FOMB

ANNUAL REPORT

2019
F I S C A L Y E A R
Financial Oversight and Management Board for Puerto Rico
Board Members
José B. Carrión, Chairman
Andrew G. Biggs
Carlos M. García
Arthur J. González
José R. González
Ana J. Matosantos
David A. Skeel, Jr.

Executive Staff
Natalie A. Jaresko, Executive Director
Jaime El Koury, General Counsel

Fiscal Year 2019 Report

July 31, 2019
San Juan, PR
I. Letter from the Chairman, José B. Carrión 3
II. Letter from the Executive Director, Natalie A. Jaresko 6
III. Fiscal Responsibility 10
1. Commonwealth 11
Fiscal Plan Framework 12
Structural Reforms and Fiscal Measures 21
The Fiscal Year 2020 Budget Process 29
2. Puerto Rico Electric Power Authority 37
3. Puerto Rico Aqueduct and Sewer Authority 39
4. Highways and Transportation Authority 41
5. University of Puerto Rico 43
6. Municipalities 46
7. CRIM 48
8. COSSEC 50
9. Implementing FOMB Authorities 51
IV. Debt Restructuring and Access to Capital Markets 53
1. Overview 54
2. GDB Title VI Debt Restructuring 54
3. COFINA Title III Plan Confirmation 55
4. PREPA Title III Restructuring Support Agreement 56
5. PRASA 56
6. Commonwealth Title III Plan Support Agreements 56
7. Debt Investigation and Special Claims Committee 57
V. Title V 59
VI. FOMB Activities 62
1. Aurelius Litigation - Defending PROMSA 63
2. Stakeholder Outreach & Engagements 63
3. FOMB Budget 67
VII. Ethics 69
VIII. Reccomendations for the Federal Government 76

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 Letter from the Chairman, Jose B. Carrión
The Financial Oversight and Management Board for
Puerto Rico (FOMB) received its mandate by law, but
our goals and our commitment are not just legal
obligations: we believe in and care deeply about
Puerto Rico. We are working to give Puerto Rico,
its people, its businesses, and its stakeholders the
stability and prosperity they deserve. We are working
to enable Puerto Rico to reach its full economic
potential.
During the fiscal year 2019 (FY2019) that ended June
30, 2019, FOMB made substantial progress on the
path to undoing the damage of Puerto Rico’s fiscal
and economic crisis. We advanced in renegotiating
Puerto Rico’s debt, establishing budgetary discipline
and fiscal transparency, and raising the importance
of critical structural reforms required to make the
economy competitive again.
Recent political events have left all of us in Puerto
Rico shaken. Although FOMB’s role is not political,
we will work with the elected leaders of Puerto Rico
to provide its people with the stability needed by all
stakeholders. We will continue our work, so this critical
period does not also shake Puerto Rico’s recovery
from the fiscal crisis and from the devastation of
Hurricane María. The sooner we fulfill Congressional
intent and comply with the Puerto Rico Oversight,
Management, and Economic Stability Act of 2016
(PROMESA) statute, the sooner we can end the work
of FOMB and return full authority to Puerto Rico’s
elected representatives. We seek to complete our
work as quickly as possible because our dedication
is to the people of Puerto Rico who deserve a better
future.
Our mandate continues to be establishing fiscal
responsibility and restoring Puerto Rico’s access to
the capital markets. However, we will continue to
outline the structural reforms necessary to improve
access and reliability to energy, increase labor force
participation, improve human capital and educational
outcomes, as well as make it easier to do business in
Puerto Rico. Each of these structural reforms assists
Puerto Rico in attracting investments, creating jobs
and providing a better future for residents.
We listen carefully to the people of Puerto Rico, and
what we hear reinforces our commitment to fiscal
responsibility because only fiscal responsibility
can lead to stability and economic growth. Fiscal
responsibility does not mean simply reducing
budgets, but more importantly, focusing available
resources on priorities in spending. In a public hearing
on public safety this spring, we heard that our police
force and our firefighters need a more competitive
compensation package and better equipment.
FOMB ensured both in the Certified Fiscal Plan and
the Certified Budget, so we can retain and recruit
the police officers and firefighters we so depend on
to protect us. We heard from stakeholders about
decades of backlog in the investigation of rapes and
3
ensured the additional funds for SAFE kit processing.
We listened to the students of the University of
Puerto Rico and increased the scholarship fund for
students in need, so every Puerto Rican has access to
the education they deserve.
We pressed for savings to be achieved via
consolidation of the over 100 government agencies.
The target is to not only reduce costs, but also ensure
the delivery of more efficient government services.
Consolidation will also have the effect of making the
Government more manageable over time.
FOMB also made major strides in promoting
transparency within the Government, specifically in
terms of reporting and budgeting. We have required
financial transparency so that society has full access
to information regarding how their taxpayer dollars
are spent. The public reports now available online
include budget to actual reporting, cash reporting,
bank balances, and attendance. FOMB certified
budgets for the Commonwealth and instrumentalities
also now include greater detail about the nature of
spending for the first time. Finally, FOMB posts online
all progress on implementation plans submitted by
Government agencies.
Where transparency was not possible, FOMB
pursued building the database to make it so. FOMB
commissioned a report detailing the bank and
investment account balances of 164 entities and
instrumentalities of the Commonwealth of Puerto
Rico. Transparency and accountability of public
finances are critical to responsible governance, and
the report, prepared by an independent forensic
analysis team of Duff and Phelps LLC, determined
that the entities and instrumentalities covered in
the report hold 1,159 accounts with a total value of
about $10.2 billion.
The government debt crisis is what prompted the
adoption of PROMESA, so finding affordable and
sustainable resolutions that will allow Puerto Rico to
overcome this debt crisis is, of course, the other core
focus of our work. We completed the restructuring
of over $22 billion of debt and other obligations
in FY2019, including finalized restructuring of the
Government Development Bank (GDB) and COFINA
debt. Agreements in principle have been reached
with PREPA bondholders and with stakeholders
of the Commonwealth. Before negotiating the
restructurings, FOMB made significant progress to
better understand and scrutinize the debt load itself.
As part of our fiduciary duty and in response to public
interest, we asked the independent investigation
law firm Kobre & Kim in 2017 to provide us with
a complete, independent review of Puerto Rico’s
debt. In August 2018, we received the result of this
investigation and presented the Kobre & Kim report
to the people of Puerto Rico. For the first time,
everyone can understand the debt in its
entirety. Subsequently, FOMB created a Special
Claims Committee which, as a direct result of the
review, challenged $6 billion worth of general
obligation bonds issued by the Commonwealth of
Puerto Rico and $2.5 billion issued by the
Employees Retirement System (ERS).
Transparency is one of the most important elements
of Puerto Rico’s fiscal responsibility, and we take our
own transparency just as seriously as the transparency
we demand from the Government and governmental
institutions. That is why we commissioned a report
to investigate the work we do with our consultant
McKinsey & Co., and whether investments by
McKinsey’s subsidiary that manages the retirement
money for the consulting firm’s partners presented a
conflict of interest with McKinsey’s work for FOMB. We
hired Luskin, Stern & Eisler LLP to do an independent
investigation. The report did not find any violation
of the disclosure rules FOMB set for its vendors or are
required by law. The Luskin Stern report
suggested implementing additional disclosure rules,
and we are implementing all of them.
FY2019 also brought new challenges. One of the
most significant was the ruling by the U.S. Court of
Appeals for the First Circuit, which held that members
of FOMB are federal officers who ne eded to be bu t
were not appointed pursuant to the Appointments
Clause of the U.S. Constitution with the advice and
consent of the U.S. Senate. We do not agree with this
decision. In April, FOMB filed a petition with the U.S.
Supreme Court to overturn the First Circuit decision,
which the U.S. Supreme Court granted in June. We
believe members of FOMB are territorial officers, and
therefore their appointment under PROMESA was
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lawful. Nevertheless, in June of this year, President
Donald J. Trump nominated all seven current
members of FOMB for Senate confirmation. President
Trump’s administration also asked the U.S. Supreme
Court to overturn the First Circuit’s decision on the
Appointments Clause. The members of FOMB thank
President Trump for his trust and for his support in
this important legal issue. We are also thankful to the
many Members of Congress who have supported the
appointment of the Board members.
After thirteen years of economic underperformance,
four years in default of our crushing debt, and the
most devastating storm in American history, it is
important that we move rapidly along the path to
restore fiscal responsibility and balanced budgets,
conclude the debt restructuring, and regain access
to capital markets, rekindling economic opportunity
for all on our Island.
We look forward to the continued support of the
Federal Government in rebuilding the massive
damage from Hurricane Maria. The people of Puerto
Rico need to be assured that the funds will be timely
and wisely invested to rebuild a resilient 21st century
infrastructure on the Island. The funds will not be
used to pay debt. These badly needed funds go only
toward the repair of damage caused by Hurricane
María.
A great deal of work lies ahead. We need to do a lot
more to make it easier to do business in Puerto Rico
and attract more investment and more jobs to our
island. Government right sizing will continue until
we reach a level of spending that is affordable and
ensure the spending fits the needs of the people of
Puerto Rico. Doing what is necessary is often painful,
unpopular, and easy criticized. However, we need to
press on and rebuild and restore our economy.
We are determined to complete the debt
restructurings, continue the transformation of PREPA
into a modern, effective provider for clean, reliable
and affordable energy, and contribute to making
Puerto Rico a thriving economy that provides a better
future for the people of Puerto Rico.
José B. Carrión
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 Letter from the Executive Director,
Natalie A. Jaresko
FOMB prepared this annual report in accordance with
PROMESA to outline progress made in meeting the
objectives of PROMESA during FY2019.
The political turmoil that characterized the beginning
of FY2020 in Puerto Rico is more evidence of the
need to improve governance, increase transparency,
and build an economy that provides opportunity for
the people of Puerto Rico. Thus, FOMB’s mandates
remain ever more important to the recovery of
Puerto Rico from its fiscal, hurricane, demographic
and governance crises. FOMB has been charged with
helping the Government of Puerto Rico to achieve
fiscal responsibility and regain access to capital
markets. Fiscal responsibility, transparency, and
economic sustainability are the keys to Puerto Rico’s
recovery, no matter who is the Governor. However,
it is crucial that FOMB have a willing partner in the
elected Government in order to fulfill the mandate of
PROMESA as quickly as possible.
We have made significant progress on both parts of
our legal mandate. FOMB updated fiscal plans and
certified compliant budgets for the Commonwealth
and four instrumentalities: the Puerto Rico Electric
Power Authority (PREPA), the Puerto Rico Aqueduct
and Sewer Authority (PRASA), the University of
Puerto Rico (UPR), and the Puerto Rico Highways and
Transportation Authority (HTA). We have completed
the restructuring of over $22 billion of debt and
other obligations, and have reached preliminary
restructuring agreements with holders of a portion
of an additional $45 billion of Puerto Rico’s debt and
other liabilities, providing a potential path to emerge
from PROMESA Title III cases – the bankruptcies that
deal with the oversized debt that has plagued Puerto
Rico for so long.
When FOMB began its work in 2016, Puerto Rico faced
an unsustainable burden of more than $70 billion in
debt arising from uncontrolled government spending
and $55 billion in unfunded pension liabilities,
exacerbated by decades of economic decline and
significant outmigration. The people of Puerto Rico
deserve better, and PROMESA provides a way forward
to provide Puerto Rico with the foundation for a future
with opportunity and prosperity for all the Island’s
residents.
Achieving the goal of a fiscally stable Puerto Rico
will take time. In Washington, DC, New York City, and
Detroit, it took years before residents began to see
progress after those cities’ respective fiscal crises.
Nevertheless, FOMB’s work in FY2019 is a milestone
on the path to recovery, built upon advances we can
and will build on in the new FY2020 that started July
1, 2019.
Fiscal Responsibility
Fiscal policy is about choices, about what services are
more important than others, about what investments
need to be made today to build our tomorrow. Years
of running budget deficits, financed by access to
debt markets, have not led to prioritizing spending
where it is most needed or valuable, and have not led
to transparency or accountability. FOMB’s mission is
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to help lay the foundation for prosperity, through a
more manageable, affordable, fiscally disciplined, and
efficient government. Balanced budgets are the long-
term goal of PROMESA, but without serious structural
reform to improve the Island’s competitiveness they
are insufficient to promote the economic growth
required by Puerto Rico residents and business.
The 2019 Fiscal Plan FOMB certified in May lays out a
number of these necessary structural reforms: reform
of the electricity sector to ensure low cost, clean and
reliable electricity; improvements to human capital
and welfare to increase the qualified work force
on the Island; and improvements in the business
environment, be it permits, registration of property,
infrastructure or tax administration burden. These are
the areas where FOMB found general alignment with
the Government, but are by no means all the possible
structural reforms that could contribute to sustainable
economic growth in Puerto Rico.
Fiscal Plan priorities are reflected in the Certified
Government Budget from June for FY2020. Total
government spending of $20.2 billion is focused on
the following priority areas: 21% for health, 17% for
education, 13% for pensions paid via PayGo, 12% for
families and children, and 5% for public safety. One of
these priorities is public safety, because government
services that improve public safety help to maintain
and build the confidence of residents and businesses.
The budget, for example, provides for increased
salaries and benefit contributions for police officers
and incremental funds to purchase bullet proof vests,
radios, and vehicles. Social Security is budgeted for
all police as of July 2019 to provide them a more
secure future retirement. In addition, the Certified
Budget raises teachers’ and school principals’ salaries
for the second consecutive year, and the salaries
of firefighters. Notwithstanding these and other
spending increases in priority areas, right-sizing the
Government to create more efficient government
services continues: professional fees declined by 30%
year over year, and redundancy in administration
within agencies is being reduced via consolidation of
the more than 120 government agencies and public
corporations.
As in the previous FYs under FOMB’s oversight, the
budget intentionally does not project the Government
spending all the revenues it collects in the current
FY. The projected surplus of $2.6 billion in FY2020
is set aside to protect future pension payments and
manage legacy obligations. Given the structural
reforms outlined in the Fiscal Plan are projected to
generate insufficient growth to maintain long term
balanced budgets, some of the currently projected
surpluses are dedicated to fund PayGo payments for
retirees in those years when the Government runs a
deficit. We need to ensure that retirees never again
have to worry about future governments not having
the resources to fully pay their pensions.
Transparency
FOMB achieved considerable improvements in the
Government’s financial transparency by providing the
people of Puerto Rico better access to higher quality
information on government reforms, government
spending, and government administration. This
includes making available online public records
of actual spending versus budget, cash and bank
balances, submission of reform implementation plans
for all agencies, and mandated oversight over all
outside contracting and new debt issuance.
The FY2020 Certified Budget includes four sets of
major improvements in budgeting practices. First,
we have worked with the Government to provide a
deeper level of detail in the Certified Budget, detail that
had not previously been available to the Legislature
or public, which enables a better understanding of
how funds are being spent. Second, the consolidated
budget is more comprehensive and captures items
not budgeted previously, including all cash subsidies
to industry, approximately $300 million in FY2020.
Moreover, the Fiscal Plan calls for a limit to tax credits
issued and claimed by capping the notional amount,
capping the number of companies and individuals
that can claim credits annually, including sunset
provisions, and adding time bound clauses upon
which each tax credit will expire. Third, the published
budget resolution, which is now combined into one
document, includes specific concepts of spending
for each agency to provide a more detailed look at
how the Government uses funds. Finally, a series of
budget controls are established within the budget to
improve fiscal responsibility.
The Government has much more work to do to improve
its budgeting practices. The Government still operates
with six different accounting systems that need to be
7
consolidated to provide better accountability over
spending. The Government needs to finally complete
the delayed financial audits for FYs 2017 and 2018.
Completion of the overdue audits and implementing
a process that will ensure best practices in issuance
of the audited financial statements going forward
(completed within 180 days of the end of the FY) is a
critical element of necessary fiscal responsibility.
Debt Restructuring
FOMB made significant progress on debt restructuring
this past year, bringing Puerto Rico another step
closer to regaining access to capital markets. Working
closely with the Government and consensually
with creditors, FOMB completed two restructurings
involving more than $22 billion in public debt and
other obligations that had been issued by the Puerto
Rico Sales Tax Financing Corporation (COFINA, for its
Spanish acronym), the sales and use tax financing
corporation, and GDB, the Government Development
Bank. FOMB restructured COFINA’s $18 billion debt.
The plan of adjustment for COFINA, approved by the
Title III court in February 2019, reduces the par amount
of COFINA bonds by $6 billion or one-third of the
original debt. FOMB also approved the restructuring
to resolve the GDB’s over $4 billion in legacy bond
debt and approximately $8 billion in liabilities. GDB’s
legacy creditors agreed to a 45% reduction in the
face amount of their claim, and municipalities were
allowed to offset their GDB loans by the full amount
of their deposits.
In addition, FOMB also entered into a plan support
agreement with certain supporting creditors to
restructure $9 billion of PREPA bond claims and
to protect future ratepayers from demand risk by
transferring it to bondholders. FOMB agreed with
PREPA bondholders to reduce PREPA’s debt by more
than 30%. For PREPA’s customers, this means that, on
average, electricity rates will be 3 cents per kilowatt
hour lower than what they would be if PREPA were
forced to pay its $10 billion of outstanding contractual
debt. The substantial savings achieved if the RSA
culminates in a confirmed Title III plan of adjustment
mean that resources can then be directed towards
modernizing and rebuilding the energy system and
attracting the necessary investments, from both
federal and private sources, to ensure the reliability
and resiliency of Puerto Rico’s energy system.
Lastly, FOMB entered into a plan support agreement
with some holders of over $50 billion in pension
claims and an additional $35 billion of debt and non-
debt claims at the Commonwealth. For more than a
year, FOMB has been working with key constituents –
retirees, unions, and creditors – to lay the foundation
for the Commonwealth’s plan of adjustment.
In June, FOMB reached agreements with unions and
the Official Committee of Retirees (COR). When FOMB
stepped in, Puerto Rico’s largest government pension
system was negatively funded which exposed Puerto
Rico’s pensioners, who are unsecured creditors
under PROMESA’s Title III process, to significant risk
of receiving any pension at all. That is what makes
our consensual agreement with the COR such a
monumental achievement and integral component of
a plan of adjustment. We agreed with COR to subject
accrued retirement benefits to a flat 8.50% pension
cut for those receiving retirement benefits of more
than $1,200 a month, with no cut for those receiving
retirement benefits of less than $1,200 a month,
which will protect over 60% of retirees and almost
75% of all beneficiaries from any cut. We also agreed
that the Commonwealth would establish a pension
reserve fund for the PayGo pension system. A part of
the projected government surplus the next several
years would be paid into a reserve fund to ensure that
the Government has funds to pay for pensions, even
in deficit years, so that retirees never have to worry
about receiving their pension checks.
Finally, FOMB reached an agreement with certain
bondholders of general obligation bonds issued by the
Commonwealth of Puerto Rico to lay the groundwork
to restructure $35 billion worth of debt and non-debt
claims against the Commonwealth. The agreement
will reduce the amount of Commonwealth-related
bonds outstanding to less than $12 billion, a reduction
of more than 60%. This broad group of stakeholders
consisting of unions, COR, and certain bondholders
came together to remove the cloud that has been
hanging over Puerto Rico’s economy, over businesses
that want to create jobs, and over the Government as it
invests in the future of Puerto Rico. These agreements
are the foundation for a Commonwealth plan of
adjustment that would restructure the largest part of
Puerto Rico’s debt. FOMB hopes that the U.S. District
Court, which has jurisdiction over the PROMESA Title
III cases, will approve the plan of adjustment soon to
8
be filed, during the current FY.

