hence, we were limited in what we could estimate. For example, DOL’s estimate for the states included the wealth transfer from employers to employees, which is important for understanding the economic effects of the 2016 Overtime Rule. We do not provide similar insights because of the difference in variables in the ACS and CPS. (See table 2 in appendix I for the differences between our analysis and that of DOL.) Additionally, DOL estimated the effect the Overtime Rule would have on the probability that a worker had multiple jobs, but the limitations of the data we used kept us from performing this analysis. Our analysis estimates that the impact of the 2016 Overtime Rule in Puerto Rico would have been largely concentrated in four industries: education and health services, wholesale and retail trade, public administration, and financial activities. We estimated that in these four industries about 76 percent (about 36,000) of our approximate 47,250 total workers would have been directly affected (see table 1). The largest directly affected industry, education and health services, makes up about 43 percent (about 20,000) of this total. Raising the Overtime Threshold Could Increase Wages for Some, but Reduce Overall Hours and Employment in Certain Industries Depending on how employers respond to an increase in the overtime threshold, the effect of amending the overtime regulations could vary across employees. Similar to employers in the states, employers in Puerto Rico could respond to changes in the overtime regulations based on the current employee’s salary and work schedule by: 1) making no changes, 2) paying overtime, 3) raising salaries, or 4) adjusting hours worked (see fig. 5). In its analysis of the impact of the 2016 Overtime Rule in the states, DOL estimated the largest impact would be an aggregate transfer of income from employers to employees, which would be seen as a positive for some employees (e.g., increased pay, fewer hours for same pay, or new hires) and a negative for others (e.g., employers in our facilitated discussion groups said they would have layoffs, move employees from salaried to hourly, or lower benefit amounts). While we were unable to conduct a full impact analysis identical to DOL’s because of data limitations, we held facilitated discussion groups, to gain insight into how employers would have responded if the 2016 Overtime Rule was implemented in Puerto Rico. Views reported by participants in these groups may not be representative of all Puerto Rico employers, but they provide illustrative examples of the types of steps employers might have taken if the 2016 Overtime Rule were implemented. Employers in 2 of our 10 discussion groups said they would make staff adjustments by increasing the salary of some employees while, in some cases, minimizing the role of others. However, employers in 9 of our 10 of our discussion groups said they might also need to convert the remaining employees to part-time or hourly work, reduce their hours, or lay them off. “We have 125 exempt employees. The rule change would impact our labor costs a lot. We would need to minimize employees/hours to reduce the labor costs. We may adjust our contribution to medical plans to make up for the increased labor costs.” “With the new rule, half would need to be paid overtime or increase salary. This would leave us not enough flexibility to cover the hours or operation.” “We have a total of 850 employees. About 8 would be affected by the change. Of those 8, 3 we would boost their salary; the others will be switched to hourly. This may affect their benefits.” Through these facilitated discussion groups, we also learned that employer responses to the 2016 Overtime Rule may differ by industry. Employers in 3 of 10 industry discussion groups said they would be able to absorb some of the higher costs associated with an increase in the Overtime Rule threshold. For example, some manufacturers told us it would not be difficult for their businesses to absorb these additional costs, particularly if the salary threshold was at a somewhat lower level. Similarly, some hotel employers told us they would be able to absorb costs associated with the change across their many hotel locations, but others said they may not be able to assimilate the threshold increase. Hospital employers who participated in our facilitated discussion groups told us they have lower margins and face threats of closure even without the threshold increase. Some restaurant and hotel employers who participated in our facilitated discussion groups said they may be unable to pass associated increased labor costs to consumers; some would have to require exempt workers to work longer hours and reduce the number of full time employees or hours (see sidebar). Employers could respond by adjusting staff if the 2016 Overtime Rule goes into effect, but the impacts to employers may be limited and the workforce could benefit from the 2016 Overtime Rule change according to our interviews with 1 economist and 1 labor group official. One economist suggested that instead of having two employees who work 60 hours each, an employer might hire a third employee so that each works 40 hours. Additionally, this economist said an increase to the threshold would not be as burdensome to business, because employee wages have risen above the current overtime salary threshold. One labor group representative suggested that the 2016 Overtime Rule would have a minimal impact because very few workers in Puerto Rico earn enough to meet the 2004 salary threshold. Further, one economist said that under the current threshold, workers work excessive hours and do not have the same bargaining power. An