2020 Fiscal Plan for Puerto Rico (DRA Exhibit 235) — Financial Oversight and Management Board for Puerto Rico
- Date
- 2020-05-27
Summary
The 2020 Fiscal Plan for Puerto Rico, titled Restoring Growth and Prosperity, as certified by the Financial Oversight and Management Board for Puerto Rico on May 27, 2020, filed October 27, 2021 as DRA Exhibit 235, Doc. 18792-1 in Case 17-03283-LTS. A disclaimer states the plan is not an audit, is not a Title III plan of adjustment, and lists factors affecting projections, including the impact of the COVID-19 pandemic and federal disaster funding for Hurricanes Maria and Irma. The table of contents covers context, macroeconomic projections including the impact of the COVID-19 pandemic, a Debt Sustainability Analysis, and reform chapters on education, power, Medicaid, tax compliance and pensions. The 271-page document ends with Exhibit 152, a table of Medicaid reform implementation milestones and deadlines.
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Cite this document
“2020 Fiscal Plan for Puerto Rico (DRA Exhibit 235) — Financial Oversight and Management Board for Puerto Rico.”
Original at www.courtlistener.com, dated 2020-05-27. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2020-05-27-kyc-company-litigation/
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2020 Fiscal Plan for Puerto Rico
Restoring Growth
and Prosperity
As certified by the Financial Oversight and Management
Board for Puerto Rico
May 27, 2020
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DISCLAIMER
The Financial Oversight and Management Board for Puerto Rico (the "FOMB," or "Oversight Board") has formulated this 2020
Fiscal Plan based on, among other things, information obtained from the Commonwealth of Puerto Rico (the °Commonwealth:
or the "Government")
This document does not constitute an audit conducted in accordance with generally accepted auditing standards, an examination
of internal controls or other attestation or review services in accordance with standards established by the American Institute of
Certified Public Accountants or any other organization. Accordingly, the Oversight Board cannot express an opinion or any other
form of assurance on the financial statements or any financial or other information or the internal controls of the Government and
the information contained herein,
This 2020 Fiscal Plan is directed to the Governor and Legislature of Puerto Rico based on underlying data obtained from the
Government. No representations or warranties, express or implied, are made by the Oversight Board with respect to such
information.
This 2020 Fiscal Plan is not a Title Ill plan of adjustment. It does not specify classes of claims and treatments. It neither discharges
debts nor extinguishes liens.
This 2020 Fiscal Plan is based on what the Oversight Board believes is the best information currently available to it. To the extent
the Oversight Board becomes aware of additional information after it certifies this 2020 Fiscal Plan that the Oversight Board
determines warrants a revision of this 2020 Fiscal Plan, the Oversight Board will so revise it.
For the avoidance of doubt, the Oversight Board does not consider and has not considered anything in the 2020 Fiscal Plan as
a "recommendation" pursuant to Section 205(a). Nevertheless, to the extent that anything in the 2020 Fiscal Plan is ever deemed
by the Governor or Legislature or determined by a court having subject matter jurisdiction to be a °recommendation" pursuant to
Section 205(a), the Oversight Board hereby adopts it in the 2020 Fiscal Plan pursuant to PROMESA Section 201(b).
Any statements and assumptions contained in this document, whether forward-looking or historical, are not guarantees of future
performance and involve certain risks, uncertainties, estimates and other assumptions made in this document. The economic
and financial condition of the Government and its instrumentalities is affected by various legal, financial, social, economic,
environmental, governmental and political factors. These factors can be very complex, may vary from one fiscal year to the next,
and are frequently the result of actions taken or not taken, not only by the Government and the Oversight Board, but also by other
third-party entities such as the government of the United States. Examples of these factors include, but are not limited to:
Any future actions taken or not taken by the United States government related to Medicaid or the Affordable Care Act
The amount and timing of receipt of any distributions from the Federal Emergency Management Agency and private
insurance companies to repair damage caused by Hurricanes Maria and Irma;
- The amount and timing of receipt of any amounts allocated to Puerto Rico and provided under the Community Disaster
Loans Program;
- The amount and timing of any additional amounts appropriated by the United States government to address The impacts of
the COVED-19 pandemic;
- The amount and timing of receipt of any additional amounts appropriated by the United States government to address the
funding gap described herein;
- The timeline for completion of the work being done by the Puerto Rico Electric Power Authority rPREPA) to repair PREPA's
electric system and infrastructure and the impact of any future developments or issues related to PREPA's electric system
and infrastructure on Puerto Rico's economic growth;
- The impact of the COVED-19 pandemic on the financial, social, economic, and demographic condition of Puerto Rico;
- The impact of the measures described herein on outrnigration; and
- The impact of the resolution of any pending litigation in the Title ill cases
Because of the uncertainty and unpredictability of these factors, their impact cannot be included in the assumptions contained in
this document. Future events and actual results may differ materially from any estimates, projections, or statements contained
herein. Nothing in this document should be considered as an express or implied warranty of facts or future events; provided,
however, that the Government is required to implement the measures in this 2020 Fiscal Plan and the Oversight Board reserves
all its rights to compel compliance. Nothing in this document shall be considered a solicitation, recommendation or advice to any
person to participate, pursue or support a course of action or transaction, to purchase or sell any security, or to make any
investment decision.
By receiving this document, the recipient is deemed to have acknowledged the terms of these limitations. This document may
contain capitalized terms that are not defined herein or may contain terms that are discussed in other documents or that are
commonly understood. You should make no assumptions about the meaning of capitalized terms that are not defined, and you
should refer questions to the Oversight Board at comments@oversightboard.pr.gov should clarification be required.
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List of Acronyms and Key Terms
AAFAF Puerto Rico Fiscal Agency and Financial Advisory Authority (Spanish acronym)
ADEA Agricultural Enterprise Development Administration (Spanish acronym)
ADSEF Family Socio-Economic Development Administration (Spanish acronym)
AFSCME American Federation of State, County and Municipal Employees
AMPR Asociacion de Maestros de Puerto Rico
April 2018 Fiscal
Fiscal Plan certified April 2018, immediately following Hurricanes Maria and Irma which first set out the major reforms
Plan
ASEM Puerto Rico Medical Services Administration (Spanish acronym)
ASES Puerto Rico Health Insurance Administration (Spanish acronym)
CAFR Comprehensive Annual Financial Report
CAGR Compound Annual Growth Rate
CB0 Congressional Budget Office
CDBG Community Development Block Grant
CHIP Children's Health Insurance Program (CHIP)
COFIM La Corporacion de Financiamiento Municipal
COFINA Puerto Rico Sales Tax Financing Corporation (Spanish acronym)
COSSEC Public Corporation for the Supervision and Deposit Insurance of Puerto Rico Cooperatives (Spanish acronym)
COR3 Central Office for Recovery, Reconstruction, and Resiliency
OCR Department of Corrections and Rehabilitation
DB Defined Benefit pension plan
DC Defined Contribution pension plan
MEC Puerto Rico Deparlment of Economic Development Commerce (Spanish acronym)
DOH Department of Health
DOJ Department of Justice
DPS Department of Public Safety
DSA Debt Sustainability Analysis
EITC Earned Income Tax Credit
ERS Employee Retirement System
FAM Municipal Administration Fund
FDI Foreign Direct Investment
Federal Government The US Federal Government
FEMA Federal Emergency Management Agency
FMAP Federal Medical Assistance Percentage (FMAP)
FOMB Financial Oversight and Management Board for Puerto Rico
FQHC Federally Qualified Health Center
FYTD Fiscal-Year-To-Date
GAO US Government Accountability Office
GOB Government Development Bank for Puerto Rico
GDP Gross Domestic Product
GF General Fund
GFEWG Governor's Fiscal and Economic Working Group
GNP Gross National Product
Government Government of Puerto Rico
Governor Governor Wanda Vazquez Garced
Hacienda Puerto Rico Department of Treasury
HHS US Department of Health and Human Services
HUD US Department of Housing and Urban Development
Hurricanes Hurricane Irma and Hurricane Maria
IFCU Independently Forecasted Component Units
IMF International Monetary Fund
IPR Invest Puerto Rico
Island Puerto Rico
KPIs Key Performance Indicators
LEA Local Education Agency
March 2017 Fiscal Fiscal Plan certified by the Financial Oversight and Management Board in March 2017, before Hurricanes Maria and Irma hit
Plan the Island
MADS Maximum Annual Debt Service
MCOs Managed Care Organizations
MFCU Medicaid Fraud Control Units
Mi Salud Medicaid program in Puerto Rico (now called VITAL)
MMIS Medicaid Management Information System
NAP Nutrition Assistance Program (Spanish: Programs de Asistencia Nutrrcional. PAN)
NRW Non-Resident Withholdings
OCFO Office of the CFO
October 2018 Fiscal Fiscal Plan certified by the Financial Oversight and Management Board in October 2018, updated for 2018 revenue and
Plan expenditure actuals
OMB Office of Management and Budget
P3 Public Private Partnerships
P3 Authority Public Private Partnership Authority
PA Public Assistance
Parties AAFAF and the Government
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Defined benefit actuarial responsibility program by which agencies and instrumentalities are responsible for paying their
PaySo
pensions obligations on an annual basis via a ''PayGo Change"
PEA Public Buildings Authority
Pia tino Medicare Advantage program that also provides Medicaid wraparound services equivalent to Mi Salud I VITAL program
PMO Program Management Office
PMPM Per Member Per Month
PRASA Puerto Rico Aqueduct and Sewer Authority
PRCCDA Puerto Rico Convention Center District Authority
PRDE Puerto Rico Department of Education
PREB Puerto Rico Energy Bureau
PREMA Puerto Rico Emergency Management Agency
PREPA Puerto Rico Electric and Power Authority
PRHFA (or HFA) Puerto Rico Housing Finance Authority
PRHTA (or NIA) Puerto Rico Highway and Transportation Authority
PRIDCO Puerto Rico Industrial Development Company
PRITS Puerto Rico Information Technology Service
PROMESA Puerto Rico Oversight, Management and Economic Stability Act
PRPB Puerto Rico Police Bureau
PRTC Puerto Rico Tourism Corporation
PSC Puerto Rico Public Service Commission
RFOP Request for Proposal
SCO State Coordinating Officer
SRF Special Revenue Fund
SR Structural Reform
SLIT Sales and Use Tax
SIFC State Insurance Fund Corporation
TANF Temporary Assistance for Needy Families
UPR University of Puerto Rico
WIOA Workforce Innovation and Opportunity Act
2019 Fiscal Plan Fiscal Plan certified by the Financial Oversight and Management Board in May 2019
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Table of Contents
Executive Summary 8
PART I: Context for Puerto Rico's current economic and fiscal challenges 20
Chapter 1. Long-term economic trends in Puerto Rico 20
Chapter 2. Enactment of PROMESA 21
Chapter 3. Fiscal plan updates due to natural disasters and emergencies 22
PART IL Puerto Rico's path to fiscal and economic sustainability 25
Chapter 4. Macroeconomic and demographic trajectory 25
4.1 Impact of the global COVID-19 pandemic 26
4.2 Federal and local relief spending for Hurricanes Maria and Irma, earthquakes,
and the global COVID-19 pandemic 28
4.3 Impact of fiscal or Government efficiency measures 36
4.4 Impact of structural reforms 37
4.5 Population projections 37
4.6 Impact of First Circuit ruling on Supplemental Security Income benefits 38
Chapter 5. Fiscal Plan financial projections (FY2o2o-FY2025) 39
5.1 Baseline revenue forecast 40
5.2 Baseline expenditure forecast 47
5.3 Surplus potentially not available for Commonwealth 53
Chapter 6. Long-term projections and Debt Sustainability Analysis (DSA) 53
6.1 Long-term macroeconomic, revenue, and expenditure projections 54
6.2 Debt Sustainability Analysis (DSA) 59
Part III. Investments to revitalize Puerto Rico 67
Chapter 7. Strengthening Puerto Rico's technology sector 71
7.1 Broadband infrastructure 71
7.2 215t Century Technical and Business Education Fund 74
PART IV: Restoring growth to the Island 76
Chapter 8. Human capital & welfare reform 78
8.1 Basis for human capital and welfare reforms 78
8.2 Broadly publicize an Earned Income Tax Credit (EITC) 8o
8.3 Introduce a Nutritional Assistance Program (NAP) work/volunteer
requirement 82
8.4 Create high-quality workforce development programs 84
Chapter g. K-12 education reform 97
9.1 Identify goals and design a strategic plan to guide reforms ioo
9.2 Launch evidence-based curriculum reforms 102
9.3 Create a post-COVID-19 back-to-school plan and stand up distance learning
capabilities 104
9.4 Improve professional development opportunities for directors and teachers 107
9.5 Make targeted investments to boost family engagement 109
9.6 Systematically collect, manage, and leverage data 111
Chapter io. Ease of doing business reform 113
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10.1 Current state of business regulation, investment promotion, and tourism
attraction 113
10.2 Streamline permits to promote business activity and public safety 116
10.3 Overhaul property registration to facilitate financial transactions and promote
disaster-preparedness 121
10.4 Simplify paying taxes to spur economic activity 123
10.5 Reduce occupational licensing to facilitate labor force participation 125
10.6 Eliminate inefficient on-Island freight regulations 126
10.7 Strengthen offshore investment attraction efforts 127
10.8 Prime tourism attraction efforts for success 129
Chapter it. Power sector reform 132
11.1 Introduction and context for energy reform 132
11,2 Energy regulatory reform and oversight 134
11.3 Vision and structure for an energy system operator 138
11.4 Energy sector debt restructuring 138
11.5 Implementation and enforcement of power sector reform 139
Chapter 12. Infrastructure reform 140
12.1 Current state of infrastructure and capital investment 140
12.2 Implementation of infrastructure reform 141
12.3 Implementation of public transportation reform 142
PART V: Transforming government to better serve the Island 145
Chapter 13. Agency efficiency reform 147
13.1 Agency operational efficiencies and improvements 149
13.2 Investing to support agency efficiency and recovery 152
13.3 Department of Education (PRDE) 152
13.4 Department of Health (DOH) 170
13.5 Department of Public Safety (DPS) 177
13.6 Department of Corrections and Rehabilitation (DCR) 183
13.7 Department of Economic Development and Commerce (DDEC) 188
13.8 Puerto Rico Innovation and Technology Services (PRITS) 191
13.9 Legislative Assembly 194
13.10 General Court of Justice 194
13.11 State Elections Commission 195
13.12 Agencies that promote public integrity and transparency 196
13.13 All other agencies 197
Chapter 14. Office of the Chief Financial Officer (OCR)) 198
14.1 OCFO design parameters 200
14.2 OCFO structure and agency efficiency measures 202
14.3 Looking ahead -. efficiency savings to be achieved and required implementation
actions 205
Chapter 15. Medicaid investments and reform 206
15.1 Current State of Puerto Rico's Medicaid program 206
15.2 Medicaid reform measures 207
15.3 Medicaid investments 211
Chapter 16. Tax compliance and fees enhancement 213
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16.1 Current state and future vision for tax environment 213
16.2 Administrative tax initiatives to increase revenue collections 214
16.3 Implementation and enforcement of revenue measures 216
Chapter 17. Reduction in appropriations to UPR 219
17.1 Current state and vision 219
17.2 Key initiatives to reduce appropriations 221
Chapter 18. Municipal services reform 222
18.1 Current state 222
18.2 Disaster Recovery and the COVID-19 crisis 226
18.3 Vision and reform needed to transform municipal services 228
Chapter 19. Pension reform 231
19.1 Current state of and required changes to pension reform 231
19.2 Proposed pension reform initiatives 234
19.3 Implementation and enforcement of pensions measures 238
Chapter 20. Ensuring successful implementation and fiscal controls 245
20.1 Implementation architecture 245
20.2 Oversight Board and OCFO implementation collaboration 246
20.3 Reporting on Fiscal Plan reforms 247
20.4 Ensuring fiscal controls and transparency 247
Chapter 21. Plan of Adjustment 252
PART VT. Conclusion 254
Appendix 255
Chapter 22. Model presentation 255
22.1 Overview of entities covered by and excluded from the 2020 Fiscal Plan 255
Chapter 23. Macroeconomic projections 258
23.1 Economic and demographic trends 258
Chapter 24. Financial projections 260
24.1 Detailed financial projections 260
Chapter 25. Fiscal measures 262
25.1 Agency efficiencies 262
25.2 Agency groupings and consolidation progress 263
25.3 Key reform implementation milestones required by prior Fiscal Plans 265
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Executive Summary
The people of Puerto Rico need and deserve plentiful good jobs, a dynamic and
prosperous economy, affordable and reliable electricity, and an efficient and
responsive public sector—but have not had any of these things for more than a
decade. Instead, since 2005, the number of people living under the poverty line has
increased, the economy has shrunk, electricity has remained expensive and unreliable, labor
market regulations have remained burdensome, the business environment has remained poor,
and the public sector has provided declining levels of service at a high cost to residents.
On top of these longstanding economic challenges, multiple large-scale natural disasters have
struck Puerto Rico in the last three years, testing the resiliency of economic and social
institutions like never before.
In the fall of 2017, Hurricanes Maria and Irma inflicted unprecedented damage on the physical
infrastructure of Puerto Rico, leaving large segments of the population without power for
weeks and in many cases months. Thousands died, many of them due not to the direct effects
of the storm but rather its aftereffects. There was widespread economic dislocation in the
aftermath as the scale of the damage became evident. Impact to the housing stock, power and
water infrastructure, and inland transportation infrastructure, created extremely challenging
conditions for residents, while the small business sector was badly damaged as inventories
were destroyed and the economy suffered an abrupt negative shock.
After a very difficult period in the immediate aftermath of the storms, the economy gradually
recovered, and efforts turned to rebuilding. Aided by a large-scale federal response, the hard
work assessing the damage to critical infrastructure occurred through the fall of 2017 and into
2018.
In the summer of 2019, the residents of Puerto Rico reacted with outrage to publicly released
comments by the governor and other senior officials. The actions resulted in a crisis of
confidence in government institutions, and large-scale public protests. The Oversight Board
watched the protests with admiration for the fortitude of the people of Puerto Rico and with
sadness for the crisis that made the protests necessary. For far too long government in Puerto
Rico has failed to treat the Island's residents with the respect that they deserve. Governor
Rossell6 and other senior officials ultimately resigned, resulting in Governor Wzquez taking
office. Just as the Island was recovering from political disruption and embarking on
reconstruction at the end of 2019, Puerto Rico suffered the most serious earthquakes in recent
memory, resulting in structural damage to buildings across southwestern Puerto Rico.
Residents of these communities were subjected to hundreds of aftershocks over several
months, some approaching the strength of the first earthquakes. Communities faced concerns
over public safety as infrastructure was affected, businesses suffered further disruption, and
the Government saw damage to schools, prisons and other crucial infrastructure. The full
extent of the damage is still unknown, and rebuilding efforts in some places have not yet
begun.
Finally, only two months later, Puerto Rico - along with the rest of the world - was confronted
with the COVID-19 global pandemic. Overnight, the economy shut down except for the most
critical activities as the Government took prudent steps to mitigate the risk of a catastrophic
public health crisis. Unemployment has skyrocketed as many businesses have been forced to
shut down, and the local and federal governments have quickly mobilized to provide support.
Many projections indicate that the economic shock due to COVID-19 will be worse than that
of the Great Recession. The pathway to economic recovery remains highly dependent on the
overall public health response and the federal government's ability to provide economic
support for those whose livelihoods are at risk.
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For nearly four years, the Financial Oversight and Management Board for Puerto Rico
("FOMB" or the "Oversight Board") has worked to fulfill the mandate of PROMESA: to ensure
fiscal sustainability and restore access to capital markets. In the first instance, due to the
unending series of unpredictable disasters, the effort has focused on utilizing certified Fiscal
Plans and Budgets to ensure Puerto Rico is able to respond to these crises while also moving
toward medium and long term fiscal and economic sustainability.
Fiscal Plans have pressed for major structural reforms to restore competitiveness, enable
growth, and spur a return to prosperity. These include human capital, welfare, and education
reforms to advance successful participation in the formal labor market, reforms to streamline
core business processes (e.g., paying taxes, registering property and obtaining permits) to
improve the ease of doing business and enable job creation, and proposals to enable reliable
power and stable infrastructure for businesses and households. In addition to these structural
reforms, the Fiscal Plans have focused on improving the responsiveness and efficiency of the
Government, while reducing unnecessary administrative expenses and mitigating the
escalating growth of healthcare and pension costs, which could otherwise cripple future
governments.
The Fiscal Plans have accompanied these reforms with targeted investments in and support
for those on the front lines of service delivery. Over the years, the Fiscal Plans have provided
for salary raises for teachers, principals, firefighters, and police officers to ensure salaries for
these critical frontline roles are more competitive. Strategic capital investments have been
made in hospitals, correctional institutions, public safety equipment, and other infrastructure.
Moreover, the Fiscal Plans have included increased spending in areas that are important for
the people of Puerto Rico: funds for an Earned Income Tax Credit to encourage more formal
labor market participation, needs-based scholarships for UPR to ensure every student on the
Island can access higher education, funds for the Puerto Rico Clean Water and Drinking Water
State Revolving Fund, and an emergency reserve to enable immediate Government action in
times of crisis, among others.
At the onset of the COVID-ig crisis, the Oversight Board mobilized in close partnership with
the Government to deliver immediate support and relief. This included providing a $787
million package of measures to support front-line workers and small businesses. The
Government also took executive actions that the Oversight Board supported to provide
temporary relief on tax payment deadlines. Finally, the Oversight Board approved actions to
provide a $400 million advance on federal funding for economic impact payments
administered by Hacienda, as well as a liquidity facility of up to $185 million for municipalities
suffering from revenue collection deferrals.
Since certifying the first Fiscal Plan in 2017, and notwithstanding the emergencies, the
Oversight Board has been able to drive meaningful progress in creating a leaner, more
affordable government. This has resulted in the ability of the Government to increase
expenditures at a time of crisis, while ensuring total expenditure levels remain within total
available revenues, rather than be forced to cut budgets that have not been carefully managed,
as other states have been forced to do as COVID-ig has caused revenues to drop. There is a
new level of transparency and control over Government spend, including the elimination of
multi-year appropriations that permitted overspending; controls over the reapportionment of
funding between concepts of spend to eliminate the defunding of accrued liabilities; and
regular reporting on revenues and expenses. Moreover, the 2020 and 2021 budgets were built
at a granular "concept code" level (e.g., differentiating between spend on professional IT
services versus advisory services). The Oversight Board has been able to reject contracts that
could have led to overspending, such as the proposal to externalize Puerto Rican prisons, and
the Government has been held accountable to its implementation requirements via public
hearings, such as those held on education, public safety, corrections, and economic
development.
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Unfortunately, despite this real progress in the face of ongoing crises, the Government has still
failed to achieve meaningful economic growth through structural reforms or drive operational
change that would deliver greater responsiveness and efficiency of government services.
Efforts at private sector labor market reforms have stalled and the impact of human capital
and welfare reform is not expected for several years. The Government's efforts to improve the
ease of doing business have not changed the burden on businesses in any meaningful way.
Rather than achieving budget savings by improving the way services are delivered or
discontinuing duplicative or unimportant services, the Government has enacted broad-based
early retirement programs to reduce headcount, creating major gaps in capabilities and
functionality and potentially putting services at risk.
Across many areas, the Government has struggled to implement changes, with even new
investments often not driving the intended use. For example, salary raises provided for
teachers were improperly implemented, bringing new litigation costs, while police officers'
enrollment in Social Security was delayed by six months. Despite efforts by members of the
Government, the Oversight Board, and the Federal Government — which has increased
oversight over the use of federal funds, installed federal monitors in certain agencies, and
managed expectations via consent decrees — the Government has been unable to meet the
increasingly urgent need for real change.
The 2020 Fiscal Plan financial forecasts suggest that the current financial trajectory is not
sustainable in the long-term. Perhaps more importantly, the 2020 Fiscal Plan — even if
implemented in full — will not raise Puerto Rico and its residents to a level of prosperity
comparable to even the poorest states on the US mainland. There continues to be insufficient
political appetite to drive the types of structural reforms that are needed to create sustainable
economic growth and an inability to implement even reforms that have nominally been
agreed-upon.
As the US and Puerto Rico begin to recover from the current economic and health crisis, and
while there is national fiscal and monetary policy support, the Government must act with an
exceptional level of determination. With so many residents suffering from the economic
consequences of successive natural disasters, the need for change is even more urgent.
The 2020 Fiscal Plan includes dozens of practical actions that the Government must take to
create a more accountable, affordable, and transparent government, with resources focused
on improving the front-line services that matter. Given the global COVID-19 pandemic, the
2020 Fiscal Plan pauses most government right-sizing measures for a year, so that the full
focus of Government may focus on recovery and implementation. To drive efficient and
successful implementation of key reforms and outcomes, the 2020 Fiscal Plan also introduces
milestone budgeting, which will provide for investments in certain areas once key milestones
are achieved. Crucial milestones include: final establishment of the Defined Contribution
accounts for public retirees and employees; the publication of the 2017 Comprehensive
Audited Financial Report (and progress towards publication of subsequent year reports);
implementation of time and attendance reporting; and meaningful consolidation of back-
offices to create efficiencies, among others.
The 2020 Fiscal Plan also lays out discrete actions that must be taken to make structural
reforms to the economy, improving labor force participation, the ease of doing business, and
energy and infrastructure management. Finally, the 2020 Fiscal Plan includes strategic one-
time investments to speed up Puerto Rico's recovery in light of the natural disasters and
COVID-19 by allocating funds to strengthen the Island's public healthcare system, human
capital, and telecommunications infrastructure.
Absent real reform, Puerto Rico may not ever fully recover from all its recent crises. The 2020
Fiscal Plan lays out the meaningful changes needed to lead to an effective, responsive
government and growing economy.
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Prior to the enactment of PROMESA, Puerto Rico had been mired in an economic
and demographic downward spiral for a decade. As of 2018, the economy was $18
billion smaller in real terms and the population was more than half a million smaller (largely
due to outmigration) than it was in 2005 — trends that, even before recent natural disasters,
were projected to continue.1 Over 40% of the population (including —58% of Puerto Rican
children) lives below the poverty line, and —47% are dependent on Medicaid for healthcare.
Meanwhile, before PROMESA, the consolidated Commonwealth's outstanding debt and
pension liabilities had grown to over $120 billion — with more than $70 billion in financial
debt and more than $50 billion in pension liabilities — an amount almost twice the size of
Puerto Rico's economy.
These core challenges were not new and temporary; they had been long-standing and
structural. For decades, the private sector had been overly reliant on now-expired federal tax
advantages while having to operate in a difficult business climate with poor infrastructure,
cumbersome laws and regulations, and expensive and unreliable electricity and transit
systems.
Other challenges included a large public sector that had struggled to deliver improved
outcomes in critical areas such as ease of doing business and education, as well as a labor force
participation rate that was (and continues to be) among the lowest in the world. In the World
Bank's Worldwide Governance Indicators, Puerto Rico ranks far below the mainland United
States in "voice and accountability" for residents, government quality, regulatory quality, rule
of law, and control of corruption.2 In the OECD's 2015 Program for International Student
Assessment (PISA), only six countries or regions in the world scored lower than Puerto Rico
in science and reading, and only three scored lower than Puerto Rico in math.3 Likewise, of
the 233 countries or regions for which the World Bank measures labor force participation
rates, Puerto Rico is currently ranked 232. In the three decades that the World Bank has
gathered such data, Puerto Rico has never ranked higher than 212. These are structural
problems that demand structural solutions, but to date, the Oversight Board has seen neither
the willingness nor the ability, on the part of the Government, to enact structural reforms
sufficient to address these problems that hold back the standard of living of Puerto Rico's
residents.
Finally, Puerto Rico had fiscal management challenges for years, creating a growing deficit
(Exhibit /). This deficit was difficult to forecast with certainty because of the protracted delays
in issuing annual audited financial statements, lack of proper fiscal controls, lack of centralized
financial records, and inefficient financial management. Puerto Rico had also been in an
economic structural decline for over a decade, which led to an eroding tax base. To finance
these primary deficits, Puerto Rico had resorted to issuing debt which became unsustainable.
As the Oversight Board began its work in late 2016, the Commonwealth was projected to run
structural annual deficits exceeding $7 billion, or $3 billion before debt service.
1 The World Bank Group, World Development Indicators
2 The World Bank Group, Worldwide Governance Indicators
3 U.S. Department of Education, Institute of Education Sciences, National Center for Education Statistics Program for
International Student Assessment (PISA) 2015, State Results. Puerto Rico.
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EXHIBIT 1: PROJECTED PRE-FISCAL PLAN DEFICIT (BEFORE THE HURRICANES)
0
Net surplu_s/(deficl) - before contractual debt service — Net sorplusirdebcd) - after contractual debt service
-1
-2
.3
FY18-23
.
4 cumulative
deficit
$19.28
-5
43
•7
FY18 FY19 FY20 FY21 FY22 FY23
In light of the debt crisis and unsustainable path of the Government's finances,
when the Oversight Board was appointed in 2o16, it set out to find long-term
solutions, certifying Fiscal Plans that have established the following priorities:
■ Creating a leaner, more affordable government. The Oversight Board has outlined
necessary operational changes to streamline the Government and enable the reduction of
unnecessary administrative expenses. Such reforms include improving management of the
public education system, pursuing civilianization to enable more sworn police officers to
move into the field, consolidating agencies to enable coordination and back-office
efficiencies, reducing the correctional system footprint to enhance staffing practices,
privatizing WIPR, incorporating best practices in digitization, and improving Elections
Commission operations. As such, the Oversight Board has identified how to remove
barriers to efficient and effective government service delivery.
■ Identifying specific actions needed to reform the structure of the economy
and create the conditions for growth in Puerto Rico. The Oversight Board has
provided a comprehensive plan for as well as targeted investments to drive economic
growth by improving participation in the formal labor market; spurring job creation;
transforming the education system; improving access to reliable infrastructure and
energy; and supporting the people of Puerto Rico through workforce development
programs.
■ Increasing transparency of and controls over Government finances. By
instituting budgets designed at the cost concept level, regular reporting on cash and actual
expenditures, formal processes for reapportionments and allocation of capital
expenditures, and reviews of major contracts to ensure fiscal plan compliance, the
Oversight Board has given stakeholders a common fact base around the Government's
fiscal situation and reduced superfluous and non-transparent spending.
■ Directing resources to front line service delivery. The Oversight Board has
enhanced the impact of Government spending through priority investments in areas of
12
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demonstrated need such as public safety, health care, and education, and to enable
response to natural disasters.
■ Maximizing the impact of federal investments in Puerto Rico. The Oversight
Board has placed particular emphasis on aligning federal funds towards investments that
will accelerate progress as much as possible against the key reform areas, such as
infrastructure, COVID-19 response, health system improvements, educational outcomes,
and economic growth.
While Fiscal Plans have been able to outline potential major improvements, progress within
the Government has been slow overall. Government agencies have reduced expenditures, but
typically not in the fashion that the Oversight Board required in its Fiscal Plans. Instead of
rethinking business processes and ways of working, agencies have almost exclusively relied on
attrition and early retirement programs broadly applied to reduce expenses in ways that may
cause longer-term risks to the Government's ability to deliver services. Progress has also been
limited across other key reforms. Some examples include:
■ Actions to consolidate government agencies and to allocate resources away from
back office to front line activities have been severely slowed or abandoned
altogether.
■ There continue to be issues with financial transparency and accountability given
delays in system integration (e.g., ERP and accounting systems are still disconnected),
issuance of consolidated audited financial statements, and establishment of a robust ()CFO
function to ensure a coordinated Government fiscal management effort across budgeting,
implementation, personnel, and procurement.
■ Efforts to improve ease of doing business in Puerto Rico have not resulted in meaningful
change, and Puerto Rico's Ease of Doing Business rankings continue to decline
as other jurisdictions have improved, contributing to low levels of new investment.
■ Labor force participation has not increased given the Government's refusal to
pursue comprehensive private sector labor market reform, coupled with a major delay in
institution of the NAP work/volunteer requirement and limited public communication
efforts to raise awareness of the new Earned Income Tax benefit.
■ While the Government has completed the transition to a single region managed care model
for Medicaid, it has stalled in pursuing value-based health system reforms and
Medicaid fraud, waste, and abuse reform initiatives.
■ Investments that Fiscal Plans have funded for the addition of staff or improvements
in compensation (e.g., police civilian admin staff, Forensics technicians/specialists, police
insurance and Social Security) have not been spent as intended and are often
delayed, diluting their intended effect.
In order to overcome the challenges facing the Island and to put Puerto Rico on a sustainable
trajectory, it is important for the Government to commit to urgent reform.
Puerto Rico can overcome this current public health and economic crisis. It will
be a difficult road ahead over the coming months and years, but the people of Puerto Rico have
proven their resiliency. It is with that in mind that the 2020 Fiscal Plan lays out a blueprint
for actions that the Government must take to responsibly prepare for the future,
notwithstanding uncertainties or further difficulties.
Puerto Rico must urgently adopt a series of bold actions to improve its fiscal and
economic trajectory. Long-term trends have only been exacerbated by the impact of
COVID-19 and damage from the hurricanes and earthquakes that have ravaged the Island, and
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the economic future of the Island is more uncertain than ever. Now more than ever reforms
and government efficiency measures are essential to counter negative growth, create the best
possible conditions for the people and businesses of Puerto Rico, and to make the Government
of Puerto Rico more efficient, effective, and responsive to its residents.
The 2020 Fiscal Plan reflects the fact that the Government has not taken sufficient action to
transform government service delivery. As such, it provides a one-year pause in most
categories of government rightsizing to allow the Government to focus on
implementation of efficiency reforms. Rather than further delay progress, the purpose
of this pause is to ensure every possibility of successful, focused implementation. The Fiscal
Plan includes detailed actions, timelines, and milestones that will require urgent action over
several years by the Government to make progress.
Government efficiency and other fiscal measures
The 2020 Fiscal Plan proposes a set of Government efficiency measures that the Government
must take ("measures") to increase government revenues and make government more
responsive:
■ Agency efficiencies: Consolidating agencies to leverage valuable human and financial
resources, centralizing procurement to achieve greater purchasing power and
transparency, transforming processes, and deploying new management tools and practices
to deliver better governmental services for substantially lower cost
■ Creation of Office of the CFO: Instituting fiscal controls and accountability,
centralizing fiscal authority, and improving governance, accountability, and transparency
over budgets, reform implementation, procurement, and personnel
■ Medicaid reform: Taking the necessary steps to curb fraud, waste, and abuse in the
healthcare system, ensuring that resources are directed to those in need of health services,
and improving health outcomes on the Island
■ Enhanced tax compliance and optimized taxes and fees: Employing new
technology and other innovative and commonly-used practices in other jurisdictions to
broaden the tax base, reduce fraud, and improve fairness to boost overall tax revenues, and
adjusting existing taxes and fees to capture revenues from under-leveraged sources
■ Reduction of appropriations: Encouraging sound fiscal self-management and
revenue generation among municipalities and the University of Puerto Rico by reducing
central Government appropriations, while meeting the needs of students facing financial
challenges with the creation of an independently-managed, means-tested scholarship fund
■ Comprehensive pension reform: Improving the financial stability of public
employees through reforms that maintain enough funds to comply with the payment of
pensions and provide the administration necessary to create a defined contribution plan
for employees
The impact of these measures on revenues and expenditures is demonstrated in Exhibit 2.
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EXHIBIT 2: IMPACT OF REVENUE AND EXPENDITURE MEASURES ON OWN
REVENUES AND EXPENDITURES
Impact or measures on Government revenues and expenditures, st!
Pre-measures and structural Weans — Postmwasures and structural reforms • Fiscal Measures shi
4C182
17,000
16,000
Own
revenues+ N
15900
••• mmm,
•■•• ....
.
0
49,2p 4i26,fi 1,1.32
15,000
Own 15,000
expen-
ditures2 14900
13,000
0 4
*•=4,1t•Watel..474,44.1Cunimu, yeeaku-csk0e4rfv2-tiem easaeceec rysz te-ttS X*Z.Z0.14CH Fits 4.1 erTAKVISI Tl.JL"at CC.. 4-1.
=Mum
Nireretes-Actersekrert -ss0 :atraeotwoneltP sicpweemers estate/2 :I,IL n4:44 tcriven c44/kee ..ae s-rn imemel pfY¢Jma c-srt,--4.1,01 martrms 00~ rir:saftt Gt
le•edued -;muiteetr00 Tunelet ei meet we
:eeenieue 04 et treeaumessurel efIrcuittle to the 4:4:ClEete.KM111. r %the.. teorssrtdre es &Limos, mamma and ne • re.s.r.trom
Investment in COVID-19 response and other core priority investments
To ensure successful delivery of the above efficiency measures and to allocate resources to the
areas of highest need, the, the 2020 Fiscal Plan also includes substantial investments.
Categories of investment include:
• Immediate support for COVID-19 response: Recognizing the imperative for the
public health system to focus its efforts on slowing the spread of COVID-19 and healing
those affected, as part of the Emergency Measures Support Package certified on March 28,
2o20, the Oversight Board approved $787 million in additional expenditures solely
focused on COVID-ig response. These funds are intended to provide "hazard pay" for
frontline workers (including public and private nurses and technicians, police, certain
correctional staff, and professionals managing taxes and financial operations), medical
and public safety supplies and capital expenditures, distance learning in the public
education system, and $100 million in support for municipalities facing reductions in
revenue due to the pandemic.
• Investing in critical healthcare infrastructure: The Oversight Board proposed the
Government to use remaining FY2o2o funds to invest in near-term improvements to the
Island's healthcare infrastructure. These opportunities, which have previously been
recommended by the Oversight Board but have not yet received Government agreement,
represent $313 million of investment in areas that include addressing critical
infrastructure gaps in public hospitals (e.g., the renovation of functionally-obsolete
facilities, purchase of power generators), instituting and expanding the use of Electronic.
Health Record programs, expanding access to care through development of telehealth
infrastructure, enhancing access to opioid medication and treatment programs, and
providing scholarships to healthcare students who are committed to working in
underserved areas of Puerto Rico.
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■ Enhancing healthcare services: The 2020 Fiscal Plan builds on the strategic
healthcare investments from prior Fiscal Plans to stabilize and improve the healthcare
system. It directs $586 million to improve the availability and quality of care under the
Medicaid system, maintain nurse and health professional staffing levels, increase hospital
capacity through major capital projects, operationalize the Comprehensive Cancer Center,
and enable operational efficiencies.
■ Safeguarding public safety: The 2020 Fiscal Plan adds to prior investments, enabling
almost $1.3 billion in public safety funding. This includes continuing significant
investments made in the May 2019 Fiscal Plan to provide sworn police officers with more
competitive salaries and benefits (including, life and disability insurance, Social Security
coverage), as well as the final of three installments to cover back pay for police, which
represents —$122 million in FY2021. These investments are meant to ensure that more
sworn officers can remain on Island and serve in the field. Given the emergencies that
Puerto Rico has recently experienced, the Oversight Board also believes it is ever more
important to ensure that there are enough emergency response personnel available to help
residents. The 2020 Fiscal Plan provides funds to recruit paramedics and dispatchers, hire
additional specialists at the Forensic Sciences Institute, support salary increases for
firefighters, and provide public safety equipment, materials, and vehicles.
■ Driving education outcomes: The Oversight Board has long recognized that
significant and thoughtful investment in the educational system is key to a stronger
economic future for Puerto Rico. The 2020 Fiscal Plan includes over $760 million for
strengthening English Language Learning training for teachers, bringing psychologists on
staff to provide evidence-based therapies for Special Education students, hiring additional
public-school nurses, driving digitization to improve management and reporting, and
compensating transitory teachers and directors, who PRDE mistakenly excluded from the
FY2019 and FY2020 salary raises previously funded by the Oversight Board.
■ Strengthening the technology sector: Addressing the digital divide is critical to
ensuring that all residents of Puerto Rico can take advantage of the well-documented
socioeconomic benefits afforded by Internet connections (e.g., telehealth, distance
learning, remote work). Important infrastructure gaps remain, particularly across rural
areas of the Island. The 2020 Fiscal Plan includes $400 million to expand access to
broadband for the residents of Puerto Rico, thereby improving economic opportunities for
those in rural areas. The 2020 Fiscal Plan also recognizes that technology skills are critical
for the future of the workforce; it thus includes $50 million in funding to invest in
workforce development, specifically focused on business- and technology-related
disciplines.
■ Reactivating the manufacturing sector: The COVID-19 pandemic has made it
apparent that most raw materials and medical products necessary to ensure national
security are manufactured in China, India, and other countries outside the US This
represents a unique opportunity for Puerto Rico as a capable and reliable venue for
manufacturing under the US flag. As part of implementation of the 2020 Fiscal Plan, the
Oversight Board will conduct a comprehensive study to update the facts and acquire the
knowledge necessary for the private sector and the Government to define a comprehensive
and actionable plan to reactivate the manufacturing sector in Puerto Rico.
■ University of Puerto Rico: The 2020 Fiscal Plan provides $43 million in FY2021 for
the UPR scholarship fund and a total of $179 million over FY2o2o-FY2025 to meet the
needs of the most financially vulnerable students. The 2020 Fiscal Plan also provides $30
million for an independently-managed scholarship fund for healthcare (e.g., medical,
dental, nursing) students and residents who commit to serving in rural and underserved
areas.
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■ Supporting the needs of municipalities: In addition to the $100 million in support
post-COVID-19, the Fiscal Plan includes several investments to support municipalities.
These include: $185 million available through July 31, 2020, for a short-term liquidity
facility to ensure that monthly property tax remittances can continue to be advanced to
municipalities (given major delays in tax payments), thereby supporting the viability of
municipal operations,4 $110 million ($22 million per year through FY2025) as an incentive
for voluntary service consolidation, and up to $92 million to fund demolition and debris
removal projects for municipalities in the southwest region of the Island.
■ Transforming government services: The 2020 Fiscal Plan includes $94 million to
support hiring of additional staff in core programs (e.g., NAP, GSA procurement initiative)
as well as incentives to drive change in government, including to publish the 2017 CAFR,
conduct an analysis of the correctional system footprint to enable consolidation,
implement a common ERP system, and publish private sector incentives.
■ Expediting reconstruction efforts: The 2020 Fiscal Plan provides for $750 million in
working capital to be made available to facilitate FEMA-approved reconstruction efforts.
These funds will accelerate rebuilding efforts by providing the necessary capital upfront,
with repayment via reimbursement from the Federal Government.5
The goal of these investments is to ensure at agencies can continue to provide the services
residents depend on while implementing the necessary efficiencies needed to maintain
sustainable operations on Island.
Structural reforms
Since 2017, the Oversight Board has worked with the Government to implement numerous
structural reforms, but there has been little meaningful progress in most areas. The structural
reforms remaining in the 2020 Fiscal Plan are those where there has been alignment with the
Government on the need to pursue change. That being said, as a result of natural disasters and
poor implementation, meaningful progress on most reforms has been delayed. As such, the
2020 Fiscal Plan provides an updated forecast reflecting such delays but also outlining the
potential positive impact looking forward (Exhibit 3).
The 2020 Fiscal Plan outlines the following structural reforms:
■ Human capital and welfare reform: Promoting participation in the formal labor
force by creating incentives to work through Earned Income Tax Credit (EITC) benefits
and Nutritional Assistance Program (NAP) reform, as well as providing comprehensive
workforce development opportunities. EITC and NAP reform are projected to increase the
economic growth rate by 0.15% in FY2026.
■ K-12 education reform: Transforming the K-12 education system to dramatically
improve student outcomes and contribute to an effective workforce in the long-term.
Education reforms are projected to add 0.13% to the GNP growth rate between FY2037-
2049.
■ Ease of doing business reform: Improving the competitiveness and attractiveness of
Puerto Rico's economy by reducing the obstacles to starting and sustaining a business
through improvements to the processes to obtain permits, register property, and pay taxes;
and by establishing best-in-class entities to attract investment and increase tourism. These
reforms are projected to drive a 0.30% uptick in overall growth by FY2025.
4 The liquidity facility is considered a use of the Commonwealth balance sheet, not a Fiscal Plan expense.
5 The working capital facility is considered a use of the Commonwealth balance sheet, not a Fiscal Plan expense.
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• Power sector reform: Providing lower cost and more reliable energy through the
transformation of PREPA, the establishment of an independent, expert, and well-funded
energy regulator, and the development of cleaner and lower cost power generation. This
reform is projected to increase growth by 0.3096 by FY2o24.
• Infrastructure reform: Integrating all transit assets under PRITA, so it can act as a
unitary transit authority managing all transit assets on the Island (e.g., all buses, ferries,
Tren Urbana), and reforming the public transportation sector more broadly.
EXHIBIT 3: IMPACT OF STRUCTURAL REFORMS
Impact of structural reforms',
April 2018 Fiscal Plan / 2019 Fiscal Plan El 2020 Fiscal Plan
2,650
34227
&ST
564
506
584
34
252
778 172 242
44 .1. 75
o o •
FY Ze F121 FY 22 FY27 FY24 FY25 FY20-25 FY20-49
The 2020 Fiscal Plan includes detailed activities, timelines, and milestones required to achieve
this impact.
Implementing these structural reforms and fiscal measures fully on a timely
basis will enable the Island to move closer to a reality in which it has low-cost and reliable
energy, robust infrastructure, more incentives to enter the formal labor market, an improved
regulatory and permitting environment, and a more effective and efficient public sector. That
said, these reforms are insufficient to put the Island on a path to growth, nor do they allow
Puerto Rico to avoid future deficits, which begin in FY2032 (see Exhibit 4). Thus, in the near
future, the Government will be required to take additional measures, such as improving labor
market flexibility through repealing restrictive laws and pursuing meaningful tax reform to
broaden the base of collection and lower rates. These incremental structural reforms go
beyond the five-year framework of this 2020 Fiscal Plan and are required to be able to have
balanced budgets moving forward. Many of these reforms — which would reduce deficits and
therefore make funds available for a variety of potential uses, most importantly to invest in the
people of Puerto Rico — have been proposed by the Oversight Board, but the Oversight Board
cannot implement them without the support of Puerto Rico's elected Government.
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EXHIBIT 4: 2020 FISCAL PLAN PROJECTED SURPLUS BEFORE AND AFTER
MEASURES AND STRUCTURAL REFORMS
Gap surplus before and after measures and structural reforms
alb Post-measures and structural reforms real GNP growth rate 2020 fiscal plan gap/surplus pre-measuresistruciural reforms'
Contractual debt servicel 2020 fiscal plan gap/surplus post-measures
— — 2020 fiscal plan gap/surplus post-measures/structural reforms'
411) 4126 43;) el* CD CP CD 411, CD
000
2.000
2 000
1 GOO
0
-1,000
-2.000
-3 000 I
-4 000 •
-5 COO
-6 000 •
.7000
:; r1r24 f -•• ',24 FY 20 FY FYA9
15 years 10 years
In conclusion, the Government of Puerto Rico cannot afford to meet its current
contractual debt obligations, even with aggressive implementation of the
included reforms and measures. The cumulative effect of multiple unprecedented
natural disasters, on top of a decade-long secular recession, have left Puerto Rico with
substantially diminished resources and capacity. Even with implementation of far-reaching,
growth-inducing structural reforms, the 2020 Fiscal Plan projects that the Government
cannot afford to meet its current contractual obligations. Recognizing the importance of the
ongoing Title III proceedings, but taking into account these realities, the Oversight Board has
paused discussion and prosecution of the Plan of Adjustment and the corresponding
Disclosure Statement filed on February 28, 2020. The Oversight Board recognizes that the
development of the February 2020 Plan of Adjustment proposed a sustainable debt burden
for the Commonwealth, while garnering the support of General Obligation and PBA
bondholders holding in excess of fifty-nine percent (59%) of such indebtedness, or
approximately $10 billion. This was an important milestone and achieved through the
assistance of the Title III Court's mediation team promoting dialogue among the Oversight
Board and the Plan Support Agreement Creditors, all acting in good faith to achieve a
consensual resolution of the Commonwealth's legacy debts. Clearly, the onset of the COVID-
19 pandemic has raised the specter of both near-term and long-term material, adverse impacts
from the virus upon the people of Puerto Rico and its economy. While the severity and the
duration (including the possibility of recurrence) of the pandemic, as well as the full extent of
federal support, are unknown, the Oversight Board's current pause on the implementation of
the filed Plan of Adjustment has been, and remains, appropriate and necessary. The 2020
Fiscal Plan lays out a prudent and integrated set of actions to restore fiscal balance in the short
term and outlines opportunities for more ambitious additional reforms to create the
conditions for long-term fiscal balance.
1g
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PART I: Context for Puerto Rico's current
economic and fiscal challenges
Chapter 1. Long-term economic trends in Puerto Rico
Even before suffering a series of natural disasters in the form of hurricanes, earthquakes, and
the COVID-19 pandemic from 2017-2020, Puerto Rico's economy had been in an acute
structural decline for over a decade. The Government had defaulted on much of its debt, and
nearly half of Puerto Ricans lived below the national poverty line. The reasons for these
problems are multiple, but the root causes stretch back 40 years.
In the 1940s and 19505, led by Operation Bootstrap, Puerto Rico's economy grew rapidly and
productivity increased by 5% per annum as it transitioned from an agricultural-led to a
manufacturing-led economy. However, as economic performance began to decline in the
19705, the federal government adopted two significant policies to help Puerto Rico shore up
its economy.
First, transfer programs increased dramatically, particularly as Puerto Rico started receiving
Nutritional Assistance Program (NAP) funding, eventually providing, in aggregate, a
proportion of residents' personal income that was twice the US mainland average. In addition
to raising costs for the Government, these programs, at times, created disincentives to work
due to benefits that were high relative to wages available in the formal labor market.
Second, in 1976, Section 936 of the federal tax code was introduced to promote investments
by companies that could transfer their "intangible assets" to Puerto Rico, and thereby shift
profits to the Island. These Section 936 companies, which were mostly in pharmaceuticals and
life sciences, became a pillar of Puerto Rico's economy, creating valuable local supply chains
and local banking deposits, and contributing substantial tax revenue. In the same year, Puerto
Rico passed Law 80, which instituted protections against wrongful discharge for Puerto Rican
workers and mandated severance for firms attempting to remove employees. This law made
Puerto Rico's labor market significantly more rigid and placed it out of step with the prevailing
labor markets in the US
In 1996, Congress decided to end Section 936, gradually phasing it out by 2006. In the face of
an anemic local private sector, the Government also expanded its employment to the point
that, by 2000, 30% of Puerto Rico's jobs were in Government and a full 40% of workers with
college degrees worked in the public sector. Major sectors such as water, electricity, and ports
are still run by public corporations, and have consistently created a drain on the economy by
delivering lower quality services at high costs while crowding out private investment. There
was also pervasive cross-subsidization among the Commonwealth, public corporations, and
other parts of the public sector that obfuscates financial management and accountability.
Finally, there was a high degree of political interference in decisions that affect every aspect of
Puerto Rican life. As a result, Puerto Rico underperformed on all important measures of a
modern economy, including educational attainment, cost of electricity, quality of water, tax
compliance, and labor market participation.
To promote the private sector, the Government undertook a broad tax incentives policy that
led to a highly complex web of non-transparent subsidies and special tax arrangements. These
actions neither promoted growth nor treated companies equitably, often discriminating
against Puerto Rican companies in favor of multinational companies. Moreover, this system
created no inducement for new investment without similar tax incentives, further eroding the
potential tax base. In addition, generous Government and federal transfer programs, taken
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together, produced disincentives to formal work, given the potential loss of housing and/or
healthcare, while increasing the share of the informal economy. Tax compliance has never
been adequate in Puerto Rico, and it became increasingly difficult in this environment.
Government revenues suffered and became increasingly hard to forecast. Taken together with
unmanageable and unconnected systems of accounting across Government entities, as well as
delayed financial audits, fiscal discipline eroded. To make up for this recurring and growing
budgetary shortfall, the Commonwealth turned to debt markets. Puerto Rico bonds found
themselves in every corner of the US bond market and, as investor appetite began to wane, the
Government turned to securing new debt by conditionally pledging various revenue streams.
The result was a highly complex financial structure that limited transparency as well as
financial accountability and management.
When the Great Recession hit in 2008, Puerto Rico's economy was already in a fragile fiscal
and financial position. Since then, the economy has continued to worsen. Puerto Rico has seen
its GNP shrink by 20%, labor force participation fall to a record low of 39%, and population
decline by 15%.6 Puerto Rico is much poorer relative to the mainland US today than it was in
1970.
Chapter 2. Enactment of PROMESA
By 2016, Puerto Rico had accumulated over $50 billion in unfunded pension liabilities and
over $70 billion of debt and was facing an imminent default. Because Puerto Rico and its
public corporations cannot take advantage of Chapter 9 of the US Bankruptcy Code, and an
attempt to create a territorial bankruptcy law was struck down by the US Supreme Court,
Congress stepped in to head off Puerto Rico's financial and debt crisis by passing the Puerto
Rico Oversight, Management, and Economic Stability Act (PROMESA). PROMESA imposed
an automatic stay on Puerto Rico's debt obligations and created the Financial Oversight and
Management Board for Puerto Rico (the "FOMB" or "Oversight Board"). The Oversight Board
is tasked with restructuring Puerto Rico's staggering debt burden and restoring sustained
economic growth to Puerto Rico so that the Government can achieve fiscal balance and regain
access to the capital markets.
Immediately after its formation, the Oversight Board began working with the Government of
Puerto Rico to create a Fiscal Plan that would help the Government achieve fiscal
responsibility and regain access to the capital markets. The initial outcome of this work was
the Commonwealth Fiscal Plan that the Oversight Board certified on March 13, 2017 (the
"March 2017 Fiscal Plan"). A few months later, the Oversight Board filed for Title III protection
for the Commonwealth Government, COFINA, HTA, ERS, and PREPA. Then, in September
2017, Hurricanes Irma and Maria struck the Island, causing great devastation and
fundamentally altering the Island's macroeconomic reality, and ultimately requiring a new
Fiscal Plan.
6 GNP and population decline represent the change between 2008 and 2018 per data from the World Bank Group's World
Development Indicators
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Chapter 3. Fiscal plan updates due to natural disasters
and emergencies
Over the last three years, the people of Puerto Rico have endured a series of natural disasters
and emergencies without precedent in modern history.
On September 6, 2017 and September 20, 2017, respectively, Hurricanes Irma and Maria
struck Puerto Rico, causing unprecedented humanitarian, economic, and infrastructure-
related damages and upending the daily lives of Puerto Rico's over three million residents.
Thousands of residents were left homeless, basic utilities were completely shut down, and
schools, hospitals, and businesses were destroyed. Tens of thousands of Puerto Ricans fled the
Island. The federal government's response has become one of the largest and most complex
disaster recovery efforts in US history.
The damage inflicted on Puerto Rico by the Hurricanes required the March 2017 Fiscal Plan
to be revised. Therefore, on October 31, 2017, the Oversight Board formally requested that the
Government submit a revised Fiscal Plan for the Commonwealth and its instrumentalities
based on the new post-hurricane realities. After months of hard work, engagement with
stakeholders, and intense negotiations with the Government, the Oversight Board developed
and certified the April 2018 Fiscal Plan to reflect the post-hurricane environment. This Fiscal
Plan also provided for the implementation of incremental structural reforms, in particular
focusing on improving the competitiveness of the local labor market.
As a result of Government and Oversight Board discussions concerning the necessary
legislative actions to deregulate and make the private sector labor market more competitive,
the Oversight Board certified an updated Fiscal Plan in May 2018. This Fiscal Plan provided
for a series of investments that would be contingent upon the successful implementation of
key labor market reforms. Unfortunately, the lack of political will to pass this much needed
private sector labor reform required the Oversight Board to update and certify another Fiscal
Plan in June 2018 to reflect the removal of this element of structural reform from the plan and
the growth forecasts. The October 2018 Fiscal Plan was subsequently certified to reflect actual
revenue and expenditure numbers, refined healthcare projections based on actuarial
estimates, new federal funding estimates, and changes in the Government's economic growth
policy objectives.
The budgetary process under PROMESA requires the annually-certified budget to be
consistent with the certified Fiscal Plan. In light of the many variables in the forecasts, the
Oversight Board has chosen to annually update and certify a Fiscal Plan for accuracy and to
serve as the most updated information for the purposes of certifying an annual budget. As a
result, prior to the adoption of the FY2020 Certified Budget, the Oversight Board certified the
2019 Fiscal Plan, which incorporated updates for new information and data from a wide
variety of sources. It revised the macroeconomic and population forecast in light of slower
disaster recovery funding rollout, faster unwinding of the associated stimulus, and more
recent federal and Puerto Rico economic statistics. It also updated the forecasted economic
impact of structural reforms to reflect slower than expected implementation. Finally, it re-
balanced spending across agencies to enable investments in police and public safety,
healthcare, and education.
On December 28, 2019, the first of many earthquakes shook Puerto Rico, registering at a
magnitude of 4.7 on the Richter scale. On January 6, 2020, Puerto Rico experienced a 5.8
magnitude earthquake. The next day, Puerto Rico experienced a magnitude 6.4 earthquake,
the most destructive earthquake in a century. On that same day, January 7, 2020, the
Oversight Board approved the Government's request to access funding from the Emergency
Reserve funds for FY2019 and FY2020 ($260 million in total) in order to bolster the response
to the earthquakes. On May 2, 2020, an earthquake with a 5.4 magnitude struck Puerto Rico's
southwestern coast. The seismic event, which briefly knocked out power in some areas, hit
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near the city of Ponce. This earthquake represented one of 1,00o overall earthquakes of
magnitude 3 or greater in 2020, with six being over magnitude 5.5. Hundreds of structures,
including homes, local government institutions, small businesses, and houses of worship, have
been damaged or destroyed by these devastating shocks. According to a January 29, 2020
report, published by the United States Geological Survey (USGS), there is a high likelihood of
continued, material aftershocks! While there will be fewer over time, Puerto Rico continues
to be at risk of potentially catastrophic earthquakes.
On top of the Hurricanes and earthquakes, Puerto Rico, like the rest of the world, was
confronted, seemingly overnight, with the global COVID-19 pandemic in early 2020, which
has required immediate and urgent action.
On March 3, 2020, the Oversight Board made available emergency reserve funds for use in
preparedness and response activities related to COVID-19. In so doing, the Oversight Board
sought to support the Government's efforts to move quickly and limit the risk to the people of
Puerto Rico to the maximum extent possible. On March 15, 2020, Governor Vazquez signed
Executive Order 2020-023. This Executive Order directed the "closure of all businesses in
Puerto Rico as of March 15 at 6:00 p.m." for two weeks, putting Puerto Rico into lockdown
earlier than any US state. The Executive Order also imposed a curfew from 9:00 p.m. through
5:00 a.m. during which time all residents of Puerto Rico were to remain in their residences.
However, only businesses related to the distribution of food, medical supplies and equipment,
gas, financial and banking institutions, and elderly care centers were excluded and remained
open. In addition, the Government closed San Juan Bay to cruise ship vessels effective as of
March 17, 2020. On March 3o, 2020, Governor Vazquez announced that, based on
recommendations from the Government's Health Taskforce and the continuing state of
emergency, the closure of businesses and curfew established in the Executive Order was
extended until April 12, 2020.
The effects of public health crisis have been far reaching and devastating — both as a
humanitarian crisis and economically. To provide additional support to the Island in
responding to the COVID-19 pandemic, the Oversight Board, on April 2, 2020, certified the
FY2o20 Emergency Measures Support Package budget. This $787 million budgetary
allocation was designed to give the Government the resources needed to be able to respond to
the significant difficulties arising from the Emergency Measures instituted to contain and
mitigate COVID-19. More specifically, it provided direct financial support payments to self-
employed individuals and small businesses, bonuses for frontline workers, funding for medical
supplies, support to municipalities, and resources for PRDE to purchase equipment to
facilitate distance learning.
Governor Vazquez has issued an additional fifteen executive orders in response to COVID-19
to address, among other things, the homeless, school and private sector closures, acquisition
of goods and services, use of the National Guard, prompt diagnosis of COVID-19, special leave
for public employees affected by COVID-19, the creation of a medical task force to advise
Governor Vazquez, and the state of emergency due to the pandemic. Taken together, these
measures aim to protect the physical, mental, and economic health of the people of Puerto
Rico, while preserving the social fabric of the Island's diverse communities.
Executive Order 2020-033, enacted on April 12, 2020, included an extension of the shelter-
in-place directive up to May 3, 2020. It also included a curfew from 9:oo PM to 5:oo AM and
authorization to operate a limited number of businesses deemed as essential. On April 14,
2020, Governor Vazquez announced she was amending the curfew established pursuant to EO
2020-33 to be in force from 7:oo PM to 5:oo AM. EO 2020-033 also allowed somewhat more
flexibility than previous orders, particularly by trying to promote working from home and
7 US Geological Survey, 2020 Southwest Puerto Rico Earthquake Sequence (January 29, 2020)
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slightly expanding the list of essential businesses. Since the original March direction, Governor
Vazquez has issued several extensions to Puerto Rico's shelter-in-place policy.
On May 1, 2020, the Governor issued Executive Order 2020-038, which extended Puerto
Rico's shelter-in-place period until May 25, 2020 but also lifted certain business restrictions
to allow limited openings of certain industries, shops, and services at specific times while
continuing to observe social distancing rules. This initial reopening is limited to primary and
specialist doctors and dentists, animal shelters, vehicle repair and parts services, laundromats,
elevator inspections, removals, services to ports and airports, air conditioner repair and
maintenance services, notary services, and critical infrastructure services, among others. As
the Government observes the results of this limited reopening, the Government will re-
evaluate and further amend business restrictions as necessary to promote economic recovery
while preserving health and safety.
On May 21, 2020, Governor Vazquez issued an executive order that further allowed certain
business operations, sports activities and worship services to gradually restart Tuesday, May
26. Social distancing measures apply, and the Island's 7:oo PM to 5:oo AM curfew will remain
in effect until June 15.
In order to enhance coordination with the private sector, the Health and Economics task forces
were constituted. The Health Taskforce is led by Dr. Segundo Rodriguez, head of the
University of Puerto Rico Medical Sciences Campus. The Economics Taskforce, which uses
FEMA's Business Emergency Operations Center framework, was implemented in Puerto Rico
in the aftermath of Hurricane Maria. With this previous emergency management experience,
the Economics Taskforce was able to start executing quickly and is led by Eng. Emilio Colon,
former president of the P.R. Homebuilders Association. These decisive and aggressive
measures have helped the Island control the infection rate of COVID-19.
It is with this unprecedented change to the economic and public health climate that the 2020
Fiscal Plan has been certified. As with prior Fiscal Plans, it includes updates for new
information about government revenues, expenditures, and reform efforts that have come to
light in the past year. It also includes an analysis of the implications of recent earthquakes,
and the current global COVID-ig pandemic. In light of the unprecedented uncertainty of the
current environment, the 2020 Fiscal Plan displays an alternative downside scenario for
informational purposes only that is based on the International Monetary Fund's downside
alternative growth projection for the US economy (discussed further in Chapter 4). Finally, it
includes a one year delay in incremental government efficiency savings expectations to allow
the Government to focus on the implementation of needed efficiency and structural reforms.
In FY2o21, to the Government must center all efforts on making the necessary changes to how
the government operates and delivers government services, as well as taking steps to improve
the conditions for investment in the economy in a post-COVID-19 world. Now, more than ever,
it is essential that the Government focus all of its attention and capacity on implementation to
better serve the people of Puerto Rico in need of efficient government services and to eliminate
barriers to economic development and recovery from the unprecedented economic damage
caused by this series of disasters.
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PART II. Puerto Rico's path to fiscal and
economic sustainability
Chapter 4. Macroeconomic and demographic trajectory
The 2020 Fiscal Plan forecasts that the economy of Puerto Rico will shrink by 4.0% in real
terms in FY2020, largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in
FY2021. This recovery is then followed by negative real growth in ._
vv2022 and FY2023 due to
the unwinding of fiscal stimulus from federal funding in the aftermath of multiple natural
disasters and emergencies. While the baseline scenario assumes gradual improvements
beginning in the summer, under the illustrative alternative downside scenario, which assumes
that the pandemic does not recede in the second half of the year, the economy is projected to
shrink by 5.8% in FY2020 and again decline by 3.4% in FY2021. Exhibit 5 shows the real GNP
growth rates (in both the baseline and illustrative downside scenarios), after the impact of
measures, structural reforms, and disaster relief funding.
EXHIBIT 5: REAL GNP GROWTH RATE AFTER MEASURES, STRUCTURAL REFORMS,
AND DISASTER RELIEF FUNDING
Real GNP growth rate. '.
Baseline case Domside rase
1
0.6
c.
0 a-
1
.0
-5
-2.0
-2.5
-3 0
-3.3
-;} 4
4
4-5
-5.0
-5.5
-6.0 -50
FY20 FY'21 rvn FY23 FYea fY26
The baseline economic outlook model, which forecasts GNP growth, primarily relies on a
comprehensive dataset on the Puerto Rican economy from 1963 to 2017. It includes dozens of
variables that collectively describe the Puerto Rican economy (e.g., growth, population, capital
stock, etc.), and is largely impacted by four major factors: (a) the pre-hurricane trendline of
Puerto Rico, (b) impacts from the shocks of hurricanes, earthquakes, and COVID-19 on
economic activity, employment and the capital stock, (c) the stimulative impact of federal and
local relief assistance for hurricanes, earthquakes, and COVID-ig (discussed in Section 4.2),
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and (d) proposed government efficiency measures and structural reforms (discussed in
Sections 4.3 and 4.4).8
The 2020 Fiscal Plan also uses Congressional Budget Office (CBO) US inflation projections
along with global forecasts of oil and food prices from the IMF's World Economic Outlook.
Puerto Rico inflation projections are summarized in Exhibit 6 and have been updated to reflect
the latest inflation trend prior to the onset of COVID-ig, as well as the collapse in world oil
prices and the demand shock due to COVID-19 that occurred in the fourth quarter of FY2o2o.
Given these effects, the 2020 Fiscal Plan forecasts effectively zero inflation across FY2020 and
FY2021, with a brief dip into deflation in FY2o2o, followed by a reversion back to a longer-
term trend from FY2021 — FY2022.
EXHIBIT 6: ANNUAL PUERTO RICO INFLATION RATE
Annual infiaton rate, -
1.2
1.1
1
-
to
0.3
IM1
-0 1
FY20 FY21 FY22 FY23 FY24 FY25
4,1 Impact of the global COVID-19 pandemic
As the 2020 Fiscal Plan is being written, Puerto Rico is over two years into the period of
recovery after the shocks of Hurricanes Irma and Maria, yet without any substantial start in
permanent reconstruction activities. As a further matter, the southern part of the Island has
recently been hit by the strongest earthquakes that the Island had seen in decades. With the
onset of the global COVID-ig pandemic the economy of Puerto Rico virtually ground to a halt,
as the public health imperative for people to stay home has left all but the most essential
workers unable to travel to their places of business. There is still significant uncertainty about
the future of the global, US mainland, and Puerto Rican economies.
The Oversight Board has consulted numerous data sources and expert economists in both
Puerto Rico and the mainland to obtain the best insights possible into the current economic
conditions and prospects for recovery. However, there is no precedent for COVID-19 in the
historical dataset that informs the Fiscal Plan macroeconomic model. As such, the Oversight
8 The forecast relies on a 60-year comprehensive dataset and applying statistical regressions to show the effects of multiple
yet distinct inter-related components of past hurricanes, exogenous developments, and economic policies on growth and
inflation.
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Board recognizes that there is considerable uncertainty around the near-term economic
outlook, as there remains a wide range of potential public health and economic outcomes for
Puerto Rico, the nation, and the world. Notwithstanding this uncertainty, the Oversight Board
has worked to develop a reasonable base case with the information and experience currently
available.
Impact of COVID-ig on the US economy
Consistent with past practice, the Oversight Board primarily relies on US government
economic forecasts to establish the general economic conditions within which the economy of
Puerto Rico evolves. On April 24, 2020, the CBO released its provisional forecast of US GDP
growth for FY2o2o and FY2o21, showing a real GDP decline of -5.6% in FY2o2o, followed by
a partial recovery of +2.8% in FY2021.9 The 2020 Fiscal Plan uses this forecast as a key input
to create the forecast for the economy of Puerto Rico.
Given the unprecedented uncertainty of the current environment, the 2020 Fiscal Plan also
displays an alternative downside scenario for informational purposes only. Rather than
relying on current CBO estimates of US mainland growth, this scenario relies on an alternative
projection for US growth described in the International Monetary Fund's April 2020 World
Economic Outlook. The IMF alternative scenario considers the implications if the pandemic
did "not recede in the second half of this year, leading to longer containment periods,
worsening financial conditions, and further breakdowns in global supply chains."10 In that
case, the IMF forecasts negative real growth globally in both 2020 and 2021, which the 2020
Fiscal plan estimates implies a -8.7% and -0.7%, decline in US growth, respectively.
Of course, while the Puerto Rican economy is currently experiencing an overwhelmingly
negative impact from COVID-19, it is possible that the economy could see some benefit from
the crisis. For example, if concerns over global supply chains result in increased domestic
pharmaceutical and medical supply manufacturing, and Puerto Rico is able to play a leading
role in the national portfolio of locations where this manufacturing relocates, the Island could
experience positive growth as a result. However, given their uncertain nature, the 2020 Fiscal
Plan does not account for these potential scenarios.
The 2020 Fiscal Plan also does not explicitly include assumptions about the effectiveness of
global, US federal, and Puerto Rico measures to contain the spread and impact of COVID-19.
Rather, the Oversight Board relies on the embedded assumptions included in the CEO and
IMF global and US growth scenarios.
Specific impacts of COVID-19 on the economy of Puerto Rico
After incorporating US mainland growth estimates, the 2020 Fiscal Plan forecasts the specific
impacts of the pandemic on Puerto Rico. The approach accounts for two primary factors,
which are outlined below: (i) lost income from an enduring spike in unemployment, and (ii)
that the relative amount of income that will be replaced either directly by extraordinary
government support programs or indirectly as a pass-through from non-labor forms of federal
and local spending on the response (e.g., on public health infrastructure, distance learning for
education) (see Section 4.2).
To determine the lost income due to COVID-19, the Oversight Board has analyzed available
public and private sector forecasts of US unemployment and data from the Government of
Puerto Rico on initial unemployment claims through early May 2020. As of May 11, 2020,
there were 275,569 initial claims for unemployment filed in Puerto Rico (an average of 34,446
9 "CEO's Current Projections of Output, Employment, and Interest Rates and a Preliminary Look at Federal Deficits for 2020
and 2021*
10 IMF April 2020 World Economic Outlook Press Briefing. Note that the IMF base case is closer to the CBO forecast, and
shows a partial economic recovery in 2021.
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filing per week) since the onset of the COVID-19 pandemic, well above historical trends of
—2,36(3 initial claims filings per week."
Exhibit 7 illustrates the unemployment forecast that the 2020 Fiscal Plan uses to estimate
income loss on the Island. The forecast includes a gradual easing of unemployment through
FY2o21, though unemployment levels at the end of FY202i are still five percentage points
higher than at the onset of the crisis. The exhibit also shows a downside alternative scenario,
in which employment is slower to recover.
EXHIBIT 7: PUERTO RICO UNEMPLOYMENT FORECAST
Unemployment
401 401 . Base scenario
375 381 E Downside scennda
368 368
326
309
215 21.5
239
202 240 21,8 207 206 204 203 :01
189223 184 216
1
I 1 1
117 117
176 I 176 176 14 172 I
Apr'20 Muy20 Jun'20 Jul20 Aug'20 Sep 20 Ocl'20 Nov20 Dec'20 Jan'21 Feb'21 klar'21 Apr'21 May 21 Jun'21
Baseline , 11.2 2E4 35.1 392 35.8 29A 22.B 19 3 18 0 17.5 17 0 16.9 1E8 16.6 16 4 16 2
Darmsido . 11 2 2E4 35.1 382 36 3 31.0 26.9 229 21.2 20 6 19.9 19 8 19 6 19.5 194 19.2
Tafel unemployment figures include -93k typical P11 unemployment plus peak -308k increase port-COVID
In light of terrible economic hardship for the people of Puerto Rico, and the US as a whole, the
federal and local governments have stepped in to provide much needed economic support for
residents on the Island. The following sections describe how the 2020 Fiscal Plan treats the
combined impact of ongoing disaster relief funding, as well as more recent economic support
in light of COVID-19.
4.2 Federal and local relief spending for Hurricanes Maria
and Irma, earthquakes, and the global COVID-19
pandemic
4.2.1 Disaster relief spending from the 2017 Hurricanes
Disaster spending tends to have a short-term stimulative effect on an economy post-crisis,
though not in the long term. In Puerto Rico, the level of committed public and private disaster
relief spending is significant when compared to the overall size of the economy. Public and
private disaster relief spending has and will continue to impact the economy in two ways:
/ 1United States Department of Labor, Employment & Training Administration, Unemployment Insurance Weekly Claims Data .
Historical trend represents the weekly average from January 2, 2010 through March 14, 2020,
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■ Stimulative impact from post-hurricane disaster relief spending that is
greater than i00% of the Island's 2018 GNP. This stimulus can come in multiple
forms, such as construction companies hiring local, unemployed workers or workers from
the mainland US paying local withholding taxes and spending money for food and lodging.
■ Expected reconstruction of the capital stock on the Island. The 2020 Fiscal Plan
factors in significant damage to capital stock that is repaired, in large part, by this
significant infusion of federal and private monies, contributing to growth in the long-term.
The 2020 Fiscal Plan projects that —$83 billion of disaster relief funding in total, from federal
and private sources, will be disbursed in the hurricane reconstruction effort over a period of
15 years. It will be used for a mix of funding for individuals (e.g., reconstruction of houses,
personal expenditures related to the hurricane such as clothing and supplies), funding for the
public (e.g., reconstruction of major infrastructure, roads, and schools), and to cover part of
the Commonwealth's share of the cost of disaster relief funding (recipients often must match
some portion of federal public assistance spend) (Exhibit 8).12
Of the total, —$48 billion is estimated to come from FEMA's Disaster Relief Fund (DRF) for
Public Assistance, Hazard Mitigation, Mission Assignments, and Individual Assistance. An
estimated $8 billion will come from private and business insurance pay outs, and $7 billion is
related to other sources of federal funding.
The 2020 Fiscal Plan includes —$20 billion from the federal Housing and Urban Development
(HUD) Community Development Block Grant - Disaster Recovery (CDBG-DR) program, of
which —$2.4 billion is estimated to be allocated to offset the Commonwealth and its associated
entities' expected FEMA-related cost-share requirements.13 This portion of CDBG-DR
funding will go towards covering part of the —1096 cost-share burden on expenditures
attributable to the Commonwealth, PREPA, PRASA, and HTA from FY2o19 to FY2o32. The
2020 Fiscal Plan allocates $4.7 billion for Puerto Rico's cost-match responsibility. After the
CDBG-DR funds, out-of-pocket cost-share is reduced to $2.9 billion for Puerto Rico, including
the provision of $600 million from FY2o2o to FY2o32 for Commonwealth cost-match reserve
funding in case fewer CDBG-DR funds than anticipated become available in a given year.
12 Puerto Rico's cost-match responsibility was estimated using FEMA-provided data, adjusted by category as necessary for
waivers and exceptions
13 Estimate based on early assessment of CDBG-DR Action Plans for Puerto Rico (as published on March 31, 2020), as well
as patterns of cost share coverage from CDBG-DR in historical storms
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EXHIBIT 8: PROJECTED PRIVATE AND PUBLIC DISASTER RELIEF FUNDING ROLL OUT
FY16 'Y19 FY2D FY21. FY22. FY23. FY24. FY25-FY32
'Or tiak 7:n1.
FEMA Pitnlic Assistance., 5.880 2.945 1.212 2.919 3.404 3.404 3.336 22.646
Heidi's/ Mitigation,
Mission Assig Ill ne nisi 13% 6% 3% 6% 7% 7% 7% 50% 42211. 4111211,
HIM Individual 2.070 336 196 11 4
Assurance' 79% 13% 7% 0% D% 0% 0% 0% 4112110 112.
0
CL1BG-DR
0% 0%
88
0%
657
3%
1,649
0%
1.993
10%
2.123
10%
13.852
68% WM. 41/12.
3 001 2895 2 104
Private insurance
38% 36% 26% 0% 0% 0% 0% 0%
Otherfedefol 509 1.237 894 1.071 868 432 430 1.530
Funding' 7% 18% 13% 15% 12% 6% 6% 22% IC110
I(4.0 11.460 7,415 4,493 4,657 5,825 5,788 5,889 341,028
4=0
CDBG cost share 10 (6 180 227 247 1.610
Oiss Star aid by sourno of funding
12.000
FEMA PA • FEMA IA • Other Fed funding
0.000
Pnvate Insurance III CDBG-DR
6.000
3.000
0
FY18 FY19 FY20 FY21 FY22 FY23 F'(74 Frifi FY79 Fv3.2
fens,' assa..mx rc,2.3 i geD2D r-getnqup Lee
St/ fie viCCNC,T9 ream no nxi Thrwpr me 5E8TR= arfirp-n
The major sources of disaster relief finding are detailed below:
• FEMA Disaster Relief Fund: FEMA provides Individual Assistance to individuals and
families who have sustained uncovered losses due to disasters. FEMA also provides Public
Assistance to state and local governments and certain types of private not-for-profits for
debris removal, emergency protective measures, and permanent repair to damaged or
destroyed infrastructure. Through both its Public Assistance Program and Hazard
Mitigation Grant Program, FEMA funds projects to reduce or eliminate long-term risks to
people or property from future disasters.14
• HUD Community Development Block Grant - Disaster Recovery (CDBG-DR):
HUD provides CDBG-DR funding that can be used for assistance to individuals,
businesses, state agencies, non-profit organizations, and economic development agencies.
Funds are to be used in the most impacted and distressed areas for disaster relief, long-
term recovery, restoration of infrastructure, housing assistance, and economic
revitalization. The 2020 Fiscal Plan assumes, based on the supplemental appropriation
included in the Bipartisan Budget Act of 2018, that —$2 billion will be used to repair the
Island's electric infrastructure and —$2.4 billion will be used to cover cost-share for the
Commonwealth and its instrumentalities.15
• Private insurance funding: Large personal property and casualty losses have been
incurred in the aftermath of Hurricane Maria. An analysis of data from the Office of the
Insurance Commissioner of Puerto Rico, adjusted for self-insured and other types of
14 The 2020 Fiscal Plan does not attribute economic impact to FEMA's Administrative funding, which is used for FEMA's
personnel (primarily outside of Puerto Rico), travel, and other internal costs
15 As per the Puerto Rico Disaster Recovery Action Plan, April 2020, "the cost share matching requirements of many of these
[FEMA] programs create a financial burden on subrecipients that will dramatically hinder the recovery process without
supplemental funding. To substantially reduce this burden, PRDOH intends to leverage CDBG-DR to meet these matching
fund requirements, ,."
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coverage, was used to determine the amount that has been paid out to individuals and
businesses for major damages.
• Other supplemental federal funding: Additional federal funding has been
appropriated to various agencies and projects in Puerto Rico following the hurricane. This
money is directed at a wide range of recovery efforts, from reconstruction of damaged
buildings (for example, funding to repair damage to Job Corps centers in Puerto Rico) to
funding for health programs and environmental management (e.g., USDA funding to
repair water systems in rural areas) to additional funds for the Nutritional Assistance
Program (NAP).
Disaster roll out for FEMA funds has been projected by subcategory to account for differences
in when funds are spent:
• Individual Assistance from FEMA was spent in the immediate aftermath of the storm
• Public Assistance Categories A & B and Mission Assignments are used for debris removal
and emergency work, and therefore exhausted in the early years of the recovery
• FEMA Categories C-G and Hazard Mitigation are longer-term funding streams that are
spread out over 15 years, based on the latest estimates regarding the time that it will take
to finalize reconstruction
Where data on obligations and disbursements of FEMA funds are available (i.e., for FY2o18
to FY2020), the 2020 Fiscal Plan estimates actual spending for that fiscal year to be the
midpoint between obligations (when funds are officially awarded) and disbursements (when
the funds are spent). This is due to the timing lag between obligation and disbursement of such
funding. CDBG-DR funds are assumed to be disbursed through FY2032, with program types
informed by the Puerto Rico Department of Housing's latest available Action Plans.
The rollout for FY2o2o and FY2021 for both FEMA Public Assistance and HUD CDBG-DR
have been updated to reflect the expected effects of the COVID-19 pandemic. The 2020 Fiscal
Plans assumes that a combination of restrictions on movement, materials, and travel will
result in a six- to nine-month delay in the ability to disburse federal funding. To date, FEMA
has continued to ramp-up activity and funding for hurricane-related projects; however, given
FEMA's increasing role in responding to COVID-19, there will be pressure on FEMA to
implement both mandates simultaneously.
The 2020 Fiscal Plan posits that, based on how disaster relief funds are spent, these funds will
impact the economy in various ways: to build the capital stock of the Island through
constructing and repairing buildings or utilities, to directly impact the economy through
spurring consumption of goods and services on the Island, or to fund programs and services
on the Island. The 2020 Fiscal Plan estimates a different rate of pass-through to the economy
for each of these different types of funding as follows:16
• A 15.5% pass-through rate is assumed for funding that is used to construct and repair
utilities, given the reliance on specialized labor and materials for such projects (e.g., FEMA
Category F Public Assistance funding towards constructing public utilities). The rest of this
funding flows to the Puerto Rico capital stock and therefore contributes to long-term
growth.
• A 23.5% pass-through rate is used for funding that is employed to construct and repair
residential, commercial, and school buildings given the ability to rely more on local labor
and materials (e.g., repair to public facilities damaged by the storm). The rest of this
16 Esti• mated using local contracts for PREPA, residential construction and school construction. These contracts were estimated
to have between 10% and 18% pass-through on the economy, respectively, which was then augmented by 55% average
spend on transportation and logistics on construction projects, which rely on 100% domestic labor.
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funding flows to the Puerto Rico capital stock and therefore contributes to long-term
growth.
■ A 23.5% pass-through rate is assumed for funding that is directed towards programs and
services (e.g., private insurance payments to reimburse personal auto expenditures), as
this funding hits the Puerto Rico economy through the labor associated with importing
and transporting. This type of spending does not contribute to the capital stock on the
Island, and therefore does not contribute to long-term growth.
■ A 100% pass-through rate is assumed for funding that is used directly and in full to replace
income or stimulate spending on goods and services originating on the Island (e.g.,
disaster nutrition assistance). This type of spending does not contribute to the capital stock
on the Island, and therefore does not contribute to long-term growth.
■ CDBG-DR funds put toward cost-share are not passed-through to the economy. These
funds are used towards the local share of FEMA projects whose value is already accounted
for in the respective categories.
The 2020 Fiscal Plan also assumes that $750 million in working capital will be made available
to address the liquidity constraints associated with the reimbursement nature of disaster relief
programs, subject to certain guidelines, restrictions, and best practices that the Oversight
Board will establish. This will help to accelerate FEMA-approved reconstruction projects,
particularly for permanent projects.17
4.2.2 Federal and local economic support in response to the earthquakes
The 2020 Fiscal Plan includes $595 million in funding from FEMA to cover the damage caused
by the earthquakes. This estimate (which is included in Exhibit S above) includes $505 million
in Public Assistance funding, of which $438 million is for Category B — Protective Measures,
$54 million is for Public Assistance Management Costs, and $14 million is for Category A -
Debris Removal. The remaining amounts are divided between Individual Assistance ($8o
million) and Mission Assignments ($10 million). The 2020 Fiscal Plan applies a 23.5% pass-
through rate on these funds as they are directed toward the reconstruction of public buildings
and facilities (see Section 4.2.1). The earthquake-related federal funding is assumed to impact
the economy from FY2020 through FY2023. Additional federal funding (including FEMA
Category C-G funding for permanent works) may become available, however, there is no
estimate yet of damages that would allow for estimation of this additional federal funding.
4.2.3 Federal and local economic support in response to the COVID-19
pandemic
In response to the COVID-19 pandemic, both the Federal Government and Puerto Rico
Government have launched major relief packages to contain and mitigate the spread of the
pandemic, support residents and frontline workers, and help the Island's economy rebound.
On March 6, 2020, President Trump signed an $8.3 billion emergency COVID-19 aid package.
At least $1.05 billion of this package will be distributed to state, local, and tribal government
efforts through grants and cooperative agreements with the Centers for Disease Control and
Prevention or as reimbursements from the Federal Government. The initial federal aid
package was focused largely on public health concerns.
On March 13, 2020, President Trump declared a national emergency in response to the
COVID-19 pandemic. The declaration allows the administration to utilize the Stafford Act, a
17 The working capital facility is considered a use of the Commonwealth balance sheet, not a Fiscal Plan expense.
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federal law governing disaster-relief efforts and makes $50 billion in emergency funding
available to states and territories.
On March 18, 2020, the Families First Coronavirus Aid Package was signed into law. The bill
includes free COVID-19 testing for uninsured individuals, emergency paid sick leave,
expanded family and medical leave programs, unemployment assistance, food aid, and federal
funding for Medicaid.
A third phase of federal COVID-19 relief, the Coronavirus Aid, Relief, and Economic Security
("CARES") Act, was signed into law on March 27, 2020. The relief package allocates
an estimated $2.2 trillion to battle the harmful effects of the COVID-19 pandemic. The
package is the largest fiscal stimulus package in modern American history and aims to
financially support both governments and businesses, provide relief to individuals, and
expand COVID-19 response measures, as well as build future resiliency. The bill includes $150
billion of direct support to state and local governments. In addition, eligible individuals will
each receive a $1,200 direct payment, as well as an additional $500 for each dependent child,
in each case subject to income phase-outs. The bill also provides for additional unemployment
insurance benefits for individuals impacted by COVID-19, including incremental benefits of
$600 per week through July 31, 2020 and a 13-week extension in the amount of time than an
individual may collect benefits (from 26 to 39 weeks). On April 24, 2020, the US government
passed the Paycheck Protection Program and Health Care Enhancement Act, which can be
considered as an extension of the CARES Act. This package provides an additional $482 billion
for small businesses, healthcare providers, and expanded testing to address the COVID-19
pandemic.
The 2020 Fiscal Plan includes an estimate, shown in Exhibit g below, of what portion of these
federal funds will be allocated to Puerto Rico, relying on a combination of direct federal
government sources and agency announcements, and, in some cases, based on historical
analogy (e.g., the American Recovery and Reconstruction Act of 2009).
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EXHIBIT 9: ESTIMATED COVID-19-RELATED FEDERAL FUNDS ALLOCATED TO
PUERTO RICO
EatirnoiedUS Esrimared Poe no
Carla-prior Thelay /Secilon(si. Funding. Rico Funding
Phase 1: PreparednessA Response Sups. Approp. Act Multiple 8.267 31
Phase 11.8 03*
Prase 2: Fandbes Fire Coronarrus Response Act — Multiple 108.327 367
Sub-Tole, Phasel EL 2 175,694 398
Emergency Surf end Tespeyer RontettrAS (COrhorate IOW* 4002, 400517E70 450,326 500
Emergency Reel are Taxpayer FrOtordtral tuition) 4002. 4003 (16s) 48.000
dorceaveus Retie Fund §xpl (221) i50,000 2241
Federal Transli Administration 25.009 169
Governors Emergency Fducanda Reef Fund FAM 7d(234) 2953 48
Elementary end Secondary EdhoOtEmergericyReisP1 Fund (5f4) 13,229 349
Higher Educaron Emergency RehoT Fund Toe cn4i 13,053 321
Censtosnay Bekekotownt Fund Tale 101 1326) 5.000 34
Hameieas Assistance Grants The XII (32E) 4.000 17
State and Local Law En forcernentAcliv lies The 1 (233.i 850 9
Recovery Rebates tor Indmillsais 2201 1554 292 374 3,060
Mese Psoilerti0 11nldnPlayrrkrd Aenermr* 2102 633L 2101PIP 260.000 3,858
CARES Act Paycheck Protection ', rowan, 1102, 1106 (64 350.000 659
10347) Pubic Health and SocUl Services Emergency Fund The VD 1281), The vie (2813) 046.360 256
Domestic Food Programs -ate 1 1227, The I (228} 25.063 237
NiferreciTaites For Businesses blipie 249,613 315
Wile CARES Act Irleariurea 67.958 293
Other Government incentives uOA de 10.579 50
bdIvidual tan incentives Multiple 10,202
Disaster Flake Fund The VI oto 229
SBA - EEC Loans 4119. .Gronis_ Tile I 27,038 52
Housing assestince COMO Multiple 3,421 49
Educe-F*1n Tile Vr 015
Naomi OuSid NuIiple 1.491 7
Sub-Total, 3.0 CARE 5 Act 2.20.036 12.307
Incrametilall Paycheck Protection Program Amendment to CARES 322.100 1,054
Phase 3.5 licreinenlal Snug BuS ass Emergency Graril Amendment to CARES 69.000 60
CARES Act Incremental tiosplel Funding .Amendriteni to CARES 76.000 75
404l3411 inerarneniai CoronevInisTesting Funding Amendment to CARES 26.000 25
Sub-Total, 15 CARES AO 442104:1 1214
cl.lredo rviv-i•.- 3.50/.730 11.9/8
I Adatlional payouts gill mule from Commonwealth s5en005 but are gramme together here as airmails Woos win the photos Unerrohoyetant insurance rams In Me CARES act
2 1. c., 1,-,i311.-c ,ould cv• " • " : .r- 77 1 01. ...sstra
In addition to the federal stimulus package, the Puerto Rico Government, with the support of
the Oversight Board, announced a package of direct assistance to workers and businesses
amounting to approximately $787 million, as shown in Exhibit 10, of which $500 million was
incremental new spending (made available via a special appropriation), $131 million was for
education related materials through existing federally-funded government contracts, and $157
million was reapportioned within the FY2o2o Commonwealth General Fund budget. The
budget for this Emergency Measures Support Package was certified by the Oversight Board on
April 2, 2020. It is assumed in this 2020 Fiscal Plan that approximately $336 million of this
aid package may be eligible for reimbursement from the $2.2 billion of funding allocated to
Puerto Rico under the CARES Act.