FOMB Organization
FOMB remains a small organization, with a flat
hierarchy. One of its organizational goals during FY
2019 was to take advantage of the incredible talent
that we have in Puerto Rico to build organizational
strength through local recruiting, thereby reducing
costs and the use of third-party consultants. The
overwhelming majority of the new hires are Puerto
Ricans, several of whom have returned from the U.S.
mainland to help our Island recover.

The expenses incurred by FOMB in carrying out

its mission are substantial and necessary. We have
a big and complex task. FOMB is responsible for
administering the largest public entity restructuring in
U.S. history and is party to hundreds of lawsuits. FOMB
is monitoring more than 120 reform implementation
plans across the Government, which requires a
significant amount of resources and expertise. These
plans translate into thousands of individual reform
milestones that need to be monitored and tracked.
Nevertheless, we were able to reduce our FY2020
budget by 11% from a year earlier, to $57.6 million.

Outlook
Years of government mismanagement, economic
decline and lack of transparency brought on and
exacerbated Puerto Rico’s crises. PROMESA is
successfully providing solutions to many of these
problems so that Puerto Rico can achieve fiscal
stability and future access to capital markets, which
is needed to operate the Government and ultimately
restore economic growth and opportunity for its
residents. Our work is focused entirely on Puerto
Rico’s recovery. The law is clear as to the work that we
need to do – and for how long. I am hopeful that we
can all work together to make Puerto Rico’s economic
future brighter than ever.

Natalie A. Jaresko

9
FISCAL RESPONSIBILITY
F I S C A L Y E A R 2 0 1 9

10
COMMONWEALTH
F I S C A L Y E A R 2 0 1 9

FOMB is working collaboratively with the Government of Puerto Rico to transform the Government and deliver
more sustainable, efficient government services to the people of Puerto Rico. The main tools provided to FOMB
by PROMESA are the certification of the fiscal plan and the certification of the budget. With these tools, FOMB
seeks to achieve three key goals:

1. More efficient, more manageable government that is affordable long-term;

2. Improved delivery and quality of government services, including public safety, healthcare
and education; and

3. Mapping the structural rereforms necessary to make the economy more competitive, attract
investments, create jobs, and promote economic growth.

This section outlines the past fiscal year's work in detail.

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FISCAL PLAN FRAMEWORK
Pursuant to PROMESA, FOMB has the authority to certify fiscal plans for the Common-
wealth and its instrumentalities. These fiscal plans are meant to chart a course for the Island
towards fiscal sustainability and a return to capital markets. During FY2019, two Fiscal Plan
updates were made – October 2018 and May 2019.

October 2018 Fiscal Plan1

This Fiscal Plan incorporated material new information on actual revenues and expenditures
from FY18, particularly, to correct the historical overbudgeting in payroll through use of
actual spending data, revised the estimated disaster relief funding to approximately $82
billion (from federal and private sources), adjusted demographic projections, updated
implementation progress on structural reforms related to the Nutritional Assistance Program
(NAP) work requirement and Trading Across Borders, and reflected the completion of the
COFINA debt restructuring settlement. After the Fiscal Plan certification, the FOMB launched
an interactive web-based reporting dashboard that tracks compliance and implementation
with the certified fiscal plan of all the agencies and covered entities.

May 2019 Fiscal Plan2

After October 2018, FOMB continued to engage various stakeholders regarding the
objectives, assumptions, and projections of the October 2018 Fiscal Plan. In January 2019,
FOMB started a collaborative process with the Government to update and recertify the Fiscal
Plan as a platform for the FY2020 budget process. This round of updates was primarily focused
on revising pension projections, aligning the fiscal plan with the FY2020 budget process,
updating for new information and better reflecting actual progress on implementation of
structural reforms.
Puerto Rico must urgently adopt a series of
bold actions to improve its fiscal and economic
trajectory. These reforms and measures are
essential to restoring growth, opportunity,
and prosperity to the people and businesses
of Puerto Rico, and to making the Government
of Puerto Rico more efficient, effective, and
responsive to its residents.

1
See the October 2018 Fiscal Plan for the Commonwealth of Puerto Rico:
https://drive.google.com/file/d/17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view

2
See the 2019 Fiscal Plan for the Commonwealth of Puerto Rico:
https://drive.google.com/file/d/13wuVn04--JKMEPKu-u-djZJHqTK-55aV/view

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STRUCTURAL REFORMS
The 2019 Fiscal Plan includes a series of structural reforms to improve the trajectory of the economy and
drive growth (Exhibit 1). The 2019 Fiscal Plan includes updated forecasts for the projected impacts of these
structural reforms based on the implementation status of these reforms.

EXHIBIT 1: IMPACT OF STRUCTURAL REFORMS

Impact of structural reforms1, $M
~34,000

332

172
107
44
0 0 0 9
FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY19-24 FY19-49

1 Structural reforms begin in FY21, and thus have no impact from FY18-FY20

Human capital and welfare reform

Puerto Rico faces immense challenges with formal labor force participation and preparedness. The Island’s
formal labor force participation rate is only ~41%, far from the U.S. average (62%) and even the lowest-ranked
U.S. state (West Virginia, 54%), and well below other Caribbean islands. 3,4 In fact, according to World Bank data,
Puerto Rico’s formal labor force participation rate is currently 7th lowest in the world and has not ranked higher
than the bottom 20 in at least the last thirty years.⁵ Puerto Rico’s youth unemployment rate is 25.8%, more than
double the world average (12.8) and over three times the U.S. average (8.2%).6
Dramatic changes to Puerto Rico’s labor market policies are necessary to provide Puerto Ricans the opportunity
for a greater standard of living at home, reversing the Island’s history of high poverty, constrained budgets,
and pressure for young Puerto Ricans to leave their home for the mainland. To ensure Puerto Rico can provide
opportunities for its people for years to come, structural reforms must make it easier to hire, encourage workforce
participation, and enhance student outcomes and workforce development opportunities to ensure a pipeline
of prepared and appropriately-skilled individuals.

3
The World Bank Group, 2018, via International Labour Organization, ILOSTAT database. Data retrieved in April 2019
4
Bureau of Labor Statistics, 2018 Employment status of the civilian noninstitutional population, annual averages by state
5
As of April 2019, Puerto Rico’s ranking has never surpassed 215th out of the 232 countries, states, and territories tracked by The World Bank Group since
The World Bank Group began collecting data in 1990
6
The World Bank Group, 2018, via International Labour Organization, ILOSTAT database. Unemployment as a % of the youth labor force, ages 15-24. Data retrieved
in April 2019.

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To address these issues, the Fiscal Plan calls for promoting participation in the formal labor
force by creating incentives to work through Earned Income Tax Credit (EITC) benefits and
NAP reform, as well as providing comprehensive workforce development opportunities.

EITC and NAP reform are projected to increase economic growth by 0.15% by FY2025.
Education and workforce development opportunities are projected to add an additional
0.17% from FY2033-2049.

Ease of doing business reform

In the 2018 and 2019 Ease of Doing Business Report, Puerto Rico ranked 64th. This represents
a 9-point decline from 2017 and is 58 spots lower than the U.S., which ranks 6th overall.7
While the overall ranking did not change in 2019, the underlying trends on the most critical
improvements needed to encourage growth in Puerto Rico were negative – such as getting
electricity, construction permitting, and registering property.

One of the best ways to increase economic growth is to attract additional investment
and create new jobs. The competitive environment in Puerto Rico requires improvement
if to compete with other investment destinations, specifically by reducing a variety of
inefficiencies related to building, expanding and attracting businesses. Easier-to-navigate
regulations, less complex and faster investment and permitting mechanisms, and
streamlined tax administration systems can encourage new businesses to hire employees
and invest in growth. These outcomes can be achieved by making necessary administrative
and legislative changes and by investing in digitization.

The Fiscal Plan addresses the issues critical to promoting economic activity and reducing
the obstacles to starting and sustaining a business in Puerto Rico through comprehensive
reform to improve ease of paying taxes, registering property, and obtaining permits.

These reforms are projected to drive a 0.40% uptick in overall growth by FY2023.

Power sector reform

Over the next five years, the power sector in Puerto Rico must transform and modernize to
support the delivery of reliable and affordable power. The Government must continue to
implement a comprehensive energy sector reform to enable a successful transformation
and the resulting growth that the 2019 Fiscal Plan projects. The goal of transforming
Puerto Rico’s power sector is to provide its residents with affordable, reliable, resilient, and
environmentally compliant power delivered by an efficient and financially sustainable utility.

The pillars of this transformation include restructuring the power generation mix to leverage
efficient, low-cost sources of power, executing a large-scale capital investment program with
federal funds and private sector investments to rebuild and modernize the energy system,
and introducing customer and stakeholder accountability by leveraging private knowledge
and capital for the management and operation of the transmission and distribution (T&D)
system, as well as for the deployment of new generation resources, subject to the oversight
of a professional, well-resourced regulator.

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. The long-term sustainability
7
See the World Bank Group’s Flagship Report “Doing Business 2019, Puerto Rico Economy Profile”
https://www.doingbusiness.org/content/dam/doingBusiness/country/p/puerto-rico/PRI.pdf
14
of Puerto Rico’s energy sector depends on the lasting presence of a strong, independent, and professional
regulator.

This reform is projected to increase growth by 0.30% by FY2023.

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. Capital decisions must be sufficiently insulated from ad hoc
political pressures to promote effective comparison and tradeoffs. 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.

Note that the reforms listed above are ones that the Government has committed to implementing and does not
represent a comprehensive list of structural reforms that the Government could pursue or that would benefit Puerto
Rico. For example, improving labor market flexibility through repealing restrictive laws like Law 80 and creating
labor conditions more similar to those in 49 of 50 states would lead to increased labor force participation rates and
much higher economic growth.

15
FISCAL MEASURES
The 2019 Fiscal Plan proposes a set of fiscal measures the Government must take to increase
government revenues and reduce government expenditures (Exhibit 2):

EXHIBIT 2: IMPACT OF REVENUE AND EXPENDITURE MEASURES ON OWN

REVENUES AND EXPENDITURES
Pre-measures and structural reforms Post-measures and structural reforms Fiscal Measures,3 $M

Impact of measures on Government revenues and expenditures, $M

35 234 361 423 491 499 509

16,500

Own 16,000
revenues1
15,500

49 498 1,024 1,829 2,214 2,502 2,646

18,000
Own 16,000
expen-
ditures2 14,000
12,000
10,000
FY18 FY19 FY20 FY21 FY22 FY23 FY24
1 Own revenues includes all Commonwealth-collected revenues excluding gross up items included in the 2019 Fiscal Plan and excludes all federal transfers; includes impact of COFINA
settlement
2 Own expenditures includes all Commonwealth expenditures, including CW-funded portion of Medicaid and social programs; own expenditures increase between FY20 and FY21 due to
Medicaid Supplemental Funding phase out
3 Comprised only of fiscal measures attributable to the Commonwealth

Creation of Office of the CFO

The Government’s current financial management functions remain decentralized,
fragmented, obsolete, and in need of improvement. This must be solved by the establishment
of a strong, centralized Office of the Chief Financial Officer for Puerto Rico (“OCFO”) in the
executive branch of the Government. The Government is required to consolidate all financial
management, human resources, and procurement activities under the OCFO.

By centralizing all financial management functions per the 2019 Fiscal Plan, the OCFO
would improve fiscal governance and forecasting, increase transparency, substantiate
accountability, heighten internal controls, and improve stakeholder confidence in Puerto
Rico’s financial management. Most importantly, it will enable the Government to achieve
fiscal responsibility and restore access to the capital markets, two cornerstones of PROMESA.

16
Agency efficiencies
Consolidating agencies and deploying new management tools and practices to deliver better governmental
services for substantially lower cost is a key fiscal measure. As of FY2018, 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). These
agencies utilize personnel and non-personnel resources that are outsized compared to the actual service needs
of the people of Puerto Rico and yet often do not meet those service needs. Compared with states serving
similar populations, Puerto Rico remains an outlier in terms of the sheer number of agencies: for example, as of
2018 Iowa only had 36 state agencies and Connecticut had 78.

As part of the new government model, the Government proposed consolidation of the 114 agencies into no
more than 42 agency groupings and independent agencies. In some cases, the consolidations are designed to
better focus the competing efforts of multiple agencies, such as the Economic Development grouping, which
will consolidate ten agencies into one. In other cases, the consolidations should serve to move services closer
to residents, such as the Healthcare grouping, which will consolidate access points to important services like
Medicaid. In all cases, the goal is to improve the quality of the underlying services. Across all agencies, the
ultimate goal should be to drive efficiencies to improve services for the population, while achieving the cost
savings required to sustain a fiscal transformation.

Healthcare reform
The goal of the Puerto Rico 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 efficacy of its health insurance plan, specifically
“bending the curve” on premium inflation reflective of escalating costs for health care delivery on the Island.

This reform 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. Moreover,
it seeks to avoid reduction in service quality – and in many cases reforms are expected to improve service
quality – for beneficiaries.

Enhanced tax compliance and optimized taxes and fees

These measures include employing new technology and other innovative and now commonly used practices
in other jurisdictions to broaden the tax base, reduce fraud, and improve fairness to boost overall tax revenues;
adjusting existing taxes and fees to capture revenues from under-leveraged sources.

Reduction of appropriations
While reducing the fiscal burden on the Commonwealth, these measures encourage sound fiscal self-
management by reducing appropriations to municipalities and UPR, while instituting a means-tested
independent scholarship fund to ensure access to UPR for all students.

Comprehensive pension reform

The Fiscal Plan measures improve the financial stability of public employees through a reform that would
maintain enough funds to comply with the payment of pensions and to provide the administration necessary
to maintain a defined contribution (DC) plan for current employees.

17
Comprehensive pension reform - Continuation
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 plans have different tiers of benefit formulas, some of which
are traditional defined benefit pensions based upon years of service and final salary, while
others are hybrid cash balance plans. Under the hybrid cash balance plans, employees have
notional accounts credited with contributions and interest, and upon retirement, benefits
are payable as an annuity. Different benefit tiers apply to employees based upon the year
in which they were hired. Per their latest data available, each of the systems included the
following actuarial liabilities, which are also shown in Exhibit 3: 8

EXHIBIT 3: PENSION SYSTEMS OVERVIEW

Total Covered Members
Employee Teachers Judicial
Retirement Retirement Retirement
System System System
Plan (ERS) 9 (TRS) (JRS) Total CW
Active Employees 119,000 33,000 364 152,364
Retirees, Beneficiaries,
123,000 44,000 514 167,514
Disabled Members
Total Covered 242,000 77,000 878 319,878
$ in thousands

Funded Ratio Percentage

Employee Teachers Judicial
Retirement Retirement Retirement
System System System
Plan (ERS) (TRS) (JRS) 10 Total CW
Annual Benefits Paid $1,660,000 $870,000 $27,000 $2,557,000
Total Actuarial Liability1 31,000,000 17,000,000 615,000 48,615,000
Net Assets (2,108,880) 505,465 26,255 (1,577,160)
Funded Ratio Percentage (6.8%) 3.0% 4.3% (3.2%)
Memo: Pension Obligation Bonds $2.95 billion

1. Total actuarial liability amounts are as of July 1, 2017, with the exception of PREPA which is as of July 1, 2018.
Source: Annual Actuarial Valuation Reports

8
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
9
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.
10
The total actuarial liability is approximately $622 million as described in the following: www.retiro.pr.gov/wp-content/uploads/
PRJRS_Val_June302017.pdf

18
All employees make contributions toward their benefits, albeit at different rates. Most regular government
employees also participate in Social Security, which includes both employer and employee contributions; most
teachers, judges, and police officers do not.