increased overtime threshold would improve these dire working conditions. Specifically, this economist said that implementing the 2016 Overtime Rule would encourage firms to hire more workers, provide employees with more bargaining power, and help prevent worker exploitation. One economist said implementing the 2016 Overtime Rule only in the states could increase the wage differential between Puerto Rico and in turn increase outmigration from Puerto Rico. One member of the Puerto Rico Economic Administration said that if Puerto Rico were to have a lower threshold than the U.S. mainland the effects might be worse than those caused by the increased labor costs of implementing the higher threshold. Another economist said that while hours may be adjusted or layoffs may occur immediately following implementation of the Overtime Rule, these impacts would not be a major concern within 3 to 4 years. Conclusions Puerto Rico has long been experiencing severe economic challenges and its default on over a billion dollars of debt payments since 2015 has focused the need for attention to this territory. As Puerto Rico officials were in the process of taking action to update their methodology for reporting inflation-adjusted GDP, Hurricane Maria exacerbated the territory’s economic challenges. FEMA estimates that it may take years for Puerto Rico to recover. The lack of accurate economic and comprehensive labor data hinders policymaking, including a determination of the potential impact of changes to the overtime regulations. To help address Puerto Rico’s economic challenges now and in the future, the federal government and investors need updated and reliable data. Going forward, having BEA include Puerto Rico in its calculation of GDP would provide federal and local authorities, as well as businesses and investors, with reliable data on Puerto Rico’s economic condition that can be directly compared with the United States and other territories. BEA’s long-term goals include measuring Puerto Rico’s GDP, but having reliable data now would help address significant economic challenges in the short term. Likewise, studying whether including Puerto Rico in the Current Population Survey is feasible would allow DOL and other policymakers to be better positioned to fully consider the cost of including the territory against the implications of exclusion. Recommendations for Executive Action We are making a total of three recommendations, including two to Commerce and one to DOL. Specifically: The Secretary of Commerce should ensure that the Bureau of Economic Analysis includes Puerto Rico in its reporting on gross domestic product, as it does for four other U.S. territories. (Recommendation 1) The Secretary of Commerce, in cooperation with DOL’s Bureau of Labor Statistics, should conduct a study on the feasibility of including Puerto Rico in its reporting of the Current Population Survey. (Recommendation 2) The Secretary of Labor, in cooperation with the Commerce’s Census Bureau, should conduct a study on the feasibility of including Puerto Rico in its reporting of the Current Population Survey. (Recommendation 3) Agency Comments and Our Evaluation We provided a draft of the report to the Government of Puerto Rico, the Department of Commerce (Commerce), and the Department of Labor (DOL) for review and comment. In written comments that are reproduced in appendix IV, Commerce agreed with the recommendations made to it. In an email, DOL’s Deputy Assistant Secretary for Policy stated that the agency did not have any comments on the report. In addition, Commerce and the Government of Puerto Rico provided technical comments, which we incorporated into the report as appropriate. We are sending copies of this report to the appropriate congressional committees, the Government of Puerto Rico, the Secretary of the Department of Commerce, the Secretary of the Department of Labor, and 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 Cindy Brown Barnes at (202) 512-7215 or Oliver Richard at (202) 512- 8424.You may also reach us by e-mail at brownbarnesc@gao.gov or richardo@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 V. Appendix I: Objectives, Scope, and Methodology Our review addressed: (1) the economic conditions in Puerto Rico as of the end of 2016; and (2) the potential effects of implementing the 2016 Overtime Rule on Puerto Rico’s economy. To evaluate the current economic conditions in Puerto Rico quantitatively, we analyzed (1) data from the Puerto Rico Planning Board’s (Planning Board) Statistical Appendix for the Governor that includes data on Puerto Rico’s gross domestic product (GDP) from 1990 through 2016 and (2) passenger data for Puerto Rican airports for years 2016 and 2017 from the Bureau of Transportation Statistics (BTS). To analyze the real GDP of Puerto Rico from 1990 through 2016 and Puerto Rico GDP by industry for 2016, we relied on data from the Planning Board’s Statistical Appendix for the Governor. We interviewed Planning Board officials responsible for producing the annual GDP estimates to understand how the data were prepared and any limitations to the data, and concluded that the while we have concerns over the precision of real GDP data, they were sufficiently reliable for our purposes of determining the direction of growth. To analyze the flow of passengers through Puerto Rican airports before and after Hurricane Maria, we relied on the BTS’ monthly passenger data for 2016 and 2017 as accessed through Diio Mi: Market Intelligence for the Aviation Industry. Diio Mi is a private contractor that provides online access to U.S. airline financial, operation, and passenger data. We reviewed the relevant documentation of