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EXHIBIT 10: PUERTO RICO EMERGENCY MEASURES SUPPORT PACKAGE
PROVISIONS
F= ref
Category Deacoptorr
Direct Payment to Sett-Employed Self-Ef9PbYnd one-tine ease paymere for apptotomaletylE.Edraelf-erroloyed MT
reCr paymetrtto atrial I bus:nestles 61TO bolhelan 61.660 ITisitre cash payment for approximetely 40.000 aural !witnesses &Di
POW MOMS 54.040 bean per n urselnottWdunp 272 Dept of Lartecuona I Health nurses; separate lase) 214
Private SedOr Horses Oenus tor private sector nurses
Pruhlasi1rval WACO* num,* bonus tar protesabnalsemoennuraes 22y
3onutt for Medical and Support Star
Dept of CeenterVnaltIOOlb florae* 54,000 bOrnis per nurse
Technician* $2.$00 boars for800 technician 1,5
DIrtifa Pubic 'actor uharrracisla 1116), madtailachnclogists(3,211), Reasaeni5-M0 (005) 11'
ASS person* 581 elan 25
Police 015cera 11,050 kora *Moe roles (thee VI include 600 curreilOy rapUrled under leave of absence) 086
Freaunters 1,x55 trantnace role* Woe not 0.0.4055 repartee under !neve olabience] i
Emergency Danagernonl 112 front Waco MOW !doe* not bare 12 reported under leave o f Obbanesi 6.0
Bonus for C c noin9P 5 en Pier" Magi 154 iron' office talon ?MS net Masts 2 reported under inaveof absence/ 14
Specal Inveab2aboasi
bil 74 front arum rota
Formals 221 tract Oilcan:0es
Munk:pal pater 54,000 balms tor 2128 afters 157
i
lunio*teicantro 53,500 Pena* tat 5P once,* 64
Bonus for Court Matt Court Staff en eltrty 51,00 tows mr dog o fficers
Pony' Tor tramentla Internet Intorno reventA4gents an Only 12,0(10 beim for 254I snarls 11A
Revenue Aperds
Dept- or Eductlion teethes, abJdenls PurOtWee Of tabStIS, SOftwent.traMilg for apprs.sksalalPfM0013 near tchalb:. 1213
Make riaL, tor the DepartrnetS of and dYmitors
E.dutatart liateriOU ter 151431310 indleiduas Islip& paid by tbe Debartrnen Educatinn ttiretNht* 130..6
contracts
Public Hearth(' 01 511 per month for twe moms formates! so poles not diedly feinted COVC-15. rnsterTalet 38.6
Hospital Invest:meta s
related to C2VC-19 are COVErEl wMS1661a fromEmergency Plasma and Federal Funding
Public Safety Investments Depeutment of Pubic Safety SONII for equipment and espial expenditures 20.,11
So pflOrt TO the Municipalttres Ilunicipaites 35041. per 11101T111 . hw Iwt months based on a Mar divishin of polaulatit n by mama:Italy 1110.6
Department of Correellons 83.500 bonus per fr ont-fn e Corrections stiff 18.8
Dos us for Corvactoro Ern ployees
Correctional Heath 03..600 bonus per Fronc-lineCorrecio;s111eeln sto awn-numbs] 0.5
1,17A Cost of mortrtonom on tots Lasso} outstanding S31.1 moony repeats fortom months 6.0
1i:serve Reserve tonil be transferred Is frst responders and tleatheare ligroin/S01ton as-needed 1.6
Resole* I:4114110 covet any deficiency Ni 1hi drstrtution tithe cash inceterres. Hoosiers are berIECI at
CAlnIte.3: schialdisbursements may vary from Mks e_sDratea)
707
These funds will play an essential role in helping to mitigate the unprecedented economic
damage from the sudden economic shock caused by the pandemic.
The 2020 Fiscal Plan incorporates the combined effect of federal and local economic support
in three ways. First, certain types of funding intended to prevent revenue and job loss are
assumed to mitigate what otherwise would have been even higher unemployment and revenue
loss had those funds not been provided. These funds are implicitly reflected in the 2020 Fiscal
Plan because, without them, the income loss estimates would have been larger. The federal
Paycheck Protection Program, which is designed to encourage businesses to keep employees
on the payroll, is one example of this type of funding
The second type of funds are those administered through economic support programs
designed to provide income support directly from the federal or local government. Examples
include unemployment benefits, economic impact payments, and direct payments to small
businesses and self-employed.
Finally, for government expenditures and programs funded by federal and local economic
support programs, the 2020 Fiscal Plan uses the same approach as it does in estimating the
pass-through of these expenditures to Puerto Rico as has been used for other types of
economic stimulus funding such as disaster-recovery spending. Specific pass-through rates
used on this funding are detailed below:
• A 23.5% pass-through rate is applied to spending on government programs and services.
Examples include funding for law enforcement and the National Guard in Puerto Rico.
• A 5.5% pass-through rate is assumed for funding that is primarily directed to acquisition
of goods that will predominantly be sourced off-Island. This funding impacts the Puerto
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Rican economy only through the on-island transportation of such goods. Examples of this
are testing and medical equipment, or educational supplies to facilitate distance learning.
The economic impact of the local and federal relief funds occurs in FY2o2o and FY2o2i. These
funds help counter the income loss on the Island but cannot fully prevent the negative impact
on business activity caused by the pandemic.
4.3 Impact of fiscal or Government efficiency measures
Government efficiency measures seek to streamline and transform the
Government of Puerto Rico to deliver critical government services to the population and
business sector more efficiently by optimizing revenue collection and reducing government-
wide expenditures, while ensuring sustainability of those services over time given population
trends. Such policy actions will generate a contractionary impact on the economy in the short
term but are necessary to drive government efficiency and fiscal sustainability, as well as
improve service delivery, in the long term. The net effect of these two forces is still significantly
positive from a fiscal savings perspective through FY2049. The short-term macroeconomic
impact of the measures is summarized in Exhibit n.
EXHIBIT 11: MACROECONOMIC IMPACT OF FISCAL MEASURES, INCLUSIVE OF
DISASTER RELIEF SPENDING
Fiscal Measures Effect on Real GNP
0.5
-0.2
-0.3
-0.6
-1.0 -1 0
FY20 FY21 FY22 FY23 FY24 FY25
The 2020 Fiscal Plan assumes that the fiscal impact of disaster relief spending and fiscal
measures is not permanent, but rather is unwound over the course of several years. The 2020
Fiscal Plan unwinds these over five years, as model-based and econometric studies find that
the output effect of an exogenous fiscal shock typically disappears within five years, even if
fiscal measures are permanent.16
18 Batini, N. Eyraud, L and Weber, A_ Simple Method to Compute Fiscal Multipliers", IMF Working Paper WP/14/93, as well
as Mountford, A. and Uhlig, H. "What are the Effects of Fiscal Policy Shocks?" Journal of APplied Econometrics, 24: 960-
992 (2009) and Jorda, C. and Taylor, A. The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy,'
Economic Journal, 126: 219-255, February 2015.
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4.4 Impact of structural reforms
The estimated impact of structural reforms is based on work done by the International
Monetary Fund on labor reforms implemented in Europe (e.g., Spain and Estonia) and South
America (e.g., Peru and Colombia), among other jurisdictions; utilities reform in Latin
America; broadly-accepted metrics for measuring improvement in the World Bank's Ease of
Doing Business Rankings (as we]] as case examples of growth experienced by countries that
have implemented such reforms); and education reforms in Europe and elsewhere. Structural
reform benchmarks, to the extent possible, come from nations or jurisdictions that face similar
constraints to Puerto Rico (e.g., limited monetary policy options, high informal labor
markets).
Energy and ease of doing business reforms are projected to increase GNP by
o.6o% by FY2o25, and Human Capital and welfare reform is expected to add
another o.15% in FY2o26 (Exhibit 12), Finally, K-12 education reforms add an
additional 0.01% annual impact beginning in FY2o37, resulting in total GNP
increase from structural reforms of 0.75% by FY2o26 and o.88% by FY2o49. The
anticipated timing of the incremental positive impact of these reforms has been delayed in this
Fiscal Plan given the delay in the Government's implementation efforts.
EXHIBIT 12: MACROECONOMIC IMPACT OF STRUCTURAL REFORMS
Structural Reform Effect on GNP.
Human Capital And Welfare Reform
PPP's/energy reforms
0.10 0.10 0.10
Doing Business Reform
0.10 0.10 0.10
Total Structural Reform Impact
010 0.20 0.20 0.10 0.15
FY20 FY21 FY22 FY23 FY24 FY25 FY26
By FY2049, K-12 Education reforms add 0 3 cumulative impact, resulting In 0.08% annual Imp et on GNP
4.5 Population projections
Even before Hurricanes Maria and Irma hit the Island in 2017, Puerto Rico's population had
been trending downward by 1-2% every year as residents have left to seek opportunities
elsewhere and birth rates declined. In 2016, the US Census Bureau's official forecast, projected
a worsening population outlook due in large part to Puerto Rico's rapidly-aging population.
This high average age range results from extremely low age-adjusted birth rates and
outmigration of younger people. Indeed, in 2016, Puerto Rico began to experience negative
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natural population change (a higher number of deaths than births). This negative natural
change has continued unabated into 2020.
Hurricanes Irma and Maria served to compound the problem, spurring an additional outflow
of people just as natural population decline has set in, as many residents lost houses, jobs, and
loved ones. While some of these people have returned, the population is still projected to
decline over the course of the 2020 Fiscal Plan period (Exhibit is) and beyond. Further
disasters, such as the series of earthquakes experienced in 2020, have not made a swift return
to balanced migration any more likely. But while net migration is a larger driver of population
change in the short term, this factor is volatile; in the Iong run, net migration is projected to
return to more balanced trends. Meanwhile, natural population change is not guaranteed to
rebalance at any point, and births are likely to continue declining, while deaths are projected
to rise or stay stable.
The COVID-19 pandemic has been less severe in Puerto Rico than in many other areas thus
far, and therefore no large epidemic-driven mortality rate increase is anticipated. COVID-19
is expected to suppress air traffic between Puerto Rico and the mainland, and thus impact
migration, but this effect will be transitory.
As outlined in Exhibit 13 below, this 2020 Fiscal Plan projects that by FY2o25, there will be
9% fewer people living on the Island than in FY2019, and that by FY2049, the drop will grow
to 30%.
EXHIBIT 13: PROJECTED POPULATION CHANGE
Annual population', -' 05
dd. annual decline
4111110 CID 411110 CCP 411.
3.033
2,984
2,938
2.891
2.851
2.813
FY20 FY21 FY22 FY23 FY24 FY25
• Mit iir■telha ,veal I I !I • MEI s••
4.6 Impact of First Circuit ruling on Supplemental Security
Income benefits
On April 10, 2020, the US Court of Appeals for the First Circuit issued a ruling in a case related
to the eligibility of Puerto Rico residents for Supplemental Security Income ("5SF) benefits
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(US v. Vaello-Madero, 2o2o). SSI provides "monthly benefits to people with limited income
and resources who are disabled, blind, or age 65 or older. Blind or disabled children may also
get SSI."19 SSI benefits have been available to otherwise qualifying residents of the 50 states,
the District of Columbia, and the Northern Mariana Islands. Residents of Puerto Rico,
however, have not been eligible for SST benefits.
The case involved an SSI recipient who moved from New York to Puerto Rico and was
subsequently required to repay SSI benefits received while the recipient was resident in Puerto
Rico. The court ruled in favor of the recipient, finding the exclusion of Puerto Rico residents
from SS! coverage to be invalid.
The court's finding is consequential, but the path forward is highly uncertain. The US
Department of Justice has not indicated whether it intends to appeal the court's ruling, and
the Social Security Administration, which administers SSI benefits, has not issued public
guidance on how it will address the ruling of the court or on what time frame it will do so.
If SSI benefits were ultimately extended to eligible residents of Puerto Rico, initial analysis
suggests that it could provide over $i billion in incremental annual federal transfers to Puerto
Rico. This amount would undoubtedly be welcome support to qualifying residents across the
Island and could enable some level of increased consumption. The ultimate economic impact
of these transfers is unclear, however, and will be examined in future Fiscal Plans. As of the
time of certification of the 2020 Fiscal Plan, there is no information as to when and how the
benefits will become available to residents of Puerto Rico, how the Government of Puerto Rico
will work with the Social Security Administration to implement the changes, and what
program integrity steps will be taken to ensure only those eligible receive it.
Chapter 5. Fiscal Plan financial projections (FY2o2o-
FY2o25)
The COVID-19 pandemic will have a profound impact on economic growth and, ultimately, on
Government revenues. In a recent report, Moody's Investor Services stated "it will take years
for state revenue to return to 2019 levels without tax increases, while recovery to a level where
no COVID-19 crisis occurred is unlikely over a five-year horizon."20 The impact to Puerto Rico
is expected to be no less severe, with a real GNP decline in FY2020 of -4.0% will change the
trajectory of economic activity in Puerto Rico over the entire forecast period.
As a consequence of this new economic reality, before measures and structural reforms (i.e.,
in the "baseline forecast"), there is a pre-contractual debt service deficit for all years of the
2020 Fiscal Plan.21 This deficit gets worse over time, as federal disaster relief funding slows
down, Supplemental Medicaid funding phases out, Act 154 and Non-Resident Withholding
revenues decline, and healthcare expenditures rise.
The fiscal measures and structural reforms contained in the 2020 Fiscal Plan are the main
drivers for a significant portion of the surplus in the 2020 Fiscal Plan. Fiscal measures will
drive —$10.0 billion in savings and extra revenue over FY2020-FY2025 and structural reforms
will drive a cumulative 0.88% increase in growth by FY2049 (equal to —$24.7 billion).
However, even after fiscal measures and structural reforms, and before contractual debt
service, there is an annual deficit reflected in the projections starting in FY2032. This is, in
19 Understanding Supplemental Security Income (551) Overview -- 2020 Edition, US Social Security Administration
20 Moody's Investors Service, April 24, 2020: 'Revenue recovery from caronavitus hit will lag GOP revival, prolonging budget
woes"
21 The baseline forecast also reflects the pledge of a portion of annual SUT revenues to COFINA creditors as per the terms of
the COFINA Title III Plan of Adjustment.
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large part, due to insufficient structural reforms, including continued highly regulated and
restrictive private sector labor market policies that prevent higher growth, a lack of progress
in rolling out the NAP work requirement to increase labor force participation rates, and more
meaningful Ease of Doing Business reforms to improve the economy's competitiveness and
attract greater levels of investment and job creation. Exhibit 14 illustrates the projected deficit
/ surplus through FY2025.
Projections for FY2026 onwards are included in Chapter 6.
EXHIBIT 14: PROJECTED DEFICIT I SURPLUS PRE- AND POST-MEASURES
Propelled defied t surplus pre- and post-nieasure,
.- 1
22 329 2170 zi 20 END 19. 116 18.874 19,095 19,262
Revenue pre-rrpeasw es
Expenditures pre.
measures (20,088) (2(1.706) (20,025) (20.596) (20.491) (20.550) (20.709) (20,948)
2,240 3.091
SUrplusJdeficit pre- 1 911 333
queasy re S
(717) (1 676) (1.615) (1.686)
2,044 2,20E 2,359
1. 530
Me asures 111. 111 106
5r1Pgi
Surplus port- 2.324 1.416 Est
rneasuPeOSRs 440 31:9 591
FY18 M9 FY20 FY21 FY22 FY23 FY24 FY25
'4..1 !gee* Mum' lug Itto tow; elperrwiteLeu, of suLn7.urel fearms 3rd ret c, 3A,d Ulm mesa -rt•las
aT:a %.• ••••X sawn ca- aniargivn cantra cuss Excl. andninunna nrex,
. tes fbr fw.x.erri unnamed km.venarnm 2-•
FPR, PEA '3,t1rireff -rrud erocarel•
5.1 Baseline revenue forecast
Major revenue streams (Exhibit 15) include non-export sector General Fund revenues
(including individual, corporate, and sales and use taxes) and export sector revenues
(including Act 154 excise taxes paid by multinationals operating on the Island, and Non-
Resident Withholdings), as well as federal funding. The 2020 Fiscal Plan also includes
clawback revenues in the Commonwealth's revenue streams and surplus calculations; this is
based on the Oversight Board's legal conclusions that (i) such monies are property of the
Commonwealth, (ii) each statute appropriating or transferring such monies to
instrumentalities of the Commonwealth is preempted by PROMESA, (iii) such statutes were
enacted by prior legislatures that cannot bind the current legislature, and (iv) in any event,
under the Puerto Rico Constitution, such monies would not be transferred to the
instrumentalities while General Obligation debt is not being paid according to its terms.
The 2020 Fiscal Plan generally reflects the revenue impact of COVID-19 in line with the
estimates of macroeconomic impact described in Section 4.1. There is expected to be
significant near-term uncertainty in the level of revenue collections as the expected duration
and severity of the COVID-19 induced recession is constantly evolving. Personal income taxes
will be significantly impacted by high unemployment. Consumption taxes will be impacted by
lower overall economic activity. The 2020 Fiscal Plan estimates these impacts based on the
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information currently available. Relative to the 2019 Fiscal Plan, general fund revenues are
expected to be 12% lower in FY2o2o and 11% lower in FY 2021.22
Administrative actions taken to delay tax payment due dates had the effect of delaying receipt
of —$668 million in taxes otherwise due in FY2o20 to FY2021, according to Hacienda
estimates. The 2020 Fiscal Plan treats these revenues as FY2o2o tax revenues even though for
some taxes the deadline for payment has been extended to early FY2021. The 2020 Fiscal Plan
also forecasts that io% of these revenues will not be received due to taxpayer inability to pay.
The Oversight Board will work with Hacienda to track these receipts and adjust for actuals,
including losses due to taxpayer inability to pay. In addition, —$44 million in FY2o2o SUT
collections will be foregone as a result of tax exemptions on prepared food and on purchases
for COVID-19-related first-aid items through May 2020
EXHIBIT 15: MAJOR REVENUE STREAMS
Key genera( fund revenue drivers, post -measures .
Personal income
taxes'
_ _ 2148 - .2149 2184.
Corporate income
taxes 1 _ 1,855 _ 1 877
Sales and use tax
1 817 1.957 1.972 1_94t 116,f__ 7 91.3
Act 154
1891. _ - 1,447 - 1,199— 1,199-1,1
Non-resident
withholdings 474 570 583 535 537 539
1
Other general fund
revenues= - 1,3611—_IL37UN-1412 1.394=1:408
Total 41111:110 CO 41110 (IP WO
FY20 FY21 FY22 P23 FY24 FY25
:rare ntmuir 4,e uI fn“ IrahNr.k, FTC lonlmi uppili4iwy7atiairviN4 7m. .re
r.,atiq 0.4 ilia lint3111 miNecti cob:10-* snot pima aii,gtOrtp
serlYme--
Ortglr 0,4sni■ turkl rtmse.,s Elvle [tare.' furs rLEV nEOCIE• WtOselc rc. ces ■re3 cow sumnif. J,C.S
Additional details on the fiscal plan revenue streams are provided below, with details on the
financial projections included in the Appendix. The following sections describe the longer-
term approach to estimating revenues for key revenue streams.
5.1.1 Non-export sector General Fund revenue projections
Individual income taxes: Individual income taxes are highly concentrated, with 78.296 of
revenues coming from the 8.7% of returns reporting income above $60,000 in FY2018.23 The
2020 Fiscal Plan also incorporates the expected incremental tax collections associated with
disaster recovery spending. Individual income tax collections outperformed relative to GNP
growth in FY2018 and FY2019, and were on trend to do so again in FY2o2o prior to the onset
of COVID-19. The 2020 Fiscal Plan projects that disaster recovery spending will continue to
contribute to the income tax base, either through mainland workers temporarily working in
22 Adjusted for one-time corporate income tax payments not included in the 2019 Fiscal Plan forecasts
23 Hacienda historical reports as of April 2018
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Puerto Rico or from Puerto Rican residents entering the formal economy as a result of disaster
recovery projects.
Corporate income taxes: There is also concentration in tax receipts among the largest
corporations operating in Puerto Rico (e.g., —29% of corporate income taxes are paid by 20
corporate taxpayers).24 Historical aggregated data from Hacienda showed an influx of
corporate activity spurred by reconstruction funding and mainland-based firms entering the
Island economy. This had led to higher corporate income taxes relative to GNP in FY2018 and
FY2019, and this trend was continuing in FY2020 prior to the onset of COVID-ig. The 2020
Fiscal Plan incorporates the contribution of disaster recovery spending into future years. The
2020 Fiscal Plan projections reflect certain adjustments to corporate income tax revenues
attributable to one-time M&A activity which resulted in a non-recurring $488 million of
revenues in FY2020 and $73 million in reduced corporate income taxes starting in FY2021, as
projected by Hacienda.
Sales and use taxes (SUT): As with corporate and personal income taxes, SUT
outperformed relative to GNP in FY2018 and FY2019, likely boosted by the increased
economic activity resulting from the post-disaster reconstruction process (including through
the replacement of lost inventory), as well as higher SUT compliance by those larger firms less
impacted by the storm. The 2020 Fiscal Plan incorporates this incremental tax collection as
disaster recovery continues in future years. Following the COFINA Title III Plan of
Adjustment, a portion of SUT collections will be used to pay the settlement going forward. This
portion reaches —$1 billion annually starting in FY2041.
Other General Fund revenue (Motor Vehicles, Alcoholic Beverages, Cigarettes):
Motor vehicle revenue tax receipts surged in FY2018 and this trend continued into FY2020,
as residents accelerated motor vehicles purchases in the aftermath of the storm. The 2020
Fiscal Plan reflects accelerated purchasing of motor vehicles that subsides and returns to
historical trends over multiple years. The 2020 Fiscal Plan also reiterates a need for Hacienda
to address challenges with cigarette taxes, which were $72 million short of required collections
in FY2019. This trend was continuing in FY2020 pre-COVID-ig, as Hacienda has yet to take
steps to recover the lost revenues.
Export sector revenue projections: Act 154 and Non-Resident Withholding (NRW) tax
revenues are concentrated in a small number of multinational corporations. From FY2017 to
FY2023, the 2020 Fiscal Plan estimates that Act 154 and NRW revenues will erode due to US
federal tax reform (reducing Puerto Rico's attractiveness as a low tax jurisdiction for
multinationals), global supply chain diversification, and patent expirations.
5.1.2 Medicaid funding
On a steady-state basis (i.e., in the absence of supplemental federal legislation), Medicaid costs
are funded primarily by the Commonwealth, as there is a cap on available federal funding.
Typical annual federal funding streams for the Commonwealth are the following, and are
projected based on current law and statutory growth rates:
■ Standard annual federal Medicaid funding. Although Puerto Rico has a 55% federal
matching assistance percentage (FMAP), the amount of annual federal funding received
under Section 1108 is capped each year. For FY2020, this funding stream was expected to
be capped at $380.3 million, and though the cap grows each year according to the Medical
CPI-U, it does not keep pace with healthcare expenditure growth.25 Each year, —$100
24 Hacienda historical reports as of April 2018
25 According to §1108(g) of the Social Security Act., from 2011 to 2016, the cap grows by the medical component of CPI-U as
reported by BLS each year. From FY2011-FY2016, this growth averaged 2.9%. This inflation rate differs from the healthcare
inflation index for Medicaid and Medicare used elsewhere in the 2020 Fiscal Plan (4.5% to 5.5% from FY2020-FY2022,
decreasing to 4.75% in FY2049). Instead, the medical component of CPI-U includes other factors that lower the inflation rate
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million of these funds are not available to cover premium expenses, but rather are
transferred to the Department of Health to cover disbursements to Federally Qualified
Health Centers ("Centros 330" or "FQHC") and Medicaid Program operations.
■ Children's Health Insurance Program (CHIP) funding. CHIP funding is not
subject to a federal funding cap. Without additional legislation, the CHIP matching rate
(E-FMAP) for Puerto Rico is expected to be 68.5%. Under the Affordable Care Act, the E-
FMAP for Puerto Rico was raised to 91.5% through September 30, 2019; under the 2020
Further Consolidated Appropriations Act, the E-FMAP was increased to 83.2% through
September 30,2021 (with an additional 11.5% increase through September 30, 2020 under
the 2018 HEALTHY KIDS Act); and under the Families First Coronavirus Response Act,
the E-FMAP was increased to 99.0%. When these pieces of legislation expire in October
2021, the federal cost share is projected to decrease to the standard level (-68.5%).26
■ Increases in available Medicaid funding from federal legislation: Since 2011,
Puerto Rico has received temporary relief from rising healthcare costs through increased
levels of federal reimbursement made available through the passage of the Affordable Care
Act and the Bipartisan Budget Act of 2018. In December 2019, the Further Consolidated
Appropriations Act was passed, which provided supplemental federal funding (up to $5.7B
in total) to Puerto Rico's Medicaid program through September 30, 2021 (i.e., the first
quarter of FY2022). In addition, the law raised the FMAP—the portion of Medicaid
expenditures that federal funds can cover—from the standard level of 55% to 76% for most
populations. Finally, as mentioned above, in response to the COVID-19 pandemic, the
Families First Coronavirus Response Act was passed in March 2020, further increasing
both the available federal funds (adding an additional $183M) and the FMAP (increased
by an additional 6.2% for most populations). The available supplemental federal funds and
higher FMAP will both return to standard levels in October 2021 without new federal
legislation. Accordingly, the Commonwealth will hit a "Medicaid fiscal cliff," whereby it
will be responsible for multi-billion-dollar annual healthcare expenditures that had
previously been covered by federal funding since 2011. The 2020 Fiscal Plan does not
assume future legislation changes. The 2020 Fiscal Plan ensures that the Commonwealth
is fiscally responsible under current law, and factors in the cost of Medicaid going forward
in the absence of incremental legislation. To ensure healthcare for a substantial part of the
population, the Commonwealth must be able to pay and manage these critical costs, which
grow faster than inflation, regardless of the future federal legislative environment.
Exhibit 16 outlines expected Medicaid federal fund receipts. After the first quarter of FY2022
(ending September 30, 2021), supplemental federal funding is projected to phase out. This
"funding cliff' further exacerbates the imperative and urgent need to implement cost-saving
measures to reduce long-term Medicaid costs (Medicaid expenditures are discussed in detail
in Section 5.2.4). All projections are based exclusively on legislation that is currently in force.
by approximately 3-5 percentage-points, meaning the increase in the federal funding cap will nat keep up with actual
increases in expenditures
26 MACPAC: "Medicaid and CHIP in the Territories" (April 2020)
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EXHIBIT 16: BASELINE FEDERAL FUNDS RECEIPT PROJECTIONS
Medicaid Federal funding sources
Social Security Section 1108 CHIP, and other standard Federal allocations
It 2018 Bipartisan Budget Act &Affordable Care Act funding {temporary)
■ 2020 Further Consolidated Appropriations Act & subsequent relief Funding (temporary)
2,456
2,387
452
451
1,037
1 030
458
527 74(1 566
FY20 FY22 Efn FY24 FY25
5.1.3 Other federalfunding
In addition to Medicaid funding, Puerto Rico receives other federal funds on a regular basis.
These are not to be confused with disaster relief funds, which are directly tied to Hurricane
Maria and earthquake reconstruction activity, or with COVID-19 response and relief funds,
which are meant to cover incremental government spend to respond to the global pandemic.
These funds typically cover both social benefits and operational expenditures. In the 2020
Fiscal Plan, these funds have been modeled based on what types of costs they cover (e.g.,
benefits or operations) as well as statutory formulas that define the size of Puerto Rico's
allotment. For example, while Temporary Assistance for Needy Families (TANF) funds are
typically pass-through (e.g., none of these funds go to operational costs), some Title I
education funds are used for operational purposes (e.g., teachers' salaries, school supplies for
programs for students with special needs, etc.). For the former, federal fund inflows and
outflows mirror each other (as benefit needs decline, so do funds). For the latter, though
inflows may decline, it does not necessarily mean expenditures decline as well — as
expenditures are based on operations, not on benefits formulas, and the Commonwealth may
have to fund the operations notwithstanding reduced federal funding. Meanwhile, while Head
Start funds are allocated from the Federal Government based on the number of children living
in poverty, NAP funds are provided through a block grant that is capped. The former,
therefore, should change by population, while the latter should only grow with inflation,
regardless of population changes.
5.1.4 Special Revenue Funds
Commonwealth agency Special Revenue Fund (SRF) revenues: The Commonwealth
collects a significant portion of its revenues through Special Revenue Funds, which are funded
from, among other sources, tax revenues transferred by statutes, fees and charges for services
by agencies, dividends from public corporations and financing proceeds. Government tracking
and reporting of these SRF revenues, associated expenses, and resulting surpluses or deficits
has historically been incomplete and inconsistent. The baseline level of SRF revenues of
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Commonwealth agencies (excluding IFCUs) has been updated in this 2020 Fiscal Plan. The
2020 Fiscal Plan does not further detail SRF by type (special state funds, own revenues and
other revenues), as Commonwealth agencies (excluding IFCUs) do not report this level of
detail. Future budget and Fiscal Plan processes will aim to further clarify Special Revenue
Funds and apply controls to ensure transparency and accountability for these revenues. SRF
revenues from fees and collections are also expected to be negatively affected by the COVID-
19 pandemic, as agencies face decreased demand for services as a result of the lockdown.
Independently Forecasted Component Unit (IFCU) revenues: The Commonwealth
contains thirteen Independently Forecasted Component Units, which range from public
corporations (e.g., the State Insurance Fund Corporation) to public hospitals (e.g., the Cardio
Center). These entities are mostly funded by Special Revenue Funds and may also receive
General Fund appropriations. Through the FY2020 budget process and FY2019 actuals, the
Oversight Board was able to gain more insight into the specific revenue streams for these
entities to further refine the IFCU revenue projections. While most IFCU revenues are
projected using GNP, given the unique nature of each IFCU, certain revenue streams are
grown by other factors, such as inflation, population, or as governed by legislation. The 2020
Fiscal Plan factors in the significant expected negative impact of the COVID-19 pandemic on
demand for government- and tourism-related services.
Municipal contributions to PayGo and ASES: The 2020 Fiscal Plan includes receipts
from municipalities to cover retirement and healthcare expenses incurred by the
Commonwealth on their behalf. Since the passage of Act 72-1993, ASES has received funding
from municipalities for the administration and delivery of the Government Health Plan on
their behalf. Similarly, since the passage of Act 106-2017, municipalities that participate in
ERS are financially responsible for PayGo expenditures covered by the Commonwealth. The
passage of Act 29-2019 disrupted this model and required the Government to fund
municipalities' PayGo and Medicaid costs from the General Fund without receiving
reimbursement from the municipalities. However, following legal proceedings initiated by the
Oversight Board challenging the validity of Act 29-2019 under PROMESA, the Title III court
ruled that Act 29-2019 violated PROMESA and nullified the law, thereby reinstating the
municipalities' obligation to cover PayGo and healthcare payments for their employees. This
ruling's consequences enabled the Commonwealth to seek reimbursement for prior payments
made under Act 29-2019 and empowered the Commonwealth to act if these contributions are
not received (e.g., to withhold payments for utilities, appropriations). The effective date of the
court's ruling was delayed to May 7, 2020 so as to allow for the parties to discuss potential
solutions to the financial challenges faced by municipalities, particularly in light of the COVID-
19 pandemic. Accordingly, the 2020 Fiscal Plan assumes that municipalities fund their
respective contributions for PayGo and healthcare expenditures going forward. In calculating
municipalities' healthcare expenditures, however, the 2020 Fiscal Plan does take into account
the incremental federal funding support in FY2021 and FY2022 made available through the
2020 Further Consolidated Appropriations Act. Given that this funding stream expires in
FY2022, the 2020 Fiscal Plan assumes that contributions from municipalities thereafter will
return to previous levels, but the Oversight Board would consider utilizing a similar approach
in future years should additional federal funding again be provided.
Public Corporation PayGo receipts: The 2020 Fiscal Plan includes receipts from public
corporations that participate in ERS to cover PayGo expenditures covered by the
Commonwealth. The Commonwealth shall be reimbursed for these payments and will act if
these contributions are not received (e.g., will withhold payments for utilities).
FAM: The Municipal Administration Fund (FAM) collects 0.5% of the SUT which is
distributed into three funds: (1) 0.2% to the Municipal Development Fund; (2) 0.2% to the
Municipal Redemption Fund; and (3) 0.1% to the Municipal Improvement Fund (referred to
as the FMM). Pursuant to Section 4050.09 of Act 1-2011, the FMM are to be distributed
through annual legislation and appropriated for select capital works and improvement
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projects for the municipalities (e.g., public housing, schools). The legislature passes
resolutions each year to allocate the FMM. These resolutions must be consistent with the 2020
Fiscal Plan and the applicable special revenue funds included in the Certified Budget.
5.1.5 Gross-up for tax credits
Gross-up of revenues to reflect potential revenues without payment of tax
incentives: In addition to offering preferential tax rates, tax exemptions, tax abatements,
and cash grants, the Government of Puerto Rico incurs hundreds of millions of dollars in tax
credits to corporations and individuals each year. Some of these tax credits function as
entitlement programs: any business that meets the requirements set forth in law is entitled to
the benefit. Other tax credits give government officials considerable discretion on which
projects will receive incentives. Many of these tax credits are intended to pursue certain policy
goals such as stimulating employment, stimulating economic activity and economic
development, encouraging investment, and protecting local industries. Unlike traditional
expenditures, however, tax credits are not incurred in a transparent fashion, and, with only a
few exceptions, are currently uncapped by any aggregate amount of benefits conveyed. The
issuance of tax credits also tends to be done in an ad hoc manner, with unclear economic
justification for the costs incurred and without monitoring of the goals described above (i.e.,
how many jobs in any particular year were created). This leads to an unpredictable, and
potentially costly, foregone revenue stream each year.
Uncapped and unpredictable issuance of tax expenditures can have a materially negative fiscal
impact. Several states have faced challenges with unexpected levels of expense from tax
expenditures, such as Michigan (the Michigan Economic Growth Authority tax credits),
Louisiana (tax credit for horizontal natural gas drilling), and New York ("brownfields" tax
credits). The examples from these states are not uncommon and they reinforce the uncertainty
and risk associated with the establishment of tax credits.
Policy makers in Puerto Rico must understand both the budget implications of current and
proposed tax expenditures and be able to manage the size of tax incentives by setting limits on
their annual cost and eliminating tax credits with negative returns. The issuance of reliable
cost estimates, including a detailed analysis of the budget implications from each tax incentive
and annual cost controls will help Puerto Rico avoid unexpected negative
outcomes. Otherwise, the Government will remain powerless to manage the cost of these
incentives and keep the incentives from growing uncontrollably.
Recognizing the importance of this question to the fiscal sustainability of Puerto Rico, the
2020 Fiscal Plan includes a forecast of gross revenues inclusive of the value of tax credits,
along with their associated expenditures. The 2020 Fiscal Plan includes a forecast of gross
revenues based on the historical level of certain tax credits claimed on income tax filings for
individual filers, regular corporation filers, and incentive tax filers, as provided by Hacienda.
As shown in Exhibit 17, over eight tax years (2010-2017), tax credits claimed across all tax
filers averaged $247 million annually. The Oversight Board requires all reporting going
forward to include monthly and quarterly reports as to the gross revenues, tax credits claimed,
and the net revenues received for the period of the report.
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EXHIBIT 17: TAX CREDITS BY YEAR
Projection FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Regular Corporations 94 47 87 84 76 65 59 32
Incentive Corporations 135 147 133 158 116 78 70 56
Individuals 59 38 90 69 65 66 61 88
Total Tax Credits Claimed 288 231 309 310 258 209 190 178
8-Year Average
400
The Government should adopt a transparent limit to the amount of tax credits issued and
claimed at an amount below $247 million by, for example, capping the notional amount,
restricting the number of companies and individuals that can claim credits annually, including
sunset provisions, or inserting time bound clauses upon which each tax credit will expire. This
is similar to the approach that other states have taken to limit the use or issuance of tax
expenditures, including Arizona, California, Florida, Illinois, Massachusetts, Minnesota, New
York, Ohio, and Pennsylvania. This limit is separate and incremental to the cash grants that
corporations and individuals also receive, which will be captured in Certified Budgets going
forward. Future Fiscal Plans must also be expanded to include limitations on foregone
revenues due to preferential tax rates and exemptions, including municipal exemptions.
These forecasts must be maintained and updated by leveraging the work that Hacienda has
undertaken to produce and maintain a more comprehensive measurement of tax expenditures
over time through the annual Tax Expenditures Report. As discussed in more detail in Section
/6.3.i, the publication of the initial Tax Expenditures Report in September 2019 provided, for
the first time, better visibility into the full scope of tax expenditures being offered, together
with a description and approximate cost of each expenditure. To continue building on this
positive first step, the Government must provide an annual update to this report. The
Government has also taken initial steps to provide transparency around, and control these
expenditures through its proposed reforms to the Incentives Code. Only by explicitly
appropriating money for incentives in the Certified Budget, and by setting a limit on the
amount that can be spent each year, will tax incentives start to function more like regular
spending programs, with the Government retaining control over the cost, and less like open-
ended commitments, and enable public debate about the value of this type of spending in light
of the various needs on the Island.
5.1.6 Gross-up for COFIM receipts
COFIM is the public corporation that collects the 1% Municipal Sales and Use Tax (SUT)
established by law for certain municipalities. The 2020 Fiscal Plan includes projections of this
1% revenue stream, along with exactly offsetting expenses. COFIM is not an entity that receives
appropriations from the General Fund, but rather relies solely on municipal SUT.
5.2 Baseline expenditure forecast
The trend of baseline expenditures, before measures and structural reforms, is summarized in
Exhibit 18.
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EXHIBIT 18: MAJOR EXPENDITURE CATEGORIES PRE-MEASURES
Key Sasellns enpend4ture thivErs ive•rnEamil?
Reirroll Olaf .Iederilly
Funded ( Hi, 3 075
Litredoperallug
expqnaitines Mon- 1 59 7 t 7 !I •
fedetatly 18/8det11,'
SAY appmpn88075! 1,189
1 004 1.218 1,228 1.123
-■■IMMI■■
Cornmonweallh Medicaid
expenditures 1',56.7: 2,105 2259 2.359
267
Poll 11011 ervoirlii1•110 2J .4 2,332 1 310 .3.311 2.309 7.7:.')E
•141••■•• 2244 2,393 2241 2.165 2126 2,106
IFC6 S CW SRF
xper1440$ eS.
Fader/DV Funded TN 8.846 5, 339 4,938 SAM
expel-MI(8p? s ,
411111. IMP 41011. 1011. 411111110 4111M
FY21 FY22 023 11111 F1•75
I haotles miry Geolem Fimei orrefilma e1 sae 1••,1.11.m..irmeo!Foulli‘len elo010417n■r In 01
2 Inudd4a nporanna10110.FITA 1100 6rdi ermilocz! c, 203
2 incurie6 01/16%fe, Cm•• ery coal metro !ilitmcEwfwki c‘Felt4lure4 70841. POEPA ,m1,11411arm4 c.004.4 onwrillmit+Mi Cm..a0gmrsala$711.a *. 0lnc Iwbal am 44g !Kw
renumpienaracurrin,:4415; trrludw e61S111rneMi Ite 001.111am 1ft11 ,i17
L , and • 7., 5 • i flA.ne x tee pre. elf;n :lbx611 Mug gwv.ria■Lery for it Cu. H etk,dir a, It.041.0-p41/Weg &ker. ... maell4,d ap ei S;c•
-
E hairlet etelweg Pros Iwo/rept Ingd cc8 aric eKadmires obuctcl i.esoomi Nevarrn. 40341741145TICsre•Fo•Kissat CotrOmmit orol.
5.2.1 General fitnd payroll and non personnel operating expenditures
Payroll expenditures: Despite progress made through the FY2021 budget process,
consistent granular payroll data continues to be a challenge for the Government. FY2018
payroll numbers reflect actual expenditures where available and the Certified Budget in cases
where actual data was not available (adjusted to reflect reapportionments among agencies).
FY2019 was assumed to be equal to FY2018 given the Fiscal Plan Compliance Act, which
enacted a payroll freeze except for certain agency-specific adjustments. Beginning in FY2020,
base payroll has been assumed to grow by Puerto Rico inflation. Any reduction to baseline
payroll expenditure projections from attrition, absenteeism, or workforce reductions will be
captured through fiscal measures.
Non-personnel operating expenditures: Non-personnel operating expenditures in
FY2019 were also assumed to be equal to FY2018 budgeted levels. Thereafter, non-personnel
operating expenditures are assumed to grow by Puerto Rico inflation, with select adjustments
as necessary (e.g., for reapportionments).
5.2.2 Special Revenue Funds
Commonwealth agency Special Revenue Fund (SRF) operational expenditures:
The Commonwealth funds a significant portion of its expenses with Special Revenue Funds
and previously did not report on these expenses transparently in a consistent manner. Given
that SRF revenues and expenditures are not part of the General Fund for budgeting purposes,
they are not included in the General Fund budget resolutions approved by the Legislature.
However, the Oversight Board has certified SRF expenditures starting with the FY2019 budget
process, with the objective of applying controls and reporting requirements to ensure
transparency and accountability for these revenues and expenditures. With data made
available by the Commonwealth, the baseline level of SRF expenses of Commonwealth
agencies (excluding IFCIJs) has been updated. Given the mandate of the Office of the CFO to
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place controls on SRF expenditures, expenses are forecasted to be equal to the estimated
revenues in each year.
Independently Forecasted Component Unit (IFCU) operational expenditures:
Most IFCU payroll and non-payroll expenses grow by inflation, with exceptions for certain
expense categories (e.g., healthcare costs grow with medical inflation, variable costs that grow
in line with revenues).
The baseline expenditures include municipality and public corporation PayGo,
COFIM, and FAM expenditures, including all the conditions outlined in Section 5.1.4.
5.2.3 Other federal funding
Most federal funds received by the Commonwealth are passed through to residents directly in
the form of social benefits (e.g., TANF, WIC), but federal funds are also used to cover operating
expenditures in many agencies. Expenditures related to pass-through federal funds are set
equal to the associated revenue stream. Baseline expenditures related to operating
expenditures are set based on the FY2018 federal funds budget reported by the Government
and grow with inflation (and in some cases population). In the case of Title I, revenues will
grow with growth in total federal funding - presumed to track US inflation - but decline with
decreasing enrollment, which is the most salient determinant of Puerto Rico's annual
allocation. At the same time, the 2020 Fiscal Plan assumes fixed costs associated with
providing these services may not decline at the same rate (given historical Commonwealth
behavior of maintaining infrastructure such as schools and program staff despite population
decline).
5.2.4 Medicaid expenditures
Medicaid costs are projected to reach nearly $3.4 billion annually by FY2025. These costs are
primarily driven by the weighted-average cost per member per month (PMPM) multiplied by
the estimated number of people enrolled in the Medicaid (federal and Commonwealth-
qualified), CHIP, and Platino dual-eligible programs. Projections also include other direct
health expenditures (e.g., Hepatitis C, HIV, and pulmonary programs) that do not flow
through managed care. These costs are exclusive of non-medical administrative costs to ASES
and the Department of Health.
PMPM costs are projected to grow at 4.5% in FY2o2o, followed by an increase to an annual
growth rate of 5.5% in FY2022, as a result of a longer recovery from depressed utilization
caused by Hurricane Maria and the impact of COVID-19. In the long term, costs increase
according to an age-mix-adjusted PMPM growth rate, which reflects a shift to a younger
enrollment population (see Section 6.1).
Enrollment rates are primarily tied to overall population decline. The large drop-off in
enrollment between FY2018 and FY2020 mainly reflects the end to the auto re-enrollment
period that was put in place after Hurricane Maria, a period during which many enrollees
either left the Island or ceased to qualify for coverage under current thresholds. The baseline
projects a return to pre-hurricane rates of enrollment in FY2o2o, as in the 2019 Fiscal Plan.
Additional changes in enrollment may be driven by the COVID-19 pandemic or other
unexpected events.
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EXHIBIT 19: PROJECTIONS FOR MEDICAID AND CHIP BASELINE COST AND
ENROLLMENT (EXCLUDING PLATINO)
Medicaid piojected enrollment and ex Ichtures, afut total cost M enrolle,
Total cost (Medicaid. Commonwealth CHIP), $M alp Projected Medicaid enrollment, millions
3.238
3.114
2.997
2.887
2.783
2,694
FY20 FY21 FY22 FY23 FY24 FY25
4E0 411111.
...&45 I r +whale, M4/4q PIP Grtttitcrwt011- tAtf•VierellY-i6141147. (tett:. 2•■•to ±-tt-esrre wel t•r■lat-}t. iltd•rtnrn Elle•t*.t q NNVF.:40 ow. ...-toca
JaarbUillikefte &Mr 411001,1 81, 1 Woroe, vj
Other Commonwealth Medicaid expenditures, which include, HIV/PDP, Air
Ambulance, MC21 administrative fee, Super Utilizers, and Pulmonary, among others, are
projected to grow at the rate of Puerto Rico healthcare inflation. Separate from those costs is
the Health Insurance Tax (HIT), calculated each year by the Federal Government and
estimated here to be 1.80% of the prior year's total premiums.27 The Further Consolidated
Appropriations Act, 2020 repealed the HIT requirement. Thus, the 2020 Fiscal Plan only
reflects the estimated HIT fee anticipated to be required to be paid in FY2021 on FY2020
premium expenditures. Thereafter, the HIT fee is eliminated from projections.
Platino dual-eligible program expenditures were estimated using a consistent SID PMPM
over FY2019-FY2023 representing payment for wrap-around services supplementing main
Medicare coverage (from FY2024 onwards, this cost grows by the PMPM growth rate).
Enrollment is projected to be affected similarly to Medicaid enrollment. Platino costs are
expected to total nearly $30 million in FY2020, decline slightly to $29 million by FY2023, and
then grow again.
5.2.5 Commonwealth pension expenditures
Pension costs: Projections rely on demographic and actuarial estimations for Employees'
Retirement System (ERS), Teachers' Retirement System (TRS), and Judiciary Retirement
System (JRS) populations and benefit obligations. From FY2o2o-FY2025, costs are projected
to grow slowly but remain approximately $2.3 billion per year. Since FY2018, pension benefits
for all plans have been paid on a pay-as-you-go basis.
27 See Sec 4003 of FOURTH CONTINUING APPROPRIATIONS FOR FISCAL YEAR 2018 at
https://www.congress.gov/115/plaws/pub1120/PLAW-115pub1120.pdf. Based on actuarial estimates provided by ASES.
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5.2.6 Appropriations
Municipalities: Baseline municipal appropriations are projected to remain constant at
—$220 million, which represents the FY2018 appropriation level exclusive of a $78 million
one-time allotment to municipalities made in the aftermath of Hurricanes Irma and Maria.
University of Puerto Rico (UPR): The UPR appropriation baseline is $717 million in
FY2019 and remains —$717 million from FY2o2o-FY2o23.
Highways and Transportation Authority (HTA): The Commonwealth provides HTA
with an annual appropriation for capital expenditures and other costs. The 2020 Fiscal Plan
provides that the HTA appropriation will be variable and set so as to cover HTA's forecasted
annual deficits (after operating expenses and capital expenditures), as well as fund an
"emergency reserve" account for the agency. The target size of the emergency reserve is
initially set at —$250 million, in-line with best practices in other US jurisdictions, and will be
adjusted each year in order to keep pace with inflation. As a result, the 2020 Fiscal Plan
includes an average annual appropriation of —$219 million over FY2021-FY2023, with —$51
million per year funding OpEx deficits, —$123 million per year funding CapEx deficits, and
—$45 million per year funding the "emergency reserve." Thereafter, the annual appropriation
is forecasted to decline as HTA operating surpluses are available to fund capital account
deficits. Over FY2024-FY2049, the 2020 Fiscal Plan includes an average annual appropriation
of —$59 million, with —$54 million per year funding CapEx deficits and —$5 million per year
funding the "emergency reserve." The 2020 Fiscal Plan also encourages HTA to prioritize and
accelerate project delivery, focusing on the projects of utmost strategic importance to the
residents of Puerto Rico.
5.2.7 Other operating & capital expenditures
Utilities: The 2020 Fiscal Plan uses the estimated billings from PREPA and PRASA on an
agency level, which are then projected to grow over the period of FY2021-FY2030 according
to forecasted utility rates (and then according to inflation thereafter).
Insurance (PRIMAS): The Commonwealth bears costs related to insurance premiums (e.g.,
property insurance, liability insurance). Government reporting on these costs has not been
transparent or consistent over time (e.g., not all agencies report these costs independently of
other operating expenses, reporting is not consolidated across General Fund and Special
Revenue Funds). The Government reports that insurance costs have increased from FY2o18
to FY2o2o due to Hurricanes Maria and Irma. Given the potential risk of future hurricanes,
the baseline expenses related to insurance have been increased, but the Government must
improve reporting on these expenses going forward so that they can be managed
appropriately.
Capital expenditures: Centrally-funded General Fund maintenance and capital
expenditures of the Commonwealth (excluding PREPA, PRASA, HTA self-funded capital
expenditures and one-time transfers) are expected to grow by inflation from a baseline of
4400 million in FY2018. In FY2021, —$59 million of the baseline expenses will be
appropriated to HTA (as part of the total appropriations), with the remaining —$308 million
for use by the Commonwealth. HTA's capital expenditure funds will be used to support
reconstruction, maintenance, traffic reduction, completion of the strategic network, and P3-
related expenditures. Other General Fund capital expenditures will be allocated to priority
projects. The 2020 Fiscal Plan includes annual Special Revenue Fund capital expenditures of
$50 million.
5.2.8 Reconstruction and restructuring related expenditures
Cost-share for disaster relief funding: Federal funds for FEMA's public assistance and
hazard mitigation programs typically require a local match from the entity receiving them
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(anywhere from 10-25% of funds). In the case of Puerto Rico, the 2020 Fiscal Plan projects
that the Commonwealth will need to cover an estimated -to% of federal public assistance
funds, amounting to $3.5 billion from FY2018-FY2032. The instrumentalities will shoulder a
further $1.2 billion in total cost-match expenditures during the same period. A portion of the
Commonwealth and instrumentalities' cost-match expenditures are projected to be covered
by CDBG funds from FY2020 to FY2032, which amounts to $2.3 billion. Meanwhile, the 2020
Fiscal Plan maintains $600 million (from FY2o2o to FY2032) in reserve funds in case less
CDBG funding is available than is currently projected. If these funds are unspent, they would
accumulate and be utilized as part of an emergency reserve fund going forward.
Restructuring-related costs: Commonwealth restructuring-related expenditures are
projected at $619 million for the period FY2o2o to FY2024, and are comprised of all
professional fees, including those of the Unsecured Creditors' Committee, the Retiree
Committee, the Government (mostly AAFAF), and the Oversight Board. The estimate for
professional fees in the 2019 Fiscal Plan was developed, in conjunction with the Government,
by analyzing FY2018 and FY20t9 run-rate billings based on available information and
soliciting input from certain professionals. Fees were benchmarked versus comparable
restructuring situations that yield an average professional-fee-to-funded-debt ratio of 2.08%
relative to 1.68% projected for the Commonwealth (Exhibit 2o). In total, for the period from
FY2018 to FY2024, the restructuring-related expenditures projection in the 2020 Fiscal Plan
continues to be -$1.1 billion (without change from the 2019 Fiscal Plan), however, uncertainty
stemming from the series of recent natural disasters and ongoing COVID-19 pandemic have
drawn out the restructuring process longer than anticipated. Separately, the Oversight Board's
operating costs will remain at $58 million per year from FY2020 to FY2026 (as opposed to
$75 million per year in the 2019 Fiscal Plan).
EXHIBIT 20: PROJECTED PROFESSIONAL FEES RELATIVE TO OTHER MAJOR
RESTRUCTURINGS
Plofessional fees for restructuring
Outstanding debt. Total fees and Fees to funded
Date filed expenses. dem.
Jul. 2013 6.400 000.000' 177.910,000 28
City nehoit. Michigan
May.2012 15.000.000.000 409.321 308 27
Jul 2615 2.800.000,000 78,553.223 20
Jan 2015 18 000.000.000 258 278.005 t4
Caesars Emehnunnerit Operating Summary
Company Statistics
Sap 2008 613400400400 956.957 469 02 As 2 08%
Lehman Brothers Holdings Inc.
Max 3 56%
Jan. 2009 22 000 000.000 205.932.292 09 Min 0 16%
Lyonciell Chemical Company
Med 2.33%
No 2011 11.020.090,000 391.637.958 3.€
American Airlines
Sep. 2308 8 000 000.000 271.005.213 31
Dec. 2012 5.000.000.000 96244.6213 19
Apr. 2014 40 000 000 000 450410.233 11
Energy Future Holdings Corp.
2417 61,000,000,000 1,075 040 NO 11
Puerto Rico invatves added complexity as the largest public sector restructuring in the history of the United Suites
.yinscas ---- -EE.519en1
Emergency reserve: The Commonwealth must build up an emergency reserve of $1.3
billion, or -2.o% of FY2o18 GNP, by reserving $130 million per year for 10 years, which
started in FY2019. The methodology supporting this reserve is informed by guidance provided
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to other Caribbean islands by the International Monetary Fund in defining an adequate
emergency reserve (2-4% of GNP, accumulated at 0.5% per year).28 Restrictions on the use of
this fund must ensure that it is a true emergency reserve.
For each of the gross-up revenue items included in Section 5.1.5 and Section 5.1.6, an
equivalent expenditure is included in the baseline expense forecast.
5.3 Surplus potentially not available for Commonwealth
The 2020 Fiscal Plan financial projections show the surplus generated by all entities covered
by the Commonwealth Fiscal Plan. However, some of the surplus is generated by
Commonwealth public corporations, and the Commonwealth's ability to access such surplus
amounts could be problematical without further legislative action. In particular, the surplus
generated by the State Insurance Fund Corporation (SIFC) and the Cardiovascular Center
Corporation of Puerto Rico and the Caribbean may be inaccessible. As such, the 2020 Fiscal
Plan also represents what the surplus would be if these funds were inaccessible (Exhibit 21).
EXHIBIT 21: SURPLUS POTENTIALLY NOT AVAILABLE FOR COMMONWEALTH
Gap/surplus after measures and structural reforms — Base case, fl
■ —•••• GaprStirtariS l',051-rnetilresrStnicI11131 reforms
FY20.25 cumulative
4.000 — — Gap/surplus excluding surplus potentiality no! available'
surplus,
3, DX FY20-49 cum urative
surplus, IL' 44mo
2,000
1,000
-•••••••-
2020 ,a tx 2t. 28 30 411 3-It 40 42 44
- 1 ,000
-2,000
-3,000
Gap/surplus after measure's and s/ruclural reforms Downside case. .M
FY20-25 cumulative
4,000 surplus, Sli FY20-49 cumulative
3000 surplus,
4141Tilb
2,040
1,000
41116.
0
2020
-1,000
-2,000
-3,000
-4,000 L
71.1a ni■ iota• •••• awi ny lumninnm., =In mrporA■goi.te: ra cvnininfling•iiir• Miry is ...AI turn,. c.o.: Er 21, 0. mrmari furmnr !swoop., Amen
Chapter 6. Long-term projections and Debt
Sustainability Analysis (DSA)
While the 2020 Fiscal Plan emphasizes actions to be taken in the period from FY2o2o-
FY2o25, the Oversight Board's ultimate goal is to put Puerto Rico on a path towards long-term
fiscal balance. However, based on current projections, this long-term fiscal balance is not
28 IMF Bahamas Article IV report published March 22, 2018
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achieved due to the impacts of COVID-19 and the scale of investment required to combat the
effects of the pandemic, as well as the lack of progress to date on structural reform
implementation. Nevertheless, long-term projections remain an important component in
evaluating the 2020 Fiscal Plan's implementation and in the resulting Debt Sustainability
Analysis (DSA). The outcome of the DSA pertains to traditional debt only, and not to other
types such as contingent or no-default debt. Given large swings in debt sustainability shown
in the sensitivity analysis, the amount of sustainable debt is contingent on several factors.
Finally, the debt sustainability analysis should be adjusted going forward to account for new
facts when available and errors when proven.
The 2020 Fiscal Plan is a 3o -year plan, as any restructuring of the Commonwealth's legacy
obligations will not extend beyond 30 years. In addition, longer-term projections involve even
further forecasting risk.
6.1 Long-term macroeconomic, revenue, and expenditure
projections
While GNP trends are volatile in the short term due to COVID-19, as well as the impact of the
hurricanes and earthquakes, after FY2025 real GNP growth is negative and gradually declines
as disaster relief funding drops off considerably and structural reform growth rates are muted.
Nominal growth is 1.0-2.0%. The population is estimated to steadily decline at an average rate
of —1.1% annually, largely due to declining fertility rates. Inflation settles at a long-term run-
rate of 1.4-1.9% as it is expected to gradually converge to mainland forecasts.
Most revenues are projected to grow with nominal GNP in the long term.29 This includes SLIT,
corporate income tax, personal income tax, non-resident withholding not paid by Act 154
entities and most General Fund revenues. Exceptions include:
■ Alcoholic beverages and cigarette-related tax revenues, which are expected to
grow by inflation and population. This assumption is supported both by relatively constant
alcohol consumption in growing economies along with the long-term decline in cigarette
consumption both in Puerto Rico and the US mainland.
■ Rum excise on off-shore shipments, is expected to grow by US mainland population
and is partially driven by the statutory waterfall by which rum excise taxes are paid into
the General Fund.
■ Non-resident withholding (NRW) and Act 154 revenues, which will face declines
due to US tax reform, supply chain diversification, and patent expirations. This decline
had begun during FY2o2o, with incremental declines forecasted in each year through
FY2023 (41.7% cumulative decline versus FY2o18 baseline). No further declines are
anticipated through FY2027; however, additional losses of Act 154 revenue is expected in
FY2o28-FY2031, such that FY2031 revenues are projected to be 64.4% below baseline.
This leads to a steady state of $859 million in annual Act 154 revenues beginning in
FY2031. NRW payments made by Act 154 payers are projected to follow a similar
trajectory, though with a shallower decline. After reaching steady state in FY2031, NRW
payments are projected at $267 million (42.7% below baseline). NRW revenues not related
to Act 154 payers continue to grow with nominal GNP.
■ Independently Forecasted Component Units (IFCU) revenues: IFCU revenues
are projected on a line item basis and grow by the same values as in the short-term
projections (largely by nominal GNP, with exceptions for those related to healthcare,
population, or other factors). The only IFCU with a different short-term and long-term
29 This methodology is consistent with general IMF forecasting approaches and is intended to capture the overall change in
consumption, investment and production within the economy
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revenue projection is the State Insurance Fund Corporation, for which the Fiscal Plan
projects an increase in revenues related to disaster recovery for FY2o2o-FY2032,
reflecting the short-term increase in construction sector activity.
Federal fund revenues grow based on historical and statutory appropriations. Medicaid
receives the most significant federal funding. The standard cap for Medicaid matching funds
grows by the medical services component of CPI-U, CHIP funding grows proportional to
growth of premiums and enrollment. However, several significant sources of federal funding
for Medicaid (e.g., ACA, BBA, Further Consolidated Appropriations Act, Families First) are
only legislated through the first quarter of FY2022. This creates a "funding cliff' whereby the
share of Medicaid funding borne by the Commonwealth increases from $633 million in
FY2021 to $2,447 million in FY2o23. While additional federal funding for Medicaid may be
provided in the future, the 2020 Fiscal Plan model only reflects currently-legislated federal
funding amounts. Additional revenue for the Medicaid program comes from municipal intra-
governmental transfers, which remain constant, and prescription drug rebates, which grow
proportionally to healthcare costs and population.
Just as most revenues grow by GNP, most expenditures grow by standard inflation after
FY2025. Exceptions include:
■ Medicaid premiums grow at a faster pace than standard inflation and are instead grown
by a PMPM growth rate and population change. On average, costs per demographic group
will increase consistent with historical PR healthcare costs, and in line with external data.
However, the latest projections suggest the magnitude of this trend will not be as
significant as reflected previous Fiscal Plans. From FY2o26-FY2049, the age-mix-adjusted
PMPM growth rate is expected to decline from 5.3o% in FY2o26 to 4.75% in FY2o49. This
projection is driven by two factors. First, current demographic projections suggest that the
population is not aging as fast as previously projected, which causes declines in overall
healthcare utilization. Second, general cost efficiency spillovers from the US mainland are
expected to exert downward pressure on PMPMs. In the near-term, PMPM growth is
expected to be muted in FY2o2o due to lower utilization driven by the COVID-19
pandemic. Social distancing and stay-at-home guidance have lowered utilization of the
healthcare system. Between FY2o20 and FY2022, the PMPM growth rate is expected to
increase from 4.5% to 5.5% as utilization recovers from both the COVID-19 pandemic and
persistent impact from Hurricane Maria. Non-premium costs, such as administrative and
payroll costs grow by standard inflation in the long-term.
■ Capital expenditures are anticipated to rise to 1.9% of GNP (in line with the mainland
average) by FY2038, increasing the annual Commonwealth average to —$650 million over
FY2038-FY2049, as Puerto Rico must sustain a higher level of maintenance and rely on
its own funding for capital investments (rather than disaster relief funding). Cost match
for disaster-related federal funding increases to an average of —$116 million from
FY2026 to FY2032, as the Commonwealth pays the entirety of the cost match during that
period. The Commonwealth is not responsible for the portion of funds allocated to
instrumentalities (e.g., PREPA, PRASA, HTA).
■ Independently Forecasted Component Units (IFCU) expenditures are
forecasted on a line item basis. Most grow with standard Puerto Rico inflation with some
exceptions, such as healthcare- or claims-related expenditures. Over the long-term, the
expenses of healthcare-related IFCUs (e.g., ASEM, Cardio) are projected to grow faster
than revenues, creating a deficit. This Fiscal Plan assumes deficits related to healthcare
will be funded by the Commonwealth.
Fiscal measures grow by their relevant macroeconomic indicator (e.g., revenues by nominal
Puerto Rican GNP, expenditures by Puerto Rican inflation, healthcare measure by health
inflation and population).
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A downside scenario based on COVID-19 has been included in this 2020 Fiscal Plan
given that the pandemic has created significant uncertainty in near-term financial projections.
As such, a downside scenario is presented to showcase the potential trajectory of the Island in
the case where the spread of the virus is greater and/or the economic impact is more severe
than anticipated in the base case. The downside scenario fundamentally alters the Island's
economic condition and therefore impacts long-term projections.
The long-term macroeconomic projections for both the base case and downside case show
trends as below (Exhibit 22, Exhibit 23, Exhibit 24, and Exhibit 25).
EXHIBIT 22: 30-YEAR FINANCIAL PROJECTIONS
— Base case — Downside case
6.1.111 Average base case 441MIIEs. Average downside case
Nominal GNP /pm% Nomura! GNP osi cardia
6 40
41111111. 35
25
20
15
10
5
a
2020 25 30 35 40 35 Me
POpi.11'26 17f1 growth Own revenues past-nwaseirias•
2020 25 34 3E 40 44 R049 18.000
16.000 __--
14,000
-0 5 Average growth
12,000
10.000 11111101b
8.700 1.13010
6.000
-IS 4.000
011P
1 ZOOG
IIIIMIIII 0
-2 0 2020 25 30 35 10 45 2045
1 r I 0,0.11E3, ELIPE4 MN Cprimonvoen[4-Eam[1idinn.e.Mite5 ana a. cum.. 10 11.er,117,. I}r; ,,d ensn r,eri..,. ,V.E9 rrr.,,, -..r.:{rF4.6.7 Willeir,r.
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EXHIBIT 23: LONG-TERM FISCAL PLAN PROJECTIONS POST-MEASURES AND
STRUCTURAL REFORMS (BASE CASE)
Financial projection detail pd sl-rnea sure s and structural ratorms, u n a us labeled
ProjeCtiOn FY-33 FriEr1.8 P121335 FY. 1140 FY3445 r(2049
Population, lt..7...JE.3.,d.,. 2,813 2,701 2,590 2,427 2,268 2,152
Population growth IAA, % (1. 3%) (18%) 0.1%) (1A%) 71.3%) (1 3%)
Real SHP growth, % 10.1%) (0.5%) (1.2%) (0.4%) (CM) (0.2%)
Nominal GNP. 1.'• 69,544 75,679 76.292 89,954 87,465 93.269
Nominal GNP per capita. $ 24,720 28,023 29.453 33.353 38.568 43,349
(I omlna I al P per capita growth, % 2.4% 1.7% 1.3% 2.9% 2.9% 3.0%
Inflation, ; 1." 1.5% 1.5% 1,9% 1.4% 1.65
Disaster funding, 5M13 5,843 3,874
Revenues', CM 19,124 20,854 20,941 22.192 23,970 25,599
COMITieflwealri revenues 14,504 15,115 14.944 15,552 16,796 17,847
Federal transfers 5,120 5,535 5,997 5,540 7,175 7,742
Expenditures', 61.1 (19 043) (20,307) (21,672) 123 971) (26,226) (24,250)
Corrimo min:Falb-fun and expenditures (14.035) (14,970) (15,956) (17.481) (19,049) (20,466)
Federally-furided expendiluras (5.007) (5,437) (5,916) (6,497) (7,177) (7,784)
Gap ( surplus, „VI 661 347 (931) (1,785) (2,256) (2,661)
Conlradual de bl servi ce payments' (1,697) (1.904) (1,653) (1.049) (163) 750)
Net gap r surplus, CH (1,016) (1,55?) (2 584) (2,834) 12.419) 9211)
Surplus potential!, not available' $14 172 220 152 176 219 258
/ Reue, i2•E s owpwar.w...:-. -.r.s iamb press Up 1(1p311118.115
2 Debt service CdSed 5/151eperii mn eontranunioepi obliged:ins Presentee for eustratae purposes on ly and does not repo awn antobated furore payment/ Dr restruMren debt. !besides
GO. PBA. CODA. PRFA. PFC. FRS. PROCD. The 2020 Fiscal Plan does not assume any predetermined outcome or en gong ligation with r espec to GO bands
3 These surpLa 11111Dullle are generated by Common/ye lair corporations cod the Cc remain w ee fills abley to access suer,ssrpius erraunts ceded be at ter. Sknout furMer ieglsialive action
EXHIBIT 24: LONG-TERM FISCAL PLAN PROJECTIONS POST-MEASURES AND
STRUCTURAL REFORMS (DOWNSIDE CASE)
polp (0.10itti on oeiali post-nteasresaria strum] ral r elerrnS. .
Projection fr29M. FeNi33 P1.2035 Pri040 F13318 Fr l41
Population, thuusnr-d: 2.761 2,501 J 2.473 2,360 2.136 2,020
Population growth rale. ' (1,7%) (1 9%) (1.2%) (1.5%) (1.4%) (1 4%)
Real GNP growl/1. 0, mix) (0.6%) (1.3%) (0.4%) (0.3%) (0.2%)
Nominal GNP ; li 64,220 69,895 70,188 74,443 88,422 95,761
Nominal GNP per capita. S 23,255 26,877 28,383 32.391 37.651 42,464
Nominal GNP per capita growth.% 29% 1.9% 1.4% 3.1% 3.0% 3.1%
Intl anon, ', 1.2% 1.5% 1, 1.9% 1.9% 1,9%
Disaster funning. SPA 5.043 3,874
Revenues, . .2 rt 19,023 19,740 19.955 21,125 22,803 24,339
Commonwealth revenues 13.827 14,258 14.027 14,569 15,727 16,706
Federal transfers 5.096 5,482 5.928 6,456 7.076 7,634
Expenditures', Sit 118,879] (20,840) (21,525) (23(483) (25,635) (27569)
Co mmonwealh-fun ded expenditure s (13,884) (14,531) (15,646) (17.042) (18,513) (19,946)
if orterally-lunded expenditures (4.995) (5.410) (5,879) (8,451) (7,122) (7.723)
Gap ( surplus, sr.! 43 (300) (1,571) (2,368) 12.832) (3230)
Contactha I debt service payments" (1,697) (1,904) (1,853) (1,949) (183) (50)
Net gap! surplus, 51.1 (1,854) 12205) (3223) (3,417 ) (2494) (3,279)
Surplus potentially not available', 51.1 119 160 89 108 147 180
I PA,. enue•s end expe,thl.rtS ezdutng pass up edjuhlnic-MS
2 Debt set-kik:erased/rid pitapat/iron miasmal debt emotions Presented rer Austral,. e purposes onry & does nor reencsentarttiCOffired rulure payMenla• an restructured debt. Nddudes GO.
gr. CODA. PRFA. PFC. ERs. P80co Tee 2020 Focal Plan donne! assume an y predelenresel outcome of impend nteauon wan respect° GP PPKIS
21111.e rwrp4s amount,.are generEE.ei by CErrwronwerall carp HMO. an dthe Cprrrnormeath s ahtty io nccess such su9A4somOunals nooki be el risk x (haul furlfter levolsErrenclm.
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EXHIBIT 25: ANNUAL GAP/SURPLUS BASED ON IMPACT OF STRUCTURAL REFORMS
Scenario
Annual gaptsurpius based on impact or structural reforms. btu tonmiriaq tSR growth wick)
1.500
1,000
$B • Cumulative surplus
500
0 _ --
2020 22 24 26 28 34 36 38 40 42 44 46 48 204g
-500
-1.000
-1,500
-2.000
-2,500
-3,000
-3.500
-4,000
Projected surplUs without
-4,500 any structural
reforms {0.0%}
-5,000
The 2020 Fiscal Plan shows minor short-term surpluses driven by significant federal relief as
well as fiscal measures and structural reforms. Long-term deficits are driven by healthcare
costs that outpace GNP growth, lack of robust structural reforms, phase out of disaster relief
funding, and declining Act 154 revenues.
While the 2020 Fiscal Plan projects deficits from FY2o32 onward, the Government will be
required to take additional measures that go beyond the five-year framework of this 2020
Fiscal Plan as the Puerto Rico Constitution requires the Government to operate within a
framework of fiscal balance. Accordingly, what follows are a set of options that future
governments can consider in order to obtain fiscal balance in the out-years. Some of these
reforms — which would reduce deficits and therefore make funds available for a variety of
potential uses, including investment in the people of Puerto Rico — have been proposed by the
Oversight Board, but have not been adopted, and the Oversight Board cannot implement them
on its own.
• Private sector labor reform, generating an additional 0.50% GNP growth over two
years, by repealing Law 80, reducing paid leave, and eliminating the Christmas Bonus. Key
reforms could require incentives, such as wage subsidies for low-income workers and
training programs to address identifiable skills gaps. The reform is projected to increase
the 30-year surplus by —$10 billion if implemented after io years (FY2o3o) and by —$3
billion if implemented within 20 years (FY2040).
• Ease of Doing Business reform, generating an additional o.15% GNP growth, based
on instituting Trading Across Borders reform to improve customs processes and
congestion and repealing restrictive laws (e.g., Laws 21 and 75 dictating terms for
terminating commercial supplier relationships). The 30-year surplus is projected to
increase by —$3 billion if implemented after 10 years (FY2030) and by —$850 million if
implementation lags by 20 years (FY2040).
• Overhaul of the tax system of Puerto Rico to stimulate growth, requiring short-term
investment (lower revenues in short-term) for long-term growth benefits up to 0.5%
spread over five years. The reform is projected to increase the 30-year surplus by —$9
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billion if implemented after in years (FY2030) and by -$2 billion if implementation lags
by 20 years (FY2040).
• Imposing a cap on total healthcare expenditure growth at 2% above standard
inflation is projected to result in savings of -$14 billion by FY2049 if implemented in
FY2030 and -$3 billion if implemented in FY2040.
• Securing additional permanent federal funding for Medicaid of -$1 billion per
year (and growing with inflation) is projected to increase the 30-year surplus by -$27
billion if begun in FY2030 and -$11 billion if begun in FY2040.
Risks to the long-term projections in the 2020 Fiscal Plan. While the 2020 Fiscal
Plan projects that -$8 billion surplus will be generated through FY2o2o-2031, there are
several variables that have a material impact on the long-term financial projections in the
2020 Fiscal Plan. The impacts of COVID-ig remain highly uncertain at this stage and could
prove to be longer-lasting and greater than anticipated. Moreover, revenues could be
compromised through lower growth generated by delayed or not implemented structural
reforms, lower than expected federal funding, and/or less efficient spending on capital than
projected. Both revenues and expenditures could be impacted by demographic shifts not yet
seen on the Island, and in the areas of government expenditures:
• Lack of implementation of healthcare reform measures could affect the long-
term projections of the 2020 Fiscal Plan. If healthcare reform measures are not
implemented starting in FY2021, the surplus would decrease by $14 billion.
• Implementation risk of agency efficiency measures also exists. For example, if
only 50% of the projected run rate agency efficiency measures are achieved, the 30-year
surplus would decrease by $21 billion. Similarly, if only 75% of the projected run rate
agency efficiency measures are achieved, the 30-year surplus would decrease by $11
billion.
6.2 Debt Sustainability Analysis (DSA)
The DSA is intended to provide a framework for assessing the long-term capacity of the
Government to pay debt service on its bonded debt. Debt levels post-restructuring need to be
sustainable over the long-term and consistent with both a minimal risk of default on the
restructured debt and a recovery of market access for future new money borrowings for
ongoing infrastructure investment. The analysis begins with the 2020 Fiscal Plan and is then
informed by the debt sustained by the most appropriate peer group against which to
benchmark Puerto Rico. The DSA then applies rating agency metrics for that benchmark group
to Puerto Rico to arrive at an assessment of what debt levels are sustainable in light of long-
term projections and the peer metrics. Net tax-supported debt is defined as debt payable from
statewide taxes and other general resources, net of obligations that are self-supporting from
pledged sources other than state taxes or operating resources (such as utility or local
government revenues). Prior to the enactment of PROMESA, Puerto Rico had approximately
$45 billion in tax-supported debt with a declining economy and no guarantee of sustained
federal funding. Post-COFINA restructuring, Puerto Rico net tax supported debt outstanding
was approximately $41 billion, comprised of GO, PBA, COFINA, PRIFA, HTA, CODA, ERS,
Public Finance Corporation (PFC), and other intergovernmental loans. Net of the restructured
COFINA debt, Puerto Rico's other net tax-supported debt outstanding totals approximately
$28 billion.
The 2020 Fiscal Plan's DSA has been fundamentally re-evaluated and adjusted to reflect
accurately Puerto Rico's post-COVID-19 economic reality. The contours of the post-COVID-19
economy are uncertain but have already caused a significant global economic recession and
could have both positive and negative effects on various industries vital to Puerto Rico's local
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economy. Due to these unknown impacts, any economic projections at this time will
necessarily be uncertain and imprecise, especially when it comes to reflecting Puerto Rico's
debt capacity. Accordingly, the DSA in the 2020 Fiscal Plan has evolved since the 2019 Fiscal
Plan's DSA,
US states as peer comparables: Like US states, Puerto Rico does not control its own
currency, has no access to IMF restructuring support programs or similar international
sovereign relief funding packages, and traditionally has been reliant on access to the same
long-term municipal bond market used by the US states to finance their capital needs. Puerto
Rico's bonds are also rated by the same rating agency analyst groups that assign ratings to US
states, not by foreign sovereign bond rating analysts. For these and other reasons, Puerto Rico
has more similarities to US states than to sovereign nations. By virtually any measure tracked
by the rating agencies, Puerto Rico's existing debt levels are clear outliers relative to these US
state peers (Exhibit 26).
EXHIBIT 26: US STATES AS COMPARABLES
Net lax-supported debt. Nat tax-supported debt, to state personal income. '
GO% 120%
5
102 4
50% 100%
40% I 80%
30% 60%
20% 40%
10% 5.7 20%
2.5 65
04 0f
0% 0%
Lowest 10 U.S average Highest 10 Puerto Rico Lowest 10 U.S. average Highest 10 Puerto Rico
state average scale average slate average slate average
Nes tax supported deer der come Gem service. Ili.1 ,•
S7O.NO 40%
15.862
S10 CO JET% 28 1
ill] OM
55.000 3&•30 10% 96
1 494 13
09
50 --- 0% — -
Lowest 10 U S average H.ghesi 10 Puerto Rico Lowest 10 U S average Highest 10 Puerto Rico
state average slate average state average state average
1Ownr ■eeilLIPe craOss8.[C..armnrASee1/■-•kelSAST.Areelite, t rics.mt8108.8.81 l'eef.ilitrEwutm%
451. Prato [c% kes-8/...1.111...11VeSC-Iller 14040,,, 3411.... At% IA" Al ,TUAL-S,(WISC 01281L 89......r....,...:,-,811.8811WellAnea OWE, A.S.!, 'Wee TY1.10.-.0101.1.8). Arefeee,_
nrproynrcon48888. An Porto rbca ..11.8. pa to wead.T1(.1 MAW Intee• eptweiveno§ SI& 143.4 PEO-1 PFC. le■ a OPO
SUcl ,r0 S r1e5ler3 Ian .181.081e- Fla. LW 18.181188.04 MIi1.4e11rr etry Ms IA lr,, To.11.1 it ii!L73 ; .1. =. -• Iwo Um A
- Mayan;- 7oW Stele PoiM■110 F411 PI !yew Mtn 7, '2[17
While some observers note that Puerto Rico residents do not pay federal income taxes, they
do pay Social Security and Medicare taxes, and the low per capita income levels would place
most Puerto Ricans in a tax bracket where they would otherwise pay little or no federal income
tax. Meanwhile, federal reimbursement levels provided to Puerto Rico for the largest
Government spending programs (including Medicaid and transportation) are capped at levels
well below the FMAP and federal highway reimbursement levels provided to comparably sized
and wealthier states. Puerto Rico's residents pay graduated income taxes to Puerto Rico at
brackets comparable to the federal income tax rates, thereby providing the funds needed to
provide services to the Puerto Rico resident population, which is far poorer than the
population of any US state. Yet Puerto Rico receives far less federal support.
Metrics for debt sustainability: Viewing US states as the most comparable group for
benchmarking Puerto Rico, the DSA uses the debt ratio metrics in the June 3, 2019 Moody's
Investors Service (Moody's) report "States - US Medians - Flat debt total signals cautious
borrowing, despite infrastructure needs" and the "Fixed Costs" ratio metrics in Exhibit 19 of
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the September 17, 2019 Moody's report "States US Medians Adjusted net pension
liabilities decline; OPEB liabilities vary widely" to develop a range of levels for sustainable debt
capacity, including Maximum Annual Debt Service (MADS) levels for Puerto Rico on its
restructured existing debt. The key debt ratios for the ten lowest indebted states, the 25 lowest
indebted states, the 25 highest indebted states, the ten highest indebted states, and the mean
for all US states are shown below (Exhibit 27).
EXHIBIT 27: KEY DEBT RATIOS FOR US STATES
let 1owluoverlocl deht .4 ,...i /lel ernoupported &kW/dote Rot hocoopporled debt per Debt sense..' •• .7,,- ,-' •-;.• Fused Cooky_ -,-. a .=,-=—..- •
-.P pocispnin ilIMITIO, '. cacao,
Low 10 0.4 Low 10 0.5 Low 10 231 Low /0 09 Low 1D 13
Law 25 10 Lax 25 1.1 Low 25 488 Low 25 21 LoW 25 Si
Mean 25 HOW ia Henn 1494 Mean 43 Mean $6
Tap 25 4.0 TOP 25 46 Top 25 24813 Too 25 84 Top 25 139
Too 10 57 Two 10 0.6 Top 10 3.880 Top 10 80 Too 10 198
I Ccoocutoul 82 1 Hamm 103 1 Cooneoldut 6.302 1 Gunned...4 9 59
13 Cnnnednout 297
2 Hawaii IT 2 Connectcul 94 2 Maiskohusetts 9113 2 New Jersey 2 Mows 291
3 massachusetio 7.8 3 Marraonikoods 91 3 Hawaii 5.453 3 1-lawair 9054 liewaler.s.. 21.3
S tie...Jersey 12 4 1:161..wa. 65 1 fitfwJtney 4154 4 Manachuselts 4 a04
5 614515310111 0.9 5 ROW &Hy 6.4 5 Now York 2247 5 IltnotY 84 5 Massocnuteks 18.9
0 T1oIowefr 43 o Roots 1.1 6 Delaware 3206 6 tAttalks10110 78 ei. Keydudry 181
7 Kar1uckY 01 7 Now Yolk 50 7 Vinod 2.752 7 K.vhir-ky 71 7 Maryland 17 D
B Ilmad 41 5 446.
4084:1131 49 8 1605111110106 1813 5 maryage 71 B Well lhigaam 164
9 Now 'York. 40 4 Kentucky 48 9 61klylond 2.343 9 Nave Yost. 6.7 9 Panos3r7v3no /19
ID Rhode Island 40 10 WaShinglon 45 10 Ft13014 Fslawl 2216 10 1Delkware 66 /0 Delaware 131
tern". 1•1em■s - 41.1 *mai wound' ownend wcyowIrci crow 440=0,00r needs hew' Joon 1
2 10110,00f3 whentcY low& 111o5Yea -641oreed re/ ;monk' 0411111 [Mae Flrtk I why yokel 110111 %Venom 1.1 ..111T
l'ord calm' no 610 rczna wile d e.w.a 1,0w.11kn.! IgL1asigMaria4 debt 11 =Mtn Id lest C) 400011 rwomIndi wffinowors ',sm.: Ed
{CPI 'l wrrcoothel 69 10900071'1
Exhibit 28 uses the long-term 30-year macroeconomic forecast to determine a range of
implied debt capacity based on the debt and fixed cost metrics of the average US state. The
debt capacity ranges shown are based off the following five methodologies: (1) debt to own-
source revenues, (ii) debt per capita, (iii) debt to state personal income; (iv) debt to GDP; and
(v) fixed costs to own-source revenues. Implied debt capacity and expected growth in debt
capacity must be sufficient to cover both restructured debt and debt service on any future new
money capital borrowings Puerto Rico needs to maintain its public infrastructure. To the
extent new and additional revenues are enacted in the future, including revenues designed to
support future capital projects or generated by public-private partnership infrastructure
investments, then those initiatives could generate additional debt capacity for Puerto Rico that
is not reflected in the current 2020 Fiscal Plan projections. Consistent with the February g,
2020 Commonwealth Plan Support Agreement, the debt service on Commonwealth tax-
supported debt (excluding COFINA senior bonds) is limited to 20 years for the purposes of
this analysis. The 5-year average capacity statistics represent the average par amount between
the five methodologies of an implied 5.55% 20-year level debt service structure. Moody's
defines "fixed costs" as the sum of a state's annual debt service and its annual budgetary
pension and retiree healthcare (i.e., Other Post-Employment Benefits (OPEB)) expenditures.
Given that Puerto Rico's public employee pension system is essentially zero percent funded -
and that as a consequence the Central Government will pay pension expenditures on a fully
PayGo basis from budgeted revenues each year — the fixed costs ratio helps capture that
burden in comparison to the level of fixed costs as a percentage of Own Source Revenues for
US States.
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EXHIBIT 28: IMPLIED NET TAX-SUPPORTED DEBT CAPACITY RANGE BASED ON
AVERAGE US STATE ($M)
Implied debt capacity range based on average US state
$20,000 — Debt to GDP
— Debt Per Capita
-- Fixed Costs to Own Source Revenues
Debt to Persona! Income
Debt Service to Own Source Revenues
$15,000
$10.000
$5,000
S0
FY20 Fle25 FY30 FY35 FY39
Exhibit 29 uses the long-term 30-year macroeconomic forecast to determine a range of
implied debt capacity based on the debt metrics of the io highest indebted US states. The debt
capacity ranges shown are based off the following five methodologies: (i) debt service to own
source revenues, (ii) debt per capita, (iii) debt to state personal income, (iv) debt to GDP, and
(v) fixed costs to own-source revenues. Implied debt capacity and expected growth in debt
capacity must be sufficient to cover both restructured debt and future debt issuance. The 5-
year average capacity statistics represent the average amount between the five methodologies
of an implied 5.55% 20-year level debt service structure
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EXHIBIT 29: IMPLIED NET TAX-SUPPORTED DEBT CAPACITY RANGE BASED ON TOP-
10 HIGHEST INDEBTED US STATE DEBT METRICS ($M)
Implied debt capacity range based on top-10 highest indebted US state debt metrics, $10
$30,000 — Debi to GDP
— Debt Per Careta
- Frxecl COMB ter Own Source Revenues
--- Debt to Personal Income
$25,000 - Debt Service to Own Source Revenues
$20,000
$15,000 urerelrunorm g Average Fr35239. 510.539
Average Fr20-24: 59,061 Average FY' 25-73 5.9.,61)5 Average Fr3Cr 14 $9132
$10,000
$5,000
$0 '
FY20 FY25 FY30 FY35 FY39
For loslrebopo purposes. Vetoes n (Rana s?
Tire Own Source Revenues metric used rot me OnSI =crate Ord For.e4 Cells reereSU rem in WAGS MG 53 45% areoYeed Seem T7 nvesc Amount Wed to pay ale restrucLu.ed ?Fero P orx
sorcludes reshrelunedWFOLA WIN service to mace The varied debt canemay and also each/dal Federal Transfers. a all eases. future untied sleet capacity range la levee Su the Cie
3GG.5:G.10 Own SOGG:L RGyGMIGS 15515
The illustrative implied levels of the Government's restructured debt in the previous chart are
calculated by applying the Net Tax Supported Debt ratios of the "top ten" US states (in terms
of debt load) to Puerto Rico's future projected GDP, population and Own-Source Revenues.
Debt Service to Own Source Revenue and Fixed Costs to Own Source Revenues figures are
derived assuming debt service of a long-term level debt service structure, with a 5.55% average
coupon.
Exhibit 30 uses the long-term 30-year macroeconomic forecast to determine a range of
implied debt capacity based on the debt metrics of the 25 highest indebted US states with the
same five methodologies.
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EXHIBIT 30: IMPLIED NET TAX-SUPPORTED DEBT CAPACITY RANGE BASED ON TOP-
25 HIGHEST INDEBTED US STATE DEBT METRICS ($M)
Implied debt capacity range based on top-25 highest indebted US state debt metrics, SW'
$30,000 — Debt to GDP
— Debt Per Capita
— Fixed Costs to Own Source Revenues
•- Debt to Personal Income
$25,000 Debt Service to Own Source Revenues
$20,000
$15,0
$10,000 Average FY'20-74 55,226 Average FY 5-'n $5,396 Average FY'30-'34 $5,513 Average FY 35-'39: $5,854
$5,000
FY20 FY25 FY30 FY35 FY39
For 11.1rettell purpmtaa. VelbeS n11500111.?
The Own Source Revenues metric used Tar Me Dee! Service and Facer) Casts iinecieu res ar3uiles the Perigeri Sates Ta.aase Amount ueadfv pay Pie restrucLareeCOFNA Gorda,
excarasnis-IniclurraCOFIRA adv service to reser. the magma oat capacey. arC also excludes Federal. Transfers. in iN celep future !WOOD Debt capacity range la Mier) Sa lire Datrt
3erwlealie Own Source Revenues .iletne
Exhibit 31 uses the long-term 30-year macroeconomic forecast to determine a range of implied
debt capacity based on the debt metrics of the 25 lowest indebted US states with the same five
methodologies.
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EXHIBIT 31: IMPLIED NET TAX-SUPPORTED DEBT CAPACITY RANGE BASED ON 25
LOWEST INDEBTED US STATE DEBT METRICS ($M)
Implied debt capacity range based an 25 lowest indebted US state debt metrics, IA
$30,000 •■■• NIA to GOP
,•—• Debt Per Capita
— Fixed Costs to OM Source Revenues
Debt Co Personal /norm
$25,000 — Debt Solace to Own Source Revenues
$20,000
$15,000
$10,000
$5,000 •1=1.
Average Fr2V241 S2.014 Average FY25-'20. 52,062 Average Fr30234: S2,111 Average Fr35-19 S2,165
FY20 FY25 FY30 FY35 FY39
1..1,v100. mr■ M•az
c a4 p
v.. re CPAIP rarpEel v, ••114. wry limb 4114 lor• .1+,0,, U610. My (9,MI C 3C-T'Ph-
Ora/MA 12 11int,* rviliv vim*, vs. avv e•cl.vel • II WNI•AgArt3v ralgt s ssleC V re cll..
Maximum annual debt service cap on restructured fixed payment debt: The
implied debt capacity and expected growth in debt capacity must be sufficient to cover both
the payments due on the restructured debt and all payments due on future new money
borrowings. Accordingly, the aggregate debt service due on all fixed payment debt issued in
the restructuring of the Government's existing tax-supported debt should be capped at a
MADS level. The cap would be derived from the US state rating metrics, and specifically from
what Moody's calls the "Debt Service Ratio." The Debt Service Ratio is the ratio of total
payments due in a year on al] existing net tax-supported debt over that state government's
own-source revenues (i.e., excluding federal transfer payments) in that year.
The Moody's report indicates that the average Debt Service Ratio for the all US states is 4.3%.
The Moody's report indicates that the average Debt Service Ratio for the top 10 most indebted
states is 8.6%. The Moody's report indicates that the average Debt Service Ratio for the top 25
most indebted states is 6.4%. The Moody's report indicates that the average Debt Service Ratio
for the 25 lowest indebted states is 2.1%. To the extent any of these Debt Service Ratios is used
to set a MADS cap on the restructured debt and the Primary Surplus is below the MADS level,
then the debt service due on fixed payment debt would need to be set at the lower of the
amount available for debt service or the MADS limit.
With respect to the Moody's Fixed Costs Ratio, the September 2019 Moody's report indicates
that the average Fixed Costs Ratio for all US States is 9.6%. The same report indicates that the
average Fixed Costs Ratio for the io States with the highest Fixed Costs Ratios is 19.8%, the
average Fixed Costs Ratio for the 25 States with the highest Fixed Costs Ratios is 13.9%, and
the average Fixed Costs Ratio for the 25 States with the lowest Fixed Costs Ratios is 5.3%.
Debt sustainability analysis. Exhibit 32 below calculates implied debt capacity based on a
range of interest rates and 2020 Fiscal Plan risk factors under an assumed illustrative 20-year
term and level debt service. The risk factor is calculated by reducing the amount of projected
cash flow available per year for debt service by a certain percentage. For example, a 20% risk
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factor case would use only 8o% of the projected cash flow available to pay debt service on fixed
payment debt.
EXHIBIT 32: IMPLIED DEBT CAPACITY BASED ON RANGE OF INTEREST RATES AND
RISK FACTORS ($M)
Implied debt capacity based on range of rilerest rates and contingency, 5M
Sensi /Way Analysi s Implied Debt Capacity at 20% contingency
Illustrative Cash Row Available $200 $400 $600 $800
4.0% $2,174 $4,349 $6,523 $8,698
Sensitivity Analysis:
5.0% 1,994 3,988 5,982 7,976
PV Rates %
5.0% 1,835 3,670 5,506 7,341
Sensitivity Analysis_ Implied Debt Capacity at 5% PV Rate
Illustrative Cash Flow Available $200 $400 $600 $800
10 0% $2,243 $4.486 $6,730 $8,973
Sensitivity Analysis
20.0% 1,994 3.988 5.982 7,976
% Contingency
30.0% 1,745 3,489 5,234 6,979
Restoration of cost-effective market access: As Puerto Rico seeks to regain cost-
effective capital markets access, rating analysts and investors will demand that the
Government demonstrate improvement in all four core areas of creditworthiness identified by
Moody's: (i) the economy, (ii) Government finances, (iii) governance and "fixed cost" debt
service, and (iv) pension expenditures. The Government must adhere to structurally balanced
budgets reflecting ongoing fiscal discipline and return to the timely publication of audited
financial statements and related disclosure information. Together, these and other measures
outlined in the 2020 Fiscal Plan can chart a path to restoring Puerto Rico's market access.
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Part III. Investments to revitalize Puerto Rico
Despite the challenging economic climate ahead, the 2020 Fiscal Plan furthers the Oversight
Board's multi-year strategic investment program to improve government services, increase
competitiveness, and create the conditions for growth that can benefit all residents.