Over many decades, successive governments have failed to adequately fund these retirement plans, and today
the ERS, TRS and JRS are nearly insolvent. In fact, PayGo expenditures to provide pension benefits are expected
to constitute approximately some 20% of General Fund expenditures without further action. Exhibit 4 shows
Puerto Rico compared to other state funded ratios.

EXHIBIT 4: PENSION SYSTEMS OVERVIEW -

Puerto Rico compared to other state funded ratios
Investment shortfalls and insufficient contributions reduced funded levels for many public worker
retirement plans, but Puerto Rico’s funded level is abnormally low.

State Pension Funded Ratios

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
New Jersey

Minnesota

Alaska

West Virginia

Idaho
Indiana
Connecticut

Alabama

Maine

Nebraska
New Hampshire

Kansas

New York
Montana

Iowa
Nevada
Virginia
Texas

South Dakota
Wisconsin
Mississippi

Arizona

California

Georgia

Arkansas

Oregon

Utah

Tennessee
Michigan

Delaware
South Carolina

Vermont

North Dakota
Rhode Island

New Mexico
Puerto Rico

Colorado

Pennsylvania

Maryland

Missouri
Massachusetts

Ohio

Washington
Wyoming

Florida
Illinois

Oklahoma

North Carolina
Louisiana
Hawaii
Kentucky

Puerto Rico data represents combined funded ratio of ERS, TRS, and JRS system.
Source: Pew Charitable Trust, The State Pension Funding Gap: 2016. Available at: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/the-state-pension-funding-gap-2016

The Fiscal Plan’s pension reform outlines three sets of actions to help restore both fiscal balance and a promise
for current and future retirees to safeguard their assets and their future pensions:

1. Freeze defined benefit plans for JRS/TRS and enroll employees in a DC plan with segregated accounts;
2. Pension benefit reduction; and
3. Cover more government workers in Social Security.

19
The Government of Puerto Rico cannot afford to meet all its contractual
debt obligations, even with the aggressive implementation of all the
structural reforms and fiscal measures included in the Fiscal Plan.

Puerto Rico is committed to repaying an affordable and sustainable amount of its outstanding
debt. However, Puerto Rico needs a comprehensive restructuring of its debt—in addition
to the adoption of pro-growth structural reforms—to regain access to capital markets and
create the basis for a sustainable economy. The best time to implement these reforms and
restructure the debt is while Puerto Rico has the temporary benefits of federal disaster relief
funding and a stay on debt service. Therefore, time is of the essence. The 2019 Fiscal Plan lays
out a prudent and integrated set of actions to restore fiscal balance in the short and medium
term and outlines opportunities for more ambitious additional reforms to create a vibrant
economy in the long term.

Such additional ambitious reforms are necessary because the 2019 Fiscal Plan projects
deficits from FY2038 onward (Exhibit 5). As a result, a Puerto Rico government in the near
future will be required to take additional measures that go beyond the five-year framework
of this 2019 Fiscal Plan to be able to have balanced budgets and a growing economy. Many
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 FOMB, but FOMB cannot implement them without the support of Puerto Rico’s
elected Government.

EXHIBIT 5: 2019 FISCAL PLAN PROJECTED SURPLUS BEFORE AND AFTER

MEASURES AND STRUCTURAL REFORMS
Gap/surplus before and after measures and structural reforms, $M

2019 fiscal plan gap/surplus pre-measures/structural reforms1 Post-measures and structural

2019 fiscal plan gap/surplus post-measures/structural reforms1 reforms real GNP growth rate
Contractual debt service 2

(4.7%) 4.0% 1.5% (0.9%) 0.2% 0.1% 0.5% (0.9%) (0.6%) (0.1%)

4,000

2,000

-2,000

-4,000

-6,000

-8,000

-10,000
FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY29 FY39 FY49

5 years 10 years 10 years

1 Includes payments under COFINA settlement

2 Excludes COFINA

20
STRUCTURAL REFORMS AND FISCAL MEASURES
IMPLEMENTATION PROGRESS
Implementing these structural reforms and fiscal measures, which will provide 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, will improve the economy and services provided
for the people of Puerto Rico.

The Fiscal Plan requires the Government to submit implementation plans to outline timelines and Key
Performance Indicators (KPIs) for all fiscal measures and structural reforms, and to provide monthly progress
reports on implementation. These implementation plans and progress reports are essential to ensure the
Government is operating within the fiscal envelope and making progress on structural reforms, and to afford
FOMB the opportunity to provide feedback on critical efforts to restore fiscal sustainability and balance to
Puerto Rico.

The Government was required to submit all implementation plans by June 30, 2018. 73% of 128 implementation
plans were received. In general, the submitted implementation plans were not fully aligned with the Fiscal
Plan and did not provide sufficient clarity to support compliance. As such, on September 2018, FOMB provided
feedback to the agencies on the implementation plans submitted and requested the Government take
corrective actions and complete submissions on missing implementation plans. The Government updated
some implementation plans based on the feedback provided, but as of today still has not submitted all
implementation plans as required.

EXHIBIT 6: GOVERNMENT SUBMISSION OF IMPLEMENTATION PLANS

AND REPORTING UPDATES
Agencies submissions3
Number of agencies

Implementation Regular monthly

plans FY19 reports FY19
Submitted 93 Submitted 30

Not submitted 35 Not submitted 98

Total 128 Total 128

 Quality of submissions varies across agencies, the majority of implementation

plans do not define clear actions to reach targets and several agencies
submitted the same report multiple months with no updated data

1 Based on reporting from July 2018 to June 2019

2 Indicates agencies that submitted 9 or more monthly reports over the specified time period
3 Includes 120 agencies and 8 reforms

21
Through a collaborative process, the Government and FOMB established an implementation
structure to provide insight into agency activities. Said structure, inclusive of monthly
progress reports and working group meetings, provided understanding on the agency
activities, risks and likelihood of hitting the savings targets established in the Fiscal Plan.

There are four major themes characterize the Government

implementation efforts to date:

1. Poor data quality: Monthly implementation report submissions and additional

data provided by agencies have been inconsistent and at times incomplete. Often key
metrics (i.e. savings targets or KPIs) are missing and reports do not provide enough
detail. The quality of information makes it difficult to properly assess progress of
key measures and more importantly, to provide government agencies the support
needed in implementation.

2. Lack of coordination from central government and agencies: The Office of the
CFO is under delivering on its two key roles: (1) as the implementation coordinating
body for the Government; and (2) as the driver for government-wide fiscal
initiatives (i.e. procurement reform, Single Employer Program, Enterprise Resource
Planning (ERP) implementation, financial statements delivery). As implementation
coordinator, to date the OCFO has been unable to adequately support agencies to
improve reporting, prepare for meetings or identify roadblocks and challenges. This
is due in part to frequent personnel changes within the OCFO, lack of availability of
relationship managers to attend key meetings, and lack of the OCFO top leadership’s
attendance at implementation meetings with FOMB.

3. Lack of progress on fiscal measures: Agency groupings have not shown

significant progress in consolidating and integrating the administrative functions
across the agencies that make up the agency grouping. In FY2019, agencies have
heavily focused on “quick wins” such as voluntary transition programs that accelerate
headcount attrition across agencies rather than through institutional business
process changes that lead to sustainable change and efficient government services.
Although targeted savings were achieved in 2019, the mechanisms employed
created concerning situations such as the substantial attrition that occurred with
police officers. 11

4. Lack of progress on structural reforms: The impact and timing of these reforms
has been adjusted to reflect the Government’s lack of and delayed action, but the
Government should take immediate action to spur progress on these reforms in
order to benefit from their potential economic impact. The Government has delayed
implementation of critical reforms, including a 4+ year delay in full implementation of
the NAP work requirement – a necessary complement to the EITC program to enable
individuals to enter and stay in the formal economy—and a delayed implementation
of specific business process changes required to achieve significant improvement in
burden and cost of doing business on the Island.

11
Approximately 600 sworn officers left the service in the first half of FY 2019, many due to the voluntary transition window offered.

22
FOMB has worked diligently to drive more successful implementation:

1. Monthly meetings with priority agencies to spur implementation progress;

2. Publicly reporting the status of progress achieved in Government implementation

plans and progress reports;

3. Utilized readiness assessments based on best practices to provide a framework for agencies
to track progress on implementation and understand the scope of the different milestones; and

4. Public hearings on implementation in areas of much needed transformation. In March 2019, for
example, FOMB held a Public Hearing on the progress made to date by the Department of
Public Safety.

STRUCTURAL REFORMS IMPLEMENTATION UPDATE

Although the requirements regarding structural reform implementation in the 2019 Fiscal Plan remain the same
as in October 2018, the 2019 Fiscal Plan incorporated revisions to the projected economic impact of structural
reforms based on delays or lack of implementation progress. The lack of progress to date was reflected in
updates to GNP growth projections, including pushing back the possible growth from implementation to
reflect the Government’s pace and plans to implement the outlined structural reforms. Below we outline the
status of structural reforms implementation:

Human capital and welfare reform

With regards to the welfare reform – the establishment of an EITC and Nutritional Assistance Program NAP work
requirement – the Government agreed to prioritize these reforms as they will provide incentives for Puerto
Ricans to seek jobs in the formal economy. In terms of the EITC, it was signed into law and came into effect
for taxpayers starting in calendar year 2019 (to be claimed on tax returns in spring of 2020). Regarding the
NAP reform, the Fiscal Plan requires a full work requirement to receive benefits from NAP starting in FY2020.
However, the Government has decided to implement a phased approach to the work requirement, which
will cause a 4-year delay in the potential impact of this reform. Further, the Government is behind its own
implementation schedule on this reform area.

Ease of doing business (EODB) reform

The Government has made important efforts recently to generate investment in the Island by creating Discover
Puerto Rico (DPR) and Invest Puerto Rico (iPR), with the goal of incentivizing foreign direct investment (FDI),
private sector investment and tourism. However, generally, Ease of Doing Business reforms key milestones
remain delayed. Although the creation and full deployment of a Single Business Portal (SBP) has launched, the
true reform of reviewing the underlying processes to reduce the number of steps in the process shows slow
progress. Overall the Government has not achieved notable progress on the critical reforms that would move
the needle and improve the World Bank ranking. In fact, Puerto Rico scored worse in 2019 than in 2018 in five
priority areas that need improvement.12 See Exhibit 7.

12
See the World Bank Group’s Flagship Report “Doing Business 2019, Puerto Rico Economy Profile”
https://www.doingbusiness.org/content/dam/doingBusiness/country/p/puerto-rico/PRI.pdf

23
EXHIBIT 7: CHANGE IN PUERTO RICO’S EODB RANKING 2018 VS 2019
Priority due to largest gap and highest potential impact

Puerto Rico Rank (2018) Puerto Rico Rank (2019) Change USA (2019)

Overall 64 64 --- 8

Starting a business 47 53 -6 53

Construction permits 138 141 -3 26

Getting electricity 69 88 -19 54

Registering property 153 159 -6 38

Getting credit 6 3 3 3

Protecting minority
investors 108 110 -2 50

Paying taxes 161 162 -1 37

Trading across
borders 64 67 -3 36

Enforcing contracts 113 63 50 16

Resolving insolvency 9 10 -1 3

Power sector reform

Implementation of the energy and power regulatory reform made substantial progress with
the enactment of Act 17-2019, known as the Energy Public Policy Act. Act 17-2019 establishes
a regulatory framework like those found in many other U.S. jurisdictions and is anchored on
the presence of a strong and independent energy regulator, the Puerto Rico Energy Bureau
(“PREB”). Act 17-2019 strengthens PREB’s roles and responsibilities and provides for a substantial
increase in its annual budget, from $5.8 million to $20 million, to ensure its full functionality.
The regulatory framework established by Act 17-2019 incorporates industry best practices,
including the elaboration of integrated resource plans, periodic rate review procedures, and
updated renewable energy targets. To build on this success, the Government must work to
continue to implement initiatives aimed at promoting a stable regulatory framework and
ensure that many of the other energy-related initiatives, such as the private operation of the
Island’s grid, the deployment of federal disaster recovery funding and the modernization of
generation resources, are achieved.

24
FISCAL MEASURES IMPLEMENTATION UPDATE
Below we outline the Government’s progress (or lack of thereof) in implementing
fiscal measures:

Creation of the Office of the CFO

The Government has not delivered in the establishment of a strong centralized Office of the CFO to centralize all
financial management functions and increase transparency, accountability and improve fiscal governance and
forecasting. In fact, no legislation has been presented to date.

As the driver of cross-cutting government agencies, the OCFO has made little to no progress on most of the
initiatives. In comparison to key milestones for FY2019, OCFO has not provided evidence that systems among
OCFO agencies have been consolidated. According to the Fiscal Plan, systems should have been integrated by
June 2019. Furthermore, the OCFO has reported that they are behind schedule on all aspects of procurement
reform (i.e. category management and strategic sourcing, centralized operating model, procurement policy,
and digital transformation).

The ERP system to integrate all accounting systems of all agencies into one system is projected to be rolled
out in three waves. The first wave was to be completed by the end of FY2019 with waves 2 and 3 by end of
FY2020. The ERP implementation is substantially delayed and of concern given its importance to the wider
transformation of the public finances of the Government.

In terms of the audited financial statements, the Government has completed the FYs 2015 and 2016 audits (the
latter being completed during FY2019). However, the Government has consistently failed to meet their self-
imposed deadlines. According to the latest Government-estimates, the FY2017 financial statements should be
ready by end of calendar year 2019.

In terms of the tax credits and incentives, FOMB has requested several actions from the Government that are
not being complied with:

• In October of 2018, FOMB requested the Government reinstate the tax credit committee
to enforce adequate controls and evaluate the cost and benefit of each tax credit. This has not
been done to date.

• FOMB requires public reporting on tax credit liabilities and tax credits issued. This reporting
has not been made public to date.

• FOMB requires the publication of the Tax Expenditure Report, which has already been reviewd in draft by
FOMB. This report has not been made public to date.

Having a clear and accurate understanding of what the Government spends through tax expenditures is critical
to ensuring that the expenditures contribute to economic growth and opportunity.

While there has been great progress in terms of improving reporting, the Government is currently not complying
with the full set of requirements per Section 203 of PROMESA and the Fiscal Plan reporting requirements.

25
Agency efficiencies
Implementation progress and engagement has varied across Government agencies.
The Puerto Rico Department of Education (PRDE) and the Department of Public Safety
(DPS) made investments in teacher and police salaries to incentivize talent retention and
productivity, and 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). However, there is a lack of structure and planning for
reform. Many agencies have not planned implementation, resulting in slow progress to
reach their ambitious targets. Overall, the lack of consolidation legislation is hampering
agencies from achieving savings, despite efforts to reduce personnel and non-personnel
spend through diverse initiatives.

• Education – Based on data provided by PRDE in April 2019, including revisions to

special education population mix, PRDE reports being on track to meet its student-
teacher target ratio of 11.8 academic teachers to general education students for
FY2019. There are, however, no plans to reduce the need of administrative headcount
due to decentralization. Finally, there has been no implementation of procurement
initiatives, as PRDE is relying on the central OCFO procurement transformation.
Moreover, even though PRDE has completed the closure of 255 schools, many of
these buildings have been left empty or repurposed for administrative uses, and
thus full savings per school closure have not been captured. No more school closures
are required. Additionally, PRDE has faced challenges planning for and deploying
federal RESTART funds effectively.

• Health – The Government has not yet presented a consolidation plan to the
Legislature for agencies in the Health grouping. The agencies in the grouping
have achieved some back-office payroll consolidation and savings from reducing
duplicative positions. These payroll reductions were achieved through use of the
Voluntary Transition Program and did not achieve the rate required by the 2019 Fiscal
Plan and reflected in certified budgets. With regards to regional office consolidation,
the Department has implemented consolidation of several regional offices including
demographic registry and Medicaid offices during FY2019 and will continue in FY20.

• Deparment of Public Safety – Although DPS has been consolidated by legislation,

it has not yet established a consolidated back-office function that provides savings,
efficiencies, and better services. The Police Bureau has instituted the 2019 budgeted
salary increase, projects to achieve overtime savings targets for FY2019, and achieved
some savings from sworn officer reductions through attrition and has delivered
small progress on unit elimination. However, this has been accompanied by mass
attrition, encouraged through the Voluntary Transition Program, in sworn officers.
As such, the 2019 Fiscal Plan highlights the need to drive true process and back office
efficiencies, as relying on retirement incentive programs to reduce frontline officers
has the potential to negatively impact service levels. Other DPS bureaus have
achieved some savings through normal personnel attrition and transitory worker
reductions, but are still on planning phases on implementing a consolidation effort,
which are crucial to FY2020 savings.

26
 • Department of Economic Development and Commerce (DDEC) – DDEC has consolidated four of 11
agencies, and recently moved four entities to a unified accounting and payroll system. DDEC is working
towards completion of the full consolidation of the 11 agencies as planned. Procurement savings are
larger than expected due to rent savings.

• Corrections – The Department of Corrections and Rehabilitation (DCR) adopted administrative and
management policies to reduce the overtime spend of the agency but has made minimal progress on
their prison consolidation efforts to expand capacity of facilities. DCR reforms have been slowed by
the delay in developing and submitting a viable plan to achieve savings through prison consolidation.
Finally, there have been no proposed redesigns within the Correctional Health Department to drive
efficiencies.