the dataset and previous GAO reports and found the dataset sufficiently reliable for our purposes. To assess the potential effects of the 2016 Overtime Rule on Puerto Rico quantitatively, we analyzed and reported data from the American Community Survey (ACS) for calendar year 2015, because DOL used 2015 data in its impact analysis of the Overtime Rule on the states. The ACS is a national survey designed and administered by the Census Bureau (Census), and it contains data on individual earnings. Since 2005, the ACS has also included the Puerto Rico Community Survey (PRCS) which extends the survey through Puerto Rico. Our data set selection process included interviews with current and former agency officials as well as review of dataset documentation such as data handbooks, data dictionaries, and guidance on the different versions of data available. The ACS is conducted annually with estimates based on 1-year and 5-year data with benefits and drawbacks for each version. The 1-year ACS is updated the earliest and gives the most current data; however, according to Census’ guidance on the different ACS samples, it also contains the smallest sample size and is more appropriate for analyzing large populations than small ones. The 5-year ACS is the most reliable data, according to Census’ ACS guidance, as it includes the largest population size, which can be used to analyze small populations; however, the 5- year ACS is the least current version of the data. Additionally, while the 2015 5-year ACS data were not the most recent available, we used them because the Department of Labor (DOL) used 2015 data in its impact analysis of the 2016 Overtime Rule for the states. Based on these benefits and limitations, we chose to use the 2015 ACS 5-year estimates. Estimates produced from ACS data are subject to sampling error. For all of our estimates we weighted observations based on the individual weight. We compared our estimates of values derived from our weighting procedures to those published by the DOL and found them to be consistent. In addition to estimates, we generated standard errors or the margin of error for the 95 percent confidence interval, and report them with estimates in figures and tables. Based on our data checks, reviews of documentation and interviews with agency officials, we found the ACS data to be sufficiently reliable for our purposes. In addition to the quantitative data collected, we reviewed relevant federal laws, regulations, court documents, agency guidance, and internal controls related to the 2016 Overtime Rule, labor in Puerto Rico, and federal statistical measures for Puerto Rico. Additionally, we reviewed previous GAO reports on Puerto Rico and its economy. We interviewed DOL and Commerce officials at the national level. We interviewed Puerto Rican government officials to better understand current economic conditions and the statistical measure used to reflect the economic conditions. We interviewed representatives of national and Puerto Rican employer and labor organizations to gain their perspectives on the impact of the 2016 Overtime Rule and the condition of the economy. We conducted 10 facilitated group discussions with Puerto Rican employers in the manufacturing, restaurant, hotel, hospital, and professional services industries. These are some of the industries that employ the largest number of people in Puerto Rico and are among the most likely to be impacted by the 2016 Overtime Rule. Employers were selected to represent both large and small business perspectives in each industry. Views reported by participants in these groups are not representative of those of all Puerto Rico employers and for that reason are not generalizable. We also interviewed four economists, identified from prior work and interviews with agency officials, industry groups, and labor groups as having expertise relating to the 2016 Overtime Rule or the Puerto Rico economy, regarding the economic conditions of Puerto Rico and the potential economic impacts of the 2016 Overtime Rule. Analysis of American Community Survey Data For our analysis of the effects of the 2016 Overtime Rule on Puerto Rico, we mirrored the analysis conducted by DOL for the impacts of the rule on the United States. While the methodologies are similar, the DOL analysis used the Current Population Survey (CPS) data that do not include Puerto Rico. The ACS data we use serves a similar role; however, we made a few adjustments to the analysis in light of available data. Specifically, in the ACS, there is no variable identifying whether the individual works an hourly job. In order to simulate the removal of hourly workers from the sample, we randomly assign hourly worker designation to the same proportion of the population that are classified as hourly workers in DOL’s analysis (41.01 percent). A few assumptions are associated with this manipulation: 1) We are assuming that the proportion of the population that works an hourly job in Puerto Rico is similar to that of the 50 states, and 2) when we perform industry and region analyses, we assume the same hourly worker proportion across all industries and regions. Additionally, in its final rule, DOL analyzes the impact of the 2016 Overtime Rule on individual worker’s propensity to work multiple jobs; the ACS does not identify workers employed in multiple jobs and we could not perform this analysis. Also, the CPS data contain several variables on the number of hours worked that allowed DOL to analyze who likely works overtime on a regular basis. While the ACS includes a variable indicating the usual number of hours worked per week over the past year, we found it does not capture the schedule fluctuations