Over multiple Fiscal Plans the Oversight Board has called for investments in front-line services
that residents depend on for health, safety, and economic opportunity. This has included
major investments in healthcare, public safety, and education. The 2020 Fiscal Plan preserves
investments included in prior Fiscal Plans and supplements them in priority areas such as
broadband infrastructure, developing the technology-oriented workforce of Puerto Rico, and
revitalizing the manufacturing sector.
With the onset of the COVID-19 pandemic and resulting economic damage, it is now more
imperative than ever that the Government make longer-term investments in the Island's
infrastructure and workforce to lay the groundwork for recovery, future innovation, and
success in an increasingly competitive global economy.
In total, the 2020 Fiscal Plan proposes $5.5 billion in investments over FY2020-FY2025.
These investments can be categorized as follows.
Immediate response to COVID-19
As described in Section 4.2.3, the Oversight Board has worked closely with the Government to
act decisively to mitigate the effects of the sudden economic shock caused by the COVID-19
pandemic. These initial FY2020 investments have included:
• Providing hazard pay for front-line workers (—$213 million): Providing one-time
bonuses to essential front-line workers (including public and private nurses and
technicians, police, certain correctional staff, and professionals managing taxes and
financial operations) so as to support them during this challenging time and reward them
for their valiant efforts in combating the COVID-19 pandemic.
• Supporting direct payments to residents ($160 million): Offering a $500 one-
time cash payment to 200,000 self-employed individuals and a $1,500 one-time cash
payment to 40,000 small businesses on the Island.
• Supplying essential supplies and equipment ($55 million): Facilitating the
purchase of critical medical and public safety supplies, as well as enabling urgent capital
expenditure programs.
• Enabling distance learning in the public education system (—$255 million):
Purchasing tablets, software, and training services necessary to support distance learning
for all PRDE students and teachers as part of the Emergency Measures Support Package
issued in response to the COVID-19 emergency.
• Supporting municipalities ($100 million): Providing funding to help municipalities
weather the fiscal challenges posed by the COVID-19 pandemic.
• Ensuring municipalities have adequate liquidity ($185 million): Authorizing
liquidity support for municipalities facing delayed property tax collections as a result of
COVID-19.30
30 •
Theili qu idi ty facility is considered a use of the Commonwealth balance sheet, not a Fiscal Plan expense.
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• Enabling research and development ($2 million): Funding COVID-19 related
research and development in CPR's Medical Sciences Department.
Investing in critical healthcare infrastructure
The Oversight Board further proposed to the Government to use remaining FY2020 funds to
invest in healthcare infrastructure and services in the near-term. The Oversight Board has
recommended several priority investment opportunities, but has not yet secured agreement
from the Government. These investments would include:
• Capital improvements in public hospitals (—'$158 million): Addressing critical
infrastructure gaps (e.g., the renovation of functionally-obsolete facilities, purchase of
power generators) that are necessary to expand capacity and ensure facilities are equipped
to meet Puerto Rico's healthcare needs. Facilities and hospitals included are the
Department of Health, the University Pediatric Hospital, the Adult University Hospital,
Hospital Universitario Ramon Ruiz Arnau, the Medical Services Administration including
Centro Medico, the Mental Health and Drug Addiction Services Administration, the
Comprehensive Cancer Center (in addition to the funds outlined in the previous section),
UPR Medical Sciences Campus, and the Cardiovascular Center Corporation.
• Public hospital IT (—$90 million): Instituting and expanding the use of Electronic
Health Record programs and driving operational improvements through the use of digital
hospital management tools. The Oversight Board recommends that $70 million be
invested in FY2020 and has included $20 million for investment in FY2021.
• Telehealth infrastructure (—$5 million): Expanding access to care through
development of a telehealth platform and establishment of access points in underserved
areas.
• Supporting opioid treatment (—$3o million): Combating the harmful effects of the
opioid epidemic through enhanced access to treatment, medication, and educational
resources. The Oversight Board recommends that $io million be invested in FY2020 and
has included $io million for investment in both FY2021 and FY2022.
• Providing scholarships for healthcare students (—$30 million): Addressing the
lack of access to quality healthcare in underserved areas by providing funding support to
healthcare students committed to serving these communities. The Oversight Board
recommends that $10 million be invested in FY2020 and has allocated $20 million for
investment in FY2021.
Enhancing healthcare services
Healthcare continues to be a priority for Puerto Rico, particularly in light of the Island's recent
history of multiple natural disasters. Accordingly, the 2020 Fiscal Plan both preserves and
supplements the strategic healthcare investments included in prior fiscal plans. Investments
in healthcare include:
• Improving the Medicaid system (—$265 million): Improving the availability and
quality of healthcare to vulnerable populations by increasing reimbursement rates,
expanding coverage for certain medications, and investing in IT programs.
• Maintaining nurse and health professional staffing levels (—$173 million):
Ensuring access to quality healthcare by retaining nurses and other health professionals.
• Capital expansions at public hospitals (—$iio million): Bolstering capacity at
public hospitals through major capital projects, such as construction of new wings starting
in FY2021.
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■ Operationalizing the Comprehensive Cancer Center ($30 million): Fully
operationalizing the UPR Comprehensive Cancer Center through purchase of equipment
and hiring of staff.
■ Enabling operational efficiencies ( — $8 million): Funding to the Psychiatric
Hospital for federal certification, materials and supplies for the Department of Health, and
$1.2 million incentive-based funding contingent on completion of an analysis that
identifies back-office efficiency opportunities at the Department of Health and on the
passing of legislation to consolidate ASES into the Department of Health.
Safeguarding public safety
The Oversight Board has made public safety a priority multi-year investment focus, including
by making a major investment in police compensation. Multi-year investments across all
public safety agencies include:
■ Police compensation ( — $1.2 billion): Providing for increases to police salaries and
benefits to improve recruitment and retention of sworn officers, as well as funding for
overtime and backpay.
■ Equipment and capital ( — $60 million): Funding for capital improvements and
purchase of equipment for Police, Firefighters, and Forensics Institute.
■ Firefighter compensation ( — $17 million): Funding to maintain the $1,500 increase
in firefighter salaries, and providing an additional salary increase.
■ Emergency medical service providers (— $6 million): Ensuring that there are
sufficient emergency response personnel to assist residents, particularly in light of recent
natural disasters and the ongoing COVID-19 pandemic.
■ Forensics Institute personnel ( — $23 million): Hiring specialists at the Forensics
Institute to address the backlog of cases.
■ Efficiency and status of facilities study/analysis ( — $6 million): Incentive-based
capex funding contingent on completion of a study to identify footprint consolidation and
operational efficiency opportunities at the Department of Corrections.
Driving educational outcomes
The Oversight Board has devoted significant attention to the imperative to improve
educational outcomes in Puerto Rico, evidenced by a multi-year investment program above
and beyond the substantial federal funds available to the Government. These investments
include funds for:
■ Public school nurses and psychiatrists ( — $337 million): Protecting the physical
and mental health of schoolchildren by ensuring that every public school has a nurse
available and that all students have access to counseling support.
■ English Language Learning (—$5 million): Developing teaching resources to
support improved English language education.
■ Teacher and school director compensation (—$285 million): Providing salary
raises for transitory teachers and directors, which PRDE mistakenly excluded from the
FY2o19 and FY2o2o salary raises previously funded by the Oversight Board.
■ Needs-based scholarships (—$179 million): Increasing funding for the UPR
scholarship program to enhance access to higher education for those without the necessary
financial means. This is in addition to the $35 million already provided in FY2o19, for a
total of $214 million for the scholarship fund.
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■ Textbooks, food, transportation, and other expenses (-$65 million): $3 million
in funding to purchase new textbooks for students in addition to $22 million provided in
FY2o2o, as well as funds to support student food expenses, transportation, and equipment
/ materials.
■ Teacher time and attendance (-$6 million): Incentive-based funding for schools
and directors that implement regular time and attendance reporting.
■ Student attendance (-$700,000): Incentive-based funding for schools that
implement regular student attendance reporting.
■ Digitalization of Individualized Education Programs (IEP) (-$25,000):
Funding to incentivize successful digitization of Special Education IEPs.
■ School scorecards (-$1 million): Incentive-based funding for school directors that
perform well on scorecards, which are to be developed and implemented across all public
schools.
■ Education innovation (-$7 million): Awards to be allocated through an education
innovation school competition to schools for implementation of innovative programs and
practices.
Strengthening the technology sector
To ensure Puerto Rico can compete in a global economy, the 2020 Fiscal Plan includes critical
funds for technology infrastructure and workforce development programs. These include:
■ Universal broadband access ($400 million): Ensuring that all residents can benefit
from access to online resources through incentives to expanded broadband roll-out and
the provision of faster service.
■ Establishment of a 21st Century Technical and Business Education Fund ($5o
million): Improving technical and business talent on the Island through programs
designed to develop workforce skills that are aligned with the needs of the 21't century
economy.
Growing the manufacturing sector in Puerto Rico
The manufacturing sector in Puerto Rico is another potential area that can help drive growth
and establish more locally-driven economic activity. The 2020 Fiscal Plan includes the
following investments:
■ Defining a comprehensive and actionable plan to reactivate the
manufacturing sector: The Oversight Board will conduct a comprehensive study to
update the facts and acquire the knowledge necessary for the private sector and the
Government to define a comprehensive and actionable plan to reactivate the
manufacturing sector in Puerto Rico.
Investments to transform government services
To accelerate transformation of government services, the Oversight Board has allocated
incentive-based funding to encourage progress in priority areas. These investments include:
■ Enterprise Resource Planning (ERP) system (-$36 million): Incentive-based
funding for Hacienda for progress and development of an ERP system.
■ Financial reporting (-$100,000): Incentive-based funding for more timely
publication of Comprehensive Annual Financial Reports (CAFRs).
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■ Transparency of incentives for the private sector (—$7 million): Incentive-based
funding for regular publication of economic incentives for private corporations and
associated returns.
■ Retirement fund management (—$2 million): Incentive-based funding for AAFAF
to complete full implementation of segregated defined-contribution (DC) plan accounts.
■ Additional staff for priority projects ($44 million): Funds to hire additional staff
in priority program areas, including GSA to centralize procurement and NAP
implementation.
■ Municipal service consolidation Ono million): Incentive-based funding for
municipalities to consider different voluntary options for service consolidation in order to
reduce costs. Municipalities that voluntarily choose to consolidate services will be eligible
to receive a one-time financial incentive upon certification of such action by the Oversight
Board. To fund this initiative, the 2020 Fiscal Plan would set aside $22 million in each
fiscal year through FY2o25 for distribution among municipalities that complete service
consolidations, once confirmed by the Oversight Board.
Supporting more effective investment of capital expenditures
and infrastructure
To expedite Puerto Rico's reconstruction, and aligned with the Government's request for a
working capital fund, the 2020 Fiscal Plan includes:
■ Working Capital Fund ($75o million): A working capital fund will be made available
to address the liquidity constraints associated with the reimbursement nature of disaster
relief programs, subject to certain guidelines, restrictions, and best practices that the
Oversight Board will establish. This will help to accelerate FEMA-approved reconstruction
projects, particularly for permanent projects.31
Chapter 7. Strengthening Puerto Rico's technology
sector
7.1 Broadband infrastructure
The 2012 Puerto Rico Broadband Strategic Plan (written by Connect Puerto Rico, in
conjunction with the Puerto Rico Telecommunications Regulatory Board and Puerto Rico
Broadband Taskforce) established a vision of a Puerto Rico with fast, robust, redundant, and
ubiquitous broadband access. Broadband provides numerous socio-economic benefits to
communities and individuals, including by improving labor market outcomes by enabling
remote education, increasing business productivity through better connectivity, providing
access to better health care through telemedicine for those in rural areas, and enhancing civic
participation through better access to information.
During the recent COVID-19 pandemic, internet access has become even more important to
residents' livelihoods. Across the US, telemedicine is becoming more widespread as a way to
deliver health services safely. As public and private school systems alike move to distance
learning models, students who do not have access to reliable, high speed internet are unable
to participate — and therefore fall farther behind.
31 The working capital facility is considered a use of the Commonwealth balance sheet, not a Fiscal Plan expense.
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Unfortunately, within Puerto Rico, while there was some growth in broadband deployment in
2011-2014 (driven by an aggressive capacity upgrade of cable networks, as well as the
deployment of fiber by other broadband providers), critical broadband infrastructure gaps still
exist, particularly across rural areas of the Island. As of 2014 (the most recent year for which
data is available), while —99% of urban households across Puerto Rico had access to speeds of
at least 10 Mbps download and 1.5 Mbps, this was true for only —66% of rural households .32
Broadband adoption figures across Puerto Rico also reveal a persistent gap among certain
demographic groups. Broadband non-adopters in Puerto Rico were generally low-income
groups, senior citizens, people with disabilities, and/or individuals with less education, which
mirrors demographic trends on the US mainland and elsewhere. These gaps have possibly
widened since Hurricane Maria, particularly in the mountainous region of Puerto Rico, where
topography has hindered replacement of damaged infrastructure.
EXHIBIT 33: PUERTO RICO BROADBAND STRATEGIC ASSESSMENT (2015) —
UNSERVED HOUSEHOLDS
Symbology
- City Number of Unserved Households per
— Primary Road Square Mile. per Census Block
Secondary Road 1.85.5+ 006 - 9.49
2111140,S0
Municipality Boundal. - 95.49 0 - 0,05
Water up 20.50 - 40.49 Broadband Available
National Lands 409.50 - 20.49
Addressing the digital divide is critical to ensuring that all residents of Puerto Rico can take
advantage of the many well well-documented socio-economic benefits afforded by Internet
connections. These benefits are most evident when people have access to the Internet at speeds
fast enough to be considered broadband; these speeds are required to facilitate full interaction
with advanced online platforms.
To accelerate growth in broadband access and expand resident adoption and use of online
resources in Puerto Rico, the 2020 Fiscal Plan allocates $400 million in FY2021 (to be used
over three years) to incentivize private sector investments in broadband build-out and to
improve access to faster speed offerings in underserved areas. These investments should help
overcome barriers to broadband expansion and ensure that all residents and enterprises in
Puerto Rico benefit from this capacity. The goal is to set up funds to support expansion efforts
in unserved and underserved areas through grant programs that fund a portion of the cost of
deployment in these communities.
32 Puerto Rico Broadband Strategic Assessment, 2015
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A successful broadband program will require strong leadership, accountability, continuity,
and willingness to work with a broad range of entities, both within the Government and the
private sector. While many similarities exist across state broadband programs and the
activities that they are undertaking to close gaps in access, notable differences are also evident.
These include the form and structure of the program, its life span, and the resources that the
state has committed.
Some states, including Minnesota and Colorado, have broadband offices established by statute
or executive order. Others, including Tennessee, have staff within an agency dedicated to
supporting broadband programs.
The 2020 Fiscal Plan requires AAFAF to conduct a transparent, competitive procurement
process as reviewed and approved by the Oversight Board to select an organization to serve as
the administrator of these funds (the "Fund Administrator"). The selected Fund Administrator
must have a staff of experienced professionals and a dynamic network of collaborators that
include a broad range of private and government organizations. The Fund Administrator must
also ensure accountability by requiring that all grantees demonstrate they are providing the
service they were funded to deliver, while also providing the data needed to evaluate the
program and progress toward defined goals. AAFAF must complete the procurement by
December 1, 2020.
EXHIBIT 34: ALLOCATION OF STRATEGIC INVESTMENT FUNDING FOR TELECOM
BROADBAND INFRASTRUCTURE ($M)
FY21 FY22 FY23 Total
Assessment — 10 0.5 15
Update Plan
Broadband 50.0 168.0 173.0 31.0
Grant Program
Trust 2.5 2.5 2.5 7.5
Admin/Program
Evaluation
Total 53.5 170.5 176.0 400.0
Over the next three years, in partnership with the Federal Government and both public and
private stakeholders, the Fund Administrator must collaborate to assess, evaluate, and map
various opportunities for broadband expansion. Broadband inventory maps and technology
assessment research will enable a better understanding of the Puerto Rico broadband market
and help define infrastructure needs in underserved regions, as well as ensure that money is
sent to the right places. The Fund Administrator, in collaboration with the broadband provider
community, information and communication technology providers, K-12 education
stakeholders, the higher-education community, healthcare professionals, local government,
grassroots community groups working to address the digital divide in their communities, and
private sector groups for whom broadband is an essential investment asset, will be responsible
for:
■ Monitoring, measuring, and assessing the impact of broadband across the Puerto Rico
economy
■ Measuring and publishing aggregate, industry-wide data regarding broadband investment
trends
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■ Measuring and publishing aggregate broadband use patterns
■ Adjusting Puerto Rico economic indicators to estimate and monitor the impact broadband
has on the overall economy
The Fund Administrator is tasked with developing a solicited proposal mechanism with the
goal of providing funding to telecommunications operators and other Internet Service
Providers to support broadband deployment in unserved and underserved areas. The Fund
Administrator must institute grant reporting, data collection, and other accountability
measures to ensure that funded projects deliver the promised service and provide data
necessary for the state to evaluate progress toward its goals.
The Fund Administrator must ensure it leverages federal support for broadband expansion,
by working to provide timely information and strategic planning support to broadband
providers who can leverage FCC funding opportunities. The Fund Administrator, in
collaboration with the Puerto Rico Broadband Taskforce, must also work to streamline
construction permitting and planning and leverage existing public assets, such as poles, ducts,
conduits, and rights-of-ways, to incentivize private broadband investments.
Through driving measuring, monitoring and strategic function to telecoms and Internet
service providers, the 2020 Fiscal Plan expects to improve the overall infrastructure on Island
and to provide enhanced opportunities—through better and more equal access to education,
healthcare, and information—for the people of Puerto Rico.
7.2 21st Century Technical and Business Education Fund
In addition to funding for telecom and broadband infrastructure, the 2020 Fiscal Plan
recognizes the importance of investing to close core skill gaps and ensure the people of Puerto
Rico are able to compete in a global economy. Creating an aligned, 21' century workforce that
prepares residents of Puerto Rico to thrive is the central challenge to maintaining economic
competitiveness over the next decade.
As the pace of technological change has accelerated, one core skill gap in Puerto Rico is around
technical capabilities — especially among those who are not part of the digital native
generation. To close the gap for these people who are already in the workforce, Puerto Rico
must take a learner-centric approach to make it easier to access targeted technical education.
Meanwhile as businesses look for new skillsets, they are often willing to look beyond college
graduates to fill open roles — especially for technical skills. According to a recent survey by
Future Workforce, go% of employers would hire candidates who validate their knowledge
using a certification, digital badge, or coursework in lieu of a college degree.33 In addition, 55%
of employers often offer jobs to people who have not finished college. Today, the number of
both traditional and non-degree credentials is rising. There are now 315,067 unique credential
programs from non-academic organizations, with the largest categories being digital badges
and online course completion certificates. Coding bootcamps, which have appeared recently,
were responsible for over 1,000 unique credentials.
In Puerto Rico, there are initiatives such as Codetrotters Academy, which offers 10-week
certification programs in web and mobile development, and the Hobberton School, which
recently opened a campus on the Island. However, these programs are limited and may not be
affordable to many residents. In addition, they mostly focus on web development and
programming, thereby leaving an array of important technical areas uncovered, such as cloud
infrastructure, server administration, cyber security, business intelligence, Al, and machine
learning. The universities in Puerto Rico, particularly private ones, have begun expanding
33 Closing the Skills Gap 2019, Future Workplace and Wiley Education Services
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continuing education and credential programs, but enrollment is low due to inability to afford
tuition costs and ineligibility for Pell Grants. As a result, many university programs have
closed.
Addressing the need for additional short-duration technical and business education
opportunities requires forceful and forward-thinking leadership. To spearhead this drive for
Puerto Rico, the 2020 Fiscal Plan allocates $50 million for a asst century Technical and
Business Education Fund.
The 2020 Fiscal Plan requires AAFAF to conduct a transparent, competitive procurement
process as reviewed and approved by the Oversight Board to select an organization to serve as
the administrator of these funds (the "Education Fund Administrator"). The selected
Education Fund Administrator must have a staff of experienced professionals and a dynamic
network of collaborators that include a broad range of private and government organizations.
AAFAF must complete the procurement by December 1, 2020.
The Education Fund Administrator will be tasked with developing a plan for 2151 century skills
for the entire workforce pipeline in Puerto Rico. The plan will identify the priority technical
and business areas/skills to focus on, and the program will partner with multiple stakeholders
in catalyzing and evolving the skills ecosystem. Scholarships would be made available for
programs that are certified by the Education Fund Administrator, which would do so in
alignment with the skill development plan. To support these efforts, the Education Fund
Administrator must establish an engagement mechanism with stakeholders (e.g., a private
sector taskforce), publish the results of its skills assessment report, create the supporting
infrastructure for the scholarship program, and put in place a regular monitoring and
evaluation process.
Furthermore, the plan will allow universities and private providers to develop and open
programs in anticipation of fees from the scholars' enrollment. Given the importance of online
learning, the plan should also encourage programs to be offered in multiple formats, be it
online, on campus, or a hybrid of the two.
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PART IV: Restoring growth to the Island
The fiscal and economic turnaround of Puerto Rico cannot be accomplished
without the implementation of structural economic reforms that promote the
transformation of the Island's economy and its workforce. Puerto Rico struggles
from an uncompetitive labor market, unreliable energy and infrastructure, regulatory and
other burdens that hinder business productivity, and low educational outcomes and workforce
support — all of which prevent it from competing in a global economy and from attaining
positive economic growth. Structural reforms—those that seek to strengthen the fundamental
drivers of economic growth to encourage job creation, investment, and increased
productivity—could transform Puerto Rico's future. Years of successive natural disasters and
health crises further underscore the need for comprehensive Government action as outlined
in this 2020 Fiscal Plan to reverse the economic challenges that have plagued the Island and
its people for far too long. If implemented quickly and widely, structural reforms are projected
to drive real economic growth, reversing decades-long economic challenges and enabling the
Island's economy and its people to flourish.
Specifically, the Government must pursue the following structural economic reforms to
achieve their forecasted economic impact:
■ Human capital and welfare reforms that will improve the well-being and self-
sufficiency of all Puerto Ricans, increase the quality and competitiveness of the workforce,
enable investment, and facilitate the economic modernization of the Island, resulting in a
cumulative GNP impact of 0.15% by FY2026.
■ K-12 education reforms that will position all students to succeed in school and upon
graduation by raising the quality of the Island's public schools, resulting in an additional
0.01% GNP impact per year starting in FY2037 (i.e., reaching 0.13% by FY2049).34
■ Ease of doing business reforms that will improve conditions for economic activity and
business vitality, attracting new investment and creating jobs, resulting in a cumulative
GNP impact of 0.30% by FY2025.
■ Power sector reforms that will improve the availability, reliability, and affordability of
energy for families and businesses, resulting in 0.30% cumulative GNP impact by FY2024.
■ Infrastructure reform and capital investment that will improve the flow of goods,
services, information, and people across the Island.
Unfortunately, while the Government has faced numerous unexpected disasters and crises
that impeded implementation, it has also, at times, rejected the deadlines outlined in the Fiscal
Plans. Together, this has resulted in delayed implementation on most of the identified
structural reforms. For example, the Government has:
■ Refused to pursue comprehensive private sector labor reform;
■ Delayed implementation of the complementary Nutrition Assistance Program (NAP) work
requirement;
■ Made little progress in strengthening the Island's workforce development programs;
■ Undertaken almost no discernible efforts to reform the Island's K-12 education system;
34 Education reforms are projected to generate GNP impact after the first kindergarten class to benefit from those reforms
completes their first year in higher education or the workforce. As such, this Certified Fiscal Plan assumes that the
implementation of K-12 education reforms in FY2024 will generate GNP uptick starting in FY2037.
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• Implemented very few of the required ease of doing business reforms in a way that would
make the Island substantially more competitive and attractive to investors; and
• Implemented the Earned Income Tax Credit (EITC) but without a robust campaign to raise
awareness of the new benefit and encourage work in the formal sector.
These delays have already diminished the projected economic uptick and revenues associated
with structural reforms. Had the structural reforms above been implemented at the pace and
scale forecasted in the 2019 Fiscal Plan, the Government would have generated 0.14% in
additional GNP uptick, worth another $10 billion in tax revenues by FY2049. This shortfall is
even more pronounced relative to the structural reform impact forecasted in the April 2018
Fiscal Plan, whereby the Government would have generated 1.18% in additional GNP uptick,
worth another $66 billion in tax revenues by FY2049 (Exhibit 35). Not only have the residents
of Puerto Rico lost opportunities to gain new skills, experiences and education, but the Island
has lost time in attracting incremental investment that would produce jobs and tax revenues
to be reinvested again into the people of Puerto Rico.
EXHIBIT 35: FORECASTED GNP UPTICK IN 2019 AND 2020 CERTIFIED FISCAL PLANS
Forecasted impact of structural reforms 0 3NP
April 21118 Fiscal Plan 201g Fiscal Plan M. 2020 Fiscal Plan
Reduced uptick
worth -$66
bilkon
206 ■
1.80 1.80 1.80 1,60 1 50 1.18)
1 55
I
O.85
0.75
I
50
40
10
0 1
FY21 FY22 FY23 FY24 FY26 FY26 FY21-49
Given the disruption and hardship brought about by the COVID-19 pandemic, the economic
uplift that could be generated through structural reforms matters now more than ever. Urgent
and comprehensive Government action is needed to promote economic recovery and
opportunity for all Puerto Ricans. If implemented as specified in this Certified Fiscal Plan,
structural reforms are projected to collectively generate an invaluable 0.75% GNP uptick by
FY2026, as well as 0.88% in total GNP growth and more than $24 billion in additional
Commonwealth revenues by FY2049 (Exhibit 36). As discussed in Chapter 6, these revenues
will play a key role in helping the Government address budget shortfalls in the medium- and
long-term.
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EXHIBIT 36: ESTIMATED IMPACT OF STRUCTURAL REFORMS
mpact of structural reforms.
- - — - - -
r • Human Capital and Labor Eased doing business • Energy • Education
24,665
4,093 a
242
125
75 159
33 75
Sc
8
121 1:1 —1111.1■1—
FY20 FY21 FY22 FY23 FY24 FY 25 FY20.25 F1'20-49
Chapter 8. Human capital & welfare reform
8.i Basis for human capital and welfare reforms
As of 2019, Puerto Rico's formal labor force participation rate stood at 39%, the second-lowest
in the world and far below US and Caribbean averages.35 The youth unemployment rate is
equally high-24.7%—roughly double the world average (12.7%) and three times the US
average (8.4%).36 Bringing labor force participation rate in line with that of even the lowest
US state (West Virginia, with 54%) would improve employers' flexibility and create labor
conditions closer to those on the mainland, driving economic growth and reducing poverty.37
Puerto Rico's low labor force participation is primarily a function of public policy, namely,
suboptimal welfare requirements and underperforming human capital development systems.
The Island's low labor force participation predates the 2017 hurricanes, the 2019-20
earthquakes. the COVID-19 pandemic, and even the economic downturn that began in 2006.
According to the World Bank, Puerto Rico's labor force participation rate has ranked in the
bottom-2o of more than 200 global economies since at least 1990.38
35 For comparison. the US has a 62% labor force participation rate. In the Caribbean, the Dominican Republic's labor force
participation rate was 64% in 2019. Jamaica and Haiti's rates were even higher (66% and 67%, respectively). See the World
Bank Group via International Labor Organization. "Labor force participation rate, total (% of total population ages 15+),"
2019; and US Bureau of Labor Statistics, "Employment status of the civilian noninstitutional population 16 years of age and
over by region, division, and state, 2018-19 annual averages,' 2019.
36 The World Bank Group via International Labor Organization, 'Unemployment, youth total (% of total workforce ages 15-24),"
2019.
37 US Bureau of Labor Statistics, 'Employment status of the civilian noninstitutional population 16 years of age and over by
region. division, and state. 2018-19 annual averages,' 2019.
38 See the World Bank Group via International Labor Organization, labor force participation rate, total (% of total population
ages 15-1)," 2019.
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Suboptimal welfare requirements: Current welfare eligibility programs may
disincentivize some residents from pursuing work within the formal economy in order to
ensure sufficient nutritional support, housing and healthcare.39 For instance, current welfare
eligibility guidelines phase-out sharply as beneficiaries' income rise, informally taxing workers
for seeking work within the formal economy.40 This phenomenon is particularly pronounced
in the case of recipients of public housing assistance: even securing a part-time minimum
wage job can render a beneficiary ineligible for public housing, potentially forcing some
beneficiaries to choose between formal sector work and keeping their homes.41 Revised
eligibility guidelines and other policies that encourage residents to work could help resolve
these issues.
Underperforming human capital development systems: 2096 of working-age Puerto
Ricans lack a high school diploma, nearly double the US average (12%), and only 45% of K-12
students have reached Spanish proficiency on META-PR exams (the Island's standardized
tests).42 Worker training programs, meanwhile, are rare and disjointedly managed by 15 local
workforce boards. Strengthening the Island's education system and introducing coordinated
workforce development programs could mitigate these challenges and help ensure that all
Puerto Ricans are able to participate in the current and future economy.
Unfortunately, the Government has delayed the implementation of many human capital and
welfare reforms intended to address these structural challenges, reducing the potential
economic uplift to the Island and delaying the opportunity for residents in need of this critical
support. Continued Government inaction will further jeopardize the development of Puerto
Rico's human capital, the opportunities available to each resident of Puerto Rico for personal
development and economic self-sufficiency, projected GNP uptick and its associated increases
in tax revenues.
To realize the associated increases to GNP, the Government must begin
implementing the following human capital and welfare reforms beginning in
FY2021.
■ Broadly-publicize the new Earned Income Tax Credit (EITC) by:
— Hacienda: Transferring EITC promotional responsibilities to ADSEF
— ADSEF: Designing a multifaceted EITC outreach strategy (including working with
community organizations throughout the Island)
■ Introduce a Nutritional Assistance Program (NAP) work/volunteer
requirement by:
39 Cordero-Guzman, The production and reproduction of poverty in Puerto Rico," in Nazario, ed. Poverty in Puerto Rico: A
Socioeconomic and Demographic Analysis with Data from the Puerto Rico Community Survey (2014), 2016.
40 For example, a single parent with two dependents and an annual income below $4,900 was eligible to receive up to $4,229
dollars in annual Nutritional Assistance Program (NAP) benefits in 2016. But, should this parent work 35 hours per week at
minimum wage—generating approximately $12,180 in annual earnings, they would become ineligible for NAP benefits. Net
of taxes on their earning, full-time formal sector work would increase household income by only $7,002—the equivalent of a
$3.86 effective hourly wage. Effective hourly wage income equals income received from formal sector work minus income
lost from loss of benefits.
41 The US Department of Housing and Urban Development (HUD) sets income limits that determine the eligibility of applicants
for assisted housing programs. For US states, the limit to be considered an 'extremely low-income family" is determined by
HUD using the Department of Health and Human Services (NHS) poverty guidelines. However, an alternative formula is
used to define an extremely low-income family for Puerto Rico-30 percent of the median family income for an area or
lower—which results in lower income limits. The current HUD income limits are so low that, in many cases, entering the
formal labor market in a part time job at the minimum wage would result in losing eligibility for housing assistance. Thus, the
existing income limits directly disincentivize formal employment and hinder economic mobility in Puerto Rico.
42 Federal Reserve Bank of New York, An Update on the Competitiveness of Puerto Rico's Economy," 2014; Puerto Rico
Department of Education, "Resultados META-PR 2018-2019: Medicion y Evaluacion para la Transformacion Academica de
Puerto Rico," 2019; in 2019, only 47% of student attained proficiency in science, 39% in English, and 30% in mathematics.
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— ADSEF: Creating a work/volunteer requirement compliant with Certified Fiscal Plan
parameters
— ADSEF: Completing all administrative requirements (e.g. obtaining Federal
Government approval) necessary to implement a work/volunteer requirement
— ADSEF: Verifying the eligibility of all adult NAP recipients for the new work/volunteer
requirement
■ Create high-quality workforce development programs by:
— DDEC: Creating partnerships with private and social sector organizations to strengthen
worker training
— DDEC: Conducting regular analyses to understand private sector labor market needs
— DDEC & Vivienda: Allocating resources in a data-driven manner
— DDEC: Removing structural barriers to employment (e.g. difficult in securing
transportation and childcare to go to work)
8.2 Broadly publicize an Earned Income Tax Credit (EITC)
To promote labor force participation and reduce poverty, the Government
should more comprehensively promote the available EITC for tax year 2020 and
beyond. US policymakers implemented and promoted EITC across mainland states and have
seen meaningful gains in formal labor force participation as a result, especially among low- to
moderate-income workers. The credit is an effective anti-poverty tool, empowering
beneficiaries to defray the cost of education, training, and childcare and support their own
self-sufficiency.43 Since its creation in 1996, EITC has lifted 6.5 million people out of poverty
(half of them children)—more than any other US based anti-poverty initiative. However, the
value of the EITC is greatest when the targeted population is sufficiently knowledgeable of its
value to a degree that influences daily decision-making around whether they will enter or stay
in the formal economy and whether they will seek employment in Puerto Rico or elsewhere.
8.2.1 EITC design parameters
The 2019 Fiscal Plan required the Government to introduce an EITC adhering to the following
parameters in tax year 2019:
■ Program benefit is sized to account for the Island's relatively lower wages
■ Individual benefit is dependent on a filer's marital status, number of dependents, and
earned income verifiable through an employer-issued tax withholding statement
■ Potential benefit increases as earned income rises to a cap, then plateaus, and then
decreases at a phase-out income level until it reaches $0 (Exhibit 37)
■ EITC should be coupled with a robust promotional campaign to raise awareness of the
benefit among potential claimants and encourage formal labor force participation
43 To reward formal sector work, the credit reduces claimants' tax obligations and often generates a cash refund. For example,
a $1,000 increase in EITC benefit has been tied to a 7.3% increase in employment; see Hoynes and Patel, 'How Does EITC
Affect Poor Families,' 2015.
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EXHIBIT 37: EITC BENEFIT FORMULA
EITC Benefit Formula,
• Benefits begin with the first dollar of reported income and increases at the phase-in rate (different
depending on household size), up to the maximum credit
■ Benefit increase ceases when income reaches the phase-in cap Benefits remain constant at income
levels that fall between the phase-in cap and phase-out start
• When income reaches the phase-out start, benefits begin decreasing at the phase-in rate for each
additional dollar earned, until income reaches the income cap (at which point benefits are $0)
Individual/ Married
Number of Phase-in Phase-in Phase-out Single in- income cap, Maximum
Children rate, •vo cap S start. S come cap, $ $ Credit, F,:.
0 5.0 6,000 18,000 20,500 21,750 300
1 7.5 12.000 13,000 20,500 24,250 900
2 10.0 15.000 16,000 28.500 34.750 1,500
3 or more 12.5 16,000 17,000 33,500 42,000 2000
8.2.2 Current stale and path forward
Although the Government has implemented an EITC adhering to the design parameters laid
out above for tax year 2019, it has not coupled the credit with a robust promotional campaign
as required by the Certified Fiscal Plan. Hacienda's EITC outreach efforts have centered
primarily around sending circular letters detailing the benefit to tax preparers and establishing
a handful of outreach centers across the Island to discuss EITC with potential filers in-person.
The centers opened in late-February of this year, but their operations were cut short when all
non-essential business operations were closed on March 15th as a result of the COVID-ig
pandemic. By relying extensively on an in-person outreach campaign after the tax year was
over and failing to establish a more robust promotional strategy (e.g. via digital channels,
targeted marketing) throughout 2019, the uptake of the program and its intended benefits
have been muted.
To maximize the uptake and benefits of EITC, the Government must accomplish the following
actions by their respective deadlines:
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EXHIBIT 38: REQUIRED IMPLEMENTATION ACTIONS FOR EITC
Action item
• Monitor Ent filing data to prevent and detect fraud • Hacienda • Ongoing
• Assume responsibility for managing EITC outreach iii tax year 2020 and beyond • ADSEF • July It 2020
• Design an EITC outreach strategy For tax year 2020 and share wish Oversight Board • ADSEF • September 15,
2020
• Prepare EITC performance report and share with Oversight Board • Hacienda September 15.
2020
• Meet wnh Oversight Board to discuss EITC performance report and tax year 2020 • Hacienda. ADSEF September 30.
promotional strategy 2020
• Launch new EITC promotional campaign • ADSEF • Annually from
January 1.2021
• Monks EITC uptake data in real-time to Inform promotional campaign • Hacienda. ADSEF • Ongoing each lax
year
• Prepare EITC performance report and share with Oversight Board • Hacienda ADSEF • Annually from
Julie 1 2021
• Discuss EITC performance with Oversight Board • Haciehda. ADSEF • Annually from
June 15, 2021
8.3 Introduce a Nutritional Assistance Program (NAP)
work/volunteer requirement
To further support labor force participation, the Certified Fiscal Plan requires
that the Government introduce a work/volunteer requirement for select adult
NAP beneficiaries by FY2022. NAP is Puerto Rico's largest Government assistance
program and provides nutritional assistance. Unlike mainland Supplemental Nutritional
Assistance Program (SNAP) benefits, NAP does not include a work/volunteer requirement.
The Federal Government requires that all able-bodied adult beneficiaries work, volunteer, or
be enrolled in worker training classes for at least 20 hours per week to receive SNAP benefits.44
When well-designed, such requirements have led to increases in labor force participation.45
The implementation of a NAP work/volunteer requirement is critical to increasing labor
market participation and the potential growth anticipated from human capital and welfare
reforms.
8.3.1 Specific initiatives and design parameters
The Certified Fiscal Plan required the Government to adhere to a set of parameters when
implementing a NAP work/volunteer requirement. Specifically, the Government should:
■ Apply the requirement year-round to all able-bodied NAP beneficiaries aged 18_5946
■ Grant all eligible recipients up to a three-month transition period to secure employment,
begin volunteering, or enroll in qualified education or training programs ("qualifying
activities")
■ Mandate that all eligible recipients complete 80 hours of qualifying activities per month
44 NAP also differs from SNAP in that the former is funded as a block grant and is administered separately from the latter; see
Center on Budget and Policy Priorities, "How Does Household Food Assistance in Puerto Rico Compare to the Rest of the
United States?• 2020.
45 For example, when the Federal Government first introduced a work/volunteer requirement for recipients of Temporary
Assistance for Needy Families (TANF) benefits in the 1990s, the labor force participation rates of single mothers rose while
poverty rates among single mothers and children both fell substantially. See Gitis, A Menu of Options to Grow the Labor
Force " 2017, and Gitis and Arndt. "The 20th Anniversary of Welfare Reform," 2016.
46 As such, all NAP recipients who are under the age of 18, older than the age of 59, or medically certified as physically or
mentally unfit for employment should be excluded from the work/volunteer requirement.
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• Redesign NAP eligibility guidelines and benefit calculations to ensure that eligible
recipients are not penalized for seeking formal sector work
• Redistribute savings realized through the work/volunteer requirement to boost working
eligible recipients' take-home pay through an expansion of the Earned Income Disregard
(EID)47
• Continue to extend NAP benefits to children even if their parents are eligible recipients
who do not comply with the work/volunteer requirement
8.3.2 Current state and path forward
Unfortunately, the Government has made no meaningful progress in the implementation of
this work/volunteer requirement as of May 2020. The Government has yet to meet any major
milestones in the implementation of this reform, including designing the requirement itself.
Additionally, the Government insists that the work/volunteer requirement must be
implemented in three-month phases (i.e. a three-month requirement in year one, a six-month
requirement in year two, etc.) over the course of four years, further delaying implementation.48
By implementing this requirement in three-month phases, it is unlikely to have any positive
effect until the end of the four years. Delays to the implementation of the work/volunteer
requirement will inhibit efforts to boost labor force participation and could further diminish
the GNP uptick, tax revenues, and improvement in economic opportunities for Puerto Ricans
projected to follow.
To rectify this situation, the Government must accomplish the following action items by their
respective deadlines:
EXHIBIT 39: REQUIRED IMPLEMENTATION ACTIONS FOR NAP WORK REQUIREMENT
Action item Owner Deadline
• Design a NAP work/volunteer requirement proposal compliant with parameters • ADSEFf • July 1, 2020
above and share with the Oversight Board
• Meet with the Oversight Board to discuss proposal • ADSEF • July 15. MO
• Submit proposal to FNS2 • ADSEF • August 1,2020
• Assess operational requirements needed to implement the work/volunteer • ADSEF • October 15. 2020
To be requirement as proposed
completed
• DISCUSS operational requirements with the Oversight Board • ADSEF • October 31. 2020
in VY2021
• Receive workivolunteer requirement approval from FNS • ADSEF • November 1 2020
• Publish FNS-approved State Plan aligned with Certified Fiscal Plan parameters • ADSEF • December 15. 2020
• Retain a qualified third-party analytical firm acceptable to the Oversight Board to • ADSEF January 31, 2021
oversee implementation
• Complete review of all NAP recipients tovely workfvolunteer requirement eligibility • ADSEF • June 30, 2021
• implement full-year workNolunteer requirement • ADSEF • July 1.2022
To be
completed • End three-month transition paned for eligible reciperde • ADSEF • September 30. 2022
in FY2022 • Validate worlvvolunteer requirement implementation with the Oversight Board • Third party firm • November 15. 2022
and
beyond • Publish annual report on NAP program and work/volunteer requirement • ADSEF • Annually frol5 August
performance 15, 2023
Thu Ft.tir 5:<•.•1r-,01.•r,CC-evecDOrr•Mt 4ililwormsce, la turraniry rernzrar_. WWI 110 W.V./
td 5 Denanmer n or gtrile.rti rnOff •ed 04-01-10,, tr ace
47 The EID allows Government assistance beneficiaries to exclude a portion of income earned through formal sector work from
welfare benefit calculations. An increase in the EID can boost an aid recipient's take-home pay by allowing the claim
Government benefits that they otherwise would not be eligible for due to an increase in earned income.
48 Initially, the Government cited a lack of personnel and technical resources to justify phased implementation, Which it stated
would begin in October 2019, to which the Oversight Board responded by increasing the Department of Families (D0Fys
FY2020 budget by $4.7MM to hire additional case workers for the NAP program. After securing additional funding, the
Government reversed course and now insists that phased implementation is necessary given a lack of jobs and qualified
workers on the Island, further delaying the start of phased implementation.
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8.4 Create high-quality workforce development programs
To facilitate labor force participation, the 2020 Fiscal Plan requires that the
Government more effectively trains residents on the knowledge and skills
needed to contribute to the economy by laying the groundwork for an overhaul
of the Island's workforce development system in FY2o2i. Currently, the Island's
worker training programs are disjointedly managed by local workforce development boards
and are too limited in scope to support the development needs of Puerto Rican workers at all
stages of their working life cycles. Moreover, the Government has not conducted the analyses
or outreach necessary to target the Island's most-pressing talent gaps. Inadequate preparation
and training have left many Puerto Ricans without a real opportunity to succeed in the formal
labor force. The COVID-ig pandemic has exacerbated these issues, meaning that empowering
workers to enter or re-enter the workforce will be especially important in the months and years
to come.
8.4.1 Specific initiatives and design parameters
To strengthen workforce development programs and promote participation in the formal
economy, the Fiscal Plans have required that the Government complete several initiatives by
the end of FYao2o:
■ Centralize the administration of Workforce Innovation Opportunity Act (WIOA) funds—
the primary vehicle for federal investments in workforce development—under the
Department of Economic Development and Commerce (DDEC)
■ Promote the signing of Memoranda of Understanding (MOUs) between local worker
training boards and Government agencies to strengthen training and defray costs
■ Conduct the rigorous data analyses outlined throughout this chapter to leverage workforce
development funds in a data-driven manner to reduce labor market talent gaps
■ Update the WIOA State Plan with a roadmap to prioritize and eliminate those talent gaps
8.4.2 Current state and path forward
Unfortunately, the Government's progress in overhauling the Island's worker training systems
is limited to the centralization of WIOA funds under DDEC. Local boards (the ultimate
authorities on WIOA-funded programming in their respective regions) continue to offer
workforce programs of disparate and inconsistent quality, and many have delayed signing
MOUs with Government agencies. Moreover, while DDEC updated its WIOA State Plan in
March 2020, DDEC did not conduct the required labor market analyses to identify talent gaps
or propose solutions to those gaps within the updated plan. As such, current initiatives may
not be well-attuned to the current and future needs of the Island's employers and its economy.
To develop high-quality worker training programs that empower all residents to reach their
fullest potential and enter the labor force, the Government must first implement strategic
and administrative enablers throughout FY2o2i. As such, DDEC must:49
■ Create partnerships to strengthen worker training by identifying private and
social sector leaders to serve on the board of the Workforce Development Partnership
Office (WDPO), a sub-office within DDEC's WIOA program that will coordinate workforce
49 U.S Department of Labor Employment and Training Administration, "Best Practices, Partnership Models, and Resources
Available for Serving English Language Learners, Immigrants, Refugees, and New Americans," 2017: Center for Law and
Social Policy, "WIOA: What Human Service Agencies and Advocates Need to Know," 2015.
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development programs with the private and social sectors, and operationalizing the
WDP05°
• Conduct analyses to understand labor market needs by analyzing the Island's
labor market to identify talent gaps and developing a workforce development coordination
strategy between DDEC and Vivienda51
• Allocate resources in a data-driven manner by developing metrics to evaluate all
uses of workforce development funds, consolidating the 15 local workforce development
boards into larger regional boards, and implementing performance-based budgeting for
all regional worker training boards52
• Remove barriers to employment by developing a pilot program to reduce
employment barriers for working parents, low-income families, and persons affected by
mental illness
In turn, these enablers will empower and implement human capital initiatives that support
the developmental needs of Puerto Ricans at all stages in their working life cycles
("life cycle initiatives") in FY2022 and beyond. As such, DDEC must:
• Work with PRDE to reform education to enable everyone to graduate high
school (see Chapter 9 and Section 1.3.3)
• Prepare high schoolers for success in college and the workforce by designing a
dual enrollment pilot program that enables high school students to take college-level
classes and earn an associate degree alongside their high school diploma, and creating a
strategy to expand and leverage vocational education to address talent gaps
• Empower college students to obtain job skills and research by designing
employer guidelines and an outreach strategy to expand the number of high-quality co-
ops and internships available to college students, and expanding opportunities for college
students to conduct STEM research
• Create training programs tailored to employer needs by designing a strategy to
create high-quality apprenticeships to address talent gaps, and developing a customizable
workforce development pilot program that leverages local technical colleges to provide
qualified employers no-cost tailored training programs
50 In Minneapolis, MN, the International Institute of Minnesota (IIM) offers job training, language classes, and other services to
local and immigrant audiences. In partnership with St. Paul College, the organization helps participants obtain a home health
aide certification and provides additional education opportunities to obtain higher-paying nursing certifications. Meanwhile,
across Illinois, workforce development programs that subsidized the cost of employing workers while the acquired additional
skills or credentials has benefitted workers and employers alike. Specifically, workers managed to acquire critical work
experience and education while covering their basic living expenses, while companies reported a range of benefits, including
improved customer serve and the ability to expand more quickly. See Social IMPACT Research Center, "Putting Illinois to
Work Evaluation: An Early Look," 2010.
51 In McAllen, TX, the Broader Workforce Alliance uses a data-driven approach to align workforce development programs to
local employer needs. The program has served more than 7,700 individuals, placed 90% of candidates into job opportunities,
and has led to a 230% increase in wages among participants. See Project QUEST'S homepage at https:/lwww.questsa.orgl.
52 In Seattle, WA, the Ready to Work (RTW) program specializes in preparing immigrants and refugees to enter the workforce.
The program couples job training via local colleges and non-profits with comprehensive data monitoring to track participant
outcomes as they enter the workforce. These include language skills (e.g. progression in English skills), participation (e.g.
attendance and advancement in RTW and higher-level non-RTW programs), employment and self-sufficiency (e.g. initial
and second job placements, retention rates), educational advancement (advancement to and progression through next-level
courses), and continuing participation in English language acquisition (continued engagement in English language learning
initiatives). RTVV's use of data to improve participant outcomes helped the program secure the US Department of Labor's
Employment and Training Administration's commendation in its official WIOA Operating Guidance. See U.S Department of
Labor Employment and Training Administration, ''Best Practices, Partnership Models, and Resources Available for Serving
English Language Learners, Immigrants, Refugees, and New Americans," 2017.
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■ Subsidize training programs to support lifelong learning by designing lifelong
learning pilot program to subsidize adult residents' access to high-quality technical
education courses that can address pressing talent gaps
DDEC and Vivienda are best-positioned to oversee the development and implementation of
these life cycle initiatives. As the administrator of WIOA funds, DDEC can fund the analyses
and establish the partnerships needed to produce high-quality workforce development
programming.53 To align with the Community Development Block Grant-Disaster Recovery
(CDBG-DR) Action Plan certified by the Oversight Board, Vivienda (which will manage a $40
million Workforce Training Program to better prepare workers for construction, hospitality
and tourism, healthcare, technology, and manufacturing jobs), should coordinate its efforts
with DDEC.54
Finally, to create a roadmap for the overhaul of workforce development systems, DDEC must
create a Strategic Plan for Workforce Development (SPWD) that details analytical
findings; KPIs, milestones, and targets; implementation strategies; pilot program results; and
implementation progress for all enablers and life cycle initiatives. This should be regularly
updated alongside the WIOA State Plan and an analysis of relevant labor market gaps and
trends outlined in Section 8.4.455 Making such a plan publicly available will enable the public
to evaluate the pace, quality, and difficulties realized in the overhaul of workforce training
system.
S.4.3 Strategic and administrative enablers
DDEC must create a Workforce Development Partnership Office (WDPO) to manage
interactions with private and social sector leaders and support the creation of high-quality
workforce development programming by the end of FY2021. The WDPO board should be
comprised of leading public, private, and social sector leaders who provide a high-level
strategic vision for the WDPO's overarching efforts. The WDPO's day-to-day operations,
meanwhile, should be staffed and directed by qualified DDEC employees (e.g. WIOA
personnel) transferred to support the WDPO's needs on a full-time basis and led by an
executive director appointed by the Secretary of DDEC. On the mainland, similar partnerships
have played important roles in strengthening workforce development programs.56 The WDPO
board should include leading business, education, and civic leaders from across the Island,
including the chief executive of Invest Puerto Rico (IPR).57 The WDPO will play a crucial role
in executing future two-stage labor market analyses (see Section 8.4.4) by providing DDEC
53 WIOA funds are intended to support initiatives to train youth, adult, and dislocated workers as well as apprenticeships. Given
their knowledge of local and regional needs, DDEC should also leverage the expertise of local WIOA boards, which are
responsible for the administration of WIOA funds and workforce programming in their respective regions, and non-
governmental workforce development organizations where appropriate.
54 Per the Action Plan, the Workforce Training Program should promote workforce development in the construction, hospitality
and tourism, healthcare, technology, and manufacturing industries. Action Plan Amendment Three was submitted to the
Oversight Board for certification on February 24, 2020 as required by the Second Grant Agreement with the US Department
of Housing and Urban Development for Puerto Rico's Community Development Block Grant-Disaster Recovery (CDBG-DR)
grant. The Action Plan was certified by the Oversight Board as compliant with the Certified Fiscal Plan on April 14, 2020.
55 DDEC is required by the US Department of Labor Employment and Training Administration to update the WIOA State Plan
every four years. While the two documents will often complement one another, the WIOA State Plan and SPWD must remain
separate documents as the former concerns the use of WIOA funds that cannot, due to Federal limitations on the scope of
WIOA programming, serve as a roadmap for all initiatives contained that should be contained within the SPWD.
56 For example, the Atlanta Committee for Progress (ACP), a public-private partnership, offers Atlanta mayors access to more
than 40 business, education, and civic leaders to devise solutions to workforce-related issues. Most recently, an effort
between the ACP, Atlanta Technical College, and the city of Atlanta created a Center for Workforce Innovation (CWI) to train
local workers in skillsets highly-sought by local companies with grants from the private sector and WorkSource Atlanta, the
city's workforce development agency. The CWI was made possible by a $2 million grant from local corporations and will
support three career tracks: aircraft technical skills, information technology, and skilled trades. To better support students,
the CWI offers a tuition balance forgiveness program and transportation vouchers for students. WorkSource Atlanta,
meanwhile, offers tuition assistance of up to $10,000 per qualifying student.
57 IPR serves as the Island's investment promotion agency and is responsible for attracting off-Island investments into the
Island.
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with relevant data and insights to help identify talent gaps within the Island's labor market. It
will also help DDEC design and implement high-quality workforce programming, and enable
the connection of trained workers with employers fully-prepared to utilize their skillsets.
To operationalize the WDPO by the end of FY2021, the Government must accomplish the
following action items by their respective deadlines:
EXHIBIT 40: REQUIRED IMPLEMENTATION ACTIONS FOR WDPO
ACIUM item Deadline
Identify poteMial WDPO taoard members and appoint members • DOEC • Snslember 30 2020
Identify the WDPOs operational requirements and discuss them with the Oversight DDEC • November 15. 2020
Board
To he Operahonalize the WDPO (e.g.. transfer relesant DDEC personnel) • DDEC • January 31. 2021
completed
In FY2021
• Begin supporting DDEC and Voenda in (1) designing relevant programming to • WDPO • February 1.2021
addr wet batman capital needs identified through the Iwo-stage analysis and (2)
developing the DDEC-Viyierg la coordination strategy
Select the WDPO executive director • DDEC • March 31.2021
Publish annual lapel an WDPO performance • WDPO • Annually horn August
To he 15.2022
completed
in mon
and
beyond
8.4.4 Analyses to understand labor market needs
To create impactful workforce development programs, the Government must first conduct an
analysis of the Island's labor market to identify talent gaps. Per the Oversight Board's
certification of the CDBG-DR Action Plan, Vivienda must ensure that the Workforce Training
Program (WTP) creates skilled workers that meet employer needs. The WTP will aim to better
prepare workers for employment in the construction, hospitality and tourism, healthcare,
technology, and manufacturing sectors—efforts which will dovetail with DDEC's own efforts
to realign its own workforce development opportunities to support key industries on the
Island. As such, Vivienda should coordinate the broader objectives and strategies leveraged by
the WTP with DDEC's own workforce development efforts.
In the first stage, DDEC must identify the current and potential talent needs of employers that
will shape their demand for workers. In this stage, DDEC must determine current and future
talent demands of employers on the Island, current skill and knowledge gaps among existing
workers (informed by employers), and the availability, cost, and quality of the Island's talent
supply. It should also draw on relevant benchmarks and best practices, as well as key labor
market trends to inform future talent needs.
In the second stage, DDEC must discern the available resources and trends that will shape the
supply of talent to meet employers' needs. As such, DDEC must identify the resources
currently available to train workers to meet employer needs, new resources that workers will
leverage to develop relevant skillsets, the amount of training currently offered through
employers, and potential private and social sector partners that can help in training or re-
skilling workers.
To ensure that the two-stage analysis fully informs workforce development efforts, the
Government must accomplish the following action items by their respective deadlines:
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EXHIBIT 41: REQUIRED IMPLEMENTATION ACTIONS FOR TWO-STAGE LABOR
MARKET ANALYSIS
Action .tql, Vs+stlIele
• Conduct the two-stage analysis. leveraging insights from prwate and social sector • ()DEC • ()coauthor It 2020
partners and share with Vrvienda
• Define strategy to coordinate Vivienda and DOEC workforce training initateves • DDEC. Vmenda • March 15. 2021
TO be
completed • Share two•slage analysis results and coordination strategy with Oversight Board • DDEC, Vmerida • March 15. 2021
in FY211.21
• Discuss two-stage analysis results and coordination strategy with Oversight Board • DDEC. Vivienda • March 10. 2021
• Update the 0.00A State Plan and SPVi/D with two•stage analysis results and • ❑DEC • April 30. 2021
coordination strategy and share with Oversight Board
• Repeat the two-stage analysis to update the V1/10A State Plan and SPWD and • DDEC • Quadrennially Sam
To be refocus life cycle initiatives December 31 2923
completed
in F(21122
and
beyond
8.4.5 Allocate resources in a data-driven manner
To maximize the number of workers that can benefit from redesigned workforce development
programs, the Government must analyze data to confirm that workforce funds are used
transparently, efficiently, and effectively. Routine and comprehensive internal data analysis
will enable DDEC and Vivienda to make interventions where appropriate and reallocate
WIOA, CDBG-DR, and other workforce development funding to boost impact in future years.
Potential metrics to analyze include:
■ Employment and worker self-sufficiency (e.g. employed participant retention rates,
average duration of first employment upon program completion, wages over time, etc)
■ Program quality (e.g. participant attendance rates, employer satisfaction rates with
participants' training, percentage of corporate partners who hire participants, etc.)
■ Workforce attraction (e.g. percentage of unemployed workers who inquire about a
program, percentage of inquiring workers who participate in a program, etc.)
To support the efficient and transparent use of WIOA funds, DDEC must also reform the
management and funding of local workforce development boards. Local boards employ
variable approaches to the administration of workforce development programs in their
regions—to varying degrees of success. As such, DDEC must:
■ Consolidate the 15 local boards into larger regional entities to enable well-performing
boards to take over underperforming peers and benefit from economies of scale
■ Ensure that regional boards sign MOUs with Government agencies to strengthen training
programs while defraying programming costs, facilitating the redeployment of workforce
development funds to support other high-performing initiatives
■ Leverage performance against the aforementioned metrics to set regional boards' annual
budgets based on prior-year performance to promote efficient and effective uses of
workforce development funds at the regional level
To ensure that workforce development funds are used in a data-driven manner, the
Government must accomplish the following actions by their respective deadlines:
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EXHIBIT 42: REQUIRED IMPLEMENTATION ACTIONS FOR DATA-DRIVEN RESOURCE
ALLOCATIONS
Action Item •Finor Medlin+
Define proposed metrics to evaluate uses of WIOA CDBG-DR. and other workforce DDEC. Mrvienda September 15.2020
funds and share with Oversight Board
• Discuss proposed metrics with Oversight Board • DDEC, Vivienda • Seplember 30, 2020
• Review current data-trac ki ng capabilities to identify metrics that cannot he readily- • DDEC. Viviende • October 15. 2020
tracked
To be Finalize build-out of previously unavailable data-tracking capabilities • DDEC. Vivienda • March 31, 2021
completed
in FY2021 Complete the consolidation of local WIOA boards into regional administrations • DDEC • March 31 2021
Design a performance-based budgeting strategy for regional WIOA boards and • DDEC • April 15. 2021
share with Oversight Board
• Discuss performance-based budgeting strategy with Oversight Board • DDEC • April 30. 2021
• Update SPWD with metrics is track across workforce initiatives and performance- • DDEC • May 15. 2021
based budgeting strategy
• Begin tracking performance of all workforce development initratives relative to • DDEC. Vivienda • July 1. 2021
metrics
To he
Finalize the first performance-based budget For all regional administrations and • DDEC • April 15. 2022
completed
share with Oversight Board
In FY2022
and
• Discuss performance-based budget with Oversight Board • DDEC • April 30 2022
beyond
• Update SPWD regarding performance of regional boards and workforce • DDEC • Annually from August
development initiatives relative 10 metrics 15.2021
8.4.6 Remove structural barriers to employment
The Government must also introduce measures to ensure that new entrants into the formal
economy can retain employment. Transportation, childcare, and mental health-related issues,
for example, can temporarily inhibit an otherwise willing worker from pursuing employment
in the formal economy. Mainland jurisdictions have used several solutions, including job
counseling, paid transitional employment, and two-generation strategies that educate parents
alongside their children, to tackle many of these same barriers.58 With 58.3% of Puerto Rican
children living in poverty and years of traumatic natural disasters and health crises, the
Government's efforts should initially prioritize reducing employment barriers for working
parents, low-income families, and persons affected by mental illness.59
To reduce barriers to employment, the Government must accomplish the following actions by
their respective deadlines:
58 For example, a New York's Center for Employment Opportunities offers formerly-incarcerated persons job training, paid
transitional employment, and career counseling; post-enrollment, participants are 48 percent likelier than non-participants to
gain full-time employment and 19% less like to be re-convicted or -arrested for a felony; see Center for Employment
Opportunities, "Research Results," and Bloom, et al., "Four Strategies to Overcome Barriers to Employment An Introduction
to the Enhanced services for the Hard-to-Employ Demonstration and Evaluation Project,' 2007.
59 Rosa-Rodriguez, 'State of mental health services for children in Puerto Rico: Mental heal services for Puerto Rico's children
are not a luxury but a necessity," 2019.
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EXHIBIT 43: REQUIRED IMPLEMENTATION ACTIONS FOR EMPLOYMENT BARRIER
REDUCTION
Action item lieunne
Create a working group comprised of DOE. DOLIIR. DRD PRDE. ASSMCik. • OIDEC • July 1. 2020
Mhienda, and DDEC
To be Design plot program to reduce employment homers for worlong parents. low- • Working group • November 15. 2020
completed Income families. and persons affected by mental illness'
in PY.2021
• Discuss pilot program with Oversight Board • Working group • December 15, 2320
• Update SPWD with pilot program design • DOEC • January 31, 2021
• Launch pilot program • TBO • July 1, 2021
• Update strategy with roadmap to serve additional populations facing significant • DOEC • March 31.2021
employment barriers
To be
completed
Begin ttroadenlng bartier reduction initiaiiye 10 suppori additional populations • TKI • Ongoing tram July 1.
in 1Y2022
2022
and
beyond
Update SPWD with pilot program results • DOEC • August 16. 2022
Update SPWO with broader Earner reduction initiative results • DOEC • Annuaty from
• August 15, 2023
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8.4.7 Life cycle initiatives
Prepare high schoolers for success in college and the workforce
To support students at the beginning of the working life cycle, the Government
should offer programming to prepare high schoolers for success in higher
education or the workforce. The Government must expand vocational education and
refocus coursework to address major talent gaps to enable more workforce-bound students to
develop marketable skillsets that increase their likelihood of successfully integrating into the
labor force. For college-bound students, the Government should also broaden access to dual
enrollment programs that position students to excel in college and expedite their entry into
the workforce.
Although dual enrollment programs can help students excel in high school and college and
expedite their entry into the workforce, Puerto Rican students have limited access to such
programs. Dual enrollment programs allow high schoolers to take college courses in high
school and get credits for an associate or bachelor's degree before college thereby accelerating
their entry into the workforce, and enable high-achieving students to complete an associate
degree alongside their high school diploma in some mainland jurisdictions 60 These programs,
which are typically offered to Puerto Rico to high-achieving students or high schoolers affected
6° Florida's Early College Program, for example, allows dual enrolled students to work toward an associate degree without
paying tuition fees, see Legg, 'Early College programs can help Florida build on its education success," 2019,
90
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by natural disasters on a temporary basis, have numerous benefits, including stronger
performance in high school and college. 61.62
To enable high schoolers to benefit from dual enrollment and programs, the Government must
accomplish the following action items by their respective deadlines:
EXHIBIT 44: REQUIRED IMPLEMENTATION ACTIONS FOR DUAL ENROLLMENT
PROGRAM
raizt tort hem Owner Deadline
• Establish a working group composed of PRDE local universities (including UPR), the • DDEC • March 31. 2021
WDPO end DDEC
• Design dual enrollment pilot program that awards college credits and enables high- • Working group • July 31 2021
acineving sIudarls to obtain an associate degree alongside their high school diplomat
To be
completed • Define criteria for subsidizing well-performing dual enrolled students' tuition coststo DDEC • September 15.2021
in Pf202/ promote accessibility
• Share design and accessibility cntena with Oversight Board • MEC • September 15 2021
• Discuss pilot program design. including projected costs, and accessibility coterie with • DDEC • September 31 2021
Cneerstight Eioard
• Identify private partners to help subsidize dual enrollment courses that align With then DDEC WDPO Ongoing front
talon! needs October 31. 2021
Update SPWD wilt pilot program design and roarfrnap to broaden duel enrollment • DDEC November 15 2021
acces s
To be
cOlnriated • Launch pilot program • PROB. • January 2022
in PY202.2 universities
and • Update SPWD with pilot program results • DDEC • July 31, 2922
beyond
• Sort broadening dual enrollment initiative beyond pilot program • PRDE • Ongoing from
universities August 2022
• Update SPWD with dual enrollment program results • DDEC • Annually from July
21. 2023
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Meanwhile, access to vocational education, which can help workforce-bound students
integrate into the labor force, is also limited. Puerto Rico's vocational education programs
enable students to take occupational coursework as part of their high school course load and
"specialize" in specific concentrations (e.g. information technology, mechanical studies)—a
practice that researchers have linked to higher potential earnings.63 Such programs allow
high-performing students to earn occupational certifications alongside their high school
diploma, boosting their labor force marketability. However, they are currently available at only
15 of PRDE's high schools and are not necessarily aligned to address the Island's most-
pressing talent gaps.
61
The University of Puerto Rico-Mayaguez (UPR-Mayaguezis R2DEEP program, the leading dual enrollment initiative in
Puerto Rico, has served high-achieving students with an interest in engineering for several years, but space is limited to just
several dozen students and tuition can exceed $240 per credit. Several small universities, such as Columbia Central
University, also enable students to complete college courses during the school year or summer breaks. In the aftermath of
the 2019-20 earthquakes, PRDE also partnered with a handful of universities to offer online college courses to high schoolers
from the most-affected areas. Although this initiative approximates a fully-fleshed dual enrollment initiative, the program was
established as a temporary solution to education disruptions, focuses on students from affected areas, and does not offer
high-achieving students associate degrees, See University of Puerto Rico-Mayaguez, "R2DEEP Requirements and Costs";
El Vocero, "Oportunidad para adelantar estudios universitarios," 2018; and Alicea, "Education lanza curses en lines en
conjurito con siete universidades," 2020.
62 A study in California, for example, concluded that students who participated in dual enrollment classes were more likely than
their peers to graduate from high school, enroll in four-year colleges, and succeed in college. California's efforts to expand
access to dual enrollment programs (e.g. offering free textbooks) have widened participation (one in eight California high
schoolers are dual enrolled) and boosted student achievement (90% of participants earned college credit). Once in college,
the study concluded that previously dual enrolled students accumulated more college credits and were less likely to take
remedial classes than their peers; see Hughes, et. al., 'Broadening the Benefits of Dual Enrollment," 2012, and EdSource,
-
High school students benefit from taking college courses, but access uneven in California,' 2020.
63 One mainland study, for example, found that higher wages among vocational high school graduates were entirely associated
with their completion of upper-level coursework and concluded that each additional year of exposure to that coursework had
accounted for a 2% wage increase; see Kreisman, et. al., "Vocational and Career Tech Education in American High Schools:
The Value of Depth Over Breadth,' 2016.
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To enable all high schoolers to take advantage of vocational education, the Government must
accomplish the following action items by their respective deadlines:
EXHIBIT 45: REQUIRED IMPLEMENTATION ACTIONS FOR VOCATIONAL EDUCATION
PROGRAMS
.1.i:hen item Deadi i ii
• Establish a working group caromed of PRDE DOLHR'. local technical colleges IPR. DDEC • March 31. 2021
the wriPo. and DDEC
lobe
completed • Assess performance ot PRDE-rnanaged vocational high schools and programs and • Working group • May 30. 2021
in FY2021 share findings with Oversight Board
Discuss performance of current PRDE vocational programs with Oversight Board • DDEC PRDE June 15. 2021
• Design strategy to (1) address current vocational program shortfalls 12) offer all PRDE • Working group November 30. 2021
high schoolers vocational education. end (3) re-align vocational curriculum to address
talent gaps identified through 11m -stage labor market analysis2
• Discues vocational education strategy with ()remota Board • DDEC • December 15. 2021
To he
Identify private partners to help subsidize vocational education courses Mat align with • TIDED. VVDPO • Ongoing from
completed
their talent needs! January15. 2022
in Fven
am)
Update SPWD with vocational education strategy • DDEC • January 31.2022
beyond
Implement vocational education strategy • PRDE • August 2022
colleges
• Update SPWD with vocational education program results • DDEC • Annually from July
31. 2923
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Empower college students to obtain job skills and pursue research
To facilitate the entry of college students into the workforce, the Government
must broaden opportunities for students to develop "real world" skills actively
sought by employers and conduct academic research. An increase in experiential
learning opportunities—namely, co-ops and internships—would allow students to hone
skillsets through part- or full-time employment before graduation. Meanwhile, increasing
research opportunities for college students would broaden students' exposure to STEM
industries and develop skillsets sought by the Island's STEM-centric employers.
Co-ops and internships help student develop marketable skillsets and enable employers to find
qualified talent, but only some of college students can benefit from such programs. Indeed,
high-quality co-ops and internships have been linked to improved employment odds, higher
job satisfaction, and greater promotion odds among participants, but opportunities are
primarily geared toward the highest-performing engineering students 64,65
The Government may be able to leverage WIDA and COBG-DR funds to help
defray the costs of expanding access to co-ops and internships.66
szt D'Abate, "Developmental interactions for business students; Do they make a difference?' 2010.
65 UPR's Cooperative Engineering Education Program (referred to as "COOP") has promoted co-ops for more than 40 years,
but access to COOP is limited to UPR students and primarily geared toward engineering students (with some exceptions).
Similarly, readily-available internships (as determined through a web search for "internships in Puerto Rico' in April 2020)
are primarily offered by large multinational firms (e.g. biopharmaceutical companies and financial services firms) are
relatively few in number, limiting opportunities to a small cohort of successful applicants. See University of Puerto Rico,
"Celebran 40 aniversario del Programa Coop de I ngenieria," 2017, and University of Puerto Rico-Rio Piedras, "Experiencia
de Education Cooperative (COOP)."
66 Federal law requires that the Government use 20% of WIOA funds to support youth work experiences. Moreover, DDEC is
permitted to submit funding proposals for co-op and internship programs that support key industries under the terms of the
CDBG-DR Action Plan. Per the Action Plan, these industries include construction, tourism and hospitality, healthcare,
technology, manufacturing, and "other unidentified workforce training needs to support Puerto Rico's long-term recovery
goals," See the US Department of Labor Employment and Training Administration's "WIOA Overview' at
https)/www.dol.goviagencies/etaiwioatabout and Action Plan Amendment Three as certified by the Oversight Board, 2020.
92
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To empower more students and employers to benefit from co-ops and internships, the
Government must accomplish the following action items by their respective deadlines:
EXHIBIT 46: REQUIRED IMPLEMENTATION ACTIONS FOR CO-OP AND INTERNSHIP
PROGRAMS
Action item Owner Deadline
Establish a working group comprised of DOUR. local universities iincluding UPR), IPR, the WOPD. • DDEC • June 30,2022
and DDEC
• Design expenential teaming guidelines for employers to promote high.quality co-ops and internships • Working group • August 15. 2022
• Design outreach strategy to identify viable experiential learning employers from high-growth industries • working group • August 15. 2022
identified through twe•stage labor market analysis
• Define cniena for subsidizing co-op expenses for qualified employers or internship living expenses for • DDEC • September 30.2022
high-achieving students
• Share guidelines, outreach strategy. and subsidy criteria with Oversight Board • DDEC • September 30, 2022
• Discuss guidelines. outreach strategy and subsidy criteria with Oversight Board • DDEC • October 15. 2022
• Submit funding proposal requesting CDBG-DR funds under terms set forth in the CDBG-DR Action Plan • DDEC October 31, 2022
• Update SPWD and WIOA Slate Plan with guidelines. outreach strategy. and subsidy criteria • DDEC • October 31. 2022
• Launch employer outreach campaign • TBD • Annually from
November 1.2022
• Identify apportundies to introduce co.-op opportunities for select college majors across universities • Working group • March it. 2023
• Discuss results of initial employer outreach campaign and co-op expansion initiative with Oversight • DDEC • March 30. 2023
Board
• implement new co-op requirements • Universities • August 2023
• Update SPWD with experiential learning program results • DDEC • Annually from
October 15. 2023
Meanwhile, research opportunities can help draw students into STEM fields and foster the
development of skillsets sought by STEM-centric employers, but financial and administrative
barriers prevent many college students from enjoying these opportunities. Academic research
empowers STEM students to familiarize themselves with their field of study, helps facilitate
students' entry, specialization, and success in STEM, and plays an important role in the
development of industrial innovation centers (e.g. Silicon Valley).67 However, it can be
difficult to partake in due to limited research funding (especially from the Commonwealth)
and stringent administrative rules (e.g., requiring professors to teach the same number of
courses when conducting research as when they are not).68
To boost the number of students and employers that can benefit from research opportunities,
the Government must accomplish the following action items by their respective deadlines:
67 Madan and Teitge, The Benefits of Undergraduate Research: The Student's Perspective,• 2013.
68 Speaking to the financial barrier, UPR's guide on identifying external funding sources does not include any grants sponsored
by the Puerto Rican Government; see University of Puerto Rico, Are you a researcher? External funding sources,' 2020.
93
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EXHIBIT 47: REQUIRED IMPLEMENTATION ACTIONS FOR COLLEGIATE-LEVEL
ACADEMIC RESEARCH
Action tern OW1181 Deadline
• Establish a working group comprised of local universities (iincluding UPR), local professors. and DDEC • ODEC • December 15, 2922
• Develop a strategy to reduce administrative barriers to coils-grate academic research' and design a • Working group • February 25. 2223
STEM research fund=
• Define criteria and determine adtudicators to review and award grants • Working group • February 28.2023
• Update strategy with input from leading mainland research universities and share with the Oversight • Working group • April 15.2023
Board
• Discuss strategy and projected research fund costs with the Oversight Board • ODEC • April 30. 2923
Identify public and social sector partners to help subsidize costs associated with research that aligns • DDEC. WDPO • May 31. 2923
with their talent needs'
Update SPWD with administrative strategy and research fund design • ODEC • June 15 2023
• Implement administrative changes in line with updated SPWD • Local • July 31. 2523
universities
• Launch research fund • ODEC • August 1.2071
• Update SPWD with collegiate research program results • DDEC • Annually from July
15.2024
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Create training programs tailored to employer needs
Offering mid-career workers robust opportunities to sharpen their skillsets or
develop new ones altogether would better empower workers to meaningfully
participate in the formal economy. To create such opportunities, the Government must
expand high-quality apprenticeship offerings and introduce customizable workforce
development programs that provide employers reliable access to workers trained to meet
mitigate specific talent gaps.
Apprenticeships empower workers to develop highly-specialized skillsets that benefit
apprentices and employers alike, but opportunities are scare on the Island. Apprenticeships
combine several years of paid on-the-job learning with classroom instruction, are registered
with the US Department of Labor Apprenticeship Office (DOL-A0), and issue an industry-
recognized Certificate of Completion upon satisfactory completion. While they have been
linked to higher lifetime earnings and productivity among apprentices and reduced employee
turnover and positive returns on investment for employers, they are offered by few employers
due to limited Government promotional efforts, 69,70
69 A study of apprenticeships in 10 mainland states found that apprentices earned more than $240,000 in total lifetime earnings
on average than those who did not complete apprenticeships; see Reed, et. al., "An Effective Assessment and Cost-Benefit
analysis of Registered Apprenticeship in 10 States," 2012. For additional findings on the positive benefits of apprentices for
employers, see Lerman: et.al., 'The Benefits and Challenges of Registered Apprenticeship' The Sponsors' Perspective,'
2009; Lerman. 'Apprenticeship in the United states: Patterns of Governance and Recent Developments," in Schlogl, ed.
Situated Competence Development Through Innovative Apprenticeships, 2008. Regarding returns on investment, a study
of more than 1,000 Canadian employers found that companies derived $1.47 in benefits for every dollar invested in
apprenticeship training; see Canadian Apprenticeship Forum, "It pays to hire an apprentice: Calculating the return on training
and investment for skilled trades employers in Canada," 2009.
70 In 2018, DDEC and DOLHR launched an initiative to develop construction, tourism, aerospace, agriculture, and advanced
manufacturing apprenticeships. Since then, the effort has only successfully engaged a handful employers (primarily
aerospace firms) to create programs. Despite their importance, the initiative has not created any construction- or tourism-
focused apprenticeships; see Action Plan Amendment Three as certified by the Oversight Board, 2020, and El Vccero,
`Arranca Programa de Formation pare el Empleo del DDEC," 2018.
94
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The Government should seek to leverage WIOA and CDBG-DR funds to fund the
development of more robust apprenticeship programs.71
To enable additional residents and companies to benefit from apprenticeships, the
Government must accomplish the following action items by their respective deadlines:
EXHIBIT 48: REQUIRED IMPLEMENTATION ACTIONS FOR APPRENTICESHIP
PROGRAMS
Action dern J'Yen ET Deadline
• Establish a working group comprised at DOLHR. Nut technical colleges. the WDPO. • DDEC • March 31. 2021
and DDEC
To be
completed • Assess performance of DDEC-managed apprenticeship programs and share findings Working group May 31. 2021
in FY2021 with Oversight Board
• Discuss apprenticeship performance with Oversight Board • DDEC • June 15.2021
• Design strategy 1°01 address current apprenticeship shortfalls. (21 address talent • Working • October 31. 2021
gaps identified through two-stage Labor market analysis. (3) promote DOL-AO- Group
compliant apprenticeships to employers, and (4l enable local colleges to-create
programs that meet employer specifications'
• Determine basis and define criteria for subsidizing apprenticeship costs for qualified • OPEC • November 30. 2021
employers
Share strategy and subsidy criteria with Oversight Board • ODEC • November 30, 2021
To be
completed
Discuss strategy and subsidy cntena with Oversight Board • ODEC • December 15. 2021
in rno22
and Su bmit funding proposal requesting COBG-DR kinds under terms set forth in the • ODEC • January 30. 2022
beyond
CDBG-DR Action Plan
• Update SPWD and WIOA State Ran with apprenticeship strategy and subsidy criteria • ODEC • January 30, 2022
• Launch employer outreach campaign • TDB • Annually from July
15. 2022
• Update SP1iliD with apprenticeship program results • DDEC • Annually from
September 15, 2022
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Meanwhile, many business-friendly states offer employers access to integrated workforce
development programs that train employees to company specifications, but Puerto Rico lacks
such a program. Customizable worker training programs offer on-the-job training through
partnerships with local educational institutions to train workers to meet employers' specific
needs at no cost. They are used to incentivize investments in many business-friendly states on
the mainland, but do not exist in Puerto Rico currently.72
The Government should seek to create these and may be able to leverage WIOA
and CDBG-DR funds to defray the associated costs.73
71 Federal WIOA guidelines explicitly allocate funding for apprenticeship programs. Moreover, DDEC is permitted to submit
funding proposals for co-op and internship programs that support key industries under the terms of the CDBG-DR Action
Plan. Per the Action Plan, these industries include construction, tourism and hospitality, healthcare, technology,
manufacturing, and "other unidentified workforce training needs to support Puerto Rico's long-term recovery goals." See the
US Department of Labor Employment and Training Administration's "WIOA Overview" at
https://www.doLgoviagenciesfetaiwioafabout and Action Plan Amendment Three as certified by the Oversight Board, 2020.
72 Site Selection and Area Development, the mainlands leading site selection magazines, both ranked Georgia the top state
for doing business in 2019, thanks in part to its Quick Start program. To draw investments into their states, South Carolina,
Louisiana, and Alabama have also implemented top-ranked no-cost customizable workforce development programs
(ReadySC, LEO FastStart, and AIDT, respectively). Like Georgia, these three states also garnered top-10 business-friendly
rankings from both Site Selection and Area Development in 2019,
73 The Government could potentially leverage WIOA funds earmarked for adult and dislocated worker training programs if that
program serves significant numbers of low-income, unemployed, or dislocated workers. Additionally, DDEC is permitted to
submit funding proposals for workforce development programs that support key industries under the terms of the CDBG-DR
Action Plan, See the US Department of Labor Employment and Training Administration's "WIOA Overview' at
https://www,dol,goviagenciesietaiwioatabout and Action Plan Amendment Three as certified by the Oversight Board, 2020,
95
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To create a highly-competitive customizable worker training system, the Government must
accomplish the following action items by their respective deadlines:
EXHIBIT 49: REQUIRED IMPLEMENTATION ACTIONS FOR CUSTOMIZABLE WORKER
TRAINING PROGRAMS
Action tern Oar di Deadline
• Establish a working group comprised of DOLI-IR. Wends. local lechnical colleges. 11311 the WDPO. • DDEC • August 31. 2021
and DOEC
• Design customizable pilot program that (1) helps qualified empioyerst IR) identify talent needs. (3) • Working group • March 31. 2022
screen candidates, and (4) design tailored worker tiainings at no cost....
• Discuss pilot program design and eligibility criteria with Oversight Board • DOEC, • April 30. 2022
Vrvienda
• Submit funding proposal requesting CDBG-OR funds under terms set forth in the CDBG-DR Action Plan • DOEC • May 15.2022
• Update SPWD and WIOA State Plan with pilot design. eligibility unless. and roadrnap Is expand beyond • DDEC • May 15. 2022
pilot
Launch pilot program • DDEC, • July 1 2022
Vivienda
Begin broadening customizable workforce development initiative beyond pilot program • DDEC. • ongoing from July 1.
Vivienda 2023
Update SPWO with pilot program results • DDEC. • Augual 15. 2023
Vrvienda
• Update Investment promotion strategy to leverage customizable program and share with Oversight • IPR • September 30. 2023
Board
• Discuss updated investment prone:411cm strategy with Oversight Board • IPR • October 15, 2023
• Update SPWD prrih customizable workforce development program results • DDEC • Annually from
August 15. 2024
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Subsidize training programs to support lifelong learning
Government subsidies to support the life-long education of residents will help
employers meet evolving talent needs. For example, in Singapore, such a credit was
implemented, offering every citizen 25 and older up to USD $1,loo to subsidize their technical
reskilling or specialization.74 Such a program could help address the Island's talent gaps and
ensure that residents can remain competitive as companies' human capital needs shift over
time.
The Government could potentially leverage WIOA and CDBG-DR funds to help
defray expenses associated with a lifelong learning credit.75
To support lifelong education, the Government must accomplish the following action items by
their respective deadlines:
74 Reskilling and specialization can be achieved through enrollment in structured career transition programs managed by local
colleges and universities or through pre-approved technical education courses (including online courses); for more
information, see SkillsFuture, "What is it?"
75 To leverage WIOA funds, the program must provide job-seekers access to industry-recognized credentials for in-demand
jobs_ Additionally, DDEC is permitted to submit funding proposals for programs that would provide unemployed or
underemployed residents training in skill areas relevant to key industries under the terms of the CDBG-OR Action Plan. See
the US Department of Labor Employment and Training Administration's "WIOA Overview" at
https://wwwdoLgoviagenciesietaiwioatabout and Action Plan Amendment Three as certified by the Oversight Board, 2020,
96
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EXHIBIT 50: REQUIRED IMPLEMENTATION ACTIONS FOR LIFELONG LEARNING
INITIATIVE
Action item Deadline
• Establish a working group comprised of local universities (Including UPI4 the WDPO. and DDEC °•vin
D:EC • September 30. 2022
• Design plot program that enables adults to access technical education courses to address talent gaps • Working group • March 31, 2023
identified through the two-stage labor market analysis'
• Define criteria for identifying and subsidizing courses • [(DEC • April 15. 2023
• Share design and subsidy criteria with Oversight Board • DDEC • April 15. 2023
• Discuss design and subsidy criteria with Oversight Board • DDEC • April 30. 2023
• Submit funding proposal requesting CDBG-DR funds under terms set forth in the CDBG-DR Action Plan • DDEC • May 15. 2023
• Identify private partners to help subsidize lifelong learning courses that align with their talent need& • DDEC, thDPO • Ongoing from May
31.2923
• Update SPWD arnh plot program design and roadmap to expand beyond pilot program • ((DEC • June 15. 2023
• Launch plot program • DIDEC. • July 1, 2023
universities
• Begin broadening lifelong learning initiative beyond pilot program • DDEC, • Ongoing from July 1.
August15.
universities 20242024
• Update SPWD with pilot program results
• Update SPWD with lifelong learning program results [(DEC • Ongoing from
August 16 2925
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Chapter 9. K-12 education reform
A high-quality education is the linchpin for social mobility for the residents of
Puerto Rico—especially after years of devastating natural disasters and the
COVID-ig crisis. Comprehensive K-12 education reforms will empower every Puerto Rican
to develop the skillsets needed to achieve economic self-sufficiency and join the formal
workforce. Together with Section /3.3, which outlines the necessary management
improvements and operational efficiencies that the Department of Education (PRDE) must
pursue, this chapter provides a transformation roadmap that will truly change K-12 student
outcomes on the Island, and therefore enable greater workforce participation and
productivity.
Studies show that mainland workers that attain fluency in both English and Spanish earn
$2,800 more per year than their monolingual peers, and that a one-quarter standard deviation
in school quality across US states would produce an average 0.35% long-run growth rate
uptick.76,77 In addition, Puerto Rican workers (ages 65 or below) with a high school diploma
earn three times as much as residents who lack one.78 Indeed, improvements in education will
bring prosperity and growth to individuals and the Island as a whole.
Meanwhile, more than 290,000 children rely on PRDE to serve as their primary vehicle for
social mobility. Three years have passed since the certification of the first Fiscal Plan for Puerto
76 Rumbaut, 'English Plus: Exploring the Socioeconomic Benefits of Bilingualism in Southern California,' 2014,
77 As measured by OECD PISA exam scores; see Hanushek, et. al., The Economic Benefit of Educational Reform in the
European Union," 2012; National Bureau of Economic Research, "Economic Gains for US States from Educational Reform,'
2015.
78 Ruggles, et. al., IPUMS USA; Version 9.0 [Puerto Rico Community Survey], 2015; $17,348 vs $5,731
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Rico, yet PRDE continues to delay the comprehensive reforms necessary to meet the
developmental needs of all children and prepare every student for success in higher education
or the workforce. PRDE has allowed school underperformance to persist, with just 45% of
students proficient in Spanish, 39% in English, and 30% in mathematics in 2019, and with
particularly sharp drops in English between third and fourth grade and in mathematics and
Spanish proficiency between fifth and sixth grade.79 PRDE has left 33% of third graders at-
risk of not graduating high school and delayed the introduction of evidence-based practices
that are important to properly serve Special Education students (who comprise a greater share
of the student population-32%— than in any other US jurisdiction] 80,81
Although natural disasters and the COVID-19 pandemic have wrought substantial destruction,
relief funds in response to these events offer PRDE an unprecedented opportunity to reshape
Puerto Rico's public schools for the better. In the aftermath of the 2017 hurricanes, PRDE was
awarded $589 million in Immediate Aid to Restart School Operations (RESTART) funds to
offset expenses associated with reopening schools. As discussed in Section 13.3, PRDE will
now receive over $349 million under the CARES Act as well 82 Finally, the Oversight Board
allocated $124 million in additional Commonwealth funds to purchase tablets, software, and
training services necessary to support distance learning for all PRDE students and teachers as
part of the Emergency Measures Support Package in response to the COVID-19 emergency.
79 English: 55.4% in third grade to 39.0% in fourth; Spanish: 613% in third to 48.6% in fourth; mathematics: 45.3% in fifth to
11.5% in sixth; see Puerto Rico Department of Education, "Resultados META-PR 2018-2019," 2019.
80 This calculation is based on recent PRDE performance data and accounts for the fact that students who do not read at grade
level by third grade are four times likelier to not graduate high school; see Puerto Rico Department of Education, "Reporte
de Desercion Escolar 2018-19: 2019 and Hernandez. -Double Jeopardy: How Third-Grade Reading Skills and Poverty
Influence High School Graduation,' 2012.
81 An average of 13% of students are characterized as special education students on the mainland; see Puerto Rico Department
of Education, "Matricula Active,' 2020; US Department of Education, National Center for Education Statistics, 2017.
82 Among other uses, CARES funds can support (1) purchasing educational technologies (e.g. hardware, software, and
connectivity), (2) mental health services, and (3) and planning for long-term school closures (e.g. how to provide meals to
eligible students).
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Investing in student outcomes
The Oversight Board believes deeply in the importance of a high-quality public-school system for
the children of Puerto Rico. While improving the quality of schools and student outcomes will take
real transformation on the part of the Department of Education, the Fiscal Plan includes funds to
cover particular programs that will enable the Department to improve student outcomes. These
investments are outlined below.
■ Distance learning (—$254 million): The Fiscal Plan includes emergency funding to enable
the purchase of tablets, software, and training services necessary to support distance learning
for all PRDE students and teachers as part of the Emergency Measures Support Package issued
in response to the COVID-ig emergency. The Fiscal Plan expects PRDE to use these funds to
provide online education offerings as quickly as possible
■ English Language Learning teacher development program (—$1.5 million):
Beginning with the 2020-2021 school year, the Department of Education will partner with a
national non-profit organization to identify, recruit, and train ELL teachers across Puerto Rico,
at the recommendation of the Oversight Board. The Oversight Board suggested this partnership
recognizing the important impact that bilingual education has on students, driving lower child
and adult poverty while also expanding professional opportunities. In order to fund this project,
PRDE and the non-profit organization will apply for a competitive federal grant. This grant will
potentially cover the costs associated with the non-profit organization for the initial three years,
after which the training program will be fully implemented and PRDE will have built the
internal capacity and resources to scale the program over the long term. During the first three
years alone, the program will train approximately 300 English teachers, with an expected
impact on nearly 90,000 students.
■ Dedicated school psychologist program (—$50 million per year): The 2020 Fiscal
Plan provides the budget to fund the hiring of one in-house psychologist per PRDE school to
help the Department better meet the social-emotional and developmental needs of all students,
beginning with the 2020-2021 school year. Specifically, the Oversight Board will allocate $52
million to hire 856 school psychologists that will join the Department as full-time employees.
Their objectives are two-fold: on the one hand, school psychologists will provide early
interventions (e.g. behavioral screenings) to connect students with appropriate resources and
ensure that children are not erroneously classified as Special Education students. Additionally,
school psychologists will ensure that Special Education students receive adequate academic and
behavioral support as required by their IEP—reducing the number of students who enter
Remedio Provisional.
■ Innovation in education (—$7 million): To encourage schools to explore new ways of
learning, the Fiscal Plan includes a potential $ioo,000 reward for 10 schools per region to
implement an education innovation project during the second semester.
■ Incentives to improve school performance and reporting (—$2 million): Making real
progress on reform in the Department of Education will start with being able to monitor,
measure, and report data better. The Fiscal Plan thus includes $2 million in funds as an
incentive (potential $1,500 one-time bonus) for school directors that perform well on
scorecards based on data captured and approved methodology to measure outcomes.
To afford all Puerto Ricans an equal opportunity to develop the knowledge and
skillsets needed to contribute to the Puerto Rican economy, PRDE must begin
implementing education reforms in FY2o2i. As described in its State Plan, PRDE aims
to achieve 73% student proficiency in mathematics, 77% proficiency in English, and 80%
proficiency in Spanish across all grade levels by the 2021-22 school year. These targets are
extremely ambitious given current student performance—in mathematics alone, reaching this
target would require doubling the average student proficiency in only a matter of years
(currently 3o%). Nonetheless, the future of Puerto Rico relies on PRDE delivering this level of
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improvement. To achieve these targets—and ensure that PRDE makes a concerted effort to
offer the children of Puerto Rico the high-quality education that they deserve—comprehensive
reforms must begin immediately, particularly in areas such as English Language Learning
(ELL), K-5 literacy, and STEM instruction.