Healthcare reform
ASES has made progress on several measures, including transitioning members to the new Vital program in
November 2018. The management care agreements under Vital, among other reforms, include new, payment-
linked quality thresholds. Puerto Rico has also been recognized by the Centers for Medicare & Medicaid Services
(CMS) for its progress in standing up its first Medicaid Fraud Control Unit (MFCU), operating through the
Department of Justice, and improving the capabilities of its Medicaid Statistical Information System (MSIS). Still,
even more effort will be required in the coming months to put in place the infrastructure and capabilities required
to achieve the savings targets outlined in the Fiscal Plan, particularly as it relates to laying the groundwork for
value-based reforms (e.g., new payment mechanisms to encourage coordinated care) that will lower costs while
improving outcomes for patients. Given the ASES decision to expand benefits and reimbursements in several
areas (e.g., dental) during this past fiscal year, the importance of accelerating progress against other cost saving
measures included in the Certified Fiscal Plan has only grown more acute.

Enhanced tax compliance and optimized taxes and fees

To date, Hacienda has made important foundational progress toward deploying an integrated tax system,
beginning with the collection of sales and use taxes, with plans to expand to other tax types. Hacienda has also
initiated new compliance techniques to better leverage data and analytics. 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 taxes and gaming fees under-performing
relative to expectations. Hacienda should comprehensively assess progress against these categories of revenue
enhancement and develop action plans to mitigate future under-performance.

Comprehensive pension reform

FOMB continues to consider pension reform a priority due to the glaring underfunding of the Government
retirement systems (more than $50 billion) that have left the plans without the resources to keep the promises
that were made to current and future retirees. Since FY2018, pension benefits have been paid on a pay-as-you-
go basis, given that the majority of the liquid assets in the retirement systems have been depleted.

The certified Fiscal Plan includes the following pension reforms:

1. Freeze defined benefit plans for JRS/TRS and enroll employees in a DC plan with segregated accounts
- To avoid creating future pension defined benefit liabilities and to fund adequately the pensions of both current
and future retirees, the JRS and TRS plans’ benefit accrual must be frozen by January 1, 2020. 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 DC retirement accounts. The process to fully implement the DC
accounts is underway and critical steps such as the selection of a plan administrator have been accomplished,
though these plans are not yet fully implemented.

27
2. Pension benefit reduction - Pension benefits for current and future retirees will be reduced
starting July 1, 2020 if a plan of adjustment has been confirmed, while protecting retirees from
falling into poverty. The level of reductions to pension benefits is necessary and in line with
reductions in other government systems facing pension funding crises. FOMB has reached an
agreement with COR to reduce the amount of the pension benefit. The ultimate reduction will
be part of the plan of adjustment.

3. Covering more government employees in Social Security - Teachers, police officers,

and judges have not historically participated in Social Security and are entirely reliant on their
government pensions for income in retirement. Covering these workers under Social Security
will provide them with diversified sources of income in retirement. Teachers and judges under
the age of 45 shall be covered under Social Security, while all police shall be covered under
Social Security. The Fiscal Plan and Certified Budget provide coverage for police as of July 1, 2019
and coverage for teachers and judges as of January 1, 2020.

While the Government is aligned with part (3) of the pension reform and has passed
legislation to begin Police Social Security coverage, it is not aligned with (2).

FOMB is continuing to monitor compliance by agencies, public corporations, and municipalities

with respect to payment of pension PayGo invoices. Last April, FOMB instructed agencies, public
corporations, and municipalities to become current in their outstanding PayGo liabilities and to
immediately transfer employee contributions that were being withheld and not transferred to
the employees’ retirement accounts. Past due employee withholdings have been settled, while
ERS entered into payment plans regarding outstanding past due PayGo obligations.

Act 29 was recently adopted exempting municipalities from paying their share of the pension
costs. FOMB believes Act 29 is inconsistent with the Fiscal Plan and is currently challenging this
statute.

In addition to the pension plans of the Commonwealth, FOMB is also considering reforms to
the PREPA pension system and the plan’s associated funding strategy.

28
FY2020 BUDGET PROCESS
During FY2019, FOMB engaged in a comprehensive, in-depth, FY2020 budget development
process to enhance due diligence on spending, provide additional transparency, and add
controls. The total central Government budget, which totals $20.2 billion, is sourced from
the following types of funds: General Fund, Special Revenue Funds, and Federal Funds.

The spending focuses on the following priority areas: 21% for health, 17% for education, 13%
for PayGo, 12% for families and children, and 5% for public safety. One of these priorities is
public safety, because government services that improve public safety help to maintain and
build the confidence of residents and businesses alike. The Certified Budget, for example,
provides for increased salaries and benefit contributions for police officers and incremental
funds to purchase bullet-proof vests, radios, and vehicles. Social Security is budgeted for
all police as of July 2019 to provide them a more secure future retirement. In addition, the
Certified Budget raises teachers’ and school principals’ salaries for the second consecutive
year, as well as the salaries of firefighters.

Notwithstanding these and other spending increases in priority areas, right sizing the
Government to create more efficient government services continues: professional fees
declined by 30% year over year, and redundancy in administration within agencies is
being reduced via consolidation of the more than 120 government agencies and public
corporations.

CERTIFYING BUDGETS
Highlights of the certified FY2020 budget include:
1. Supports the Government’s priorities of public safety, education, and healthcare
services, and includes a higher level of capital expenditures spending consistent
with the 2019 certified Fiscal Plan.

2. Funds social security for eligible police, teachers and judges, as well as increases
in salaries for teachers, police officers, and firefighters.

3. Ensures sufficient funds to cover PayGo pension obligations for current retirees of
the central Government.

4. Increases local budget funding of Medicaid program. This represents the largest
cost increase for FY20 given local Medicaid spending in FY2020 increased to $917
million from $15 million in FY2019, as a result of reductions in federal funds.

5. For the second FY in a row, includes a UPR scholarship fund to supplement UPR’s
self-funded need-based scholarships.

6. Incorporates federal disaster aid local match funding, other new federal funding
sources, and the second of ten annual emergency reserve installments.

7. Reduces professional services expenses significantly year-over-year (by 30%), as

well as spending in a low visibility areas of allocations (“englobadas”).

29
 8. Provides for sustainable spending in a transparent and prioritized way.

9. Includes an unprecedented level of public transparency on how the Government spends its resources.
Multiple budget resolutions were combined into one document, including specific concepts of spend
for each agency.

10. Takes a comprehensive view of governmental spending and incorporates previously unbudgeted
appropriations to enhance transparency and visibility of overall spending.
As shown below, in total, the FY2020 Central Government budget is $20.2 billion, of which $9.051 billion is
General Fund spending. Exhibit 8 shows the main components of the FY20 central Government budget.

EXHIBIT 8: COMPONENTS OF THE FY20 CERTIFIED CENTRAL

GOVERVNMENT BUDGET, INCLUDING PAYGO FEES

Total Central Government spending $ in millions

$20.2 billion Overview of spending

Excluding Instrumentalities
with independent fiscal plans1 Health2 $4,278
K-12 education2 2,898
PayGo fees for all groupings 2,575
Special
Revenue Families & Children2 2,446
Funds Public Safety2 1,106
18%
Housing2 1,032
General Fund OMB and Hacienda custody3 789
45%
Higher education3 611
Corrections2 387
Federal Funds
37% Office of the CFO – Hacienda2 362
Public Works2 336
Courts4 279
Legislature4 96
Other agency groupings 3,015
Total $20,210
Note: Due to rounding, numbers presented may not add up precisely to the totals provided.
1. Excludes Instrumentalities with independent fiscal plans. Budget balance does not include PREPA, PRASA, HTA and UPR. The FY20 total budget including instrumentalities would be ~$27.0b.
2. Refers to combined budgets for all agencies in the Fiscal Plan grouping, net of PayGo costs.
3. This grouping has been modified for illustrative purposes, and budgets are shown net of PayGo costs. Refer to slide 64 for additional detail on groupings.
4. Refers to the individual agency rather than a Fiscal Plan grouping, net of PayGo costs.
Source: FY20 certified budget; certified Fiscal Plan, Dated May 9, 2019

The Central Government budget is sourced from the following types of funds: $ in millions

General
 The General Fund is the Government’s primary operating fund $9,051
Fund

 Revenue earned by agencies and public corporations for providing

services
Special
 Special State Funds generated by specific laws which define the
Revenue collection and use of the revenue
$3,563
Funds  Non-recurring Other Income (e.g. asset sales, donations) estimated
annually by agencies and public corporations

 Federal Funds includes expenses funded by appropriations from the

Federal Funds Federal Government
$7,595

Note: Due to rounding, numbers presented may not add up precisely to the totals provided.
Source: FY20 certified budget; certified Fiscal Plan, dated May 9, 2019 Total $20,210

30
 EXHIBIT9: COMPONENTS OF THE FY20 CERTIFIED CENTRAL
GOVERNMENT BUDGET

K-12 Education $2,898 PayGo $2,575

UPR 2 599 FY20 Central Government budget
Other 12 total expenses - $20.2b1 Nutritional assist. funding $1,924
Total Education $3,509
$ in millions Dept. of Families and Children 204
Socioeconomic Dvlp of Family 158
ASES $2,942
Other 160
Dept. of Health 935 17% 13% Total Families & Children $2,446
Centro Medico (ASEM) 160
K-12 and
ASSMCA 124 Higher Education PayGo Police Department $937
Other 118 Fire Department 83
Total Health $4,278 Emergency Medical 28
Labor $417 9-1-1 Service 20
State Insurance Fund Corp. 357 Special Investigations Bureau 6
Families & 12%
Executive Office 339 Children Other 32
Economic Development 330 Total Public Safety $1,106
21% Health
Independent Agencies 233
Unallocated CapEx $159
Rum Cover Over to Producers 179 5% Title III Fees 3 126
Environmental 161
Emergency Reserve 130
Justice 132
4% Federal Fund GDB Payment 105
COFIM 130
Cost Share of Public Assistance 100
Other 734
5% Other 169
Total Other $3,013 Other
2% Total Custody Acct. 4 $789
15% 2%
Public Works $336 2%
2% Department of Housing $458
OCFO – Hacienda Grouping 3 $362 Public Housing Admin. 387
Public Works
PR Housing Finance Corp. 187
OCFO – Hacienda
General Court of Justice $279 Total Housing $1,032
Courts & Legislature Corrections
Legislative Assembly 96
1. Excludes Instrumentalities with independent fiscal plans. Agency budgets are
Total Courts & Legislature $375 shown net of PayGo fees. Budget balance does not include DRF, PREPA, PRASA, 4. Excludes UPR Scholarship.
5. Includes both Dept. of Corrections &
Corrections 5 $387
GDB, HTA and UPR.
Source: FY20 certified budget, certified Fiscal Plan 2. Total FY20 GF appropriation for the UPR, including UPR Scholarship Dept. of Correctional Health
dated May 9, 2019 3. AAFAF’’s budget in the ‘OCFO – Hacienda’ grouping includes an additional $49.9M in Title III Fees. As a consequence, total estimated Title III fees in FY20 are approximately $176 million.

Note: Due to rounding, numbers presented may not add up precisely to the totals provided.

The FY2020 budget development process was designed to provide greater transparency,
visibility, and confidence in the data used.

Following consultation with the Governor and the Legislature, FOMB established a schedule
for the development of the FY2020 budget in accordance with Section 202 of PROMESA.
In January 2019, FOMB submitted to the Governor a forecast of revenues for the General
Fund, other funds, and Public Corporations, consistent with the Fiscal Plan.

On May 11, 2019, FOMB provided a revised forecast for FY2020 to incorporate data provided
by the agencies, risks proposed by agencies, focused investments, and fiscal priorities. The
Government’s first submission of the FY2020 budget was not compliant with the 2019 Fiscal
Plan and required resubmission.

Despite the Governor submitting a revised budget on May 22, 2019, the budget submission
remained incomplete, lacking sufficient detail and documentation. The Governor’s budget
submission remained non-compliant as the proposed budget still exceeded the
spending envelope provided in the 2019 Fiscal Plan. Therefore, on May 28, 2019, FOMB
submitted a compliant budget to the Legislative Assembly.

Despite the extensions of time provided to the Legislature to file a compliant budget,
the Legislature failed to send an FY2020 budget to FOMB. As such, on June 30, 2019,
FOMB certified a consolidated FY2020 budget for the Commonwealth.

31
SPENDING PRIORITIES
The FY2020 budget includes investments in the following core areas:

EXHIBIT 10: FY20 BUDGET SPENDING BY GROUPING CATEGORY

The $20.2b FY20 certified Central Government budget spending by grouping category
and PayGo, including General Fund, Special Revenue Fund, and Federal Funds1

$4.3b $3.5b
Health K-12 and Higher Education

$2.6b $2.4b $1.1b $1.0b

Pension Families and

Public Safety Housing
PayGo Children

$387m $336m $362m $279m $96m $3.8b

OCFO – General Court Legislative Other

Corrections Public Works
Hacienda of Justice Assembly groupings2

Note: Due to rounding, numbers presented may not add up precisely to the totals provided.
1. Grouping categories exclude PayGo.
2. Other groupings include: OMB and Hacienda Custody Accounts, State Insurance Fund Corporation, Executive Office, economic development, independent agencies, federal unemployment, Rum cover over, COFIM,
and disaster cost share.

32
Police compensation and equipment
Currently, sworn officer salaries and benefits in Puerto Rico are not competitive and are
insufficient to recruit new cadets. The Certified Budget makes a significant investment
to ensure salaries and mandatory benefits for sworn officers are increased 30% over two
years (by roughly $11,500), provides a $250 investment per sworn officer per year in life and
disability insurance, and enacts Social Security for police as of July 2019. Finally, the Certified
Budget includes ~$122 million per year from FY2019 to FY2021 to cover back pay for police.
These investments are meant to ensure that more sworn officers can remain on the Island
and serve in local communities. Additionally, the Certified Budget includes an incremental
$42 million in funding for bulletproof vests, radios, and vehicles. See Exhibit 11.

EXHIBIT 11: SIGNIFICANT INVESTMENTS IN POLICE

Significant investments in Police compensation and equipment to
promote public safety on Island

Police $11.5 K Salary increase over two years per sworn officer to make
salaries more competitive, which represents an annual
investment of $70+ million starting in FY2020, which
ramps up to ~$140+ million in later years
Investment to provide Social Security for all sworn
$33+ M officers each year
Investment to increase life and disability insurance
$3 M coverage by $250 per sworn officer starting in FY2020

$42 M For capital expenditures to purchase bullet proof vests,

radios, and vehicles
To provide payment for past services to sworn
$366+ M officers, amounting to $122 million in FY2019, FY2020
and FY2021

Healthcare
Healthcare agencies on Island are struggling to meet patient needs. As a result, the Certified
Budget includes $15+ million in funding to maintain current nurse staffing levels across the
Island, and also invests in strategic health centers, such as $25 million for the Puerto Rico
Cancer Center to enable it to become fully operational, $2 million for the Cardiovascular
Center of Puerto Rico and the Caribbean for medical products and materials, and $12 million
for the Psychiatric Hospital to enable it to improve services to obtain Medicare certification
(over two years). Further, the budget provides $4 million in capital expenditures for medical,
emergency room and office equipment across three health agencies. See Exhibit 12.

33
 EXHIBIT 12: SIGNIFICANT INVESTMENTS IN PRIORITY AREAS

Highlights of investments in other high priority spending areas

$1.4 B Increase in funding across FY2020-2024 to improve stability within

the healthcare system

$25+ M Investment in FY2020 to enable the Comprehensive Cancer Center to

become fully operational
$15+ M Investment annually to maintain nurse staffing levels
Healthcare
$12 M Over FY2020 and FY2021 to enable the Psychiatric Hospital to
increase standards of care for Medicare certification

$4 M For capital expenditures for medical, office and air conditioning

equipment
$2 M Investment in the Cardiovascular Center of Puerto Rico for purchases
of medical products and materials

$14 M For salary increases of $500 for teachers and directors annually
starting in FY2020 (in addition to FY2019 salary increases across
Education teachers and directors)
$39 M Investment in the UPR scholarship, amounting to $214 million in
scholarship funding between FY2019-2024
$3 M For salary increases of $1,500 per firefighter annually starting in
FY2020
Firefighters $14 M In capital expenditures for fire pumps, vans and trucks

$2 M Investment for safety equipment and materials in FY2020

Forensics $4.5 M Personnel investment annually to allow for 95 new employees to

decrease backlog of cases
Institute
$750 K Investment in laboratory equipment and materials annually

Education
In addition to the investments made as of the October 2018 Certified Fiscal Plan, which provided for a $5,000
salary increase for directors, $1,500 salary increase for academic teachers, and ~$70 million for textbooks
(through three one-time investments across FY2019-FY2021), the Certified Budget provides an additional $500
salary increase for all teachers and directors in FY2020. Moreover, the Certified Budget provides $39 million for
a UPR scholarship fund incremental to the $35 million already committed in FY2019, for a total of $214 million
over FY2019-FY2024.

Firefighter salaries and equipment

Firefighters similarly face a challenge with the competitiveness of their compensation. The Certified Budget
provides for a $1,500 annual increase for all firefighters, as well as $2 million for enhanced equipment and
materials and $14 million in capital expenditures for trucks, vans, and fire pumps.

Forensic Sciences Institute payroll and equipment

The Forensics Sciences Institute has struggled, especially in the wake of Hurricanes María and Irma, to respond
to the needs on Island. It has experienced backlogs in cases and physical capacity constraints. As such, the
budget invests $4.5 million in payroll to enable the hiring of forensic scientists, pathologists, examiners, and
DNA specialists, as well as $750 thousand for laboratory equipment and chemicals.