as accurately as the CPS variables. As such, we do not calculate the dollar amount transfers from employers to employees and dead weight losses, or the loss in economic efficiency from the rule that DOL shows in its analyses. To the extent possible, we used DOL’s methodology to determine the potential effect of the 2016 Overtime Rule in Puerto Rico. However, due to data limitations there were some ways in which our approach differed from the approach used by DOL. In DOL’s analysis, the sample includes only the workers covered by its regulation. We adapt the sample to match the DOL’s analysis as follows: 1) remove military personnel, unpaid volunteers, self-employed individuals, clergy and other religious workers, and federal employees, 2) remove blue-collar workers and workers paid hourly; and 3) remove workers who are categorized under occupation and industry codes that are generally exempt under other exemptions. For consistency, our analysis makes the same adjustments to our sample that DOL makes in its analysis. Since we use the 2015, 5-year ACS data, we first put all wages into 2015 levels using ACS defined variables. Next, we inflate from 2015 to 2017 levels using the calendar year consumer price index (CPI-U). Just as in DOL’s analysis, we do not know whether any specific worker satisfies the duties test of the 2016 Overtime Rule, so we follow the same steps DOL took in its final rule. These steps include using DOL’s probabilities that specific job codes meet the duties test and assigning the probability to individual workers using the gamma distribution with the shape parameter alpha was set to the squared quotient of the sample mean divided by the sample standard deviation, and the scale parameter beta was set to the sample variance divided by the sample mean. Additionally, DOL explicitly removes certain industries and occupations from the sample and we follow its methodology exactly to remove these. Finally, to estimate the population that would have been affected by the 2016 Overtime Rule, we limit the sample to only those above the 2004 overtime salary threshold ($23,660) and below the 2016 salary threshold ($47,476) just as DOL did in its analysis. DOL’s estimates for industries and regions use different groupings than those provided in the ACS; however, since the ACS variables use the same coding but, a finer level, we can recreate the variables used in DOL’s analysis. For example, we used Census guidance on converting 2012 industry codes to create a major industry variable from the ACS industry codes. Similarly, to compare our estimates to DOL estimates by region, we take the ACS data, which is reported state-by-state, and put it into larger regions, such as “Northeast.” We conducted this performance audit from September 2016 to June 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. Appendix II: Effects of Implementing Alternative Overtime Rule Thresholds on Puerto Rico Table 3 shows how different populations of workers would be affected by applying alternative overtime thresholds in Puerto Rico. For our analysis, in order to more closely replicate Department of Labor’s (DOL) design, we use the same alternative salary thresholds DOL analyzed in its final rule, which are defined as follows: Alternative 1: Inflate the 2004 Level - takes the 2004 overtime threshold and inflates it to fiscal year 2015 dollars using the consumer price index. This method leads to an overtime threshold of $570 per week or $29,640 per year. Alternative 2: 2004 Methodology - uses the 2004 final rule and updates it with data from the third quarter of 2015. This method leads to an overtime threshold of $596 per week or $31,015 per year. Alternative 3: Kantor Long Test - is based on a 1958 Report and Recommendations on Proposed Revision of Regulations, Part 541, by Harry S. Kantor. This methodology uses data collected on actual salaries paid to executive, administrative, or professional (EAP) employees grouped by geographic region, industry group, number of employees, and city size. DOL then used the long-duties test such that no more than about 10 percent of exempt EAP employees in the lowest-wage region, lowest-wage industry, smallest establishment group, or smallest city group will fail to meet the test. This method leads to a threshold of $684 per week or $35,568 per year. Alternative 4: 40th Percentile of Full-time Salaried Workers (Nationally) - takes all full-time salaried workers in the United States and calculates the 40th percentile of their wages. This method leads to a threshold of $972 per week or $50,544 per year. Alternative 5: Kantor Short Test - is also based on the Kantor method described in the third alternative, but uses the methodology associated with the short-duties test instead of the long-duties test. To do this, DOL took the $684 per week of the Kantor Long Test and inflated it by the average percent wage difference between the long and short test from 1949 through 1975 (149 percent). Multiplying $684 per week by 149 percent yields a Kantor Short Test threshold of $1,019 per week or $52,984 per year. Alternative 6: Inflate 1975 Short Test Level - takes the 1975 short- duties test salary level and inflates it to fiscal year 2015 dollars. This leads to a threshold level of $1,100 per week or $57,205 per year. Appendix III: Data Checks for American Community Survey The following tables show how the Department of Labor’s (DOL) analysis of the 2016 Overtime Rule in the United States using the analysis of Current Population Survey (CPS) data compares to our analysis using the American Community Survey (ACS) data. This analysis was conducted to support using ACS data as an alternative to CPS data. The