To maximize the likelihood of success, education reforms should build on the improvement
areas PRDE identified in 2017: increased student achievement (as measured by META-PR
scores and graduation rates), stronger professional development for directors and teachers,
and more efforts to support the developmental needs of the whole child.83 As such, the
Government's overhaul must:
■ Define goals and design PRDE's 2022-27 strategic plan to guide reforms
■ Launch evidence-based curriculum reforms
■ Create a post-COVID-19 back-to-school plan and stand up distance learning capabilities
■ Improve professional development opportunities for directors and teachers
■ Make targeted investments to boost family engagement
■ Systematically collect, manage, and leverage data for better decision-making
These reforms must collectively aim to strengthen system-wide accountability among
educators and administrators; facilitate data-driven leadership at the central, regional, and
school level; and increase PRDE's responsiveness to the needs of the whole child and the
broader community on the Island. Moreover, the Oversight Board welcomes PRDE, its non-
Government partners, and other Government agencies to design and propose further
innovative reforms to strengthen PRDE schools.
9.1 Identify goals and design a strategic plan to guide
reforms
Successful education reforms require a strategic and operational foundation to
succeed. Before PRDE can transform the Island's schools, it should understand how student
needs (e.g. curricular resources, developmental opportunities) vary across schools, and
segment all schools into "achievement tiers." Then, for each achievement tier, PRDE must
define improvement goals and strategies to realize them within a 2022-27 strategic plan.
PRDE must also create a Chief Operating Officer (COO) function to lead the PRDE Central
Office and oversee the day-to-day implementation of reforms. To complement these efforts,
the Department must strengthen financial management capabilities within the existing CFO's
office.
9.1.1 Specific initiatives and design parameters
The 2020 Fiscal Plan requires that PRDE execute the following actions to establish a
foundation for education reforms:
■ Segment all schools by student outcomes (as illustrated in Exhibit 51)
■ Develop a 2022-2027 strategic plan to define KPIs, improvement targets, and
milestones for each achievement tier to gauge the effectiveness of education reform efforts
in real time, codify an operational model that clearly delineates central, regional, and local
83 The fourth improvement area—right-sizing schools to optimize resources, improve responsiveness, and strengthen regional
and local management—is addressed in Section 13.3.
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administrators' responsibilities around the implementation of education reforms, and
identify strategies for central, regional, and local administrators to implement
differentiated interventions across all achievement tiers84
EXHIBIT 51: PROPOSED OUTCOME-BASED PRDE SCHOOL SEGMENTATION
• All schools that qualify for School Improvement resources?
Underperforming
schools • Schools that average less than 50% student proficiency across all four
META-PR exams
a Schools that average 50% to 75% student proficiency across all four
Fair-performing META-PR exams
schools
• Schools that average more than 75% student proficiency across all four
Well-performing META-PR exams
schools
All elementary (K-5), middle (6-8), and high (9-12) should be segmented, with schools spanning
two or more categories (e.g a K-8) segmented two or more ways
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To establish the firm foundation required to implement education reforms, PRDE's Central
Office must accomplish the following actions by their respective deadlines. Implementation of
the PRDE efficiency measures stipulated in Section 13.3, which will promote the more effective
management and use of Departmental resources, will further strengthen education reform
efforts' likelihood of success.
84 [CPIs measure a unit of performance (e.g. percentage of third-graders deemed proficient by META-PR exams), targets define
an objective (e.g. 50% third-grade mathematics proficiency within three years), and milestones provide regular markers of
performance (e.g. 30% third-grade proficiency in mathematics in year one).
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EXHIBIT 52: REQUIRED IMPLEMENTATION ACTIONS TO ESTABLISH ENABLERS FOR
EDUCATION REFORM
Action Item Deadline
• Launch search for a COO • July 1, 2020
• Segment all PRDE schools • Start of 2020-21 school
year
• Define KPIs. targets. and milestones for each achievement tier to evaluate the impact of • September 30, 2020
education reforms and share them with the Oversight Board
• Discuss KPIs. targets, and milestones with the Oversight Board • October 15. 2020
• Discuss progress made in the development of a preliminary 2022-27 strategic plan with • November 30, 2020
the Oversight Board (check-in #1)
To be • identify a COO • December 15, 2020
completed • Discuss progress made in the development of a preliminary 2022-27 strategic plan with • January 15, 2021
in FY2D21 the Oversight Board (check-in #2)
• Share a preliminary 2022-27 strategic plan with (1) professional development, (2) • February 15, 2021
c umeular and distance learning, (3) family engagement. (4) data-driven, and (5) other
viable reforms for each achievement tier with the Oversight Board (cheek-in #3)
• Discuss preliminary strategic plan draft and projected costs with Oversight Board • February 28, 2021
• Finalize strategic plan and share with Oversight Board • March 31.2021
• Discuss finafized strategic plan and projected costs with Oversight Board • April 15.2021
• Publish annual reform implementation progress report • Annually from June 30.
2022
To be - implement 2022-27 strategic plan • July 1, 2021
completed
in FY2022 • Discuss annual implementation progress report with Oversight Board • Annually from August
and beyond 15. 2022
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9.2 Launch evidence-based curriculum reforms
PRDE must overhaul its curriculum and leverage supplemental learning
opportunities, especially digital aids, to achieve significant increases in student
proficiency. PRDE's curriculum is in need of end-to-end standardization around evidence-
based best practices while also preserving the flexibility for educators to meet the diverse
learning needs of all students and address requirements within Special Education students'
IEPs. Finally, PRDE's curriculum must integrate digital aids that facilitate the high-quality
education of Puerto Rico's children and guard against schooling disruptions.
9.2.1 Specific initiatives and design parameters
The Certified Fiscal Plan requires that PRDE execute the following actions to strengthen its
curriculum:
• Assess the impact of current curricular spend on student performance to direct
resources to evidence-based curriculum and instructional strategies across subjects and
grade levels to benefit the greatest number of General and Special Education students
while still providing all additional supports required by Special Education students' IEPs,
design a new curriculum to address the areas of most-significant academic and
developmental underperformance across the PRDE system, and determine when to
purchase updated or specialized curricular materials (e.g. textbooks) to better support
General and Special Education students.
• Implement innovative learning strategies to empower students through curricular
innovations being used in peer systems such as project-based learning (PBL). These
approaches aim to build foundational problem-solving skills (e.g. synthesis, analysis)
through a "real world" application conducive to long-term information retention, and
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empower all educators—through the use of formative assessments (e.g. reviews of student
notes, weekly quizzes, student-teacher feedback sessions)—to boost student achievement,
quality of work, information retention, and attendance 85,86
■ Bolster learning strategies with proven digital aids to equip educators with
learning resources (e.g. lessons, assessments) and other curricular materials tailored to
each student's developmental needs that boost student performance and enable schools—
by virtually connecting students with qualified instructors—to improve the quality of
student instruction and boost student performance.87,88
9.2.2 Current state and path, orward
PRDE's current curriculum does not adequately support the academic and developmental
needs of all General and Special Education students, and many teachers lack the pedagogical
strategies needed to maximize student performance with current curricular resources. The
Department lacks a sense for how its curricular spend translates into student impact,
preventing PRDE from reallocating resources to maximize performance. Likewise, PRDE has
not yet implemented innovative teaching strategies—such as project-based learning—across
all schools, further inhibiting student performance.
Despite years of interrupted schooling, PRDE has inadequately planned for the virtual
education of its students even though federal and Commonwealth funding has eliminated
major barriers to digital education within and outside of PRDE schools. All schools have wired
internet access and will have wireless internet by the end of 2021, but PRDE has not yet
identified beneficial digital aids to enhance student performance inside schools.89 Launching
a robust distance learning capability, as outlined below, will be a core enabler to curricular
reform.
While the Oversight Board encourages the Department to select interventions that align most-
closely with its 2022-27 strategic plan, PRDE must accomplish the action items outlined in
Exhibit 53 by their respective deadlines.
85 Unlike traditional learning environments (which evaluate learning at a unit's end), PBL emphasizes ongoing learning and
evidence-based argumentation. Studies spanning more than 40 years have linked PBL to stronger long-term information
retention, skill development, and student and teacher satisfaction than traditional educational approaches; see Strobel, et.
al., "When is PBL more effective? A meta-synthesis of meta-analyses comparing PBL to conventional classrooms," 2009.
86 Formative assessments have been linked to gains in student achievement, with especially strong results among previously
underperforming learners, as well as higher quality student work, better student attendance, and increased retention. See
Bakula, The Benefits of Formative Assessments for Teaching and Learning," 2010, and Hanover Research, The Impact of
Formative Assessment and Learning Intentions on Student Achievement," 2014.
87 Miami-Dade County Public Schools (FL) piloted Voxy, an English-learning software with adaptive learning capabilities, to
strengthen ESL instruction. Students with one semester of exposure to the program improved an average of 15% on the
Language Proficiency Assessment, while their non-Voxy peers only averaged a 3.5% improvement.
88 For example, in Uruguay, a nationwide initiative used laptops that had previously been distributed to elementary schoolers to
improve ELL instruction, driving meaningful improvements in participants' reading and writing scores
89 Wireless initiatives have been funded through a combination of Federal E-Rate and RESTART funds. The Federal
Communications Commission's E-Rate program offers eligible schools and libraries discounted telecommunications
products and services, including internet connections, on the basis of local poverty levels; see Federal Communications
Commission, "E-Rate: Universal Service Program for Schools and Libraries," 2020.
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EXHIBIT 53: REQUIRED IMPLEMENTATION ACTIONS TO STRENGTHEN CURRICULUM
FY20/1 Midget
Action item Deadline _ incentives
• PRDE to launch a school competition for education innovation and create an Oecembar 2020 • 6100.000 reward
application process for school leaders that have ideals to positively impact student for 10 schools per
achievement through innovative programs or practices region to implement
the education
Innovation project
during ale second
semester
• Design curricular reform to complement distance Warning strategy and leverage (1) student February 15 2021
performance assessments (2) innovative Warning strategies and l3f proven digital aids and raj.
other voila interventrone to strengthen PFtDE's curriculum at each achievement tiaras part of the
preliminary strategic plan
• Finalize updates to curricular reforms as pan of the updated strategic plan • March 15. 2021
• Update curricular reform section within annual reform implementation progress capon • Annually from July
31.2022
9.3 Create a post-COVID-19 back-to-school plan and stand
up distance learning capabilities
While implementing evidence-based reforms is an important near-term goal, the most
immediate priority for PRDE must be to develop a plan for students in the 2020-2021 school
year in the context of the COVID-19 pandemic. This planning process must include a
comprehensive distance learning strategy and a path to reopen schools when safe for teachers
and students. It is critical for PRDE to begin this work immediately so that the strategy can be
implemented in advance of the new school year in the fall of 2020, though such innovations
will also support instruction in future years as well.
9.3.1 Specific initiatives and design parameters
In order to effectively deal with these challenges and respond in an urgent manner, PRIDE
must create a task force that is solely focused on school re-opening and distance
learning:
Back-to-school planning must combine public health guidance, PRIDE management
expertise, stakeholder input, and research on national and international back-to-school
approaches in order to develop the right plan for Puerto Rico. Nearly every school system in
the world is currently navigating this exact challenge—and Puerto Rico can learn from the
successes and failures of others. In addition to creating the right plan, PRDE will also have to
effectively implement it. The impact of the COVID-19 pandemic on top of the 2017 hurricanes
and 2020 earthquakes, will require new safety measures on top of accelerated learning
strategies, scheduling modifications, and greater support for students and educators. A
thorough response could also include relatively straightforward elements like procuring
additional cleaning supplies and better protective equipment for staff that still may take
several months to coordinate.
Most states and districts are considering three broad scenarios for returning to school in the
2020-2021 school year:
■ Scenario 1: Schools use online remote learning platforms for the beginning of the school
year while physical schools remain closed
■ Scenario 2: Schools re-open for in-person instruction while implementing social
distancing protocols
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■ Scenario 3: Schools employ a hybrid model using modified schedules to meet social
distancing protocols, while off-schedule time is coordinated remotely
PRDE must be prepared to provide guidance to schools on how to choose among these
scenarios as well as navigate among them in the case of new outbreaks of the virus. For this
last reason, PRDE needs a learning strategy that flexes across delivery channels with limited
to no disruption.
Some of the topics to be addressed in this scenario planning effort are identified in Exhibit 54.
EXHIBIT 54: CONSIDERATIONS FOR BACK TO SCHOOL PLANNING
Important considerations for hack to school planning (questions not meant to be exhaustive.'
• How can we improve upon remote learning from the spring experience?
• How can we diagnose and accelerate student learning in the fall?
Accelerating Academic planning
• How can we best support educators through different models of
learning & educational delivery?
supporting
student • How can we support the social-emationat and mental health of students
Social-emotional and
wellness and educators?
mental health
• How can we provide a safe learning environment for students and
supports
educators, whether remote or in-person?
• How do make sure we have enough of the right devices for students and
educators that support effective leaching and learning?
Technology
• How do we protect data privacy and ensure cybersecurity with heavier
considerations
Engaging technology use?
students & • How do we expand/augment network access for schools and students?
families • What information do families need to know and where/how should we
Family engagement 8. solicit their input?
communication • How can we effectively communicate with families about reopen updates
policies and ways to support student learning?
• How can schools repurpose the existing physical space to adhere to the
appropriate social distancing protocols?
Physical space
Enabling safe
& equitable
learning • How can states advise LEAs as they manage limited resources while
facing increasing expenses to provide education under new or multiple
Resource allocation
delivery models, and what sources of funding might be available to
provide incremental support to schools and distracts?
Distance learning strategies are no longer an optional component of a school
system's education model. Given the amount of out-of-school time in Puerto Rico over the
past several years, the Department must make meaningful progress in developing distance
learning strategies. Going forward, it should be anticipated that distance learning may need to
be accessed on a moment's notice and could even be the default delivery model for the fall of
2020. PRDE's distance learning plan should include strategies to support instructional
delivery (e.g., adaptive curriculum), vulnerable populations, professional development
mechanisms for teachers, technology deployment (and supporting technology platforms—e.g.,
a learning management system), etc. PRDE has begun t❑ procure thousands of devices for
students and teachers to address technology gaps, but the deployment of these devices alone
does not constitute a learning strategy. Rather, careful planning will be required to effectively
distribute the devices and use them effectively to support student learning. As with back-to-
school planning, PRDE should seek to leverage strategies that have proven successful in other
places, focusing on identifying and delivering high-quality instruction with appropriate
professional supports for teachers.
Funding for a task force to take on these initiatives should come from the various funding
sources mentioned above. For example, these kinds of planning efforts are an allowable
expense under federal funding from the CARES Act. Exhibit 55 describes some of the key
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implementation actions that are critical to effective back-to-school planning and the
development of effective distance learning strategies.
EXHIBIT 55: BACK-TO-SCHOOL AND DISTANCE LEARNING IMPLEMENTATION
ACTIONS
Required implementation action Deadline
• Develop plans and protocols to deliver remote instruction, and support parents and teachers June 2020
through remainder of 2019-20 school year
• Assess which portions of the curriculum will be areas of focus during remote learning period
balancing accessibility and equity
• Rapidly provide Professional Development and platform for digital community/connection as
educators seek to exchange ideas and best practices for remote instruction
• Assess summer scenarios by exploring options to provide ongoing learning opportunities and/or
programming for students during summer months
• Reflect on what worked this spring, challenges, and emerging best practices to develop a plan August 2020
to strength instructional delivery (regardless of setting)
• Provide new professional development for educators that reflects the now-different demands of
their jobs, and the likely need for flexible instructional tactics going forward
• Engage in scenario planning for fall instruction (various delivery channels, adjusted curriculum),
and plan for altered curriculum and schedules for fail
• Develop plan to assess impact of COVID-related school closures on student learning and
progress
• Assess impact of remote learning and remediate lost learning time by doubling down on December 2020
English, Spanish, Science and math
• Offer additional mental health services and social-emotional supports for students, who will
have had a wide variety of at-home experiences over the last 6 months
• Create specific plans, pathways, and supports for students in key transition grades to ensure
that they have the supports necessary to be successful without having completed the prior
grade in-person
• Provide educators with ongoing support and professional practice opportunities to improve
regardless of delivery channel
• Identify gaps in IT systems and infrastructure to enable seamless online learning and teaching June 2020
experience
• Define criteria for selection of technology vendors, including long-term viability, scalability of
platform, and data security among others
• Distribute devices and support students' and educators' hardware and connectivity needs as July/August
they transition to remote learning 2020
• Coordinate with Academics team and educators to reflect on best practices in remote learning
environments, and streamline technology to support better integration of education delivery and
instructional strategies
• Evaluate effectiveness of technology tools and platforms, and improve processes underpinning
remote operations (e.g , systems to connect administration and learning, devices and training)
• Develop more comprehensive asset management strategy, including asset inventory reviews,
to support remote learning
• Assess security, bandwidth and resiliency of current IT infrastructure and invest to shore up December 2020
gaps identified
• Review and alter cybersecurity processes and protocols to reflect changes in technology
infrastructure and use
• Invest in online learning infrastructure to ensure resiliency of remote learning environment
• Identify opportunities improve efficiency and security of technology portfolio, infrastructure, and
operating model
PRDE will need to invest significantly in its back-to-school planning and distance learning
strategies, though it must also continue to address the structural challenges within the system
that are aligned to the Fiscal Plan categories. While savings measures have been deferred for
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one year, PRDE must continue its organizational transformation and efforts to operate a more
effective and efficient system.
9.4 Improve professional development opportunities for
directors and teachers
PRDE must strengthen longer-term professional development for teachers and
directors to improve classroom instruction and school management. Effective
teachers are better equipped to develop strong lesson plans, understand their curricula, and
support their students.90 Similarly, school directors are better equipped to improve school
operations, implement reforms, and oversee the development of teachers when they receive
robust training on how to do so.
9.4.1 Specific initiatives and design parameters
The Certified Fiscal Plan requires that PRDE adhere to a set of parameters when implementing
this reform. Specifically, PRDE must:
■ Define operational and results-based criteria that will provide the Central Office
additional input in identifying the top-performing directors and teachers across PRDE,
enabling PRDE to broaden mentorship opportunities that introduce underperforming
educators to best practices (e.g., by reducing top-performers' workloads to leverage them
as formal mentors trained via the University of Puerto Rico-PRDE partnership; hiring job-
embedded coaches to serve as full-time mentors), and offering evaluators across PRDE
schools (e.g. superintendents, gerentes escolares, facilitators) a clear structure against
which to offer directors and teachers performance-based feedback.
■ Formalize learning walks and communities of practice across PRDE schools
to expose teachers and directors to instructional, administrative, and social-
developmental best practices (e.g., by requiring every teacher to participate in a learning
walk that addresses an area of underperformance among their students, piloting the use
of job-embedded professional development coaches), and strengthen ELL, K-5 literacy,
and STEM instruction (especially K-5 mathematics) through robust mentorship (e.g. all
low-performing teachers could be assigned a high-performing mentor to help them
develop their strengths and address weaknesses).91,92
■ Fully leverage the K-12 teacher training partnership between the University
of Puerto Rico (UPR) and PRDE—made possible by a $10 million annual
Commonwealth payment to the university—to subsidize teacher certification and training
in core subjects (e.g. English, mathematics, science) and practices (e.g., classroom
management, how to design effective assessments) to improve instructional quality, and
expand the availability of teacher preparation classes that address specific areas of
Departmental underperformance (e.g., coursework on how to identify, support, and find
additional assistance for students with academic or behavioral challenges).
9° Investigators found that a one standard deviation increase in teacher quality in a single grade raises annual earnings by 1%
on average. Moreover, researchers linked the replacement of a low (bottom 5%)value-added teacher with an average value-
added teacher to a $267,000 increase in students' average lifetime incomes per classroom taught; see Chetty, at al, The
Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood," 2011
91 Learning walks enable teachers to visit other instructors to observe their peers' in action and glean best practices. Similarly,
communities of practice offer teachers and administrators a forum to meet their counterparts to discuss best practices and
solve classroom challenge.
92 In California, Long Beach Unified School District has used formal CoPs to improve English language learning (ELL) test
scores—a top priority for PRDE—by 9% since 2015.
107
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■ Capitalize on partnerships with education NGOs to establish a high-quality
fellowship program to train motivated and high-quality professionals on the Island to
transition into careers in education and develop long-term home-grown solutions to
instructional or administrative challenges (e.g., how to develop teacher evaluations that
measure value-add behaviors).93
■ Introduce universal student screenings conducted by PRDE school
psychologists" alongside a Multi-Tiered System of Support (MTSS)95
framework to ensure that every student's developmental needs are routinely identified
and met to prevent children from being erroneously categorized as Special Education
students, understand the academic, behavioral, and social-emotional needs of the whole
child to pair every student with appropriate interventions (e.g., small group lessons for
certain Special Education students), ensure that every Special Education student receives
services required by their Individualized Education Plans (IEPs) in the least restrictive
setting possible (e.g., reading comprehension support in a General Education classroom),
and reduce the use of costly professional services firms to execute IEP analyses and other
support services required by Special Education students (e.g., by leveraging in-house
developmental staff).
9.4.2 Current state and path, oruyard
Despite its importance, PRDE currently lacks a standardized approach to teacher and director
professional development. PRDE has proposed strengthening its STEM offerings, boosting
literacy proficiency and bilingualism, and teaching more "real world" or actionable skills. To
further these goals, the Oversight Board has allocated funding to several initiatives that would
strengthen professional development opportunities and student instruction across the
Department.
Over the last several years, the Oversight Board has allocated funding to several initiatives
intended to improve student instruction and outcomes by supporting more robust
professional development within PRDE. Among these are (i) the UPR-PRDE teacher training
partnership, (ii) a soon-to-launch initiative between PRDE and a leading non-profit
organization to train ELL instructors across the Island, and (iii) a major effort to hire a
dedicated psychologist for each PRDE school.
UPR teacher training partnership
The UPR-PRDE partnership is intended to offer PRDE educators robust training
opportunities to help them develop capabilities and skillsets actively sought by the
Department. The initiative is made possible through a $10 million annual appropriation from
the Commonwealth to UPR.
93 Some partnerships are already yielding benefits; an ongoing PRDE-Puerto Rico Education Foundation (PREF) initiative has
provided administrators guidance on how to manage a regional education system. As part of this effort, PREF identified of
barriers to improved student outcomes in Bayamon ORE and proposed several solutions.
94 To identify students with academic or behavioral learning challenges, screenings should be brief, sensitive to change over
time, and grounded in research.
95 The MTSS framework is a three-tiered approach to identify and meet the needs of General and Special Education students
in the least-restrictive setting possible (as required by law). It stresses the use of a pedagogical approach that evaluates the
academic, behavioral, and social-emotional needs of the 'Whole child" to place students into the appropriate tier. The first
tier (80-85% of students) includes all General Education and many Special Education students and uses universal
screenings to identify learning or behavioral challenges. The second tier (10-15% of students) includes Special Education
students with additional academic or behavioral goals that respond to support in a targeted small group setting. The tertiary
prevention tier (3-5% of students) offers students that do not respond to second tier interventions individualized support and
assistance.
io8
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The Oversight Board encourages PRDE to select interventions that align most-closely with its
2022-27 strategic plan, but stresses that the Department must complete the following action
items by their respective deadlines:
EXHIBIT 56: REQUIRED IMPLEMENTATION ACTIONS TO STRENGTHEN
PROFESSIONAL DEVELOPMENT
Action item Deadline
• Work with the non-profit organizations to apply for discretionary Federal grant to defray expenses • June 200
To be associated with training ELL rnsiructors
completed
before
FY2021
Launch NGD partnership to hire and train high-quality ELL instructors • September 2020
Design professional development reform that leverages (11 effectiveness criteria. cot learning walks and • February 15. 2021
communities of progress. (3) the PRDE-LIFFt partnership. (4) partnerships with non-prod organizations.
MISS
(5) internal developmental staff and the framework. and (6) other viable interventions ho strengthen
school management and student instruction as part of the preliminary strategic plan
To be
completed Finalize updates to professional development reforms as pan of the updated strategic plan) • March 15. 2021
M FY2021
• Train all supenntendents gerenres eavolares, facilitators. direclors school psychologists, and other • June 30 2021
developmental support staff in how to leverage the MISS framework to better support the needs of all
students
Finalize professional development section of annual reform implementation progress report • Annually from line
30.2021
9.5 Make targeted investments to boost family engagement
Given the relationship between family engagement and student achievement,
PRDE must broaden its efforts to promote robust family engagement in their
students' academic lives.96 Parental involvement is one of five key factors that, when
present, make schools ten times likelier to drive meaningful improvements in student
performance.97 Comprehensive family engagement, meanwhile, can magnify the benefits of
parental involvement and has been linked to higher levels of academic performance, stronger
student motivation, fewer behavioral problems, and easier social-emotional adjustment.96 As
such, PRDE should leverage non-digital and digital tools, as well proven family engagement
strategies, to facilitate robust and impactful family engagement.
9.5.1 Specific initiatives and design parameters
The Certified Fiscal Plan requires that PRDE adhere to a set of parameters. Specifically, PRDE
must:
■ Utilize non-digital and digital engagement tools to empower families to obtain a
robust picture of their child's academic trajectory (e.g. through individualized emails, use
of a student information system containing student grades and attendance data) and
identify opportunities to volunteer in their student's school (e.g. through a weekly
96 A family engagement partnership between District of Columbia Public Schools and local parents, for example, yielded
improved student literacy scores and boosted student attendance by 24%.
97 The other four factors are the (1) use of an instructional guidance system to articulate the "what' and "how" of teaching, (2)
professional capacity to improve instruction. (3y the presence of a student-centered learning climate. and (4y strong
leadership from principals; see Bryk, et. al., Organizing Schools for Improvement: Lessons from Chicago, 2010.
96 Examples of comprehensive family engagement include setting clear academic expectations and helping children develop
strong reading habits; see Castro, et. al., Parental Involvement on Student Academic Achievement: A Meta-Analysis." 2015;
Niehaus, et. al., "School Support, Parental Involvement, and Academic and Social-Emotional Outcomes for English
Language Learners," 2014.
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newsletter), and enable parents of Special Education students to more effectively advocate
for and support the needs of their child (e.g. guide to Special Education services).
■ Leverage proven family engagement strategies to better equip parents and
teachers, using strengths-based approaches and relationship-based practices, to
collaborate as equal partners in a child's development and improve student outcomes,
especially for Special Education students, and improve student achievement, through two-
generation partnerships, by directly intertwining the education of children with parents to
improve outcomes for both (e.g. offer parents job training alongside high-quality
afterschool for their children).99,1°0
■ Regularly survey the families of PRDE students to empower directors and teachers
to understand how effectively instructors support students' academic development, and
identify opportunities to better meet the needs of the whole child (e.g. improve safety,
provide additional behavioral support).
9.5.2 Current state and path forward
PRDE has taken initial steps to boost family engagement, but the Department must
standardize the use of tools and strategies to maximize the impact of its family engagement
efforts. In 2018, PRDE created an office of family engagement. While this office is a step in the
right direction, the broader Department has yet to institutionalize the use of non-digital and
digital tools to give parents a more robust sense of their child's performance. Moreover, the
Department has not yet trained administrators or teachers in the use of proven family
engagement strategies to foster more effective family engagement.101
While the Oversight Board encourages the Department to pursue interventions that align
most-closely with its 2022-27 strategic plan, PRDE must accomplish the action items outlined
in Exhibit 57 by their respective deadlines.
EXHIBIT 57: REQUIRED IMPLEMENTATION ACTIONS TO BOOST FAMILY
ENGAGEMENT
Act/on item Deadline
• Design family engagement stsalegythai leverages it) non-digital and digital tools, (2) praven engagement • February IS. 2021
strategies. {3) fielding family surveys and (4) other viable interventions to boost Family engagement at
each achievement tier as par! of the preliminary strategic plan
To be
completed
• Finalize updates to family engagement an pert of the updated strategic plan • March 15 2021
M 11/2021
• Update family engagement reform section aiswi annual reform implementation progreee report • Annually kern July
15. 2022
• Distribute Family survey • Every six months
To Ile from October IS
completed 2021
in FY2022
and
beyond
99 Under a strengths-based approach, educators engage with parents as partners in a child's education, leverage parents to
broaden their understanding of a student's needs, and work with families to identify opportunities to reinforce in-class lessons
outside of school, Relationship-based practices promote reflection on families' personal backgrounds to shape interactions
and use parents' emotions around their child's education to establish common ground between educators and households.
100 For example, a 2-Gen partnership in SL Clair. AL successfully graduated 100% of adult participants from a pharmacy
technician program at a local college while improving student attendance at an educational after-school program.
101 Notice!,"Na te nueva oficina en el Deparlamento de Education," 2018.
no
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9.6 Systematically collect, manage, and leverage data
Regular data collection, management, and analysis will empower PRDE to make
informed decisions to improve student outcomes and assess the effectiveness of
its reform efforts. Evidence from mainland states suggests that data collection and analysis
will enable PRDE to better direct resources toward impactful evidence-based curricular
resources and instructional strategies, make targeted and timely interventions to support
vulnerable student populations, and assess the impact of education reforms.102 In turn, access
to these datasets and analyses will empower educators, families, and third-parties to further
improve student outcomes.
9.6.1 Specific initiatives and design parameters
The Certified Fiscal Plan requires that PRDE adhere to a set of parameters to strengthen family
engagement:
■ Identify which data are crucial to the optimization of funding, the
identification of intervention opportunities, and the evaluation of reform
effectiveness to conduct a diagnostic of readily-trackable data within PRDE, understand
which systems to connect, consolidate, or eliminate, and engage internal and external
resources as needed to develop currently unavailable data-tracking capabilities.
■ Implement a Data Management System (DMS) that allows superintendents,
gerentes eseolares, and facilitators to quickly access relevant regional,
school, and student data to evaluate student achievement (e.g. META-PR scores, grade
point averages) and performance trends (e.g. attendance, truancy, and drop-outs;
disciplinary referrals) in real-time, digitize Special Education students' IEP
documentation to facilitate compliance with IEP requirements103 and enable PRDE to
effectively staff and budget Special Education and Remedio Provisonal programming,
more quickly allocate resources (e.g. regional support teams) to support underperforming,
vulnerable, or Special Education student populations more efficiently, quickly, and
effectively, and gauge the impact of education reforms on student performance and teacher
satisfaction.
■ Enable directors and other school administrators to access the DMS to support
the implementation of the evidence-based progress-monitoring required for the
operationalization of the MTSS framework to support all General and Special Education
students in the least restrictive manner possible, evaluate the performance of teachers and
students relative to key metrics or Departmental policies (e.g. revised time and attendance
guidelines), tailor teacher professional development opportunities to address the most-
pressing areas of student underperformance, and optimize the allocation of school
resources.
■ Publish anonymized data within the DMS on a regular basis to facilitate the
creation of school-specific performance scorecards to include student and teacher
attendance, META-PR results, and graduation rates, among other data points, empower
educators to reshape their instructional plans (e.g. content, lesson plans, pacing) in
response to student data (e.g. META-PR scores), allow parents to quickly understand their
child's educational trajectory and make home-based interventions when appropriate, and
1°2 For example, in Texas, the state education agency uses the Student Data System (TSDS) to collect, manage, and produce
individual student dashboards for educators to evaluate important information, such as college readiness trends. Similarly,
in Kentucky, the Center for Education and Workforce Statistics collects statewide government data to support informed K-
12 policymaking at the state, district, and school levels.
103 More robust initial compliance with IEP requirements could reduce costly expenses currently incurred through the use of
Remedio Provisional as a result of untimely or inadequate support for Special Education students
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allow third parties, such as education non-profits and academic researchers, to better
understand and support the educational needs of Puerto Rican students.
9.6.2 Current state and pathforward
PRDE has made very little progress in collecting or managing data to inform decision-making.
To-date, the Department has focused on developing a stronger time and attendance system to
track student and teacher attendance. Beyond this initiative, PRDE has yet to train and require
all directors and teachers on how to make data-driven decisions. Moreover, the absence of a
robust DMS populated by accurate and timely relevant data further inhibits data-driven
decision-making—especially at the regional and central offices where robust data would
support holistic decision-making across PRDE schools.
Although the Oversight Board encourages PRDE to introduce interventions that align most-
closely with its 2022-27 strategic plan, the Department must accomplish the action items
outlined in Exhibit 58 by their respective deadlines.
EXHIBIT 58: REQUIRED IMPLEMENTATION ACTIONS TO FACILITATE DATA-DRIVEN
DECISION-MAKING
Action item _ Deadline
• PRDE Central Office: Assemble data reform working group comprised of PRDE technical personnel and • July 1. 2020
educators (e g. directors. teachers. etc
• Develop a template and methodology to establish school-level scorecards and provide the Oversight
Board with a plan for implementing them across all schools At a minimum, the template must include - July 31. 2020
basic school information. teacher attendance rates (as measured by kronos). student attendance rates
(as measures by SIE). META-PR test results. and graduation rates. The methodology to measure
outcomes can be based on changes on performance of test scores for both general and Special
Education students, changes in attendance rates. and changes in graduation rates. among others. In
addition. scorecards must include surreys as a lool to promote family and community engagement
Working group Define kPis and ideal technical future state for DMS (e.g. desired data outputs to appear • August 1 2020
on student-. school-. and system-wide performance dashboards: IEP digitization. centralization. and
management capabilities. creating arronymized datasets to share externally)
• Discuss KPiS and DM5 future state with Oversight Board August 15 2020 -
To be • PRDE Central Office Launch and implement time and attendance policy and tracking system (Kronos). Start of 2020-21
completed across the entire system. including all PRDE schools and administrative offices school year
in FY2021
Working group Conduct a review of PROEs systems architecture to determine if the existing technical September 15. 2020
ecosystem can support the future state DMS
• Working group: Present systems architecture findings to the Oversight Board September 30. 2020
• Working group Design implementation roadmap and milestones to develop a viable DMS system that October 31. 2020
features a pilot program (with a scaled-down version of the future DM5 tested in a small number of
sc hoots) at the oil eel
• Present implementation noadmap to the Oversight Board • November 15. 2020
• Publish detail performance scorecard for every PRDE school • Annually from
December 15, 2020
• PRDE technical staff Launch DMS pilot program, commence data collection. and begin assessing March 31,2021
performance
• PRDE technical staff Create performance report for DINS pilot program • June 30,2021
• PROE Central Office: Update data reform section within annual reform implementation progress report • Annually from June
30 2021
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Action hem Deadline FY2021 budget incentives
• PRDE technical staff Discuss performance report with Oversight Board • July 15, 2021
• Update scorecards to reflect the most recent information for school year ▪ September 2021 • S1.500 one-rime bonus far
2020.2021 and prowde reporltrig to the Oversight Board en agreed upon school directors that
formai perform well on scorecards
based on data captured
and approved methodology
to measure outcomes
To be
completed
in PY2022 PRDE technical staff Scale pilot program across PRDE schools • July to December
and 2021
beyond • PROE Central Office Train all educators (e g directors. teacherst on how to • July to December
use the DMS 2021
• PRDE technical staff. Launch full ems at all PRDE schools • January 2022
• PRDE Central Office Begirt sharing anonytutzed DMS data with the • Ongoing from
National Canter for Education Statistics January 2022
• PRDE schools Offer educators refresher courses and parents introductory • Ongoing from
sees one on hew to use the DMS January 2022
Chapter 10. Ease of doing business reform
10,1 Current state of business regulation, investment
promotion, and tourism attraction
In 2020, Doing Business—an independent assessment of the ease of doing business in 190
economies—rated Puerto Rico the 651 h most business-friendly economy. The Island's ranking
trails the mainland's (ranked 6th in 2020) and has worsened since 2006, when Puerto Rico
was ranked 18th. Bringing the Island's business environment in line with Mexico—the top-
ranked Latin American and Caribbean economy (4909—will give Puerto Rico the edge that it
needs to play in an increasingly competitive environment.104 The Island competes regionally
for investments like tourism; internationally for pharmaceutical, knowledge services,
hospitality and tourism investments; and, overall, with mainland states. The Island must
improve its business-friendliness and consider ease of doing business reforms to support
economic growth.
Instituting comprehensive reforms is particularly important in light of the COVID-19
pandemic. As economic activity slows, companies look to shift supply chains back to the US,
and other economies implement rapid reforms to capture growth, instituting ease of doing
business reforms is critical. In the aftermath of the pandemic, many firms—especially small
businesses—will continue to face significant headwinds (e.g. falling demand for their goods
and services), underscoring the need to generate economic activity and attract new
investments across the Island. And, while delaying reforms will undermine Puerto Rico's
ability to recover from the pandemic, failure to institute them at all will enable mainland states
and rapidly-reforming countries to out-compete Puerto Rico for key investments, such as
pharmaceutical manufacturing facilities. For example, Costa Rica, a major competitor for
knowledge services investments, improved from 12151 in the 2010 Doing Business survey to
74 in the 2020 iteration, and has become a top player in the field.
104 Ease of doing business reforms were first proposed in April 2018, when Mexico topped the Doing Business index for Latin
American and Caribbean economies as the 49th most business friendly economy in the world (as of 2020, Chile is the top-
ranked Latin American and Caribbean economy at 59th). As such, macroeconomic forecasts within this document—which
link an improvement in the Island's Doing Business ranking to economic growth—are dependent on Puerto Rico being
ranked 49th or better—rather than on achieving ranking parity with Mexico or Chile. The Republic of Georgia's output per
capita increased by 66% and business density tripled between 2006 and 2014–the same period in which Georgia improved
its ranking from 98 to eight.
113
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Puerto Rico's relatively low-ranked business-friendliness is attributable to deficiencies in
Government regulations or processes (see Exhibit 59), including:
■ Getting electricity: The Island's energy supply is costly and unreliablel (15
■ Dealing with construction permits: Firms spend significant time (165 days), effort
(22 procedures), and money (6.7% of project's future value) to obtain permits, on
average106
■ Registering property: Companies must invest significant amounts of time (190 days)
and effort (eight procedures), on average, to register property107
■ Paying taxes: Firms spend significant time (218 hours) completing filings (16 payments),
on average, and are much likelier to be audited than on the mainland108
■ Occupational licensing laws: Excessive regulations have restricted labor force
participation and constrained economic activity
■ Freight regulations: Inefficient regulations have inflated transportation costs for
businesses across the Island
■ Offshore investment attraction: Inadequate Government oversight and resourcing
have inhibited efforts to attract investments
■ Tourism attraction: Insufficient Government funding and a narrow mandate
undermine the Destination Marketing Organization's efforts to transform Puerto Rico into
a leading tourist destination
105 The cost to obtain an electric connection in Puerto Rico is equal to 318% of income per capita, on the mainland, this cost
falls to just 22% of income per capita and businesses enjoy much more reliable energy supplies (7.0 points on an 8.0 point
scale on the mainland versus 3.0 points in Puerto Rico).
106 For comparison, businesses must invest 81 days, complete 16 procedures, and pay 0.7% of a project's 'future value on the
mainland.
107 For comparison, businesses must invest 15 days and complete four procedures on the mainland.
108 For comparison, businesses must make 11 payments and invest 175 hours on the mainland; the odds of an audit for a
corporate income tax underpayment are also substantially lower on the mainland.
114
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EXHIBIT 59: DRIVERS OF PUERTO RICO'S UNDERPERFORMANCE IN DOING
BUSINESS
doragBusiness2019 = Doong8usiness2020
indicator scores, lower rrgLvt-s are Wre .
159 161 162 163
Puerto Rico's ranking continues to worsen as a
result of insufficient ease of doing business reforms 141 143
88 92
64 65
59
53
Overall' Starting a Getting Dealing with Registering Paying taxes
business2 electricity construction property
permits
• ••••••••"•• ■ ni••• *_._ ■LN1pettonms•-•.~4 01,1Y1■rm Aer•Celn x 1f1.0-0 .11 Deb none,
. teo.n.m. rennn• 13.5e! ,Ine^syenna,r efeel•I • n teliffemsn At In e-Ide.ene-n [(tele e•ft r. I rake •ne tnIven--ne n■
The Governments' efforts to implement ease of doing business reforms have been at best
insufficient to compete with other destinations improving faster. At worst, ease of doing
business reforms have been rare and not radical or thorough enough to warrant improvements
in scoring or in investor attitudes. Notwithstanding the need to replace previous competitive
advantages to attract investment and the creation of jobs, the implementation has been
uneven and minimal.
As such, when compared to the May 2019 Fiscal Plan, delayed implementation of ease of doing
business reforms has delayed the impact on forecasted GNP growth by two years to FY2025
and reduced the uptick (by o.io%) to 0.30%. Continued Government inaction will further
jeopardize projected growth.
To attain the GNP uptick associated with ease of doing business reforms, the
Government must focus on achieving the following in FY2021:
• Improve the availability, cost, and reliability of electricity (see Chapter 11).
• Make permits more easily accessible to enable business activity and public
safety by streamlining processes and eliminating procedural inefficiencies (e.g. reallocate
underutilized personnel) across permitting agencies ("lean transformations"), digitizing
all procedures required to start a business into the Single Business Portal, developing the
Permitting Performance Dashboard, and launching the Red Tape Commission to support
operational and technical transformations.
• Overhaul property registration to facilitate financial transactions and
promote disaster-preparedness by identifying and standardizing best practices
among registrars to speed up processing, merging the current land registration system
with a faster land recordation system, merging the existing Land registries into one uniform
parcel registry, and launching a campaign to map ownership of all unregistered properties
on the Island.
115
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■ Simplify paying taxes to spur economic activity by designing a tax administration
reform that digitizes, consolidates, and eliminates select tax filings, and conducting an
operational needs assessments across Hacienda to reallocate personnel.
■ Reduce occupational licensing to facilitate labor force participation by
designing legislative reforms to reduce required licenses, and consolidating the processing
of occupational licenses under one department
■ Eliminate inefficient on-Island freight regulations by ending the minimum land
freight charge across the Island
■ Strengthen offshore investment attraction efforts by identifying KPIs to gauge the
effectiveness of Invest Puerto Rico's promotional efforts, and designing and implementing
a strategy to compete with mainland states and other economies for investments as firms
move to shift their supply chains to the US
■ Prime tourism attraction efforts for success by transferring internal (on-Island),
airline, and event marketing responsibilities and funding from Puerto Rico Tourism
Company to Discover Puerto Rico
While all reforms will help produce a friendlier business environment,
simplifying and digitizing permits (including business registrations), property
registration, and paying taxes will have a particularly significant impact. As such,
the streamlining of these three processes will foster economic growth and job creation.
10.2 Streamline permits to promote business activity and
public safety
To foster economic development, promote public safety, and enable recovery
from the COVID-19 pandemic, the Government must revamp the Island's
permitting system. Despite recent reform attempts (resulting in a new Joint Regulation
that set Island-wide permitting rules and time limits to adjudicate permits), the average
construction permit still takes 165 days to obtain.1°9 Delays in construction may incentivize
informal construction, potentially increasing risks to public safety.11° Without thorough
action, permitting will impede the Island's economic revitalization—discouraging
construction and business operations and undermining recipients who aim to rebuild their
homes and businesses in the wake of natural disasters. In the aftermath of the COVID-19
pandemic, creating a streamlined permitting system that allows businesses to quickly start or
restart activity will be crucial to support Puerto Rico's recovery—especially in the case of small
business, which are particularly vulnerable to economic disruptions.111
To redesign the Island's permitting regime, the Government must:
■ Implement operational changes to permitting processes: Permitting regulations
must be streamlined to facilitate economic activity without sacrificing public safety
109 World Bank Group, Doing Business 2020, 2019
110 In 2007, Interviron Services, Inc. concluded that as much of 55% of the Puerto Rico's residential and commercial construction
could have been done informally; see Hinojosa, et. al., The Housing Crisis In Puerto Rico and the Impact of Hurricane
Maria " 2018.
111 For example, the average small business generally holds less than one month of cash on hand. JP Morgan Chase & Co
Institute, "Cash is King: Flows, Balances, and Buffer Days: Evidence from 600,000 Small Businesses,' 2016.
116
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■ Overhaul the Single Business Portal (SBP): The platform requires solutions to
glitches and additional features to meet the Island's permitting needs112
■ Launch Red Tape Commission: A commission of private and public experts can help
identify, design, and prioritize the implementation of operational and technical reforms
While the implementation of these reforms is critical, the Oversight Board does not assert that
they are exhaustive and encourages the Government—and especially the Planning Board (JP)
and the Permits Management Office (OGPe)—to implement additional reforms to improve the
permitting system.113
10.2.1 Permitting reform design parameters
The 2020 Fiscal Plan requires the Government to adhere to a set of parameters when
implementing permitting reforms. Specifically, the Government must:
Implement operational changes to permitting processes
■ Improve efficiency while maintaining public safety by eliminating sources of waste
(e.g. under-trained employees asking applicants for excess documentation) through a lean
transformation and routine regulatory training and testing for employees at key permitting
agencies,114 and issuing all construction (PCOC)115 and business (PU)116 permits that
comply with basic requirements on a conditional basis, with continued validity dependent
on the findings of proactive (mid-construction or -operation) inspections.117 The
Government must also increase utilization (i.e. identifying additional inspection types to
delegate) and oversight of third-party inspectors (e.g. more training and auditing),118,119
streamline permitting for strategic projects (e.g. major developments, projects above a
certain value threshold), and guarantee highly-delayed applications a right to obtain
agency review.1 2°
112 SBP was created by Act 19-2017 to serve as the Island's one-stop portal for construction and business permits, individual
and corporate incentives, and business registration procedures. To-date, the platform is only used to solicit and adjudicate
permits and incentives. SBP has been played by technical issues (e.g. incorrectly computing application fees, sending
applications to the wrong permitting office, etc.) and hampered by the absence of important features (e.g. amending
applications, allowing permitting agencies to view all tasks awaiting completion, etc.).
113 For example, creating a more coherent land use plan and zoning map could streamline the permitting process by eliminating
the need for time-intensive pre-construction consultations. Multi-year delays in updating this map have increased the need
for such consultations as Island's developmental trajectory has necessitated commercial and industrial development in areas
officially zoned for residential or agricultural uses. As such, the Oversight Board urges collaboration between JP and
autonomous municipalities to produce an updated land use plan and zoning map that meets the Island's economic and
environmental needs.
114 These include the Permits Management Office (OGPe), the chief permitting regulator; the Environmental Quality Board
(DRNA-JCA), which exempts permits from environmental impact reviews and conducts the reviews themselves; and the
Department of Health (DOH) and Firefighters Bureau (CB), which issue the sanitation licenses and fire prevention certificates
required for businesses to operate.
115 The consolidated construction permit (PCOC) is required for all construction on the Island.
116 The single permit (PU) is required of all businesses on the Island to operate. It consolidates the use permit, the environmental
quality certificate, the fire prevention certificate (adjudicated by CB), the sanitation license (adjudicated by DOH), and,
depending on the nature of the business, liquor and tobacco licenses (adjudicated by Hacienda).
117 All permits are currently adjudicated through a time-intensive analysis to determine whether projects as written in the
applications would comply with regulations. In a proactive inspection regime, regulatory compliance is ascertained through
live inspections, enabling adjudicators to issue permits more quickly (reducing processing times), inspectors to verify code
compliance in practice (boosting safety), and builders spot quality control issues earlier on (averting expensive rework).
118 Profesionales autorizados may complete fire prevention certificate inspections, but both OGPe and local permitting experts
have voiced concern about the quality of some third-party inspections.
119 In Washington, D.C., third-party inspectors may conduct building, mechanical, electrical, and plumbing with supervision from
the city's Commercial Inspections Division; see District of Columbia, "Third Party Program Procedure Manual 2018," 2018.
120 The Government could offer significantly delayed permit applications the ability to petition OGPe's Adjudication Board
(OGPe-JA) for a final decision. In turn, the Government should bolster the board's technical capabilities by developing a
permanent technical staff to review applications and require OGPe-JA to issue final rulings on their status by a certain
deadline.
117
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■ Accelerate construction permitting by expanding the types of businesses and
construction projects excluded from environmental impact review,121 issuing
infrastructural recommendations (SRI) on a conditional basis, and allowing one SRI to
apply to multiple permits if associated with the same project
■ Expedite business permitting by eliminating sanitation inspections conducted before
a facility commences operations and ending sanitation inspections for low-risk businesses
(e.g. offices, retail outlets) altogether.122,123
■ Improve municipal permitting offices' compliance with permitting
regulations by predicating the renewal of legal agreements that allow autonomous
municipalities to issue permits on their compliance with permitting regulations,124
redirecting applications and fees away from non-compliant municipalities,125 and allowing
municipal permit applicants to document a municipal permitting office's regulatory non-
compliance and petition OGPe to review their cases.
■ Allowing Government agencies to propose regulatory changes in response to
economic or technological changes to maximize efficiency and safety.126
Overhaul the Single Business Portal (using the FEMA Hazard Mitigation funds detailed in
Section 10.2.3)
■ Create the technical foundation (e.g. new features) necessary for operational reforms.
■ Facilitate inter-agency collaboration by offering all permitting agencies and
municipal offices more visibility into outstanding tasks (e.g. inspections) that they must
complete and storing their historical permitting data (e.g. previously-adjudicated
permits).127
■ Digitize and centralize all procedures to start a business as required by Act 14)-
2017.128
■ Launch a Permitting Performance Dashboard to evaluate permitting agencies'
compliance with processing time limits found in the Joint Regulation129 by calculating the
average processing time (submission to adjudication) for all permit classes and types (and
121 Before applying for permits, applicants must solicit an environmental document approval from OGPe. The categorical
exclusion (DEC) is the most common and fastest to adjudicate (as no analyses are required). Applicants who do not qualify
for a DEC must complete an environmental assessment (EA) or an environmental impact assessment (DIA).
122 An end to preliminary inspections would allow DOH to increase sanitation audits of operational businesses to boost public
safety and allow the department to issue licenses more quickly, enabling businesses to commence operations earlier on.
123 An end to low-risk business sanitation inspections would reduce regulatory burdens for those businesses and enable DOH
to allocate additional personnel to inspect high-risk facilities (e.g. labs, restaurants).
124 Act 81-1991 created autonomous municipalities. Under existing regulations, autonomous municipalities are legally allowed
to open municipal permitting offices once they have submitted municipal zoning maps to and signed convenios de delegacion
with JP. Convenios de delegacion are valid for five-year periods.
125 OGPe could redirect permitting applications and fees away from municipalities that display sustained patterns of non-
compliance (via SBP) or (in conjunction with JP) digitally revoke their authority to issue permits altogether.
126 Modifications should respond to technological advances (e.g. development of new software that renders certain analyses
obsolete). An effective mechanism in the Joint Regulation would require JP to (1) review all proposals and send viable ones
to public commentary on a quarterly basis and (2) update the Joint Regulation within 90 days of their approval.
127 Currently, all agencies except OGPe lack a real-time view of the number of inspections and analyses outstanding at their
agency and cannot track how many inspections are assigned to or completed by their employees every day.
128 As such, the Government must target complete integration into SBP of (1) filings for business certificates, (2) submission of
an employer identification number (EIN) from the Internal Revenue Service (IRS) to Hacienda to support employee tax
withholding, (3) flings for municipal business licenses, (4) filings for unemployment and disability account numbers from the
Department of Labor and Human Resources, (5) filings for workmen's insurance policies from State Insurance Fund
Corporation (SIFC), and (6) flings for merchant certificates.
129 The Joint Regulation creates three permit classes: Ministerial permits comply with all land use, zoning, and building
regulations and must be adjudicated within 30 days. Discretionary permits that contravene only building rules (e.g. square
footage limits) are subject to a Construction Consultation (CC) but not subject to public commentary and must be adjudicated
within 120 days. All other discretionary permits are subject to a public hearing and must be adjudicated within 180 days.
118
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agency sub-tasks if adjudicated by two or more agencies),130.131 tracking the number of
applications closed without adjudication or returned to applicants due to incomplete
documentation for all permit classes and types,132 recording the percentage of third-party
permit inspections audited by OGPe, and enabling applicants to view their permit's
approval status in real-time.
■ Launch a Red Tape Commission133 comprised of private and public sector experts to
identify opportunities to streamline the environmental documents (DEC, EA), major
construction procedures (CUB, PCOC, SRI), and business permit (PU). The commission
should also map the objectives of all OGPe-issued permits to identify overlaps in scope,
outdated use cases, permits that could be processed in parallel or leverage the same
analyses, as well as recommend which permit inspections could be delegated to third-party
inspectors and flag major SBP glitches and common-sense technical upgrades.
10.2.2 Reform targets and indicators
Successful property registration reforms will allow Puerto Rico (ranked 143rd in the Doing
Business construction permits indicator) to compete with the top-ranked Latin American and
Caribbean economy in this indicator (ranked 871h) by reducing the time, number of
procedures, and cost required to obtain permit by rf2023. It should also serve to digitize and
integrate all procedures required to start a business into SBP (Act 19-2017).
The Oversight Board will also track the following indicators to monitor the Government's
implementation of permitting reforms:
■ Average number of days to obtain CUB, DEC/EA, PCOC, PU, and SRI permits
■ Number of procedures required to obtain CUB, DEC/EA, PCOC, PU, and SRI permits
■ Percentage of backlogged CUB, DEC/EA, PCOC, PU, and SRI permits
■ Number of business registration procedures integrated into SBP
■ Number of procedures required to start a business
■ Average number of days required to start a business
10.2.3 Current state and path, ortvard
The Government has made no meaningful progress in simplifying, expediting, or enabling
permitting. Agencies struggle to reduce permit processing times due to a continued reliance
on inefficient application review procedures (e.g. time-intensive proposal-based adjudication,
continued use of sequential application processing). The operational redesign outlined above
will enable agencies to comply with processing time limits to adjudicate permits. SBP's
functionality, meanwhile, has been reduced by technical glitches (e.g. applications sent to
incorrect offices) and a lack of critical features (e.g. amending applications). SBP upgrades will
provide a foundation for the operational transformation.
130 Class refers to a permit's ministerial or discretionary character, type refers to its use (e.g. PCOC, PU, etc.).
131 The SRI is one example of a permit adjudicated by more than one agency. Although it is issued by OGPe, the determination
is based on input from the affected infrastructure agency (e.g. PREPA).
132 The Joint Regulation resets time limits when agencies receive an application lacking required documentation. Local
permitting experts have noted prior experiences with agencies marking completed applications Incomplete to reset
application time limits.
133 In New York City, a red tape commission developed more than 60 solutions to address inefficient business processes,
including permitting. In New Jersey, the creation of a statewide commission coincided with a slowdown in the issuing of new
regulations. When enforceable by law, red tape reduction efforts have drastically reduced excess regulations. Rhode Island
eliminated 31% of all statewide regulations when it legally set its entire regulatory code to expire at the end of 2018. See
Broughel, "A Dark Day for Red Tape in the Buckeye State," 2019.
119
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This inaction is particularly concerning given the Government's access to a $144 million FEMA
Hazard Mitigation grant over the last two years to revamp the Island's permitting system. To
date, the Government has only spent and submitted reimbursement requests for less than $4
million. The grant, set to expire in September 2024, must be spent in its entirety to maximize
its potential to revamp the Island's permitting system in an effective and lasting manner.134
The grant, awarded to the Planning Board, is meant to support the enforcement of stronger
building codes and permitting regulations and can fund:
• Hiring additional permitting and building inspectors across the Island
• Purchasing or upgrading technological systems that support code enforcement (e.g. SBP)
• More robust training for inspectors to promote compliance with permitting regulations
and building codes, as well as community outreach to educate stakeholders on changes
■ Hiring technical experts (e.g. lean consultants) to build code enforcement capabilities at
JP, OGPe, and municipal permitting offices
To successfully implement permitting reform, the Government must accomplish the following
action items by their respective deadlines:
EXHIBIT 60: REQUIRED IMPLEMENTATION ACTIONS FOR PERMITTING REFORM
Action dam .11•gr • hensleco
• Establish Recrrape commission co rnpriSe d or citrate sector experts, CB, DOH,I3RNA- • OGPe Juno 30, 2020
m1.2070
/GA JP. OGPe. and th e Oversight Board
• D es I sin I mplementeticri plan to di gltire all business registrati on pro cesseS BU sin eaS regiettatien aqua:48Sr September 30,2020
• Reale* all Internal prO ce S Sea l° Ide nifty Operational i n Stir send e S and develOp StralegleS • Permitting agendeS2 September 30. 2020
to addre as the m
• Corn pile all ne cessary SOP fixes and upgrades Onduding Perrndt no Performance Red Tape Ocirpo,Api September 30.2020
❑ae h snare
• SF! detnilion or strategic protects and bOdtlY Streamlined permitting procedures !Or Marti • °DEC. JP. ()GPO SePtallaber K. 2020
• Engage relevant !Cirri-parties ra i It con duct lean tt an stor mation at CB. 001-1. DRNA-JCA, • JP, OGPe November 30, 2020
and OGPe and (21 i rnple me rt SBP fixes and Upgrades (inulpdng di gitilarion of all
procedures lo start a business)—bola of which can be 'Linde d vi a FDA Hazard
Pr'2021 Mitigation grant
• Red Tape Commission shares recorrirtendatians to (1) oppOrtunities to streamine • Red Tape Commission November 30, 2020
permits (2)inspe ctionsto de I egate to third-party Inspectors, and (31SBP
recommendations with agendas and Oversighl Board
Din cuss recommendation swIlb Oversight Board • Red Tape Commission December 15, 2020
Launch ean transform-at ons and SEP overhaul (induding Pus In PISS registration • C13. DOH. DRNA-JGA OGPe. January 1,2021
cfigIllzati on efforts) runde d vi a FEMA Hazard Mitigation grant third-parties.
I Mpl ement all neCe Ssary GdMin IStiative and le OiSlalive oh an g ea to suppOrtprOcedural • Hu sin ea s regisUallo n and per- March 31,2021
streamlining. SAP modifications. and digitization of procedures to stale business mit& g agendas. Leglsialure
Fully digiliZe all procedures to Mart a business Within SDP • Third-parties Jinn 30, 2021
Finareni SEP overhaul • Th "1-d-bates November 30.2021
PPD • JP. OGPe De cam Der 15, 2021
Ff2072
and Reduce average processing times for each permittype and dab s to 2x Joint Regulation • Permitting ag @noes June 30. 2022
beyond limits
Reduce average process ing times for each perrndtype and das s to comply wilh Joint • F'erroftting agencies June 30, 2023
Regulation WAS
1 These 11.111tle Its Lepartrnerd 0151310 ryanin es the Deeiretrint or Labor and Nana Resources. end Cr c SW* 'ocotillos rues Ca minion
3 These include the Perms Pchscement Office ICOPcl, the Pepirtment otAgrteucute (Oki. me (Apartment ern/ducal is0Enrhermentel ReSOLIrCeS'Eanranfrental bunch,Beare tnnfir."-
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IITRSVVHAl Teacirrimousaiona PsaWarbry Basra nalleule oihi om 41..xc raw • 11CP1. Hecessa. the Oesertmen1 roiheeil$ ftabi inn los Freighters Lr,nxmearan rag,
10.2.4 Enforcement mechanisms
To ensure that the Government implements impactfui measures, the 2020 Fiscal Plan requires
that JP and OGPe create and launch the Permitting Performance Dashboard (PPD) by the end
of December 2021.
The 2020 Fiscal Plan also requires that each permitting agency must adjudicate each permit
type (e.g. PCOC, PU) and class (e.g. ministerial, discretionary)—on average—within 2x the
limits by FY2022 and at the limit by FY2023. The Oversight Board will utilize the PPD to gauge
134 The Government must also ensure that corresponding request for reimbursement are submitted to FEMA in a timely fashion.
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agencies' compliance with time limits, and it will track the percentage of permitting
applications closed without adjudication or marked incomplete and returned to applicants to
ensure that all permitting agencies achieve these targets legitimately.
10.3 Overhaul property registration to facilitate financial
transactions and promote disaster-preparedness
To remove barriers to financial activity and promote disaster-preparedness, the
Government must continue implementing property registration reforms in
FY2o21. Accelerating property registration will ensure that all residents and businesses can
quickly and reliably document property rights—crucial to day-to-day business operations and
to post-disaster recovery efforts. As it stands, the Island's current set of disjointed registries
do not comprehensively map all land ownership, complicating Government disaster relief
efforts.135,136.137 To empower residents and businesses to recover from future natural disasters
and comply with US Department of Housing and Urban Development (HUD) guidelines for
unlocking $8.3 billion in Community Development Block Grant (CDBG-MIT) funds, reforms
must also demonstrate meaningful progress in the creation of a uniform parcel registry that
can be used to verify the ownership of properties across the Island.
10.3.1 Reform design parameters
The Certified Fiscal Plan requires the Government to adhere to a set of parameters when
implementing property registration reforms. Specifically, the Government must:
■ Reduce the amount of time required to register a property by identifying and
promoting the systemwide adoption of top-performing registrars' best practices,138
conducting performance analyses to reallocate support staff (e.g. technicians) to maximize
registrars' processing capabilities, eliminating the backlog of outstanding property
registrations (see UPR-Property Registry task force below), and replacing or combining
the existing land registration system with a faster and more comprehensive land
recordation system.139
■ Create a uniform parcel registry that comprehensively records property
ownership and rights across the Island (funded by a $50 million CDBG-DR grant
for this purpose) by prioritizing mapping the entire Island, including only basic
information for each property, and limiting participation to stakeholders with registration
135 In the aftermath of the 2017 hurricanes, many individuals and families affected by the disasters struggled to document legal
ownership of their properties, requiring FEMA to make an exception and allow claimants to self-certify ownership,
136 Unregistered properties, also known as informal housing stock, are generally self-built by lower-income households, often in
flood zones and without rigid building code compliance. In 2007, Interviron Services, Inc. concluded that as much of 55% of
the Puerto Rico's residential and commercial construction could have been done informally.
137 Puerto Rico has three property registration systems: (1) DOJ-PR's registry records transactions (e.g. acquisitions) relating
to real properties and uses registrars to analyze the validity of property transactions; (2) Centro de Recaudacion de I ngresos
Municipales (GRIM) maintains a digital registry of real property in each municipality (the Cadaster of Puerto Rico) for tax,
legal, economic, and administrative purposes; (3) JP maintains an interactive database with location, environmental, and
land use data across the Island. Neither the DOJ-PR registry nor the Cadaster accurately capture property ownership.
Registration in the former is voluntary, time-consuming, expensive, and unnecessary in the absence of financial transactions.
While registration in the latter is mandatory, the Cadaster does automatically record informal transactions.
138 D0J-PR's registrars exhibit significant disparities in performance—in 2019, 22% of registrations inscribed by DOJ-PR were
inscribed by its five most-productive registrars, while its five least-productive registrars accounted for only 6% of processing
volume; see Puerto Rico Department of Justice-Property Registry, performance data shared with Oversight Board, 2019.
139 The Island's land registration system (a) is voluntary, (b) legally guarantees title to a property, and, by virtue of its legal
protections, (c) often takes longer to process registrations. Land recordation systems (like those on the mainland) mark the
temporal order in which documents are tiled, providing a priority claim of ownership. This does not certify that a property is
free of liens. Assurances of ownership are established through title searches Intended to verify that preexisting claims or
liens do not exist, escrow companies that assure the timely transfer of resources and documents, and title insurance to
provide a financial safeguard against title defects.
121.
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data, establishing an administrative and technical protocol for continuously updating the
parcel registry to reflect legal changes (e.g. new ownership), and creating a legal protocol
to incorporate informal housing stock lacking legally-determined boundaries, deeds, or
titles into the uniform parcel registry.
• Launch a GIS map that provides an interactive geospatial presentation of data
populated within the uniform parcel registry (funded by the same $50 million
CDBG-DR grant mentioned above) by contracting surveyors and GIS service providers to
develop a digital map of the Island, and prioritizing the overlay of parcel and ID,
ownership, land use, and valuation data140
10.3.2 Reform targets and indicators
Successful property registration reforms will allow Puerto Rico (ranked ifag in the Doing
Business registering property indicator) to compete with the top-ranked Latin American and
Caribbean economy in this indicator (ranked 5 95th) by reducing the time and number of
procedures required to register property by FY2023. It will also allow Puerto Rico to
demonstrate to the US Department of Housing and Urban Development (HUD) how ongoing
efforts to develop a uniform parcel registry and GIS map will assist HUD in verifying legal and
physical addresses associated with the use of CDBG-MIT funds.
The Oversight Board will also track the following indicators to ensure that the Government
implements property registration reforms:
• Average number of days to register property
• Number of procedures required to register property
• Number of backlogged property registration applications
10.3.3 Current state and path forward
The Government has taken steps to streamline the Island's property registration processes in
recent years, but significant work remains to be done. Digitization of property registrations
has boosted productivity at the Department of Justice-Property Registry (DOJ-PR), enabling
the registry to process more documents than it received.141 DOJ-PR and the University of
Puerto Rico (UPR) launched a task force to further reduce the backlog in March 2020, but its
efforts were cut short by the COVID-19 shutdown. Currently, more than 400,000 registrations
remain backlogged, and registrations average 190 days to process.142
UPR-Property Registry backlog reduction task force
In March 2020, the Oversight Board worked with UPR and DOJ-PR to establish a task force
to eliminate the property registration backlog at D0J-PR. Funded via $1 million in unearned
UPR revenues from FY2018, the task force comprised more than 100 UPR (primarily law)
students and DOJ-PR registrars who were supposed to process and inscribe backlogged
registrations. The objective of the task force was to eliminate all backlogged documents in the
San Juan area while exposing student participants to the intricacies of the legal processes
surrounding property registration. Unfortunately, the COVID-19 pandemic cut short the task
force's efforts shortly after they commenced, and is expected to resume operations as the
Island re-opens its economy during the aftermath of the pandemic.
140 After satisfying HUD requirements, the Government could populate additional data (e.g. utility, school population, crime) to
meet the Island's legal and economic needs.
141 This resulted in the elimination of 30,000 documents from DOJ-PR's backlog; see Puerto Rico Department ofJustice-Property
Registry, performance data shared with Oversight Board, 2019.
142 Puerto Rico Department of Justice-Property Registry, performance data shared with Oversight Board, 2019; the World Bank
Group, Doing Business 2020, 2019.
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To successfully implement property registration reform, the Government must accomplish the
following action items by their respective deadlines:
EXHIBIT 61: REQUIRED IMPLEMENTATION ACTIONS FOR PROPERTY REGISTRATION
REFORM
Action Item Owner Deadline
• Establish a property registration reform working group comprised of CRIM. DOJ-PR. JP. • Vmenda June 30.2020
Vivienda. and the Oversight Board
• Identity top-performing registrars and best practices DOJ-PR August 15. 2020
• Issue request for proposal for third-party surveyors and GIS providers to begin developing Vmenda September 39.2020
digital map of the Island (funded by a 550 million COOL-DR grant for this purpose)
Design strategy to accelerate property registration processing times by CD promoting Woriung group October 15. 2020
systemwide adoption of best practices. (2) reallocating technical staff. and (3) hybridizing
the land registration system with a faster and more comprehensive recordation system
and share with Oversight Board
• Discuss strategy to accelerate property registration wile/geeing times with Oversight Board • 00J-PR October 31, 2020
• Begin implementing strategy to reduce property registration processing times • DOS-PR November 15., 2020
• Issue request for proposal for third-party firm to merge CRIM. 00.1-PR. JP property • Witenda November 15.2020
registries into uniform parcel registry
• Design protocol to incorporate informal housing stock when identified nit uniform parcel • Working group January 31. 2021
registry
Design campaign to map unregistered properties or those with outdated ownership and • Wedging group February 15, 2021
share with Oversight Board
• Discuss mapping strategy with Oversight Board • luvirttf. group February 28, 2021
• Launch mapping campaign and begin updating uniform parcel registry and GIS map • 1130. _ March 31.2021
• Finalize necessary administrative and legislative changes to introduce hybrid registration • TBD April 15. 2021
system
Define administrative protocol to continuously update uniform parcel registry in response • Working group April 30, 2021
to legal changes (e.g ownership changes,
• Finalize merger of CRIM. 00J-PR and JP property registries into uniform parcel registry
• Third-parties May 30, 2021
• introduce technical mechanisms to continuously update uniform parcel registry and GIS • Third-parties June 15, 2021
map in response to legal changes (e.g. ownership changes)
• Conclude mapping campaign • TBD March 31.2022
• Finalize upload of data from mapping campaign into uniform parcel registry and GIS map . Third-parties June 30. 2022
FY2022 and
• Finalize uniform parcel registry that maps all ownership and rights across the Island • TBD September 15.2022
beyond
• Finalize GIS map that include parcels. property Os. property ownership. land use and • TOO January 31. 2023
property value data
104 Simplify paying taxes to spur economic activity
To spur economic activity, the Government must implement reforms to
meaningfully simplify paying taxes. The Oversight Board acknowledges Hacienda's
progress in digitizing and centralizing an increasing number of tax filing payments and into
SURI. However, several major filings and payments that businesses and residents in Puerto
Rico must make (including municipal and property taxes) have not been digitized or
centralized, requiring filers to interface with multiple revenue agencies and mediums to
comply with their tax obligation.
10.4.1 Reform design parameters
The 2020 Fiscal Plan requires the Government to adhere to a set of parameters when
implementing tax administration reforms. Specifically, the Government must:
■ Reduce the time required to pay taxes by digitizing analog tax filings (e.g., municipal
and property taxes) and post-filing error-resolution processes (e.g. by creating secure
uploads for digital document) into SURI, as well as by exploring opportunities to reduce
the number of required tax payments (e.g., less frequent payments for smaller amounts).
■ Accelerate the processing of tax filings and timeliness of audit completion by
conducting an operational needs assessment to support the reallocation of underutilized
personnel to critical functions (e.g. error-resolution, audits), and identifying and
implementing operational efficiencies within the audit process (e.g., by identifying
bottlenecks, duplicative work, and workload scheduling).
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• Create a working group to identify and prioritize efficiency-minded
regulatory changes that can be incorporated into future SURI releases.
10.4.2 Reform targets and indicators
Successful tax administration reforms will allow Puerto Rico (ranked 163.1 in the Doing
Business paying taxes indicator) to compete with the top-ranked Latin American and
Caribbean economy in this indicator (ranked 99th) by reducing the time and number of filings
that companies must complete to pay taxes by FY2023
The Oversight Board will also track the following indicators to ensure that the Government
implements tax administration reforms:
■ Average number of mandatory tax payments for corporations
• Doing Business post-filing index score
10.4.3 Current state and path forward
Although digitization efforts around SURI have helped make tax filings less burdensome,
paying taxes remains a cumbersome and time-consuming process. To its credit, SURI has
helped filers reduce the time required to complete certain filings and payments (e.g. form 480,
SUT, corporate income taxes) by digitizing and centralizing those processes in one place.
However, municipal and property tax filings and payments remain time-consuming and
complex. Post-filing audit procedures are particularly time-consuming and challenging to
resolve, often involving multiple in-person visits to Hacienda.143
To successfully implement tax administration reform, the Government must accomplish the
following action items by their respective deadlines:
EXHIBIT 62: REQUIRED IMPLEMENTATION ACTIONS FOR TAX ADMINISTRATION
REFORM
Action item Owner Deadline
• Establish a tax administration reform working group comprised of private • Hacienda September 30. 2020
sector tax professionals, GRIM, Hacienda, and the Oversight Board
• Assess basic operational needs across all departments to facilitate • Hacienda January 31, 2021
reallocation of personnel to processing filings, error-resolution, and
To be audits
completed • Design tax administration reform by (1) digitizing tax payments, (2) • Working March 31. 2021
in FY2021 consolidating the number of tax filings (3) eliminating burdensome group
filings, and (4) reshuffling internal personnel and strengthening their
training and decision-making authority'
• Discuss strategy, projected costs, and necessary administrative and • Hacienda April 30, 2021
legislative changes with Oversight Board
• Design implementation plan to maximize the effectiveness of tax • MD September 30, 2021
administration reforms with the Oversight Board
To be
completed
• Discuss implementation plan with Oversight Board • Hacienda October 15, 2021
in FY2022 • Finalize necessary administrative and legislative changes required to • Hacienda October 31, 2021
and implement tax administration reforms for tax year 2021
beyond • Finalize technical upgrades to Hacienda's digital platforms • Hacienda December 15, 2021
• implement tax administration reform • Hacienda January 1, 2022
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prcgrerrro,g h-r103:1.
143 Most technicians only have the authority to resolve (and frequently escalate to their superiors) errors worth $25,000 or less
necessitating follow-up visits to speak to higher-level officials.
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10.5 Reduce occupational licensing to facilitate labor force
participation
Current occupational licensing requirements complicate certain workers' entry
into the formal workforce and expose applicants to lengthy wait times.
Occupational licensing can boost the quality of services rendered while improving public
safety, but the practice can also restrict labor force participation and economic output while
increasing the cost of goods and services.144 To promote labor force participation and facilitate
migration to the Island, the Government should streamline, eliminate, or harmonize
occupational licensing requirements with those on the mainland. Additionally, the
Government could leverage established best practices when creating new licenses to produce
less burdensome regulations and reduce the need for future time-intensive legislative
overhauls.
10.5.1 Reform design parameters
The 2020 Fiscal Plan requires the Government to adhere to a set of parameters when
implementing occupational licensing reforms. Specifically, the Government must review
requirements to identify licenses for simplification, consolidation, or elimination, and assess
the basis for legislating a mandated reduction in occupational licensing regulations, as done
in other US jurisdictions.145 It must also join US mainland compacts that recognize licenses
obtained in other states, such as the Compact for the Temporary Licensure of Professionals,
as well as amend current licensing requirements to align them with those in mainland states
that are home to significant Puerto Rican populations that could one day return to the Island
(e.g. Florida, New Jersey, New York, Pennsylvania) or employ significant numbers of workers
in industries that Puerto Rico aims to attract (e.g. knowledge services, hospitality and tourism)
to facilitate relocations.
Additionally, the Government must create less burdensome occupational licenses in the future
by employing less-restrictive alternatives for occupations that pose low risks to public safety,
closely tailoring license requirements to mitigate specific health and safety risks, conducting
regular cost-benefit analyses for all analyses, and reducing barriers to inter-state mobility.146
10.5.2 Reform indicators
The Oversight Board will also track the following indicators to ensure that the Government
implements occupational licensing reforms:
■ Average number of days to obtain an occupational license
■ Number of occupational licenses eliminated or harmonized with interstate compacts
10.5.3 Current state and path forward
The Island's occupational licensing regime remains expansive and inefficient. More than 6o
professions are licensed by autonomous boards and supervised by DOH, the Department of
State (DOS), or the Puerto Rico Tourism Company (PRTC). Workers must meet application
/44 The White House, "Occupational Licensing: A Framework for Policymakers," 2015; Carpenter, et. al., uLicense to Work: A
National Study of Burdens from Occupational Licensing,' 2017
145 Virginia, for example, created an inventory of all statewide regulations and mandated a 25% reduction in occupational
licensing rules; see Broughel, "A Dark Day for Red Tape in the Buckeye State,' 2019.
146 These include certification, registration, mandatory bonding, or more direct regulation of companies; with certifications, for
example, the Government would limit the use of professional titles to licensed workers but allow workers to practice a trade.
See The White House, "Occupational Licensing: A Framework for Policymakers," 2015.
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requirements set by licensing boards. Applications are then processed by their respective
boards and issued by DOH, DOS, or PRTC. Processing times vary substantially.147
To successfully implement occupational licensing reform, the Government must accomplish
the following action items by their respective deadlines:
EXHIBIT 63: REQUIRED IMPLEMENTATION ACTIONS FOR OCCUPATIONAL LICENSING
REFORM
Action item Owner Deadline
To be • Establish working group comprised of DOH, DOS, PRTC, and the • DOH, DOS, PRTC June 30, 2020
completed Oversight Board
before Pr 2021
Design reform to reduce licensing by (1) creating protocol to streamline • Working group October 31, 2020
licenses. (2) joining inter-state /licensing compacts, and (3) aligning
licensing rules with those in slates with large Puerto Rican communities
• Identify viable strategies to promote local boards' compliance with Working group November 15.
licensing reforms 2020
To be • Design strategy to accelerate processing of licenseswithin DOH and - Working group November 30,
completed in
DOS (e.g. consolidation under one department) 2020
FT2021
Discuss licensing reform. compliance strategy, processing • Working group December 15,
improvements. projected costs, and necessary administrative and 2020
legislative changes with Oversight Board
• Finalize necessary administrative and legislative changes required to THU June 30, 2021
implement occupational licensing reforms from FY2022 onward
To be Implement revised occupational licensing requirements Working group July 1, 2021
completed in Publish performance report detailing (1) the average time and costs Working group Annually horn
FY2022 and required to obtain each license type and (2) administrative or legislative August 15, 2022
beyond changes made to reduce licenses or accelerate their processing
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.reag-urenno
10.6 Eliminate inefficient on-Island freight regulations
The deregulation of land freights would reduce transportation costs for the Puerto Rican
business community. For nearly ioo years, the federal Interstate Commerce Commission
regulated land freights across the US, creating artificial price floors to support the railroad
and trucking industries and protect them from competition. The elimination of those price
floors reduced the cost of truckload-sized shipping costs by 25% between 197 and 1982 alone.
10.6.1 Reform design parameters
The 2020 Fiscal Plan requires that the Transportation and Public Services Bureau (NTSP)
issue an administrative order eliminating the minimum land freight charge across Puerta
Rico.
10.6.2 Reform indicators
The Oversight Board will also track the minimum land freight in dollars to ensure that the
Government implements on-Island freights reform.
10.6.3 Current state and pathfortoard
The continued regulation of land freights promotes the interests of inefficient trucking
companies at the expense of the broader business community and, by extension, their
147 In 2019, applicants for designer licenses waited approximately 33 business days to receive their license (18 days at the
board and 15 at DOS), while barbers waited nearly 160 days (117 days at the board and 40 at DOS). Puerto Rico Department
of State, performance data shared with Oversight Board, 2019,
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customers. Puerto Rico is one of only two major US jurisdictions that still regulate land
freights. Regulated freights have reportedly decreased the quality of services rendered by
carriers and shippers, and forced companies to hold additional inventory, all of which have
helped increase the cost of doing business in Puerto Rico.148
To successfully implement on-Island freights reform, the Government must accomplish the
following action items by their respective deadlines:
EXHIBIT 64: REQUIRED IMPLEMENTATION ACTIONS FOR ON-ISLAND FREIGHTS
REFORM
Ac1011) hum 1...omput Deadline
issue an adnunistrafere order eliminaring the minimum land freight charge across NTSF. September 30.
To be
2020
completed in the Island
FY2021
10.7 Strengthen offshore investment attraction efforts
To transform Puerto Rico into a more competitive destination for offshore
investment, the Government should improve its funding for and oversight of
Invest Puerto Rico (IPR), the Island's Investment Promotion Agency (IPA).
Attracting job-creating investments is crucial to Puerto Rico, as the number of business
establishments in Puerto Rico was already in decline before the 2017 hurricanes.148
Jurisdictions across the globe have leveraged IPAs to attract offshore investments, fuel
economic growth, and create jobs for their residents.15° Effective investment promotion
efforts are especially important in the aftermath of the COVID-19 pandemic. Off-Island
investments (from both mainland and international companies) will play a crucial role in
supporting economic growth and creating jobs necessary to help Puerto Ricans economically
recover from the COVID-ig pandemic. Stronger investment promotion will also help ensure
that the Island can effectively compete with mainland states and other countries for critical
investments aligned to the Island's competitive advantages (e.g. pharmaceutical
manufacturing, knowledge services, and hospitality and tourism) - increasingly important as
companies look to shift their supply chains in the aftermath of the COVID-I9 pandemic.151
10.7.1 IPR in comparison to other IPAs
Unlike other IPAs, Invest Puerto Rico only has one mandate: attract offshore investment
(primarily from the mainland) to the Island. For this purpose, IPR has an annual budget of $5
million, $1.4 million of which is allocated to investment promotion.152 However, according to
an analysis by the Organization for Economic Cooperation and Development (OECD) of IPAs
in its member states, national IPAs commonly have about six individual mandates, including
inward foreign investment promotion, export promotion, innovation promotion, regional
148 Advantage Business Consulting, "Progress Report on Deregulation of Land Freight Rates." 2016.
149 Puerto Rico Department of Labor and Human Resources, Bureau of Labor Statistics. "Puerto Rico Economic Analysis Report'
2015-2016,' 2016.
150 In Ireland, for example, the Industrial Development Authority (IDA) has helped secure investments from many of the world's
top pharmaceutical firms and software companies, and more than 210,000 Irish residents—nearly 10% of the country's
workforce—are employed by IDA client companies. See IDA Ireland, "Local impact": the World Bank Group via International
Labor Organization, "Labor force, total – Ireland,' 2019.
151 Rapoza. 'New Data Show US Companies are Definitely Leaving China," 2020.
152 For comparison, JobsOhio has an annual budget of $134 million, Invest Atlanta of $40 million, and Enterprise Florida of $37
million. The average national IPA, meanwhile, as a budget of $68 million ($12 million of which is allocated to investment
promotion) and the median national IPA a budget of $12 million (with $5 million allocated to investment promotion) See
Organization for Economic Cooperation and Development, 'Mapping of Investment Promotion Agencies in OECD
Countries," 2018,
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development promotion, and granting financial incentives.153 Sub-national IPAs (such as IPR)
often have many of these same responsibilities, as well as domestic investment promotion,
issuing relevant business permits, and operation of a business one-stop shop.
10.7.2 Reform design parameters
The 2020 Fiscal Plan requires the Government to adhere to a set of parameters in order to
fully empower IPR to effectively attract growth-generating and job-creating investments to the
Island. Specifically, the Government must:
■ Require IPR to publicly release performance data clearly illustrating the
effectiveness of IPR's promotional campaign in bringing incremental and new investments
to Puerto Rico.
■ Ensure that IPR designs and implements a strategy to compete with mainland
states and other economies for investments that arise as companies move to shift
their supply chains to the US to minimize risk.
■ Partner with DDEC and Discover Puerto Rico to develop an integrated
strategy that leverages the US Department of Transportation (DOT) air hub waiver
authorizing international air cargo and passenger transfers in Puerto Rico's international
airports to foster economic development and spur tourism (if effectively utilized, the
waiver is expected to generate $30 million in additional payroll by 2022).154 The strategy
must also increase the air hub waiver's likelihood of renewal in 2022.155
■ Provide IPR with visibility into existing idle Government properties (e.g.,
abandoned industrial parks, factories, storage facilities) that could be leveraged by
potential investors as they explore the possibility of running their businesses on the Island,
and give IPR broker rights over those properties. This would allow IPR to present to
investors a more compelling offer, as finding the right location to run operations in a new
area is time-consuming and challenging. It could also provide IPR with a new source of
revenue (through brokerage fees on each transaction) and help the Government leverage
their unused properties. The team in charge of managing these properties currently sits in
DDEC, but should be transferred to IPR (together with its corresponding budget) in order
to empower the Island IPA with these additional responsibilities.
10.7.3 Reform targets
The 10-year collaboration agreement between the Department of Economic Development and
Commerce (DDEC) and IPR establishes a set of multi-year performance targets. Despite the
disruptions caused by the pandemic, the growing number of firms considering shifting their
supply chains to the US to minimize risk in the aftermath of the pandemic—if well targeted—
will ensure that IPR can meet or exceed its contractual obligations. As such, IPR should
generate, by the end of FY2023, at least:
■ 4,400 new businesses
■ 26,000 new jobs
153 These include inward foreign investment promotion (100% of I PAs), export promotion (56%), innovation promotion (56%),
promotion of regional development (50%), green investment promotion (44%), domestic investment promotion (41%),
granting financial incentives (31%), outward investment promotion (28%), trade facilitation (25%), and screening and
approving investors (25%); see Organization for Economic Cooperation and Development, °Mapping of Investment
Promotion Agencies in OECD Countries," 2018.
154 Issued in February 2020, the waiver is expected to allow at least 10 new flights per day, creating 900 new jobs and increasing
payroll by about $30 million (according to a study by Estudios Tecnicos, Inc.).
155 With Federal approval, the waiver can be renewed every two years.
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■ $925 million in capital investments
■ $37,500 in average payroll committed by each new business
10.7.4 Current state and pathforward
To-date, a lack of Government oversight and resourcing have undermined IPR's effectiveness.
IPR has been unable to present any data—beyond incentive performance figures already
collected by DDEC—documenting the effectiveness of its promotional campaign to either the
Government or the Oversight Board. Furthermore, IPR has been hampered by inadequate
Government support for its promotional efforts: DDEC allowed IPR to operate on reserve
funds for more than eight months between 2019 and 2020 as the department drew out
contract negotiations. To support IPR's promotional campaign as part of the broader effort to
help the Island recover from recent natural disasters, Vivienda has allocated $7 million in
CDBG-DR funding to IPR.
To successfully implement investment attraction reform, the Government must accomplish
the following action items by their respective deadlines:
EXHIBIT 65: REQUIRED IMPLEMENTATION ACTIONS FOR EFFECTIVE OFFSHORE
INVESTMENT ATTRACTION
Arbon item •pelle t
Identify KPIs that IPR wiit report to AAFAF on a morally basis • 1PR. AAFAF May 30.2020
Develop dear list at target sectors and corny allies that1PR will target as IT works to take • IPR June 30.2020
advantage or eftorts to rebalance supPli chains toward Mat).S. and capitalize on the DOT
To he
a Ir hub waiver and discuss with Ove reign! Board
completed
bolero I Y21121 Establish air nub working group comprised or DDEC. DPR. IPR Land AdmIni station. Ports DDEC June 30. 2020
Authodty. private Sector business an tl manufacturing a ssoci.4i on s, and the Oversig ht Board
to design an integrated economic deve loomed strafe oyln at leverages the newly-iSsued
DOT air hub waiver
S endKPl report lo AAFAF • IPR Monthly from Jllly 15.2920
updaie 2019-20 promobonzipian to dearly dotaii strategy to capture irrveslrn ents from • 1PR July 30. 2020
corn panies rebaiand n g their global atIppy Chains b r able to capitalize on the air hub
Publish annual performanca rep orl • IPR Ann ually from Augos110.
2020
To be • Design economic development strategy and sh are writ Oversight Board • vVoricIng group September 30.2020
completed in
FY2021 • Discuss econ0 criC devela purer! Strategy and projected costs watt OVerSi Oa hoard • Vtrorting croup Weber 15.2020
• PUPIIS /1 pro motion al plan for upcoming talon Oa' ye ar • IPR Annually from December
15. 2029
• !me olory idle G overn merit pro penny s twilit dela Ile n prOperry ante me es).that E out cl • DDEC December 15.2020
be leveraged by Polenlial mainland and Foreign investors
• Value the Inventoried properties In the Government porlfolio to set in err manse! paioneal • DDEC December 15.2020
• Transfer DDEC's Government management pro pe rly learn and ou doei to IPR • DOW January 1, 2021
To he
• Provide tne updated Inventory of avaJlable ',tonere e s for pate ntial relocnoons • IPR Monthly from February.
completed in
2021
FT2022 and
beyond • Perrorm a mantelvaivaii on of the invontoned p rop mire s lo update tl elr Markel value • IPR Annually from January.
2022
io.8 Prime tourism attraction efforts for success
To continue Puerto Rico's transformation into a leading Caribbean tourism
destination, the Government must expand the mandate and resourcing of
Discover Puerto Rico (DPR), the Island's Destination Marketing Organization
(DMO). Despite its natural beauty and rich culture, Puerto Rico underperformed as a tourism
destination even before the 2017 hurricanes. For example, the Island was ranked 55c in the
2015 Travel and Tourism Competitiveness Report—an independent assessment of the
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strength of the tourism sector in 141 economies conducted by the World Economic Forum.156
Destinations across the globe have leveraged DMOs to attract visitors, generate economic
activity, and create jobs.157 In Puerto Rico's case, DPR became fully operational in early 2019,
when it launched its first promotional campaign and played an important role in driving
record tourism performance in 2019. Effective management of on- and off-Island tourism
marketing efforts will remain especially critical in the aftermath of the COVID-19 pandemic,
which effectively crippled global tourism and the Island's industry and associated sectors (e.g.
cruises) and is expected to reduce tourism employment in Puerto Rico by 37.5%.158
10.8.1 DPR in comparison to other US and Caribbean DMOs
DPR has a smaller mandate and lower budget in comparison to other DMOs. The typical DMO
markets to six distinct segments: visiting individuals and families; groups (e.g. family
reunions); Meetings, Incentives, Conferences, and Exhibitions (MICE); events (e.g. major
sports tournaments); local residents; and airlines (e.g. purchasing airline ads, subsidizing
seats). DPR, however, is only responsible for marketing to individuals, groups, and MICE;
PRTC continues to manage event, internal, and airline marketing. DPR also has a smaller
budget than other Caribbean destinations—$25 million (or $943 per available hotel room)
compared to an average budget of $40.8 million (or $1,485 per room) for Caribbean DMOs.159
10.8.2 Reform design parameters
The Certified Fiscal Plan requires the Government to adhere to a set of parameters in order to
enable DPR to capitalize on its early successes and continue leading the Island's emergence as
a leading tourist destination. Specifically, the Government must:
■ Transfer internal (i.e., local), airline, and event marketing responsibilities
(and the corresponding operating budget) from PRTC to DPR to centralize all tourism
marketing efforts within one organization
■ Partner with DDEC and Invest Puerto Rico (IPR), the Island's investment
promotion agency, to develop an integrated strategy to foster economic
development that capitalizes on the recently-issued Federal Department of
Transportation (DOT) waiver
10.8.3 Reform targets
DPR's initial performance indicates that the organization can effectively compete with top-
ranked Caribbean DMOs and destinations in attracting visitors and growing the Island's
tourism sector. As such, the 2020 Fiscal Plan requires the organization to meet targets that
illustrate its effectiveness. Given the COVID-19 pandemic's impact on global tourism,
however, no targets are in effect for FY2o2o-FY2o21.160 The below targets will become
156 The mainland, for comparison, was ranked 6th that same year. See World Economic Forum, Travel and Tourism
Competitiveness Index 2015, 2015.
157 For example, the Barbadian Tourism Product Authority (TPA), created in 2014, helped increase the travel and tourism
sector's direct contribution to Barbados' GDP (5.4% contribution in 2015, 10.3% contribution in 2016)and employment (4.3%
contribution in 2015, 9.8% contribution in 2016). The creation of a DMO in New Orleans, LA was linked to higher business
activity in other nearby cities as higher tourism demand for flights to New Orleans facilitated economic development in
surrounding areas. And, in Chicago, the creation of a DMO helped raise the city's business exposure, resulting in a
partnership between the city's DMO and its World Business Chicago (MC), the city's economic development agency, to
promote the city as both a tourist and business destination. As a result, 70% of WBC marketing is conducted via Chicago's
DMO; see Oxford Economics, "Destination Promotion: An Engine of Economic Development,' 2014.