34
Capital improvement projects
The Government must pursue capital projects to improve the infrastructure on Island. As
such, the budget includes an additional $85 million annually in capital expenditures funded
through Special Revenue Funds (in addition to the $400 million in General Fund capital
expenditures provided for the Commonwealth, UPR, and HTA), as well as a cost share reserve
of $100 million per year to support FEMA-funded rebuilding efforts requiring local cost
match (beyond the anticipated CDBG funds available).

The goal of these investments is to ensure these agencies can continue to provide the
services residents depend on while implementing the efficiencies required to maintain
sustainable operations on Island.

BUDGETARY CONTROLS
The Certified Budget includes significant budget compliance mechanisms
to control spending. Critical budgetary controls include:

• Budget preservation levers – the Certified Budget provides for restrictions on

encumbrances and disbursements of General Fund appropriations, such that 2.5%
is held back until the fourth quarter of the FY. The Judicial Branch, Public Broadcast
Corp, Department of Public Safety, Health agencies and PayGo appropriations are
not subject to this holdback.

• Restriction on prior year budgeted funds – the Certified Budget provides for
restricted use of appropriations of prior FYs to a 60-day period after the end of the
FY, assuming such appropriations have been encumbered by June 30. Exceptions
apply to permanent improvements, as well as to equipment with long procurement
cycles and certain appropriations held in custody by the Department of the Treasury.

• Reporting requirements – the Certified Budget provides the nature and cadence
of reporting, quarterly certification that no prior year funds have been assigned to
current year expenses, monthly and quarterly budget versus actual reporting, and
other support for implementation.

• Prior year reprogramming – the Certified Budget provides for the suspension of
the ability of the Office of Management and Budget, the Fiscal Agency & Financial
Advisory Authority, and the Department of the Treasury to authorize reprogramming
or extension of appropriations of prior FYs.

• Quarterly Budget – the Certified Budget includes the provision of detailed

quarterly budget projections, in compliance with PROMESA Section 203.

• Budgetary controls for all concepts of spend – the budget restricts any spending
or encumbrance that exceeds authorized appropriations.

35
 • “Sábana File” – the Certified Budget requires OMB to submit the Government’s budget in an Excel
format known as the “Sábana file,” which identifies both the General Fund budget and non-General
Fund budgets within the Government’s accounting systems, including detailed budget appropriations
and allocations by agency, instrumentality, public corporation, fund type and concept of spend.

• Budget reapportionments – the Certified Budget provides that FOMB must approve reprogramming
of budget reapportionments.

IMPROVING FISCAL GOVERNANCE, ACCOUNTABILITY, AND INTERNAL CONTROLS

FOMB has required reporting of the Government’s financial and budgetary data to improve fiscal governance,
accountability, and internal controls. Section 17.4 of the Fiscal Plan outlines a comprehensive reporting
framework, including reports that are required to be published by the Government.

A few highlights of the reporting requirements include, but are not limited to,
the following:
• Monthly public reporting of TSA liquidity, Component Unit liquidity, General Fund budget to actuals,
PayGo balances, and public employee payroll, headcount and attendance data;

• Quarterly budget to actual revenues, expenditures, and cash flows, together with
variance analysis, of the Government during the preceding quarter

• Tax credits reporting, including a Tax Expenditure Report;

• Measures and reforms monthly implementation reporting progress;

• Quarterly reporting on budget variance consistent with modified accrual

accounting; and

• Quarterly requirements to update revenue forecasts allowing for continual

monitoring of performance and an ability to plan and react to changes in overall
revenue sources.

FOMB publishes a monthly status report detailing compliance with many of these reports. The report is on the
FOMB’s website.13 FOMB will continue to work on enhancing its website and working collaboratively with the
Government to improve the reporting and additional information pertaining to these reports.

13
See FOMB’s Reporting Dashboard at https://oversightboard.pr.gov/reporting-dashboard/

36
PUERTO RICO
ELECTRIC POWER
AUTHORITY
F I S C A L Y E A R 2 0 1 9

Power sector reform is one of FOMB’s principal objectives and one of the key pillars on
which Puerto Rico’s overall recovery must be built.

During FY2019, with support from FOMB, PREPA developed the initial framework for a transformation of PREPA
and the power sector in Puerto Rico. Since then, PREPA has achieved measurable progress in several key areas
and implementing initiatives and reforms during FY2020. Key achievements during FY2019 include:

Key achievements during FY2019 include:

• Issuance by the Public-Private Partnership Authority of a Request for Proposal to transfer the
operation and management of PREPA’s Transmission & Distribution (T&D) system to a private
operator with proven experience in providing energy services;

• Enactment of a robust regulatory framework by the Government focused on attracting and

introducing private investment, knowledge, and experience to manage and operate PREPA’s
T&D system and develop new, modern and clean generation resources; and

• Development of an Integrated Resource Plan (IRP) proposing the deployment of as

much as 1,800 MW of solar resources and 920 MW of battery storage within the next five
years (representing up to 35% of total generation) and reducing oil-fired generation from
38% to 9% of total generation; and

• Continuation of repair and reconstruction efforts to address damages to PREPA’s grid caused by
Hurricanes Irma and María.

37
Transitioning away from expensive, oil-fired generation resources and towards low-cost, efficient, and clean
natural gas and renewable generation resources are essential investments necessary for reducing fuel costs,
price volatility, and steering PREPA towards environmental compliance. To that end, PREPA is currently in the
process of converting San Juan units 5 and 6 to run on natural gas (from much more expensive diesel) and
has launched various competitive procurement processes to develop new battery storage resources and
improve and expand existing hydroelectric generation assets. Additionally, as required by its Fiscal Plan, PREPA
is currently renegotiating over 300MW of renewable power purchase agreements to achieve satisfactory and
affordable pricing levels.

Equally important is ensuring Puerto Rico’s electric grid is managed prudently and in a manner that is responsive
to customer needs. The competitive process to identify and select the entity responsible for operating and
maintaining PREPA’s T&D system was launched on February 1, 2019 and is expected to conclude by the fourth
quarter of calendar year 2019. Once in place, the grid’s private sector operator is expected to use its extensive
experience to operate and maintain the grid at industry standard, improving quality of service and customer
satisfaction and ensuring full compliance with policy goals, including the interconnection of renewable energy
systems, all under the watchful eye of the Island’s energy regulator.

Another key achievement is the execution of a Definitive Restructuring Support Agreement (RSA) which
provides for substantial savings in the recovery of legacy costs associated with the financing of Puerto Rico’s
electric infrastructure. The RSA delivers significant relief to PREPA’s debt burden, providing a reduction of 32.5%
in overall debt obligations and up to $3.8 billion in present value savings. For PREPA’s ratepayers, this means
that, on average, electricity rates under the RSA will be 3 ¢/kWh lower than what they would be if the RSA were
to be rejected and PREPA is forced to pay its contractual debt, which amounts to more than $9 billion.

Throughout FY2019, FOMB engaged PREPA to both monitor compliance with transformation initiatives
identified in the Fiscal Plan, as well as provide technical and substantive support in detecting problem areas
and identifying solutions and opportunities.

FOMB holds periodical Fiscal Plan implementation meetings with PREPA’s staff and advisors, which provide
the opportunity to measure compliance with fiscal plan transformation initiatives. Through these meetings,
FOMB’s staff can work collaboratively with PREPA to identify the actions necessary to continue making progress
towards PREPA’s transformation and provide valuable feedback, based on expert knowledge and insight.

FOMB also continues to work closely with PREPA and the Public Private Partnerships (P3) Authority to transfer
the operation and maintenance of PREPA’s grid to a private utility, with ample experience in providing energy
services. FOMB and its advisors provide essential feedback and are an integral part of the working group
tasked with completing this procedure. This close collaboration has proven beneficial, as evidence by given the
measurable progress that has been made in this process.

Finally, on June 27, 2019, FOMB certified a 2019 Fiscal Plan for PREPA. This 2019 Fiscal Plan provides a clear path
towards achieving the objectives of an affordable, reliable, resilient and clean energy system. The 2019 Fiscal
Plan recognizes PREPA’s challenges and identifies multiple actions and initiatives that, if properly undertaken,
should lead towards a sustainable and affordable energy system for the people of Puerto Rico.

38
 PUERTO RICO
AQUEDUCT AND
SEWER AUTHORITY
F I S C A L Y E A R 2 0 1 9

PRASA has achieved measurable progress towards implementing many of the reforms
identified in PRASA’s Fiscal Plan as necessary to ensure the people of Puerto Rico receive
reliable affordable and clean water and wastewater treatment services.

However, while PRASA’s operational and financial position has improved, it is still vulnerable, and ongoing
efforts to lead PRASA towards a path of financial sustainability must continue.

Throughout FY2019, PRASA implemented a modest rate adjustment that allows for additional revenues critical
to maintain and improve service quality and reliability, while also maintaining affordability and accessibility
to ratepayers. PRASA also launched a P3 process aimed at enhancing and optimizing metering and customer
service activities, achieving operational efficiencies and reduce costs to ratepayers. The selection of the entity
that will enter into the P3 agreement is expected to take place by end of calendar year 2019. Other initiatives
implemented by PRASA include improved collections from government entities, revisions to bill dispute
adjustment policies, and the reassessment of fees and other charges related to miscellaneous services provided
by PRASA, including disconnections for non-payment.

PRASA also continued its efforts to restructure its debt obligations, particularly those related to its State
Revolving Funds (SRF) with the U.S. Environmental Protection Agency (EPA) and the Rural Development (RD)
bonds with the U.S. Department of Agriculture (USDA). PRASA has secured forbearance agreements with the
EPA and USDA as it continues to negotiate with this particular group of creditors.

Over the past year, FOMB worked closely with PRASA’s management and its advisors to monitor PRASA’s
compliance with the prior year Fiscal Plan and FY2019 Certified Budget. This was achieved primarily through

39
regular monthly reports that included budget-to-actuals, projected weekly cash flows and implementation
reports, supplemented by working sessions with PRASA to review and discuss the reported information.

FOMB also requires PRASA to provide monthly updates on collections performance by customer segment (i.e.,
residential, commercial, government), accounts receivables, and the completion of FEMA site visits. FOMB’s
staff and advisors have also provided key technical and operational assistance, which has helped PRASA
detect problem areas, identify solutions and opportunities and restructure its operations. As a result, PRASA’s
structural deficits have been significantly reduced. However, while PRASA’s short-term outlook has improved,
its medium- and long-term sustainability depends on the implementation of further reforms, which require
continued monitoring and oversight.

To achieve PRASA’s long-term sustainability, on June 25, 2019, FOMB certified a 2019 Fiscal Plan for PRASA,
which also served as a basis for developing PRASA’s Certified Budget for FY2020.

Like prior fiscal plans, the 2019 Fiscal Plan provides a path, highlighted by specific actions, that PRASA must take
to achieve financial and operational sustainability and deliver affordable and quality services to its customers.
The 2019 Fiscal Plan focuses on identifying funding for key infrastructure investments and optimizing staffing
and personnel levels to match service needs. Particularly, the 2019 Fiscal Plan identifies the need for developing
and deploying a comprehensive water loss reduction program, designed to identify underground leakage and
water loss sources, and undertaking the necessary investment and improvements to reduce such occurrences.

40
 HIGHWAYS AND
TRANSPORTATION
AUTHORITY
F I S C A L Y E A R 2 0 1 9

A significant gap remains between HTA’s performance to date and its June 2018 Fiscal
Plan requirements, particularly in enhancing the operating model, growing revenue
streams and delivering on the capital improvement program.

Bringing the transformation back on track requires a renewed commitment from HTA towards:
1. fundamentally changing its operating model;
2. securing sustainable revenue streams; and
3. accelerating capital improvement project delivery.

Measurable results were seen with regards to fiscal measures such as the organizational transformation,
generation of non-toll revenues and the re-bidding of its bus contract. Several measures such as discretionary
federal funding and toll optimization were delayed, while other measures such as toll increases—with toll
increases being the highest impact fiscal measure in the Fiscal Plan—were not implemented. For example, the
June 2018 Fiscal Plan required CPI-based adjustments to tolls which were not implemented. However, Puerto
Rico applied for new discretionary grants in FY2019 after five years without any discretionary grant funding.

Efficient and effective delivery of the capital improvement program as planned is paramount to supporting
broader economic development. Critically, HTA failed to deliver on its budgeted capital improvement program
disbursements during the FY. In FY2019, HTA invested ~32% of the $821M in the combined Commonwealth and
federal funds budgeted.

To improve capital improvement project delivery, HTA signed a Memorandum of Understanding (MOU) with
Eastern Federal Lands Highway Division (EFLHD) to manage the administration of federal emergency repair
funding. HTA also signed an MOU with the Puerto Rico Infrastructure Financing Authority (PRIFA) to provide
support to HTA on bid execution, as well as construction engineering and inspection.

41
Finally, HTA found cost savings through analyzing and successfully renegotiating a major operating contract
with $3.5M in estimated annual savings, exceeding targets of the June 2018 Fiscal Plan. Additionally, HTA
implemented two voluntary transition programs to right-size the organization, with 334 associated full-time
employee departures.

HTA did not exceed its FY2019 Certified Budget primarily due to underspending on its capital improvement
program.

42
UNIVERSITY
OF PUERTO RICO
F I S C A L Y E A R 2 0 1 9

UPR plays an essential role as the Island’s engine for economic and workforce development.
In many ways, the future of Puerto Rico depends on a vibrant and sustainable UPR.

However, reductions in enrollment, necessary reductions in Government appropriations (which previously

have provided over 70% of UPR revenues), and growth in unfunded pension liabilities require thoughtful
changes to UPR’s financial management and operating model. See Exhibit 13.

EXHIBIT 13: UPR REVENUE MIX VS. MAINLAND AVERAGE

Revenues per full time student equivalent by source (%, 100%= $)

43
The reforms outlined in the 2019 UPR Fiscal Plan are designed to maintain the ability of all
students to access and benefit from the improved university system:

• Operational efficiencies – Cost reductions are paired with operational improvements, such as the
transition to shared administrative service hubs and optimization of academic offerings – pairing
resources with greatest student need. This dual focus is designed to enable UPR to maintain and
enhance the quality of services it provides to students while improving its financial position.

• Revenue Enhancement – Maximizing opportunities to diversify sources of revenue is the key goal,
including federal grants and awards, intellectual property (IP) and patent monetization, and ancillary
service fees for providing training to external institutions, among others. The Government will provide
an additional UPR scholarship program to ensure all students with demonstrated need can meet tuition
costs.

• Pensions Reforms – UPR’s pension fund is approximately 40% funded. The most up-to-date actuarial
analysis indicates UPR’s required pension contribution for its current defined benefit plan is considerably
higher than previously expected (~$160M in FY2021, ~88% higher than previous estimates). The update
reflects a combination of updated actuarial assumptions from UPR’s most recent experience study
using a 30yr amortization of the unfunded liability. To avoid future insolvency and ensure pensions,
UPR must choose between making the full amount of new required contributions or reducing the
required contributions by implementing pension reform measures. We estimate that if it continues its
current trend of underfunding, UPR’s pension plan will be insolvent by 2031. Underfunding the pension
system after the experience of bankruptcy in other Commonwealth public pension plans is simply
unacceptable. As part of the 2019 UPR Fiscal Plan, FOMB included pension reform options for UPR.

• Fiscal governance and controls – These are designed to provide adequate management and greater
transparency into spending across the 11-campus system. Reforms will also improve UPR’s ability to
respond to annual financial reporting and requirements from third parties, including accreditation
entities.

Taken together, the Commonwealth Fiscal Plan and the 2019 UPR Fiscal Plan ensure funding of $280
million in need-based scholarship funds to guarantee that tuition increases never affect anyone who
chooses to attend UPR.

44
The measures have been carefully designed to safeguard the institution and its most vulnerable students from
adverse effects on instruction, research, and affordability. The ultimate goal of the 2019 UPR Fiscal Plan and
Certified Budget is a leaner and more effective academic institution that is among the most affordable in the
United States and on the Island. See Exhibit 14.

EXHIBIT 14: UPR TUITION COMPARED TO OTHER UNIVERSITIES

UPR tuition Private combined tuition + fees
UPR fees Public combined tuition + fees
Average Tuition & Fees1 per Undergraduate Students, $

Tuition at private universities shown for SY18-19; likely to grow beyond these levels

8,804
8,328

Pell grant (2018-19): $6,195

Likely to increase

5,820 5,940 6,000

5153

3834

4461
3220

614 692
UPR SY18-19 Ana G. Inter-American Sacred Heart Polytechnic US In-State UPR’24
Mendez University University University Average2
University
system
1 UPR fee estimate assumes each undergraduate will pay all possible fees
2 NCES data for 4-year public universities on tuition and required fees in 2017 5

In order to maintain the highest level of instructional quality, the 2019 UPR Fiscal Plan ensures funding is available
for faculty increases of 3% per year. Moreover, the faculty will not be subject to the same benefit reductions and
attritions as other employees. Finally, the faculty-student ratio increases to 17.9:1 by converting transitory and
trust positions into full-time positions.

To date, UPR has made meaningful progress on some measures (e.g., undergraduate tuition increases, attrition),
but less on others (e.g., administrative shared service implementation, bonus reductions). The full impact of all
fiscal plan measures is required to achieve fiscal balance, and these are highly dependent on timing. Indeed,
some savings have already been forfeited due to slow implementation by UPR (e.g., slow ramp up in graduate
tuition increases, pension reform delays). FOMB will actively keep monitoring progress against these targets
and requires UPR submit regular reports on its implementation.

The path to implementing the reforms will not be easy, but we will partner with all stakeholders to make this
transition to a more efficient and effective operational model as seamless as possible for all who benefit from
this iconic institution. We have met and will continue to meet with students, professors, administrators, and
other stakeholders.