methodologies used in our analysis and the DOL analysis are similar, but some adjustments were made to our analysis to attempt to replicate the DOL’s analysis of CPS data because variables were missing from the ACS data. Between the slightly different methodologies and different data sets, we expect the estimates to be of similar magnitudes, but not necessarily identical. The results indicate that our adjustments to the methodology and use of a different data yield similar results and add validity to our estimates for Puerto Rico. Appendix IV: Comments from the Department of Commerce Appendix V: GAO Contacts and Staff Acknowledgments GAO Contacts GAO Acknowledgments In addition to those named above, Kimberley Granger and Seyda Wentworth, Assistant Directors; Amber Yancey-Carroll, Analyst-in- Charge; Pedro Almoguera and Michael Naretta made key contributions to this report. Also contributing to this report were Jeffrey Arkin, David Blanding, David Chrisinger, Sarah Gilliland, Robin Marion, Jonathan S. McMurray, Sheila R. McCoy, Thomas Moscovitch, Dominic Nadarski, Mimi Nguyen, Karissa Robie, Benjamin Sinoff, Almeta Spencer, Amy Sweet, Anjali Tekchandani, Rosemary Torres Lerma, and Kathleen van Gelder.
target: Puerto Rico, the largest and most populous territory of the United States, is subject to congressional authority, although it has broad authority over matters of internal governance. After it defaulted on over $1.5 billion in public debt since 2015, Congress passed PROMESA to establish federal oversight of fiscal affairs. This debt crisis coincided with DOL finalizing the 2016 Overtime Rule, which was invalidated in federal court and is being appealed. PROMESA included a provision for GAO to assess the rule's impact on Puerto Rico and examine its economic condition. This report (1) examines the economic conditions in Puerto Rico as of the end of 2016, and (2) assesses the potential effects of applying the 2016 Overtime Rule to Puerto Rico. GAO analyzed 1990-2016 economic data and replicated DOL's impact analysis of the 2016 Overtime Rule using 2015 ACS data, the same year used by DOL in its analysis. GAO also reviewed federal laws, regulations, court documents, agency guidance, and criteria related to the federal overtime rule; facilitated group discussions with employers in Puerto Rico from industries most likely to be impacted by the rule; and interviewed relevant stakeholders and labor groups. Unreliable economic and limited labor data make conditions in Puerto Rico difficult to evaluate. Puerto Rico Planning Board data show that from 2005 to 2016 Puerto Rico's gross domestic product (GDP), a principal economic indicator, decreased by over 9 percent, after adjusting for inflation, and the devastation brought by Hurricane Maria in 2017 has worsened economic conditions. While the overall downward trend is reliable, GAO found that the Planning Board uses outdated methods to calculate GDP, which results in unreliable data from year to year and can make it difficult for policymakers to fully analyze specific economic needs and develop long-range plans. The Bureau of Economic Analysis (BEA), within the U.S. Department of Commerce (Commerce), does not calculate GDP for Puerto Rico, as it does for the other U.S. territories. For 6 years, BEA has provided technical support to the Planning Board to update its methods and Planning Board officials described plans to do so, but its methods remain outdated. A 2016 Congressional Task Force recommended that BEA calculate Puerto Rico's GDP, and BEA considers it a long-term goal; however, BEA has not taken steps to do so. Further, Puert Rico has limited labor statistics because it is not included in the Current Population Survey (CPS), which is produced by Commerce's Census Bureau (Census) and Department of Labor's (DOL) Bureau of Labor Statistics (BLS). CPS provides detailed information about employment, such as hours of work and earnings. The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) suggested that Census conduct a study to determine the feasibility of expanding data collection to include Puerto Rico. Census officials said that they estimated the cost of such a study but have not yet conducted it. Census officials also cited concerns with data collection burdens. However, without CPS data on Puerto Rico, policymakers are limited in estimating the full economic impact of different policy changes. For example, DOL did not have the data needed to include Puerto Rico in its assessment of the economic impact of DOL's 2016 Overtime Rule. Conducting such a study would help policymakers consider the tradeoffs of including Puerto Rico in the CPS. GAO used a different dataset—American Community Survey (ACS)—to assess the potential effects of applying the 2016 Overtime Rule, which would have increased the salary level threshold from $23,660 to $47,476 at which executive, administrative, and professional workers would not be eligible for overtime pay. GAO estimated that about 47,250 of 1.06 million workers in Puerto Rico would be affected—that is, they would become eligible for overtime pay. In response to a salary level threshold increase, employers from selected industries in Puerto Rico told GAO that they might increase certain workers' salaries, but cut overtime hours for other workers, and adjust the number of staff. An economist and a labor group official said that employers could respond by adjusting the number of staff or their hours, but the impacts to employers may be limited and the workforce could benefit. In 2017, a federal district court invalidated the 2016 Overtime Rule and the overtime salary threshold remains at $23,660, but that decision is currently on appeal.