158 Discover Puerto Rico.
159 DPR, Destinations International.
160 Targets are reduced in response to a projected 71% reduction in global air travel in 2020 (relative to 2019) and a 58%
reduction in 2021 (also relative to 2019).
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applicable starting in FY2022, once the post-COVID-19 global economic and travel trends
become more clear:
■ 5% year-on-year growth in the tourism sector's direct contribution to GDP161
■ 596 year-on-year annual growth in direct contribution to employment162
■ 7% growth in average travel receipts per visitor per year163
■ 8% growth in tourist visitors per year164
■ 12% growth in the number of meetings and conventions attracted to the Island per year165
Additionally, DPR should prepare a scorecard illustrating how Puerto Rico compares to the
top-ranked travel destination in the Travel and Tourism Competitiveness Index at the end of
the first quarter of each fiscal year.166 This scorecard should be made publicly available on
DPR's website and distributed to leaders of the Executive and Legislative branches, along with
the Oversight Board.
10.8.4 Current state and path, arward
The operationalization of DPR appears to have contributed to a successful recovery of the
Island's tourism sector after the 2017 hurricanes. COVID-19 has had an enormous impact on
global tourism and the Island's tourism sectors. As Puerto Rico looks forward, the Oversight
Board is encouraged that, according to third-party travel data, Puerto Rico was moving the
needle of growth in this sector pre-COVID-19. The tourism sector's contributions to GDP and
Island-wide employment surpassed historic trends in 2019,167 air arrivals and lodging
demand reached record levels in 2019,168 and DPR's media campaign is attributed for spurring
higher spend and longer hotel stays among visitors.169
To support DPR's promotional campaign as part of the broader effort to help the Island
recover from recent natural disasters, Vivienda has allocated $7.8 million in CDBG-DR
funding to DPR. To successfully implement tourism marketing reform, in particular in light of
the severe changes to the industry's future post-COVID 19, the Government must accomplish
the following action items by their respective deadlines:
161 As measured by the World Travel and Tourism Council (WTTC).
162 As measured by the World Travel and Tourism Council (WTTC).
163 Panama, the leading Latin American or Caribbean destination in this category as measured by the World Tourism
Organization's "Yearbook of Tourism Statistics" (accessed via the World Bank Group's database), averaged 6.7% annual
growth in tourism receipts (in USD) between 2009 and 2018.
164 Peru, the leading Latin American or Caribbean destination in this category as measured by the World Tourism Organization's
"Yearbook of Tourism Statistics" (accessed via the World Bank Group's database), averaged 8.4% annual growth in air
arrival between 2009 and 2018.
165 Argentina, the leading Latin American or Caribbean destination in this category as measured by the International Congress
and Conventions Association's 2018 rankings, averaged 11.7% annual growth in in the number of international meetings
and conventions attracted to the country between 2016 and 2018.
166 For reference, an interactive version of Brazil's 2019 scorecard can be accessed at http://reports.weforum.orgitravel-and-
tourism-competitiveness-report-2019/country-profilesMeconomy=BRA
167 World Travel & Tourism Council, "Puerto Rico: 2019 Annual Research: Key Highlights,' 2019.
168 Aerostar, AirDNA, Discover Puerto Rico, Smith Travel Research. In 2019, Puerto Rico welcomed 5.2MM visitors (2016, the
previous record-holder, had only 4.8MM air arrivals). Similarly, lodging demand reach 4.7MM units (in both hotels and
independent lodging units), up from 4.6MM units in 2017.
169 ADARA Impact, Arrivalist. Visitor exposed to DPR media stayed 4.8 days on average (vs. 4.3) and spent an average of $217
on lodging per night (vs. $199).
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EXHIBIT 66: REQUIRED IMPLEMENTATION ACTIONS FOR EFFECTIVE TOURISM
ATTRACTION
Action item Drenei Deadline
To be Establish air hub working group comprised of DDEC, DPR, IPR, Land • DDEC June 30, 2020
completed Administration, Ports Authority, private sector business and manufacturing
before associations, and the Oversight Board to design an integrated economic
FY2021 development strategy that leverages the newly-issued DOT air hub waiver
• Publish annual performance report • DPR Annually from
August 15, 2020
• Create and share Puerto Rico's Travel and Tourism Competitiveness scorecad • CPR September 30.
with Fortaleza, the Legislature, PRTC, and the Oversight Board 2020
• Design air hub strategy and share with Oversight Board • Working group September 30,
To De 2020
completed
Discuss air hub strategy with Oversight Board • Working group October 15.2020
in FY2021
- Finalize all administrative and legislative changes required to transferintemal, - PRTC, December 15
airline, and event marketing responsibilities to DPR Legislature 2020
• Publish promotional plan for upcoming calendar year • CPR December 15.
2020
• Transfer all internal, airline. and event marketing responsibilities and • PRTC January 1, 2021
associated funding from PRTC to DPR
Chapter 1 r. Power sector reform
11.1 Introduction and context for energy reform
An affordable, reliable, safe, and resilient electric power service is essential for the island's
economic growth and development. Electricity is a fundamental enabler of the people of
Puerto Rico's livelihoods, and remains a critical service that needs to be safeguarded,
particularly in light of the outsized catastrophic events in 2020 (e.g. January 2020
earthquakes, COVID-19 pandemic). And as an important element of household and business
activity, electricity is also a critical factor for attracting and maintaining investment in Puerto
Rico. The Puerto Rico Electric Power Authority (PREPA) has been responsible for providing
electricity to Puerto Rico since 1941 and is a public corporation owned and operated by the
government of Puerto Rico.
However, PREPA has been encumbered by numerous financial and operational issues. Over
the years, PREPA has failed to update rates to cover base operating costs, neglected to invest
in modernizing the system, avoided funding the pension system, and failed to provide
customers with reliable services. Furthermore, PREPA incurred significant legacy debt
obligations, failed to implement a long-term capital improvement program, and made
decisions based on short-term political gains (e.g., avoiding modest rate increases), all of
which have culminated in consistently poor and unreliable service.
This operating model has created an untenable financial situation for PREPA. Politicized
management and volatile fuel prices — exacerbated by declining demand and an economic
contraction — have resulted in PREPA's inability to service its debt, and ultimately resulted in
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PREPA seeking PROMESA Title III bankruptcy protection in July 2017.170 For more than a
year prior to filing for bankruptcy, PREPA lacked access to the capital markets to help fund
grid and generation modernization investments, further contributing to the poor quality of
service experienced by the island's residents and businesses.
Underinvestment and underdevelopment of the grid, poor maintenance practices, and
workforce losses all contributed to a chronically poor performing power sector. Puerto Rico
has twice as many forced outages as the US industry average.171 PREPA also significantly
underperforms against mainland utilities on multiple operational, reliability, and customer
service metrics:
■ PREPA's 2018 reliability metrics lagged behind those of US utilities in every area SAIFI172
and SAIDI173 metrics (frequency and system average interruption duration respectively)
fall within the worst-performing 20 percent and 50 percent of US utilities, respectively,
and CAIDI174 is the third-worst out of 1,116 peer US utilities.175
■ Safety incidents are high by utility standards: PREPA recorded 10.7 safety incidents per
200,000 hours of labor in 2018 versus the US average of 1.7
■ Even though tree-trimming conditions caused 35 to 45 percent of service interruptions in
2016,176 PREPA lacks a comprehensive vegetation management strategy and has been
slow to spend the allocated FY2020 budget for vegetation management.177 In contrast.
vegetation management is typically the largest spend category in US mainland utility
operating budgets.178
Over the next five years, the power sector in Puerto Rico must continue its transformation and
modernization to support the delivery of reliable and affordable power. The Commonwealth
must continue to implement a comprehensive energy- sector reform to enable a successful
transformation and unlock the resulting growth from Fiscal Plan projects. The successful
transformation of Puerto Rico's power sector depends an:
1. Implementing regulatory reform: A strong and independent energy sector regulator
is essential for injecting certainty and stability into the energy- market, promoting much
needed investments, and enforcing compliance with the energy sector transformation's
objectives. In recent years, the framework of regulatory reform has been approved and an
independent regulator (i.e., PREB) has been established. The focus in coming years will be
continuing to support the independence of the regulator and enabling the regulator to
execute on its mandate. This will be accomplished by developing and strengthening the
regulatory framework and promoting greater transparency and accountability.
2. Transitioning the operation and management of PREPA's electricity grid and
generation assets to private operators: Attracting a private operator to manage and
operate Puerto Rico's Transmission and Distribution (T&D) network will improve
operational performance and customer service, support rigorous capital project execution
170 -Puerto Rico's Power Authority Effectively Files for Bankruptcy", New York Times, 2 July 2017
171 'A review of PREPA's generation patterns reveals that PREPA, in fact, increased its reliance on the diesel generation fleet
in FY2015 and FY2016, doubling its use of distributed generation turbines and tripling its use of the diesel Aguirre CC plant.'
Fisher and Horowitz, revised November 23, 2016, Expert Report, 21.
172 System Average interruptions Frequency Index (SAIFI)
173 System Average Interruptions Duration Index (SAID!)
174 Customer Average Interruptions Duration Index (CAI DI)
175 North American Electric Reliability Corporation, 'Generating Unit Statistical Brochure 4 2014-2018 — Al Units Reporting,"
(Excel data set, July 30, 2019), on -.Generating Unit Statistical Brochures,' accessed January 23, 2020.
176 " .[PREPA] describes itself as always playing a catch-up game on maintenance — following outages, instead of improving
the fundamental system." Fisher and Horowitz, Expert Report, 33.
177 PREPA, "Professional & Technical Outsourced Services,' B2A YTD-Expenses. Budget to Actual Variance Report for the
Fourth Quarter of Fiscal Year 2018-2019, data set, June 30, 2019).
178 Vegetation Management Not Sexy, but Vitally Important," Smart Energy International, last modified February 8, 2019,
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to modernize the system, strengthen grid resilience, and ensure ongoing fiscal balance and
control. In early 2019, Puerto Rico's Public-Private Partnership Authority (P3), began an
ongoing process to evaluate potential private operators to assume responsibility for
managing and operating the T&D system. A similar process will be undertaken to select
potential private operator(s) of PREPA's generation assets.
3. Restructuring legacy debt obligations: In order to fund the transformation of Puerto
Rico's power sector, PREPA will require access to capital markets. Given the utility's
significant legacy debt obligations, a sustainable restructuring plan is necessary for PREPA
to exit bankruptcy and regain access to credit. Without restructuring, customers will
experience higher rates, resulting from repayment of a higher debt burden and risk
premiums associated with bankruptcy. Ultimately, successful restructuring of outstanding
bonds and debt obligations will allow PREPA to achieve its transformation goals, thus
modernizing Puerto Rico's power grid, and passing on subsequent efficiencies and cost
savings to end users.
PREPA's Fiscal Plans and the government of Puerto Rico's energy sector regulations179 lay out
the transformation road map. If successfully implemented, a reformed energy system will lead
to a modernized and reliable energy service across the island: a diversified fuel mix and
reduced fuel costs, anchored on low-cost generating resources which reduce price volatility;
increased operational efficiencies; and a well-funded, financially sustainably utility. These
outcomes will benefit the customers and businesses of Puerto Rico in enabling a more
affordable, reliable, and safe electricity service.
11.2 Energy regulatory reform and oversight
The current regulator of the power sector in Puerto Rico is the Puerto Rico Energy Bureau
(PREB), which has been operational since its creation by Act 57-2014. PREB has the
responsibility to "regulate, monitor, and enforce the energy public policy of the
Commonwealth of Puerto Rico."
As Puerto Rico's energy sector is transformed into a vibrant, modern system, PREB will
continue to be responsible for the development of a robust regulatory framework that will
promote prudent investments by utilities, increase quality of service to customers, and ensure
industry trends and technological advancements are appropriately incorporated into Puerto
Rico's energy system. To that end, PREB's regulatory oversight will directly impact the utility
and have significant influence on Puerto Rico's energy sector. To fully achieve its purpose,
PREB should remain financially independent from the Government and its decisions, and its
determinations should be free from any political influence or interference.
Currently, PREB shares oversight role of the power sector with the Oversight Board. The
following section provides a description of what PREB's roles and responsibilities will be in
the long-term as well as the near-term delineation of oversight responsibilities shared with the
Oversight Board. Additionally, a few structural elements are recommended to ensure PRES
becomes a best-in-class regulator.
11.2.1 Long-term mandate, authorities, and expertise for the energy sector
regulator
To be effective, PREB's regulatory authority and its mandate to promote an efficient, reliable,
resilient, and customer-responsive energy system must be clear and well-established. In a
transformed energy system state, PREB's responsibilities can be categorized as (1) rate setting,
179 Puerto Rico Energy System Transformation, Act No. 120-2018; Puerto Rico Energy Policy Act, Act No. 17-2019
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(2) Integrated Resource Plan (IRP) approval and compliance, (3) protecting customers, and
(4) ensuring workforce safety.
Rate setting: PREB should "review and approve and, if applicable, modify the rates or fees
charged by electric power service companies in Puerto Rico."180 In doing so, PREB should
ensure rates and rate structure are rational and predictable, minimize risk and "rate shock",
and create incentives to support equitability and economic development. PREB should set a
clear, transparent, and efficient process for rate cases. All rate adjustments and revisions must
be approved by PREB before enactment. In this capacity, PREB must ensure that necessary
operational frameworks are in place to not only provide a robust review process in line with
best-in-class mainland US state regulators (e.g. New York), but also ensure that rate reviews
are conducted efficiently and in a manner that does not adversely impact service performance
or consumer confidence.
In future rate cases, PREB should encourage several core principles to be incorporated
including dynamic rate structures (e.g., time of use, rate decoupling, unbundling), prudency
of investments, cost of service, and distribution of cost and revenue allocation.
Integrated Resource Plan (IRP) approval and compliance: PREB is mandated to
"review and approve policies and strategic plans...in connection with energy resources
integrated planning in Puerto Rico, and oversee compliance therewith."181 During review,
PREB should assess related policies and plans on whether they meet the objectives of Puerto
Rico's energy public policy and promote energy service reliability, safety, efficiency, and
affordability. During implementation of the plan, PREB should fulfill its role of ensuring there
are no impediments to the integration of renewable resources, establishment of demand
response or management, and adoption of energy efficiency programs.
Protecting customers and customer service: PREB should be responsible for ensuring
customers are reasonably protected in the energy system for factors such as affordability,
information accessibility, and quality of service. This includes reviewing potential policies,
rates, and capital projects for their potential effects on customers, and ensuring impacted
customers understand and have the ability to respond in due course. Ultimately, PREB and
the Oficina independiente de Protection at Consumidor (0IPC)182, as part of the Regulatory
Board of Public Services, hold the responsibility of evaluating and providing determination in
all cases of consumer complaints regarding pricing and quality of services provided by PREPA.
Ensuring safety: PREB is responsible for ensuring the safe operation of Puerto Rico's
utilities for workers and the public. This is particularly important given the high number of
safety incidents PREPA has experienced by American utility standards (PREPA recorded 10.7
safety incidents per 200,000 hours of labor in 2018 versus the US average of 1.7). 183 PREB
should develop a comprehensive safety plan addressing overall safety culture at regulated
entities and ensure that utilities have sufficient resources to comply with these plans. Finally,
PRES should establish, track, and analyze key safety performance metrics, and monitor the
effectiveness of utility safety programs.
11.2.2 Expertise
To implement its long-term mandate in a robust and effective manner, PREB should build
expertise on topics that reflect the core regulatory priorities facing most regulators:
■ Generation planning and dispatch
180 'ABOUT THE PUERTO RICO ENERGY BUREAU" htIps:llenergia.prgovien/about-the-commissionf.
181 °ABOUT THE PUERTO RICO ENERGY BUREAU" https://energia.pr,govientabout-the-commission/.
182 Independent Office for Consumer Protection (IOPC)
183 PREPA, 2019 Fiscal Plan, 30
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■ T&D reliable operations and capital planning
■ Workplace safety
■ Customer service
■ Rate-making
In addition, PREB can build expertise in topics that are increasingly addressed by regulators
across the mainland so that Puerto Rico's energy sector is able to match pace with best-in-
class utilities. By doing so, PREB can provide proper guidance to sector players on how to
secure, modernize, and efficiently operate the grid. These topics include:
■ Contribution-in-lieu of taxes (CILT)
■ Renewable energy integration (distributed and commercial)
■ Weather-related risks (e.g., hurricanes, climate change)
11.2.3 Authoritiesfor the energy sector regulators during transformation
Until the transformation of the energy system is complete, it is important to clearly delineate
the role of the Oversight Board and PREB with respect to energy sector regulation. The table
below describes the role of each entity during the transition period:
EXHIBIT 67: ROLES OF THE OVERSIGHT BOARD AND PREB DURING THE TRANSITION
PERIOD
Oversight Board PREB
Approves the IRP The IRP process shall be open and
Approves revenue requirements and expenditures in the Fiscal
transparent so that third parties can understand inputs
Plan for PREPA. PREPA's Fiscal Plan should be informed by the
and methodologies behind each scenario. and be able to
results of the IRP and provide a clear framework for executing the
participate and attend hearings to understand the
modernization of generation resources.
decisions &ring approval of the final capital plan and
revenue requirement
Approves a yearly budget for PREPA that aligns with PREPA's Authorize rates (either formulaic or on an expedited
Budget and rate.
Fiscal Plan and thus should align with revenue requirements and manner) which align with the budget as certified by the
making
expenditures. Oversight Board.
Approves restructuring of existing debt through the Plan of No authority
Utility debt
Adjustment for PREPA.
Oversees liquidity management in the energy system, to ensure No authority
Liquidity
that consistent and quality energy service to customers is not
management
disrupted.
As the representative of PREPA in Title ill. the Oversight Board No authority
iftle III has the exclusive right to file a Plan of Adjustment. which will
contain any transformation-related agreements
Approves any operator that engages with PREPA T8.12 and No additional authority beyond PREB's existing oversight
Transition to generational operators) After the operators have been installed. over PREPA_ including the issuance Elan Energy
Privately the Oversight Board will continue to ensure compliance with Compliance Certificate as required under Act 120-2018
Managed PROMESA and the energy sector transformation objectives The
Operations interaction between PREPA, the operators. and the Oversight
Beard will be determined at a later date.
- — — —
Track PREB's actions around distributed generation. net metering. Continues to exercise duties and responsibilities (el
and CILT to ensure the regulator is providing proper oversight over addressing distributed generation. net metering, and
Other CILTI as outlined in its enabling laws, except when doing
these critical topics
so is inconsistent with the powers and authorities
delegated to the Oversight Board under PROMESA
11.24 Structural elements to ensure a best-in-class regulatory agency
Although administratively located within the Puerto Rico Public Service Regulatory Board
(PSRB), PREB's decision-making process should not be subject to direct or indirect review by
other government entities, except for any review under applicable administrative procedure
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rules. Staff involved in substantive decision-making should be kept separate and independent
from the PSRB and be fully dedicated to matters within PREB's jurisdiction and purview.
PREB may, on an annual basis, provide funds to the PSRB to cover administrative and other
operational costs, however, PREB's resources should be kept separate and shall not be
controlled or placed under the direction of the PSRB.
There are five key structural elements that will ensure PREB is a best-in-class regulatory
agency:
• Governance: It is imperative that PREB's governance structure enable quick and robust
decision-making. In line with best practices for regulatory commissions (e.g. California
Public Utilities Commission, Hawaii Public Utilities Commission, New York Public
Services Commission), PREB is headed by five commissioners who serve staggered six-
year terms. The commissioners are appointed based on their technical, professional
and/or academic credentials, with potential candidates identified and appointed through
a candidate list developed by an external recruitment firm. The commissioners should be
supported in their oversight role by professional civil servant staff that has utility expertise.
• Independent ratepayer advocate: All commission decisions in adjudicatory
proceedings must comply with applicable requirements of administrative procedure.
Separate from the regulator, there shall be an independent ratepayer advocate, a role
currently filled by the Oficina Independiente de Protection al Consumidor (OIPC). OIPC
should be well-funded so that it has the resources to meet its responsibilities. Currently,
PREB transfers 10% of its budget to OIPC; as priorities evolve and the need for a robust
consumer advocate increases, the government may — with the approval of the Oversight
Board provide OIPC with additional funding.
• Employee structure: Presently, PREB must develop and implement a plan for
transitioning from its existing employee structure to a structure comprised of no less than
75% civil servant employees and no more than z5% trust employees.184,185 In the future,
PREB must minimize the percentage of trust employees to 15%, and ultimately 109086
During and after the energy sector reform process, PREB must have enough staff to
effectively undertake its duties and responsibilities in a timely and professional manner.
The selection, hiring, and management of PREB's staff must not be subject to review or
approval by any other entity of the Executive or Legislative Branch.
• Budget: PREB's substantive independence must be supported by financial independence.
Under current law, PREB's yearly budget is set at $20 million and collected through
charges assessed on certified energy companies.187 To provide for a steady and predictable
funding source, PREB's enabling act must be amended to provide that PREB's budget shall
be funded entirely through rates, as part of the revenue requirement used to determine
energy rates. PREB's funds are then collected by the T&D operator through customer bills
and periodically remitted to PREB. This funding mechanism is consistent with the
mechanisms used to fund peer mainland regulators. Providing for an independent and
unencumbered source of income for PREB helps create the conditions to protect ratepayer
interests, increase transparency, and reduce system costs. PREB's budget and funding
must be kept separate and independent from the Commonwealth budget or the budget of
any other Commonwealth agency, entity, or instrumentality, and neither the Executive nor
the Legislative branches shall have authority to modify PREB's budget or reapportion any
of PREB's funds without PREB's prior consent. However, PREB is subject to periodic
184 Trust employees" includes any employees that are related to political appointments, non-civil service appointments, etc.
185 To show that this has been completed, PREB needs to submit an organization chart showing the split of employees (civil
servant vs. trust) no later than the end of 01 of FY2021.
186 Relevant milestones and deadlines are shown in Section 11.5, Exhibit 68, and Exhibit 69.
187 Amount in line with other jurisdictions; the Hawaii Public Utilities Commission had revenues of $19M in FY2017 to serve a
population of 1.4 million.
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reviews from relevant authorities for use of public funds, which is consistent with all other
government agencies in Puerto Rico.
■ Transparency: To achieve best-in-class status as an energy system, transparency is an
indispensable factor. PREB must ensure that proactive transparency permeates relevant
energy operations (i.e., this should exclude confidential information such as customer data
and operational details that would increase cyber or risk vulnerabilities, etc.). This may
include making information publicly accessible, maintaining quick and efficient decision-
making, and holding public events when appropriate in order to consider public opinion.
Additionally, PREB must uphold transparency in its own financials and operations,
including disclosing how it utilizes its annual budget.
11.3 Vision and structure for an energy system operator
Private operators for T&D and generation operations will be responsible for executing Puerto
Rico's energy system modernization strategy as well as assisting with the allocation of related
federal funding. Each private operator's overall objective will be to improve service quality and
deliver reliable service at just and reasonable prices. As such, a private operator will be
motivated to deliver financial and operational performance improvements across five
dimensions:
■ Reduced costs by introducing experienced personnel. A private operator would
be incentivized to reduce PREPA's dependency on outsourced contracts by insourcing
activities, empowering the local labor force, and potentially achieving economies of scale.
■ Upgraded technology. While PREPA has limited access and experience with industry-
standard technology, a private operator would be incentivized to deploy modern grid
technologies, digital capabilities, and infrastructure to significantly enhance operational
efficiency, thus lowering O&M costs and customer rates over time through better asset
utilization.
■ Improved processes and procedures. Drawing on operational expertise, a private
operator would be incentivized to streamline and standardize critical management
processes and implement operational efficiencies (e.g. processes such as procurement,
contract management, maintenance, etc.). A private operator can also leverage experience
in customer service to improve PREPA's responsiveness to customer needs and
expectations.
■ Limited political interference. A private operator's decisions would be subject to
independent regulatory oversight, but free of political interference. This would lead to the
adoption of standard industry practice where experienced utility operators make
operational decisions with oversight from an independent regulator (e.g., investment
decisions made based on overall benefit to the system, instead of short-term political
gains).
■ Effective and efficient capital delivery. A private operator would be incentivized to
establish the tools and processes critical to improving PREPA's capital project
management. This will be key to unlocking the federal funding required for grid
modernization improvements, which in turn will aid PREPA in strengthening grid
resilience.
11.4 Energy sector debt restructuring
As of May 2017, PREPA had $9.25 billion of outstanding bond and other debt obligations, and
an unsustainable repayment schedule; PREPA would have had to repay approximately $4.5
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billion of debt service obligations between FY2o19 and FY2o23. PREPA's unsustainable
capital structure reflects persistent operating deficits, resulting from overly low base rates and
high operating costs. As long as PREPA remains in bankruptcy, it poses a risk to suppliers and
partners, potentially increasing costs and delaying progress in rebuilding after major
catastrophic events (e.g. hurricanes, earthquakes, COVID-ig).
To restructure PREPA's debt, a debt restructuring agreement among a group of PREPA
creditors, the Oversight Board, the Government, and PREPA is in progress. However, as a
result of the uncertain and unpredictable effects of COVID-ig on PREPA and its customers,
the Oversight Board has requested delays in the court process to assess and understand the
implications of COVID-1.9 on the bankruptcy process.
11.5 Implementation and enforcement of power sector
reform
To achieve Fiscal Plan savings projections, several reforms to the power sector must be
implemented immediately. Several of those measures recommended in earlier Fiscal Plans
already have been completed and are listed in Exhibit 68.
EXHIBIT 68: COMPLETED MILESTONES FOR POWER SECTOR REFORM
Responsible
Area of focus Action item party Completed
Provide interim feedback on PREPA's Integrated Resource Plan PREB August 14.
(IRP) 2018
Implement Remove CW govemmentapproval needed forPREBstaff OW April 11
regulatory appointments government 2019
reform
Revise charter legislation to provide dedicated funding for CW December
power sector regulation that provides regulator with annual government 31. 20181
budget of $20 million in line with benchmark
Perform market sounding to collect feedback an interests and P3 Authority 1 December
Transition concerns from interested parties for generation asset Oversight 2019
to private privatization Board
operators
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Exhibit 69 describes the additional reforms required to ensure the transformation of the
electricity sector and compliance with the Fiscal Plan, and to meet the Fiscal Plan growth and
revenue targets. Several of these reforms were outlined in the June 2019 PREPA Fiscal Plan
and remain incomplete (demarcated with *).
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EXHIBIT 69: PENDING MILESTONES FOR POWER SECTOR REFORM
Area of focus Action item Responsible party Deadline
Appoint the remaining PREB commissioner to serve staggered six-year terms* CW government September 30-
2120
Increase number of PREB staff in line with appropriate benchmarks' PREB June 30. 2021
Amend PREB enabling act (Act 57-2014) to stipulate that PREB's budget will be funded PREB June 30. 2021
through rates
Implement Reduce the percentage of trust employees to 15% of total employees PREB June 30. 2021
reg Ulato ry
reform Reduce the percentage of trust employees to 10% of total employees PREB June 30. 2922
Conduct a study and issue a recommendation to the Legislature on optimal GILT PREB September 30,
structure ' 2020'
Develop a CILT ;access by which municipalities pay for electricity consumption not MED. December !.1
covered by CILT. and are able to file complaints related to CILP 2020
Approve IRP PREB in process
Select a winning proponent is manage and operate PREPA'sT&D system' P3 Authority May 31. 2020
Prepare for and launch RFD for the selection of a proponent for PREPA's generation P3 Aulttonty June 15. 2020
assets
Prepare for and launch RFP for the selection of a proponent for PREPA's generation P3 Authority October 15. 2020
Transition to assets
private
operators Select a winning proponent to manage and operate PREPA s existing generation assets P3 Authority April 15, 2021
Impternenl recommended operational initiatives outlined in certified fiscal plan for PREPA PREPA June 31. 2021
to ensure operational and financial efficiency
Implement approved 1RP and grid modernization plan to ensure a modernized. resilient. PREPA Ongoing
and tetra bie grid
Restrv clure
Confirm Title ill plan of adjustment FOMB To be determined
legacy debt
Implement PREPA plan of adjustment PREPA To be determined
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Chapter 12. Infrastructure reform
Relative to the mainland US, Puerto Rico's infrastructure outcomes rank near the bottom in
terms of quality. For example, the percentage of road pavement in good condition is 11% in
major highways and 1% in smaller traffic arteries, significantly underperforming the average
of the mainland US (81%).188 The poor state of transport infrastructure has contributed to
congestion and thus impacted the ease of doing business on the Island. Improving the
efficiency and effectiveness of infrastructure and capital investments is critical to improve
mobility on the island, increase convenience for residents, and lower the costs for business.
Improving these outcomes will enhance the island's competitiveness and the ability to attract
and retain population and investment.
12.1 Current state of infrastructure and capital investment
Infrastructure investment as a percentage of GDP decreased from 3.3% in 2000 to 1.2% in
2018, indicating a lack of recent experience in large-scale building.189 The Government also
has a history of failed large-scale projects. For example, Tren Urbane was scheduled to open
on July 1, 2001 after beginning construction in 1996; it finally opened in 2005 and the budget
for the project increased more than 6o%, from $1.38 billion to $2.25 billion.
188 htips://www.fhwa.dot.gov/policyinforrnation/statistics/2016/hm64.cfm
489 American Society of Civil Engineers, 2019 Report Card for Puerto Rico's Infrastructure
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In addition to the challenges with infrastructure delivery and maintenance, the poor state of
transport related infrastructure is a key constraint on mobility. Puerto Rico is ranked 51st out
of 52 jurisdictions for quality of roads (percentage of roads in poor conditions), while urban
congestion is particularly problematic in the San Juan metropolitan area and on major
highways.19° San Juan is the 25th most congested city in the US according to the INRIX 2019
Traffic Scorecard Report with 46 hours yearly lost per driver in congestion during peak
commute periods compared to free-flow conditions, resulting in —$400 million of annual
commuter cost.191
Improving traffic on major highways, such as PR-52 and PR-18, is critical to enhancing
growth. A 25% reduction in travel time for trips coming into and out of the central business
district can reduce travel cost by over 6% (NCHRP Report 463). Investments to reduce
congestion should prioritize the most economically important trips or provide alternative
travel capacity to enable access despite congestion (Sweet, 2013). Targeted investments, such
as "smart intersections", dynamic tolls and reversible lanes using movable barriers will reduce
delays on key routes and journeys and facilitate economic growth.192
However, Puerto Rico still has a lot of work to do in order to transform its transportation
delivery organizations, enabling them to meet the standards set by other states in the US
mainland. Such a transformation effort would mainly revolve around the following key
initiatives:
1. Prioritizing projects with the highest long-term benefit-cost ratios, taking into
account a variety of monetizable and non-monetizable benefits
2. Systematically leveraging private sector capabilities to improve overall public
outcomes, thereby supporting and growing the private sector as well
3. Promoting the creation of a unified transport system for the San Juan
metropolitan area through an integration of public transit agencies and a closer
collaboration with private network operators
12.2 Implementation of infrastructure reform
The Government should employ infrastructure delivery best practices (e.g. prioritization of
projects for economic impact, fast-track permitting, procurement reform). Competitive
processes need to be engineered into the capital budgeting process for Puerto Rico.
Competition between capital projects helps assure that scarce resources are used effectively
and equitably. This is achieved by establishing appropriate processes, procedures, definitions,
information and analytic requirements, roles of actors, submission requirements, review
criteria and programming responsibilities. All of these require formal capital budgeting
practices and the elimination of the ad hoc practices.
These best practices improve efficiency and transparency and should be applied to all areas of
infrastructure expenditure of the Commonwealth including: reconstruction, construction and
maintenance of government owned assets, and procurement of infrastructure through public
corporations and Public-Private Partnerships (P3s) and coordinated by COR3.
A timeline for the implementation of infrastructure reform can be found below (Exhibit 70).
The Government must fulfill the milestones of this timeline to comply with the Fiscal Plan and
190 https://www.statista.com/statistics/907676/infrastructure-road-conditions-in-the-us-by-state/, 2019 HTA reports
191 http:Mnrix.com/scorecard/
192 See, Jamal Haidar, ''The impact of business regulatory reforms on economic growth," Journal of the Japanese and
International Economies, Vol 26, 2012, pp. 285-307. In addition, there are several studies that review the impact of
decongestion of roads on growth. Two examples are: New Zealand Institute of Economic Research, Benefits from Auckland
road decongestion, July 2017, and Clifford Winston and Quentin Karpilow, A New Route to Increasing Economic Growth
Reducing Highway Congestion with Autonomous Vehicles, Mercatus Working Paper, January 2017
141.
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to remedy the main flaws of the current transportation landscape on the Island (i.e., the
significant congestion of major traffic arteries, the poor condition of highway infrastructure,
and the inefficiencies in the operation of transportations assets). Concerns around the roll-out
of Commonwealth-wide procurement best practices and the establishment of standardized,
objective project prioritization goals remain and should be promptly addressed:
EXHIBIT 70: IMPLEMENTATION TIMELINE FOR INFRASTRUCTURE PROCESS REFORM
AND CAPITAL IMPROVEMENT PLAN DELIVERY
Pae.vuuR Action Rem Responsible Party' deadline
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Identity best p radices to overcome call en ecics an d levered e them to HTAt DTOPI PRITA Fe tiruary 243. 2921
accelerate pre-constru clam process
Rued sustainable ro nd did models Conduct a diagnostic or externalfunding°pportunInesandpursuethese HTAI DION PRITA May 31.2021
OppOrtunides meth a rOPOP1Fre promotion strategy
Compiled del ot reduletorr f3arnirrs to the vpti mica n Oda m rstc HTA/ PTOPI PRrTri. May 31. 2021
Milano opportunities and remove mete earners oritniedi 5121Iva ace on
(e.g., fine rationaltzation)
Promote delivery hest practices Determine opportuntlies to make cordractlnd skeledies more met- HTN MCP/ PRITA July 21. 2021
ere dive
Leverage Wiese o pp °dun Ines in pi Int prole ds and assess the res LOA g MN DTOPI PRITA October 11.2921
outcomes
Ingest in innovative Introduce. dyne mIctoil ianes an cl opt MVP traffic signailnd lo manage HTN FAF AF January 31.2022
tianSpOrtatiOn projects congestion that are currently under construction
.7-iryci etry=cirialits me— •y f • [ - T. s4c. • - T^=, • n"
12.3 Implementation of public transportation reform
The state of transit on the Island deserves special focus. Transit has particularly low mode
share, reflecting its poor performance, especially to the detriment of Puerto Ricans without
the means to own a private vehicle. Further shifting demand from more space-intensive to less
space-intensive means is over the long-term one of the only enduring ways to fight congestion
that is stifling economic development. The Government should promote the establishment of
a unified island-wide transport system, which would give all Puerto Ricans access to a reliable
way of travelling from one city to another for leisure or business, thus bolstering economic
activity in the San Juan metropolitan area and beyond while decreasing environmental
impacts of travel and congestion. Although these initiatives would ideally be implemented by
an integrated PRITA, their implementation can and should start today.
The creation of such a system would mainly rely on the implementation of the following
initiatives:
• Integrate all transit assets under PRITA: PRITA should be empowered to fulfill its
original intention, and act as a unitary transit authority by managing all transit on the
island (e.g., all buses, ferries, Tren Urbana). The Ports Authority would continue to retain
control over airports and ports. As a result, the Government can help PRITA pursue federal
grantee status as these new roles and responsibilities require (e.g., FTA grantee status).
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■ Integration of public transit networks: Even before the creation of a unified agency
in charge of transit in the Island, the existing public transit agencies of the San Juan
metropolitan area must integrate their operations to maximize ridership by increasing
both the legibility and usefulness of the system. Example initiatives include:
— Adoption of a single farecard for all transit networks, in order to give the residents of
the San Juan metropolitan area the opportunity to store their balances in one location
and to use the same form of payment across different systems.
— Harmonization of fares and schedules across TU, buses and ferries, in order to enable
commuters to transfer from one means of transport to another without time delays or
other obstacles.
— Design of a coordinated network of routes, in order to expand the combined coverage
area of public transit and to increase the attractiveness of multimodal mobility, creating
high-frequency trunks, with timed transfers to a useful branch network.
— Pooling of data resources, in order to conduct common research on the design of new
initiatives, such as the creation of a master time schedule and of a coordinated route
network. Pooled schedule data will also facilitate the creation of unified transit apps
that make it easier for users to navigate the system.
— Redesign of the physical landscape around transit stations in order to a) make stations
more accessible to pedestrians and b) increase the visibility and attractiveness of
stations in the broader community.
■ Coordination of public transit systems with private transport networks: Public
transit agencies should also collaborate more closely with private transport networks (e.g.
Publicos, Transportation Network Companies), which carry —5o million passengers per
year and carry the vast majority (65%) of total transit rides in the San Juan metropolitan
area) 93 If public agencies and private network operators were to implement a series of
joint initiatives (e.g., fare integration, station re-design, schedule integration, multi-modal
trip planning), transit service quality would increase, leading to a likely increase in
ridership as well. For example, commuter rides would become faster since San Juan
residents would be able to benefit from the extensive networks of private operators as well
as from the speed of public assets such as TU, which avoids gridlock.
■ Improvement of curb management practices: Public transit agencies should work
with the Government and local municipal authorities to promote the adoption of
innovative curb management practices (e.g., dynamic pricing for on-street parking,
replacing on-street parking with drop-off zones). These practices would raise the cost of
car usage and would incentivize commuters to use public transit. They would also generate
funds that could improve service quality in the communities they service (e.g., construct
more and better bus shelters)
Overall, these initiatives would contribute to the decrease of average commute times for the
residents of the San Juan metropolitan area, thus resulting in substantial labor productivity
gains. At the same time, they would enable public transit networks to increase their ridership
and their revenue, thus having a smaller need for subsidies from FTA or the Government.
These measures should be led by agencies responsible for various assets (HTA, ATM, PRITA)
until the transformation of PRITA into a true transit authority is complete, at which point
PRITA should become the responsible party across assets.
193 Data comes from FY2011 actuals included in the Puerto Rico Lang Range Transportation Plan, published in December 2013
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EXHIBIT 71: IMPLEMENTATION TIMELINE FOR PUBLIC TRANSPORTATION REFORM194
Madam Action item Responsible party, t7•rFOri
integrate transit assets under a Compite a comprehensive list of assets that wfil be transferre0 to PRITA PRITA . DIOR RCA, ATM, December 31.2020
unified PRITA and create a legal framework lo formalize new institution wield esign tied eatFAP
ittridino for subsidized as eels, as necessary su Omuta iernsiature
Approve leois I ali on for new ban sil asset onganizaton CW Government January 31, 2021
Assess in frestrucrnre priorities Adopt a single farecard for all publichans it n etworks 1-iTA, ATM. PRITA Decembef 31.2020
and priernize Investments
Harmonize fares and s chedu I esaccoss T1J. buses and ferries 1-17A, ATM. PRITA December 31.2020
Pool data resources in ortferto Conduct common reseanli OD rubffe 1-ITA. ATM. PRITA December 31,2020
initiatives
Design a coordinated network of pu brio Iransd mules PRITA March 31. 2021
Begin redesigning bi e physical landscape arou nd transit stations PRITA December 31,2021
Promote delivery bestpractices Design a series of inibatives that could be implemented In collaboration IIIRTFA December 31,2020
with private bans port n etwOrka fee_ Pliblicoa)
Doe I op a strategy of reaching sults parole transport network PRITA. Public Service January 31. 2021
operators Bureau. Private third-parry
stakeholders
Establish partnersrnas with private Van sport networks and begin PRITA April 30, 2021
executing joint initiatives (e.g., a chedule i ntegretion)to bo051ndership
Invest in innovative Identify existing CUrb manage mert pradices that in centnize Puerto PRITA December 31.2021
transportation projects Ri can s to utilize mass transit infrastructure
Introduce new iegair regulatory framework in order to eliminate these PPJTA January 31. 2022
curb manage me nt practices that disificenfirize use oilcans it
194 In the event the transformation of PRITA has not yet been complete, the agency should still take a leading role in the design
processes laid out above
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PART V: Transforming government to better
serve the Island
In addition to structural reforms, the Government must also implement fiscal measures to
create a sustainable fiscal future for Puerto Rico. Fiscal reforms should reduce costs while
maintaining or improving the quality of important services. The wide range of government
efficiency initiatives shall target an increase in revenues through new and more efficient
collections activities, while decreasing government expenditures by ensuring reasonable usage
of resources.
While the Government has successfully maintained balanced budgets established by the Fiscal
Plans, it has been slow to make meaningful progress regarding the necessary measures to
sustainably reduce the cost of operations by transforming its processes and organizational
structures. This has created a precarious risk to government service delivery, especially given
recent earthquakes and the COVID-19 crisis, when Puerto Rico's population is more reliant on
the Government to effectively and efficiently provide them the public services that enable life
to proceed and the economy to recover. While the Oversight Board continues to believe that
incremental government efficiency measures included in the 2020 Fiscal Plan are of the
utmost importance for the Island to establish a solid foundation for the future, the Oversight
Board also recognizes that given the complexity of the situation and lack of progress in
implementation to date, pausing new measures for a year will provide time to focus all efforts
on implementation of the changes that need to be effected. The Oversight Board urges the
Government to re-commit to identifying and driving initiatives that will result in better
processes, more efficient spending, and greater quality of service for the Island. The 2020
Fiscal Plan also introduces the concept of milestone budgeting, which provides incentives for
achievement of longstanding key fiscal goals and efficiencies. For example, the Department of
Corrections will receive additional budget allocations for FY2021 capital expenditures once it
has provided an outline for its facility footprint and consolidation assessment study.
Fiscal measures
Agency Efficiencies (Chapter 13). A new model for government operations will "rightsize"
the Government through agency consolidation and reduction and/or elimination of
government services. It includes comprehensive reform initiatives in the Departments of
Education, Health, Public Safety, Corrections, OCFO, and Economic Development, as well as
consolidations and reductions within the long tail of other agencies. Agency efficiency
measures must result in $1,215 million in run-rate savings by FY2025.
Office of the CFO (Chapter 14). The Office of the CFO ("OCFO"), will be responsible for—
and crucial to achieving—a variety of reforms to ensure the most efficient financial
stewardship of the Island's resources.
Medicaid Investments and Reform (Chapter 15). Healthcare measures seek to reduce the
rate of healthcare cost inflation through a comprehensive new healthcare model that
prioritizes quality relative to cost and must result in $318 million in run-rate savings by
FY2025, projected to grow with healthcare inflation.
Tax Compliance and Fees Enhancement (Chapter 16). Tax compliance initiatives
involve employing technology and other innovative practices, as well as implementing new
taxes, to capture revenue from under-leveraged sources. These initiatives must increase run-
rate revenues by $462 million by FY2025.
Reduction in Appropriations to UPR (Chapter 17). The central Government will decrease
appropriations granted to UPR, which must result in $282 million in run-rate savings by
FY2025.
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Municipal Services Reform (Chapter 18). The annual Commonwealth appropriation to
municipalities will also be gradually phased-out in its entirety, which must result in $220
million in run-rate savings by FY2025.
Pension Reform (Chapter 19). Improvements must be made to the current PayGo system
and framework for Social Security and Defined Contribution Plan implementation in order to
safeguard the financial stability of public employees' retirement funds. These pension reform
measures must result in $74 million of net run-rate savings by FY2025.195
Together, these measures are crucial to the structural balance of the Commonwealth's budget,
and are projected to have an impact of over $10 billion during FY2o2o-2o25 and over $85
billion by FY2049 (Exhibit 72).
EXHIBIT 72: CUMULATIVE IMPACT OF FISCAL MEASURES SAVINGS AND REVENUES
Impact of fiscal measures',
• Agency eftciencies2 Pension reform
85,346
Medicaid Reform EfTC
II Tax Compliance and fees enhancement
UPR and municipal appropriation reductions
10,034
5.4387
15.836
60'
15,076
2,232
2,206 .-_;b8
1,096 766 13.531
=111 2.281
153 6,311
4220 -6.119
FY20 FY21 FY22 Fy23 FY24 FY25 FY20-2 FY20.49
• z■•• [•• .--ee t9riiinIWARM C•!■■■,.dWv MAI
! Ft. ••■ !WI! .emext..±-
/ 95 Excludes savings attributable to the upfront payment to System 2000 participants
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Chapter 13. Agency efficiency reform
In accordance with Section 2o1(b)(1) of PROMESA, the Fiscal Plans for Puerto Rico "provide
a method to achieve fiscal responsibility and access to the capital markets." When the Fiscal
Plan process began in 2017, the Government had approximately —116,500 employees across
114 Executive Branch government agencies, as well as agencies within the Legislative and
Judicial branches (excluding large instrumentalities, e.g., PREPA, PRASA, HTA UPR,
COSSEC, GDB).196,197 These agencies were ineffective and inefficient in delivering the
services needed by the people of Puerto Rico, while consuming resources that
were outsized compared to the population served. Even now, compared with states
serving similar populations, Puerto Rico remains an outlier in terms of sheer number of
agencies. For example, as of 2018, Iowa only had 36 state agencies and Connecticut had 78.
Staffing and managing an organization of this size is challenging even in a stable economic
environment. With over 100 direct reports to the Governor, it has been a practically impossible
management task. In addition, notwithstanding the amount of spending, there are
countless examples of subpar service delivery across the Government. For
instance, despite having six agencies primarily dedicated towards the financial stewardship of
the Island, the Government has been unable to consistently issue consolidated audited
financial statements on a timely basis. Further, Puerto Rico's education system has a record
of consistently delivering unsatisfactory student outcomes, including below- US mainland
average graduation rates and standardized test scores that are far below basic proficiency
levels.
To assure the delivery of essential services while achieving financial sustainability, the
Government must focus on operational efficiencies to enable better service
delivery in a cost-effective way. A leaner, more efficient, and transformed future
Government of Puerto Rico should wherever possible reflect mainland US benchmarks in
terms of both number and size of agencies.
As part of the new Government model, the Government should consolidate the 125 agencies
into no more than 44 agency groupings and independent agencies (see Section 0). In some
cases, these consolidations should better focus the competing efforts of multiple agencies, such
as the Economic Development grouping, which is consolidating ten agencies into one. In other
cases, the consolidations should serve to move services closer to residents, such as the
Healthcare grouping, which will consolidate access points to important services like Medicaid.
Additionally, consolidations will enable agencies to streamline back-office processes,
eliminate duplicative resources and benefit from procurement efficiencies.
In addition to agency consolidations, the Fiscal Plan outlines operational and process
improvements that must be made to more efficiently use resources—including staff,
equipment, services, and buildings—across agency groupings such as Education (PRDE),
Corrections (DCR), Health (DOH), and Public Safety (DPS). The goal of such efficiency
measures is to improve the quality of the underlying services for the population while also
directing valuable resources toward priorities and achieving the cost savings needed to balance
the Government budget.
These measures were developed through an iterative process with the Government and are
designed to ensure compliance with necessary savings targets without compromising the
quality of public service delivery on the Island—and actually improving it in many cases. These
measures include various agency-specific efficiency (rightsizing) measures as well as certain
government-wide savings measures:
196 Excludes transitory employees
197 Excludes agencies which currently have $0 operating budget and no employees
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• Agency-specific personnel measures: Personnel efficiencies specific to each agency
(such as back office consolidation, process re-engineering to enable headcount rightsizing
and align resources with mainland US state benchmarks) that will enable the reduction of
payroll expenditure levels
• Agency-specific non personnel measures: Operational efficiencies specific to each
agency (such as procurement centralization and optimization of spend, consolidation of
facilities) that will enable the reduction of non-payroll expenditure levels
• Government-wide compensation measures: Standardization of personnel policies
throughout government (including institution of common healthcare benefits, a hiring
freeze, and limited holiday pay, as well as elimination of the Christmas bonus and
carryover of sick/vacation days beyond the statutory caps) to enable the reduction of
payroll expenditures across agencies without reducing additional employees
• Government-wide non personnel measures: Energy efficiency improvements and
conscious usage of electricity and water (e.g. PREPA and PRASA), resulting in savings on
utility expenses. Further, reductions to professional services to enable the
professionalization of the civil service and reduce reliance on outside consultants. Finally,
elimination of `englobadas' or less transparent spending, which impacts fiscal controls and
accountability.
• Investments and other ,funding: Agency-specific one-time or recurring funding
provided by the Fiscal Plan to ensure Government agencies can meet federal requirements,
provide quality front-line service delivery, respond to COVID-19, and focus on
implementation of efficiency measures.
To date, the Government has unfortunately not demonstrated meaningful
progress in implementing agency consolidations or otherwise improving
operational efficiency, though they have generally met budget targets.
To achieve personnel savings, the Government has primarily utilized broad-based early or
incentivized retirement programs (e.g., the Voluntary Transition Program and Voluntary Pre-
Retirement Program (Law 211-2015, as amended)), instead of driving optimization of back-
office roles (e.g., through reduction of duplicate administrative roles in DCR or centralizing
back-office operations in OCFO) or initiatives to align front-office roles with benchmarks from
mainland US states (e.g., State Elections Commission personnel). The Government's efforts
through these untargeted retirement programs have led to large payouts with high retirement
rates, major gaps in skills and capabilities, and a slower, less effective government, often
encouraging needed personnel to retire early.
To achieve non-personnel savings, the Government has made little to no changes in the
procurement processes or the organization of operations. While the Government has reported
its intent to centralize procurement (within GSA), consolidate the number of contracts across
agencies, and consolidate physical locations of operations, inefficient spending often
continues longer than necessary (e.g., utility expenses at closed schools have largely continued
even though the school is unused, and officers continue to be staffed to guard closed
correctional facilities).
While this approach enabled the Government to meet budget targets in FY2oig,
it has prevented meaningful progress towards more effective or sustainable
agency operating models. Without changing the way services are delivered and/or
determining which non-priority government activities will be discontinued, simply reducing
headcount risks exacerbating already outdated government operations. Going into the next
fiscal year (FY2021), this approach to personnel reductions would lead to a need for agencies
to take drastic actions (e.g., decreasing the accessibility or quality of services offered, or
slowing or altogether halting important services) given no rethinking of delivery has
accompanied the reduction in staffing. This was not the intent or the requirement of the Fiscal
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Plan. Clearly, this creates a precarious risk for the population, especially given recent
earthquakes and the COVID-19 crisis, which both mean that Puerto Rican residents are further
reliant on the Government to effectively, efficiently, and promptly provide them the public
services that enable life to recover and continue.
Thus, while the Oversight Board continues to believe that the fully outlined efficiencies are of
the utmost importance for the Island to have a solid foundation for the future, the Oversight
Board also is cognizant that, given the current circumstances, the Government
will need to invest time and effort in achieving the measures previously required and
not yet implemented, while supporting Puerto Rico residents. Therefore, the 2020 Fiscal
Plan has paused incremental agency efficiency measures until FY2022. The
expectation is that this one-year pause will enable the Government to redouble its focus on
implementation of the efficiency measures not implemented to date.
The Oversight Board is also including implementation budget incentives in
FY2o21 to encourage accelerated implementation of reforms that would bring
Puerto Rico a step closer to a sustainable government. There are six affected agencies: PRDE,
DCR, DDEC, DOH, Hacienda, and AAFAF. In select priority areas in which agencies
implement certain required actions -- including but not limited to meeting higher data quality
and transparency standards, conducting operating model/capacity analyses, or building up
essential infrastructure to facilitate process improvements -- incremental budgetary resources
are available for the implementing agency. Detailed descriptions of these implementation
budget incentives are included in the required implementation actions detailed for each
agency later in this chapter.
13.1 Agency operational efficiencies and improvements
The Fiscal Plans outline a set of medium-term savings the Government is expected to achieve
through both agency-specific and government-wide personnel and non-personnel measures
13.1.1 Agency-specific personnel and non-personnel efficiency measures
There are several actions that have been applied to each agency to achieve these targets:
■ A series of agencies must be merged when benchmarking and best practices
determine that activities across agencies could be better served through a single mission
and management to eliminate redundancies, and/or where economies of scale make
shared services more economical without reducing quality of service
■ A small subset of agencies will be left independent but made more efficient
through a series of streamlining efforts related to both personnel and operations, allowing
the agency to provide improved services at a lower cost to taxpayers
■ Some agencies will be closed completely or privatized if their function and
programs are not required, or can be transferred to private ownership, resulting in a 100%
personnel and non-personnel savings for all non-federal funded expenditures after a two
to three-year wind-down period (a minimum of 50% savings must be achieved no later
than year two). The Government proposed six agencies for closure: Model Forest; Culebra
Conservation and Development Authority;198 Company for the Integral Development of
Cantera's Peninsula;199 Economic Development Bank; Industrial, Tourist, Education,
/98 Agency will only be partially closed, so funding will be reduced by 32% overall starting in FY2020
/99 To be closed on July 1, 2033 per current law.
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Medical, and Environmental Control Facilities Financing Authority (AFICA); and National
Guard Institutional Trust.2°°
■ Additionally, the Oversight Board requires the transfer of ownership or change in
legal status of the Public Broadcasting Corporation (WIPR) to a not-for-profit
organization.
The Fiscal Plan lays out three major types of areas of operational efficiency across all agencies
(whether consolidated or kept independent, but made more efficient):
■ Back-office personnel savings: Achieve process efficiencies, centralization, or
digitization of redundant tasks and eliminate role duplications in administrative positions.
These levers have demonstrated savings of 15-20% in entities undergoing mergers
■ Front-office personnel savings: Achieve personnel efficiencies by ensuring staffing
levels are consistent with operational drivers with benchmarks from mainland US states
■ Procurement/non-personnel savings: Achieve operational efficiencies through
contract renegotiations, reduction of rent payments, reforms on bundling acquisition
across agencies, and other initiatives. Similar reforms of this nature have been shown to
save create savings of 10-15% for public and private sector entities
The Oversight Board and Government established a working group in 2018 to develop the
roadmap for this rightsizing effort, which became the basis for the Fiscal Plans. For several of
the larger agency groupings (i.e., PRDE, DOH, DPS, DCR, DDEC, and OCFO), the Fiscal Plan
lays out specific reforms expected in each of these areas. For other agencies, the Fiscal Plan
sets savings targets that agencies are expected to achieve through their own operational
improvement plans. Finally, while the Government has indicated that some consolidation
plans may change, the Government shall still be accountable for achieving the total annual
savings projected in the 2020 Fiscal Plan.
13.1.2 Cross-cutting personnel measures
In addition to driving operational improvements specific to service delivery, the Government
is expected to achieve cross-cutting personnel expenditure reductions through several
initiatives which would reduce the requirement to reduce personnel:
Maintaining a payroll freeze: The March 2017 Fiscal Plan included a measure to freeze all
payroll expenditures which became law in FY2018. To extend the savings from freezing payroll
increases and avoid dramatic further rightsizing of staff, the freeze must be continued
through the end of FY2023.
Standardizing healthcare provided to government employees: Medical insurance is
a core benefit provided to all government employees. However, the degree of coverage varies
widely across government agencies, with some employees receiving superior coverage
compared to their peers. For instance, PRDE employees receive an average of $120 per month
in medical benefits, whereas employees of the Housing Finance Authority receive more than
$1,000 per month.2°' To ensure fairness and reduce expenditures, the Government must
implement its proposal to standardize employer health insurance contributions so
that all Commonwealth agencies contribute $125 per employee per month, or
$1,500 per year, with the exception of public corporations, which should maintain current
employer contribution levels for those employees with pre-existing conditions. This initiative
should have been fully implemented by the start of FY2019, but it has not been to date.
200 The National Guard Institutional Trust and Economic Development Bank will close but not achieve any savings.
201 Analysis of active, non-transitory government employees not supported by Federal Funds, data provided within January 2018
Government attrition model
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Reducing additional outsized non-salary compensation paid to employees: There
are several policies that the Government must continue to enforce through the duration of the
2020 Fiscal Plan that will impact personnel spend. These include:
■ Asserting a hiring freeze with stringent requirements for backfilling positions left open by
attrition or workforce reduction
■ Limiting paid holidays to 15 days annually across all public employees
■ Prohibiting carryover of sick and vacation days between fiscal years over the statutory caps
(6o days for vacation and go days for sick leave, aligned with Act 26-2017)
■ Prohibiting any future liquidation of sick and vacation days in excess of the amount of days
permitted by law
■ Eliminating funding for the Christmas bonus
The hiring freeze policy has been included since the March 2017 Fiscal Plan, and the 2020
Fiscal Plan continues to enforce that policy while requiring the Government to propose
stringent requirements for the backfilling of any opened positions and gain budgetary
approval by the Oversight Board before doing so.
The other policy measures outlined above were enacted in Act 26-2017, except for the
elimination of the Christmas bonus. The elimination of the Christmas bonus was to be
implemented starting in FY2019, but unfortunately the Government paid the bonus without
approval from the Oversight Board. Meanwhile, in FY2020, the Oversight Board reached an
agreement with the Government to pay employees the Christmas bonus as feasible within the
existing Commonwealth FY2020 Certified Budget. Moving forward, Certified Budgets will not
include funding for the Christmas bonus.
13.1.3 Cross- cutting non-personnel measures
In addition to driving operational improvements specific to service delivery, agencies should
reduce spend on utilities as well as on other areas of the budget which have been historically
"opaque" in terms of where funds are flowing:
Reducing utility spend over time: The Government should implement energy efficiency
initiatives that reduce utility payments in line with mainland energy efficiency efforts such as
the US Federal Energy Management Program (FEMP). Energy efficiency initiatives would
include facility & fleet optimization (e.g., recycling), improved procurement agreements, and
strategic investments, potentially through utility capital expenditure. By FY2023, the
Government must achieve savings of 15% on its FY2o18 utilities expenses, considering the rate
increases projected by PREPA and PRASA. As with agency-specific rightsizing measures,
additional increases in savings to be achieved will be delayed until FY2022.
Reducing spend on historically low visibility areas: The Government should
continuously monitor and reduce expenses in historically low-visibility areas (e.g.,
"unclassified professional services" and "englobadas"). In the 2019 Fiscal Plan, a one-time and
government-wide 10% incremental cut on professional services spend and 10% limit to
unclassified professional services was required. While no incremental cut is explicitly required
in FY2o21, the Oversight Board continues to expect more rigorous documentation and
justification for such spending before approving their inclusion in future agency budgets and
will maintain the 10% limit on unclassified professional services.
As with prior Fiscal Plans, this 2020 Fiscal Plan includes implementation exhibits that date
back to Fiscal Plans certified in 2018 (see Section 25.3). These exhibits continue to show
implementation dates that have passed without Government completion of the action. The
Government must act to address these missed milestones and to accelerate the pace of change.
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This Fiscal Plan therefore also lays out future dates for these milestones, for which the
Government is accountable.
13.2 Investing to support agency efficiency and recovery
The 2020 Fiscal Plan includes new incremental funding to support the Government in its
efforts to operate effectively and sustainably. These include:
■ Immediate funds for COVID-ig response: In addition to pausing new measures for
FY2021, the Fiscal Plan includes $787 million certified as part of the Emergency Measures
Support Package, solely focused on mitigating the effect of the COVID-19 pandemic on
front line healthcare and public servants, as well as self-employed and small businesses.
The package is comprised of $500 million in additional FY2020 expenditures, a $157
million reapportionment from the FY2020 General Fund budget, and $131 million in
Restart funds. These funds are intended to provide $212 million for "hazard pay" for
frontline workers (including public and private nurses and technicians, police, certain
correctional staff, and professionals managing taxes and financial operations), $50 million
for medical and public safety supplies and capital expenditures, and $255 million for
enabling distance learning in the public education system, Sim million for municipalities,
and $16❑ million in one-time direct payments to individuals and small businesses.
■ Investments in frontline service delivery: The 2020 Fiscal Plan includes several
incremental investments in frontline service delivery, including compensation and benefit
raises for police officers (including backpay for those who are owed overtime payments
from past service); support for Special Education therapy, and overdue teacher
compensation; funds to attract additional recruits to the Emergency Medical Services
Corps and Institute of Forensic Sciences; and investments in healthcare (including funds
for opioid treatment, telehealth, electronic health records, hospital capital expenditures,
scholarships for medical students who commit to practice outside of major metro areas,
and additional school nurses).
■ Support for accelerating operational improvements: The Government lack of progress on
operational changes to date has created a risk to government services delivery, especially
given the effects of the recent earthquakes and COVID-19. Given the complexities of the
situation, the Fiscal Plan includes a one-year pause in new rightsizing measures, which is
intended to enable agencies to focus all efforts on implementing the necessary operational
reforms needed to improve services long-term. Further, the Fiscal Plan includes
implementation budget incentives that would become available when certain milestones
are accomplished (e.g., consolidation of back office functions).
■ Funding to enable consent decree compliance: Several Puerto Rico Government agencies
are subject to federal consent decrees that require them to adhere to certain regulations.
With these consent decrees often come funding requirements (such as, certain funding
levels to Special Education students). The 2020 Fiscal Plan includes funding for the
consent decree requirements that the Oversight Board is aware of currently.
Specific investments are detailed by agency in the following sections.
13.3 Department of Education (PRDE)
The Puerto Rico Department of Education (PRDE) is the largest government agency within
the Commonwealth, charged with providing high quality education for approximately 289
thousand K-12 students across the Island at 856 schools. Meanwhile, as Chapter 9 indicates,
for several years PRDE has struggled to improve educational outcomes for its students and to
operate at a size commensurate to its student enrollment.
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First, student outcomes and proficiency rates have declined for all core subjects in the past
years, as measured by META-PR test results. Since the META-PR test was implemented in
FY2016, proficiency rates have fallen, compared to FY2019, as follows: Spanish by 6% (from
51% to 45%), Math by 3% (from 33% to 30%), English by 6% (from 45% to 39%) and Science
by 6% (from 53% to 47%). Further, as the largest agency in the central Government by budget,
PRDE is outsized relative to its results and needs. While student enrollment has declined
considerably over the past few decades (over 50% decline since its peak in 1980 and
approximately 33% in the preceding decade) in line with a declining population, prior to the
first Fiscal Plan, the number of schools and teachers had not decreased proportionally.202,203
A significant factor driving PRDE's subpar outcomes is a set of underlying bureaucratic
systems and structures that are ineffective and inefficient. Simply stated, PRDE has not
developed the internal capacity, or led with commitment to a clear plan to manage the complex
educational dynamics in Puerto Rico. PRDE has not fully mobilized the organization to
execute on a clear strategy to accelerate progress in schools—namely, the creation of seven
regional offices that were launched on the premise of providing more direct support to schools
through a decentralized model that is more responsive to the specific needs and context of
each school. While the regional offices are up, running and staffed, they currently function
more as an additional layer of bureaucracy, rather than as mechanisms to drive change and
shared learning closer to the student and parent populations in schools.
The Oversight Board has made a number of suggestions to help PRDE operate in more
strategic ways while aiming to fulfill its core function of driving a more efficient and cost-
effective educational delivery model within PRDE. Rather than implement these efficiencies,
PRDE has relied on actions that enable near-term savings but hurt its ability to provide
optimal services in a sustainable way in the long term. For example, in order to achieve payroll
savings, PRDE implemented a broad-based Voluntary Transition Program (VTP) in FY2019,
instead of enforcing its existing classroom staffing policies, revamping back-office processes,
and executing planned active workforce reductions. As a result, by its own reasonable staffing
guidelines, referred to as Organization Escolar, PRDE has more teachers in aggregate than it
needs, and—even after closing 255 schools—PRDE still operates a system that has significantly
more capacity than it has students. At the same time, PRDE does not have teachers in all the
places it needs; it has a clear deficit in the number of English language teachers to support
students across the Island. All of these issues result in schools that are sub-scale and require
more resources, on a per student basis, to operate.
The Oversight Board recognizes that PRDE has been operating in a complex environment in
the wake of Hurricanes Maria and Irma, recent earthquakes, and the spread of COVID-19.
Indeed, the challenges that the Department faces even to re-open schools in the fall are
formidable. However, beyond these crises, PRDE has further created challenges for the school
system. Investments approved for FY2019-2020 by the Oversight Board for teacher and
director salary raises and student textbook purchases, all meant to improve the quality of
education, have either been stalled or implemented incorrectly (though the funds provided
have been spent, at least in part). When the Fiscal Plan provided salary raises to teachers, the
Department incorrectly implemented the investment (as it did not provide raises to transitory
teachers), thus incurring an estimated $23 million of retrospective pay, which resulted in
lawsuits against PRDE by the Teachers Union. Additionally, due to PRDE's poor management
of federal funds, the US Department of Education is requiring the agency to contract a third
party for spending oversight. Finally, PRDE has been unprepared and thus unable to provide
202 Helen F. Ladd and Francisco L Rivera-Batiz, "Education and Economic Development in Puerto Rico* The Puerto Rican
Economy: Restoring Growth, Brookings Institution Press, Washington, D.C., 2006, 189-238
203 There were 1,619 public schools in 1990 and 1,131 at the time of reporting. Oversight Board Listening Session, Secretary
Julia Keleher, "On the Road to Transformation,. November 30, 2017
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distance learning and other important services in the wake of the earthquakes and the global
COVID-19 pandemic.2°4
Given the federal and local response to COVID-19, PRDE will have access to significant federal
funding to help address high priority needs associated with planning for a safe return to school
in the fall and offering robust remote learning opportunities in the case of ongoing physical
school closures to prevent further learning loss. Incremental funds available to PRDE include:
■ Federal funding of —$349 million for K-12 education made available through the
Elementary and Secondary School Emergency Relief Fund of the CARES Act
■ A portion of the —$48 million allocated to the Governor's Emergency Education Relief
Fund, authorized by the CARES Act
■ Federal funding carryover from FY2o2o of $68o million that has been frozen while the
Department contracts with a fiduciary agent
■ Additional Commonwealth appropriations of $124 million as part of the FY2020
Emergency Measures Support Package to enable implementation of remote learning (part
of total investment in devices of $255 million, partly funded through RESTART funds)
The above funding—which will require a clear plan and rigorous controls to provide for the
basic needs of students and families—are not meant to reduce the expectation that the
Department accelerate a major transformation of its operations and basic management
improvements to better provide services and maintain fiscal balance. Without active
management and operational improvements, PRDE will likely continue to see student
outcomes stall.
To improve the capabilities and capacity of the Puerto Rican population, the Government will
need to set high aspirations and redouble efforts. This involves both immediate actions to
enable learning to continue in the context of COVID-19, while also driving the operational and
management improvements to provide better services for the children of Puerto Rico. To
support these efforts, the Oversight Board is providing funding, which will go to support
fulfillment of federal consent decrees, hiring of additional school nurses, textbook
procurement, transportation, and increased teacher compensation.
204 PRDE finally opened cafeterias on April 29, 2020 after the Oversight Board sent a letter to the Governor on April 24, 2020
with a list of short, medium and long-term solutions for PRDE's consideration to ensure proper nutrition and made available
to students. However, as of latest information available to the Oversight Board, only —10% of school cafeterias are currently
open and PRDE is distribution only lunch meals (not breakfast) to —14% of students, and majority of food distribution efforts
to students is being led by municipalities.
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Investments to drive operational improvements
In addition to the investments outlined in Chapter 9, the 2020 Fiscal Plan will provide funding to
ensure PRDE has what it needs to fulfill federal requirements and to enable better service delivery:
■ Teacher and school director compensation (—$285 million over five years): The
2018 and 2019 Fiscal Plans provided salary raises for teachers and directors in FY2019 and
FY2o2o. Unfortunately, however, PRDE mistakenly excluded transitory teachers and
directors from these raises, which has generated a lawsuit against the agency. As such, the
2020 Fiscal Plan provides raises for these groups.
■ Textbooks, transportation, and other student services (—$65 million): The Fiscal
Plan includes $25 million across FY2020-2021 for textbooks and $40 million in FY2021 to
cover transportation costs (largely to support Special Education students), student food
expenses, and other materials.
■ Additional school nurses in all schools (—$15 million per year): The Fiscal Plan
provides $15 million per year to hire needed school nurses, instead of contracting these
services.
■ Student and teacher time and attendance reporting (--$6 million): A major gap for
the Department is it is not able to accurately report headcount or student enrollment. This is
due in part to an over-reliance on manual processes, as well as poor management. The Fiscal
Plan therefore provides funds to support the implementation of Kronos, a time and attendance
system, and to provide incentives to directors and schools that demonstrate consistent and
reliable reporting on student and teacher attendance.
Special Education Remedio Provisional program-specific FY2021 budget
accounting: In addition to the funding above, the Fiscal Plan ensures that PRDE is compliant
with legal requirements for the Special Education program. In order to ensure proper resources
are allocated to all Special Education students, the FY2o21 Budget for the Special Education
Program and the Remedio Provisional Program will be separately presented from PRDE's overall
budget. By doing so, the Oversight Board can ensure resources are properly allocated based on
special education student enrollment and needs, while also ensuring greater transparency in
program spending.
13.3.1 Overview of efficiency measures
PRDE will not be required to achieve additional savings in FY2021 over that required in
FY2o2o — this delay must be used to manage through the current pandemic and progress with
implementation efforts across key reforms. However, in FY2022 to FY2025, PRDE must
achieve the personnel and non-personnel savings outlined in Exhibit 73.
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EXHIBIT 73: DEPARTMENT OF EDUCATION MEASURES SUMMARY OF IMPACT
Run-rate savings from agency efficiency measures', ••.3
" Non-personnel ■ Personnel
(6) 103 = 25 37 28
525
495
458
433
12E
.14
4
120
337 331
370 398
313 334
FY20 FY21 FY 22 FY23 FY24 FY25
- ,r-w:111F142 ;11•445fSTIEMS and erfiar finning
Improving student-teacher ratio
One key indicator of school efficiency is the student-to-teacher ratio (ST ratio) used across the
school system. Given the need for PRDE to rightsize its resources in alignment with a steadily
declining students enrollment, it should aim to manage to its ST ratio to ensure improvements
in efficiency.
The 2020 Fiscal Plan reflects an updated calculation for the ST ratio, based on data from the
Department, to include both general education students as well as Special Education students
who spend most of the school day in inclusive classrooms with their general education peers
(known as "salon recurso"). As in prior Fiscal Plans since April 2018, the teachers counted in
the ST ratio are those that teach core subjects and/or homeroom classrooms (previously
referred to as 'academic' teachers).2°5 Also, in prior Fiscal Plans, staffing of all other teachers
(previously referred to as 'non-academie' teachers) are expected to be rightsized through
attrition.206
While the FY-2018 baseline system-wide ST ratio was 18.9 (332,251 students to 17,607
teachers), data provided in December 2019 indicates that the ST ratio has worsened to 18.5
(-276,000 students to —15,000 teachers). Moreover, given the range of school sizes across the
Island, many schools have a staffing ratio that is much lower than 18.5. Exhibit 74 below shows
that —500 schools have a ratio below 18.5, and 75% of those schools have enrollments below
345 students. As a result, by the Department's own guidelines, referred to as Organiz.acion
Escolar, it has "overstaffed" schools by —800 teachers in FY2020, and without further action,
the ST ratio would decline to 15.3 by FY2025.2°7
205 Core subjects / homeroom teachers include those that teach General Education, English, Math, Science. Spanish, History,
and homeroom.
206 All other teachers include, for example, Career and Technology, PE, Arts, and Special Education teachers.
207 PRDE student-teacher ratio analysis.
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EXHIBIT 74: ACADEMIC STUDENT-TEACHER RATIO BY SCHOOL ENROLLMENT AND
GRADE
PRDE school-level student-teacher ratio distribution by enrollment and grade
• 6-12 • K 8 •9-12
Academic student-teacher ratio •6 8 • K 5
All general classroom (SpED inclusive) students to core subjects) homeroom teachers
35 i •
• • • •
30 J ••• »
.. o • • • •
•• • • • •
• • • • , •
25 • •Ir* •
all 6
•
i•...
_•.....
tAt • ,.•
20 • di. • 11 •• , •
8 • Average ratio: 18,5
• Ile 0_ •
15 •• .•
•
•
10
5
Average school size: 345
0
0 200 400 600 800 1,000 1,200 1,400
School enrollment,
Number of students
frP.DE ,rnirtn+e actre MC.E. ot,semaelrnstt, 5
Part of this problem can be resolved through a more formalized implementation of PRDE's
own staffing policies (i.e., Organizacion Escolar) and are summarized in Exhibit 75.208
208 Based on policy documents from and discussions with PRDE.
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EXHIBIT 75: PRDE ORGANIZACION ESCOLAR STAFFING PQL}CIES
Formal policy Implied guidelines No implied guidelines
• class size maximums • Grades 6 12. 5 classrooms per pod • General Education
General (PK 16, K-3: 25, 4-12: 30) of 5 teachers - consisting of math, assistants (n=-80)
Education science. history, Spanish, and
English teachers
• English (K-5) 5 classes taught
per day
• PE 1 every 250 students
Specialty
• Ms Health: Career & Technology
1 per subject per 6-8 and 9-12
grade
• Class size maximums • Note Special Education class size ■ Special Education
- Regular, reduced enrollment: 16 maximums in practice are lower assistants (n=5.8k)
than stated formal policy Note Driven in large
- Full-time classroom (promotion) 12;
Special part by IEPs. but
- Full-time classroom (modified): 10 exceptions are made
Educati ❑n
• Resource teachers 25 pull-outs per day based on need with no
• Therapists: based on individual IEP firm ratios
• OrganizabOn Escolar (General • Escuela Basica • Decisions are made
Source
Education + Special Education) • HR Director guidance flexibly
Policy
• Convenio Colectiva
Notes: Spscal fdu cation salad iSerr first seSsol oesarszaixen poky in f's't6-19' -PPtE cularnsscated 1 mil in per school S reap Sed sy k_sw though the 'assuage is sot apparent
SOLIiICr Carta CSTular num 0E-201.9-2S21) PricE pat' pigbica tare Is PrganiZaC21,1 esedsr pars prpsrsrse de efiLJUIcsis esisedsly ips reguSaos ds. rrarimms .
gre.d.sa rig, pare Ins eats desteS ekes tl%C3P3OdActs rretrtUladOS en ids ea ci.ekas del depend memo de ed4ciciiin de puerto neo Kay :OI N
Given that Fiscal Plan savings targets are being deferred by one year, we anticipate that the
Department's student-teacher ratio will fall from 18.5 in FY2o2o to 17.7 in FY2o21 given the
forecasted enrollment decline. However, in subsequent years, the expectation will once again
be that PRDE is more efficiently managing its student-teacher ratio by faithfully observing its
own staffing policies (i.e., Orgartizaciort Escolar).
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EXHIBIT 76: TEACHER-RELATED PAYROLL SAVINGS
PRIDE historical and target teacher headcount, 1000
MID Student- teacher ratio
Student enrollment – Ail population Teacher count – core subject/ homeroom (academic)
— Student enrollment – General classroom (SPED inclusive) • Teacher count – All other teachers,
icao on* 411130 410 4171.
30 360
300
250
20
200
150
10
100
50
0 0
FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Calltr.1.
While by following its own guidelines, PRDE would be pursuing a more efficient staffing
structure than its current state, it will still ultimately fall short of Fiscal Plan targets over time
given that many schools operate at inefficient enrollment levels and thus incur significant
"breakage" (i.e., underutilized teachers). For example, if a school has 36 students in 3rd grade,
that school will need two 3rd grade teachers with classrooms of i8 students each, even though
those teachers could theoretically teach an additional 7 students each, per the Organization
Escolor guidelines. This situation exists across the Island: only 40% of PRDE's total 856
schools operate at an efficient school size (see Exhibit 77). These schools are geographically
dispersed across the Island, with inefficiencies existing in all regions and
urban/suburban/rural.
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EXHIBIT 77: MAP OF PRDE SCHOOLS BY ABILITY TO ACHIEVE EFFICIENT STAFFING
PRDE schools by location and efficiency
Si • • •
•
w ■ip go 44 *,
• •
•-• •
•• • S S : •
.• •
•
• •
•4.••
• • -
:4w- *.•-.) ••
• SO •
•
%. • ■
U.
• Inefficient school: based on current enrollment structure or size, 485 schools
applying organizaciOn escolar results in a teacher need that equates to a
below average ratio
Efficient school: based on current enrollment structure or size, applying 353 schools
organizacion escolar results in a teacher need that equates to an above
average ratio
As enrollment is projected to decline by 4-5% each year through FY2026 (due to overall Island
population decline), this issue of breakage will worsen, with schools increasingly less able to
maintain efficient staffing levels. While the Fiscal Plan does not require additional school
closures (which would reduce breakage in the system), it is nonetheless important to
acknowledge the personnel (and operating) costs of managing a school system where capacity
exceeds enrollment. This issue can be best addressed with active footprint management,
taking into consideration geographic and student demographic constraints. While the Fiscal
Plan does not require footprint redesign, it acknowledges that such reform will be important
for the Department to pursue in the long-term in the face of continuing decline in enrollment.
EXHIBIT 78: REQUIRED IMPLEMENTATION ACTION ITEMS FOR IMPROVING STUDENT-
TEACHER RATIO
Required implementation action Deadline
• Delineate roles and responsibilities for each function of the Central vs Regional offices in a August 2020
manner that allows PRDE to identify duplicative responsibilities and re-prioritize school support
in the regions
• Review current staffing levels against PRDE staffing guidelines {organization escolar) across December 2020
all 856 schools and identify schools with incorrect mix of teaching staff
• Define an implementation plan to invest in Region's school support function by re-alocating December 2020
staff to increase academic facilitator positions in the regions and reduce administrative
headcount in the central and regional administrative offices, aligned to Fiscal Plan targets for
FY2022 to FY2025
• Define an implementation plan to align teacher count to current organizacion escolar guidelines May 2021
for identified schools — this change would allow PRDE to meet the Fiscal Plan savings targets
for FY2022 to FY2025, as described in Exhibit 5 above
• Outline a plan to streamline the rocess for school staffing in a transparent data-based manner May 2021
that wilt allow PRDE to continue to manage the student-teacher ratio in a systematic way
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Optimizing personnel with school consolidations
To date, school consolidations have not led to proportional cost savings because they have not
been accompanied with concurrent reductions in administrative staff. From FY2022 forward,
the 2020 Fiscal Plan requires the number of school administrators (principals, office staff,
etc.), food service staff, facility maintenance staff, and other school-specific staff to be scaled
down to account for a smaller number of schools (than achieved with to-date consolidations).
To do this, the Department should endeavor to maintain its 2018 average of 2.24
administrative FTEs per school, 3.39 food services FTEs per school, and 2.27 maintenance
FTEs per school.
In FY2020, the Government informed the Oversight Board that PRDE's staffing levels for food
services and maintenance staff209 are driven by minimum staffing requirements established
through Collective Bargaining Agreements with the worker's union and inhibit the agency's
ability to reduce headcount further On line with school consolidations). When asked to provide
further support for this assertion, no further information was made available.
Rightsizing regional and central offices
The 2020 Fiscal Plan supports PRDE's own proposed shift from a single central administrative
office model to a central/regional administration model. By pursuing a regional model, PRDE
had aimed to enable faster, more locally relevant services; drive system-wide initiatives and
shared services from a central office; and reduce administrative headcount. In this new
central/regional model, administration of individual schools would be decentralized and made
leaner while also putting decision-making closer to students and families. Developing and
relying on regional leadership would also allow PRDE's central administrative structure to
right-size to staffing levels comparable to state educational agencies on the mainland.
In keeping with the push toward a central/regional model, the 2019 Fiscal Plan required that
by FY2o2o, PRDE achieve approximately a 25% reduction in administrative headcount
between regional and central office roles — this target is maintained in the 2020 Fiscal Plan,
though the distribution of staff amongst roles appears to now be different per the latest data
analyzed from PRDE.
As of December 2019, PRDE had —3,5oo staff that held central/regional office roles: —boo in
the central office, —go❑ in the seven regional offices, and the largest portion, —1,800, in field-
based roles that are directly serving schools or groups of schools but tagged to regions.
Separate from the staff headcount, the current staff composition for the regional offices is
heavily concentrated in administrative roles, instead of educational support roles, which were
the original primary purpose for creating regional offices. In fact, across all seven regions,
PRDE's count for academic facilitators falls short of what its own design of the regional
structure would require (Exhibit 79). PRDE must realign its resources to address this gap by
appropriately downsizing administrative functions in the regions.
209 Full time equivalents (FTEs)
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EXHIBIT 79: ACADEMIC FACILITATOR COUNT VERSUS TARGET
Proposed regional IteadcOunt v= current state fiDr academic facilitators C)ec
• Faci/alor Special Education
53
El Facilitator Special Education Centers
▪ Facilitator General
34
32 32 32
1154,
27
O
7 2.5
4
5 20
‘01
PRDE Ponce Arecibo Caguas Mayaguez Humacao San Juan Bayamon
proposed
region In PRDE's proposed ORE structure,
struiCtUce academic facilitators (instructional
coaches) represent 53 out of the 102
academic affairs positions within an ORE
PRLe f-Mter E .2•J
Further, there remains opportunity to right-size the central office as an FY2019 analysis
conducted by PRDE concluded that the central office could operate efficiently with -boo staff
if allocated appropriately across functional areas.21°
Moving forward, PRDE should pursue its vision for a more well-defined central/regional
model by eliminating duplicative responsibilities between the central and regional offices and
prioritizing school support in the regions. Further, PRDE should rebalance staff to increase
academic facilitator positions in the regions and to right-size administrative headcount in the
central and regional offices to ensure resources are more adequately focused on driving
student achievement in schools.
Consolidating the K-12 school footprint
After an analysis of several factors including capacity, geographic and cultural characteristics,
distance to neighboring schools, transportation costs, and facility quality, among others, the
October 2018 Fiscal Plan determined that PRDE should close 307 schools by FY2o20.
Consolidation of schools would enable systems to invest in a smaller number of higher-
performing schools. Each school closure was estimated to save $47,000 annually by reduction
of facility costs... By FY2020, PRDE consolidated 255 schools, and the Oversight Board had
determined that no further closures were required. However, the Fiscal Plan still expects these
savings (representing -$15-20 million per year) to be captured elsewhere.
Meanwhile, to date, consolidation of the 255 schools has resulted in lower utilities and other
operating costs, but many of these buildings have been left empty or repurposed for
administrative uses, which has inhibited PRDE's ability to capture full savings from each of
the school closures. Further, notwithstanding that PRDE is often not the owner of the schools,
210 PRDE analysis of Administrative headcount need for central office in FY2019.
211 -$47,000 is a result of analyzing Government-provided school closure data from previous years and represents the average
non-personnel savings across a group of 151 closed schools.
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the Government must make every effort to finalize a plan for sale, lease or other to ensure the
unused buildings are most efficiently utilized in the communities and do not create new
community challenges due to their abandonment. Starting in FY2022, PRDE is expected to
capture all of these savings.
Reducing procurement spend
PRDE procurement spend should be reduced by —10-15% by FY2023 through centralized
procurement policies, including strategic purchasing, and demand controls. To date, PRDE
has not made notable progress in realizing procurement savings, and instead has depended on
the centralized GSA to provide them with the savings. GSA has not taken on a meaningful role
in procurement on behalf of PRDE to date, and PRDE is responsible for achieving these
procurement savings in the interim.
PRDE's ability to make informed strategic management decisions on how to effectively
allocate resources to procurement expenses is constrained by a lack of transparency in
spending. For example, the Oversight Board's analysis of FY2019 spending revealed that ^-4o-
50% of non-personnel expenses are tagged to categories that have unclear descriptions, serve
as miscellaneous categories, or simply are listed as "unclassified" (Exhibit 80). A significant
percentage of both professional services and purchased services are not classified, meaning
they are missing basic descriptive information to categorize spend without referencing back to
the original contract documents. PRDE needs to improve accounting and expense
categorization data not only to be able to manage costs, but also to leverage dollars more
effectively for students.
EXHIBIT 80: FY2019 PROCUREMENT SPEND BREAKDOWN
Spend dy concept code and account description. j•
L....a a.
•
iz
a
*OM, C•Wa=
Ca
dria. .PI:KE 1. Nc..-,, sonne.ke.
In FY2019, PRDE had over 3,000 contracts driving $851 million in procurement spending
across all funding sources (General Funds and Federal Funds).212 There are four cost concepts
that account for over 6o% of that spending:
212 FY2019 PRDE Single Audit File.
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■ Facilities as a cost concept only represents —4% ($38 million) of procurement spend, but
accounting for facilities-related vendors and programs (e.g., Oficina Mejoras Escuelas
Publicas - OMEP) from other concept codes, true spend on facilities is closer to —22%
($184 million) of spend. In fact, while purchased Services represents —14% ($116 million)
of spend, upon further analysis, it appears that —$79 million of this spend tied to
purchased services is spent on facilities-related vendors
■ Transportation represents —11% ($94 million) of spend and covers —18,000 general
education students and —12,000 Special Education students. However as of March 2020,
—9,800 Special Education students still did not have access to transportation services213
■ Professional Services represents —30% ($273 million) of spend, with Special Education
professional services such as evaluation and therapy services accounting for —40% ($101
million). We further analyze Special Education services below.
Many of the contracts across these categories are very small and difficult to analyze due to
limited data available about them. PRDE should identify more efficient ways to procure
services to address its needs through procurement savings levers such as contract
renegotiations, bulk purchasing, etc. Furthermore, PRDE should implement greater data and
accountability standards for its contracts so that the value of these contracts can be assessed
in the future. For example, it is difficult to ascertain how many and which schools and/or
students benefit from each of these contracted services, whether these services have been fully
delivered, and what their overall impact is.
Facilities costs
Currently, there is very little transparency into what PRDE spends on facilities. While FY2019
PRDE financial files indicated —$38 million of spending on facilities (in the "facilities" cost
concept), deeper analysis suggests that facilities-related spend is also recorded in several other
cost concepts, resulting in total facilities-related costs of closer to —$184 million (Exhibit 81).
This current classification makes it difficult to disaggregate facilities spending into custodial,
maintenance, utilities, rents/leases, and capital expenditures—a prerequisite to effective
decision-making on facilities spending.
213 PRDE-provided transportation data.
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EXHIBIT 81: FY2019 FACILITIES-RELATED SPEND BREAKDOWN
Facia ties-related spend, FY19
S184m
Other
PRDE spends an additional
Custodial e-
-S50m in custodial
personnel (per FY20 raster)
(04) Donations and Subsidies
(0t4 Transportation
This captures a percent of
(061 Professional Semites utilities paid by PRDE as the
rest is centrally budgeted/
Wel ❑tiler Ofitratiog Eerie mos
Pala (e-1).. PREPA. PRASA)
(09) Prior Year Debt
F
re/died spend:
-$184m
11113= -1W-
1=111•1:12- OMEP represents -S100m
of this spend and more data
is required to break down
(13) Social Well Being For Puerto Rico how Maintenance and
; capF_x dollars are spent
(14) Appropriations to Non.
Governmental Entities
FY19 Facilitie: Spend
Oficina parr ei Mejoramienta Escuela Publica (OMEP) represents —6o% ($no million) of
facilities spending. OMEP operates as a program within PRDE24 providing maintenance for
over 50% (514) of PRDE schools and coordinating system-wide capital expenditures. Among
its responsibilities, OMEP oversees the upkeep of green areas, plumbing, electricity, and basic
construction work. OMEP outsources maintenance and capital investment for its 514 schools
to a municipal contractor for 88% of schools (450 schools) and over 200 private contractors
for 12% of schools (64 schools).215
A preliminary analysis of OMEP's spending is provided in Exhibit 82, however current spend
classification does not provide the sufficient visibility to assess the resource allocation between
types of spend (e.g., routine maintenance vs. capital expenditures projects). Driving to a
greater level of transparency in how OMEP spends its budget across the various facilities cost
concepts will help PRDE make sure dollars are being allocated with the appropriate level of
prioritization.
214 OMEP costs are captured in an arrange of concept codes (e.g., Purchased Services. Materials, Professional Services,
Facilities, Equipment Purchases, Other OpEx).
215 88% (450) of the schools are served by a municipality contract.
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EXHIBIT 82: FY2019 OMEP SPEND BREAKDOWN
OMEP spend. by type of
wend FY19, $m Tapia Sub-contracted services by OMEP, FY19-FY20, $M
12.7
110,3
I
Hurricane- 1A I
related 19.2 Green areas maintenance
10.5 0.6
maintenance and fumigation
0.6
Installation or 0.7 2.5
maintenance of AC 0.7
AFI - CapEx Administration expenses 0.8
40_0 0.2 0.6
spend 0.7
Permanent improvements 1.0
Wells draining 0.6
1.1 Security
0.9
Exterior/interior paint services
Construction/improvements 19 1.4 for power
substation
OMEP- (92 schools)
51.1
Other' Security services for
warehouse and closed 3.8
schools (Nov 18 - Jun 19)
OM EP FY19 FY20
Spend FY19 # of OMEP sub-contractors 271 220
Unique description of services 609 338
1 Fort-el, rata rasureC ;Am PW..E 5, lLlfiglrtfh em- can twos., E.
sai3f • ri caviirmt4N-20/.:a FAKE rat:
PRDE must consider how to further delineate facilities costs across major categories of
spending including custodial, maintenance, capital expenditures, utilities, rent/lease
payments, etc., to allow for greater transparency into all facilities-related spend for the
different programs at PRDE that offer these services.2,6
More broadly, PRDE must commission the development of a Facilities Master Plan to assess
its portfolio of buildings alongside their purpose and plan for the future. Facilities Master
Plans are common across school systems, and consider the current use of each building, its
condition, and its intended use going forward. Given that PRDE continues to have more seat
capacity than students (a situation that will only become magnified given projected enrollment
trends), it is critical for PRDE to prioritize investments in school buildings that have a long-
term place in the school footprint. Such a plan would also allow PRDE to understand potential
alternative uses of its facilities to accommodate difficult situations like the COVID-ig
pandemic.
Transportation costs
In FY2019, PRDE provided transportation to —18,000 general education students (-84% of
those eligible under the minimum income and distance from school eligibility rule) and
—12,000 Special Education students (-5596 of students that require transportation per their
IEP as of March 2020).217 PRDE spent roughly —$94 million on these student transportation
services, almost all funded through General Funds. These services are procured in a highly
fragmented way, with over 250 vendors and 35 municipalities providing services.
Of this total spend, —6o% ($56 million) supports transportation for Special Education
students. Using transportation data provided by PRDE, the average cost to provide
216 Includes OMEP and Auxiliary Services programs.
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transportation to a Special Education student is —$4,600, more than double the cost to
transport a General Education student.
Federal IDEA dollars are often used to fund transportation for Special Education students;
however, USDE-imposed restrictions on PRDE prohibit the use of federal funds for
transportation. This is due to the fact that SAEE has had a series of reports on non-compliance
with the provisions of the Code of Federal Regulations and the IDEA Law related to improper
payments, lack of internal controls, non-compliance with the policies of the Agency, and lack
of adequate monitoring in relation to the issuance of payments for transportation services to
students of the Special Education Program. Thus, PRDE will have to continue to fund Special
Education transportation through the General Fund, until compliance with USDE-imposed
special conditions are met. Ultimately, this puts increased pressure on General Fund dollars
for Special Education instead of being able to leverage Federal dollars. PRDE should evaluate
its current spending on transportation services to ensure all eligible students are receiving
transportation services if needed.