45
 MUNICIPALITIES
F I S C A L Y E A R 2 0 1 9

As part of its mandate to ensure the adequate delivery of key services for the people of
Puerto Rico, FOMB has been monitoring the fiscal and economic development challenges
faced by the Island’s municipalities.

In fact, many of these necessary services, as made particularly evident in the aftermath of Hurricanes Irma and
María, are provided at the municipal level.

Over the last two years, FOMB has been working to better understand the fiscal and socioeconomic situation,
challenges and opportunities of the municipalities in Puerto Rico, through visits and with working meetings
with mayors, the Governing Board members of the Center for Municipal Revenue Collection (CRIM, in Spanish),
business associations and community leaders, among other stakeholders. After these interactions, it is clear
that a combination of property tax revenue improvements and fiscal responsibility, municipal collaboration,
and economic development measures for the municipalities are needed to achieve sustainable local units of
government in Puerto Rico. FOMB’s work with the municipalities is an additional and fundamental step towards
the improvement of Puerto Rico’s fiscal and economic development outlook.

On May 9, 2019, FOMB adopted a resolution designating all 78 municipalities of Puerto Rico (the “municipalities”)
as Covered Territorial Instrumentalities pursuant to Section 101 of PROMESA. As part of this determination,
FOMB decided to select an initial group of 10 municipalities as a pilot project (Municipal Pilot Project or MPP) for
evaluating and enhancing municipal financial and budgetary practices, promote municipal collaboration and
shared services partnerships, and for formulating economic development strategies to address municipal fiscal
and socioeconomic challenges. The aim is to achieve fiscally sustainable local units of government.

The 10 municipalities participating in MPP were selected considering a combination of factors such as fiscal
challenges, impact of the reduction of intergovernmental transfers from the Commonwealth, their experience

46
implementing innovative and creative initiatives, and a demonstrated capacity for collaborating with other
municipalities. The selected municipalities include: Aibonito, Barranquitas, Camuy, Cidra, Comerío, Isabela,
Orocovis, Quebradillas, San Sebastián and Villalba. See Exhibit 15.

EXHIBIT 15: MAP OF PUERTO RICO – PILOT PROJECT PARTICIPANTS HIGHLIGHTED

The selected municipalities were asked to develop and submit Municipal Fiscal Plans (MFP) in accordance with
PROMESA’s Section 101(d)(1)(E) and following a schedule established by FOMB for the process of developing,
submitting, approving, and certifying a MFP. FOMB members and its Executive Director have visited
municipalities in the pilot program, conducted working meetings with Mayors, and held public meetings and
listening sessions with stakeholders in the municipalities.

Eight municipalities submitted their proposed MFP by the July 1, 2019 deadline set for submission. The
Municipality of San Sebastián and the Municipality of Comerío did not submit by the July 1, 2019 deadline.
However, FOMB staff is working with these municipalities to ensure submission.

The eight proposed MFPs were received by FOMB and reviewed to determine compliance with the requirements
set forth by PROMESA. The municipalities will be informed of the findings pertaining to their respective
proposed MFPs and receive notice on the modifications required for FOMB certification.

In essence, preliminary analysis of MPP indicates that participating municipalities are willing and open to think
out of the box, and Mayors have been proactive highlighting fiscal, budgetary, municipal collaboration, and
economic development initiative and measures. Examples include existing shared services partnerships,
budgetary practices such as zero-based budgeting improvements and broadening of tax collections,
establishment of Municipal Enterprises, and P3 initiatives, alliances with non-governmental organizations
for the delivery of services, optimization and better management of federal funding, and local and regional
economic development taking advantage of programs such as Special Opportunity Zones.

FOMB recognizes the important role municipalities play in the everyday life of the residents of Puerto Rico.
FOMB’s objective is to collaborate to assist municipalities in their efforts to become more efficient, fiscally
responsible and capable of providing the needed services to its residents, and to boost and support economic
development at the local level and Island wide.

47
CRIM
F I S C A L Y E A R 2 0 1 9

The Center for Municipal Revenue Collection (“CRIM”) plays an essential role in supporting
Puerto Rico’s 78 municipalities in their economic and social development by ensuring an
efficient process to collect and distribute municipal tax revenues.

The reduction in CRIM’s sources of funds, coupled with the economic reality of Puerto Rico, poses a threat
to the financial stability of the Municipalities it supports (see Exhibit 16). In this environment, it is essential
that CRIM seizes all opportunities to maximize property tax collections and ensure effective distribution to the
municipalities.

EXHIBIT 16: CENTRAL GOVERNMENT TRANSFERS TO CRIM ($ MILLIONS)

48
In 2016, CRIM was designated as a Covered Territorial Instrumentality pursuant to Section 101 of PROMESA;
and, in accordance with Section 101(d)(1)(E) of PROMESA, on May 9, 2019, FOMB determined that the Governor
must provide FOMB with an Instrumentality Fiscal Plan and an Instrumentality Budget for CRIM.

FOMB’s goal is to work with CRIM to implement, promote, and track revenue raising measures and to
enhance the agency’s financial performance by increasing property tax revenue to support the municipal
governments.

For FY2018, CRIM had total revenues (including inter-governmental transfers) of approximately $1.3 billion
(which represents a reduction of 12% when compared with FY2017).

Revenue measures can be achieved at the administrative level (without legislation) and are not targeted
at increasing property taxes. CRIM has a Governing Board composed of nine Mayors and two members of
the Commonwealth. FOMB has been working alongside CRIM’s Governing Board in identifying proposals,
opportunities, and solutions to the municipalities’ financial stability.

By working together to improve CRIM’s performance, the Government of Puerto Rico will be in a better
position to eliminate other tax burdens which hinder business and economic development. The personal
property tax on inventory, for example, has been identified by the private sector as a hindrance to economic
expansion.

The measures that will be adopted in CRIM’s Fiscal Plan are expected to focus on improving operations
and enhancing tax revenue collections:
• Operational efficiencies – CRIM is undergoing a major operational transformation centered around
the replacement of outdated applications and hardware; implementation of best practices for business
continuity; decentralization and re-engineering of processes to improve services to Municipalities
and taxpayers, along with the establishment of a data-driven culture. These initiatives will serve as
the foundation that will enable CRIM to implement strategies for enhancing tax revenue collections
successfully.

• Tax revenue collection enhancement – CRIM’s Fiscal Plan will outline measures that CRIM must
undertake to capture unrealized tax revenues by increasing tax compliance and improving collection rates.
Some of the revenue-collection enhancement measures proposed are as follows:

• Appraisal of non-appraised properties

• Identification and appraisal of new properties

Historically, many municipalities have neglected to contribute their annual PayGo obligations as determined
by ERS. CRIM has the authority to offset current year PayGo obligations from each municipalities’ property tax
receipts and remit these funds directly to ERS. To date, CRIM has rarely used this mechanism and liabilities have
increased over the past year. As a result, ERS has implemented payment plans. However, if payment plans are
not adhered to, CRIM must utilize its legal authority.

FOMB has filed an adversary proceeding against the Commonwealth of Puerto Rico regarding the enactment
of Law 29-2019, which is the "Law to Reduce the Administrative Burden of Municipalities”. The complaint
asserts that Act 29-2019 violates PROMESA and that it substantively undermines PROMESA’s goals insofar as it
is inconsistent with the Commonwealth’s Certified Fiscal Plan and Certified Budget. Under the provisions of Act
29-2019, the municipalities’ annual PayGo obligations are transferred to the Commonwealth even though these
expenditures are not in the Certified Budget. Ultimately, CRIM’s success will result from its ability to effectively
collaborate with municipalities, other government agencies, and FOMB in the implementation of the initiatives
outlined in its Fiscal Plan.
49
 COSSEC
F I S C A L Y E A R 2 0 1 9

On August 4, 2017, FOMB certified the Fiscal Plan for the Public Corporation for the
Supervision and Insurance of Cooperative in Puerto Rico (“COSSEC”, for its Spanish
acronym), which is the regulator and insurer of the Cooperative system in Puerto Rico.

The Cooperative system is a pillar of the Puerto Rican economy, serving as the main alternative to a highly
concentrated commercial banking sector. The Cooperative movement has a strong presence in Puerto Rico,
with nearly 1 million customers.

Given the importance of the Cooperative system, there is a need for COSSEC to have stronger and independent
governance in order to exercise its role as a regulator and insurer of the Cooperative System. Reforms are also
aimed at identifying and adopting regulatory and accounting reporting standards and capital levels more
consistent to that of Federal regulators.

Since the certification of the Fiscal Plan, there has been little to no progress in the Government’s effort to reform
the entity, despite several high-level efforts between FOMB and the Government.

Despite the Government’s lack of action, the FOMB has been in frequent communication with a wide variety of
stakeholders including representatives of the Cooperative system, Government officials, and technical experts
from federal regulatory agencies to urge action to ensure the long-term viability of the Cooperative system.

50
IMPLEMENTING
FOMB AUTHORITIES
F I S C A L Y E A R 2 0 1 9

Section 104 Access to Data

FOMB has exercised its powers pursuant to Section104(c)(2) of PROMESA which provides FOMB the authority to
request “direct access to such information systems, records, documents, information, or data”. FOMB entered
into a memorandum of understanding (“MOU”) with the OCFO in order to establish the procedures for granting
FOMB direct access to the Government’s information systems. As part of the MOU, and to be more efficient
and effective in the transfer of knowledge, FOMB and the OCFO established a working group composed of
representatives from OCFO, the Puerto Rico Innovation & Technology Service and FOMB to discuss related
information systems and data. FOMB obtained access to certain financial data from the Puerto Rico Integrated
Financial Accounting System (PRIFAS), one of the Government’s payroll system and two applications from OMB.
FOMB continues these efforts in order to gain visibility of the Governments’ financial data and get a deeper
understanding of current data limitations.

Section 204(a) Review of Legislative Acts and Section 204(b)(2) Review of Certain Rules,
Regulations, Administrative, and Executive Orders
FOMB continues to implement Section 204(a) of PROMESA which requires the Governor to submit to FOMB
each law enacted by the territorial Government no later than seven business days after its enactment along
with a cost estimate and certification of compliance or non-compliance. The Governor must also submit certain
rules, regulations, administrative orders, and executive orders to FOMB for our review and approval pursuant to
Section 204(b)(2) of PROMESA. The singular objective is to assure that all enacted acts as well as any proposed
rule, regulation, administrative order, and executive order will have no adverse impact on the Certified Fiscal
Plan or Budget. Unfortunately, the Government has consistently failed to comply with its obligations under
Section 204(a) to send acts no later than seven business days after enactment. In fact, over 100 signed acts and
joint resolutions were not submitted to FOMB as required by PROMESA.

51
At the moment FOMB has filed a court case under Sections 108(a)(2), 204(a)(5), 204(c), and 207 of PROMESA to
prevent the implementation of Act 29 that was found inconsistent with the applicable Certified Fiscal Plan. This
is the first court case filed under such Section 204.

Section 204(b)(2) Contract Review

FOMB continues to implement its Contract Review Policy which was established pursuant to Section 204(b)
(2) of PROMESA on November 6, 2017 (as modified on June 18, 2018) which requires approval of contracts with
an aggregate value of $10 million or more that would be entered into by the Commonwealth or any covered
instrumentality. The policy’s objectives are to promote market competition and ensure a government contract’s
consistency with the applicable Certified Fiscal Plan and Certified Budget. In order to make the contracting
policy more transparent, FOMB publishes a status report of each contract under review, including the name of
the contracting party, the date of submission, the date of any response from FOMB or from the contracting party,
and a copy of all FOMB’s formal responses. The policy requires that the government contracting entity submit
to FOMB a certification whereby its head or general counsel certifies that no person has unduly intervened,
offered anything of value or wielded any influence in connection with the execution of the contract. The policy
requires that contractors submit a similar certification to FOMB and disclose any sharing of any portion of its
compensation with any third party. Since the inception of the Contract Review Policy, FOMB has reviewed 197
contracts for a total aggregate value of over $16.5 billion.

Section 205 Recommendations

Pursuant to Section 205, FOMB can submit formal recommendations to the Governor or the Legislature on
actions the Government may take to ensure compliance with the Certified Fiscal Plan and Certified Budget, or
to otherwise promote the financial stability, economic growth, management responsibility, and service delivery
efficiency of the Government. FOMB sent four Section 205 Recommendations to the Government of Puerto
Rico this past fiscal year:

• To recommend that the Governor rescind Executive Order 2018-033 (the “Executive Order”), which
set a minimum wage of $15 per hour for those performing work for federally funded construction
projects. Specifically, based on a preliminary analysis of the available information and research, FOMB
was concerned about the impact that the Executive Order will have on private sector employment,
particularly in construction, but with the potential to leak into the broader economy. The Governor
declined to adopt this recommendation.

• To recommend that the Government of Puerto Rico take necessary steps to transfer the rights and
ownership of the Puerto Rico Public Broadcasting Corporation to a private non-profit entity. The
Governor adopted this recommendation, albeit within a delayed time frame, and has set up a
working group to implement it.

• To recommend that the Puerto Rico State Elections Commission (the “CEE” in Spanish) adjust its
operations to fluctuate with the electoral cycle and restructure its organization to become more
efficient. The Governor declined to adopt this recommendation.

• To recommend the establishment of a competitive process for use of the Municipal Improvement Funds
(MIF) and increase the transparency surrounding the capital project selection process. The Governor
and/or Legislature have not responded to this recommendation.

52
DEBT RESTRUCTURING
AND ACCESS TO
CAPITAL MARKETS
F I S C A L Y E A R 2 0 1 9

53
FOMB made significant progress on its debt restructuring negotiations this past year,
bringing Puerto Rico closer to regaining access to the capital markets. Working closely with
the Commonwealth and consensually with creditors, FOMB completed two restructurings
involving more than $22 billion in public debt and other liabilities that had been issued by
COFINA, the sales and use tax financing corporation, and GDB. FOMB also entered into plan
support agreements with certain supporting creditors affecting over $50 billion in pension
claims at the Commonwealth, an additional $35 billion of Commonwealth-related bond and
“clawback” claims, and $9 billion of PREPA bond claims. The plan support agreements are
agreements with holders of some of the debt to be affected, which agreements are then
transposed into proposed Title III plans of adjustment. The court may confirm the proposed
plans of adjustment and make them binding on all holders of the affected debt depending
on either the level of ultimate creditor support or, absent sufficient support, the satisfaction
of other legal and economic criteria.

EXHIBIT 17: TOTAL POTENTIAL SAVINGS FOR PUERTO RICO TO DATE

Commonwealth COFINA PREPA GDB
80

70 67
5 Total Aggregate
60 Reduction : 50%
10

50
($BILLIONS)

18
40
34
3
30
7

20
35 12

10 Total CW
Reduction: 12
60%
-
PR IOR C LA IM POT EN T IA L
R EST R U C T U R ED D EB T

GDB Title VI Debt Restructuring

The GDB debt restructuring was completed in November 2018 pursuant to Title VI. GDB had
more than $4 billion in legacy bond debt and approximately $8 billion in total liabilities. These
claims were resolved with the issuance of $2.6 billion in new bonds under PROMESA’s Title VI
procedure. Those bonds are mainly secured by the cash flow from loans GDB previously
made to Puerto Rico municipalities and other GDB assets.

The policy goals of the FOMB and the Government in the GDB restructuring were to ensure
that these new bonds are payable solely from legacy GDB assets, without recourse to any
future general government appropriations from the Commonwealth, and to cushion the

54
financial effect of the GDB restructuring on the many Puerto Rico municipalities who also were creditors of GDB.
Many municipalities had deposits at the GDB that were trapped in the agency’s financial collapse. As part of the
restructuring, the municipalities were allowed to offset their GDB loans by the full amount of their deposits. The
new GDB bonds are only entitled to cashflow the legacy GDB assets generate with no additional remedies. There
is no “Event of Default” as long as the future cash flows are applied to pay down the new bonds, even if that cash
flow is insufficient to pay the new bonds’ regularly scheduled principal and interest. GDB’s legacy creditors agreed
to a 45% reduction in face amount of claim par. However, the new debt, given its limited recourse and non-rated
nature, has traded in the low-to-mid 70s. Accordingly, the effective “haircut” to GDB creditors exceeds 60%.

COFINA Title III Plan confirmation

In February 2019, the FOMB completed the COFINA debt restructuring with the entry of the Title III confirmation
order and the issuance of restructured New COFINA Bonds. The COFINA restructuring resolved the largest
class of bond claims in Puerto Rico, representing $18 billion in legacy bonded debt. Under the court-approved
COFINA plan of adjustment, the par amount of Old COFINA Bonds was reduced by $6 billion and total debt
service was reduced by 32%, saving approximately $17.5 billion that will now be available to the Commonwealth
for delivering services to the people of Puerto Rico. On an annual basis, the maximum annual debt service was
reduced from $1.85 billion on the Old COFINA Bonds to $992.5 million on the New COFINA Bonds. Notably, even
with these sharp reductions in debt payments compared to the prior COFINA debt obligations, the COFINA plan
had the support of all classes of COFINA creditors.