Across all procurement categories, PRDE must create greater spending transparency, focus on
consolidating vendor contracts, and look to prioritize potential savings in areas that represent
variable costs (which generally decline as enrollment does) and those that have less impact on
students and schools.
EXHIBIT 83: REQUIRED IMPLEMENTATION ACTION ITEMS FOR REDUCING
PROCUREMENT SPEND
Required implementation action Deadline
• Define a plan to increase expense categorization and reporting transparency which could December 2020
include adding descriptors in PRDE's internal financial systems (e.g., SIFDE)
• Evaluate current transportation spend and services in order to ensure that all students that are December 2020
eligible (per IEP or regular eligibility guidelines) receive transportation services
• Evaluate facilities spend and create an implementation plan to capture all facilities spend at December 2020
PRDE (e.g., spend from OMEP) in a more streamlined manner and to be able to differentiate
spend between maintenance, capital expenditures and custodians
• Create a facilities master plan that assesses and the need of PRDE facilities portfolio in order to May 2021
ensure that spend is prioritized according to need and PRDE's long-term facilities strategy
Special Education Program professional services costs
Overall, it is difficult to draw a conclusion as to whether Special Education spending is
sufficient or not; while anecdotally PRDE is believed to be under-spending, it is difficult to
assess definitively without better data on student need, which is articulated in Individualized
Education Plans (IEP). It is imperative that PRDE digitize all IEP data in a manner that allows
PRDE to monitor progress, ensure IEP compliance, and provide adequate resources for
Special Education students.
It is important to note that PRDE serves Special Education students through two programs.
The primary program is the Special Education Program, known as Secretaria Asociada de
Education Especial (SANE), which provides educational and therapeutic services to students,
with the second program being Remedio Provisional, which only provides non-education
support services to students. Remedio Provisional was created as a result of the Rosa Lydia
Velez Case to offer therapeutic services to Special Education students whose only impediment
to receiving services is that the Department of Education does not have the resources to offer
them. Typically, if PRDE does not provide necessary services within 30 days from the request
of services from SAEE and drafting of the IEP, the family of the special education student has
the ability to receive services through this alternate channel. While it is good practice for
districts to have a formal mechanism for complaints and ensuring students receive adequate
services, PRDE's way of addressing this situation is not typical. PRDE uses Remedio
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Provisional as a more permanent solution for students to receive services when they are not
budgeted for appropriately at the beginning of the year within SAEE, with difficulty to then
transfer students over to receive services via SAEE the following year. Given this structure,
PRDE ends up spending much more on student support costs than is necessary to deliver the
same quality of service.
In FY2o2o, Special Education spending across all funding sources was as follows:
• Personnel: -$243 million spent on -11,600 staff, with 95% dedicated to instruction
• Non-Personnel: -$176 million spent, with -95% spent on student supports and
instruction
• Remedio Provisional: $39 million
EXHIBIT 84: TOTAL SPECIAL EDUCATION PROGRAM SPEND BY CATEGORY
FY -19 acTuias'
$243m 5175m j9n,
Special Secretary office St5rn
ORE Adorn! 5101n
education
office (SASE)
instruction,
student
supports and 1
Transportation Sim
transportation
General Ethication instruction -420am
Spacial Ed Instruction
$225m
Student supports 535rn
Special Ed Instruction Sigm
SAEE SAEE General Ed Personnel Reined lo
eessonnel Non-Pei sonne I Serving 27% Special Ed Provisional
Ekami gbx !eel. general &Necker, %she-forst., Wills 7g11, Pawl 1141.4 In Spebel Eduerckna 11.,,Aoltstrvr.111%114kagf IJ
a...TPA& othnineg fres al.DE dr. Fil13, sol !slop Anc.-Nri o4 Amex. 0. Py.404.14■1116 c0.1.•.nA. Ara- D.44 he OW r
B nears for Lire Ciene,41Fvb
Remedio Provisional presents a significant cost; in FY2o2o, —ii,000 services were provided
at a cost of 4-5)c of that of SAEE. Remedio Provisional constituted only 6% of therapy services
provided to students but represented nearly 30% of the total cost (Exhibit 85). This price
differential could be understandable if the bulk of therapy services provided were highly
specialized offerings, however the majority of therapy types being offered through Rernedio
Provisional are similar to the services offered through SAEE, just at a higher cost and with
more fragmented usage of specialists.
By providing services via Rernedio Provisional, PRDE is unable to secure contracts with
volume pricing as they are within SAFE. PRDE should aim to address this issue by establishing
a transition process for students from Remedio Provisional to SAEE. Additionally, PRDE
should perform a pricing analysis on Remedio Provisional contracted service rates to ensure
they are aligned to market pricing as established in Law 85-2019.
1.68
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EXHIBIT 85: COST OF THERAPY SERVICES OFFERED THROUGH SAEE V. REMEDIO
PROVISIONAL
——
Count and cost of all students therapies Average number of students served Average cost per student served through RP
provided through SAEE vs, RP per therapist in RP vs. SAEE vs. SAEE
182k $104m 47 ' t costs RP 5x as much • 82 437
----- to serve students as it
Remedio er%
Provisional would through the SAEE
.
\ 27% channel given they pay
market rates with
fragmented spend
instead of achieving
procurement efficiencies
in bulk
SAEE
Count of Total cost SAEE Remedio SAEE Remedio
Refendos to provide Provisional Provisional
"Students" therapies
■
RP represents only -6% of students Total number of 79 289
therapies provided. but nearly 30% providers under
I of the total cost of therapies con tract
SOU; ESP:,.4:6,
EXHIBIT 86: REQUIRED IMPLEMENTATION ACTION ITEMS FOR SPECIAL EDUCATION
Required implementation action Deadline FY2021 budget incentive
• Create a small Central Office team (max of 8) to implement the digbzation of Special July 2020
Education EF' records with supporting documentation. assigned resources and related
service requirements, arid provide a 12-month implementation plan to the Oversight Board.
At a minimum, the plan must include (1) amount of El's to be digitalized, (2) amount of
time employees will take to carry out the project. (3) accountability measureslchecks to
validate accuracy of data inputted, (4) monthly milestones, (5) team members with name.
employee ID contact information and job title, and (6) project supervisor with name,
employee ID, contact information. and job title.
Establish transition process for students from Remedio Provisional back to PRDE Special Dec 2020
Education program, which will allow PRDE to serve these students within the system at
more reasonable rates
— - — — - — — — — -
• Revisit Remedia Provisional's services pricing to ensure these are aligned to market rates May 2021
as per Law 85-2019
• Digitize EP data in a manner that allows PRDE to facilitate progress monitoring, IEP May 202t 53.000 onetime bonus
compliance and resource adequacy for the team of existing
employees that carry
out the project
13.3.2 Required implementation actions
PRDE has faced several challenges, especially in the recent year. However, the Fiscal Plan aims
to provide clear and tactical actions the Department can take starting in FY2o21 to improve
the way it delivers services to students and bring enhanced transparency, controls, and
efficiencies to its expenditures.
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To achieve the 2020 Fiscal Plan requirements, the Puerto Rico Department of Education must
complete key operational efficiencies as outlined in Exhibit 87.
EXHIBIT 87: PRDE REQUIRED IMPLEMENTATION ACTIONS
Retained imp ementahoo action Deadline FY2021 bu... el incentive
• implement KfOrlo3 and lime S attendance reporting policy for all school staff and • December • 51.500 one-time bonus for school
institutionalize monthly repottrng to the Oversight Board to improve transparency of 2029 directors if Mono's is properly
school staff attendance. School directors must (1) validate that workable machines implemented within then schools
exist in each school. (2t prpede a diagnostic of current usage. and (3) do targeted
follow-ups for lack of particmation.
• Record daily Student attendance on Blasting reporting platform SIE to hatter track • December
attendance across PRIDE schools. and institutionalize monthly attendance reporting to 2020
the Oversight Board to improve transparency of student attendance
• Improve time reporting tot teachers in order to reduce teacher absenteeism as • May 2021 • 55.000 reward for schools that reach
measured by Krenos. and inatihniondze monthly reporting to the Oversight Beard to a teacher time reporting threshold of
improve transparency of teacher attendance at least 95%
• Use of funds must be previously approved by the Oversight Board. particularly as it relates to discretionary school rewards
• if schools do not open for the first semester of school year 2420-2021. PRDE and the Ovfo8ight Board need to agree On a plan to move the iniliathres
forward or defer the inittalwes nag regular operations resume
With the above changes, as well as those outlined in Chapter 9, PRDE will be able to better
allocate its resources to help improve K-12 student outcomes on the Island.
13.4 Department of Health (DOH)
As of 2016, the Government had several health-related agencies that were highly fragmented:
three public corporations, three public hospitals, seven sub-secretaries, six regional offices,
and eight program offices administering 64 federally-funded programs—all with their own
support functions. Such fragmentation has driven up cost and inefficiency, as each agency is
required to provide its own human capital management, procurement, and financial support.
Citizen experience and care delivery have also suffered as residents face multiple handovers of
individual cases across frontline staff.
Additionally, access to care on the Island lags national averages. This is especially the case
outside of San Juan, given the shortage of clinics and trauma centers. Overall, there are 107
Health Professional Shortage Areas (HPSA) and 72 Medically Underserved Areas in Puerto
Rico.218 Based on the number of additional physicians required to remove HPSA status, Puerto
Rico meets 1.92% of demand for primary care (versus the 45.11% national average), 16.56% of
demand for dental care (versus the 29.79% national average), and 14.57% of demand for
mental health services (versus the 27.24% national average).219 In Puerto Rico, this
fragmented and resource-constrained healthcare system has resulted in several issues,
including health outcomes that are significantly poorer than national averages.
The Fiscal Plan requires that the Department of Health consolidate six of the healthcare
agencies with centralized support functions: Department of Health (DOH); Medical Services
Administration (ASEM); Health Insurance Administration (AS ES); Mental Health and
Addiction Services Administration (ASSMCA); Puerto Rico and the Caribbean Cardiovascular
Center Corporation; and Center for Research, Education, and Medical Services for Diabetes
(Exhibit 88).220 Consolidating these six agencies should provide the opportunity for
rightsizing support functions, as well as centralizing procurement to provide savings on costly
218 Health Resources & Services Administration, May 2020
219 KFF data as of September 30, 2019
220 University of Puerto Rico Comprehensive Cancer Center will likely remain separate but is maintained in the Health Grouping
given no formal legislation passed as of May 2019
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medical materials and equipment. This new DOH should enable efficiencies while maintaining
a high-quality public healthcare system.
EXHIBIT 88: AGENCIES INCLUDED IN FUTURE STATE DEPARTMENT OF HEALTH
GROUPING
Department of Health 5 Center for Research, Education and
Medical Services for Diabetes
2 Health Insurance Administration (ASES) 6 Mental Health and Addiction Services
Administration
3 Medical Services Administration (ASEM)
4' Puerto Rico and the Caribbean
Cardiovascular Center Corporation
To date, the Government has achieved limited progress towards this future state. Legislation
that is needed to execute the first phase of consolidation (consolidation of ASES and DOH)
has stalled since December 2019, and legislation to consolidate the remaining health agencies
has not been drafted. Additionally, though ASEM has made initial progress on initiatives to
improve supply chain management (e.g., procurement centralization), these initiatives remain
in the early stages and must be expanded significantly in order to achieve target savings. The
revenue cycle management optimization initiative has also been delayed for over a year,
though a third-party provider has been selected and the project is expected to launch soon.
Moreover, while an Electronic Health Records (EHR) system has been deployed in the ASEM
emergency room, trauma center, Adult Hospital, and Pediatrics Hospital, EHR capabilities
and digital hospital management tools across DOH remain limited, creating a barrier to
achieving hospital operational efficiencies.
Such lack of progress in improving the public healthcare system is particularly problematic
given the major crises Puerto Rico has faced and is likely to continue to face. Most recently,
the emergence of COVID-19 in Puerto Rico threatens to strain the healthcare system. COVID-
19 testing per capita lags all US mainland states,221 and DOH has struggled to establish an
effective, centralized process for managing testing results. Municipalities outside San Juan
have found it hard to get access to tests entirely.222 Given the relatively high proportion of
seniors and high rates of comorbidities (e.g., diabetes), Puerto Rico's population is especially
vulnerable to COVID-19. Moreover, provider infrastructure has not fully recovered since
Hurricane Maria, and the number of medical professionals has been declining since. While
DOH has moved to counter some of these issues by coordinating patient care with private
hospitals, COVID-19 still threatens to overwhelm the health system in the future.
221 The Covid Tracking Project (The Atlantic); May 6, 2020
222 NBC News "Puerto Rico mayors work to fight coronavirus with few tests available" (April 17, 2020)
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Investments to enhance healthcare services
Ensuring access to high quality, affordable healthcare for all of Puerto Rico is an ongoing priority of the
Government and Oversight Board. In accordance with this priority and given the increased public health needs
driven by the earthquakes and COVID-ig pandemic, this 2020 Fiscal Plan recommends• and includes several
strategic investments in the health system. These include:
• Hospital and health facility infrastructure ($188 million): $158 million of recommended
spending in FY2o20 to address critical, near-term infrastructure needs at public hospitals (e.g., renovation
of facilities in major disrepair, installation of air conditioning and purification systems. purchase of power
generators) and $i io million allocated in FY2021 to complete major capital expansions. These investments
will ensure that the health system has the capacity and equipment needed to meet the long-term healthcare
needs of Puerto Rico. In addition, $5 million will be provided for capital improvements at the UPR
Comprehensive Cancer Center along with -$25 million in funding to fully operationaliae the facility in
FY2020.
• Capital expansions at public hospitals ($110 million): Bolstering capacity at public hospitals
through major capital projects, such as construction of new wings starting in FY2o2i.
• Public hospital iT ($90 million): $70 million of recommended spending in FY2o2o and g20 million
allocated in FY2o21 will be provided to public hospitals to modernize technology, particularly Electronic
Health Records (EHR) and digital tools for hospital management. EHR (or digital patient records) can be
accessed by all clinicians involved in a patient's treatment in real-time, enabling integrated communication
within and across provider facilities, and allowing clinicians to make informed decisions based on
comprehensive patient treatment histories. Investing in EHR capabilities will reduce clinical/prescription
errors and reduce administrative burden in public hospitals. Digital hospital management tools allow
hospitals to collect and analyze data on patient flows, equipment, etc. in real-time. Investing in these tools
will enable operational improvement in public hospitals.
• Telehealth infrastructure ($5 million); -85 million of recommended spending in FY2020 to
implement telehealth infrastructure to address the urgent need to improve access to care outside the San
Juan municipal area. Advancements in telehealth infrastructure allow patients to seamlessly receive care
from physicians regardless of location. This is particularly beneficial to people living in rural areas, and to
all of Puerto Rico during periods of heightened physical distancing. Funding should be invested in a
telehealth platform and/or to develop access points in facilities (e.g., FQHCs) in underserved areas.
• Maintaining nurse staffing levels ($15 million per year): -$15+ million in annual funding to
ensure that the nurse staffing levels needed to serve Puerto Rico's healthcare needs arc maintained. In
addition, given the significant burden placed on nurse staff, amplified by the COVID-ig pandemic, $157
million has been allocated in FY2o2o to grant a one-time bonus for all nurses and technicians, both in
public and private health organizations, practicing in Puerto Rico.
• Combatting the opioid crisis ($30 million): -Sip million of recommended spending in FY2o2o and
-$20 million allocated over FY2o21-FY2o22 to combat the opioid crises, which remains a pressing concern
for Puerto Rico. The extent of the tragedy remains unknown, as data quality from Puerto Rico has been
contested. Funding can be used to procure and distribute overdose reversal drugs, invest in community
health events, and scale existing opioid treatment programs.
• Medical scholarships ($30 -Sio million of recommended spending in FY2o2o and -$20
million allocated in FY2021 to fund an independently-managed scholarship fund for healthcare (e.g.,
medical, dental. nursing) students and residents who commit to serving in rural and underserved areas.
Many rural areas in Puerto Rico are underserved by physicians, due to lack of training opportunities, low
salaries for medical residents, and difficulty becoming certified to contract with health insurance plans.
The scholarship program would incentivize physicians and other healthcare providers to practice in
underserved areas by providing up to 525.000 in loan forgiveness per year of service in these areas (up to
four years).
• DOH staff and materials ($6o million): Additional staff at DOH as well as core medical materials
and supplies. Further, DOH is eligible for $1.2 million if they successfully conduct a back-office staffing
capacity analysis to identify efficiencies through consolidation.
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Fulfilling federal requirements
In addition, the 2020 Fiscal Plan provides funding for fulfillment of three federal consent decrees:
■ Intellectual Disability Program: The Puerto Rico Division of Services for People with Intellectual
Disabilities is required to have certain standards for services, and state appropriations to the program must
be fully utilized to meet those standards. A Federal Court found that Puerto Rico failed to use state funds
allocated for this purpose from FY2o15-FY2oi.q. Accordingly, the Fiscal Plan allocates $2o million over
four years (FY2021 to FY2o25) in order to reimburse the program.
▪ Health 33❑ Centers: Puerto Rico is required to cover the difference between "reasonable costs" and what
is reimbursed by the Medicaid Program for federally qualified health centers (FQHCs). The Fiscal Plan
includes annual funding of —$50+ million to cover these "wraparound payments."
■ Psychiatric hospital: The Fiscal Plan ensures that the annual budget for the Psychiatric Hospital in Rio
Piedras is a minimum of $23 million. To do this, the Fiscal Plan allocates an incremental $6 million in
FY2o20 and FY2o21 to enable the facility to earn its Medicare certification. Certification will drive
increased revenues, which can be reinvested in the hospital to maintain full compliance with the consent
decree.
In part to counter the pressures that COVID-19 has placed on this already struggling public
health provider system, the Oversight Board and the Government have made targeted
investments. This additional funding has been complemented by funds from federal
legislation related to the COVID-19 response, which are to be distributed across public and
private sector health care providers. Major funding flows include: ."$12-2o million from the
Coronavirus Preparedness and Response Supplemental Appropriations Act, and —$1go
million from the Families First Coronavirus Response Act.
Funding from these sources will be invested to both enable the Government's near-term
response to COVID-ig and position the healthcare system to meet the long-term needs of
Puerto Rico. These funds will need proper controls and management to ensure they are used
effectively, which has already been a challenge for the Government. While these funds are
important to meet near-term needs, without meaningful change—both through efficiency
measures as well as targeted investments in the public health provider system—
the Department will continue to falter in its ability to provide health services for the people of
Puerto Rico.
13.4.1 Overview of efficiency actions
DOH will not be required to achieve additional savings in FY2021 over those required in
FY2020 — this pause shall be used to progress implementation efforts across key operational
efficiencies. From FY2022 to FY2025, DOH must achieve the personnel and non-personnel
savings outlined in Exhibit 89.
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EXHIBIT 89: DEPARTMENT OF HEALTH MEASURES SUMMARY OF IMPACT
Non- personnel U Personnel xx Incremental measure
(13) 42 11 2 1
144 146 147
133
36 36 37
35
104
17 91
12
103 109 ItI
99
".88
78
FY20 FY21 FY22 FY23 FY24 FY25
- . i .. •i:e■ lf$
13.4.2 Consolidating administrative and support functions
Consolidation of health agencies will enable efficiencies in administrative and support areas,
including Direction, General Administration, Auxiliary Services, IT, and a portion of Hospital
Administration. In addition, operational efficiencies are expected to be actualized through
elimination of duplicative programs across agencies. For example, labor-intensive and/or
paper-based processes are expected to be streamlined through digitization and
implementation of software solutions.
Thus far, efforts to achieve required savings in this area have focused on consolidation. In
FY2019, DOH conducted an analysis to identify support-function savings that could be
achieved through consolidation. Legislation to enable consolidation of DOH and ASES has
been submitted, and DOH and ASES have produced a high-level plan, but alignment on final
design choices has not been reached and role-level transition plans have not been developed.
As part of this plan, DOH and ASES have identified potential areas of improvement associated
with the future-state organizational design. However, progress towards moving to the future-
state organization has stalled, with agencies citing the need for the passage of legislation and
leadership alignment. Furthermore, the Department has not outlined any detailed steps to
achieve efficiencies. The Government has stated that opportunities related to consolidation
are being identified through an in-progress roster audit and capacity analysis, however,
potential efficiencies opportunities have not been shared to date, despite the fact that these
initiatives were expected to be completed in March 2020 and April 2020, respectively.
Given the delays in legislation, it is critical for health agencies to identify efficiency
opportunities (e.g., back-office operational improvements, cross-agency coordination,
program consolidation) that are not contingent on consolidation. To date, efforts to achieve
operational improvements (e.g., implementation of time and attendance reporting,
digitalization of finance processes) within health agencies have been limited. Health agencies
report efforts to implement memoranda of understanding (e.g., MoU 2020-00059 between
ASES and DOH regarding the provision of HIV medications to indigent populations);
however, none of the memoranda signed to date have driven operational efficiencies in back-
office processes. Efforts must be undertaken to streamline internal management processes
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and enable identification of further efficiencies. This should include completing a capacity
analysis to identify duplicative roles and programs across health agencies.
13.4.3 Rightsizing of non-administrative health personnel
As the Puerto Rico population declines, spend on non-administrative payroll, such as that on
allied health professionals, is expected to decline. There are several ways to do this without
impacting services. For example, wages should be aligned with fair market value to reduce
turnover and the associated spend on temporary/overtime workers, and roles and
responsibilities should be optimized to skill level and wage rate (e.g., nurses should practice
at the "top of their license"). DOH facilities should also optimize staff placement, moving
underutilized practitioners to departments with need wherever possible. Best practice hospital
management tools, such as shift management software, can be used to maximize efficiency.
Expected savings for this category were determined using the Government's analysis of need
and attrition for DOH and ASEM.
While DOH reported some savings in FY2020, these savings were driven by VTP departures,
and the agency overspent payroll by $13.5 million. Hospitals have not implemented best-
practice operational tools to manage personnel, and records are decentralized and often
outdated. Accordingly, agencies have been unable to provide consistent and comprehensive
historical or current data on clinical staff roles. Some hospitals report target staff-to-patient
ratios, but data on utilization, patient flows, and staffing levels, is not consistently collected.
Furthermore, HR processes (e.g., payroll, hiring) are complex and inefficient. Simplification
and streamlining of these processes can reduce administrative burden and improve
operational efficiency. Public hospitals should utilize IT investments to implement digital
clinical management tools that can enable consistent data collection I reporting and
identification of opportunities for operational optimization.
13.4.4 Consolidating regional Medicaid offices
At the end of FY2018, the Medicaid Program within DOH had 85 offices across 78
municipalities. These must be consolidated into fewer, more strategic locations. Reducing the
Medicaid office and regional hospital office footprint will eliminate duplication of effort and
allow the Department to provide more robust services at convenient locations. In addition, the
Medicaid Program, in concert with ASES, should redesign the Medicaid eligibility and
enrollment process to be more web-based, MCO-dependent, and hospital-centric, and
encourage the use of online services to improve data management.
To date, the Medicaid program has successfully reduced the number of offices to 66. Savings
from this consolidation (which relate to savings on office space and equipment rental, utility
expenses, and cleaning services) reached —$440,000 in FY2019 (out of a total of $500,000
required), and additional office closures are being considered. Key priorities going forward
relate to operational improvements and digitization for the Medicaid eligibility and
enrollment process, which are discussed in Section 15.2.1.
13.4.5 Optimizing supply chain management
Implementation of procurement best practices and leveraging of economies of scale must also
be extended to non-medical categories (e.g., office and general maintenance supplies, security
services). Such initiatives are expected to be enabled by agency consolidation and operational
streamlining. While ASEM has made progress in achieving savings on medical supplies (see
Section 13.4.6), non-hospital procurement savings across health agencies has been minimal.
To help expedite these savings initiatives, the Government should leverage its ability to utilize
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the federal General Services Administration's (GSA) procurement services and rates.223 Full
utilization of these services can drive additional procurement savings.
Procurement savings specific to hospitals are discussed in Section 13.4.6.
13.4.6 Transforming hospital management
Due to the large volume of spending on procuring medical supplies and equipment and the
high cost of such materials, there is a significant opportunity to improve procurement
efficiency for hospitals and health systems by focusing on commodity standardization and
sourcing, indirect spending (analyzing insourcing versus outsourcing opportunities), and
physician preference item optimization.
ASEM was originally created to serve as a central procurement office for Government hospitals
to create economies of scale for medical supplies, devices, and services. Over time, however,
procurement costs increased at a higher rate than within the broader healthcare industry, and
procurement processes became decentralized across the hospitals that ASEM was created to
serve. This trend can be reversed through cross-agency cooperation to leverage economies of
scale.
Efforts to address this issue have begun, with the University District Hospital for Adults
(UDH) working with ASEM to centralize purchasing and establish competitive bidding. These
early efforts have yielded reported savings of —$9 million to date.224 However, the opportunity
exists for more health agencies and facilities (e.g., the Pediatric University Hospital) to
participate in procurement centralization and efforts should be made to expedite this cross-
agency cooperation.
Holistic hospital transformation efforts should also reduce payroll spend through clinical
labor optimization, which is captured in Section 13.4.3. To date, health agencies have
successfully implemented Electronic Health Records (EHR) in the Emergency Room, Trauma
Center, and Operating Rooms, and at UDH and the Pediatric University Hospital. However,
financial savings from EHR deployment have not been reported. As discussed in Section
13.4.3, hospitals should leverage investment in IT to implement digital clinical management
tools in the near-term.
13.4.7 Restructuring ASEM and Revenue Cycle Management
Optimized revenue cycle management allows hospitals to improve timely collection on
accounts receivables. Without leveraging software solutions and analytics, these processes can
be labor-intensive and ineffective. By working with analytics experts, ASEM can increase the
speed and accuracy of claims processing, improve collection rates, and maximize revenue.
ASEM has selected a vendor through a competitive process to outsource revenue cycle
management. As of February 2020, ASEM expected to finalize an outsourcing contract,
however, launch of the project has been significantly delayed due to the COVID-19 pandemic.
As of May 14, 2020, the contract had still not been signed. Accordingly, no savings have been
achieved to date. As soon as feasible, ASEM should resume efforts to launch the transition to
outsourced revenue cycle management.
13.4.8 Required implementation actions
To achieve the 2020 Fiscal Plan requirements, the DOH grouping must complete key
operational efficiencies as outlined in Exhibit go.
223 GSA order GOP 4800.21 (July 19, 2016)
224 Health Implementation Meeting, February 2020
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EXHIBIT 90: DEPARTMENT OF HEALTH REQUIRED IMPLEMENTATION ACTIONS
Required implementation action CW3E11111.1 FY2021 budget incenthe
• Launch ASEM revenue cycle management initiative with engaged vender • June 2020
• Develop near-term and tong-term plan to improve data consolidation capabilities and • June 2020
develop unified syndrornic Surveillance system
• Identify common administrative and medical supplies across health agencies and • September 2020
public hospitars with opportunities for savings through procurement centralization
• Develop plan to hire additional nurses to maintain FY2018 staffing levels. and • September 2020
optimize deployment across DOH facilities
• Identify 10e sites (e3. FQHCs. community centers) outside San Juan for potential • September 2020
installation of telehealth portal
• Identify ocaoid treatment initiatives I organiations for investment and partnership with September 2021
DOH
• Finalize design of medical student scholarship and identify potential federal matching September 2020
funding
Develop proposat for hospital capital improvement projections including • September 2020
recommended vendors. detailed cost estimates. and timelines for completion
• Ensure passage of legislation to enable consolidation of DOH and ASES • December 2970
• Conduct capacity analysis Is identify duplicatrve roles and positrons across • December 2020 • Provide addrtional Si 2M of
agencies/programs and opportunities for centralization of duplicative tasks pro-fessional services budget'
• Work with providers to develop action plan to enable lelehealth including required • December 2020
tools/software
• Centralize procurement of identified administrative and medical supplies within ASEM December 2020
• Develop plan to improve clinical operations. including identification of hospital • December 2020
management software /solutions EHR software)
• Enact legislation to consolidate DOH and ASES and launch consolidation • March 2021
implementation efforts
orckhdincr riaavrtala. raeullatd and IrWeclual. Csatiliv
13.5Department of Public Safety (DPS)
The Department of Public Safety (DPS) is an agency grouping which was approved by Puerto
Rico's Legislature in 2017 (Act 20) and includes eight bureaus responsible for ensuring the
safety and security for all residents of the Island (Exhibit 91). The grouping includes
the following agencies:
EXHIBIT 91: LIST OF BUREAUS IN DEPARTMENT OF PUBLIC SAFETY GROUPING
Puerto Rico Police Bureau (PRPB) 5 9-1-1 Services Governing Board
2 Firefighters Corps 6 Institute of Forensic Sciences
3 Emergency Medical Services Corps 7 Special Investigation Unit
4 Emergency Management and Disaster 8 Department of Public Safety
Administration Bureau
Of all Commonwealth agencies, the second largest agency by spend and personnel is the
Puerto Rico Police Bureau (PRPB), representing —85% of total DPS spend. Based on reports
as of July 2017, over 2,000 of the 13,000 sworn officers in the Police were fulfilling
administrative roles. This situation had persisted since 2013, when a consent decree
agreement with the US Department of Justice on reform measures compelled PRPB to
conduct a staffing allocation and resources study to assess the proper size of the police force.
This study, completed in May 2018, found that PRPB needed to rebalance its workforce and
move sworn officers to non-administrative roles to improve personnel resource allocation and
maximize public safety. The Fiscal Plan adopted key recommendations from the study to
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outline necessary efficiency actions, including transitioning sworn officers to the field, adding
civilians to backfill administrative roles, and increasing police salaries to bring to competitive
levels as compared to the mainland by FY2021.
For other DPS bureaus, the 2020 Fiscal Plan requires consolidation of back-office functions
and optimization of non-personnel spend, while allocating funds for priorities such as consent
decree compliance, materials and equipment, additional frontline personnel for the Institute
of Forensic Sciences, and salary increases for the Firefighters Corps. Specific investments and
other funding are outlined below.
To date, the Department has made some progress towards consolidating back-office roles,
partially implemented a time and attendance system, and digitized all forms (including the
CAD system incident reporting). The 2019 Fiscal Plan included investments in police
compensation: salary, life and disability insurance, and inclusion into Social Security as part
of PRPB retirement compensation to reduce the high attrition rates amongst police officers
noted in previous years. Following these investments, attrition rates saw a decrease from 9%
in FY2019 to 1% in P12020.
However, several operational challenges remain. As of March 2020, PRPB reported that
-1,200 of 11,650 sworn officers were still performing administrative roles. A combination of
high historical attrition rates, the agency's continued inability to hire additional civilian staff,
and a push for headcount reductions through Voluntary Transition Programs (VTP) has led to
a shortage of field officers and increased overtime spend. PRPB implemented two academies
and recruited 263 cadets in FY2020 to address this shortage, but despite these efforts, PRPB
has struggled to hire civilians and to enable more cadets and sworn officers to move into field
roles.
Several DPS bureaus (such as the Institute of Forensics Sciences) have also struggled to fill
vacant positions, both in field and administrative roles. As such, the 2020 Fiscal Plan
highlights the need to drive actual changes in processes and back-office efficiencies, as relying
on retirement incentive programs to reduce frontline staff has the potential to negatively
impact service levels. The currently unfolding COVID-19 crisis further necessitates DPS
bureaus to resolve recruitment issues by utilizing payroll investments provided by the Fiscal
Plan (see below) to maintain service levels.
Safeguarding public safety
The 2020 Fiscal Plan includes continued investment in public safety for Puerto Rico. The below
detailed investments shall enable the Bureaus to hire and retain frontline employees and work
with proper and sufficient equipment. Investments include:
■ Sworn police officer salary increase (—$160 million per year): The Fiscal Plan
continues the provision of funds to support the 3o% increase in salary relative to FY2019
levels (which already included a $1,500 raise per sworn officer instituted at the beginning of
FY2019), provided in two installments of 15% each in FY2o2o and FY2o21. It also maintains
increased funds for life and disability insurance ($250 per year per sworn officer), employer
Social Security contributions for all police starting in FY2o2o, and Law 70 contributions.
■ Firefighter salaries and equipment (—$3 million per year): The 2020 Fiscal Plan
provides the funding required to preserve the $1,500 salary increase for
firefighters in FY2o2o. The Fiscal Plan also maintains $2 million in FY2020 for
Firefighter Corps for the purchase of equipment and materials.
a Institute of Forensics personnel and materials: The Forensics Sciences Institute has
struggled, especially since Hurricanes Maria and Irma, to respond to needs on Island. It has
experienced backlogs in cases and physical capacity constraints. As such, the 2019 Fiscal Plan
had established an investment of $4.7 million in payroll to enable the hiring of forensics
scientists, patholo sts, examiners, and DNA • ecialists. The 2020 Fiscal Plan continues an
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investment in Forensic Sciences Institute of $2.3 million annually, with provision for a further
$1.1 million if the agency successfully implements a recruitment drive for its specialist roles.
■ Emergency Medical Corps personnel: Since 2017, EMS has registered an improvement
in its response time by 14 minutes despite facing attrition of -too paramedics. Taking into
account the unfolding COVID-19 emergency, the FY2o2o Fiscal Plan provides funding to the
Bureau to recruit additional paramedics and further improve response time to US mainland
standards. Therefore, the 2020 Fiscal Plan also establishes an annual investment of $1.1
million annually towards the recruitment of paramedics and dispatchers.
• Police overtime backpay: Funds are included for the final of three installments to settle
backpay owed to officers for past services provided. This equals $122 million in FY2o21.
In addition, the Fiscal Plan includes funds to support compliance with federal consent decrees.
• PRPB reform: $20 million annual investment in 212 areas of police improvement for two
consecutive years. The Fiscal Plan includes funding to meet the requirements of the
agreement.
■ Police overtime: The Fiscal Plan includes funding for overtime pay and implementation
and maintenance of the Kronos electronic timekeeping and overtime management system.
13.5.1 Overview of ef ficiency measures
DPS will not be required to achieve additional savings in FY2o21 over that required in FY2o2o
- this delay in incremental measures is intended to provide the funding needed to urgently
implement efficiency efforts. However, from FY2022 to FY2025, DFS must achieve the
personnel and non-personnel savings outlined in Exhibit 92,
EXHIBIT 92: DEPARTMENT OF PUBLIC SAFETY MEASURES SUMMARY OF IMPACT
Run-rate savings from agency efficiency measures', Ski
-—-
IF Non-personnel •Personnel szk Incremental measure
0 21 17 2 2
179 181 183
162 36 36
36
141 141 35
21 31
143 145 147
120 128
'110
FY20 FY21 FY22 FY23 FY24 FY25
lEttrivarrn. irnWsmni Ire direr koairg irk7aaa-4
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13.5.2 Moving sworn officers out of administrative roles and into the field
As of March 2020, PRPB reported 11,650 sworn officers, of whom —1,200 are still performing
administrative roles. PRPB should replace sworn officers currently performing civilian
duties—such as mechanics, radio operators, record and report keepers, area command
statistics compilers, and maintenance workers—with less expensive civilian personnel and
move the sworn officers out into the communities. By doing so, PRPB will enable better
services through enabling more officers to work in the field, while reducing overall
expenditures for the Bureau.
The 2020 Fiscal Plan requires that PRPB move more than 1,000 sworn officers to non-
administrative roles between FY2o2o and FY2o25 and hire an additional —goo civilian
personnel to perform the administrative functions, while also pursuing efficiency measures to
reduce the overall need for administrative personnel. PRPB should do so by pursuing process
optimization, digitizing incident reporting, automating time and attendance systems, and
consolidating statistical reporting. Furthermore, DPS must streamline vehicle maintenance
processes through superior scheduling and procurement protocols, which can reduce the need
for vehicle maintenance staff.
To achieve additional efficiencies, PRPB must consolidate police stations, transit units, and
specialized units to reduce the amount of administrative personnel required (e.g., station desk
officers, station commanders and directors, stations auxiliary commanders and directors, and
vehicle managers). Simultaneously, PRPB must eliminate units and divisions which perform
duplicative services already provided by other agencies within the Government (e.g., the
Divers Unit, the Rescue Squad Division).
PRPB has made progress, including successfully piloting a time and attendance system in one
precinct (with plans to deploy it across all PRPB precincts by December 2020) and digitizing
the incident reporting system (TIBURON/CAD). Further, due to salary and benefit raises
(including Social Security and disability &life insurance) provided in the May 2019 Fiscal Plan,
sworn officer attrition rates saw a decrease from 9% in FY2o19 to 1% in FY2o2o.
However, on overall process improvements, as well as its goal of moving more sworn officers
into the field, PRPB is behind. The Bureau still has 1,200 sworn officers serving in
administrative roles, with a shortage of -520 officers in the field. This is due to a lack of real
back office operational improvement, struggles to hire civilian personnel, and overall attrition
rates.
The Bureau has reported no savings from back-office efficiencies, and in February 2020, DPS
reported that 7 officers in administrative roles had been replaced by 12 civilian employees,
which is not in line with partial back-fill targets as required in the 2020 Fiscal Plan. Efforts to
implement two academies and recruit 263 cadets in FY2o2o have not solved current staffing
shortages.
The Bureau has also struggled to recruit civilians to administrative roles, despite multiple
attempts to recruit from civilian staff within government as well as external efforts. In FY2o2o,
PRPB launched external recruitment for 187 roles, but received applications from only 134
candidates. OARTH has made 19 external sourcing attempts to fill 130 positions, with 200
applications received but no positions have been filled to date. The Department claims the
limited hiring is due to non-competitive salaries for the civilian roles, additional requirements
(such as thorough background checks), and academic/professional experience needed to
qualify (DPS claims to have implemented multiple recruitment drives, both within the
government as well as externally, to recruit for accounting, legal and, other back-office roles).
However, DPS has not provided evidence to substantiate claims of non-competitive salaries or
a plan for addressing any of these claimed obstacles.
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Without focused action, PRPB will be unable to achieve the actions needed to transform its
operations and ensure it can move more sworn officers onto the streets to improve public
safety on the Island.
13.5.3 Reducing overtime
PRPB spent approximately —$50 million on overtime in FY2018 (excluding the emergency
overtime needs resulting from Hurricane Maria). This level of overtime is considerably higher
than overtime for comparable police forces in US mainland states. For instance, Connecticut,
which has a similar population to Puerto Rico, had overtime spend of only —$28 million on a
comparable basis in 2017. This gap comes even though Connecticut's total police spend per
capita is —$140 less than in Puerto Rico225,
The Fiscal Plan, therefore, has required PRPB reduce paid overtime by 6o% by FY2023, in
part through the operational efficiencies noted above, as well as through moving more sworn
officers into the field and through staffing models that are more effective.
While PRPB reduced overtime spend in FY2019, there has been a sharp increase in FY2o20,
driven by a shortage of field officers and inability to hire civilian staff. Based on latest
information made available by PRPB, as of February 2020, the Police Bureau had already
spent $32.5 million, almost twice its FY2o2o budget on overtime, including $1.4 million that
had been disbursed on account of the January 2020 earthquakes. However, 23% of the spend
was related to payouts from previous periods. Meanwhile, additional increases in overtime are
expected due to upcoming elections in FY2021. During the last election cycle, primary
elections drove a —$10M increase in overtime spending. Additional systemic factors (e.g.,
policy to pay current pay rates for previously incurred overtime), drive increases in overtime
pay.
Tracking and management of overtime is further complicated given a manual process and lack
of centralized reporting. As a result, DPS does not have visibility into the numbers of overtime
hours in a given period. A system to track overtime hours (SITAS) has been successfully
implemented in Puerto Nuevo, and future expansion is expected. Schedule has 1 Phase with 3
cycles of 2,000 employees, one cycle for every month from April-June 2020. Second Phase
has another 3 cycles of 2,000 employees, for the months of Oct-Dec 2020, respectively.
The Bureau should continue to advance efforts to improve tracking and management of
overtime to avoid unnecessary costs moving forward.
13.5.4 Driving other DPS agency personnel efficiencies
The other DPS bureaus226 are required to consolidate back-office functions into the DPS
agency to achieve efficiencies, with a 50% reduction in transitory workers starting in FY2019.
Measurable progress has been made at DPS in consolidation of back-office functions. DPS has
reported that 600 employees227 have transferred to DPS from the 7 Bureaus within the
grouping to perform centralized back-office functions. DPS has established direct reporting
lines and process integration across all seven bureaus (for Procurement, Legal,
Communications, HR and Finance), and migrated all Bureaus onto standardized system
software for key back-office functions (e.g., accounting, finance, procurement), which would
further ease the transition to centralized back-office operations beginning FY2021. Starting in
FY2021, the DPS budget will reflect and fund a centralized back-office staff to support all
225 Connecticut Office of the State Comptroller; census data 2014; FBI Crime Justice Information Services
226 Excluding 9-1-1
227 Including more than 200 positions that are currently vacant.
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Bureaus within the Department. The Oversight Board is awaiting from DPS a proposed end-
state organization structure, estimated staffing allocation, and an implementation timeline.
The Firefighter Corps has adopted the time and attendance system (Kronos) for administrative
roles. As of now, DPS has not confirmed plans for other agencies to adapt this same system,
though that would enable better transparency in personnel time allocation and payroll
expenditures.
The Institute of Forensic Sciences has successfully converted 23 transitory positions into regular
frontline roles, but the bureau has struggled to implement the 2019 Fiscal Plan's FY2020 payroll
investment to hire additional frontline staff. The Firefighter Corps has also failed to recruit additional
frontline personnel in FY2020. Both the Institute of Forensic Sciences and Firefighter Corps, as well
as the Bureau of Emergency and Disaster Management, project an underspending in personnel
budget in FY2020 due to personnel shortages and a lack of capacity to hire additional frontline staff.
13.5.5 Optimizing all DPS agency non personnel spending
DPS must achieve procurement savings of 3o% on FY2o18 spend base. To do so, DPS should
centralize and consolidate purchasing for all DPS agencies, leveraging the federal General
Services Administration, utilizing e-auctions, launching competitive Requests for Proposal
(RFPs), and outsourcing contracting responsibilities.
While DPS has identified — 35 contracts for potential consolidation in the future, no estimated
savings for those contracts have been communicated.
13.5.6 Required implementation actions
To achieve the 2020 Fiscal Plan expectations, the Department of Public Safety grouping must
complete key operational efficiencies as outlined in Exhibit 93.
EXHIBIT 93: DEPARTMENT OF PUBLIC SAFETY REQUIRED IMPLEMENTATION
ACTIONS
Required implementation action Dead:me
- -
• Launch external recruitment drive for civifians to fill target administrative role vacancies in PPS 1111 FY2021 • July 2020
• Outline end-state organization design (with proposed reporting structures) and operationalize consolidated • September 2020
back-office for shared servic esnunctions across all ❑PS bureaus
• Launch recruitment drives to fill specialist front-office roles across UPS agencies (e.g., Institute of • September 2020
Forensics. Firefighters. EMS)
• Outline implementation plan to achieve overtime savings and launch initiatives to achieve rightsized • September 2020
staffing levels of sworn officers in field roles
• Scale up rollout of automated time and attendance system (Kronos) across all PRFB precincts and other • December 2020
DPS agencies (e.g.. front-office personnel in Firefighters Corps)
• Outline potential initiatives so achieve other operational process improvements across all bureaus (e.g., • December 2020
digitization of incident reporting. consolidation of statistical reporting, streamlining of vehicle maintenance)
• consolidate purchasing for all UPS agencies and report procurement efficiency gains • June 2021
• Complete hiring of 900 civiHans to administrative roles to enable transfer of all sworn officers to field roles • June 2024
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13.6 Department of Corrections and Rehabilitation (DCR)
The Department of Corrections grouping (Exhibit 94) consists of two agencies, the
Department of Corrections (DCR), which manages the functions and policies of the Puerto
Rican correctional system (including penal institutions and rehabilitation facilities, for men,
women, and juveniles) and the Correctional Health Department (CH), which provides
healthcare to the inmates under the jurisdiction of DCR. For FY2018 DCR reported a total
employee headcount of 6,695, for an adult inmate population of 9,385 and juvenile population
of 156. Together, these agencies had combined FY2018 budgets of $419 million.
EXHIBIT 94: LIST OF AGENCIES IN FUTURE STATE DEPARTMENT OF CORRECTIONS
AND REHABILITATION GROUPING
DelogIrrent of Cr_HTL•i:r.lerlas orld Rellor3ivolLNI 4 C:,..-re•E•nrrim OaNtri Cetorlinoil
While DCR's reality of operating an aging prison system dependent on outdated technology
necessitates a relatively high number of employees, the actual number of employees is
substantially higher than comparable benchmarks; whereas DCR's FY2018 17E-to-inmate
ratio was 0.71, the 75th percentile of US states has only 0.54 FrEs per inmate.228 Besides its
inmate population, DCR also served 7,122 community program participants in FY2018, a
population that is three-fourths the size of its overall inmate population. In contrast, mainland
US states with FTE-to-inmate ratios near 0.54 serve nearly 3.6 times as many community
program participants as adult inmates in state prisons229. Additionally, while most US state
prison systems are near 100% utilization, as of December 2017, Puerto Rico's prison facilities
were only 78% utilized. 23°
To deliver healthcare services to inmates, CH employs a hybrid management model
comprising of in-house direct care providers and administrative roles, as well as contracted
management of healthcare delivery through third-party vendor and healthcare providers (e.g.,
Physicians, Mental health professionals). While most states in the US have a direct-care model
or use staff for administration and outsource healthcare, CH's model is relatively complex and
unique where a contracted vendor directly manages CH's roster staff as well. In FY2018, CH
spent $8,499 per inmate to provide healthcare services, while median spend across US
mainland states was $5,763.231
In 1994, the United State filed a complaint against the Commonwealth of Puerto Rico and
some named officials for subjecting juveniles confined in residential facilities to conditions
that deprived them of their federal rights. The Commonwealth and the named Commonwealth
officials agreed to settle the matter with the United States culminating in the comprehensive
1997 Settlement Agreement. On December 12,1997, the US District Court for the District of
Puerto Rico ("USDC") entered the Settlement Agreement as an Order. The USDC appointed a
Monitor to ensure compliance with the provisions in the Settlement Agreement.
In a report made for 2019, the Monitor concluded that the Department of Correction and
Rehabilitation was non-compliant on three (3) provisions and partially compliant on twenty-
one (21) provisions of the remaining provisions in the court approved Settlement Agreement.
The non and partial compliance provisions were related to inadequate staffing levels, which
hinders the security of the juveniles, and the conditions of the facilities. To address these
issues, the Federal Monitor, concluded in a report that an adequate staffing analysis and a
separate budget for the Juvenile Program would be conducive towards good management of
the Juvenile Program. In April 2020, the USDC ordered to assign a separate budget for the
228 NASBO. FBI. BJS databases
229 Bureau of Justice Statistics, 2014
230 Census data, 2014; Bureau of Justice Statistics, 2014
231 Pew Trust 'Prison Health Care: Costs and Quality" Report, 2017
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Juvenile Program in the amount of $22 million. Going forward, the Oversight Board will be
separately delineating a budget for the Juvenile Program at a granular concept code level.
Below is the FY2021 preliminary budget intended to be certified.
The Oversight Board has not seen any progress towards achieving operational efficiencies by
DCR or CH. DCR's system wide utilization of spaces for adult prisons continues to lag at 74%
as of January 2020. This has mostly been driven by declines in the prison population over the
past decade that have not translated into reductions in government resources dedicated to
prisons. The adult inmate population in DCR has declined by 6% per year between 2014 and
2020, while total employees has been reduced by only 4% per year over the same period.
Following the earthquakes, DCR had to close a severely damaged facility in Ponce, and two
other facilities were partially evacuated. Further, two additional facilities, which were
reportedly consolidated in the past, had to be reopened to transfer inmates temporarily. In
light of these operational challenges, as well as additional challenges emerging from the
COVID-19 emergency, it is imperative for DCR to identify inefficiencies embedded in the
system currently and enhance Puerto Rico's correctional facilities to make more space
operationally useful and optimize delivery of healthcare service to its inmates.
While in FY2021, DCR and CH will not be held to any incremental measures, DCR and CH are
expected to continue agency efficiencies in order to move toward a more efficient staffing
model and facility footprint. To enable progress, the Oversight Board will make a one-time
investment of $500,000 for a feasibility study to identify major areas of disrepair and capital
investment need.
The Oversight Board strongly believes that DCR must focus more carefully on how it spends
its resources so that it can more successfully deliver on its mission to protect inmate and staff
safety.
Supporting the correctional system
To ensure DCR makes meaningful progress in facility consolidation and improvement of its FTE-
to-inmate ratio, the 2020 Fiscal Plan includes $500,000 in additional funding for a feasibility
assessment on facilities, to identify priority areas for capital investment and begin to fill major
gaps in infrastructure and other features. At the conclusion of this study, the Oversight Board will
provide $5 million in capital expenditures to enable improvement of facilities.
The 2020 Fiscal Plan also includes explicit funding to enable DCR to fulfill federal consent decree
requirements, including:
• Corrections reform: The Fiscal Plan takes into account minimum confinement standards
and inmate support at Puerto Rico Corrections facilities and ensures funding availability to
meet them
• Juvenile corrections: The US District Court recently approved a $22 million budget for the
FY2021 Juvenile program following a joint recommendation from the Juvenile Program and
the Federal Monitor that was appointed to the case. The Fiscal Plan includes funding to meet
the requirements of the Court.
• Correctional Health reform: The Fiscal Plan provides funding to meet correctional health
requirements based on the Carlos Morales Feliciano case.
13.6.1 Overview of efficiency measures
For FY2021, the 2020 Fiscal Plan does not require additional savings for DCR and CH; this
pause must be used to urgently implement efficiency efforts. From FY2022 to FY2025, DCR
must achieve the personnel and non-personnel savings outlined in Exhibit 95.
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EXHIBIT 95: DEPARTMENT OF CORRECTIONS AND REHABILITATION MEASURES
SUMMARY OF IMPACT
Run-rate savings from agency efficiency measures'. M
Non personnel • Personnel xx Incremental measure
j411_ 47 4
106 107 108
102
96 1M1■
lip 1mr._
111111
30 40
55
20
65 06
FY20 FY21 FY22 FY :?.2. FY24 FY25
1 E.:rltlnn I.Totrrierits and ottie,, rdirittrig cr,e2Ets
13.6.2 Optimizing the Irl'Es-to-inmate ratio
Personnel savings must be captured by reducing DCR FFEs per inmate to reach a
target employee headcount of 5,604 to serve current inmate population of 8,855. 232 This
headcount target implies a target FTE-to-Inmate ratio of 0.63 by FY2023 in comparison to the
bottom-quartile US states' benchmark of 0.54 (the prior target ratio in preceding Fiscal Plans).
233 Thus, the 2020 Fiscal Plan provides significant relief in personnel savings DCR is required
to achieve by lowering its FTEs per inmate target. With minimum staffing needs established
by law for juvenile officers and DCR's obligations towards community program participants
(through socio-penal technicians), DCR must achieve headcount reduction targets through
rightsizing administrative staff roles, and redirecting correctional officers currently working
in administrative or civilian roles.
DCR must achieve these personnel reductions by employing back-office process efficiencies.
Building internal capacity, increasing access to information technology, establishing clear
measurement tools for identifying progress in implementation and quality of services
rendered, identifying and training staff to assume leadership positions in Finance and
Operations, having increased control over its budget, and strengthening quality assurance
systems. The Oversight Board believes these changes would be conducive towards better
administration of services being provided to its employees and inmate population both for
adults and juvenile programs.
232 Reported as of Jan 02, 2020
233 Census data, 2014; Bureau of Justice Statistics, 2014
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13.6.3 Consolidating adultfacilities
To bring the system in line with the requirements of the population and to increase utilization
across all prisons, DCR is required to consolidate its footprint to reach an overall system
utilization of 93% while maintaining appropriate separation of different inmate risk profiles
and populations, including men, women, and juveniles, as required.
DCR's facilities are technologically outdated with a deteriorating infrastructure. There are
additional repairs needed for plumbing, electric, roof sealings and gate repairs, among others.
The January earthquakes have complicated matters significantly. A facility in Ponce had to be
closed down due to a shift in the ground that affected the overall structure.
Given the FY2021 has no additional savings requirements — DCR must use this time to move
forward with the consolidation of adult facilities. In FY2021 DCR is required to conduct a
facility footprint and consolidation assessment study with the objective to: (1) diagnose
current state of infrastructure across its facilities, (2) identify capex investment needs and (3)
identify opportunities for additional facilities that could be consolidated. This assessment
would serve as a guiding tool for DCR to implement the consolidation of facilities following an
overarching and comprehensive approach.
DCR has reported consolidating five prisons before FY2o18 and the additional closing of four
prison facilities, including two juvenile facilities, a departure from Fiscal Plan expectations.
However, DCR has continued to operate those facilities, at least in part, using them as storage,
administrative offices, or program offices (e.g., community program, special arrests) with no
savings achieved.
Though DCR has reportedly consolidated facilities, its system-wide utilization rates for
facilities that house inmates continue to be low. Based on post-earthquake information made
available to the Oversight Board in January 2020, DCR had to reopen two facilities to transfer
inmates because of damage made by the earthquakes. DCR is now operating a total of 32
facilities with a total capacity of 12,259 spaces for 8,855 inmates, implying a utilization rate of
72%. This indicates potential for DCR to further consolidate additional facilities.
Almost 13% of total capacity is reported 'uninhabitable'. To enable improvement in
habitability of this excess space, the Oversight Board provided DCR a one-time capex
allocation of $19.2 million in FY2o2o. However, the agency did not utilize these funds to
improve habitability of spaces, instead spending the funds on regular roof repairs, perimeter
gates repairs, infrastructure repairs and purchase/installation of power generators. Given
lower inmate population, DCR has consistently pointed to the uninhabitable spaces in large
prisons. Making these spaces habitable may be a key element to enable additional
consolidations of low utilization prisons going forward.234
Completion of the feasibility study by mid FY2021 will provide additional clarity and further
direction as to which facilities are idle for additional consolidation either by investing in
repairs to uninhabitable spaces and making the general repairs needed to existing facilities.
While DCR implements the consolidation of its footprint, operational consolidation needs to
happen for the agency to achieve savings. DCR must cease operations in facilities not currently
used to house inmates and, accordingly, wind down maintenance and operating costs. At
minimum, DCR would need to completely cut off utility costs (electricity, water) at these
facilities, and wherever possible, identify opportunities to enable transfer of ownership to
generate savings. Capital improvements on facility modernization (e.g., electronic monitoring
through installation of security cameras, automated gates, etc.) can reduce dependence on
front-line personnel and enable personnel efficiencies as well.
234 As of January 2020 data, 11 facilities with the lowest utilization rates had 925 inmates who could be transferred to the
remaining facilities to increase system wide utilization rates to 91%
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All in, the 2020 Fiscal Plan expects 40% of non-personnel operating expenditures to be
captured by FY2025 for each closed facility by consolidating the physical footprint, winding
down contracts, and other levers, with the remaining operating expenditures transferred to
support population increases in other facilities. These savings account for the inability to
reduce certain fixed costs associated with the facilities. To further enable savings from
consolidations and reduced FTEs, DCR may contemplate initiatives to actively reduce the
prison population as appropriate, such as alternative custody, diversion and/or credits for
good behavior/program completion, programs to reduce recidivism like in-prison drug
rehabilitation, and increased training and occupational programs.
13.6.4 Reducing procurement spend
In FY2018, DCR spent $73 million on procurement, costs that can be reduced through a
variety of means, including leveraging the Federal General Services Administration, utilizing
e-auctions, launching competitive Requests for Proposal (RFPs), centralizing purchasing to
the greatest extent possible, and outsourcing/contracting responsibilities.
In FY2019, DCR reported --$4 million in procurement savings through renegotiation of HMO
contract for delivery of correctional health services, closure of administrative offices and
Juvenile facility at Humacao. In FY2o2o, DCR reported a decline in the number of signed
contracts (from go to 44) but did not reported any associated savings.
13.6.5 Improving management ofprisoner healthcare
In FY2018, the Government spent $8,499 per inmate for correctional healthcare. The 2020
Fiscal Plan requires the Government to bring per-inmate spend in line with the 50th percentile
of US states and unlock savings by renegotiating existing contracts, launching competitive
RFPs for key contracts that will provide terms more in-line with mainland spending practices,
reconsidering level of service due to the currently declining prison population, and
strategically evaluating insourcing options.
Furthermore, CH must achieve personnel efficiencies by reevaluating its staffing policies for
administrative and support roles (such as paraprofessionals, pharmacists, etc.), and
implementing back-office process efficiencies or centralization/digitization of common tasks
across facilities.
CH reported achieving procurement savings in FY2019 through efficient inventory
management, renegotiating procurement contracts with rebates, implementing generic drug
buying policy, new medication formulary and clinical management.235 In FY2020, CH did not
achieve savings targets and the Oversight Board provided one-time additional funding of $8
million to cover overspend. Even as DCR has achieved procurement savings through
renegotiating the correctional health HMO contract and food services contract, there are still
opportunities to evaluate potential savings on other contracts in Correctional Health,
including those for sub-contractors.236
13.6.6 Required implementation actions
To achieve the 2020 Fiscal Plan requirements, the Department of Corrections and
Rehabilitation grouping must complete key operational efficiencies as outlined in Exhibit 96.
235 As reported by Physicians HMO — correctional health administration and management vendor
236 Contract with Carolina Catering was established prior to FY2020. However, ongoing legal proceedings with Trinity catering
(prior vendor) has delayed implementation of the new contract.
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EXHIBIT 96: DEPARTMENT OF CORRECTIONS REQUIRED IMPLEMENTATION ACTIONS
• • i• - •,:cementation action Deadline 'r"2021 bti•;,et incentwE
• Implement back-office process redesign (e.g.. digitization of record keeping) to • July 2020
achieve personnel efficiencies and reach FY2022 headcount targets
• Provide outline for facility footprint and consolidations assessment study • July 2020
• Provide updated roster of Correctional. Health employees (direct contracted). outlining • July 2020
key roles and responsibilities to validate current staffing levels
• Provide facility-level data on open spend. list of procurement contracts and outline • September 2020
initiatives to achieve procurement efficiencies in FY2022
• Publish facility foolpnnl and consolidation assessment study listing facitrties to be • December 2020 • Provide 35M additional Capex funds
considered for consolidation or investment required to improve habitability of spaces (excluding capes for Juvenile program)
• Provide assessment of healthcare spend per inmate and identify initiatives to generate • December 2020
personnel or apex savings
• Implement Plan to consolidate additional Inc ilitieS and improve habitability of spaces to • March 2021
improve system level utilization of existing spaces and provide supporting
documentation (e.g.. RFP documents submitted to proceed with consolidation)
• Outline initiatives to reduce headcount in order to achieve target headcount in FY2022 • March 2021
and onward
13.7 Department of Economic Development and Commerce
(DDEC)
The Department of Economic Development and Commerce {DEC) includes a consortium of
agencies critical to incentivize and support the economic revitalization and transformation of
Puerto Rico's economy. To promote growth, DDEC must enable high-impact projects, energize
existing industries, and facilitate the attraction of off-Island investments to strengthen and
modernize the Island's economy. Additionally, the Department manages a variety of youth and
workforce development programs meant to foster qualities (e.g. entrepreneurship, job-
preparedness) crucial to a growing economy. Finally, DDEC and its component agencies are
charged with the implementation of structural reforms (e.g. overhauling permitting) to
transform Puerto Rico into a more competitive business, tourist, and investment destination.
To ensure a streamlined economic development function and realize efficiencies, seven
agencies have been slated for full front- and back-office consolidation into DDEC, with three
more agencies to become assigned to the Department. Assigned agencies will consolidate their
back offices into DDEC, but retain separate front offices. The agencies to be consolidated are
as shown below (Exhibit 97).
EXHIBIT 97: LIST OF AGENCIES IN FUTURE STATE DEPARTMENT OF ECONOMIC
DEVELOPMENT GROUPING237
f Department of Economic Development and Commerce IDDECy 6 Commonwealth of Puerto Rico Regional Center Corporation
2 Puerto Rico Industrial Development Company 1, Local Redevelopment Authority Tor Roosevelt Roads
3 Puerto Rico Trade and Export Company t Permits Management Office
4 Ofitce of Industrial Tax Exemppoo 9 PPM% Rico Tourism Company
5 State Oftice of Energy Policy ia Planning Board
237 While agency #2, Puerto Rico Industrial Development Company (PRFOCO) is expected to consolidate with DDEC, its cash
flows are no longer include in the Commonwealth projections for the 2020 Fiscal Plan
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13.7.1 Overview of efficiency measures
DDEC will not be required to achieve additional savings in FY2o2i over that required in
FY2o2o — this delay shall be used to progress implementation efforts across key reforms. In
Fy2022 to FY2025, DDEC must achieve the savings outlined in Exhibit 98.
EXHIBIT 98: DEPARTMENT OF ECONOMIC DEVELOPMENT MEASURES SUMMARY OF
IMPACT
Run-rate savings from agency efficiency measures',
' Non-Personnel U Personnel xx Incremental measure
31 (3) 2
Reductions due to decknes in
Tourism SRF revenue and
twisters to other agencies
58 57 58
55 57
27
13 13
FY20 FY21 FY22 FY23 FY24 FY25
I .1.(1■01,14y Ihnngq Owl n .0tita irnugiithir it**()
-nmacIrrtit, rft.1.11 1.MA-
13.7.2 Consolidating operations and rightsizing personnel
The Fiscal Plan requires DDEC to consolidate io entities to yield significant personnel and
non-personnel savings. This requires that DDEC clearly define each agency's responsibilities
to limit costs and prevent overlapping duties and distinguish agency responsibilities from
those of Discover Puerto Rico (DPR)—currently responsible for attracting off-Island tourists,
groups, and conventions—and Invest Puerto Rico (IPR)—charged with attracting offshore
investments from businesses.
The Fiscal Plan requires DDEC to realize front and back-office personnel efficiencies as the
Department consolidates other agencies. Specifically, DDEC should reduce front-line
personnel by 20% by FY2022 to produce a streamlined and efficient organization. In line with
the findings of a Government analysis that identified a redundancy in service of back office
personnel across the Department, DDEC should also consolidate back-office operations to
reduce back-office headcount by 41% by FY2o22.238
Further, DDEC should establish a set of key performance indicators, targets, and milestones
for each of its subsidiaries to measure the performance of its subsidiaries and partners and act
to address issues.
238 DDEC analysis. 2018
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Pursuant to Law 141-2018, seven of the above entities will be fully consolidating into DDEC
and three will be partially consolidating. To date, DDEC has made substantial progress by
consolidating 70% of agencies. Five of seven agencies have moved to centralized accounting
and payroll systems, with Trade and Export on track to be the sixth by June 2020. By FY2021,
all agencies will have one accounting system except for PRTC, PRIDCO, RR and PB.
Although DDEC has integrated seven of ten agencies and merged agencies' back-offices into
one, targets are at-risk due to PB, PRTC and RR. Due to the recent creation of the Gaming
Commission and the inclusion of PRTC in DDEC's Fy2021 budget, the consolidation of PRTC
as a program under DDEC must be concluded as established under Law 141-2018. The
remaining outlier is the Planning Board, which has not yet been consolidated in accordance
with the law and must be by FY2022. DDEC has struggled to integrate their back office given
lack of cooperation from the Planning Board. Finally, a capacity analysis for the future state of
DDEC, explaining the various offices and the required personnel, has yet to be presented to
the Oversight Board.
Further, DDEC has only reduced headcount through Voluntary Transition Programs (VTP) or
natural attrition. To achieve personnel reductions in a manner that does not compromise
short-term or long-term operational capabilities, DDEC will need to analyze its personnel base
and develop a targeted plan for what roles could be rationalized. Cross training employees
from PRIDCO and Trade and Export must be a priority of DDEC for the first half of FY21.
13.7.3 Achieving non personnel efficiencies
DDEC must also reduce non-personnel spend by 30% by FY2022. DDEC has yet to initiate its
procurement reform which should aim to generate savings from contract renegotiations.
Going forward, DDEC must focus on reviewing all its procurement contracts and identify top
contenders for contract consolidation or renegotiation.
In addition to reducing procurement spend, DDEC should consolidate its physical footprint to
accommodate all the programmatic areas and back office personnel and manage all tax
exemptions, grants and credits under one centralized Department. Physical space
consolidations are currently under way, with remodeling of PRIDCO's office space in Hato Rey
to provide front office employees a space to receive citizens and businesses in a more
accommodating environment. In the future state, all back-office employees will be located in
the ME building, while PRTC, PB and RR will continue to maintain the office space they
currently inhabit.
13.7.4 Required implementation actions
To achieve the 2020 Fiscal Plan requirements, the Department of Economic Development and
Commerce must complete key operational efficiencies as outlined in Exhibit 99.
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EXHIBIT 99: DEPARTMENT OF ECONOMIC DEVELOPMENT AND COMMERCE
REQUIRED IMPLEMENTATION ACTIONS
FY2021 budget
Required implementation action Deadline incentives
• Quarterly • Provide up to
• Publish quarterly reports in the agency's websrte detailing all economic inventive
Si BM per quarter
donationtsubsidy amounts given to pnvate corporations
in additional
operating budget
• Identify which procurement contracts have been renegotiated or are pending renegotiation • June 2020
or elimination (across all consolidated and ascribed DOEC entities) lo the Oversight gourd
• Conduct operational needs assessment across all consolidated and ascribed entities • September 2020
(including PRTC and JP( to identify Where to reduce front- and back-office personnel
without inhibiting the performance of DDEC agencies
- Finalize the consolidation of the physical footprint of all consolidated DDEC agencies • September 2020
• Reduce excess front- and back-office headcount across all DDEC agencies (excluding • March 2021
PRTC and JP)
• Execute the administrative actions (e.g systems integration) required to consolidate PRTC • March 2021
and ascribe JP
• Finalize procurement contract renegotiations • June 2021
• Consolidate PB's key back-office personnel into DDEC's back office • June 2021
• Reduce excess front- and back-office headcount from P RTC and back-office personnel • June 2021
from JP in line with September 2020 operational needs assessment
13.8 Puerto Rico Innovation and Technology Services
(PRITS)
13.8.1 Context and current technology landscape in the Government of Puerto
Rico
The Puerto Rico Innovation and Technology Services (PRTTS) was created in 2017 with the
purpose of establishing an administrative structure responsible for technology strategy across
the Government of Puerto Rico. The enabling Executive Order that established PRITS gave it
responsibilities including: integration of technology into government management,
promotion of public, private and academic projects in the technological field, creation of a
digital platform to integrate the different components and government entities, generation a
system of tax payment and bank transfers under Hacienda, and development of a public
accountability system, among others. In March 2019, an additional Executive Order was
signed which reinforced additional aspects of the leadership roles and responsibilities of
PRITS. This executive ordered transferred the responsibilities of the Office of the Chief
Information Officer to PRITS and established the role of the Chief Information and Innovation
Officer ("CHO") to be in charge of integrating and streamlining the government's information
and communication technology processes.
In July 2019, the Government enacted Act 75 of 2019, making PRITS the office of the Executive
Branch responsible for implementing, developing and coordinating the Government's public
policy on innovation, and information technology ("IT"). Prior to Act 75 of 2019, the Office of
Management and Budget (OMB) had been in charge of managing IT systems and
implementing rules and procedures regarding the use of IT for the Commonwealth. However,
there were several delays in the development and adoption of key technological reforms and
little oversight in the use of technological resources. An example of this lack of efficiency was
seen in cloud consumption: a centralized 4-year contract allowed government agencies to
acquire new licenses without supervision, which led cloud consumption to spiral out of control
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and could result in a deficit of double the original budget amount for such services; even when
the Department of Treasury's mainframe is currently being underutilized by 40% to 50% each
month. Lack of centralized oversight and leadership have also manifested in recent
emergencies such as the hurricanes, the earthquakes, and the COVID-19 pandemic during
which the government has failed to produce timely and accurate data for decision making and
transparency.
Since its creation, in spite of the intent of the executive orders, PRITS has not made significant
progress toward fulfilling the responsibilities it was given. Despite existing laws and
regulations, PRITS has not taken active oversight over government technology strategies and
budgets. The Government has largely asked for new funding for PRITS instead of re-allocating
key strategic resources from other agencies to PMTS. Additionally, individual government
entities have insisted in the development of new platforms instead of leveraging existing
applications. Up to 20-30% of existing applications can be phased out or consolidated
reducing costs and creating efficiencies between government entities. Furthermore,
consolidating applications and reducing the number of datacenters and facilities enhances
security by reducing the number of access points. The Government is in dire need of such
enhancements in cyber security as well as establishing government wide security policies and
procedures. Recently, the government suffered from various cyber security incidents
impacting at least four government agencies which resulted in agencies initiating transfers of
millions of dollars to fraudulent accounts. Additionally, there has been public reporting of
cyberattacics that have compromised several agencies of the Government, including the
Tourism Company, the Treasury Department, and the General Services Administration.
As provided by the Act 75 of 2019, the Governor has the authority to transfer to PRITS
personnel, funds, budgets, documents, records, equipment, materials, and files of any other
IT operational area of any agency, for use in the purposes and purposes of the Act. The
Government and PRITS should prioritize creation of centralized teams with the specialized
skills needed to accelerate infrastructure consolidation, and improve the Government's ability
to deliver new technology solutions. Agencies continue to rely too heavily on external vendors
rather than building the capabilities of PRITS to lead and manage these initiatives. Similarly,
there is unclear accountability for technologies developed at the agency level. As a result,
pieces of infrastructure are developed and managed separately, with dispersed accountability,
creating a complex web of oversight, incremental cost and ineffective systems. As a result,
pieces of infrastructure are developed and managed separately, with dispersed accountability,
creating a complex web of oversight, incremental cost and ineffective systems.
13.8.2 Importance of digital modernization
Now more than ever, it is critical that the Government make effective use of its technology
resources. The Government, via PRITS, must improve its capabilities in digital delivery to
achieve critical benefits, including:
■ Reducing expenses and improving reliability through data-center
consolidation. Since 2016, the Federal Government has closed 210 tiered data centers,
and over 3,000 non-tiered data centers. PRITS must implement best practices in place at
the state and federal level such as: increasing use of virtual ization, freezing new data
centers unless compelling justification exists, and exploring the use of cross-agency share
shared services.
■ Rationalizing the application portfolio to ensure that resources Government-
wide are directed to the highest priority initiatives. All governments face
substantially higher demand for technology services than they can fulfill. In a resource-
constrained environment, governments have turned increasingly to disciplined
application portfolio management as a way to ensure alignment between IT spend and
government priorities. PRITS must implement a Government-wide application
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rationalization effort which includes proven actions, including: creating a portfolio
management governance approach, establishing a baseline inventory of applications,
assessing the business value and total cost of ownership of the applications,
scoring/ranking them, and then creating a forward-looking plan to migrate the portfolio
to higher value uses.
■ Enhancing cybersecurity to prevent costly data breaches. Cyber threats continue
to proliferate and government agencies globally have responded by adopting leading risk
management practices. FRITS can step up the government's cyber defenses by developing
a government-wide view of "crown jewels" in the technology ecosystem that must be
protected, providing policy guidance to agencies setting forth evolving standards and
requirements, and coordinating delivery of specialized expertise across government where
the need arises.
■ Improving transparency and accountability of IT spend across government
and focusing on value for IT dollar spending. PRITS ran be significantly aided in
its work if stakeholders inside and outside of government had a clear line of sight into
where IT spending is going, and what value is being delivered. Providing this transparency
should be a core expectation of agencies spending government resources on technology,
rather than a centralized effort that is incremental to existing IT spending.
13.8.3 Required implementation actions
In line with the four key initiatives stated above, PRITS must achieve the following objectives
and milestones (Exhibit100).
EXHIBIT 100: PUERTO RICO INNOVATION AND TECHNOLOGY SERVICES REQUIRED
IMPLEMENTATION ACTIONS
Required implementation action Deadline
— - — -
• Establish process and protocols for IT contract review , of government • September 2020
agencies to create greater transparency on IT spend and needs of
infrastructure or cloud services
• Develop strategy to consolidate Cloud services and on premise data- • December 2020
centers with a detailed migration plan to drive consolidation of
infrastructure during FY21
• Provide a structured and exhaustive portfolio of digital initiatives, • December 2020
prioritizing by impact, feasibility and relevance for Central Government
Agencies
• Ensure critical cybersecurity infrastructure. processes and control systems are • December 2020
set in place by PRITS and adopted by government agencies to minimize risks
through clearly defined governance structures
• Create a protocol for PRITS to review all technology-related budget requests • December 2020
as part of the FY2022 Budget cycle
• Consolidate current personnel spending and establish cross-functional • June 2021
teams by identifying personnel in government agencies with specialized
technology skills to be centralized
DNS .01 1P9.,Im fti.ns AST mean a rem..1 ■=4711. mere.,
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13.9 Legislative Assembly
As of FY2017, the size of the Puerto Rican Legislative Assembly was significantly larger than
comparable legislatures in US mainland states, even when accounting for the demands of full-
time legislatures and excluding the money that the Legislature spends on supporting non-
profit organizations. Puerto Rico spent $34.16 per citizen on addressable legislature
expenditure, while the weighted average expenditure per capita for comparable "full-time" US
mainland legislatures (e.g., in Michigan, California, New York, and Pennsylvania) was $13.11.
The variance persists even when legislative expenditure is considered as a percentage of GDP.
As such, reductions to the size and funding of the Legislature are necessary to bring it in line
with benchmarks and optimize government funds.
As remarked earlier in Chapter 13, Legislative Assembly will not be required to achieve
additional savings in FY2021 over that required in FY202o. Refer to Exhibit IOS for annual
savings that must be achieved through FY2o25.
EXHIBIT 101: LEGISLATIVE ASSEMBLY MEASURES SUMMARY OF IMPACT
Run-rate savings from agency efficiency measures'
Non-personnel xx Incremental measure
0 6 0 1
58 58 Se
40 40 52 1
— '
PY2O FY2T FY22 FY23 FY24 FY25
aging ortrettin.r0 ynd 1.11.■ FLIPC91.1g 41V341.11.1
13.10 General Court of Justice
The General Court of Justice, although to a lesser extent, was similarly over US mainland cost
benchmarks in FY2018 (by -35% when compared to the median cost of mainland full-time
Judiciaries). As such, the 2020 Fiscal Plan continues to require that the Court implement
agency efficiency measures equivalent to a 10% reduction in their annual budget.
The Court will not be required to achieve additional savings in FY2021 or beyond, as it has
already experienced a 10% cut to its budget. As a result, its budget is to remain flat for the
course of the Fiscal Plan.
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EXHIBIT 102: GENERAL COURT OF JUSTICE MEASURES SUMMARY OF IMPACT
Run-rate savings from agency efficiency measures',
Non-personnel • Personnel xx Incremental measure
(8) 3 1 0 1
44
40 40 41
39
36
14 14 14 14
26 25 26
FY20 FY21 P1'22 FY23 FY24 FY25
,
13.11 State Elections Commission
The State Elections Commission (SEC or "CEE" by its Spanish acronym) is charged with
administering elections for the Commonwealth. Given this important role, every effort must
be made to ensure that SEC can thoroughly execute its mandate to promote and enable voter
rights for the people of Puerto Rico in the most efficient, simplest, and least costly ways. The
Oversight Board is deeply committed to supporting elections that are conducted in a fair, free,
and open manner. Consistent with this objective, the Oversight Board also holds the SEC must
adapt its processes to bring down the Island's cost of election administration closer to that of
mainland states.
While SEC's operations are currently governed by Act 78-2011, which requires electoral
balance239 and minimum staffing requirements across its programs (e.g., General
administration, Permanent Registration Boards, Planning & Development of Electoral
Activities, and Election Commissioners), the Oversight Board's analysis of SEC's staffing
indicates that more than half of its current 650+ staff are employed in roles that are not legally
required within the agency. Further, the lack of modernization in the electoral services offered
by SEC (e.g., no automatic or digital voter registration channels, no provisions for vote-by-
mail, requirement of a separate voter ID card) further exacerbates operational and fiscal
inefficiencies.
The 2020 Fiscal Plan continues to expect the SEC to reduce its steady state (non-election year)
expenditures, based on FY2018, by 32% by FY2022.
To enable SEC to seamlessly administer electoral activities in FY2o2o, the Oversight Board
approved additional one-time funding of $5.4 million for presidential primaries and $2.2
239 Implies an equal representation of the political parties across all offices and dependencies of the Commission which is
applicable to all technical and administrative positions among the commission
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million for local primaries. The 2020 Fiscal Plan further provides $9.2 million for electoral
activities in FY2021 and every four years thereafter, as well as —$5.6 million every four years
starting in FY2024 for pre-electoral activities.
In January 2019, the Oversight Board asked the Governor and Legislature to adjust the
operations of the SEC to fluctuate with the electoral cycle and restructure its organization to
become more efficient. In April 2019, the Governor responded by agreeing that the SEC's
operations must be restructured but declining to adopt the Oversight Board's request.
In January 2020, the Oversight Board represented several short, medium, and long-term
initiatives that SEC could employ to achieve personnel and non-personnel savings within the
covenants of the existing legal framework. These initiatives chiefly include potential to
consolidate oversight of functional offices and programs, removing duplicate or redundant
back-office support roles, outsourcing "Special Projects" to third-party vendors, reducing
Inscription Officer roles in excess to legal requirements, and onboarding volunteers or existing
staff for temporary election work.
EXHIBIT 103: STATE ELECTIONS COMMISSION MEASURES SUMMARY OF IMPACT
Run-rate savings from agency efficiency measures', SM
Non-personnel 1111 Personnel XX Annual inCremental measure
0 4 0 1
12 12 12 13
3 4,
8
2 2
rr
8
8
FY20 FY21 FY22 FY23 FY24 FY25
I EltiiklInc, Irrvimlmnn+R and nilher
13.12 Agencies that promote public integrity and transparency
There is wide agreement that to drive a successful fiscal transformation within the
Government of Puerto Rico, it will be important to promote public integrity and transparency
at every turn. Within the Government, several agencies are dedicated to maintaining oversight
and fiscal responsibility; namely, the Office of the Comptroller and the Office of Government
Ethics. In line with the priorities of the Governor, the functioning of these agencies is critical
to achieving the goals and ensuring the long-term sustain ability of the 2020 Fiscal Plan.
Accordingly, the budgets for the Office of the Comptroller and the Office of Government Ethics
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will not be affected by agency-specific rightsizing measures but must still achieve Christmas
bonus, uniform healthcare, and utilities savings.
13.13 All other agencies
To date, implementation progress and engagement has varied across the smaller Government
agencies. Some agencies are developing meaningful tools and creative solutions to achieve
savings (e.g., the Department of Agriculture planning digital solutions to reduce personnel or
the Department of Environment's green tourism initiative, which could create job
opportunities and tax revenues) but many have not planned to implement these effectively,
resulting in slow progress to reach their savings targets.
The Government of Puerto Rico must continue looking for ways to reduce back office
expenditures, align staffing levels to the volume of services required, and upgrade those
services needed to accommodate for current conditions. Some success has been achieved to
date in these areas. For instance, the Prosecutor Panel was able to reduce staffing levels during
several months of the year to accommodate for a lower volume of work. The Utility
Commission was able to consolidate all back office functions and move into one
office/building. The Puerto Rico Education Council was able to consolidate State Departments
in under go days and save over $400K by reducing office footprint. And the Office of Women's
Advocate was able to provide its employees with the necessary equipment to aid in the
increased call volume after the COVID-19 emergency declaration.
Support for implementation of operational efficiencies
The 2020 Fiscal Plan provides funds for priority programs to enable provision of services and
implementation of efficiencies in the following areas:
■ NAP roll-out and delivery ($1.6 million per year): From FY2021, ADSEF will receive
funding to recruit additional staff to ensure the comprehensive delivery of the Nutrition
Assistance for Puerto Rico (NAP) program, which is critical for thousands of households on
the Island, especially amidst the COVID pandemic.
■ Additional Justice attorneys (—$3 million per year): The Department of Justice will
receive additional funding to hire more attorneys in light of the trend of growing caseloads per
existing attorneys.
■ Support to eliminate the Land Registry backlog (—$4 million): The Land Registry
backlog must be resolved, and thus the 2020 Fiscal Plan includes funding in FY2021 and
FY2022 for DOJ to contract services to clear prior years' backlog, aiding with making land
registrations more convenient and timely
13.13.1 Required implementation actions
To achieve the 2020 Fiscal Plan requirements, all agency groupings must complete key
operational efficiencies as outlined in Exhibit 104, with particular requirements associated
with the Department of Natural Resources.
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EXHIBIT 104: REQUIRED IMPLEMENTATION ACTIONS FOR OTHER AGENCY
GROUPINGS
Action item Deadline
• Enact legislation for agencies consolidation • September 2020
• Conduct an analysis of non-personneispenci and priorit ze major say ngs • September 2020
opportunities to be pursued
• Develop detailed plan and timeline for ac h eying required utilities savings • September 2020
• Develop target organizational structure and plans for achieving personnel • December 2020
rightsizing: Share with FOMB
• Fully transition to target organizational state and implement personnel rightsizing • June 2022
13.13.2 Required implementation actions related to the Volkswagen Diesel
Emissions Environmental Mitigation Trust
The 2020 Fiscal Plan also notes the existence of unused funding from the Volkswagen Diesel
Emissions Environmental Mitigation Trust, which has been available since January 29, 2018
but has gone unused due to Government delays in meeting the necessary requirements for
accessing funds from the trust, as well as in recruitment of the necessary personnel so that
development and implementation of the mitigation projects can commence. The Department
of Natural and Environmental Resources was designated as the lead agency for Puerto Rico
on March 27, 2020, and a high-level action plan has been developed.
EXHIBIT 105: REQUIRED IMPLEMENTATION ACTIONS RELATED TO THE
VOLKSWAGEN DIESEL EMISSIONS ENVIRONMENTAL MITIGATION TRUST
Action item Deadline
• Develop Mitigation Action Plan and Administrative Order • June 2020
• Contract staff to run project administration ■ June 2020
• Release public notice with availability of funds under the Mitigation Action Project • August 2020
• Begin disbursement of funds from the Volkswagen Diesel Emission Environmental • October 2020
Trust pursuant to the Second Mitigation Action Plan (DNER)
• Evaluate funding requests and start disbursement of funds • October 2020
Chapter 14. Office of the Chief Financial Officer (OCFO)
One of the key goals of the Puerto Rico Oversight, Management, and Economic
Stability Act (PROMESA) is for fiscal accountability to be quickly and
permanently ensconced in the Government. To fulfill this goal, the Government
must create a strong Office of the Chief Financial Officer (OCFO). By centralizing
key financial management functions (e.g. procurement, payroll) under a capable and well-
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resourced OCFO, the Government must address long-standing issues that have arisen under
the Island's historically decentralized financial management regime. These include persistent
difficulties around understanding the financial needs and priorities across Government as a
whole based on transparent data, timely and accurate consolidated reporting, preventing the
misallocation of funds, preventing agencies from overspending their budgets, control over
opening and managing bank accounts, and timely consolidated financial statement issuance.
The creation of a centralized ()CFO was a linchpin in the restoration of fiscal responsibility of
several public entities, including the District of Columbia following its financial crisis in the
mid-1990's and the City of Detroit in its Chapter 9 bankruptcy. The Oversight Board strongly
stands behind the need for a centralized OCFO to place the Island on a fiscally
responsible economic trajectory and restore its access to the capital markets as
required by PROMESA.
The Government's efforts to create a highly-capable OCFO have been slow and disjointed.
However, progress has been made in certain areas, including providing bank account
transparency, weekly publication of emergency reserve reports, monthly reporting of budget-
to-actuals for select Government agencies and publishing of the 2017 tax expenditure report
published in September 2019. While the enhanced reporting yields some improvements in
management and oversight capabilities, there is a need for more detailed reporting in several
areas (e.g., payroll and attendance as well as consolidated reporting for PRDE, detailed
monthly budget to actuals on component units, etc.). In essence, each relevant financial
agency has improved operational capacity and accountability somewhat, but there has been
little centralization and responsibilities remain unclear within the group. Operating without a
strong legislative mandate, the OCFO has moved from Hacienda to AAFAF throughout
FY2020. While ()CFO has made recent efforts to produce more granular budgets and create
detailed agency-level budget-to-actual spending reports, it has been substantially delayed in
the issuance of the Government's Comprehensive Annual Financial Reports (CAFRs) (as of
May 2020, the FY2017-FY2019 CAFRs have not been issued). Key financial management and
administrative functions remain distributed across a half-dozen Government agencies, and
the Government has yet to legislate the OCFO's organizational and governance structures or
adequately staff the organization to fully execute its oversight responsibilities. Without
comprehensive action, the Island's financial management capabilities will continue to fall
short of best practices, the expectations of the capital markets, and the needs of the Puerto
Rican people. As such, the OCFO should assume all key financial management functions
across the Government—necessary to place the Island on stronger financial footing.
The core objectives of the consolidated OCFO must be to:
■ Centralize treasury and liquidity management
■ Enhance the budget development process by improving monitoring and performance
tracking based on timely and accurate accounting practices and data
■ Drive the standardization and integration of the Government's financial IT systems
■ Ensure compliance with procurement, contract, and human resource management
policies across Government agencies
■ Ensure full implementation of pension policies across Government agencies, including
Law 106 regarding the Defined Contribution system for government employees, the timely
deposit of employee contributions withheld by government employers, the timely
implementation of Social Security as required by the Fiscal Plan for judges and teachers,
and the full repayment (with repayment plans as required) of amounts owed by
government employers for PayGo obligations
■ Strengthen oversight of Special Revenue Funds (SRF) through enhanced control
mechanisms
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■ Improve the timeliness in publication of the Government's CAFRs and financial reporting
■ Centralize and validate the management of Government bank accounts, funds, debts, and
other financial transactions
■ Ensure coordination of maximally efficient use and transparent reporting of federal funds,
including both regular annual funds and disaster-related funds
Empowering ()CFO to effectively manage the Government's finances is more important than
ever before considering the devastating COVID-19 crisis. As part of the Federal Government's
response to the pandemic, OCFO will play a central role in administering and monitoring the
use of federal and Commonwealth funds meant to support the Island's recovery from the
pandemic. To that end, OCFO must be prepared to comply with enhanced reporting and
oversight requirements governing the use of Coronavirus Aid, Relief, and Economic Security
Act (CARES) and other federal funds earmarked for Puerto Rico.
14.1 ()CFO design parameters
14.1.1 Responsibilities of0CF0
The 2020 Fiscal Plan requires the Government to strengthen the OCFO in line with the
following parameters during FY2o21 by:
■ Centralizing treasury and liquidity management to:
— Enforce and manage a consolidated Treasury Single Account (TSA) for the Government
that controls and offers visibility into all Government bank accounts (to the extent
possible), including those of component units (CU) at private banks
— Enable all other public entities to maintain zero balance sweep accounts
— Empower OCFO to serve as the sole authority for Government bank account creation
and closure—facilitating liquidity reporting, monitoring, and analysis
— Facilitate the rationalization of the Government's account portfolio to support
maximization of earnings, cash pooling, daily cash sweeps and treasury operations, and
implementation of uniform accounts payable and disbursement prioritization
processes and reports
■ Enhancing the budget development process by improving monitoring and
performance tracking to:
— Comply with the recently-issued Oversight Board budget guidelines to develop an
auditable budget that is readily-traceable to the Certified Fiscal Plan
— Forecast and manage the seasonality of tax receipts
— Forecast and report the fiscal cost of tax credits
— Oversee all tax decrees and tax agreement issues
— Operationalize the financial system budget to ensure consistency between accounts and
facilitate their monitoring
— Estimate, protect, and enhance tax collections and revenue streams
— Establish budgetary priorities—namely, effective expenditure controls and
Government-wide procurement reforms
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■ Driving the standardization and integration of the Government's financial IT
systems to:
— Identify disparate systems being used for financial tracking and reporting
— Establish a roadmap to standardize and integrate systems to the fewest possible
— Orchestrate the integration across agencies, including defining new policies and
procedures, coordinating data migration and validation, and training system users to
effectively utilize new systems
The Oversight Board encourages the Government to evaluate current laws which
exempt certain government entities from the Puerto Rico Government Accounting Act.
Regardless, while some entities are mandated by law to maintain fiscal independence,
these entities could still leverage central financial IT systems to reduce costs and
automate current processes.
■ Ensuring compliance with procurement, contract, pension, and human
resource management policies across Government agencies to:
— Certify all contracts, bills, invoices, payroll charges, and other evidences of claim,
demand, or charge relating to the Government and entities reliant upon its taxing
authority by prescribing receipts, vouchers, and claims for all agencies to leverage
— Manage centralized health insurance procurement and policy management
— Oversee human resources, Government payroll operations, and all Government-related
financial transactions
— Implement uniform time, attendance, and overtime processes, payroll controls, and
reporting standards
■ Strengthening oversight of Special Revenue Funds (SRF) through enhanced
control mechanisms to:
— Implement processes that improve stewardship of all SRF
— Ensure all revenue streams attributable to SRF are deposited within the TSA
■ Improving the timeliness of the Government's Comprehensive Annual
Financial Reports (CAFR) and financial reporting to:
— Produce high-quality CAFRs that follow the modified-accrual basis of accounting
required by PROMESA and leverage new forecasting, e-settlement, and analytics
capabilities for FY2018 onward within established regulatory timeframes
— Publish the FY2o17 CAFR and provide a draft of the FY2o18 CAFR by November 2020
The 2020 Fiscal Plan provides for a one-time bonus of $1,5oo to each Hacienda Central Accounting
employee if Hacienda both (i) publishes and issues the FY2o17 CAFR and (ii) provides a draft of
the FY2o18 CAFR by November 30, 2020.
— Identify and resolve drivers of historic CAFR publication delays to ensure FY2o20 and
beyond publications can occur within six months of a fiscal year end
— Support stronger implementation forecasting of measures required by the Certified
Fiscal Plan and more robust reporting of actuals
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— Supervise property tax assessment reforms, prepare tax maps, and provide notice of
taxes and special assessments
• Centralizing and validating the management of Government funds, debts, and
other financial transactions to:
— Maintain custody of all public funds, investments, and cash
— Administer cash management programs to invest surplus cash
— Facilitate short- and long-term borrowing programs
— Establish accountability over all Government funds, property, and assets
— Oversee all tax decrees and agreements issued
— Publish an annual Tax Expenditure Report that identifies and quantifies all tax
expenditures24° (initial report published in September 2019 for tax year 2017)
• Overseeing the Implementation of the Certified Fiscal Plan to:
— Enable all Government agencies to comply with efficiency measures stipulated within
the Certified Fiscal Plan
— Facilitate timely and targeted interventions to address areas of underperformance
relative to efficiency measures
14.1.2 Authority and composition of ()CFO
To execute these responsibilities, °CFO must have the power to:
• Act as the central authority over finance, budget, human resources, audit, procurement,
cash management, and debt issuance matter for all entities supported by the General Fund
or dependent on the Government's taxing authority
Exereise a direct reporting line into agency CFOs (in parallel to reporting lines to agency
secretaries)
• Remove any fiscal officer belonging to entities supported by the General Fund or the
Government's taxing authority for violations of or non-compliance with the law—including
failure to provide timely and accurate financial information
• Reform personnel policies—even through the renegotiation of existing or negotiation of
future Collective Bargaining Agreements (CFAs)—in a manner consistent with the
Certified Fiscal Plan's efforts to realize budget savings and efficiencies and enhance the
delivery of Government services
14.2 OCFO structure and agency efficiency measures
14.2.1 Future state structure
To enable this degree of centralized management, these functions must be concentrated under
a single individual: The Chief Financial Officer currently responsible for overseeing OCFO.
Over time, relevant responsibilities presently distributed across various Government agencies
240 These include tax exclusions, exemptions, adjustments, deductions, subtractions, credits, abatements, deferrals, rebates
and special rules.
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should be consolidated within OCF0.241 After this consolidation, the Government should
consolidate or eliminate the following agencies (Exhibit io6):
EXHIBIT 106: LIST OF AGENCIES IN FUTURE STATE OCFO GROUPING
1. Department of Treasury (Hacienda) Treasury (internal amity)
. . . _ _
e Office of Management and Budget S' General Services ArInnisgaiion
Office of Arentrirsnatien and Transrormagon of KR : 410 Fiscal Agency and Financial Adosary Authority'
t. trAwv &mon me stir qr+, •S rb.nPmY we,
Limited legislative support for OCFO consolidation and various delays around standardizing
and upgrading financial systems have placed the broader benefits of a consolidated ()CFO at
risk. The Government has not complied with original deadlines to consolidate the requisite
agencies under OCFO. Although Executive Orders can facilitate initial reforms, a broader
legislative and administrative overhaul conforming to the parameters set forth within the
2020 Fiscal Plan and PROMESA is necessary to establish an effective OCFO capable of
executing the responsibilities and wielding the authority outlined above. And, while Act 73
marks a step in the right direction, its primary benefits (improved visibility and budgetary
controls) are contingent upon IT system upgrades and the creation of procurement boards
that have yet to be realized.
Enabling improved financial stewardship
• GSA centralized procurement staff and implementation (—$6 million per year):
Starting FY2o21 onwards, GSA will be funded for the staff needed to rapidly centralize
procurement across the Government, focusing real effort on identifying opportunities to
consolidate contracts, bring increased insight into spending, facilitating coordinated and
rigorous vendor management, among other best practices.
• Additional Hacienda accountants (—$2 million per year): Starting in FY2o21,
Hacienda will receive funding to hire for additional roles on the Central Accounting staff in
Hacienda, so that critical skills and capabilities can be honed and retained in-house while
reducing professional services spend currently needed to execute critical financial processes.
• CAFR publication (—$10o,ono): A one-time bonus of $1,500 will be provided to Hacienda
Central Accounting employees if both the official 2017 CAFR is published and a draft of the
2018 CAFR is provided to the Oversight Board by November 2020.
■ ERP implementation ($36 million): Capital expenditure funding will be provided for the
implementation of a new Government ERP system - - $14 million for Wave i once a dedicated
project team (at least 3FrEs) is in place, by August 2020, and then $22 million for Wave 2
after the completion of Wave 1 between September 2020 and February 2021 ail million will
remain in Hacienda custody until FOMB receives and approves monthly progress reports).
■ DC plan account transfer ($2 million): During FY2021 based on progress made each
quarter, up to $2 million will be released to AAFAF for professional services, once written
confirmation is submitted to the Oversight Board that segregated accounts for the DC plan
have been created and funds transfers have been completed or are scheduled to be completed
by the end of the fiscal year. There will be no impact on Title III fees as these amounts arc pre-
established on the Certified Budget.
241 These agencies include but are not limited to The Department of the Treasury, the Office of Management and Budget, the
Government Development Bank (scheduled to be liquidated), the Office of Administration and Transformation of Human
Resources, and the General Services Administration. AAFAF remains a separate entity per Government plans as of May
2020 but is included in 0CF0 agency efficiencies section for presentational purposes.
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14.2.2 Hacienda process streamlining and personnel rightsizing
By FY2022, Hacienda should attain a 15% net reduction (25% gross) in overall costs
(approximately $33 million or $55 million gross).242 To do so, Hacienda could:
■ Partner with private banks to reduce its real estate and personnel footprint
■ Optimize non-personnel and procurement spend (e.g. support service consolidation)
■ Digitize and optimize general processes to capture operational efficiencies
40% of Hacienda's gross cost reduction (approximately $22 million) should be reinvested to
bolster compliance activities and capabilities by:
■ Hiring additional full-time employees for compliance activities (e.g., collection centers)
■ Funding relevant technology investments to improve collection and reporting (e.g., fix
challenges with SURI platform)
■ Strengthening its in-house accounting capabilities and reduce its reliance on contracted
accounting services
■ Rolling out its internal ERP program
To-date, Hacienda has made progress in streamlining its processes, primarily by finalizing the
roll-out of the SURI digital platform. The agency has also been rightsizing its personnel with
headcount decreasing by 18% between FY2o17 and FY2o1g. However, further improvements
are needed in order to meet the FY2022 personnel target without compromising on its service
quality.
14.2.3 Other OCFO personnel and non personnel efficiencies
The Office of Management and Budget, the Office of Administration and Transformation of
Human Resources, and the General Services Administration must also achieve significant
savings as part of their consolidation under OCFO.
To date, the OCFO should have:
■ Implemented the Procurement Reform Act to drive expected procurement savings across
agencies
■ Fully built out a new ERP system to consolidate all financial management, HR and
procurement activities
The realization of ()CFO efficiencies is currently delayed, with only a third of the targeted
efficiencies expected to be realized by the end of FY2o20. These delays are tied to several
factors, including delayed procurement optimization efforts, the absence of a plan to
consolidate shared services, the lack of an HR management system and the Government's
establishment of the OCFO within AAFAF. To achieve the 2020 Fiscal Plan savings
projections, ()CFO reforms must be implemented at the pace outlined below in Exhibit 108.
242 For instance, a transformation within Her Majesty's Revenue and Customs agency (United Kingdom) reduced costs by 25%
over a five-year period through a series of management initiatives, including IT cost reductions, realized operational
efficiencies, reduced real estate footprint, and overall process improvements; see National Audit Office, "Reducing Costs in
HM Revenue & Customs," 2011.
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14.3 Looking ahead - efficiency savings to be achieved and
required implementation actions
()CFO must continue driving consolidation and other reforms in order to achieve the annual
run-rate savings through FY2025 outlined in Exhibit 107.
EXHIBIT 107: ()CFO MEASURES SUMMARY OF IMPACT243
Run-rate savings from agency efficiency measures (excluding investments and other funding increases), $M
Non-personnel NI Personnel xx Annual incremental measure
55 _ 3
Change due to
transfers to
establish 96 97 98
FRITS budget 93
82
27
17 21
FY20 FY21 FY22 FY23 FY24 FY25
243 Includes AAFAF and all agencies within the °CFO grouping
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EXHIBIT 108: OCFO REQUIRED IMPLEMENTATION ACTIONS
Required implementation action Deadline FY2021 budget incentive
• Transfer DC plan funds from 2017 onward (located in temporary trusty into • Quarterly • Provide an additional
newly created segregated accounts. including payroll transfer of the ONI of professional
employee contributions to the new DC account services
• Designate project management team (with 34 FTEs) to monitor and • August 2020 • Provide additional $14M
evaluate the progress and completion of the Enterprise Resource For capex related to ERP
Management implementation Wave 1 implementation
• Complete ERP Wave 1 implementabon for the internal ERP system at • September 2020 • Provide additional
Hacienda 522M, for capex related
to ERP Wave 2
implementation
• Provide an action plan for the audit process and publication of the 2019 • November 2020
Comprehensive Annual Financial Reports (CAFR)
Publish the 2017 Comprehensive Annual Financial Reports (CAFR) and • November 2020 • Provide S104k for a 81.5k
one-time bonus for central
provide a draft of the 2018 CAFR
accounting employees
Ensure passage of legislation to enable Consolidation and empower OCFO to • December 2020
act as the central authority over finance, budget, human resources, audit,
etc?
Create and recrus associate Chief Financial OINcer positions for the Following • December 2020
groupings: (a) Economic Development. (b) Ed ation. (c) Health. (d) Housing,
(e) Public Safety and (f) Justice, whose authority would fall under the ()CFO
pursuant to enabling legislation
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Chapter 15. Medicaid investments and reform
15.1 Current State of Puerto Rico's Medicaid program
In 2019, —37% of Puerto Ricans received their health coverage through the Commonwealth's
state-run Medicaid program; this was the highest share of Medicaid/CHIP-funded health
insurance coverage of any US state.244 In addition to its large covered population, Puerto Rico
has lagged mainland states in both health outcomes and access. Puerto Ricans face higher
rates of chronic conditions like hypertension (12.4% above national median), diabetes (4.5%
above national median), and asthma (1.6% above national median) than national averages.245
Puerto Rico also has higher premature birth and infant mortality rates, and higher rates of
adults reporting fair or poor health.246,247 At the same time, 72 of Puerto Rico's 78
municipalities are deemed "medically underserved areas," with 500 doctors leaving per year
(pre-Maria). Puerto Rico has half the rate of specialists (e.g., emergency physicians,
neurosurgeons) as compared to the mainland in critical fields. 248,249
244 Kaiser Family Foundation, "Medicaid State Fact Sheets: Percent of People Covered by Medicaid/CHIP, 2019"
245 CDC (Centers for Disease Control and Prevention), 'BRFSS Prevalence and Trends Data," 2019-2020. Behavioral Risk
Factor Surveillance System
246 Puerto Rico infant mortality rate is 6 per 1000 vs. US mainland 5.3 per 1000; premature birth rate is 11.8% vs. 9.6% in US
mainland. "Puerto Rico," World Factbook (Washington, DC; CIA)
247 Kaiser Family Foundation, "Medicaid State Fact Sheets: Percent of People Covered by Medicaid/CHIP, 2019"
248 Areas with a shortage of personal health services, e.g., areas or populations that have too few primary care providers, high
infant mortality, high poverty, and/or high older adult population
249 HRSA Medically Underserved Areas (Accessed May 2020)
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Puerto Rico's Government-funded health plan, Vital, covers individuals through three primary
funding sources: federally-matched Medicaid funds, the Children's Health Insurance Program
(CHIP), and the Commonwealth's self-funded insurance program for low-income adults who
do not qualify for federally-matched Medicaid. An additional —8% of the Puerto Rican
population receives some benefits from the Government as part of the Platino program, which
supports Medicare Advantage recipients who also qualify for Medicaid (also known as "dual-
eligible").
Because federal Medicaid funding for US territories is subject to an annual cap, Medicaid
expenditures eligible for federal matching exceed available funding without supplemental
legislated sources. This makes Puerto Rico's Medicaid program very sensitive to rising
healthcare costs. Since 2011, Puerto Rico has received temporary relief from rising healthcare
costs through increased levels of federal reimbursement made available through the passage
of the Affordable Care Act and the Bipartisan Budget Act of 2018. In December 2019, the
Further Consolidated Appropriations Act was passed, which provided supplemental federal
funding (up to $5.78 total) to Puerto Rico's Medicaid program through September 30, 2021
(first quarter in FY2022). In addition, the law raised the FMAP—the portion of Medicaid
expenditures that federal funds can cover—from the standard level of 55% to 76% for most
populations. In response to the COVID-ig pandemic, the Families First Coronavirus Response
Act was passed in March 2020, further increasing both the available federal funds (adding an
additional $183M) and the FMAP (increased an additional 6.2% for most populations). The
available supplemental federal funds and higher FMAP will both return to standard levels in
October 2021 without new federal legislation (see Section 5.1.2 for more information on
Medicaid federal funds). Accordingly, the Commonwealth will hit a "Medicaid fiscal cliff,"
whereby it will be responsible for multi-billion-dollar annual healthcare expenditures that had
been covered by federal funding since 2011. It is crucial, therefore, that ASES take advantage
of the additional runway provided by recent federal legislation to put in place reforms that
reduce the long-term growth rate of healthcare expenditures. Given the uncertainty as to
future federal reimbursement levels, the 2020 Fiscal Plan assumes that no further
supplemental funding will be provided beyond current programs, and thus, the
Commonwealth must be prepared to cover growing Medicaid costs as if federal
reimbursement rates reverts to steady-state levels.
15.2 Medicaid reform measures
The goal of the Puerto Rican public health insurance system is to fund high-quality health care
services to all residents in need and, in doing so, cultivate a healthier population, especially as
it relates to lowering outsized rates of chronic conditions. To ensure the system can continue
to support the most vulnerable populations who rely on its services, Puerto Rico will need
to improve the efficiency and effectiveness of its health insurance plan by
"bending the curve" on premium inflation, which is reflective of escalating costs
for health care delivery on the Island.
This section outlines several categories of actions the Government will take to both to curb the
growth rate in per capita health care expenditure as well as shift the health system overall
toward higher-value care. In all the below required measures, the plan seeks to avoid reduction
in service quality — and in many cases reforms are expected to improve service quality — for
beneficiaries.
Puerto Rico's healthcare system has faced significant challenges from recent events.
Unfavorable trends instigated by the hurricane (e.g., provider shortages, outstanding
infrastructure needs) persist, and have been amplified by the earthquakes and COVID -19
pandemic. These circumstances make progress against healthcare measures challenging, and
the availability of additional federal funding enable a more tempered path to achieving the
target end-state for the healthcare system. To-date, the Government has enabled savings
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through implementation of initiatives aimed at controlling healthcare cost inflation. These
initiatives include the launch of the new, single-region managed care model and effectively
managing the Prescription Drug List (PDL). These reforms are expected to continue to yield
cost savings through greater competition, incentives to lower costs, and reduction in
administrative costs.
In addition to the reforms implemented thus far, further efforts are needed to keep Medicaid
cost growth at sustainable levels, ensuring that the Commonwealth Medicaid program can
effectively deliver quality care to the -37% of Puerto Ricans who rely on Vital for medical
insurance, the 2020 Fiscal Plan reduces the total savings target across FY2o2o-
FY2o25 by -$2 billion and adjusts the ramp-up of expenditure reduction measures to
provide additional time for implementation. Total run-rate savings must reach .--$328
million by FY2025 (off the FY2o25 baseline of approximately $3.4 billion). After
FY2025, the savings continue to increase as baseline expenditures increase (Exhibit 109), but
absent further action by future governments, the per capita cost of healthcare will grow with
long-term healthcare inflation rates (which are higher than general inflation), creating a
significant deficit. The Government must still act urgently to implement value-based reforms
that deliver both improvements in health services and savings to the Commonwealth,
including building the infrastructure and data systems required to execute more advanced
payment reform models and quality monitoring across the Island.
The measure savings in the 2020 Fiscal Plan are designed to lower premium expenditures
across the multiple public health programs (namely Medicaid and CHIP). When temporary
increases to available federal funding for Medicaid and the FMAP expire, the targets recognize
that the federal government will realize -3% of premium expenditure savings. While the
Government must achieve all savings to curb long-term costs, the 2020 Fiscal Plan surplus
will only consider savings that accrue to the Commonwealth.
EXHIBIT 109: MEDICAID REFORM SUMMARY OF IMPACT
summary at medicaid refam, impact
Value-based payments= • Program mlegray3
32B
95
23!,
6.8
147
233
166
62
20. it
FY21 'FY22 FY23 FY24 FY25
aeon FreMyr.r..60 ea.:AC 01GlICANI Vert. 1,051,11,0
92.0197 rrunr:_rta emi) timer
_ 9.7 0"yee.t.2be.,,, 7.1162■0■0 ifie
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15.2.1 Medicaid reforms to improve program integrity
The 2020 Fiscal Plan requires savings between FY2022 and FY2o25 to be achieved through
initiatives to improve enrollment verification and reduce other forms of fraud, waste, and
abuse.
The US Government Accountability Office found evidence that MCOs have not consistently
reported improper payments to providers billing to the system. Further, it found that many
MCOs face conflicts of interest in finding and eliminating fraud 250 Typical fraud, waste,
and abuse reduction programs in other state Medicaid programs and health insurers
have been able to achieve 1-3% cost savings. These savings have been reached through: pre-
payment review (e.g., reviewing claims before payment to identify outliers/issues); auditing
and enforcement units to investigate suspicious behavior; advanced analytics capabilities to
identify inefficient or fraudulent activities in post-payment review, such as identification of
"impossible" utilization (e.g., billing for over 24 hours of service in one day) or frequently
repeated, high value procedures; and long-term policy or organizational transformation. In
addition, it is imperative for Medicaid programs to ensure coverage is offered only to eligible
individuals through robust enrollment verification. Since 2014, states have relied on
electronic sources to confirm information for purposes of determining Medicaid eligibility.
However, GAO has found that inconsistencies and errors in eligibility determinations persist.
Full compliance with Payment Error Rate Measurement (PERM) and Medicaid Eligibility
Quality Control (MEQC) requirements and establishment of an asset verification system that
utilizes 3rd party data sources can strengthen enrollment verification.251
To-date, Puerto Rico has made meaningful progress towards improving program integrity.
This includes integration of ASES data with the Medicaid Management Information System,
establishment of a Medicaid Fraud Control Unit and Program Integrity Unit, establishment of
a competitive process for Medicaid contracts, and improvement in enrollment verification
through employer certification and Public Assistance Reporting Information System (PARIS)
checks.
While Puerto Rico has taken steps towards improving its Medicaid Program integrity,
opportunities for further improvement remain. Limited recoupments from MCO
investigations suggest that additional opportunity remains. Best practices from other states
indicate that additional program integrity activities can be developed in parallel to
development of MMIS tools. For example, there is opportunity to leverage analytics vendors
on a contingent bases to identify savings related to improper payments. Furthermore,
enrollment verification can be improved by instituting an Asset Verification System and
partnering with key out-migration states to conduct enrollment checks. Pursuant to the 2020
Further Consolidated Appropriations Act, Puerto Rico must continue to make progress to
meet CMS's Payment Error Rate Measurement and Medicaid Eligibility Quality Control
requirements.
15.2.2 Medicaid rearms to improve quality relative to cost
Pursuing value-based improvement initiatives with demonstrated success can help the
Commonwealth "bend the curve" on healthcare inflation without jeopardizing — and in fact
while improving —health outcomes across the system. Similar value-based programs have
been piloted in other states, and typically have saved between 2-10% of costs included under
the programs. In Puerto Rico, value-based reforms may result in lower-than-average savings
due to the breadth of other simultaneous savings measures being implemented for Vital and
challenges associated with recent natural disasters and the COVID-19 pandemic.
250 GAO 'Medicaid and CHIP Increased Funding in US Territories Merits Improved Program Integrity Efforts," April 2016
251 GAO 'Medicaid Eligibility: Accuracy of Determinations and Efforts to Recoup Federal Funds Due to Errors,' January 2020
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Nevertheless, these structural changes to reimbursement and care delivery present the most
viable path to long-term sustainability for the program.
There are several potential sources of value in Puerto Rico's healthcare system. These sources
of value are opportunities to reduce wasteful healthcare spending and increase efficiency while
improving quality of care and health outcomes. One potential source of value is in reducing
ER visits. Prior to Hurricane Maria and the reforms, Puerto Ricans utilized the ER three times
as often as peers on the US mainland, with estimates as high as 90% of ER visits occurring for
non-emergency care that could be treated in lower cost settings.252 Successfully shifting
unnecessary ER visits to lower-cost settings, such as primary care offices or urgent care, could
save tens of millions of dollars annually. Additional opportunity exists through reduction of
inpatient length of stay. Puerto Rico's inpatient length of stay was 1.5 times the US average in
2014.253 MCOs can incentivize reduced hospital readmissions and length of stay through
improved discharge planning and increased staffing to manage weekend discharges. Hospitals
can improve quality of care and long-run costs by reducing hospital readmissions. Hospital
readmissions occur when patients are discharged from hospitals but must return for
additional treatment for the same condition. This can occur when patients are not adequately
prepared to return home due to lack of education, lack of access to follow-up care, challenges
with prescription drugs, etc. Readmission rates at hospitals in Puerto Rico are higher than the
national average. Savings can be achieved by incentivizing hospitals to minimize
readmissions.
Value-based payment models are an effective tool to capture these sources of value and
incentivize providers to fully treat patients in more efficient ways. Pursuant to this measure,
ASES has begun development of a Diagnosis Related Group (DRG)-based payment model.
Under a DRG-based payment model, providers are reimbursed a fixed amount to fully treat a
patient with a given medical condition. DRG-based payment models help control medical
costs by incentivizing providers to deliver cost-effective care without sacrificing quality. in
addition, these payment models improve the effectiveness of Medicaid service delivery by
standardizing the measurement of patient acuity across providers and reducing the
administrative burden associated with reimbursements, etc. ASES will begin testing this
payment model in 2020 ahead of a launch in July 2021. Successful actualization of savings
from this effort is necessary for the Government to fund the long-term health needs of Puerto
Rico.
There are several, additional value-based payment models that can be implemented to achieve
cost savings. Best practice value-based payment models from other managed care settings
include direct pay-for-performance quality bonuses, providing special incentives to care for
members with high-cost needs, such as behavioral health, etc. New approaches that emphasize
care coordination and align incentives between patients, providers, and payors can produce
improvements in health outcomes while lowering costs. Care coordination models like patient
centered medical homes — which empower primary care providers to work closely with
patients and manage treatment plans across multiple care providers — have been quite
effective at improving outcomes for members with chronic conditions.254 Given the
preponderance of chronic conditions and potential rising behavioral and mental health needs
in the wake of Hurricane Maria, better access and coordination of mental health services will
become increasingly important.255
252 JEL Consulting analysis (Dec 30, 2106) of ASES data and Puerto Rico Community Survey, Public Use Microdata, 2014.
Estimates exclude Platino beneficiaries
253 As of 2014. J EL Consulting analysis (Dec 30, 2106) of ASES data and Puerto Rico Community Survey, Public Use Microdata,
2014. Estimates exclude Platino beneficiaries
254 Patient-Centered Primary Care Collaborative, 'Benefits of Implementing the Primary Care Medical Home: A Review of Cost
& Quality Results, 2012' (Sept 2012)
255 Thomas Huelskoetter, Center for American Progress, "Hurricane Katrina's Health Care Legacy' (August 15, 2015)
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15.2.3 Bringing transparency to FQHC transfers
As a requirement of the 2020 Fiscal Plan, the Office of Medicaid must take immediate action
to:
■ Within 6o days of 2020 Fiscal Plan certification, transparently document the process by
which wrap-around payments are calculated and distributed to Puerto Rico's federally
qualified health centers (FQHCs), including: (i) the detailed formula for determining how
prospective payments are estimated and reconciled within the Office of Medicaid, ASES,
or other government entities; and (ii) the flow of funds across Commonwealth agencies,
public corporations, and FQHCs.
■ Within 120 days of 2020 Fiscal Plan certification, provide the Oversight Board with a
provider-level reconciliation of the total FQHC transfers from Commonwealth agencies,
including federally-funded portions of such transfers, for each of the last three fiscal years
(i.e., beginning with FY2o18); the documentation must include note of any funds currently
held by FQHCs that are in dispute (e.g., as overpayment) by Commonwealth agencies.
15.3 Medicaid investments
Puerto Rico's healthcare system has experienced significant strain stemming from the
hurricane, earthquakes, and COVID-19 pandemic. These events are expected to have amplified
provider shortages and create increases in demand for health services, particularly behavioral
health care. Given these turbulent circumstances and the uncertain outlook with respect to the
COVID-19 pandemic, it is prudent to make incremental investments in the health system. Such
investments are enabled by federal funding made available through the 2020 Further
Consolidated Appropriations Act and the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act). As a result, the Government will make certain priority investments that will
apply through September 30, 2021 (the expiration of supplemental federal funding). These
investments are providing Hepatitis C drug coverage and increasing reimbursement rates to
specialty and primary care providers and hospitals.
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Increased provider reimbursement rates
Reimbursement rates for Government Health Plan (GHP) providers lag those of Medicaid
programs in other states and territories. For example, from July 2016 to July 2017 primary care
services were reimbursed at 19% of the Puerto Rico Medicare fee-for-service rate, while these
services are reimbursed at 66% of the Medicare rate nationally. Also, maternity services were
reimbursed at 50% of the Puerto Rico Medicare fee-for-service rate while these services are
reimbursed at 81% of Medicare rate nationally. Low reimbursement rates place pressure on
providers and may lead to shortages, lack of access to certain specialty services, and lengthy wait
times. From today through September 30, 2021, ASES will increase provider reimbursement rates
as follows:
■ Establish a 70% of Medicare reimbursement floor for outpatient physician
services Woo million): Pursuant to a provision in the 2020 Further Consolidated
Appropriations Act, ASES will establish a reimbursement floor for physician services set at
70% of the Medicare fee-for-service rate. The costs associated with the investment will be
included in the Managed Care Organization PMPM capitation rate. In turn, the MCOs will be
contractually obligated to reimburse all contracted providers at the rate of at least 70% of the
Puerto Rico Medicare fee schedule.
■ Increase sub-capitation payment for primary care physician (PCP) services ($lo
million): Almost all primary care services are paid through sub-capitation arrangements,
wherein MCOs pay Primary Medical Groups (PMGs) a fixed, monthly rate per member treated.
To improve access to primary and preventive services, ASES will include a 10% increase in the
PMPM sub-capitation rate paid to PMGs for contract year 2020.
■ Increase reimbursement rates for hospitals ($45 million): According to the latest
available CMS Hospital Cost Reports, over 50% of Puerto Rico hospitals reported net losses.
Given the high portion of the population covered by Medicaid, Puerto Rico hospitals are
disproportionately affected by reimbursement rates of the Medicaid program, which are lower
than those of most other payers. These conditions jeopardize the ability for hospitals to operate
and re-invest in their infrastructure. To support the ability of hospitals to meet the needs of
Puerto Rico, ASES will increase reimbursement rates. Specifically, ASES will mandate that
MCOs increase reimbursements for inpatient services through an episode-based payment
schedule.
Hepatitis C drug coverage ($50 million): Puerto Rico's Medicaid plan did not previously
provide coverage for drugs that cure the Hepatitis C virus. There are approximately 14,000 Puerto
Ricans that are eligible for treatment and could be cured by making these drugs available to them.
Granting coverage for these drugs will significantly increase the quality of lives for affected
individuals. Furthermore, in the long term, it is estimated that savings can be achieved due to the
avoidance of costs related to the treatment of Hepatitis C virus such as decompensated cirrhosis
and liver transplants. Starting in March 2020, this coverage will be available to affected Medicaid
recipients.
Medicaid IT ($50 million): Funding for capital expenditures and operational support to enable
ASES to improve and modernize technology for eligibility processing and enrollment verification,
and invest in analytics to identify fraud, waste, and abuse, claims cost optimization opportunities
and inform value-based program design.
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EXHIBIT 110: MEDICAID REFORM REQUIRED IMPLEMENTATION ACTION
Required implementation action Deadline
• Incorporate language requiring participation in DRG-based payment model in MCO contract • May 2020
• Define key performance indicators and savings target measures for Medicaid program integrity • June 2020
initiatives (e,g., fraud. waste, and abuse reduction, enrollment verification)
• Complete assessment for the need for additional third party vendors to develop an Asset Verification • June 2020
System and analytics for fraud, waste, and abuse reduction and enrollment verification
• Pilot CMG-based payment model and revise design based on performance • July 2020
• Identify and design additional value-based incentives {e.g., direct pay-For-performance quality • December 2020
bonuses) for inclusion in future MCO agreements, including timeline and plan for implementation
- Develop plan to incorporate Medicaid program integrity key performance indicators and savings • December 2020
targets into future MCO contracts, including design for associated incentives and penalties
• Complete Phase II of PRMM1S development and migrate financial and enrollment processes to the • June 2021
platform
• Draft plans To meet PERM and MEOC requirements and receive CMS approval • June 2021
• Launch DRG-based payment model • July 2021
Chapter 16. Tax compliance and fees enhancement
16.i Current state and future vision for tax environment
Puerto Rico's current tax system suffers from its structural complexity, instability, internal
inconsistency, inefficient administration, and inadequate enforcement. There have been at
least ii major revisions to Puerto Rico's tax code since 1994, including at least six adjustments
since 2013.256 This has allowed for persistent problems with non-compliance, worsened by a
lack of an integrated approach to addressing non-compliance. Top marginal tax rates are high
relative to US federal and state taxes. Much of the Government's revenue is highly
concentrated in collections from a handful of multi-national corporations. The Government
has also issued an assortment of credits, deductions, and incentives that add to the system's
complexity and further erode the tax base. Furthermore, audit and enforcement activity in
recent years has been limited, which creates risks of increased levels of non-compliance.
Due to its compliance and collections issues, the Commonwealth has not been
able to collect as many revenues from taxes as it should each year.
In response to these challenges, the Government has taken actions to improve tax compliance.
It has taken steps to improve information reporting to better detect under-reporting of income
and over-usage of deductions and credits, notably through recent changes to information
reporting requirements included in Act 257-2018. These changes create greater
interdependencies among taxpayers and the information they are obligated to report, which is
expected to enable greater oversight and verification of the information being reported to the
256 Reforms include: Act 40-2013, the "Tax Burden Redistribution and Adjustment Act" Act 120-2014, the "Small and Medium
Business Job Generation and Retention Act,' Act 72-2015, the 'Adjustments to the Internal Revenue Code of 2011;'
Administrative Orders 2017-01 and 2017-05; and Act 257-2018, the "2018 Puerto Rico Tax Reform Act."
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Government. Enhanced usage of data can help Hacienda better isolate risk and focus its
compliance and enforcement resources. It is driving improvements in its culture and
organization to boost enforcement capabilities, and digitizing the process of filing taxes, to
lighten the burden of compliance on taxpayers.
With the publication of the first Tax Expenditure Report in September 2019 (see Section
16.3.1), policymakers now have the data necessary to review, assess, and adjust the use of
individual tax expenditures to ensure that these foregone revenues are leading to positive
economic development on the Island.
16.2 Administrative tax initiatives to increase revenue
collections
By driving administrative tax reform, the Commonwealth must increase revenues over the
amounts implied by baseline economic trends by $2.2 billion over FY2o2o-2025, as shown
below (Exhibit111). To capture impact, measures must be implemented in full by FY2o23. The
2020 Fiscal Plan recognizes the substantial economic challenges ahead in FY2o21 and
therefore does not assume any incremental impact beyond what was already required in
FY2020.
EXHIBIT 111: REVENUE MEASURES SUMMARY OF IMPACT
Summary of tax compliance and fees enhancement measures rmpact, SIN
Improve compliance rate ■ Right- rate other taxes and fees
500
457 462
450
398
400
300
232 233
200
'114 11
100
11tit
0
FY20 FY21 FY22 FY23 FY24 FY25
16.2.1 Improve compliance rate
The Government must continue its efforts to achieve a target 5% net uplift in
annual revenues due to enhanced compliance by FY2023 across the major tax lines
(personal income tax, corporate income tax, and SUT) — inclusive of implementation costs.
Such an improvement would be in-line with improvements seen in other tax transformations.
This improvement would be relative to a reduced baseline estimate of revenue collections due
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to the impacts of COVID-19, and expanded impact would not be expected to resume until
FY2022. 257
Hacienda should continue to take a variety of initiatives that can boost voluntary compliance.
The goal should be to reduce the cost of compliance while simultaneously raising the cost of
non-compliance, through a combination of an increased likelihood of being caught while not
paying taxes owed and more effective and enforceable penalties.258
■ Use new systems and processes to identify and remediate non-compliance.
Hacienda has taken steps to make it harder to abuse deductions and credits to avoid tax
liability, for example by only allowing taxpayers to claim certain deductions and
exemptions if their return is prepared by a certified public accountant following agreed
upon procedures.
■ Reduce the complexity of the tax system and process of filing taxes to make it
easier for individuals and businesses to pay their taxes correctly. As detailed further in
Section 10.4, improving the process of for filing and paying taxes is critical for improving
ease of doing business, but it also helps boost voluntary compliance.
■ Improve use of data and analytics to address non-compliance. Small and
medium taxpayers account for a significant share of the unpaid and underpaid taxes, but
only a tiny fraction of these taxpayers receive full-scale audits due to the significant time
and cost investment needed. While a traditional IRS audit costs an average of $2,278 per
case, automated notices or letters can be executed for $52 to $274 per case.259 Hacienda is
receiving increasing filings of information returns that can be used to better identify risk
and focus compliance resources. Implementing data-driven, tiered compliance
approaches over time will enable Puerto Rico to reach a significantly larger share of
nonpayers.
■ Collecting SUT on Internet sales. Nationally, the percentage of taxpayers voluntarily
reporting and paying sales and use taxes on their income tax forms ranges from 0.2% to
10.2%, while nearly So% of Americans shop online.260,261 Mainland states have taken steps
to improve sales tax collections on online sales through legislation, as well as voluntary
agreements with major online retailers.262 In its 2018 Wayfair decision, the US Supreme
Court further provided mainland states with parameters under which sales taxes could be
levied on out-of-state sellers. Given these trends, the Government should also be working
to capture SUT on a much larger share of Internet sales. Hacienda has announced
agreements with some online retailers to charge Puerto Rico SUT on Internet sales of
goods.263 With Internet sales growing at —15% annually, and growth expected to accelerate
further as the COVID-19 pandemic makes the internet a critical component of consumer
purchasing habits, Internet sales tax presents an even more important opportunity going
forward.
The impact from these compliance related activities is projected to phase in over the course of
four years. In light of the challenging economic climate anticipated in FY2021, the 2020 Fiscal
Plan does not forecast incremental increases in revenue yield until FY2022, though Hacienda
will continue to implement its compliance-related initiatives.
257 Analogous case studies include Panama, Jamaica, and Spain, which saw 1.0 to 2.5 percentage point increases in tax ratio
relative to GDP through comprehensive tax overhauls, which included compliance initiatives
258 Xenia Velez presentation to the Oversight Board (Nov. 30, 2017), 3
259 IRS Enforcement Results, TIGTA Filing Season Audit, IRS Taxpayer Advocate, Team Analysis, GAO
260 Use Tax Collection on Income Tax Returns in Other States' Research Department of Minnesota House of Representatives,
April 2015. http://www.house.leg.state.mn.usihrd/pubs/usetax.pdf
261 Tech Crunch, 2016
262 Voluntary agreements occur when corporations agree through individual negotiations with states to collect and remit sales
tax directly to the state
263 Caribbean Business, 'Amazon to charge Puerto Rico sales tax"
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16.2.2 Right-rate other taxes andfees
Prior to Hurricane Maria, the Government reported that it had already developed a plan to
right-rate certain taxes and fees. These original plans, as well as any adjustments mutually
agreed upon between the Government and the Oversight Board during implementation of the
March 2017 Fiscal Plan, have been largely included in this 2020 Fiscal Plan, except where
explicitly noted below.
Despite multiple pieces of enabling legislation, the Government's approach to implementation
lacks central accountability, with specific actions and timelines. Progress against these
measures has been uneven and the Government must urgently make progress to close the gap.
Gaming tax. Legislation passed in 2017 increased licenses and fees on mechanical and
electronic gaming machines to $3,000 from $100. This was originally estimated to generate
—$71 million in incremental revenues.264 Part of this calculation involved assumptions of
improved enforcement, as the Government has previously estimated that it is losing
approximately $170 million per year due to illegal machines that are not paying licensing fees.
However, when factoring in the potential that a 2,900% increase in taxes on the machines
could decrease total revenues from gaming, the Fiscal Plans adjust the required revenues to
be approximately $46 million.
Licenses and other fees. 2017 legislation enabled fee increases in miscellaneous categories.
Hacienda will determine which exact fees are to be increased to meet these minimum
thresholds, achieving an overall revenue increase of —$57 million per year.265 Categories are
as follows: Charges for services; Fines; Insurance; Licenses; Permits; Rent; Royalties; Stamps;
Other.
Tobacco taxes. Legislation was passed in 2017 to increase specific tobacco taxes, including
taxes on cigarettes, cigars, rolling tobacco, cigarette paper and tubes, chewing tobacco, snuff,
electronic cigarettes, nicotine cartridges, and vaporizers. Accounting for one-time declines in
use due to price elasticities after the new law went into place, a —$52 million per year increase
by FY2024 in revenues due to the new taxes is required. In order to give the Government time
to focus on a comprehensive implementation approach, the required revenues are delayed
until FY2022.266
Medical marijuana tax. Legislation has been enacted to tax medical marijuana. Based on
an estimated 29,000 patients, the Government expected to collect approximately —$13 million
per year in additional revenue through this initiative.267
Airbnb Tax. Legislation has been enacted to apply a 7% hotel room tax to Airbnb rentals,
resulting in a projected annual revenue increase of —$3.5 million This revenue stream will be
substantially impacted by the reduction in demand due to COVID-19, recovering only as the
tourism sector rebounds.
16.3 Implementation and enforcement of revenue measures
The following implementation plan details the continuation of the Commonwealth's efforts to
increase compliance and imposes further details on key milestones in the process to right-rate
taxes and fees. To date, Hacienda has made important progress towards deploying SURI, its
integrated tax system. Phases i and 2 of SURI have been rolled out for SUT, excise taxes and
264 Based on an assumption of 23,000 gaming machines on which Hacienda is able to collect fees (http://www.osrprorg/2017-
2020/leyes/pdfiley-108-23-Ago-2017.pdf)
265 Assumes an 80% capture rate on the $73M potential to account for potential elasticities in demand based on fee increases
266 Based on an 15% decline, per Hacienda (April 5, 2017 calculations)
267 $15M projected receipts, minus $1.5M of dedicated revenues for the medical marijuana council established in 2017-Act 42
and controlled substances monitoring in 2017-Act 70
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license fees and will likely have a beneficial impact on FY2o2o tax compliance. Phase III has
been rolled out in February 2020 for Individual Income Tax and Corporate Income Tax, with
likely impact starting in FY2021. The benefits of the SURI platform include improved filing
and payment capabilities, digital workflows, and integration of previously-disparate data
sources. These features are expected to, over time, improve Hacienda's ability to serve
taxpayers and enhance its compliance capabilities. Hacienda has also begun to make use of
new information reporting and withholding requirements to limit the structural opportunities
for non-compliance (e.g., through the use of alternative minimum taxes and limitations of
deductions where there is no corroborating information reporting). On right-rating of taxes
and fees, the progress has been mixed, with certain smaller revenue streams such as collection
of tax on Airbnb rentals meeting initial expectations, with others like increases in tobacco
revenues and gaming fees under-performing relative to Fiscal Plan requirements. Hacienda
must comprehensively assess progress against these categories of revenue enhancement and
develop action plans to mitigate future under-performance.
16.3.1 Creation of a tax expenditure report and regular reporting
In order to provide a critical element of fiscal responsibility and transparency, the Government
must regularly produce a tax expenditure report, which will include a comprehensive list of
revenue losses attributable to provisions of the Puerto Rican tax code that deviate from the tax
structures benchmark law. Having a clear and accurate understanding of what the
Government spends through tax expenditures is critical to ensuring the expenditures are
continuing to contribute to economic growth and opportunity.268
In response to the 2019 Fiscal Plan requirements, the Government published its inaugural Tax
Expenditure Report in September 2019 for tax expenditures associated with tax year 2017. For
the first time in Puerto Rico's history, taxpayers and the Government now have better visibility
into the full scope of tax expenditures being offered, together with a description and
approximate cost of each expenditure.
Additional revisions are required to tax expenditure reporting. For future iterations, the Tax
Expenditure Report must include the cost of each tax expenditure for the current year and at
least the prior two years. The report must also forecast the expected revenue collections and
losses for at least the next five years from the date the report is produced. The forecast of
revenue losses must include a comprehensive inventory of all tax credits, cash grants,
deductions, exemptions, preferential tax rate, tax liability deferral and any other tax incentives
where amounts allocated can materially impact the Commonwealth's financials.
16.3.2 Tax incentives code reform
The current tax incentives code structure has high fiscal costs — in excess of $400 million -
but does not provide enough visibility to allow for clear tracking of these tax concessions and
the returns they generate for Puerto Rico's economic growth. Past studies, based on limited
available economic data, have indicated that while some tax incentives led to positive returns
on investment, many others do not yield similar results.
That is what led the Commonwealth to enact Act 60-2019 (the "Puerto Rico Tax Incentives
Code" or "Incentives Code"), which amended the tax incentives code and adopted a new legal
and administrative framework to normalize the way in which new incentives are created,
approved, processed, and monitored. Existing incentive laws were repealed and replaced by
similar incentives in Act 60-2019.
To evaluate the fiscal benefit from each incentive, the legislation uses a Return on Investment
("ROI") approach combined with an assessment of fiscal multipliers to prioritize high value-
268 Tax Policy Center, Urban Institute & Brookings Institution, "State Income Tax Expenditures'
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added incentives relative to those that do not generate sufficient economic return. The
legislation, however, does not include explicit caps on, reductions to, or the elimination of any
specific incentives. Rather, the purpose of the Incentives Code is to measure the ROI of tax
and economic incentives by grouping them under a transparent and uniform code.
Through the Incentives Code, the term, rate, and characteristics of incentives offered are
harmonized across industries and credits. The Incentives Code also creates a centralized
Incentives Office for Businesses in Puerto Rico at DDEC and establishes an Incentives
Concession Portal to centralize, standardize, and streamline the processes related to the
application and approval of decrees, cash grants, tax credits, subsidies, and other incentives.
Act 60-2019 also required the public disclosure of beneficiaries of certain tax expenditures. In
accordance with that requirement, DDEC disclosed (on January 30, 2020) that 8,364
companies and individuals received certain tax incentives. The online database offers the
name of the grantee, the type of benefit, and the decree's issue date. At the moment, DDEC
released the relevant information for recipients that receive benefits from the following Acts:
Act 14-2017 (Physician Retention); Act 20-2012 (Exportation of Services); Act 22-2012
(Investor Relocation); Act 273-2012 (International Financial Center Regulatory Act); and Act
27-2011 (Film Production). DDEC subsequently released additional data on February ti,
2020, disclosing recipients of the following tax expenditures: Act 73-2008 (Economic
Incentives for the Development of Puerto Rico Act); and Act 83-2010 (Puerto Rico Green
Energy Incentives Act).
Many provisions of Act 60-2019 require the drafting and approval of regulations prior to their
implementation.269
The lack of transparency and high cost of these tax concessions warrant additional reform in
the tax incentives code. In addition to public disclosure of the amount and type of tax
incentives awarded as part of the tax expenditure report, a value-for-money assessment for
these tax concessions needs to be conducted to increase the rate of return on investment to
Puerto Rico. Subsequently, based on the findings of this formalized assessment and explicit
annual budget, the Government should implement a reform on the existing tax incentives
code, to better align the tax concessions awards to the growth strategy of Puerto Rico.
16.3.3 Principle of Revenue Neutrality
Puerto Rico needs to drive toward more formality and increased compliance within the tax
base, but it cannot lose revenues in the process. Therefore, any tax reform or tax law initiatives
that the Government undertakes or pursues during a year within the 2020 Fiscal Plan period
must be revenue neutral, that is, all tax reductions must be accompanied by specific, offsetting
revenue measures of the same amount that are identified in the enabling legislation. Each tax
measure must also include confidence building elements, such as behavioral adjustments and
reasonable capture rates. To ensure revenue neutrality, the implementation of any tax law
initiatives must occur sequentially, with the Government ensuring that initiatives are paid for
before rates are reduced. Enforcement mechanisms must also be part of any tax initiative
package to prevent a scenario where tax reductions are not accompanied by sufficient
offsetting revenue measures identified in the enabling legislation.
16.3.4 Required implementation actions
To achieve the 2020 Fiscal Plan revenue measures, certain action items must be implemented
according to the schedule described in Exhibit 112.
269 Pursuant to PROMESA section 204(b)(4) and the Oversight Boards policy with respect thereto, proposed rules, regulations,
administrative orders and executive orders covered by said policy, including all regulations under Act 60-2019, must be
submitted to the Oversight Board before being issued to ensure compliance with the certified Commonwealth Fiscal Plan.
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EXHIBIT 112: REVENUE MEASURES SUMMARY OF IMPACT
Required implementation action Deadline
■ Finalize the integrated plan for the next phase of compliance improvement • December 2020
across the major tax types and assess the resources needed to support the
activities identified
■ Develop resource plan to implement next phase (personnel, IT, other • March 2021
support) as needed to drive progress against key initiatives
• Implement process to estimate the impact of compliance efforts on revenue • June 2021
collections to inform future program priorities
Chapter 17. Reduction in appropriations to UPR
17.1 Current state and vision
The central Government provides a range of appropriations to three main groups of recipients:
The University of Puerto Rico (UPR), Puerto Rico's 78 municipalities, and "other" recipients
(typically private industry or non-profit institutions).
The University of Puerto Rico, founded in 1903, is Puerto Rico's largest and main university
system. Its mission is to serve the people of Puerto Rico, contribute to the development and
enjoyment of the fundamental values of Puerto Rican culture, and uphold the ideals of a
democratic society. To advance its mission, UPR strives to provide high-quality education and
create new knowledge in the Arts, Sciences, and Technology. UPR has a history of academic
excellence, with 694 degree-granting academic and professional certification programs,
including six first level professional degree programs and 34 PhD programs. The university
system is also an important center of research; for example, the Rio Piedras campus is
classified as a high research activity university by the Carnegie Foundation (one of only 335
US universities to receive such a designation) and there are 79 separate research centers across
the university system. UPR also plays a critical role in providing avenues for social and
economic advancement, with 68% of students receiving Pell grants.270
In FY2018, UPR was 67% subsidized (-$678 million in annual appropriations) by state and
local funds, compared to an average 25% state and local subsidization for US public
universities.271 In FY2018, UPR's undergraduate tuition was less than one-third of the US
average for public universities, even after adjusting for per-capita income, and more than 40%
below the average tuition of private universities on the Isla nd.272 Yet, during the past decade,
UPR has seen a 24% enrollment decline (13% since FY2018) across both graduate and
undergraduate populations. Moreover, UPR consists of 11 independent campuses with
minimal shared services or administrative consolidation. As a result, UPR has grown reliant
on the significant subsidies from the Commonwealth, and has made slow progress in
addressing declining enrollment, diversifying its revenues, rationalizing its tuition and
scholarship systems, renewing and maintaining its infrastructure, addressing operational
270 UPR 2012-2017 Strategic Plan
271 UPR, IPEDs 2016 College Board
272 Represents the average across the Ana G. Mendez University system, Inter-American University, Sacred Heart University,
and Polytechnic University for SY18-19.
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inefficiencies, appropriately funding its pension system, and paying its contractually-obligated
debt.
Establish an independent needs-based scholarship fund for UPR
The Fiscal Plan and Certified Budget assigned funds to establish an independently-managed
needs-based scholarship fund to benefit the students of the university system. This fund will be
used to provide need-based scholarships to UPR students." As such, this year's Government
contribution to the scholarship fund is projected at -$43 million.
In April 2020, an RFP process was started in order to provide Fund Administration Services and
Trust Services to AAFAF with respect to the scholarship endowment trust fund. The RFP was
awarded in May 2020 to Fundacion Comunitaria. The fund is expected to award the first
scholarships in August 2021, as the application process is expected to be conducted between March
and June of the same year.
Establish an independent scholarship program for medical students who commit to
practice in underserved areas
The 2020 Fiscal Plan creates an additional independently-managed scholarship program to
incentivize doctors to practice in underserved areas in Puerto Rico. Many rural areas in Puerto
Rico are underserved by physicians, due to the lack of training opportunities, low salaries for
medical residents, and difficulty becoming certified to contract with health insurance plans. This
has resulted in a shortage of -500 primary care, mental health, and dental providers (according to
HHS). Accordingly, the 2020 Fiscal Plan allocates funding for a loan forgiveness program to be
offered to medical residents or students. Each student or resident would be eligible for up to
$25,000 of loan forgiveness per year of service (up to four years) in underserved areas, and the
program would be administered by an independent party chosen via a competitive process. The
2020 Fiscal Plan recommends that the Government invest $io million in FY2o20 and allocates
$20 million for investment in FY2o2i. This program directly responds to the increased need for
healthcare providers in rural areas following the COVID-ig pandemic and is representative of the
2020 Fiscal Plan's commitment to protecting the health of the people of Puerto Rico. To ensure
timely implementation of the program, UPR, in concert with AAFAF and the Oversight Board,
must undertake the initiatives described in Exhibit 114.
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17.2 Key initiatives to reduce appropriations
Reducing Commonwealth subsidies to UPR must lead to run-rate savings of - $282 million by
FY2025 (Exhibit 113).
EXHIBIT 113: REDUCTION IN APPROPRIATIONS MEASURES SUMMARY OF IMPACT
Summary of UPR appropriation inet of measures), SM
4111IP Measures impact
411111. 41:110 4110 41:10
560 560
466
442 447 452
FY20 FY21
11_ FY22 FY23 FY24 FY25
A reduction of the appropriation for UPR was determined in 2017 through a shared process
with the Government to identify reasonable, sustainable measures to bring UPR closer to US
mainland public university tuition and administrative cost benchmarks, while maintaining
(and in many cases improving) the performance of the system, which serves as a primary
economic growth engine of the Island. It reflects both the declining enrollment of the
university as well as the sizeable opportunity to diversify revenue sources, transform
operations through greater utilization of shared services and other administrative
streamlining across its n. campuses. In light of the COVID-19 pandemic, the Oversight Board
has agreed to provide a one-year pause in the further reduction of UPR's annual appropriation
to enable UPR to focus all its efforts on implementing the efficiencies previously required and
not completed. The 2020 Fiscal Plan therefore maintains the UPR subsidy level at 54% in
FY2021. Thereafter, a gradual decrease in the UPR appropriation will continue as previously
envisioned to -$452 million by FY2025.
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EXHIBIT 114: REQUIRED ACTfON ITEMS TO UPR SCHOLARSHIP PROGRAM FOR
MEDICAL STUDENTS
Action item Deadline
• Finalize the program's design, including the terms of the agreement between the • September
program and its beneficiaries, and launch an RFP to identify a third-party provider 2020
• Selectthe third-party provider and finalize contracts • December2020
• Finalize application and selection process and execute awareness campaign • March 2021
• Launch application and selection process • June 2021
Chapter 18. Municipal services reform
18.1 Current state
Puerto Rico's 78 municipalities are also recipients of Commonwealth appropriations. To
incentivize a new operating model between the territory and municipal governments, as well
as municipal operational changes, prior Fiscal Plans reduced Commonwealth appropriations
to municipalities. In FY2018, the total municipal appropriation was $220 million (a reduction
of $150 million relative to the prior year). In FY2019, it was reduced to $176 million, and in
FY2020, as stipulated in the 2019 Fiscal Plan, it was further reduced to $132 million. Over the
past two years, however, there has been little meaningful progress on redefining the
relationship between the territorial government and municipalities, almost no
decentralization of responsibilities, and no expenditure-sharing. Moreover, municipalities
have made little (if any) progress towards implementing the fiscal discipline required to reduce
reliance on Commonwealth appropriations and better reflect a declining population in many
areas. The lack of fiscal management is now being exacerbated by the COVID-19 pandemic,
threatening the ability of municipalities to provide necessary services, such as health.
sanitation, public safety, and emergency services, to their residents and forcing them to
prioritize expenditures.
Over the last decade, Puerto Rico's population has declined by —1896 and it is projected to
continue declining going forward. Given that and absent any other structural reorganization
of responsibilities, municipalities must pursue consolidation of services across multiple
municipalities to enable better and more efficient services for Puerto Rico residents.
Moreover, consolidation would significantly reduce costs by leveraging scale, especially in
areas of services provided directly to residents, such as garbage disposal and maintenance of
municipal buildings and roads.
A further review of historical trends of municipalities' fiscal condition validates the challenge
of operating with declining resources. Analysis of data produced by ABRE Puerto Rico, a non-
profit that evaluates municipality finances, from 'fully-reporting" municipalities
demonstrates a pattern of inability to operate within budget targets (Exhibit n5).273
273 •Fully-reporting" municipalities are defined as the 57 municipalities (out of the 78 total) that reported yearly results to ABRE
Puerto Rico for each year between 2010 and 2018. To avoid any misleading comparisons due to inconsistent data
availability, only these municipalities are analyzed throughout this section.
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EXHIBIT 115: GENERAL FUND REVENUES, ACTUAL VS. BUDGET
General fund revenues actual vs budget Ski
2,100 4 General Fund Rev - Actual General Fund Rev - Budget
2,000
w
1.900
1,800
1.700
1.600
1,500 imk ink
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
• Lir, .••• . 4.4,:.=.2...1163. retorted. ye srly retkASS to WM For esc.h, str VerftMen 201r:14mi Rc E. =ol.u•,• . Ann : •-■ . CS* RRIP1.33ISLIES .re snaieze 2
ltrOUVICPUIMM be.Gtall
In any given year, less than half of the fully-reporting municipalities often recorded a positive
change in general fund balance due to budget shortfalls, and approximately 40% are
dependent on Commonwealth appropriations to operate. From FY2c10 to F172018, these
municipalities' aggregate General Fund balances declined from $55 million to negative $118
million (Exhibit 116). These repeated budget shortfalls put further financial strain on the
following years, driving negative fund balances that have required persistent Commonwealth
support and/or increased borrowing. As currently operating, many of the municipalities are
not fiscally sustainable.
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EXHIBIT 116: FULLY-REPORTING MUNICIPALITIES' END-OF-YEAR GENERAL FUND
BALANCES
Municipalities end-of-year balance, gin:
413, >50% <50%
% of munis with positive change in general fund
150
Cif 0:11, 4120 CD CO 1:1)
100
50
0
-50
-100
-150
-200
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
In total, municipalities have been able to reduce long-term debt (excluding pensions), but this
is primarily due to limited access to credit, particularly after the liquidation of the
Governmental Development Bank (GDB) (Exhibit i17).
EXHIBIT 117: FULLY-REPORTING MUNICIPALITIES' DEBT AND DEBT PAYMENTS
Debtand debt payments by fully-reporting municipalities ,
8.000 — Debt payments Debt 500
450
7.000
400
6,000
350
5,000
300
1
4,000 250
200
3,000
150
2,000
100
1,000
50
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Many mayors argue that municipalities have been given unfunded mandates by the
Commonwealth to provide basic services, and many point to this as a major cause of their
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budget deficits. During the recent COVID-19 pandemic, municipal governments did take over
some central government responsibilities, such as food delivery, and have shown leadership
with testing and contact tracing. However, these actions have often not been intentionally
planned, and thus municipalities have difficulty keeping track of such expenses, which is
critical to qualify for the FEMA reimbursement process under the National Emergency
Declaration. As well, given the poor centralized accounting and data collection of the
Commonwealth, it is difficult to segregate central costs at a municipal level, even though the
Commonwealth has regional offices and employees in nearly every municipality of Puerto
Rico. Given the Commonwealth's extensive regional service infrastructure, there are definitely
redundancies with municipal governments in several areas.
On the revenue side, improving collections has the potential to increase annual revenues for
municipalities. The Municipal Revenue Collection Center (CRIM), which operates property
tax collection on behalf of municipalities, must establish a program to improve collections on
existing properties, reclassify properties that are currently erroneously categorized
(residential v. commercial), and pursue strategies to enhance collections. Current year
collections have averaged approximately 68% in recent years, which is well below comparable
US jurisdictions. Low compliance rates and thousands of properties in Puerto Rico that do not
appear on the property tax rolls affect the revenue productivity and fairness of the property
tax system. CRIM has the responsibility for virtually every aspect of property tax
administration, including developing a cadastral survey, identifying taxable parcels,
developing and maintaining an appraisal manual, developing tax records, calculating the
valuation for all real property, notifying taxpayers of their respective obligations, and
collecting the real and personal property tax. Although CRIM currently delegates services to
select municipalities via collaboration agreements for functions such as appraisals, collections,
verifications, and investigations, municipal governments still have limited roles in the
administration of the property tax. Thus, enhancing the effectiveness of CRIM is critical for
municipal revenues and services.
18.1.1 Act 29-2019
On April 15, 2020, the Title III court issued a decision granting summary judgment to the
Oversight Board on several of its claims against the Governor and AAFAF and nullifying Act
29-2019 as being in violation of PROMESA. The Title III court's order became effective on
May 7, 2020. The effect of this nullification requires municipalities to cover their own
employees' healthcare and PayGo costs. For FY2020, the PayGo and healthcare obligations
are approximately $166 million and $32 million, respectively. The Oversight Board, the
Government, and CRIM have agreed that the combined amount due, $198 million, will be
partially offset by the FY2020 Commonwealth transfer of $132 million (that was transferred
to CRIM in accordance with the 2019 Fiscal Plan and certified Budget). Under Act 29-2019,
CRIM was retaining these funds, but remitted approximately $34 million to municipalities in
lieu of property taxes as part of the monthly remittances. This was in violation of the 2019
Fiscal Plan and certified Budget, and the Commonwealth will recover these funds through the
short-term liquidity facility described in Section 18.2.3. Therefore, CRIM must return the
retained funds to the Commonwealth to be applied as a set-off against these obligations due.
After accounting for the various transfers of funds, the nullification of Act 29-2019 results in
the municipalities currently owing $66 million to the Commonwealth for their employees'
FY2020 PayGo and healthcare contributions. This amount equates to approximately 3% of the
total municipality General Fund budgets in FY2020 (—$2 billion), although the impact varies
on a municipality-by-municipality basis.
The Oversight Board accepted CRIM's proposal to allocate the $132 million in equal
proportion across municipalities. Under this option, every municipality will owe —33%
(representing $66 million of the $198 million total amount due) of its FY2020 PayGo and
ASES obligations. These amounts will be repaid according to the repayment waterfall in
Exhibit 118. This repayment waterfall focuses on incremental revenues that municipalities
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have not considered in their FY2020 budgets. Therefore, the financial impact on
municipalities should be minimized.
EXHIBIT 118: REPAYMENT WATERFALL
Repayment waterfall DeschMon
• CRIM identified 517 6 million of Electronic Loltery proceeds from FY2016 & FY2017 previously not remitted to CRIM as
Slop 1 - Offset
OUCHOnding obligation required by Law
• Use these funds to offset a portion of the remaining obligation of 566 million
against electronic
loiter/ lunds we up
Step 2 - Offset • If tax collections exceed the amount needed to tover annual debt senate on CAE loans. municipalities receive this
excess at the end of the year
outstanding obligation
against excess CAE • Use these funds to Milder offset remaining obligations after Step
rebate
• CRIM projects annual municipal advances at the beginning of each focal year and remits funds based on projections
Step 1- Offset
monthly
outstanding obligation
• After the fiscal year ends, CRIM reconciles actual collections to remittances and liquidates any excess to the
against the final FY20
corresponding municipality
liquidation
• Use these funds to further offset remaining obligations after Steps 1 and 2
• CM will value and plan to monetize its portfolio of accounts receivable by the end of FY2021 This action is projected
Step 4 - Offset
lo result in up la 5400 million to proceeds
outstanding obligation • Proceeds from the sale of this portfolio shall be paid to the Commonwealth to further offset remaining obligations after
against the collection
Steps 1 2 and 3
of aged Accounts
Receivable
• If FY2020 PayGo and health care obligations are not fully repaid after Steps 1. 2.3 and 4, CRIM should offset the
municipaRy's monthly advances until the remaining obligation is repaid in hill
• To minimize the impact of offsets. MN must undertake revenue enhancing measures to secure additional revenues
Step 5 - Offset that could then offset the remaining liability due
outstanding obligation • If CRIM does not achieve its revepue-enhancing measures by the end of FY2022. a series of collection measures will be
against municipal enacted These measures include the establishment of a Iockbox mechanism to control all cash receipts and
advances disbursements and an immediate offset of 25% of the outstanding obligation from property tax advances
• These offsets will continue in varying amounts until the obligation is fully repaid
• If the balance of the FY2020 health care and PayGo obligations is not paid clown by the end of FY2022. the budgeted
monthly Commonwealth transfer will be placed on hold until such time as the requirement is mat
18.2 Disaster recovery and the COVID-19 crisis
18.2.1 Accelerating post-disaster recovery at municipalities
Puerto Rico has experienced historic and unprecedented disasters since 2017. The impact of
Hurricanes Irma and Maria, as well as a magnitude 6.4 earthquake on January 7, 2020 (and
the subsequent aftershocks), resulted in significant damage to the infrastructure and
economy, and prompted material out-migration. The Federal Government has supported
post-hurricane reconstruction in the municipalities primarily through FEMA's Permanent
Work (Categories C-G) Small Projects and Community Disaster Loans (CDLs). Small Projects
are defined as those with total project costs of up to $123,100 for Permanent Work Categories
C-G. As of May 18, 2020, 1,224 projects have been obligated to municipalities, totaling -$48.9
million, of which -$33.5 million has been disbursed. In addition, 3,285 Small Projects are
currently in the project formulation stage, with a total approximate cost of $152 million. CDLs
are provided to municipalities that have suffered a substantial loss of revenues as a result of a
disaster and that can demonstrate a need for federal financial assistance to perform critical
functions such as payroll, supplies, and maintenance materials related to disaster operations.
76 of the 78 municipalities have received nearly $300 million from the Federal Government
to make up for lost revenues due to the Hurricanes in the form of CDLs. Municipalities and
the people of Puerto Rico have also received disaster funding through Individual Assistance
programs, Small Business Administration Loans, Department of Housing CDBG-DR
programs, and Department of Transportation funding.
On December 7, 2019, the Oversight Board approved the Government's request to establish a
"State Recovery Fund" that would fund advances to eligible Small Projects under the FEMA
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Public Assistance program, which many municipalities required due to a lack of liquidity.274
The State Recovery Fund was financed solely from a reprogramming of the $100 million
FY2020 certified budget appropriation under the custody of OMB designated as "Cost share
of public assistance" and is to be used only for Small Projects (as defined above). The Oversight
Board also included several requirements from the Government as a precondition to approval
of this State Recovery Fund. Since the establishment of this State Recovery Fund, COR3 has
informed the Oversight Board that $92.5 million would be returned to OMB given other
mechanisms have been put in place to expedite Small Projects and the funds are no longer
required by the municipalities.275
The 2020 Fiscal Plan includes the use of $9 million requested for the first required steps of
demolition and debris removal as a result of the earthquakes in Guayanilla, Guanica, and,
Pefiuelas, which are a prerequisite for redevelopment of the southwest region. As a next step,
the Oversight Board urged the Government to determine what incremental efforts of this type
are necessary in other municipalities (e.g. Ponce and Yauco) that have suffered from the
earthquakes, and that these incremental requests be submitted for Oversight Board approval
as soon as possible.
Beyond the first steps of demolition and debris removal, the next step should be the
development of an integrated and comprehensive plan for the long-term economic
reconstruction of the southwest region, focusing on rebuilding with resiliency and taking into
account the changes in the economy in a post-COVID world, the patterns of migration from
the area, and the potentially-permanent risks to populations from the earthquakes and erosion
after the hurricane, among other factors. This plan should be developed in coordination with
FEMA and other relevant agencies.
18.2.2 COVID-ig crisis
In response to the COVID-19 crisis, the 2020 Fiscal Plan provides for a one-year pause in the
further reduction of Commonwealth appropriations to municipalities; accordingly, the
FY2021 appropriation will remain at $132 million (i.e., the same as in FY2020) rather than
decline by $44 million as defined in the 2019 Fiscal Plan. This additional financial support for
municipalities should be used to effectively implement strategies that will allow municipalities
to improve their financial sustainability by instituting critical changes in operating structure,
sharing costs through consolidated services, and improving revenue collection.
In addition, the Governor signed an executive order that adopts the "Strategic Plan for
Disbursement" of the $2.2 billion allocated to Puerto Rico by the Coronavirus Relief Fund
created by the Federal Government through the CARES Act, which assigns $1oo million to be
transferred to the municipalities for eligible expenses related to COVID-19.
18.2.3 Liquidity Facility
The onset of the COVID-19 pandemic resulted in the deferral of the personal property tax
return due date as an emergency measure enacted by the Government. This extension has
created a short-term liquidity challenge for CRIM and the municipalities for the remainder of
FY2020 (May and June) and the first month of FY2021 (July). The Oversight Board approved
a short-term liquidity facility of up to $185 million, funded by the Commonwealth, to ensure
that CRIM can continue to advance monthly tax remittances to municipalities, which are
crucial for municipal operations. This authorization will be in effect through July 31, 2020.
The use of the liquidity facility is dependent on an approved budget that incorporates monthly
municipal net remittances, payment of certain statutory and contractual debts, and CRIM
274 Oversig
• ht Board letters dated December 7 and December 14, 2019.
275 COR3 letter to the Oversight Board dated April 14, 2020.
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operations. Repayment of the loan will come from basic property tax revenues received by
CRIM, with receipts expected in August, September, and October 2020. This liquidity facility
shall be repaid in full on or before November 30, 2020. The creation of a lockbox account will
be required to protect the Commonwealth's collateral. In addition, CRIM will be required to
provide both weekly and monthly financial reports regarding tax collection activity and
financial statements, including income statements, balance sheets, and cash flow statements.
18.3 Vision and reform needed to transform municipal
services
Given the lack of meaningful progress to date in achieving municipal government services
reform and municipalities' financial challenges, particularly in the context of the Hurricanes,
earthquakes, and COVID-19, the Government will need to develop a solution to streamline and
consolidate municipal services throughout Puerto Rico. Otherwise, the Government faces the
prospect of expanding municipal operating deficits, further deteriorating infrastructure, and
worsening service delivery.
Since municipalities provide services that are, in most cases, complementary to those of the
Government, the Commonwealth should take this opportunity to rethink the entire
governmental structure, not just that of municipal governments. This will allow the
Government to deliver better services across agencies in coordination with municipalities, and
to do so more cost-effectively. A centralized approach has proven, repeatedly, to be inadequate
for the management of various government programs in Puerto Rico. A new decentralized
model could remove the bottleneck of centralized Commonwealth agencies, dramatically
increasing capacity to respond to a crisis and improving service delivery at a local level.
Unfortunately, the vast majority of municipalities do not (individually) have the
administrative or financial capacity to operate Commonwealth programs. Many also lack the
economies of scale necessary to be efficient with programs such as ASUME, ADFAN, or
Vivienda. However, a consolidated municipal service structure could enable the delegation of
certain Commonwealth responsibilities to local governments. Such a model could yield
municipal and Commonwealth savings, and a portion of those savings could be reinvested
back into the municipalities where savings are realized.
In addition, a more integrated government structure could help implement locally-based
economic development strategies, which are more viable at a regional level than on an
individual municipality basis. On the revenue side, service consolidation could further
enhance the coordination of property tax collection by standardizing and automating
processes and integrating data and information systems.
18.3,1 Incentivizing consolidation of services
To further incentivize service consolidation, the 2020 Fiscal Plan lays out a set of voluntary
options for municipalities to consider. By consolidating services, municipalities will be able to
significantly reduce costs. Under this approach, municipalities that voluntarily choose to
consolidate services will be eligible to receive a one-time financial incentive upon certification
of such action by the Oversight Board. To fund this initiative, the 2020 Fiscal Plan sets aside
$22 million in each fiscal year through FY2025 for distribution among municipalities that
complete service consolidations, as confirmed by the Oversight Board. The amount distributed
will be determined in coordination between AAFAF and the Oversight Board and will depend
on the size of the municipality and the scale of service consolidation. The 2020 Fiscal Plan
otherwise maintains the overall approach of phasing-out the entirety of municipal
appropriations, which will reach zero by FY2025.
Exhibit 119 illustrates the reduction in municipal appropriations that would occur if voluntary
consolidation of services is not pursued and the status quo is maintained.
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EXHIBIT 119: REDUCTION IN MUNICIPAL APPROPRIATIONS UNDER STATUS QUO
SCENARIO
Summary of appropriaton (net of measures), 13m
IN. Measures impact
111110 1110 COP 11110 41111.
132 132
88
44 44
FY20 FY21 FY22 FY23 FY24 FY25
18.3.2 Oversight Board's municipalities pilot program
On May 9, 2019, the Oversight Board announced that all 78 municipalities would become
covered instrumentalities under PROMESA, with the aim of securing their long-term fiscal
viability. As part of the initiative, the Oversight Board selected 10 geographically-aligned
municipalities for a pilot program to develop fiscal plans and budgets to be reviewed and
certified by the Oversight Board.
The ten municipalities selected from the central and northern regions are Orocovis, Aibonito,
Barranquitas, Cidra, Comerio, Villalba, Camuy, Isabela, Quebradillas, and San Sebastian.
Each municipality is required to include spending reduction and efficiency measures in their
fiscal plans. These measures may include inter-municipal shared services arrangements,
programs to improve and optimize local revenue collection, economic development
guidelines, and decentralization proposals, and the Oversight Board has offered technical
assistance in this process. The pilot program will show the value of consolidating services in
seeking to reduce expenses and achieve long-term fiscal viability.
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EXHIBIT 120: MAP OF MUNICIPALITIES PARTICIPATING IN THE OVERSIGHT BOARD'S
PILOT PROGRAM
Pilot Municipalities
•••■••
AO-
..1•-■=1■••
a-
18.3.3 Property tax reform
CRIM plays an important role in supporting Puerto Rico's municipalities in their economic
and social development by ensuring an efficient process to collect and distribute real and
personal property tax revenues, which are an important revenue stream for municipalities. In
FY2020, property taxes represented approximately 29% of the aggregate general fund budget
for municipalities.
Historically, the taxable value of real and personal property has been significantly reduced by
tax exemptions and exonerations. In FY2019 for example, more than 50% of the real and
personal property tax base was eliminated through these exemptions and exonerations. In
addition, there is a backlog of real properties not yet appraised, and collection rates for current
year real property tax billings are well below comparable jurisdictions at approximately 68%.
This has resulted in a large accounts receivable balance. Therefore, it is essential that CRIM
seize all opportunities to maximize property tax collections to improve municipal revenues.
In partnership with the municipalities, CRIM must implement measures to capture unrealized
property tax revenues by increasing tax compliance and improving overall collection rates.
CRIM must also update the tax roll to include the tens of thousands of non-registered
properties and home improvements. Additionally, CRIM must undergo an operational
transformation centered around the replacement of outdated and inefficient applications and
hardware and the establishment of a data-driven culture. Based on implementation planning
discussions with CRIM management, CRIM estimates these initiatives could produce:
■ $70 million of additional annual revenue from raising real property tax compliance from
68% to 76%;
■ $118 million of additional annual revenue from registering properties and home
improvements not on the tax roll;
■ $400 million of one-time revenue from selling the accounts receivable portfolio; and
Additional revenue-enhancing measures are identified in CRIM's Fiscal Plan.
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Chapter 19. Pension reform
19.1 Current state of and required changes to pension reform
The Government operates three public employee retirement systems in Puerto Rico: The
Employees' Retirement System (ERS), the Teachers' Retirement System (TRS), and the
Judiciary Retirement System (JRS). The systems have different tiers of benefit formulas, some
of which are traditional defined benefit pensions based upon years of service and final salary,
while others are hybrid cash balance plans. Under the hybrid cash balance plans, employees
have notional accounts credited with contributions and interest, and upon retirement, benefits
are payable as an annuity. Different benefit tiers apply to employees based upon the year in
which they were hired. Per the latest data available, each of the systems included the following
liabilities: 276
■ ERS: 242,000 total covered (119,000 active employees, 123,000 retirees and other
beneficiaries); with $1.5 billion in annual benefits and $31 billion in total actuarial
liability277
■ TRS: 79,000 total covered (35,000 active employees, 44,000 retirees and other
beneficiaries); with $0.7 billion in annual benefits and $17 billion in total actuarial liability
■ JRS: 878 total covered (364 active employees, 514 retirees and other beneficiaries); with
$25 million in annual benefits and $0.7 billion in total actuarial liability
All employees have historically made contributions toward their benefits, albeit
at different rates. Most regular government employees (including police officers as of
January 1, 2020) also participate in Social Security, which includes both employer and
employee contributions; most teachers and judges do not participate.
276 All liability estimates are as of July 1, 2017, and benefit estimates are for FY2018, but based on census data as of July 1,
2016
277 Coverage counts do not include participants who are terminated and owed a deferred vested benefit as this participant data
is unavailable. The liability for these participants is estimated via a load in the actuarial liability.
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EXHIBIT 121: PUBLIC EMPLOYEE RETIREMENT SYSTEMS OVERVIEW (PRIOR TO PLAN
OF ADJUSTMENT)
Defined Benefit Hybrid Cash Balance Defined Contribution Social Security
Group Component Component Component Coverage
.—
ERS Hired Jan 1, None Based on employee Based on employee Police - Yes1
2000 or later contributions and a share contributions Others - Yes
of investment earnings beginning July 1:
prior to July 1, 2017 2017
ERS - Hired before Based on years of Based on employee Based on employee Police - Yes1
2000 sernce and salary, contributions and a share contributions Others - Yes
frozen as of June 30, of investment earnings beginning July 1,
2013 from June 30, 2013 to 2017
July 1, 2017
TRS - Hired Aug None None Based on employee No
1, 2014 or later contributions
IRS - Hired before Based on salary None None No
Aug 1, 2014 and years of service
JRS - Hired Jul 1 Reduced formula Based on employee None No
2014 or later based on salary and contributions and a share
years of service of investment earnings
JRS — Hired before Based on salary None None No
Jul 1, 2014 and years of service
• sa of fx-s ..sere• wirored in Sscial Sacuray traces as cf January
Over many decades, successive governments have failed to adequately fund these
retirement plans, and today the ERS, TRS, and JRS are nearly insolvent. In fact,
Commonwealth PayGo expenditures to provide pension benefits are expected to continue
constituting over 1/5 of General Fund expenditures without further action, as detailed below
(Exhibit 122). In accordance with Section 211 of PROMESA, the Oversight Board published a
detailed report in September 2019 on the Commonwealth's retirement systems.278 This report
provides a comprehensive analysis of the retirement systems' legal structure, operations, and
benefit provisions, as well as additional detail related to the history of management of these
funds and actions by the Commonwealth that led to the insolvency of these plans. Moreover,
it clearly illustrates the systems' critical underfunding and urgent need for reform.
278 Available via the following link: https://drive.google.comSe/d/leJGQ-gRaScilT IxTqHzjLoRxE xEkX1/view
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EXHIBIT 122: PAYGO EXPENDITURES COMPARED TO OVERALL GENERAL FUND
EXPENDITURES, PRE-MEASURES
PayGo expenditures compared to overall General Fund expenditures, SIVi
General Fund expenditures. including social programs (e. g., Medicaid)' /Total PayGo PayGo as %tit General Fund expendilures
12.000
11,000
10,000
9.000
8.000
7,000
6.000
5,000
4.000
3,000
2.000
1,000
0
FY20 FY21 FY2 FY23 FY24 FY25
26% 26% 22% 21% 21% 21%
These retirement plans have depleted the assets that were set aside to pay benefits. Further,
the employer contributions were not transferred as anticipated.279 Satisfying pension
commitments to current retirees and future retirees and their families is not only important
to these individuals but also important to Puerto Rico's economy as retirees spend virtually all
their income on the Island. Action must be taken to identify a level of benefits that
Puerto Rico can afford and devise a plan for the Government to fund these
revised benefits.
The Commonwealth has already taken critical steps toward a more stable pension system.
Benefits for System 2000 ERS employees hired after January 1, 2000 were transitioned to a
hybrid cash balance design with a benefit level based solely on the level of employee
contributions. Subsequently, various legislation passed from 2013 through 2017 ceased
accruals under the unsustainable ERS and TRS defined benefit (DB) plans (though TRS
reform was subsequently partially overturned). As part of this reform, benefits for all ERS
employees and for TRS employees hired after August 1, 2014 were transitioned to a hybrid
cash balance plan design. With Act 106-2017, the Commonwealth transitioned to a new PayGo
pension system, liquidated assets to help fund benefits owed, and has moved the assets of
recently hired TRS members (and future contributions of ERS members) into segregated
accounts. Hybrid accounts of System 2000 members were not similarly moved into segregated
accounts. The Commonwealth is still in the development stage of implementing true defined
contribution (DC) retirement plans for these members who previously had hybrid cash
balance accounts, but this process has experienced significant delays. There is a need for
further action to ensure the long-term adequate funding of pension benefits; in addition, some
of the current commitments have not yet been fulfilled (e.g., the transition to the new defined
contribution system has not yet been completed).
279 Legislative attempts to increase employer contributions to the pension trust were passed, including the Additional Uniform
Contribution payments for ERS (Act 32-2013) and the Annual Additional Contribution for TRS and JRS (Act 160-2013 and
Act 162-2013), however, large portions went unpaid and/or were not fully implemented prior to elimination by Act 106-2017.
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Puerto Rico's retirement systems must be further reformed to reduce costs and maintain
adequate funding for current and future retirees. The measures included herein will have an
average annual impact of approximately $89 million through FY2o25, once fully implemented
by the start of FY2o23. Reductions to benefits have also been structured to protect lower-
income retirees, who otherwise could become impoverished and therefore be forced to rely
upon government "safety net" benefits.
Only with pension reform can the Government help restore both fiscal balance
and the promise for current and future retirees to safeguard their assets and
their future pensions.
19.2 Proposed pension reform initiatives
Based on the measures herein, restructuring the pension system will lead to $227 million in
savings from FY2020 to FY2025, as shown below (Exhibit 123).
EXHIBIT 123: PENSION REFORM SUMMARY OF IMPACT
Summary of pensions reform impact, $M
Freeze on TRS r JRS ■ 8 5% pension reduction ■ Social Security contributions • System 2000 removal2
200
88 97
81
150 72 20
100 15
Measures 50
0 —
-17
-50
-100
2,301 2.369 2.314 2.248 2240 2,227
PayGa'
FY20 FY21 FY22 FY23 FY24 FY25
19.2.1 Freeze DE accumulation for JRS/TRS and enroll employees in a DC plan
with segregated accounts
TRS members hired prior to August 1, 2014 and all JRS members are currently accruing
benefits under the defined benefit components of their retirement plans. ERS members and
TRS members hired after August 1, 2014 have already transitioned to hybrid cash balance
plans. TRS members hired after August 1, 2014 have subsequently had their hybrid accounts
segregated from the DB plan by Act 106-2017. These segregated balances, along with ERS
contributions made after June 30, 2017, are being transitioned to DC accounts with a targeted
completion date of July 2020.280 To avoid creating future pension liabilities and to
adequately fund the pensions of both taxpayers and future retirees, the JRS and
280 Estimate provided by the Retirement Board in May 2020, however, the Retirement Board indicates that the delay may be
further extended due to COVID-19.
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remaining TRS benefit accruals must be frozen by July 1, 2021. Members will retain
the benefits they have accrued to date, subject to the benefit reduction discussed below. Future
benefits must be based on contributions and earnings in new defined contribution retirement
accounts. This will result in consistent and equitable treatment across ERS, TRS, and JRS,
where all employees will contribute to segregated DC accounts. Going forward, employees
should have certainty that their contributions and investment returns will be safeguarded for
the future through managing their own segregated accounts.
Although in the early years the DB freeze savings are small (—$3 million in FY2022), overtime,
the freeze should produce significant savings (growing to over $300 million per year by
FY2041) which will play a significant role in restoring long-term adequate funding. The freeze
will be implemented through the Plan of Adjustment (see Chapter 21) and is slated to take
effect at the beginning of FY2022 so that needed changes can be implemented.
The 2020 Fiscal Plan reflects freeze provisions that are comparable to the ERB freeze that was
implemented in 2013, with the following key aspects:
■ Participants eligible to retire at the freeze date retain eligibility to retire at any time based
on the benefit that has accrued through the freeze date. Otherwise:
— Individuals that have yet to vest in a benefit amount will be allowed the opportunity to
earn additional service towards vesting after the freeze; the benefit upon vesting will be
calculated based on service as of the freeze date, with prorations of the full 10-year
benefit based on years of service less than 10 years for judges with shorter tenures;
— Certain judges within six months of service as of the freeze of reaching 30-year
enhanced service benefits will be granted six months to grow into a modified enhanced
30-year benefit;
— Normal retirement eligibility will be delayed up to three years for those not yet eligible
for retirement as of the freeze date;
■ Future Cost of Living Adjustments (COLAs) will be eliminated;
■ Minimum benefits and bonuses will be eliminated for future retirements;
■ The ability to purchase additional years of service will be eliminated; and
■ Future terminations due to disability will be entitled to the same benefits as regular
terminations.
19.2.2 8.5% pension benefit reduction
Notwithstanding the reduction in expenditures throughout the Commonwealth's budget,
contractual debt service remains unaffordable. Retirement plan participants, like other
unsecured claimholders, therefore face a reduction of up to 8.5% in the amounts paid to them
by the Commonwealth.281 A reduction in pensions (with protections for participants
close to the poverty level) is appropriate and necessary for the Commonwealth
to achieve long-term fiscal stability. The goal is a balanced approach to restore fiscal
health to Puerto Rico while ensuring that cuts to retirement benefits occur in a manner that
protects any retirees from falling into poverty. The proposed reduction, while significantly
281 As per the terms of the Plan Support Agreement reached between the Oversight Board and Retiree Committee on June 7,
2019. In comparison, the 2019 Fiscal Plan included a reduction that was expressed as a marginal reduction to benefits
above a threshold that varied by position and was indexed, resulting in a 10% average reduction in monthly pension benefits
(including medical insurance bonuses). The revised formulation is a simplified 8.5% fiat reduction to the monthly pension
benefits (excluding medical insurance bonuses) that is limited by a single $1,200 per month threshold, below which benefits
are not reduced.
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smaller as a percentage reduction than those faced by other unsecured claims, including GO
bondholder claims and General Unsecured Claims, will still represent a significant reduction
in retirement income for many retirees. This treatment is similar to the level of reduction in
pension benefits relative to reductions faced by other creditors that has been seen with other
government systems facing pension funding crises.282
Although the benefit reduction will be 8,5%, this reduction will not apply to those with
monthly pension benefits of less than $1,200 per month and will not reduce anyone's monthly
benefits below such level 283 Exhibit 124 illustrates the current distribution of participants by
monthly benefit amount across the Commonwealth's retirement systems.
EXHIBIT 124: DISTRIBUTION OF BENEFIT AMOUNTS BY RETIREMENT SYSTE1V1284
ERS TRS JRS
Number of % of total Number of % of total Number of % of totai
Monthly benefit amount pensioners pensioners pensioners pensioners pensioners pensioners
Up to $1,000 71,065 59.8% 12,1334 27 8% 37 6.9%
$1,000 - $1,200 9,539 8.0% 3,932 8.6% 8 1.5%
$1,200 - $1,500 12.545 10.5% 8.728 191% 23 4.3%
$1.500 - 52.000 12.815 10.7% 7.648 16.7% 34 6.4%
$2.000 - $3,000 9.509 8.0% 12.436 27.2% 51 9.6%
Over $3,000 3,778 3.2% 322 0.7% 380 71.3%
Under this approach, about 59% of retirees would receive no reduction in their
benefits and no retiree will experience a benefit reduction of more than 8.5%
(Exhibit x25).
This formula will also apply to benefits earned by current employees who have yet to retire.
EXHIBIT 125: DISTRIBUTION OF BENEFIT REDUCTION
Distribution of benefit reduction for 2020 Fiscal Plan entities, °AD of retirees
8.5% reduction
36%
Reduction of less than 8.5%
282 For example, in Detroit and Rhode Island, pension cuts ranged from 0-30% across beneficiary categories
283 The reduction formula is determined as follows:
• Calculate the average monthly pension by adding the regular monthly pension amount, the special law pension, and 1/12
of the Christmas, Summer, and Medicine Bonus payments
- Reduce these monthly benefits by 8.5%
• Reductions are limited such that the total benefit level (as defined above) is not reduced below $1,200 per month
284 Based on preliminary information provided by the retirement systems as of July 1, 2019 for participants in payment status as
of that date. Information has not been reconciled with prior system and actuarial data.
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The 2020 Fiscal Plan assumes that this 8.5% reduction shall take effect on January 1, 2022.
19.2.3 Covering more government workers in Social Security
Currently, teachers and judges do not participate in Social Security. They do not pay into the
program, nor does the Government make a Social Security contribution on their behalf. Unlike
ERS members, teachers and judges are entirely reliant on their government pensions for
income in retirement. This places them at risk given that government retirement plans are
poorly funded. Effective January 1, 2020, police officers, who were similarly situated
previously, began actively participating in Social Security.
These groups are exempt from Social Security because of the "Section 218" agreement between
the Commonwealth and the Social Security Administration, which stipulates that certain
government employees have wages that are includable for Social Security and subject to FICA
taxes while others may be exempt from Social Security if they participate in a "qualified
replacement plan." Section 218 of the Social Security law provides guidance as to what
constitutes a "qualified retirement plan," such as a defined benefit plan with a minimum
benefit level or a defined contribution plan in which total employee and employer
contributions equal to at least 7.5% of employee wages. Teachers and judges are both in job
classifications that, under the Section 218 agreement, are exempted if such a "qualified
replacement plan" exists. Under the current TRS and JRS retirement plans, this requirement
is met and, therefore, such employees are exempted from Social Security.
Covering these workers under Social Security will provide them with diversified sources of
income in retirement, and Social Security's progressive benefit formula will provide a stronger
safety net for lower-paid employees. Workers will typically earn greater retirement benefits
under Social Security, based on a 6.2% employee contribution and a 6.2% employer
(government) match, than they would in a DC plan funded only with a 6.2% contribution. For
example, a typical full-career government employee retiring with a salary of $35,000 will be
entitled to a Social Security benefit of approximately $16,000, in addition to the benefit the
employee builds in their defined contribution retirement account.
Social Security retirement benefits are only provided for those who have ten years of covered
earnings. Therefore, it would not be worthwhile for older workers, who may not meet the ten-
year threshold and do not have other employment in which they were covered by Social
Security, to be covered under Social Security. For this reason, only teachers and judges under
the age of 45 shall be covered under Social Security. This can be accomplished without either
an employee referendum or new federal legislation by freezing the TRS and JRS plans and
reducing the defined contributions for current teachers and judges under the age of 45 and all
future teachers and judges hired to an amount lower than the 7.5% required by Section 218.
This step will trigger mandatory enrollment in Social Security. Concurrently, lowering the
employee defined contribution for younger workers will address the loss of take-home pay
they would suffer by having to contribute the 6.2% Social Security payroll tax. This approach
is consistent with the approach used to implement Social Security participation for police
officers in FY2020.
The 2020 Fiscal Plan includes the enrollment of teachers and judges under the age of 45 in
Social Security as of July 1, 2021, coincident with the plan freeze discussed in Section 19.2.1
above. At a further date, the Commonwealth may wish to take the necessary steps to provide
the option for teachers and judges over the age of 45 to be covered under Social Security.
19.2.4 System 2000 settlement
Following the agreement with AFSCME documented in the AFSCME Plan Support Agreement,
the Plan of Adjustment (see Chapter 21) includes specific treatment for certain ERS plan
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participants known as System 2000 members. These are generally ERS members hired on or
after January 1, 2o00.
Beginning for employees that joined ERS on or after January 1, 2000, participants were
enrolled in a hybrid cash balance plan design. The hybrid account balances were credited with
the employee contributions made to the plan and interest that was connected to the overall
ERS trust return. As a result of Act 106-2017, these accounts were frozen as of June 3o, 2017
and no longer were credited with either employee contributions or interest.
For participants who have not yet retired, providing access to a market interest return can help
the participant in achieving greater retirement benefits from these historical contributions. In
lieu of receiving a future benefit from ERS, System 2000 participants will receive the value of
their contributions and any interest accrued under the terms of the plan through the
Commonwealth (approximately $1.5 billion) petition date as a deposit into their Act 106-2017
accounts.
For ERS participants hired prior to January 1, 2000, benefits payable under Act 1 and Act 447
were frozen as of June 30, 2013 by Act 3-2013. As a result, from July 1, 2013 through June 3o,
2017, these employees also accrued a hybrid account from employee contributions and interest
associated with ERS trust returns. These benefits are annuitized and paid out along with the
benefits calculated under Act 1 / Act 447. As this portion of the benefit is largely based on
employee contributions, the benefit reduction described in Section 19.2.2 will not be applied
to the annuitized value of these hybrid accounts.
19.2.5 Other Plan ofAdjustment provisions
The Plan of Adjustment (see Chapter 21) provides that an independent pension reserve trust
will be established and funded to ensure that future PayGo benefits can be paid regardless of
the future economic or political situation in the Commonwealth. Funding for the pension
reserve trust is to be provided according to a formula based on the Commonwealth's annual
surpluses.285
In order to ensure that retirees may benefit from the Commonwealth's outperformance of
Fiscal Plan financial projections, the Plan of Adjustment also contemplates a mechanism
whereby retirees subject to the aforementioned reduction in monthly pension benefits may
see that reduction partially, or even fully, restored in cases where the Commonwealth
materially exceeds the financial projections in the Fiscal Plan that is certified by the Oversight
Board and is in effect as of the Effective Date of the Plan of Adjustment.286
Due to the contingent nature of these provisions, neither are included in the 2020 Fiscal Plan
projections. For additional detail on these and all other Plan of Adjustment provisions, please
refer to the published Plan of Adjustment, available on the Oversight Board website, as the
authoritative source for information.287
19.3 Implementation and enforcement of pensions measures
Advance work will be necessary to prepare the systems for the JRS / TRS freeze and pensions
reductions, as well as to ensure proper communications with all Puerto Rican pension
recipients. The May 2019 Certified Fiscal Plan assumed the full implementation of pension
285 Please refer to Article [XV — Governance and Provisions Regarding Pension Reserve in the February 28, 2020 Amended
Plan of Adjustment for additional detail.
286 Please refer to the definition of 'Benefit Restoration' and Article XL111 - Provision For Treatment Of Active And Retired
Employee Retirement Benefit Claims (Class 39A Through 39E) in the February 28, 2020 Amended Plan of Adjustment for
additional detail.
287 The Plan of Adjustment is available at https://drive.google.comifilek1/1DKAXIMA:IDUvya_UzGjEhyHTAuiuqcfNview
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reform measures by July 1, 2020. Given implementation delays, the 2020 Fiscal Plan assumes
that full implementation of pension reform measures will not occur until January 1, 2022.
19.3.1 Defined Contribution plan implementation
Effective July 1, 2017, Act 106-2017 was passed to commence the process of reforming the
pension systems after years of mismanagement. Since then, the Oversight Board has been
actively encouraging the Government to take further steps to reform the pension system.
Act io6 required implementation of a Defined Contribution plan that would cover all ERS
participants and certain TRS participants (those hired on or after August 1, 2014). It also
created the Retirement Board, which is charged with overseeing the implementation of these
defined contribution accounts. The Defined Contribution plan comprises of individual
retirement accounts funded with contributions that are automatically withheld from each
employee's paycheck. The Defined Contribution plan impacts —104,000 active government
employees and provides not only a mechanism for employees to easily save for their
retirement, but also an opportunity to grow these retirement savings based on either default
or individually-selected investment options.