The New COFINA Bonds are 100% fixed-rate debt and fully amortize over 40-years, which is the same term as the
Old COFINA Bonds. The New COFINA Bonds have no floating rate risk or require a future refinancing, thereby
giving the Government future budgetary certainty. In return, the New COFINA Bonds have credit protections
from a pledge of a portion of the Commonwealth’s island-wide sales and use tax. The FOMB believed that
creating a strong, but smaller and sustainable new COFINA sales tax credit would help restore Puerto Rico’s
access to the capital markets at reasonable interest rates. Trading in the New COFINA Bonds since their issuance
in February 2019 suggests that the FOMB’s restructuring of the COFINA bond credits achieved this goal of
PROMESA. Dozens of the traditional municipal market investors whose investment will be crucial to Puerto
Rico’s future capital markets access have in fact re-entered the market for these New COFINA Bonds, which now
trade near their face value.

EXHIBIT 18: COFINA DEBT REDUCTION

55
PREPA Title III Restructuring Support Agreement
In the summer of 2018, FOMB and the Government entered into a preliminary debt
restructuring support agreement with a majority of PREPA’s uninsured bondholders to
restructure PREPA’s legacy debt. The PREPA restructuring support agreement reduces
PREPA’s debt by over 30%, protects consumers from uncapped electricity price hikes to pay
debt service, and, relative to prior debt, saves the Puerto Rican residents and businesses who
depend on its electricity supply about $3 billion in debt service payments over the next 10
years alone. The agreement is designed to support the transformation and modernization
of Puerto Rico’s energy system to deliver affordable, reliable power to the people of Puerto
Rico, while shifting much of the risk of the potential for reduced customer demand for PREPA
electricity to the bondholders and away from the residents and businesses served by PREPA.

Hurricane María demonstrated to everyone that PREPA is not servicing the people of Puerto
Rico or its economy adequately, much less well. FOMB believes it is paving the way for
the introduction of private sector management of PREPA’s transmission and distribution
functions, and fully private generation, by resolving the PREPA debt on a consensual basis
with the bulk of PREPA’s bond creditors.

To support key public policy goals, FOMB and the Government designed specific debt
instruments, such as a fixed charge that will not adjust higher for falling electricity demand
on the Island. The two new debt instruments involved in the preliminary PREPA debt
restructuring agreement include a “flexible amortization” bond and what amounts to a
“growth bond.” The flexible amortization bond is designed to shift much of the risk of falling
electricity demand on the island to the holders of the restructured PREPA bonds, so that risk
is not all borne by the residents and businesses of Puerto Rico. The growth bond provides
some upside to the PREPA creditors if electricity demand actually exceeds projections in a
material way, but that bond will be partially or wholly unpaid and expires without payment
if higher electricity demand does not materialize. Since that preliminary agreement was
reached, FOMB and Government have expanded the parties to include the monoline bond
insurers of PREPA’s bonds. The current restructuring support agreement is pending approval
by the Title III court.

PRASA
PRASA also continued its efforts to restructure its debt obligations, particularly those related
to its State Revolving Funds (“SRF”) with the U.S. Environmental Protection Agency (“EPA”)
and the Rural Development (“RD”) bonds with the U.S. Department of Agriculture (“USDA”).
PRASA has secured forbearance agreements with the EPA and USDA as it continues to
negotiate with this particular group of creditors.

COMMONWEALTH Title III Plan Support Agreements

On June 7, 2019, FOMB entered into a plan support agreement with the Official Committee
of Retired Employees (“COR”) regarding how the Commonwealth Title III plan of adjustment
will treat accrued retirement benefit claims for the over 300,000 employees in Puerto Rico’s
Employees Retirement System (“ERS”), Teachers Retirement System (“TRS”), and Judiciary
Retirement System (“JRS”). Together, the unfunded pension liability across ERS, TRS, and JRS
is over $50 billion. The plan support agreement with the COR provides that nearly 75% of all
beneficiaries will be protected from any cut. Those beneficiaries who will receive a benefit
reduction will have their retirement benefits cut by no more than 8.50%. Moreover, the
agreement with the COR protects and secures pensions going forward for all Commonwealth
employees, both retired and active, by allocating accumulated surplus in the short term to a
reserve fund that guarantees the payment of future pension obligations.
56
On June 16, 2019, FOMB announced an agreement with certain holders of Commonwealth bonds on the
framework for a plan of adjustment to resolve $35 billion worth of debt and non-debt claims against the
Commonwealth. The agreement will reduce the amount of Commonwealth-related bonds outstanding to less
than $12 billion, a reduction of more than 60%. This agreement would cut the Commonwealth’s total debt
service, including principal and interest payable over the next 30 years, by about half, to $21 billion from $43
billion. This FOMB agreement, together with the COFINA debt restructuring described below, would reduce
the Commonwealth’s maximum annual net tax-supported debt service payable in any future year by more than
70%, from $4.2 billion annually to below $1.5 billion a year. FOMB’s agreement with the supporting creditors is an
acknowledgement by the supporting bondholders, and other parties with claims against the Commonwealth,
that Puerto Rico’s difficult financial situation requires a meaningful reduction in its debt burden to a sustainable
level. FOMB considers the agreement an important element of the Commonwealth Title III plan of adjustment.

FOMB has also entered into a plan support agreement with Public Servants United of Puerto Rico (“SPU”), the
local affiliate of American Federation of State, County, and Municipal Employees (“AFSCME”), on the terms of a
new collective bargaining agreement. This new collective bargaining agreement would provide certainty and
security to the SPU/AFSCME members through a new five-year agreement, would keep benefits consistent with
Law 26-2017, would increase the employer healthcare contribution, provide members with a one-time signing
bonus, provide that members would share in 25% of any excess surplus that the Commonwealth generates,
and would refund and segregate the employee contributions that members made into System 2000 retirement
accounts.

The agreements with the unions and COR were made based on the understanding that pension benefit accruals
will be frozen as part of the confirmed Title III plans of adjustment, thereby providing the Commonwealth
significant debt relief.

These three plan support agreements, with the COR, certain Commonwealth bondholders, and SPU/AFSCME
address over $50 billion in pension benefit claims and over $35 billion worth of debt and non-debt claims
against the Commonwealth. Together they provide Puerto Rico with a viable and sustainable path to put its
legacy debt restructuring behind it and form the cornerstone of a Title III plan of adjustment that FOMB expects
to propose within weeks.

Debt Investigation and Special Claims Committee

As noted in the prior Annual Report, in September 2017, the Special Investigation Committee of FOMB
engaged an independent investigator to carry out its mandate under Section 104 of PROMESA to conduct a
comprehensive investigation and review of the factors contributing to Puerto Rico’s fiscal crisis, Puerto Rico’s
debt issuances, related disclosure and selling practices, Puerto Rico’s use of proceeds from debt offerings, and
how Puerto Rico’s debt practices compare to the debt practices of states and large municipal jurisdictions.

At the conclusion of the investigation, FOMB published the independent investigator’s final report in August 2018,
which included an analysis of the historical and more recent macroeconomic and political factors contributing
directly and indirectly to Puerto Rico’s fiscal crisis, the Puerto Rico municipal bond issuance process, and the
legislative efforts to restructure the debt, in addition to its investigative findings, policy recommendations, and
identification of potential claims and matters for regulatory attention.

Within a few days after the publication of the final report, FOMB created its Special Claims Committee to pursue
claims and causes of action resulting from the findings in the final report. Shortly thereafter, the Special Claims
Committee retained the law firm Brown Rudnick LLP as Claims Counsel and DiCicco, Gulman & Company LLP as
its financial advisory services firm.
In December 2018, the Special Claims Committee and the Official Creditors’ Committee filed a joint claim
objection seeking to invalidate certain general obligation bonds issued by the Commonwealth in 2012 and 2014

57
because they were purportedly issued in violation of the Commonwealth’s constitutional
debt limit. The Court entered a procedures order with respect to a process to identify parties
interested in participating in the claim objection litigation and to develop a meet and confer
process to identify the timing and sequencing of the claim objection litigation.

Additionally, in advance of the expiration of the statute of limitations for the Commonwealth,
HTA, ERS and PREPA, the Special Claims Committee jointly filed, with the Official Creditors’
Committee, several hundred lawsuits seeking to recover several billions of dollars in
prepetition payments the respective Title III debtors made to various vendors, suppliers,
bondholders, and professionals. The actions fall into three broad categories: (i) avoidance
actions against vendors; (ii) avoidance actions against bondholders; and (iii) other third party
actions.

With respect to the avoidance actions against vendors, the Special Claims Committee,
after months of extensive review of the Title III debtors’ prepetition payment histories, filed
approximately 250 avoidance actions to avoid and recover payments by the various Title III
debtors against hundreds of suppliers and vendors to Puerto Rico because the payments were
made in violation of Puerto Rico law and/or the transfers are recoverable as preferences and/
or constructive fraudulent transfers under the Bankruptcy Code. Cognizant of the burden
the vendor actions have caused the Puerto Rican business community, the Special Claims
Committee instituted an informal resolution process for the actions, and obtained Court
approval establishing litigation deadlines and settlement parameters to support the effort
to resolve these actions on a consensual, out-of-court basis. The Special Claims Committee
expects to begin resolving many of the actions in the following weeks.

With respect to the avoidance actions against bondholders, the Special Claims Committee
filed fifteen actions against approximately 1000 holders of Puerto Rico bonds that have been
challenged in claim objections filed by the Special Claims Committee and other parties. The
avoidance actions seek to avoid and recover payments made on account of the challenged
bonds. In these avoidance actions, the Special Claim Committee asserts that payments made
on these challenged bonds may be recovered if the bonds are adjudicated as null and void.

With respect to actions against other third parties, the Special Claims Committee commenced
two actions. The first is an action against several underwriting investment banks, law firms,
and other professionals that advised the Commonwealth of Puerto Rico and other Title
debtors in connection with the issuance of certain bonds subject to validity challenges.
In these actions, the Special Claims Committee asserts that if the bonds subject to these
challenges are declared null and void, it can recover many of the fees and other profits these
professional parties received in connection with their role in the issuance of the bonds.
The second is a lawsuit against several former and current fuel suppliers to the Puerto Rico
Electric Power Authority that purportedly colluded to market and sell inferior grade fuel
to the Puerto Rico Electric Power Authority and its ratepayers. This action incorporates
the allegations asserted in the class action complaint pending in the United States District
Court in the District of Puerto Rico at Civ. No. 3:15-cv-01167-JAG. If a court determines such
allegations are actionable, the complaint filed by the Special Claims Committee preserves
PREPA’s ability to recover damages on account of the purported fraudulent transfers relating
to the fuel oil purchases and laboratory service testing.

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TITLE V
F I S C A L Y E A R 2 0 1 9

59
Overview of Title V of PROMESA
Congress added Title V to PROMESA because Puerto Rico desperately needed a
revitalized infrastructure. To facilitate private investment in infrastructure, Title V created
the Revitalization Coordinator (RC) position to review private infrastructure projects for
consideration as a Critical Project. If FOMB agrees with the RC that a project is a Critical
Project, it is entitled to expedited local permitting.

In 2017, the Government adopted accelerated permitting procedures independent of Title

V. Then Hurricane María made Puerto Rico’s infrastructure needs all the more urgent. Not
only did Puerto Rico’s electric infrastructure collapse in the wake of the storm, but so did its
roads, aqueduct and sewers, housing, and other infrastructure assets. In the past year, the
majority of projects submitted to the RC for consideration as a Critical Project have been
energy-related.

FY19 Modifications to the Critical Project Process

On July 31, 2018, FOMB adopted a Title V Policy that helped further specify procedural
requirements the Revitalization Coordinator must follow when considering potential critical
projects. The Policy clarifies requirements for projects that involve doing business with any
Government agency or public corporation, especially, energy related projects that require
a Power Purchase and Operating Agreement (PPOA). All projects that require obtaining
a contract or Request for Proposal (RFP) award from any Government agencies or public
corporations must obtain such contract or RFP award prior to the project submission through
Title V. In the case of energy related projects, projects that require a PPOA must be validly
assumed under Title III of PROMESA in order to satisfy the contract award requirement.

The Title V Policy of July 31, 2018 gave way for the RC to focus efforts on projects that had
obtained valid contract awards or RFP awards, and other projects, such as private to private
or with a municipal government.

Critical Projects Process (CPP) Status Report14

By the beginning of FY19, the RC evaluated 55 projects totaling an excess of $9 billion
dollars approximately. Upon adoption of FOMB Policy as of July 31, active projects had to
be withdrawn from participation or placed on hold (at project sponsor’s discretion) since
approximately 80% were energy related requiring a valid PPOA assumed under Title III
and the remaining 19% (approx.) required a Government RFP or similar. One percent (1%)
constituted a qualifying project (Viewpoint of Roosevelt Project) which was real estate
related and a rejected project that did not meet initial requirements. Nevertheless, many
energy related project sponsors continued to negotiate their contracts with PREPA through
the respective process and demonstrated interest in reactivating their project submission
upon successfully complying with FOMB Title V Policy.

14
Access the Critical Projects Process website at https://cpp.juntasupervision.pr.gov/en/

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 FY19 CPP PROJECTS EVALUATED
ENERGY RELATED VS OTHER COMMERCIAL PROJECTS

$200 Million $8,800 Million

Count Approx. Total

Other Commercial Projects 9 $200 Million
Energy Related Projects 46 $8,800 Million
Total 55 $9,000 Million

Several factors have been cited by project sponsors and/or noted by the CPP team:

• The expected flow of infrastructure projects under CDBG-DR has not materialized.

• The Government continues to struggle in effectively managing proposals for infrastructure projects.

• Projects currently under consideration by Government do not qualify under Title V without an RFP
award. Some examples are Fajardo ferry, UPR student parking, residential housing construction / repair
under FEMA.

• Much of current infrastructure activity is in FEMA Cat A/B (debris removal & remediation) which do not
require extensive permitting support.

Revitalization Coordinator Vacancy:

On March 15, 2019, the RC, Noel Zamot, resigned. PROMESA appoints the RC as an intermediary, first line
evaluator, and process driver of the CPP. Pursuant to Section 503(a)(1) of PROMESA, projects are submitted to
the RC for consideration and review.

In order to provide uninterrupted service to project sponsors, FOMB designated Natalie Jaresko as Interim RC,
until the position is filled. FOMB continues to actively search for qualified candidates.

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 FOMB
ACTIVITIES
F I S C A L Y E A R 2 0 1 9

62
AURELIUS LITIGATION
DEFENDING PROMESA
On August 7, 2017, almost one year after FOMB members’ appointments, Aurelius Investment, LLC (“Aurelius”), a
hedge fund that invested heavily in distressed Puerto Rican bonds, moved to dismiss the Title III case FOMB had
initiated on behalf of the Commonwealth under PROMESA. Aurelius argued FOMB members were appointed
in a manner that violated the Constitution’s Appointments Clause. Assured Guaranty Corporation, a municipal
bond insurer, and UTIER, a labor organization that represents employees of the government-owned Puerto
Rico Electric Power Authority, also filed adversary complaints challenging FOMB members’ appointments on
the same grounds. FOMB opposed the motions on the ground that FOMB members are territorial officers, not
“Officers of the United States” subject to the Appointments Clause (U.S. Const. art. II, § 2, cl. 2). The United States
joined FOMB in defending the constitutionality of FOMB members’ appointments, as did the Puerto Rico Fiscal
Agency and Financial Advisory Authority, an independent fiscal entity within the Government of Puerto Rico,
and several creditor groups and labor unions.

The district court, Judge Swain presiding, denied Aurelius’s motion to dismiss and Assured and UTIER’s adversary
complaints, holding that the Appointments Clause did not govern FOMB members’ appointments because they
were territorial officers, occupying offices created pursuant to Congress’s Article IV authority over the territories
(U.S. Const. art. IV, § 3, cl. 2) and exercising duties limited to Puerto Rico. Aurelius, Assured, and UTIER appealed
to the First Circuit. That court (Judges Torruella, Kayatta, and Thompson on the panel) reversed, holding FOMB
members were “Officers of the United States” requiring Senate confirmation under the Appointments Clause.
Rather than dismissing the Title III case, however, the court of appeals accorded de facto validity to FOMB’s
prior actions based on the de facto officer doctrine. The court also stayed its mandate pending final disposition
in the Supreme Court. As a result, FOMB has been able to continue operating during the pendency of the
proceedings in the Supreme Court.

Both FOMB and the United States filed petitions for certiorari in the Supreme Court seeking review of the First
Circuit’s Appointments Clause holding. Aurelius, Assured, and UTIER also filed certiorari petition, seeking review
of the First Circuit’s de facto officer holding. On June 20, 2019, the Supreme Court granted certiorari on both
questions and expedited briefing and argument. Argument is scheduled for Tuesday, October 15. The First
Circuit’s mandate is stayed pending final disposition in the Supreme Court. In an abundance of caution, on June
18, 2019, the President nominated the current FOMB members to serve in their current positions and requested
Senate confirmation. The Senate has not yet acted on the nominations.

STAKEHOLDER OUTREACH & ENGAGEMENTS

FOMB Public Meetings
FOMB held several public meetings during the FY2019. These meetings serve to publicly communicate FOMB’s
work in fulfilling its mandates pursuant to PROMESA.

• September 18, 2018 – Public Meeting in San Juan re: Debt Investigation Report
• October 23, 2018 – Public Meeting in San Juan re: Fiscal Plan Revisions
• March 28, 2019 – Public Meeting in San Juan re: Department of Public Safety Implementation Status
• May 9, 2019 – Public Meeting in San Juan re: Fiscal Plan Certification

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U.S. Congress Outreach
FOMB engaged Members of Congress and their staff, both in the U.S House of Representatives
and U.S. Senate on a monthly basis. The outreach consisted of correspondence and
comprehensive informational meetings, both with individual Members and senior staff,
as well as at the Committee level which have included Congressional Delegations (CODEL)
visits to Puerto Rico. These meetings served to inform our Congressional stakeholders on
progress achieved by FOMB during this year, as well as challenges faced in fulfilling the
mandates of PROMESA. FOMB also testified in House and Senate hearings as requested and
provided written testimony as needed.