Shortly after Act io6 was enacted, the Oversight Board issued letters and statements that
emphasized the need for quick and effective implementation of the Defined Contribution plan.
However, implementation of the Defined Contribution plan has taken far longer than
expected, due to both the disruptions caused by the natural disasters and the extensive
administrative delays by the Retirement Board. Litigation over the failure to implement or
develop the Defined Contribution plan began to unfold, led in many respects by significant
unions such as AFSCME and AMPR. This litigation eventually led to AAFAF pledging that
Defined Contribution plan accounts would open no later than 2019. Yet, nearly three years
after enacting Act 106, implementation of the Defined Contribution plan remains incomplete.
The Oversight Board has repeatedly been advised by the Government that Defined
Contribution accounts would be fully implemented in short order, with the balances
transferred to the management of individual employees. Though this has still yet to come to
fruition, the Oversight Board had recently been given assurances that phase 2 of
implementation, including the funding of individual accounts invested at the participant's
direction, would be completed by the end of FY 2020. However, in light of the COVID-19
pandemic, the Oversight Board has subsequently been notified that further delays are now
possible.
Section 201(b)(1) of PROMESA requires the fiscal plan to provide a method to achieve fiscal
responsibility. This includes the responsibility of ensuring that the retirement programs that
the Commonwealth provides to its employees are sufficient to provide adequate retirement
income and minimize the economic dependence of these employees on the Commonwealth in
the future. This is further emphasized by Section 201(b)(1)(C) which requires adequate
funding for public pension systems.
PROMESA Section 201(b)(1)(A)(i) requires that fiscal plans be based on applicable laws. Act
106-2017, which outlines the objectives and provisions for these new Defined Contribution
accounts, specifies in Section 4.2(t) that the Defined Contribution plan should follow the rules
under the Employee Retirement Income Security Act of 1974 ("ERISA"), which contains
standards regarding the rights of Participants and the responsibilities of administrators.288
ERISA defines various fiduciary responsibilities, including Section 404(a) of ERISA which
defines standards for a "Prudent man standard of care". As further defined in Subsection
288 Act 106-2017 Section 4.2(f) states: To establish, implement, and oversee the best practices related to discretion, loyalty,
diligence, and the rules applicable to the New Defined Contribution Plan regarding the operation thereof, the rights of
Participants, the responsibilities of administrators, fiduciary duties, and any other rules applicable under the "Employee
Retirement Income Security Act," Public Law 93-406, of September 2, 1974, or any other pertinent or similar statute.'
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(a)(1)(B), ERISA requires plan fiduciaries, including plans sponsors, to act "with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent man acting in
a like capacity and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims."
It has been almost three years since Act 106-2017 introduced Defined Contribution accounts
for most Commonwealth employees. In the meantime, employee contributions to the Defined
Contribution accounts are being held in a temporary trust with only nominal interest accruals.
Only by full funding of individual accounts will the participants have access to the market
returns implicitly promised by the Government. The Oversight Board feels that the failed
timely implementation of the individual DC accounts is not compliant with fiduciary
responsibilities under ERISA.
Current and future public sector workers need to have confidence that the funds being invested
toward their retirement are being treated with the appropriate level of care and afforded the
opportunity to grow over time. It is precisely because the Government has no financial
obligation for these retirement benefits, that the Government must honor its fiduciary
obligation for implementing the Act 106 plan and transferring employee contribution in a
timely manner.
During this implementation delay, the Oversight Board has repeatedly identified instances
where the Government has failed to ensure employee withholdings are transferred
immediately to the temporary trust where account balances are being held.
■ On April 30, 2019 the Oversight Board notified the Commonwealth that it had identified
agencies that had withheld employee contributions intended for participant DC accounts
but had failed to transfer these dollars to the Retirement System. The total Individual
Contribution debts included $2.6 million on behalf of public corporations and $7 million
on behalf of municipalities. The Oversight Board referred these matters to Commonwealth
and federal authorities, and all outstanding balances have since been collected.
■ On February 21, 2020, the Oversight Board once again outlined Individual Contribution
debt owed by various agencies. Approximately $20 million was identified that was owed
for Individual Contributions made to the DB plan (prior to July 1, 2017) and an additional
$2 million in contributions intended for participant DC accounts. Though the Oversight
Board once again referred matters to the Department of Justice, there remains $20 million
outstanding due to public corporations' lack of liquidity. These debts and the liquidity
position of public corporations continue to be monitored, and the Oversight Board will
continue taking necessary action to ensure that accumulation of additional debt for
Individual Contributions is avoided.
The Oversight Board urges the Government of Puerto Rico to instruct agencies, municipalities,
public corporations, and those entities that manage government payroll to deduct and
immediately address the transfer of these individual contributions. A failure to honor this
fiduciary obligation increases the risk of insufficiency in retirement income, the potential
futility of the benefit offering, and the diminishing viability of employment in the public sector.
The Oversight Board has been actively monitoring the progress of the Retirement Board in
completing the implementation. While the primary focus has been on the timing of
implementation, other issues have arisen that the Oversight Board has addressed. A list of
letters (including the two concerning employee withholdings) from the past year related to
Defined Contribution Plan implementation is contained in Exhibit 126.
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EXHIBIT 126: SUMMARY OF LETTERS SENT BY THE OVERSIGHT BOARD REGARDING
DC IMPLEMENTATION
Letter Description Date
Individual Contributions Oversight Board highlights the lack of April 30, 2019
Withholdings compliance with Act 106 regarding individual
contributions withholdings on behalf of
Government
Act 106— Default Investment Pursuant Section 205 of PROMESA, January 11, 2020
Option Oversight Board provides recommendation to
Government on legislative intervention to
amend Act 106 in order to define the default
investment option as a target date life-cycle
fund, rather than a principal preservation fund
Individual Contributions Oversight Board highlights the continued lack February 21, 2020
Withholdings of compliance with Act 106 regarding
individual contributions withholdings on behalf
of Government
DC Implementation Delay Oversight Board expresses concern with February 27, 2020
Contributions Withholdings constant changes and delay in due dates
Act 106 Policy Response to Government declining April 27, 2020
recommendations in Section 205 letter
previously sent on behalf of Oversight Board
regarding DC implementation delay
Once the transition to the Defined Contribution plans is complete, employees will depend on
the ability of these accounts to produce retirement income. To this end, the Oversight Board
believes that the default investment option offered by the Defined Contribution Plan should
encourage participants to adequately invest their accounts to generate retirement stability.
The current default option of the principal preservation fund is inadequate for this task, and
as such the Oversight Board feels it is important to change the default investment option to
the target date life-cycle fund. This vehicle produces significantly higher long term returns by
providing access to higher returning investments during the period of participants' lives when
they are better able to handle the risk. While the Government has declined to take the Board's
suggestion on this matter, the Oversight Board remains committed to promoting this change
since the default option of a principal preservation fund, as currently provided under Act 106,
is inadequate for retirement readiness.
The Oversight Board believes that the use of a principal protection fund as the default
investment option is not compliant with fiduciary responsibilities under ERISA. The use of
target date funds as an investment option, however, is largely supported by similar plans in
both the private sector and is consistent with the investment vehicles used by many other
governments.
PROMESA Section 201(b)(1)(F) requires the fiscal plan to improve fiscal governance,
accountability, and internal controls. As part of proper governance and accountability, the
fiscal plan requires the government to correct the fiduciary responsibility failure and correct
the default payment option to a more appropriate option of a target date fund. While the
principal protection fund was established as the default investment option by the same Act
106-2017 and perhaps seemed prudent at the time for existing Commonwealth employees and
particularly participants close to retirement, data from the Retirement Board has since shown
that over 8o% of Commonwealth employees have maintained the default investment option.
The Oversight Board feels that it is irresponsible to lead the younger plan participants to have
their investments default to an investment option for their entire career that is meant for older
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workers. Therefore, the Oversight Board believes that it is necessary to change the default
investment option to target date funds which will automatically steer younger workers to
invest in funds consistent with their extended retirement horizon and will automatically shift
older workers to funds that are closer to retirement to the principle protection fund currently
defined for all members.
As part of meeting its fiduciary responsibility, in selecting which target date funds to offer, the
Commonwealth should select funds that have a demonstrated track record of appropriate
management and achieving returns that are justified by their fees. This will provide
Commonwealth employees with the tools they need to be adequately prepared for retirement.
19.3.2 PayGo Compliance
In addition to establishing the Defined Contribution Plan, the passage of Act 106-2017
established the Pay-as-you-Go ("PayGo") system. The PayGo system, under which pension
benefits are paid out of the annual Commonwealth budget rather than via amounts previously
set aside into pension trust funds, was implemented to ensure the continued payment of
benefits to retirees given that the ERS, TRS, and JRS trust funds were effectively insolvent.
Currently, PayGo obligations represent approximately 26% of General Fund expenditures.
Section 2.1(b) of Act 106-2017 establishes a PayGo Fee that is "equal to the amount paid to
Retirees and Beneficiaries of each covered entity." The responsibility for entities to pay this
Fee and the authority of the Office of Management and Budget to collect the fee is further
outlined in the legislation. Section 2.1(f) authorizes the Office of Management and Budget to
"withhold from the appropriations made to the agencies of the Government of Puerto Rico,
the necessary amounts for the payment of the Pay-Go Fee, if it determines that such
withholding is necessary to ensure that covered entities fulfill their obligation." Section 3.5(2)
further subjects any entity who fails to remit the Fee to a series of corrective actions, including
the following items all to be requested by the Retirement Board in writing:
■ The immediate transfer of the Pay-Go fee or delinquent contribution
■ The Secretary of Treasury to make adjustments to the "accounts, obligations, and advances
that the Department of Treasury must remit to the delinquent employer"
■ That the Municipal Revenue Collection Center, "CRIM", remits the Pay-Go fee or
delinquent contribution of the "unencumbered balance of the property tax and other
revenues that the Municipalities are entitled to receive."
■ The Office of Management and Budget may withhold any form of appropriations to
agencies necessary to meet the Pay-Go Fee obligation
The Oversight Board continuously monitors the status of entity compliance with paying the
Pay-Go Fee. Exhibit 127 demonstrates the significant level of PayGo debt owed by
Commonwealth Government Entities and Municipalities as of May 15, 2020.
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EXHIBIT 127: CURRENT PAYGO DEBT FOR MUNICIPALITIES AND PUBLIC
CORPORATIONS ($M)
Entity type
. _
F(2018 debt 1 Y2019 debt FY2020 debt I Total
M unicipality 132 132 214
Commonwealth 49 30 44 123
government entities
Total 1111 112 44 237
.0 *re, .wreere wqrivfti iewes.sine weacedwei crsiclolercwe ■ wcar);:= IftWelm't Sre..X.C'ee'Os
r :7- • 4:1: nor urremwtot rearrriere /al me.
There has been an effort to have delinquent agencies enter into payment plans to resolve
historic PayGo debt. As of May 15, 2020, twenty-seven municipalities and public corporations
have entered into repayment plans, with seven other active negotiations ongoing. Signed
payment plans account for -- $48 million of the $337 million in outstanding debt.
The Oversight Board has further discussed with AAFAF possible remedies to further reduce
the outstanding debt. AAFAF has the authority under Section 8(e) of Act 2 — 2017 to appoint
a representative to oversee compliance with the execution of the Fiscal Plan, including
compliance with the requirement that future and historic PayGo Fees be remitted in a timely
fashion. Further, Section 8(b)(iv) of Act 2 — 2017 permits that when reports indicate an entity's
cash flows are not consistent with the certified Budget, AAFAF may "direct and perform
banking transactions on behalf of the appropriate entities of the Government of Puerto Rico
to make debt service payments, among others." The Oversight Board and AAFAF have
discussed actions including, but not limited to, withholding general fund revenues and/or
debiting existing cash accounts to satisfy PayGo Fee debt.
Proper long-term health of the PayGo system requires constant compliance with and
monitoring of the PayGo Fees as set forth in Act 106-2017. Failure to ensure these payments
continue to be made would threaten the ability of the General Fund to sustain pension
payments in the long-term and ultimately harm the welfare of Commonwealth retirees.
19.3.3 Soda/ Security Working Group
The Oversight Board reached out to the Government on February 27, 2020 to convene an
interagency working group (the "Social Security Working Group") to oversee the
implementation of Social Security for teachers and judges. The expansion of access to Social
Security for public workers has been a goal since the 2017 Fiscal Plan, and the Social Security
Working Group has been created to prevent additional delays in ensuring that public
employees are eligible for this benefit, particularly in light of past delays and challenges
experienced as part of the implementation process.
On July 19, 2019, the Governor enacted legislation (Act 71-2019) to allow for the participation
of police officers in Social Security. Multiple Fiscal Plans, including the 2019 Fiscal Plan, called
for police officers to have access to Social Security no later than July 1, 2019. To provide
adequate funding, the certified Commonwealth budgets also provided the appropriations
needed for the Police Bureau to fund their Social Security contributions. Nevertheless, the
implementation of Social Security for police was delayed by six months to January 1, 2020.
The Social Security Working Group will be addressing the lessons learned from the
implementation of Social Security for police officers, payroll implementation, and optional
participation election with the participation of members selected by the Government from
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AAFAF, the Department of Education, the Retirement Board, the Department of the Treasury,
and the Office of Court Administration, as well as representation from the teachers' union.
The Working Group has begun meeting, developing timelines, and assigning the tasks
necessary to meet this goal, including educational materials for all teachers and judges. In
connection with this, and at the Oversight Board's recommendation, the Social Security
Working Group is also participating in implementation discussions related to the Defined
Contribution plan so that all retirement related withholdings are coordinated. This is
important in particular for police whose minimum Defined Contribution requirements have
been reduced to 2.3%, with an additional 6.2% being withheld for Social Security FICA
purposes. Based on the terms of their Section 218 agreement, police that want to maintain
their eligibility for Social Security coverage cannot be allowed to contribute more than the 7.5%
bar for a qualified replacement plan under Social Security law to their Defined Contribution
accounts. Similar protocols will also need to be in place for teachers and judges that eventually
are enrolled in Social Security.289
19.3.4 Municipality PayGo and Act 29
Act 29-2019 was passed by the Government to alleviate the municipalities from the
responsibility for payment of their respective PayGo contributions (as established by Act io6-
2017) and healthcare costs associated with ASES. The Oversight Board filed a complaint
seeking to nullify the law. On April 15, 2020, the Title III Court granted the Oversight Board's
motion for summary judgment and ruled that Act 29-2019 violated PROMESA and was
nullified. The Title III Court delayed the effective date of its ruling through May 6, 2020, at
the request of the Government, to give the Oversight Board and the Government an
opportunity to discuss potential solutions for the impact of Act 29-2019 nullification. The Title
III Court entered its order on May 7, 2020 and, as a result, Act 29-2019 is nullified and no
longer in effect and the municipalities are expected to continue to be responsible for their
respective PayGo and ASES contributions. A payment plan was put in place to extinguish the
$198 million FY2o2o liability that does not affect operating budgets and enables repayment
from incremental, unbudgeted revenues over a two-year period.
19.3.5 Required implementation actions
To achieve the 2020 Fiscal Plan pension reform measures, certain action items must be
implemented according to the schedule described in Exhibit 128.
289 https://www.irs.gov/publirs-pdf/p963.pdf
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EXHIBIT 128: REQUIRED IMPLEMENTATION ACTIONS FOR PENSION REFORM
Action item Target date FY2021 budget incentive
• Transition teachers hired after August 1, 2014 and ERS ■ July 2020 • Provide an additional 20%
post-2017 contributions to segregated DC accounts to AAFAF professional
services budget'
• Implement JRS / 7RS freeze and transition to • July 2021
segregated DC accounts
• Enroll teachers and judges underage 45, as wetl as • July 2021
new hires, in Social Security
• Implernent8,5% pension reduction • January
2022
Chapter 20. Ensuring successful implementation and
fiscal controls
As discussed in Chapter 14, the OCFO has broad responsibility for improving fiscal
management as outlined in the 2020 Fiscal Plan. Below are specific details regarding the
necessary implementation steps and reporting required by the 2020 Fiscal Plan.
20.1 Implementation architecture
Developing a centrally-run PMO is an important step toward ensuring the implementation
and tracking of the core operational transformation and agency efficiency measures that will
achieve savings targets under the 2020 Fiscal Plan. The ()CFO should serve as the central PMO
with defined reporting to the Governor of all economic and transformation measures. The
PMO should be run by OCFO senior leadership, regularly coordinate across OMB and OARTH,
work directly and frequently with Agency PMOs, and report directly into the Governor's office.
Individual Agency PMOs should be established with direct reporting to the ()CFO PMO. Each
agency head shall be responsible for developing and implementing a PMO structure that best
fits their respective agency groupings. They are expected to coordinate across all agencies in
their grouping, lead reforms for the grouping and be responsible for achieving their agency
grouping savings targets. Through this PMO structure, the Government will be positioned to
effectively manage and implement the 2020 Fiscal Plan. As such:
■ Designated agency heads should lead the Agency PMOs and report directly to the OCFO
■ Agency PMOs should undertake the required work to implement initiatives
■ The daily activities of PMOs should be managed and undertaken by staff knowledgeable in
the relevant subject matter areas, and assigned members meet regularly with PMO
leadership to report on progress and facilitate necessary decision-making
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■ Agency PMOs shall be responsible for assembling a taskforce to: complete validation and
definition of full scope of projects and priorities; finalize reporting tools and tracking
responsibilities; and perform ongoing weekly tracking and reporting.
The PMOs should ensure continued implementation progress through robust tracking and
reporting tools that foster growth in transparency and ownership, including:
■ Project charters that establish the goals and structures of measures, identify risks and
obstacles, and establish metrics and KPIs
■ Implementation plans with detailed layouts of each activity required for accomplishing
sub-measures, risks / mitigants for each activity, clear leaders and owners for each activity,
and metrics and KPIs. These should include a "live" calendar of updates and status of each
measure. If an activity goes behind schedule, the workplan will reflect that the activity is
still in progress.
■ Implementation dashboard / tracker that provides a single snapshot of the entire
transformation plan; and allows management to know the status of each initiative in a
distinct status: Complete; In Progress; Delays; Major Issues. This tracker will allow the
Oversight Board to monitor progress and ensure enforcement of measures and reforms.
■ Sub-measure dashboards that provide "zoomed in" views of a specific sub-measure,
display progress with details / commentary on project status, include agreed upon
milestones / dates to track progress, and provide mitigation plans
■ Implementation monthly reports that provide a more detailed perspective on
progress, including several key reporting elements: a) headcount by regular and transitory
with more details in specific agency cases, b) budget to actuals by cost category and
concept, c) milestones progress, d) KPIs/leading indicators, e) achieved savings to date.
These reports provide important codification of progress as well as context for monthly
meetings where agencies, OCFO and Oversight Board representatives can hold meaningful
discussions on progress, items at risk and ongoing mitigating activities
20.2 Oversight Board and OCFO implementation
collaboration
The Oversight Board has played, and will continue to play, an active role in overseeing all
aspects of Fiscal Plan implementation. The OCFO must provide the Oversight Board and its
staff the information needed to effectively track the status of key initiatives included in the
2020 Fiscal Plan, which is necessary to measure overall progress against the fiscal and budget
objectives outlined therein.
For example, the ()CFO will provide Oversight Board staff with key management artifacts on
a timely basis, including:
■ Implementation plans submitted by individual PMOs
■ Progress reviews (including milestones and metrics) against key structural and
fiscal measures
■ Reviews of key implementation risks, including assessments of the likelihood of
realization, potential impact, and potential mitigations
■ Monthly progress reports submitted by individual PMOs
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20.3 Reporting on Fiscal Plan reforms
The fiscal and structural reforms described in the 2020 Fiscal Plan represent a
significant and transformative effort across the Government. As such, there are
strict reporting requirements needed to ensure savings and growth targets are being achieved
on time, and to identify any major risks to reform to course correct at an early stage.
To date, however, the Government has struggled with implementing reforms and
reporting on this implementation in timely manner. Progress has, as a result, been
inconsistent and incomplete, and many agencies appear unprepared to meet savings targets.
While some progress on measures has been made, many reforms are delayed or not occurring.
In cases where certain reforms will not occur, the Government must achieve these savings
through other means.
The Government shall produce monthly performance reports, which shall be
submitted to the Oversight Board on the 15th of each month, demonstrating the progress made
on all key reform areas. Agency efficiency savings that have been realized should be broken
down by grouping and agency across payroll and non-payroll savings (as well as on an object
level where needed) and display the performance of the realized agency efficiency savings for
each agency against the projections as set forth herein. Implementation reports should
explicitly explain how budget-to-actuals reports tie to agency actions and reforms, and what
is driving major discrepancies. Reporting shall also include detail on use of funds for
professional services, as well as within the "englobadas" cost concept, such that these expenses
can be appropriately managed. To date, less than 50% of agency groupings have consistently
provided implementation reporting. The Government must improve reporting such that it and
the Oversight Board can hold agencies accountable for achieving savings.
If, after any fiscal quarter the projected agency efficiency savings for any grouping is not
realized, the shortfall from that fiscal quarter will be added to the agency efficiency savings
target for the corresponding grouping for the following quarter. As needed, the Oversight
Board will also hold public hearings to review implementation progress. Should there be
underperformance in agency efficiency savings for any grouping, the Oversight Board may rely
on its powers and rights pursuant to PROMESA to take measures to enforce reductions in the
amount of unrealized savings.
20.4 Ensuring fiscal controls and transparency
Consistent with Chapter 14, the OCFO must improve fiscal governance, accountability, and
internal controls over the Government's finances and budget. To ensure that there is
transparency into the Government's progress toward meeting its savings targets, the
Government is expected to meet the following milestones (Exhibit 129).
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EXHIBIT 129: FISCAL CONTROLS AND REPORTING KEY IMPLEMENTATION
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In addition to meeting the above milestones, the Government must proceed according to the
following budgetary requirements:
■ The Department of the Treasury will remit to: the Legislative Branch and its components,
the Judicial Branch, the University of Puerto Rico ("UPR"), and the non-profit entities that
receive funds from the General Fund, monthly and in advance, the budgetary allotments
corresponding to one-twelfth (1/12) of the budget allocation provided herein for such
entities. The one-twelfth monthly allocation to each entity (except with respect to the
Judicial Branch) shall be subject to the two and half percent (2.5%) withholding set forth
in the section below during the first three quarters of FY2021.
■ The Director of the Office of Management and Budget ("OMB") may authorize the
encumbrance and disbursement of up to ninety-seven and a half percent (97.5%) of each
appropriation intended for encumbrance and disbursement during the first three quarters
of FY2021. The Director of OMB shall withhold the remaining two and a half percent
(2.5%) of each appropriation until after the end of the third quarter of FY2021. Such
withheld percentage of each appropriation shall only be encumbered and disbursed during
the fourth quarter of FY2021 if (1) the first eight months of actual General Fund revenues
reported to the Oversight Board reach the revenue forecast in the 2020 Fiscal Plan for that
period and (2) the encumbrance and disbursement is approved first by the Oversight
Board and then authorized by the Director of OMB. If actual General Fund revenues for
the first eight months of the FY2021 fail to reach the revenue forecast for that period, the
amount of the withheld percentage of each appropriation that may be encumbered and
disbursed shall be reduced proportionally according to the negative budget variance
between projected and actual General Fund revenues. Notwithstanding the foregoing,
PayGo appropriations and agencies in the Department of Public Safety and in the Health
groupings, as defined in the 2020 Fiscal Plan, shall not be subject to the two and half
percent (2.5%) withholding requirement.
■ No later than 45 days after the closing of each quarter of FY2021, the Secretary of Treasury
shall revise the projected net revenues of the General Fund for FY2021 (the "Quarterly
Revision") and notify the revision to the Director of the OMB, the Governor and the
Oversight Board. The Quarterly Revision shall project future revenues based on actual
General Fund revenues and include revisions to the assumptions used to generate the
General Fund's net revenue projections.
■ All appropriations authorized in any prior fiscal year, including appropriations without a
specific fiscal year, are eliminated and no disbursement of public funds may be covered by
such appropriations, except the following which the Oversight Board redeploys as current
appropriations, subject to Oversight Board adjustment at any time: (1) appropriations
authorized in the fiscal year to carry out permanent improvements that have been
encumbered, accounted for and kept on the books; (2) appropriations in the certified
budget for equipment with procurement cycles that extend beyond the end of the fiscal
year, which are encumbered on or before June 30, 2021; (3) the portion of the
appropriations authorized for fiscal year that have been encumbered on or before June 30
of such fiscal year, which shall be kept in the books for 6o days after the termination of
that fiscal year and after those 6o days no amount shall be drawn against such portion for
any reason; (4) the appropriation in the amount $130 million for the emergency reserve
included in the FY2020 certified budget and required by Section 5.2.8 in the 2020 Fiscal
Plan (the "Emergency Reserve"); (5) the unobligated portion of the $100 million Public
Assistance Federal Fund Matching appropriation included in the FY2020 certified budget;
(6) the appropriation in the amount of $34 million for the UPR Scholarships Fund
included in the FY2019 and FY2020 certified budgets, which is held under the custody of
the Department of Treasury; (7) Unused appropriations for use in audit services held at
the Department of Treasury; (8) FY2020 unused General Funds intended for Medicaid
related expenditures; (9) Unused Title III funds; (10) Reported unused funds from
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Department of Health's Mental Disability program until the end of the following fiscal
year; and (11) unused Special Revenue Funds collected during prior fiscal years for Ports
Authority, Puerto Rico Convention Center District Authority and Puerto Rico Tourism
Company. In addition, this restriction on the use of appropriations of prior fiscal years
shall not apply to: (i) programs financed in whole or in part with federal funds; or (ii)
orders by the United States district court with jurisdiction over all matters under Title III
of PROMESA.
■ On or before July 31, 2020, the Treasury Secretary, Executive Director of the Fiscal Agency
and Financial Advisory Authority ("AAFAF", by its Spanish acronym), and the Director of
the OMB shall provide to the Oversight Board a certification indicating the amounts of
unused FY2o2o appropriations for items (1), (2), (3), (4), (5) (6), (7), (8), and (9) of the
previous section.
■ Each power of OMB, AAFAF or the Department of the Treasury, including the authorities
granted under Act 230-1974, as amended, known as the "Puerto Rico Government
Accounting Act" ("Act 23o"), to authorize the reprogramming or extension of
appropriations of prior fiscal years is hereby suspended.
■ The appropriations approved in this budget may only be reprogrammed with the prior
approval of the Oversight Board. For the avoidance of doubt, this prohibition includes any
reprogramming of any amount, line item or expenditure provided in this budget,
regardless of whether it is an intra-agency reprogramming. Reprogramming also known
as reapportionments may be made into spend concepts and/or objects not explicitly listed
in the FY2021 certified budget resolution as long as such requests are submitted to and
approved by the Oversight Board.
■ The Governor shall submit to the Oversight Board all reporting requirements set forth on
Exhibit 129 of the 2020 Fiscal Plan according to the reporting cadence described therein.
In addition, if the Oversight Board approves a reprogramming pursuant to the section
above, the immediately subsequent report by the Governor must illustrate the specific
implementation of such reprogramming, including the amount, the source of the
reprogrammed amount identified by government entity and expenditure concept, the
government entity that received such amount, and the expenditure concept to which it was
applied.
■ In addition, the Governor shall submit to the Oversight Board a comprehensive reporting
package in a similar format to that required and provided in accordance with Section 203
of PROMESA for the following specified programs within different agencies: (1) ASSMCA's
Rio Piedras Hospital; (2) PRDE's Special Education; (3) DOH's Adult Hospital; (4) DOH's
Pediatric Hospital; (5) DOH's Hospital Institutes; (6) DOH's 330 Centers Payments; and
(7) DCR's Juvenile Program. Program reporting must include and clearly detail budget to
aetuals on a concept level basis, any reprogramming of funds within the program, and any
reprogramming of funds to/from other programs or agencies.
■ The reports required pursuant to this section are in addition to the reports that the
Governor must submit to the Oversight Board in accordance with Section 203 of
PROMESA.
■ In conjunction with the reports that the Governor must submit to the Oversight Board no
later than 15 days after the last day of each quarter of FY2o2i pursuant to Section 203 of
PROMESA, the Treasury Secretary, Executive Director of AAFAF and the Director of the
OMB shall each certify to the Oversight Board: (1) that no appropriation of any previous
fiscal year (except for the appropriations covered by the exceptions in the sections above)
have been used to cover any expense; and (2) the Director of the OMB shall certify to the
Oversight Board that no amount of (i) the Emergency Reserve and (ii) the unallocated
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capital expenditures under the custody of OMB has been obligated unless authorized in
accordance with the section below.
■ The Emergency Reserve, the unallocated capital expenditures, and the economic incentive
fund under the custody accounts of OMB and the Department of Treasury, respectively, as
detailed in the certified budget for FY2o2o and FY2o2i may not be used to cover any
allocation or expense whatsoever without the approval of the Oversight Board. The
economic incentive funds held under the custody of the Department of Treasury will be
released on a quarterly basis after a formal reapportionment is submitted by the
Department of Economic Development (DDEC), reviewed and approved by OMB, and
submitted to the Oversight Board for review, and the Oversight Board provides its
authorization to release such funding. Exceptions to the economic incentive fund release
may apply upon meeting all of the specified criteria listed on the Milestones and Incentives
Appendix.
■ As a rule, necessary for the responsible disbursement of budgetary allocations for
operating and other expenses, OMB shall withhold from any of the allocations to the
agencies of the Executive Branch the amounts necessary to pay for the pay-go contribution,
unemployment insurance, or taxes withheld from their employees, when OMB determines
that such a withholding is necessary to ensure compliance with these obligations by the
agencies concerned. Any such amounts withheld by OMB shall solely be reprogrammed to
pay the corresponding outstanding obligations related to PayGo contributions,
unemployment insurance, or taxes withheld from employees.
■ Additional General Funds may be made available to agencies upon reaching certain,
specified milestones and after the approval and authorization from the Oversight Board.
For FY21, see the Milestones and Incentives Appendix for allowable milestones /
incentives and corresponding agencies. Once the respective milestones are achieved,
agencies must provide a formal notice and submit supporting data corroborating such
achievement for the Oversight Board's review.
■ OMB and the Department of the Treasury are authorized to establish the necessary
mechanisms to ensure that when implementing the concept of mobility, pursuant to the
provisions of Law 8-2017, as amended, known as the "Puerto Rico Human Resources
Management and Transformation in the Government Act," the corresponding transfer of
funds allocated to payroll and related costs of said employee are to be carried out
simultaneously.
■ The Secretary of Treasury, the Director of the OMB, and the Treasurer and Executive
Director of each agency or public corporation covered by the 2020 Fiscal Plan shall be
responsible for not spending or encumbering during FY2021 any amount that exceeds the
appropriations authorized for FY2o21. This prohibition applies to every appropriation set
forth in a budget certified by the Oversight Board, including appropriations for payroll and
related costs. The Executive Director of AAFAF and the Director of the OMB shall also
certify to the Oversight Board by September 30, 2020 that no amount was spent or
encumbered that exceeded the appropriations in the certified budget for FY2020.
■ For the avoidance of doubt, any reference within the budget to AAFAF, the Department of
Treasury, or OMB, or any of their respective officers, shall apply to any successor thereof.
■ On or before July 31, 2020, the Governor shall provide to the Oversight Board budget
projections of General Fund revenues and expenditures for each quarter of FY2021, which
must be consistent with the corresponding budget certified by the Oversight Board (the
"Quarterly Budget"). The Quarterly Budget shall be provided to the Oversight Board in
Excel format and include detailed allocations by agency, public corporation, fund type and
concept of spend. Together with the report that the Governor must provide under Section
203 of PROMESA not later than 15 days after the last day of each quarter, the Governor
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shall provide a quarterly variance analysis that is consistent with modified accrual
accounting.
■ If during the fiscal year the government fails to comply with the liquidity and budgetary
savings measures required by this 2020 Fiscal Plan, the Oversight Board may take all
necessary corrective action, including the measures provided in PROMESA Sections 203
and 204.
■ In order to ensure agencies remain compliant with the 2020 Fiscal Plan, the Oversight
Board has enacted a policy that includes reviewing contracts of $10 million or more. The
objective of these reviews is, among other things, to determine the extent to which the
contracts are in compliance with the applicable fiscal plan(s). The Oversight Board
encourages the use of additional object level professional service fee categories in order to
support more transparency of how professional fees are spent. The Oversight Board is
authorized to require review of contracts less than $10 million to ensure compliance with
the applicable fiscal plan(s).
The above implementation and fiscal controls requirements are important to ensuring the
Government can make meaningful progress towards achieving the goals of the 2020 Fiscal
Plan.
Chapter 21. Plan of Adjustment
On February 28, 2020, the Oversight Board filed an amended Plan of Adjustment for the
Commonwealth, ERS, and PBA that proposed a comprehensive settlement between the
Commonwealth and its creditors. This represented a significant advance in the ongoing efforts
of Puerto Rico to exit bankruptcy, regain access to the capital markets, and begin the process
of achieving a true economic recovery. In total, the Plan of Adjustment sought to achieve a
nearly 7096 reduction in the Commonwealth's total liabilities, a reduction in annual debt
service to sustainable and affordable levels, and a substantial and reliable restoration of
pensions. This plan followed extensive negotiations between the Oversight Board,
Government, and various stakeholder groups, and sought to return the Commonwealth to a
sustainable fiscal position, provide meaningful recoveries to creditors, and allow for the
continued operation of Government services.
In light of the COVID-19 pandemic, the Oversight Board announced on March 21, 2020 that
it would be seeking a motion to adjourn court proceedings on the Plan of Adjustment until
further notice. Such action was taken so as to allow for the Government and Oversight Board
to prioritize the health and safety of the people of Puerto Rico during this challenging time,
and to better understand the economic and fiscal impact of the pandemic. The Oversight Board
will continue to work collaboratively with the Government to find reasonable and meaningful
financial and policy solutions that ensure the safety and well-being of the Island, while also
still preserving prudent and sound fiscal policy.
Despite the adjournment in court proceedings, the Oversight Board remains committed to
facilitating Puerto Rico's emergence from bankruptcy, while also recognizing the new realities
facing the Island. It is a fact that certain Plan of Adjustment provisions, if enacted, would
impact the primary annual surplus/deficit of the Commonwealth. The 2020 Fiscal Plan
therefore incorporates all such provisions (detailed below) on the terms published in the
February 28, 2020 Plan of Adjustment (as adjusted for the delay in any confirmation timing):
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■ Reduction in monthly pension benefits. The Plan of Adjustment requires an 8.5%
reduction in monthly payments to retirees earning over $1,200 per month.290
■ Freeze in the accrual of benefits for JRS/TRS participants. Together with the
transition of JRS and TRS participants to defined contribution pension plans, the Plan of
Adjustment requires a freeze in the accrual of benefits earned under the pre-existing
defined benefit pension plans of each group. In connection with this freeze, the
Commonwealth shall also take the necessary steps to enroll JRS and TRS members under
the age of 45 in Social Security.
■ Increase in employer healthcare contribution. Commonwealth employees who are
AFSCME union members shall see an increase in healthcare contributions provided by the
Commonwealth from $125 to $170 per employee per month.
■ Elimination of PayGo contributions to System 2000 participants. In exchange
for an upfront payment of -$1.5 billion related to the restoration of historical plan
contributions, System 2000 participants shall no longer receive pension or other system-
administered benefits from the Commonwealth.
For additional detail on all Plan of Adjustment provisions, please refer to the published Plan
of Adjustment, available on the Oversight Board website, as the authoritative source for
information.
29° For such participants, the 8.5% reduction shall apply to the full amount of monthly pension benefits; however, the measure
shall not reduce any participants monthly pension benefits to less than $1,200 per month. Additionally, if this formula returns
a larger cut than 25% of the difference between the unadjusted monthly pension benefit and $1,000 per month ($600 if
receiving Social Security), then the lesser of the two reduction formulations shall apply.
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PART VI. Conclusion
The 2020 Fiscal Plan is the result of three years of intensive work sessions,
dialogue, stakeholder engagement, and experience working to establish the
conditions for economic recovery and growth for the benefit of residents of
Puerto Rico. Across these activities, the Oversight Board and the Government collaborated
to create a deep and rich fact base to underpin their work and remained focused on creating
an integrated approach to restoring fiscal sustainability and economic opportunity for future
generations of Puerto Ricans. The starting point for this Fiscal Plan involved numerous
structural inhibitors to growth, over $120 billion in outstanding debt and unfunded pension
obligations, and the devastating impact from a historically-destructive set of natural disasters.
Yet in the aftermath of hurricanes, earthquakes, and the COVID-19 pandemic,
and given the depth and breadth of the economic and health crisis faced by the
residents of the Island, as well as the federal support mechanisms being made
available, Puerto Rico now has a unique opportunity to take control of its future
destiny through implementation of broad-based structural economic reforms.
First priority must be implementation of the transformational structural
reforms that will change the nature of Puerto Rico's economic development
trajectory and provide the residents of the Island with a better and more
prosperous future. Disaster recovery-related spending will provide economic buoyancy in
the coming years. However, the failure to pass comprehensive private sector labor market
reform that Puerto Rico requires means that timely and robust implementation of the
remaining structural reforms, such as ease of doing business reforms, is even more important
to achieve meaningful economic growth. Without sustained dedication to implementing the
2020 Fiscal Plan, and the ambition to pursue additional structural reforms in the future, the
challenges that have held back the economy will not be addressed, and the Government will
have lost its window to restore long-term opportunity to the people of Puerto Rico.
Importantly, future opportunities available to the people of Puerto Rico will depend on the
level of implementation of the structural reforms required by the 2020 Fiscal Plan, and
additional growth-inducing structural incremental reforms that the Government may seek to
implement. The 2020 Fiscal Plan lays out a series of practical and proven growth-oriented
structural reforms and investments, which, when coupled with the federal reconstruction
funds, can ensure that the painful economic contraction caused by the pandemic is turned
around as quickly as possible.
Second, reorganizing the way government services are delivered, as well as
improving their delivery and efficacy on the Island, is critical. The Government has
successfully managed to operate within certified budgets over the past years. PROMESA and
Title III provide a temporary stay on Puerto Rico's unsustainable debt service. Unlike many
states and countries, Puerto Rico has not yet been forced to reduce its government spending
in FY2020 despite the impact that COVID-19 is expected to have on revenues. Unfortunately,
since the first Fiscal Plan certified in March 2017, the Government's implementation of
efficiency measures, which change the way government is organized, the way it delivers
services, and the manner in which it defines which services are prioritized, has been slow and
incomplete. As a result, the 2020 Fiscal plan provides the Government an opportunity in
FY2021 to invest every effort without budgetary pressures and enable the Government to focus
squarely on governance and improving service delivery to the people and businesses of Puerto
Rico. The Oversight Board stands ready to work in partnership with the Government to
achieve this vital outcome.
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Appendix
Chapter 22. Model presentation
22.1 Overview of entities covered by and excluded from the
202o Fiscal Plan
The 2020 Fiscal Plan addresses the finances of central government agencies, component units,
and other agencies. Agencies for which an independent Fiscal Plan is being developed have
not been consolidated into the 2020 Fiscal Plan and are only represented to the extent they
impact the Commonwealth (Exhibit 130, Exhibit 131, Exhibit 132). It is important to note that
PRIDCO has been removed from the 2020 Fiscal Plan, which is a change relative to prior Fiscal
Plans and therefore may make some numbers incomparable.
EXHIBIT 130: MAJOR ENTITIES INCLUDED IN AND EXCLUDED FROM THE 2020 FISCAL
PLAN
Major Entities included 1 ISA 2. Major CUs 3. Other
In the 2020 Fiscal Plan
Central
Government ASEM GDB1 Roughly 45
CCPRC PRTC additional agencies
ASES PRfTA and component
Agencies Ports PBA ADEA units, such as Sold
t Central Government Department of HTA' DDEC Waste Authority and
Entities Education. AAFAF UPR1 HFA Publc Broadcasting
included 2 Major Component Units Department of SIFC PRCCDA Authority
3 Other Component Units Health, Police, etc .
and agencies
Not Individually
Individually Reported — Comprises approx. Reported — approx
90% of Fiscal Plan Cash Flow 10% of Fiscal Plan
Cash Flow
Major Entities Excluded Puerto Rico Electric Power PR Aqueduct and Sewer
from the 2029 Fiscal Plan Authority (PREPA) Authonty (PRASA)
Exclu
The Children's
PRIDCO COSSEC Municipalities
Trust Fund
L
1 CZB HTA and 4JP.4 nave htwele Arid eiart fecal plopsfromtne LtMr331 GcAnsrmowttl, HU, arsot upt; 0,0ftet Ggy1,0 fun oppropftiony
klajv CUa nc4de She tolto wimp FFCUa: ASEAt 4SE. RITA. PPrha, PBA AMA. AAFAF . HFA %Ft PRCCOA
hee 101.k.V.Mg FiAnce Awhonty. re.goacel ',rpm the Car) Rrhfls tffitneY it a mi. PY HLD rPr foll.010 9 WPM. mPAY..11 are n a cvntemoimp me 20:0 f AL% Pion
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EXHIBIT 131: LIST OF ENTITIES COVERED BY THE 2020 FISCAL PLAN
Entities included in fiscal plan
Agency Agency
Code Agency Cade Agency
8 Office of the Comptroller 43 Puerto Rico National Guard
10 General Court of Justice 45 Department of Public Safety
11 Traffic Safety Commission 49 Department of Transportation and Public Works..
14 Environmental Quality Board 50 Department of Natural and Environmental Resources
15 Office of the Governor 55 Department of Agriculture
16 Office of Management and Budget 60 Citizens Advocate Office (Ombudsmen}
18 Planning Board 62 Cooperative Development Commission
21 Emergency Management and Disaster Admin Agency 65 Public Services Commission
22 Office of the Commissioner of Insurance 67 Department of Labor and Human Resources
23 Department of State 6B Labor Relations Board
24 Department of the Treasury 69 Department of Consumer Affairs
25 Hacienda 70 State Insurance Fund Corporation (SIFC)
28 Commonwealth Election Commission 71 Department of Health
29' Federal Affairs Administration 75 Office of the Financial Institutions Commissioner
30 Office of Admin and Transformation of HR 78 Department of Housing
31 General Services Administration 79 Automobile Accident Compensation Admin (ACAA)
_ . .
34 Investigation. Prosecution and Appeals Commission 81 Department of Education
35 Industrial Tax Exemption Office 82 Institute of Puerto Rican Culture
37 Civil Rights Commission 87 Department of Sports and Recreation
38 Department of Justice 89 Horse Racing Industry and Sport Administration
40 Puerto Rico Police 90 Medical Services Administration IASEM)
42 Puerto Rico Firefighter Corps 95 Mental Health and Addiction Senates Administration
56 Women's Advocate Office
— — — —
100 Legislative Assembly 165 Land Authority of Puerto Rico
105 Industrial Commission 167 Company for the Integral Development of Cameras Peninsula
106 Public Housing Administration 168 Ports Authority
109 School of Plastic Arts 177 Land Administration
119 Dept of Economic Development and Commerce 180 Tourism Company
120 Veterans Advocate Office 184 Solid Waste Authority
121 9-1-1 Services Governing Board 186 Culebra Conservation and Developmenr. Authority
122 Department of the Family 187 Health Insurance Administration (ASES)
123 Families and Children Administration 188 PR and the Canttean Cardiovascular Center Corp
124 Child Support Administration 189 Institute of Forensic Sciences
......_
126 Vocational Rehabilitation Administration 191. Musical Arts and Stagecraft Corporation
127 Admin for Socioeconomic Develop of the Family 192 Fine Arts Center Corporation
133 Natural Resources Administration 193 Office of Government Ethics
137 Department of Correction and Rehabilitation 195 Economic Development Bank
138 Institutional Trust of the National Guard of Puerto Rico 196 Public Broadcasting Corporation
139 Parole Board 198 Farm Insurance Corporation
141 Telecommunication's Regulatory Board 200 Special Independent Prosecutor Panel
152 Elderly and Retired People Advocate Office 208 Contnbutions to Municipalities (CRIM)-
153 Advocacy for Persons with Disabilities of the CW of PR 211 AFICA
155 State Historic Preservation Office 215 Conservatory of Music
161 Infrastructure Financing Authority 220 Correctional Health
162 Public Buildings Authority (PUA)
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231 Health Advocate Office 289 Energy Commission
235 Housing Financing Aulhonty (HFA) 290 Energy Affairs Office
238 Port of the Affiances Authority 293 Center for Research Education and Medical Services for
241 Administration for integral Development of Childhood Diabetes
294 Bosque Models de Puerto Rico
258 Puerto Rico Trade and Export Company
295 Fiscal Agency and Financial Advisory Authority (AAFAF).
264 Martin Perm Canal ENLACE Project Corporation
393 Convention Center District Authority (PRCCDA)
265 Roosevelt Roads Naval Station Redevelopment
329 Socio-Econornic Development Office
268 Institute of Statistics
928 Government Employee Retirement System (ERS)
272 Office of the Inspector General
929 Judicial Retirement System ORS)
273 Permit Management Office
929 Teacher Retiremem System (IRS)
276 Public-Private Partnership Authonty
Additional IElectronic1 Lottery
271 Agricultural Enterprises Development Adrian (ALMA)
Maritime Shipping Authority
278 Puerto Rico Education Council
Special Communities Perpetual Trust
279 Public Service Appeals Commission
Traditional Lottery
281 Office of the Electoral Comptroller
Unemployment Insurance Fund
285 Puerto Rico Integrated Transport Authority (PRWA)
Corp for the Industries of Blind. Mentally Retarded. and Other
286 Ponce Port Authority Disabled People of Puerto Rico
Puerto Rico Municipal Finance Corporation
EXHIBIT 132: LIST OF ENTITIES EXCLUDED FROM THE 2020 FISCAL PLAN
Entities issuing standalone fiscal plan
• Development Bank for PR • PR Electric Power Authority ■ Public Corporation for the
■ Aqueduct and Sewer ■ PR Highways and Supervision and Deposit
Authority Transportation Authority' Insurance of Puerto Rico
Cooperatives
• Municipal Revenues • Puerto Rico Industrial
Collection Center (GRIM) Development Company ■ University of Puerto Rio&
Ent,ties excluded from fiscal plan
■ Agency Fund (Special ■ Puerto Rico Municipal ■ Safe Drinking Water
Deposit Fund) Finance Agency Treatment Revolving Loan
• Commonwealth of Puerto ■ Puerto Rico Water Pollution Fund
Rico Regional Center Control RevoIv. Fund • The Children's Trust Fund
Corporation • Puerto Rico Industrial • Tourism Development Fund
• Public Finance Development Company
Corporation (RFC)
• Puerto Rico Government
investment Trust Fund
2! (Aryl irmwml!. Fiscal f'wo in4:446. LIM vir.al lwx1
2 57
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Chapter 23. Macroeconomic projections
23.1 Economic and demographic trends
EXHIBIT 133: MACROECONOMIC TRENDS
Macroeconornictrajectory: Total GNP, $8 Fiscal Years ending June 3O
— Nominal GNP • Constant 1954 Dollars
Constant 1954 Dollars Nominal Output
7_5 75
7.0 70
6.5 65
6.0 60
5.5 55
5.0 50
4.5 45
4.0 40
3.5 35
3.0 30
2.5 25
2_0 20
1.5 15
1.0 10
0.5 5
0 111111111 I0
FY07 FY08 FY09 FY10 FY11 FY12-FY13 FY14-FY15FY16FY17 FY18FY19.-FY20FY21 FY22 FY23 FY24 FY25
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EXHIBIT 134. POPULATION TREND
Historical and projected population, millions of people
4.0
2.5
II
2.0
1.5
1.0
0.5
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
EXHIBIT 135. PER CAPITA GNP TREND
Historical and projected GNP per capita, $ USE)
25,000
20,000
15,000
10,000
5,000
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY16 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
259
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Chapter 24. Financial projections
24.1 Detailed financial projections
EXHIBIT 136: MACROECONOMIC OVERVIEW OF PUERTO RICO, FY2020-FY2025
Six-year financial projections pest-measures and structural reforms units as labeled. SR = structural reforms
Line am F' 20211 Pretr2 I Fv2Cm FY2023 FY2024 FY2025 FY2020-25
Population, = 3,033 2,984 2,936 2.891 2,851 2.813
Population growth rate. • (1.8%) (1.6%) (1.6%) (1.5%) (1.4%) (1.3%)
Real GNP growth, ' • (4 0%) 0.5% (1.5%) (1.9%) 0.5% (0.1%)
Nominal GNP, `.'•1 68,019 /0.920 68.025 68,557 68,273 67.670
Nominal GNP per capita, ..' 22.428 22.975 23.252 23,404 24.133 24.720
Nominal GNP per capita growth. (24%) 2.4% 1.2% 0.7% 3.1% 2.4%
Inflation, `.- (0.1%) 0.3% 1.1% 1.0% 1.1% 1.2%
Disaster funding. '.' 1 4.483 4.581 5.645 5,561 5.642 5.596 31,509
Revenues1, `ri.; 21 571 21,133 20 174 19 324 19,552 19,724 121,477
Commonwealth revenues 14,716 14,348 14.703 14.328 14,496 14.604 87,195
Federal transfers 6,855 6.785 5.471 4.995 5.056 5,120 34.282
Expenditures', .r,r (20,076) (20,694) (19.362) (18,956) (18.961) (19 1143) (117,090)
Commonwealth-funded expenditures (13.368) (14,047) (14,022) (14 085) (14.023) (14.0135) (83,581)
Federally funded expenditures (6.708) (6.646) (5,339) (4.871) (4,938) (5.007) (33.509)
Gap/surplus, 51,4 1,495 440 812 368 591 681 4,387
Contractual debt service payments2, 5M (1,798) (1,742) (1,767) (1,782) (1,692) (1,697) (10,477)
Net gap i surplus, '.',f (303) (1 302) (955) (1,414) (1,101) (1,016) (6,090)
Surplus potentially not avellabliP, 3W 77 83 170 168 $73 172 844
I Reresues and expel/dares esducting gross be seinstrneres
2 Dein service based en [repetition contra etuarefebt obligations. Presentee for iStorrstive 'nemeses only 3 does net reprairrlaxtzepated Nitre payments on rei1nretured eobt. Includes GO.
P8x. CE0A. ?pr'a. wc. ER.S. 18110C 0. The 2020 fist& Plan does not assume any preileteimmett o Wattle of ongoing Irlgathn win respect to GO bowls
3 Tnese burgh's anseurta are generated by Corrvisonwealib cob:sermons and the Corsenoewes NM I abaty 10 = s-saucer surplus amounts ers41017.0 at nak Winput torther1001S101,1 re Odin
260
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EXHIBIT 137: REVENUE BREAKDOWN
Revenue detai post,neasures and slru aural reforms
Meal Year 4ndeng June 30 En, 0Y292c Prw212i Fe 3,221 5172933 P t2C.14 6'42LCI F
General Fond Revenues:
ladlidual Income Taxes 2014 1,813 2,088 2.090 2,084 2.109 12,133
Corpotale Income Taxes 2,247 1,744 1.765 1,751 1,780 1,796 11,083
Ron.-Residant Wthholcrings 474 979 963 535 537 539 3,238
Ale011-3C Beverages 257 266 261 263 262 262 1,574
Nereltes 98 96 93 94 93 93 568
Motor Vehicles 338 341 339 338 342 348 2,043
Exciseson Dtt-Shore Shipment Rum 213 214 206 198 199 199 '234
Other General Pune Revenue 34E1 342 341 us 343 347 2.051
Subtotal 5,980 5,386 6,661 6,564 5,640 6,588 33,920
SLIT Colections (excl. 53.65% PSTEIA, 0641$ 3 CM) 1.776 1,917 1,892 1.854 1.869 1,874 11,177
Act 194 7,r:Melons 1,831 1,691 1.447 1,199 1.199 1,199 8,567
PREPA Loan Repayment -
General Fund Revenue 1preeneasure0 9,597 8.994 9,001 8,613 8,709 0.761 53,664
Revenue (tenures 232 233 396 450 457 462 2,232
General Fu n91 Reverue)pOrat-rne4911pear 9,319 9.221 9,399 9,083 9,165 9,224 55,895
Component Unit Revenue 1,381 1,192 1.305 1.304 1.318 1.331 7,807
Additional SUT (53.65% PSTBA, F40 & CI4E1 126 127 127 126 128 129 762
Third party ASES teverpla (rebates end raJnicinal 270 309 415 425 435 445 2,299
contributions)
Other Tax Revenues 2.339 2,433 2,406 2.379 2,398 2.416 14,364
Other Non-Tax Revenues
SRF expense for Common w eeth Agencies 809 1,080 1040 1.037 1,051 1,099 9.068
AA Revenue P01474eaSureslExcl Feder01 Transferal 14,715 14,348 14,703 14,328 14,496 14.604 87,199
..... _ ..
Federal Transfers lo Ce neat Government 4,240 4,240 4,273 4,306 4,546 4,388 25,793
Feeersi Transfers - Medicso 2,496 2,367 1,037 527 946 564 7,519
Federal Transfers lo indepen Pent Campion' Lin la 199 199 161 162 164 166 971
Revenues Post Measures 21,571 25,133 20,174 19,324 19,552 19 724 124,477
Adjustments for revenue gross up 727 716 705 699 704 708 4,260
Revenue Post rheaSU res and po at rev enuegrossup 72298 21,850 20,879 20,023 20.256 20,432 110.730
1 lo olu den -9411 annual -..tn-g cne - a 0, .1 roue mennurta allrtidable FRTC.
EXHIBIT 138: SUMMARY OF BASELINE EXPENDITURES AND MEASURES
Explegoe wad peaurnaex,rae aro 3
F der 'espied.) June 50 3, 11-1
1'4•: - • _L.; F - (721.7 vziurro
EXpierael
Germaal Feed Expendritems.
Nest Pavel P.035) 17.54S1 (2.970; (3,611) (2.579) iT7SCI.
Men-Fersennid Opermarg Eninnules ittg7) 11,711) (1.723) (1,773) I 1.791) (10.143)
liuntipai ExperP*1 00). (2263 an} 4220) i2207 (1 sug
Reclean Expenses (Z7J74) (7. 337) (2,314) (3,309) (3,301 03,117.2)
Dwain Recovery Cost Match 1181) .R13i (1311 On, (1,013)
Rasousrumso i Tel MI Caen a 17). (114 066) Op) g[111
ORR haiVecnatexi and Ottxte OF Everts. 0090. 0 lira) .(i(3
t7 11(92
,7
: 0
:31
13)
:) (LOW (0534 0,71%
Total General FBA Expenses incl. iniergoirtmetels)
1."32)
(9.043) IS I mull 111.011)
Unload - convnuntrean forged (en (i873 d.1.5) time) (a.741.)
EWA! Pregnant) -nernmerrosith 1Wittad OP ('1) 41)
Total General Fund Semmes lexxt intervenor...n:4i 7 i(9
11'11
.22
1{1%111 ((
-1101
1MI
L V61
:73
:}) 110100) ; ..370
(le jsesl
P50- 1...•.]
Fedeaar Funds. SRI' and CU aerates saws.:
One Perna i1,320) 0 321) (1.335) (1.$47) (5.37Z
tien--nritnnel Oproung Excreta's ii
::4:2i
4) 11,920 (1.796} (1,018. "333:11:.S41
857
3821
(13:1 111.090)
SMRNPRWIS fari:erranuirelapth eirtninta Ci'Xt OW) (8981) (994) (500 01'9 (5.2121
Slowed - reerany ruonleo /2.159} p.lan (1s37} (127) 1540 1190 (7.5191
tauliese - SRP (7103 {209i KM) OM (435) 7111
; 26 (72193
Spear Papaw.; -roPerarly ruedod (2..7301 (27343 (2.786) 12.8491 _[2.89 118.8821
TPA! CW Funded Op. Exp SIM os 6861 712-
9 51
7; 116.6■767 i.7.*q 11
115
6.4,61
.72ta
Expense Peasants MI 027) 1,132 1.594 1,385
Tend CWFurnkd Cp.. Exp Pest Measures exel_ Losing likelleadd 111,2231 (11 675) (17.417) 117,032) '111"71. 07
171
Fund rep
Acrinstinenl1pr exproltrixte rase ap (7F.. De/ POSii Mir: 17041 (4730 .
Mel Operating Surprusr(DefisiM 3,241 7458 7.757 2291 2515 2.411 11631
Capes and Mx Expanses:
Itaintenanne Cape PM) (307) (337} OM (375) TM 9.111)
Emeriti". hoax (1,185) 0,190) (1.2071 (1113) 0 L2231 (1214) 0.26*
Oreoursenome nu. Revenues', Din. Owslie INV (915) (390 (796) (5314 450 4334 .12.238).
Omer Pen-Recurring 734 .971 (101 , (9) Cr) (E6 63
Tetal Copse and Omer Sapenat 5 11 617) 12.0151 (1.943) 11.1.19) (1857) 71640
Surplus Post Xlii iiiii ( taxi. Dybi Paymtnt0 1,60 tau 513 Sea Sit US 4,37/7
Contractual Cent Sr.. Palmer':: 0,7363 .. . 7.7471 (1.757) 0,7421 OAF' (171MO 0MM
Bureaux aft er Measures and 5.91Payments 13091 7 3471 19551 {(1
E1.19133)
41 f1_119. (117161 46.04
-
5raparoporenuosynor avliati/e. 0.41 77 31 170 163 173 172 - - 54e
1 Debi set: ior based on prepetlien o.onue cur nickel in tnrgatlin s Presented Mr guslretive purposes only end does not represent ontic4reled tut, re payments en restructured note
2 These lir r01,ta amourita are 0eneraled icy Cummonwealth corporal0ns and the C-Ornrronweatlie petty 10 is egtes SUCh Su rplre amounts Could lee el risk wilhtiul Nether legislative 9000.
261
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Chapter 25. Fiscal measures
25.1 Agency efficiencies
Exhibit 139 details the payroll and non-payroll savings for each of the agency groupings.
Agency groupings are as shown below in Exhibit 140.
EXHIBIT 139: MEASURES SUMMARY IMPACT FOR ALL AGENCY GROUPINGS 291
Run-rate savings fronnagenc, e1tici en ci measures- 9,
Penag F11421 PfM121. Pr2623 IrM024 Pr2929
Education 336.854 330,682 433,237 458,275 495,397 524,656
Courts and Legislature 84.540 75.614 90.906 97,225 98,325 98,514
Hearth 104,341 90,611 133.493 144,002 145,632 147,392
Public Safety 141,371 141,078 152,334 178,920 190,945 183.132
Correclions 96.346 54,837 101,627 105,942 107.141 108,435
OCFO - treasury 26,966 81,606 92,916 95.608 96.690 97,859
Public Works 37.260 38,671 65.951 68,071 66,842 69.674
State insurance Fund Corpo ralion 61,700 59,433 78,511 81,291 82,212 83,206
Econ omic Developmert 26.770 58,347 55.459 56,638 57,279 57,972
Executive Office 16.973 9,790 19.602 21,440 21,683 21,945
In depen dent Agencies 25.085 6,348 26.136 27.706 28,019 29,358
Emnronmental 15.034 10,535 18.674 19.642 19,864 20.105
Families 8 Children 21,108 20,652 49.821 55.642 56.272 55,952
Housing 26.790 10.272 23.404 25,358 25.646 25,956
Automobile Accident Compensation Admin isbeiton 16.051 13,180 19.246 19,978 20,204 28446
Label 13.473 11,871 18.221 19,309 19,527 19,763
FOMB 10.971 17,375 17.447 17,502 17,700 17,914
Agriculture 26,682 24.992 29.860 30,345 30.689 31.050
Justice 14,619 13,888 18.393 21.320 21.561 21,822
Culture 5.407 4,665 6.833 7,088 7,168 7,255
Closures 3.377 10.303 15.748 16.075 16,257 16,454
Fl nance Commission 3,513 2.963 4.197 4,349 4.398 4,452
Retirement Services 26.656 2,900 3.011 3.154 3,189 3,228
Land 2,994 1,740 4.021 4,158 4.205 4,256
Slate 11.203 2.025 3.345 3.441 3.480 3,522
LIU lili es Co mrrission 3.239 1,531 3.115 3.251 3.318 3358
Transparency 6 Control Entities 995 564 1.009 1,018 1,030 1,042
Ombudsman 1,692 1,565 2.338 2,462 2.490 2,520
I.] revers ItieS 1,651 1,355 1.955 2,121 2,146 2,171
Institute of 51.1.951105 483 375 537 550 557 563
Custody Acct 110.841 48,230 56.153 67.49B 69,262 60,087
RU OlIC Sews Commission - -
Total run rate savin qs tom agency. efficiency measures 1,274 075 1.156.096 1,560.100 1.659,409 1,710.130 1.754,071
1 ExCI 11919 9 IMaotr69312 and 0160 funding IA Clr045 ED
291 Excluding investments and other funding increases
262
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25.2 Agency groupings and consolidation progress
EXHIBIT 140: AGENCY GROUPINGS
AgricA.iraiEnterprises Driie4rrentAdnvritstraton Farrn nsicnnoe Corperation
Agricultuie
2 Departmentof Agirallore
Courts and 1 Neneral L,o .1irsoca 2 LegsLative Asserri)VP13
Legislabae
r "Fre Arts CreeErtcepos
atoe s epscalAnsanc
Cullum
2 Institinnof PuetoRican Canoe
1 Authority lor the AteneveknerentoMorise.kfcRceds Weed So eor 8. Pennituanagenesrt lace
7r . ... ..........
2 CenanmetitofEcononioDeselosmen endear-el-ewe Plaryyrg Board
Fe ODOM IC
3 Energy AfisesOfIce * Puerto Fnitio Trade and Exp.-Women/
D•Enf el opment
4 I fustrii9 Dee:lino-1)87u 150FYipiatii ""
3, I oustfal Tax Bens:6405re 10 Tourisrn Omens/
I parenereofttealadtantonmertaiSksoures 3. Natimarriesoirom Adrviesraten
Envi rornsenta I
2 EnveenneeelCuslitySoadd 4 Seed Waste Alan)*
I Federal AttairsAdinnstalca 5 Of rime Scope:mown Demiopned
2 I rf rastnokare ancing Aukority Publo Buidmgs Autbosty
Executive Office
3 0 fficeof the Coirrrissiorer of Municipal Atfars
4 Orficeoftl-e Governor • Stem. 1-1 isbrical Pnmene ton Once
Fi name 1 O Noeof Cormimbrer or eeLtrance 67ce o ttelrnarciai Institilionsororrissiorer
COMM is son
"
rater 4o- &mane, tductiSco and 4edesillienices Nedsetes • $ en iced Adriensirarion
2 bepinmentof Ffealen 3. lilecheal health and Addoction Services Adniniseatine
Health Insure-icersamirisraton I puerto Rion and Caibbemi Quilovastnlar dolor Corpniriciir ..
7 Univ ersityo 1Pento Rico Cornorineusive Cancer Cellar
Justice. Deiti-arTnTenio4.ioe 1: PEard
bepartinetitoiLalcor and14 ran RAMinCeS 4- Pelle Serowe ApTimis 6:70'47 007o
Lam, 2 I r vesegeon. Prosecut on and Apse
. rrrniscsvi 13- Vocational RebatteitstionAdrranislaton'
3 Lake Relations Goad
Land Administration 2 Land Auteority
Land
Agnouitoial oeveloorrent novatCr Fend
iti 74w:cap/ix FerSOnSWITA "Me blies oTthe rainnioneeaftli orNerla gcn 4 Veteranskinicak Eke
Onibud sni an 2. Ekieny and Reflect Pewee T,idv;:cie, Nix 110 Wonen's Advocate Ofice
3 Health Advoclie 0147:0
1 Cuepartrnentorriaropsnalon and Put& VTIarks 3 Pons kdhodel
PubliWorks
c
2 I ntagratod Transportikirbority 4 Traffic 3a4age Commission
- Administra7on b Integra/ beelloprentaf Clektlioxl 4 Desbarement071te Am*
P air 2 Adosintstiaten 7Q Sociceocrionec DeMoixrentollie Fat* 3 Farness said
• Chid Support kInnnstabon
1 Depanmernoil-teseg * J40 Housing Pehimistration
Hous ............ .
2 Housing Finaanng Adhere,/
rates I Depiistreeritegnt 2 Puerto Rico GeLeireonCounnll
Transparency i C tficeof GoverrimentEriks 2 tithaeof the .orrpteilkal
Control Entlks
Puerto Rico Poke Departirent(PRP1:1) 5 9-1 Sery pois Otnerring Board
Department of 2 FeekilliersCorpo ▪ I imbue of FcaenspoScierces
Public Sal* 3 Ernensenoyllettel Servos Cores 7 Sewn' In vest9.401 4.1ne
4 Ernergencyfilanagernott and Disaskr AdrniniseaSon Agency 8 Departmental. Pe Sixty
1. Depart...mocha TreareeY 4 01f.eof Lienateneere and anted
Treasury I -2 Hacienda $ General SerVieeSAdMiniSeakel
OCFO
3 Puerto Rico Once of Baran A.SOISOIN Llanagenlen andTransirennion ▪ Fisaal Aoancyand Fenr-aa' AdvisoryAnboriy.
Universilies I Ci
'zinseryaregofteeie. 2 Sc.1. 55 n4 Plan■cAns
Reette Rico Envy Board 4- Irceser se,t Exec:-
Utilities Telex.rnr.alr
.
2 Pubic Sery ices Corrrns eon
Commission
3 Pubic Sery ice Regdatryieeici
kiedet FDAPSI of Peelle Ftit4 a. C ME: DL:,r.ot:s Cevooperenketnriy
Closures
2 Economic Deielocrnent Back
▪ Civaan's Ac&ocaeOnce (Orebudenan) 12 r*eoftee Eivnoral Compeoler
2 Civil Right Cerninencie 13 ZtlnDs-Qf ire I usce-nx Climatal
3 CommenweanlEimion Ccnentseet 44 For! .! Pon ce Andnrity
4 Company 'bane In Davekbrrentof Cattsra'sFlerilraula II Pon of the fursuicas
3 Convenor Ce irDisdkzAutornty 45 PL ben 8-roeScaslog Cogent/ion
Independent
▪ Cooperative: DeveloprentConitimorr 17 Puerio Ripe Innovation anfrectinelogytenkee
Agencies
7 Departmentof Cnesurner.n/Lee 18 %aro Ron Ns Porta Gard
▪ Departmentof Spalsand Ficcesalm. 19 ScePial I rilisizer.deni Frroaeaetor Panel
9 Gaming Corninmion 20 Tead,er. s Retirement System
10 I riciustrial Convnissicn 21 I rataLle 01. SntatiM.
I Martin Rita Canal ENLACE Project Corpora—
bin
it Automobile Accident Compoisatisnikutlxerly 3 Stalel r s ia-ceF:Lro Corpoo Ca!
Other
2. Financial Overnitie and Ltanarmant Scald
1 1,i_nen eS r. i Trann,re leen
redea lane; '133 rtl.1.3... mIscp;•:L..71
263
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EXHIBIT 141: AGENCY CONSOLIDATION PROGRESS DETAILS
Consolidation Legal provision in Remarks and key FY21 prioMies lindicated
Grouping Agencies status applicable) by agen cy)
Depantnent of State Puerto RICO EdUCiati an COWIN ■ completed Law 212-2018 • Cana Midair On Of glared ServiCeS COMpleted
within 90 days: savings high e rthan UW400
thousand realized in rental contract
NO.
cancellation
• One single Finance reporting and HR system
• Staffing remains constrained
PR Energy Board (PREB). Public Service Commission Completed Law 214-7018 • Consolidation of shared services completed
(PSC}, Independent Bureau of Consume r ProtecOon. under Pu blic Service s Commission (J Rat')
Utilities Tel ecomnsuricati on s Regulgory Board • All administrative (e.g.. HR. Legal. Finance)
Commission supervision consolidated under one director;
IT yet to cons olidrie under ce rare! Oft ce
location and im element platfarrn integration
Department &Natural and Envi ion mentai Resources, Completed Law 171-201R • Office locations can sd leafed in the same
Environmental Quality Board. Natural Resources braiding
AdMiniStratiOn, Said Waste Authority • sniped gebiLaS and back-offiCre SySte ms
consolidated aaoss agencies
AgriCultu rat Enterprises Devele prnenl Administration Completed MGR Signed • COOS olidali On Of addliniStranVe areas {FIR,
{ADEN. Departin ent or Agriculture WA). Fenn Insurance leStritetign Legal, Finance, IT} for ADEA and DA Is
Corporation (CSA} December 31, 2020) complete with shared back-office (with back-
Ofb ce personnel efficiencies)
A071CUnele
CSA continues to maintain op eralional
independence (legal limiations on being an
insurance company) but is In the process In
merge IT systems with ADEA
Puerto Rico Police Bureau (PRP13). Firefighters Corps. ei Delayed Law 20-2017 • Process es an lead for a II to notions (except
Emergency Medi cal Services Corps, Emergency Hlai across bureaus: currently cons otidling
Management and Di sasler Administration Agency. 9-1-1 shared services
Department Services Governing Board. Instiller; of FOrenSiCSa enCeS. • Direct reporting and central office established
Of Milled Spacial investigations Unit across mostiunctio n al d apartments:
Safety currently staffing vacancies
• FY21 pnOrityte reCtuil staff for
administrative roles and implement KRONOS
aaos S all bureaua
Authority of the Redevelopment of the Roos even Roans ika Delayed Law 141-2018 • Consolidation of accounting books (except
Naval Station (Rla), Deparenent of Economic e stabil s hes all PRTC. PRIDCO, CRELA and RR)
Development and Commerce. Energy Affairs Office, agent:lest be • Cross-braining of employees across age noes
Economic Industrial D evel op mei Compa rd (PRIDED). Industrial reorganized into • PRIDCO building being rerno del ed to transfer
Development Tax Exemption Office, Permit M an ag ement Office, DDEC except ascribed all front-office personnel
Planning Board. PR Trade and Export Company. Regional agencies (RR,
Center Corporation of Commonwealth MFR. (CRELA). PR PRIDCO and Plannin g
Tourism Company (PRTC) Board)
Office of the Commissimer of insurance(OiC). Office of No Legislation repeated; • Third-party analysis Or shared services
Finance the Financial institutions progress MOIL certified consolidation is yet incomplete
Commission • OCt to identify Commissions r to reinitiate
consolidation effort.
Center for Research Education and Medical Services for • No Legislation pending • Plan pres anted tO OverSIghl Beard Mr
Diabetes. Comprehensive Cancer Center. Depadm sot of progress for A SE SaiOil consolidation of shared services
Health. Health Ins trance Admi nistration Medical Services Consolidation • No tack-office cons oil nations achieved
Dawn Administration. Mental Health and Addi a on Services between agencies in the grouping
Administration, Puerto WO and Carl sees n Cardiovasatt
Center Corporation
Department of Labor and Human Resources. No HOU not signed • No progress reported on cons at dation of
Investigation. Prosecution and Appeals Corn mission, progress shared services
Labor Relations Board. Public Service Ap peals
CommLsslon, Vocations] Rehabilitation Admiral seat on
Administration for IntegratDeve lop rn ent caChildhood. Delaye d Legislation proposed • MOLE pending for physical space
Administration for So doeconorric Develop ment ofth e but not presented consolidation
Family. Child Suppo rtAdministrali on. Department of Backoffice consoliaalion has been achieved
Fyne Family. Families and Children Administration partially between some subg roues of
agencies but Innen sistertly across drffe rent
tunctiOnS (e.g., HR. procurement)
Department citric. Treasury. Puerto Rico Olt ce of Human i No Legislation not • PMO still not identit ed for consolidation of
Resources Man agemert and Transformation (OATR1- ), progress passed] MOU's shared services
Treasu ryi Office of Management and Budget (OMB) General pending • Pending visibility on additional Government
°CFO Services AdMin i strati on (GSA). Fiscal Agency and action to evaluate compliance
FirianCialAOVISOry Authority (AAFAF)
264
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Federal AffeirS ArtmlniStall 0 n. InfraSirUctUre Finanrind • No Ho lino' provision • G OvernMen1 it as ind sate I rid ngnessto
MAP 0*, Office of the COMMiSSIOP or Of MU niCip al Whirs. pro MSS Merge S0ertei eS
EfteOttrtivie Mice of the Governor, °Tice of Socioeconomic
Gifite
Develoomenl,PublicBuildingsAultiorify, Public-Private
artnership Audi only, State Historical Preservation Office
Fine Arts Center Oerper;bori. I it Sidles of Puerto Rican • No MOU signed • Only Consulting services snared as of now
Culture, Musical Ails and Stagecraft Corporabon Progress le apiraten June 30 • No progress (or future plans) repodedon
J023i unIficabon of functions or offices
Pirtic
Deparlment ofTransportabon and Public Works (UMW),
lniegrateraransportAuttionty (MA), PorlsAuthority,
• No
progress
Legislation repealed • No progress orfuture implementation plans
reported
Works
TraffiC Safety GommiSMon (PSC)
Geparloi aril or Housing, Housing Financing ArldlOribr. No Ire law or MOM r• Ali agencies curranItyoparatng
Routing Public HouSingAdrniniStration progress lipped In no prOgreSS or rulure
implementation plans reported
Conservatory of Music, School of Plasfichts • No Legislation proposed • Governmerd leiter to Oversig hi Board
Untie is dies progress but not presented ri aim ed lard( of Inter-agency cooperation
GoPfirlrrtentotJuslice.Parole Board • No Po detail provided • No progress or future implementation plans
progress ori legal iziroveskin N- reported; Parole Doan] ste un der OCR
IKO
tan O Adml nIstation, LandAulhorily • No No law or MOU eblb agencies currently operaling
progress signed independently; no progress or future
implementaucin plans reported
Advocacy for Persons with Disability. Elderly and Retired No Legislation repealed. • No progress or future implementation plans
anbudstrien PeOiplearerocate Moe, Filson Adviscats Office, Veterans progress MOU not signed repotted
Advocate Office, Women Adrocale Office
25.3 Key reform implementation milestones required by
prior Fiscal Plans
The 2019 Fiscal Plan and prior Fiscal Plans required the Government to achieve a set of
important implementation milestones deemed necessary in order to realize savings targets for
agency efficiency, Medicaid reform, tax compliance and fee enhancement, and pension reform
measures. As previously discussed in this 2020 Fiscal Plan, the Government has not made
meaningful progress against the implementation milestones nor the savings targets in a
manner enabling of a rightsized Government while also improving quality and effectiveness of
the services provided to Puerto Rican residents.
The following exhibits provide the implementation milestones required by prior Fiscal Plans,
and reflect the actions and deadlines stated in the 2019 Fiscal Plan. Looking ahead, the
Government must couple the achievement of budget efficiencies with true operational
transformations (i.e., process re-engineering) to ensure budgetary changes are sustainable
within rightsized operational capabilities. In the prior chapters of this 2020 Fiscal Plan, the
Oversight Board has outlined new required implementation actions for the Government
agencies to prioritize, primarily in FY2021.
265
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EXHIBIT 142: CROSS-CUTTING PERSONNEL AND NON-PERSONNEL MEASURE
IMPLEMENTATION MILESTONES
yI = Completed
Ness of locus Action item Deadline
. Pass legislation to freeze payroll for public employees through at least FY23 March 31.2019 le
Payroll freeze • Institute payroll freeze June 30 2019
• Renew policy of payroll freeze June 30.2023
• implement Christmas bonus phase out December 1. 2018
Eliminate
Christmas
bonuses
Launch RFP for uniform healthcare July 1. 2018
• implement new contract January 1.2019
Uniform
healthcare
• Launch new RFP process January 1.2022
New provider coverage operational July 1. 2022
• Develop energy and water efficiency savings plan modeled after the U S Federal Energy Management July 1. 2018
Program
Utilities
savings • Implement efficiency plan and achieve 40% of total run-rate savings in FY2020 July 1. 21319
• Achieve 100% of run-rate savings. which will represent 15% savings off of FY2018 expenditures Jan uary 1.2023
Conduct analysis of all professional services expenditures and those categorized as 'other to identify July 1. 2019
Professional potential savings opportunities
services and
IOW visibility • Implement reduction of professional services and low visibility" expenditures to achieve 104% July 1. 2019 ir
spending
reductions • Categorize all professional seraces contracts moving forward is ensure reduction of 'other category October 1,2019
EXHIBIT 143: DEPARTMENT OF EDUCATION GROUPING KEY IMPLEMENTATION
MILESTONES
Complete
Areas of focus Required implementation action Deadline
Outline clear pathway to achieving 33% progress to desired student-leacher ratio by end of FY1G August 1, 2018
(school closures and any other measures)
Optimize
student- Publish number of leachers reduced through school closures September 1, 2018
tea c.her ratio • Outline further measures required to reduce teacher numbers September 10,2018
Complete measures 10 achieve target of 14:1 End of SY22
Close 255 total schoces Erin Of SY18
• Develop transportation plan for relocated students July 1. 2018
Enact school
Ensure cancellation of auxiliary service contracts (i.e. food. maintenance', to capture savings and August 1, 2018
consolidetio
release non-teacher headcount reductions
ns and
closures • Sell or reappropriate empty buildings September 1, 2018
• Publish report On Cost savings achieved through school closures (non-teacher personnel and auxiliary November 1.2018
services)
............
Established regional superintendencies AugJst 1.2018
Pass legislation to fonnalize new structure October 1 , 2018 ene
Decentralize • Merit-based Regional Leadership selection system in place October 1,2018
institutions
• Regional superintendancies established and staffed October 30.2013
and •.
structure • Publish plans For rightsizing the state educational agency (SEA) October 30, 2018
• implement rights
izng plans December 31, 2018
• Review rightsizing plans Ongoing
• Develop new centralized operating model for procurement September 1, 2018
• Identify major contract targets for savings September 1,2018
Achieve
procurement • Release RFP for major services October 1,2010
efficiency
• Capture savings November 1,2018
• Review procurement strategy January 1, 2021
266
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EXHIBIT 144: DEPARTMENT OF HEALTH GROUPING KEY IMPLEMENTATION
MILESTONES
401. C.an~
iectr‘-. -u2n, liettun,J nnptrAnunkilion 1,112(.1.
• Passle855184111n of nretTni-,t writes January 1.2019
Consolidate
• Compere.) syscOM eitegtEllen blftretel agencies June n0,2014
agencies
• Mender merger plogrece On90111
• Cortipiele capandy anaiysis September 1. 2018
• Grose now organizalsonal elms Nowoniter I. 2018
Rightsizing • Gracie Immune program turernutoym litinsdens January 1.2010
personnel • Commence wave Iwo of replsoing July 1.2019
• Assess rightsiong aciiieremenis Ana 10000 strategy laurels July 1, 2021
• Comptes minoring June 10. 2027
• namely hence IrleHlutencte•-.anci determine pesos for closure. Swag carilreuse klCell0f6 NOVetrit.0■ 1.2618
Consolidate
regional
• Creme pion for orricerassures December 1.2018 le
Imploment GIGE.1.-¢5 FOtentnry 1.2019 0.
Medicaid offices
Monitor posl.ciosuro %mega Ongoing
• Conduct thorough irreriory of currant procuronent procossas, suppliers, are process owners Octavo 1.2010
• login RFP protte.;./or Ke1SIOIS NrainilsoF I. 2018
improve supply • Select lendric December 1.2010
chain • imulenele. chanties Feticouly 1.2019
management • „tree per sIer End issue nub RFr Artery 1. 2021
• LBURCI1 new On:Neer COnt.reCt July 1, 2021
• Monitor wrings 0ng0sfl0
• ni„iiiniyerrprinneie h>rpmrrrc eandaregailen rprocuremani 04113.1311r5ylg n1 13.E1•5.. lefttelryO3Y neeir11110// ClelOrede 1 2018
• Build pen including erasing workflows and standard policies based on tern praclic us by procice Erma December I. 2018
Transform
• Reciesirt melLtekttoel crielratetsed m lied leUltryrA Nutt eetcontes DeCertltel• 1. 2018
hospital
• Renew current operrrtrons and tend new map strategy January 1, 2322
management
• implement new system Juno 30, 2022
• Monte 5e0.7+ DTI9OMP
• r nen[h PFP for lettered! support Au0.0 I. 20111 folll
• Sen conked wth prondor September 1. 2010 es.
Redesign AS E
Intelfsreen1 I Mona cycle ernnusweind Deloher 1.2018
r revenue cycle
management • Po'r■ nrrcrrn ent Fru..ks AuffufMance am ruquirpmein January 1.2021
• tatirich new wonder June 30, 2021
• lAnnIllir wags leer 111006m. p lotnallwinsinh Orignmg
EXHIBIT 145: DEPARTMENT OF PUBLIC SAFETY GROUPING KEY IMPLEMENTATION
MILESTONES
vf• = Completed
Ar ed5 of fOcriS Required implemenlaeon action Deadline
• Publish plans !or improving processes firldming automation etc.] September 1, 2018
, . ....... .
improve • Implementplena for improving processes Decernb at 1.2018
processes • Evaluate process improvement stride gy June 30, 2020
. . .
• Identity and implement additional process mprosementoppsrbeilion Ongoing
• Publish plan of sworn officer positionsinat can to replaced WO civilian-les chiles for staff reduce:wan-enlacement September 1, 2010
Clv I Ilanizallon
with civilian counterparts
OF non-core
'uks • Evaluate creilianization and outsourcing atralogy June 30. 2020
• Publish plan to consolidate stations. units and divisions August 31. 2018
Co nsolldatio rt?
elimi ngponof • I mpreme fit plan March 1, 2018
stations. units
and cat/Isle rie. • Identify eddrtional co n sohdalron and elimination opporlunted Ongoing
• Publish plan to reduce overtime August 31, 2018
Overtime
• Implement plan December 91, 2013
efficiencies
• Rave* end evaluate overtime reduction glen January 1. 2020
• Identify officers erg ibis far a raise of 51 500 of annual salary by FY 2019
• Ineehne $1.500 raise across nil sworn officer poartions *thin PRPC by FY 2019 Aa#
Saia ry and
• Insenne adomoris raise toren sworn Offitor tO Close PPP-adjusted tJ S. mainland salary gap of-$11.000002 by FY 2021
benefits
preside additional $100 per year per officer for im proved life and disability insurance
Increases
• I nallute 5500 raise for all firefig Mors in the Puerto Rico Firefighter Corps By FY2020 gle
• Monitor retention Fates and arafeate need lor Weller raise Ongoing
• Identify add re sae Pie non-porsonne spend September- 1., 2018
Non-personnel • Reduce non-personnel spend by 113 of the local Fur .reter savings byFY2018
spend
reduclion • Revers procommunist:Hand reduction slratirgy January 1. 2021
• Reeasessopporturrities for procuremani Oft le rEAS January 1.2023
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EXHIBIT 146: DEPARTMENT OF CORRECTIONS AND REHABILITATION GROUPING KEY
IMPLEMENTATION MILESTONES
Completed
Areas of focus Reniuren ■ mplernentation action Deadline
• Publish plans to consolidate prisons August 1.2018
• Close 5 prisons September 1 2018 te
Col ISOlidate • Implement plan to reuse or sale buildings October 1, 2018 10.
facilities
• Close further 2 prisons February 1, 2018 te
• Implement plan in wage or eel Elthbonal bulldogs March 1, 2018
• Evaluate opportunibes for additional closures Ongoing
• Publish plans to reduce headcount across OCR system August 1.2018
. .
Rights-12,13g • Commence stage one of rightsihng September 1, 2018
personnel • Implement further agency efficiency measures July 1.2019
• Complete agency efficiency measures June 30.2021
Publish plans for consolidation of procurement spend September 1.2018
• Initiate RFPa int needed for vendors to improve quality and cost of services September 15, 2018
Optimize
procurement • Select vendors and sign contract to address min. 20% of procurement costs October 1,2018
spend
• Review procurement strategy January 1, 2021
• Rea sse as a pportunibes for procurement efficiencim January 1, 2023
Launch RFP for correctional health services October 1, 2018 1/10
Redesign
correctional • Appoint vendor for services December 1 2018
health • Implement new contract January 1, 2019 •••
program
• Confirm Strategy for any additional savings needed beyond those in contract July 1 2020
EXHIBIT 147: DEPARTMENT OF ECONOMIC DEVELOPMENT GROUPING KEY
IMPLEMENTATION MILESTONES
tt,= Completed
Areas of focus Required implementation action Deadline
• Pass legislation to merge entities September 1, ie
Consolid- 2018
ate
• Finalize system mergers between entities June 30, 2019
agencies
• Complete all process and organizational changes June 30, 2020
• Complete capacity analysis for new merged entity September 1,
Right-size 2018
the number
Publish plan for new organizational structure with plans for reduction In personnel— November 1,
of
both front line and back office 2018
employees
• Full implementation of agency efficiency plan June 30, 2019
• Conduct scan or non-personnel spend and prioritize by major oppo atm ties for September 1,
Savings 2018
Optimize
non-
• Define plan to execute on priority opportunities November 1,
personnel
2018
spend
• Reduce non-personnel spend by 30% Ongoing
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EXHIBIT 148: OFFICE OF THE CHIEF FINANCIAL OFFICER GROUPING KEY
IMPLEMENTATION MILESTONES
=Completed
Areas , 1- four:a Required irnpiementation action Deadline
• Pass legislation to merge entities September 1. 2018
Consolidate
Finalize system mergers between entities June 30,2019
agencies
Complete all process and organizational changes June 30, 2020
. . . . .. .. . ...... . .
Identity major contract opportunities and estimate value October 31, 2018 voll
Develop strategy for footprint consolidation and digitalization November 1, 2018
Start re-negotiations of target contracts December 1, 2018
• Identify retail banking partners December 31,2018
Ira nsf o rrn
i-le deride • Roll out trial of consolidating services In bank real estate and start site closures March 31,2019
e fficie n c ies
• Finalize plan for footprint reduction informed by pilot June 30.2019
• Review of procurement savings achieved and develop strategy for FY20 June 30, 2019 '119
• Launch consolidation in all municipalities and finalize closures June 30.2021
• Assess impact of digitalization and footprint consolidation and identify future opportunities Ongoing
• Complete capacity analysis for new merged entity September 1 2018
• Conduct scan of non-personnel spend and prioritize by major opportunities for savings September 1. 2018
Reduce non- • Define plan to execute on priority opportunities November 1, 2018
"Treasury
back -office • Pubeeh plan for new organizational structure with plans for reduction in personnel November 1, 2018
and non-
• Review personnel rights ixing in light of shove initiatives June 30,2010
personnel
• Complete personnel rights lying to end stale June 30, 2021
• Reduce non-personnel spend by 30% Ongoing
- —
EXHIBIT 149: OTHER AGENCY GROUPINGS KEY IMPLEMENTATION MILESTONES
•••• =compieted
Areas of focus Action Item Deadline
• Pass legislation of merging entities September 1.
2018
Consoli-
date
• Finalize system mergers between entities June 30, 2019
agencies
• Complete all process and organizational changes June 30, 2020
• Complete capacity analysis for new state entity September 1,
2018
Rightsiz-ing • Publish plan for new organizational structure with plans for reduction in personnel November 1,
personnel
2018
• Full implementation of agency efficiency plan June 30, 2019
• Conduct scan of non-personnel spend and prioritize by major opportunities for savings September 1.
2018
Optimize
non- • Define plan to execute on priority opportunities November 1.
personnel
2018
spend
* Reduce non-personnel spend by Fiscal Plan targets Ongoing
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EXHIBIT 150: TAX COMPLIANCE AND FEES ENHANCEMENT KEY IMPLEMENTATION
MILESTONES
rf = Completed
Areas cif locus Required implementation action Deadline
• Finalize integrated plan for compliance improvement across major lax types, including expected value Cic I ober 31. 2018
from each
Improve
CompVence • Develop resource and milestone plan lo support activities identified in the compliance improvement plan November 30.2018
in Major
Taxes (SUT. • Launch acquisition activities (personnel, IT, external support) as needed to drive progress against key November 1, 2018
CIT, PIT) IndiatiireS
• Continue monitoring performance of Internet sales tax Ongoing
Initiate new gaming lax license c °Ructions and report on revenue yield Apnl 30, 201B ir
• Initiate new licenses and fees Collections and report On revenue yield June 30, 2010 llef
Right-Rate Apply local I axes to Ai rbnb rentals and report on revenue yield March 31, 2019 IVO
Taxes and
Fe OS Continue collecting taxes on medical marijuana and report on revenue yield Ongoing 1
1,
Continue collecting iecreasedtobacco taxes and report on revenue yield Ongoing
Evaluate performance of added tax types; measure collections and compliance June 1, 2022
EXHIBIT 151: PENSION REFORM KEY IMPLEMENTATION MILESTONES
ept = Canpleled
Areas of locus Action Item Deadline
Shift to Defined • Transition hybrid accounts to segregated DC accounts July 1, 2019
Contribution
Accounts • Implement JR S I TRS freeze and transition In segregated DC accounts January 1, 2020
Reduction in • Implement 10% average pension reduction July 1, 2020
Pension
Benefits
• Pass legislation for enrollment of aft police, including new hires, in Social Security June 30 2019 rI
• Enroll all police, including all new hires, in Social Security July 1, 2019
Social Security
• Pass legislation for enrollment of teachers and fudges under 49, as well as all new hires, in Social September 30,2010
Security
• Enroll teachers and Judges under 45. as well as all new hires, in Social Security January 1.2020
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EXHIBIT 152: MEDICAID REFORM KEY IMPLEMENTATION MILESTONES
✓ = Completed
Areas of locus Action item Deadline
Release RFP, publish data-book, hold conferences. and develop proposals for FY2019 MCO contract December 31. 2017 ve
• Receive proposals. negotiate rates. award and signed FY2019 MCD contract June 30, 2018 ire
Receive adjudication of FY2019 MCO contract from CMS October 3t 2018 if
Implement FY2019 MCO contract November 1, 2018 r/
• Build out analytics and quality assessment tools December 31, 2018
Conduct first quarterly audit and review of FY2019 MCO contract March 1, 2019
Overall New Publish first HEDIS report March 1, 2019
Healthcare
Model Complete negotiation of rates and finalize amendments to the MCO contract for FY2020 August 15.2019
• Conduct second quarterly audit and review of FY2019 MCD contract May 1. 2019
• Receive approval of negotiated premiums and amendments to MCD contract for FY2020 00.15. 2019 ge
Achieve $222 in savings from new island-wide healthcare mode/ July 1, 2020
Achieve $347 in savings from new island-wide healthcare model July 1.2021
Achieve $478 in savings from new island-wide healthcare model July 1.2022
• Achieve $615 in sayings from new island•wide healthcare model July 1. 2023
Establish a functional Medicaid Management Information System (MMIS) to track utilization, claims. January 1.2018
and priwide the data inputs for advanced analytics assessments to identify inappropriate spending,
while also leveraging the national Public Assistance Reporting Information System (PAMS)
Other Healthcare
Cost Savings Pass legislation to establish a Medicaid Fraud Control Unit (MFCIJ) under PR Department of Justice June 30., 2018
Initiatives to identify and prosecute fraudulent charges
Receive certification of MFCll from HHS Secretary September 30. 2018 tor
Fully operationatize MFCU December 31, 2018
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