• November 1, 2018 – Surveys and Investigation Staff of the U.S. House Committee
on Appropriations Visit
• March 1, 2019 – Staff CODEL of the U.S. House Committee on Homeland Security
• March 18, 2019 – Chairman Grijalva and U.S. House Committee on Natural
Resources CODEL visit
• April 6, 2019 – CODEL of the U.S. House Appropriations Subcommittees for
Homeland Security and for Transportation
• May 2, 2019 – U.S. House Committee on Natural Resources Hearing on the Status
of PROMESA

U.S. Executive Branch Outreach

FOMB regularly engaged the U.S. Executive Branch in order to provide updates on its work
on the Island and exchange correspondence and information relevant to the economic and
fiscal situation of Puerto Rico. This outreach included meetings with federal officials from
executive agencies and from the White House, including FEMA, Treasury, USDA, EPA, GAO,
FHWA, among others.

Media Outreach
FOMB held press roundtables and interviews with Puerto Rico and mainland media, at least
monthly, in order to provide detailed information of work being done on debt restructuring
matters and on fiscal responsibility efforts, such as fiscal plan revisions and implementation,
the budget process, and transparency measures, among others. FOMB also held press
conferences at Public Meetings.

Selected op-eds:
• October 2018 – El Nuevo Día Commentary by FOMB Executive Director Natalie
Jaresko, Implementing the New Fiscal Plan (Implementando el Nuevo Plan Fiscal)
• November 2018 – Morning Consult Commentary by FOMB Member Arthur
Gonzalez, Lawful Restructuring Compromises are Key to Puerto Rico’s Future
• November 2018 – El Nuevo Día Commentary by FOMB Member Arthur Gonzalez,
COFINA Deal is Key for Puerto Rico (El acuerdo de COFINA es clave para Puerto Rico)
• December 2018 – Washington Post commentary by FOMB Chair José Carrión and
Board Member Andrew Biggs, Don’t Blame Puerto Rico’s Poor Economy on
Hurricanes
• March 2019 – El Nuevo Día Commentary by FOMB Member David Skeel,
What Should Puerto Rico Expect Now (¿Y ahora que debe esperar Puerto rico?)
• March 2019 – El Nuevo Día Commentary by FOMB Executive Director Natalie
Jaresko, For Better Public Safety (Por una mejor seguridad)
• April 2019 – New York Post Opinion Editorial by FOMB Chair José Carrión,
Puerto Rico Won’t Recover from Bankruptcy Unless it Embraces Fiscal Reform
64
 • May 2019 – El Nuevo Día Commentary by FOMB Member David Skeel, Preserving
Puerto Rico’s Rights (Preservando los derechos de Puerto Rico)

Private Sector Outreach

FOMB regularly engaged private sector stakeholders to inform its work on the Island, to offer comprehensive
information regarding FOMB activities, and to regularly collaborate for the benefit of Puerto Rico. This outreach
included informational meetings with local and national professional organizations, non-profit institutions,
think tanks, and Puerto Rico diaspora groups, speaking engagements at private and public forums held by the
private sector, and frequent exchanges of data from different economic sectors.

• August 8, 2018 – CPA Society forum on Cooperatives in Puerto Rico Keynote

Speech by Executive Director Natalie Jaresko
• August 30, 2018 – Chamber of Commerce of the South Forum Keynote
Speech by Chair José B. Carrión
• September 9, 2018 – Visit to Boys & Girls Club Workforce Development
Program by Executive Director Natalie Jaresko
• September 27, 2018 – Grupo Trinchantes Forum on PROMESA
Updates by Chair José B. Carrión
• September 29, 2018 – League of Cooperatives of Puerto Rico, North Regional
Council Forum Keynote Speech by Chair José B. Carrión
• November 2, 2018 – Blue Ocean International Bank Conference on the
Challengesand Opportunities of the New Commonwealth Fiscal Plan Keynote
Speech by Chair José B. Carrión
• November 27, 2018 – Enactus Puerto Rico Lunch Forum for Female
Executives Keynote Speech by Executive Director Natalie Jaresko
• November 30, 2018 – Animus Conference Keynote Speech by
Executive Director Natalie Jaresko
• February 1, 2019 – YPO San Juan Event Keynote Update by
Executive Director Natalie Jaresko
• February 19, 2019 – Center for Budget and Policy Priorities Visit to FOMB
• March 29, 2019 – Wharton School at the University of Pennsylvania Conference Keynote Speech by
Chair José B. Carrión
• March 30, 2019 – Wharton School at the University of Pennsylvania Conference Keynote Speech by
Executive Director Natalie Jaresko
• April 11, 2018 – Georgetown University Puerto Rico Students Events Forum
• May 16, 2018 – Official Chamber of Commerce of Spain in Puerto Rico Keynote Speech
by Chair José B. Carrión
• June 1st, 2019 – Puerto Rico Manufacturers Association Convention Keynote Speech
by Executive Director Natalie Jaresko

Legislature, Municipalities and other Governmental Outreach

FOMB regularly engaged with Puerto Rico Legislature and Municipalities in order to explore in cooperating
in fiscal and structural initiatives for the benefit of the Island. This outreach included informational meetings,
budgetary work and other legislative proposal discussions, visits to municipalities, and other communications.

• July 2018 to June 2019 – Monthly meetings with various P.R. legislators
• July 11, 2018 – Visit and meetings in municipality of Ponce
• August 23, 2018 – Memorandum of Agreement Signing with the Comptroller’s Office of Puerto Rico
and the Puerto Rico Institute of Statistics

65
• October 9, 2018 – Meeting with P.R. House Speaker and Ways and Means Committee Chair
• October 15, 2018 – Meeting with Senate President and Senate Majority Delegation
• October 23, 2018 – Informational Session with all members of the P.R. Legislature
• November 6, 2018 – Meeting with P.R. House and Senate Minority Leaders
• March 11, 2019 – Visit and Meetings in municipality of Bayamón
• April 9, 2019 – Meeting with leadership of the P.R. Association of Mayors and Federation of Mayors
• May 9, 2019 – FOMB Public Board Meeting announcement designating Municipalities in Puerto Rico
as covered entities under PROMESA
• May 14, 2019 – Visit to Orocovis and Meeting with Mayors of Orocovis, Aibonito, Barranquitas, Cidra,
Villalba, and Comerío
• May 15, 2019 – Visit to Isabela and Meeting with Mayors of Isabela, Camuy and Quebradillas
• May 20, 2019 – Meeting with Mayor of San Sebastián
• June 11, 2019 – Meeting with Board of Governors of the Center for Municipal Tax Collection (CRIM)
• June 13, 2019 – Meeting and Visit to Municipality of Comerío

66
FOMB BUDGET
THE FOMB’S BUDGET FOR FISCAL YEAR 2019 WAS $64,750,000 AND IT IS
DETAILED BELOW:

General Fund
(In thousands)

Revenues
Contributions from territorial government $ 64,750,000
Interest Income 12,000
Other
Total Revenues: 64,762,000
Expenditures
Paryroll and other related costs 4, 151,270
Rent and other office costs 288,523
Purchased services 4,067,770
Transportation and travel costs 1,999,135
Professional services 53,345,690
Materials and supplies 39,522
Equipment purchases 239,045
Other Expenditures 619,045
Total expenditures: 64,750,000
Excess of revenues over expenditures
and net change in fund balance 12,000

As soon as the audit of FOMB’s financial statements is completed in the coming months, it
will be sent to all parties that officially receive this Annual Report as required by PROMESA.
FOMB reduced its operational budget by 11% to $57.6 million in FY2020.

67
Today, FOMB is responsible for administering the largest public entity restructuring in U.S. history and is party
to hundreds of lawsuits, many in opposition to FOMB-formulated debt restructuring, others by parties opposed
to PROMESA, and inevitably actions by FOMB implementing PROMESA.

• We are hard at work to augment internal capabilities. In the last few months,
we have increased our staff from 17 to over 40 , and will continue to hire personnel in
key areas related to fiscal plan implementation, monitoring, and reporting.

• Moreover, the FOMB is monitoring more than 120 reform implementation plans across the
Government, which requires a significant amount of resources and expertise. These plans
translate into thousands of individual reform milestones that need to be monitored and tracked.

PROMESA Restructuring Expenses

Commonwealth PROMESA-related expenditures are projected to be $1.5 billion for FY2018 to FY2024, comprised
of all professional fees including those of the Unsecured Creditors’ Committee, the Retiree Committee, AAFAF,
and FOMB (approximately $1.1 billion from FY2018-2024), as well as funding for FOMB ($352 million over
FY2018-2023). The estimate for professional fees was developed, in conjunction with the Government, by
analyzing FY2018 and FY2019 run-rate billings based on available information and soliciting input from certain
professionals.

FOMB and the Government have worked closely and cooperatively to reduce the high cost associated with the
debt restructuring, albeit approximately 1.2% of the bond and pension debt being restructured, and $9,100 for
each of the 165,000 proofs of claims filed. We continue to explore ways to eliminate duplication and minimize
professional fees. The Court-established mediation – while certainly welcome – requires a full complement
of lawyers and financial advisors spending additional time constituting an added cost to the restructuring
expenses. Of course, the mediation may save substantial professional fees if it is successful.

68
ETHICS
F I S C A L Y E A R 2 0 1 9

69
PREPARED BY ANDREA BONIME-BLANC
INDEPENDENT ETHICS ADVISOR TO THE FOMB
Over the past year, the FOMB has overseen the implementation of a variety of ethics and
transparency initiatives that have been developed and implemented with the assistance of
their Independent Ethics Advisor (IEA), an independent third party role that was created
through PROMESA and the FOMB Bylaws in late 2016 to oversee and manage a variety of
ethics and transparency matters for the FOMB.

Amongst the leading matters the IEA manages and oversees on behalf of the FOMB are
(1) board and designated executive staff initial, annual, quarterly and termination financial
disclosures as set forth in applicable law, (2) conflict of interest management, (3) code of
conduct and related matters (such as training, communications and a newly launched
interactive ethics website) for the FOMB board, executive staff and overall staff, (4)
participation at the request of FOMB General Counsel on ethics and transparency related
inquiries and investigations, (5) FOMB third party contractor ethics and transparency issue
management, and (6) FOMB stakeholder engagement on matters of ethics and transparency.

TABLE 1
SUMMARY OVERVIEW OF FOMB ETHICS & TRANSPARENCY PROGRAM & ACTIVITIES 2018-2019

SUBJECT MATTER RESPONSIBILITY COMMENTS

• FOMB BOARD, ALL COMPLETED, REVIEWED

1. FOMB FINANCIAL BOARD DESIGNATED AND SIGNED INITIAL,

DISCLOSURE EXECUTIVE STAFF ANNUAL, QUARTERLY &

MANAGEMENT
TERMINATION REPORTS ARE
POSTED PUBLICLY ON THE
• INDEPENDENT
FOMB DOCUMENTS & ETHICS
ETHICS ADVISOR RESOURCES WEBSITE PAGES
REVIEW & SIGN OFF

2. FOMB CONFLICT • FOMB BOARD, ALL FOMB GENERAL COUNSEL

OF INTEREST FOMB STAFF & INDEPENDENT ETHICS

ADVISOR PROACTIVELY
MANAGEMENT • THIRD PARTY REVIEW AND RESOLVE
ANY NEW ISSUES RAISED
CONTRACTORS

70
 TABLE 1
SUMMARY OVERVIEW OF FOMB ETHICS & TRANSPARENCY PROGRAM & ACTIVITIES 2018-2019

SUBJECT MATTER RESPONSIBILITY COMMENTS

• FOMB BOARD, INDEPENDENT ETHICS ADVISOR

3. CODE OF EXECUTIVE & STAFF MANAGES CODE OF CONDUCT ISSUES,
CONDUCT FOMB, CODE OF CONDUCT REVISIONS TO REGULAR CODE AND

TRAINING &
CONTRACTOR CODE, STAFF QUERIES,
REPORTING OF ISSUES, ETC., PERIODIC
• THIRD PARTY
COMMUNICATIONS CONTRACTOR CODE
BOARD & STAFF ETHICS EDUCATION &
(INCLUDING OF CONDUCT
TRAINING, NEWLY LAUNCHED ETHICS
WEBSITE AND BLOG
NEWLY LAUNCHED
ETHICS WEBSITE)

• GENERAL COUNSEL ANY ETHICS CONCERNS OR INQUIRIES

4. FOMB ETHICS& & INDEPENDENT FROM BOARD, STAFF, THIRD PARTIES,
TRANSPARENCY ETHICS ADVISOR MEDIA, ETC., ARE REVIEWED. WHEN

INQUIRIES &
WARRANTED, A FURTHER INQUIRY
• WHEN NEEDED, U.S. IS CONDUCTED AND WHEN NEEDED,
INVESTIGATIONS OR PUERTO RICO OUTSIDE COUNSEL IS ENGAGED TO
CONDUCT AN INVESTIGATION
OUTSIDE COUNSEL

• GENERAL COUNSEL FOMB THIRD PARTY CONTRACTORS

5. FOMB THIRD & INDEPENDENT ARE SUBJECT TO PRIOR REVIEW,
PARTY CONTRACTOR ETHICS ADVISOR & ENHANCED CONTRACTOR AGREEMENT

ETHICS & OTHER DESIGNATED REPRESENTATIONS, COVENANTS &

COMMITMENTS TO HIGH ETHICAL
FOMB STAFF
TRANSPARENCY STANDARDS, CONTRACTOR CODE OF

MANAGEMENT
• SOMETIMES U.S. CONDUCT; EXTENSIVE CONFLICT OF
OR PUERTO RICO INTEREST COMMITMENTS ON SIGNING
OUTSIDE COUNSEL AND BIANNUALLY THEREAFTER

• GENERAL COUNSEL MEETINGS WITH VARIOUS

6. FOMB & INDEPENDENT STAKEHOLDER GROUPS INLCUDING
STAKEHOLDER ETHICS ADVISOR & NGO’S, GOVERNMENT OFFICIALS,
OTHER DESIGNATED
ENGAGEMENT ON
ADVISORS IN PUERTO RICO AND IN
FOMB STAFF WASHINGTON DC TO DISCUSS / RESOLVE
ETHICS & • SOMETIMES U.S.
ETHICS & TRANSPARENCY MATTERS

TRANSPARENCY OR PUERTO RICO

ISSUES OUTSIDE COUNSEL

71
Amongst the important ethics and transparency matters that have taken
place from 2018 to 2019 (to date) are the following:

FOMB FINANCIAL DISCLOSURE MANAGEMENT

REVISIONS TO FOMB INITIAL AND ANNUAL FINANCIAL DISCLOSURE REPORT FORM.
This form has been used since the inception of the FOMB in 2016 as the form for an Initial
Financial Disclosure Report and for Annual Financial Disclosure Reports, created in 2016 to
reflect PROMESA and Federal Ethics legal requirements. In early 2019, this form was revised
to include an FOMB Board or designated executive staff member departure requiring
the departing Board member or designated executive staff member to file a partial year
Termination Financial Disclosure Report beginning on January 1 of the year of departure
and running through the official date of departure in that same year. This revision to the
original form of Initial and Annual Financial Disclosure Report was adopted after considering
comments and suggestions from third party stakeholders to broaden these financial
disclosures to include departure / termination financial disclosure including, most notably,
from the non-governmental organization (NGO), Espacios Abiertos.

FIRST TERMINATION FINANCIAL DISCLOSURE REPORT FILED IN 2019.

Noel Zamot, FOMB Revitalization Coordinator from mid-2017 to early 2019, was the first
designated executive staff member to file such a partial year Termination Financial Disclosure
Report covering January 1, 2019 through March 15, 2019, his date of departure from the
FOMB executive staff. This Termination Financial Disclosure Report was reviewed by the IEA
in conjunction with Mr. Zamot prior to his departure and the final signed form was posted
on the FOMB website under “Documents” and under the new “Ethics Resources” page
launched in 2019 (see point 3 below).

2018 ANNUAL FINANCIAL DISCLOSURE REPORTS

Were prepared by each member of the FOMB Board, including the ex-officio Board member
appointed by the Governor of Puerto Rico, and the three designated executive staff members
(the Executive Director, the General Counsel and the Revitalization Coordinator) designated
under the Bylaws to do so and posted to the FOMB website – under the Documents and
Ethics Resources sections. Each of these reports was reviewed by the IEA together with each
of the Board and executive staff members prior to finalization, signature and posting on the
FOMB website.

Q1, Q2, Q3 AND Q4 2018 PERIODIC TRANSACTION REPORTS

Were prepared by each member of the FOMB Board, including the ex-officio Board member
appointed by the Governor of Puerto Rico, and the three designated executive staff members
(the Executive Director, the General Counsel and the Revitalization Coordinator) designated
under the Bylaws to do so and posted to the FOMB website – under the Documents and
Ethics Resources sections. Each of these reports was reviewed by the IEA together with each
of the Board and executive staff members prior to finalization, signature and posting on the
FOMB website.
Q1 2019 PERIODIC TRANSACTION REPORTS
Were prepared by each member of the FOMB Board, including the ex-officio Board member
appointed by the Governor of Puerto Rico, and the three designated executive staff members
(the Executive Director, the General Counsel and the Revitalization Coordinator) designated
under the Bylaws to do so and posted to the FOMB website – under the Documents and

72
Ethics Resources sections. Each of these reports was reviewed by the IEA together with each of the Board
and executive staff members prior to finalization, signature and posting on the FOMB website.

ONGOING BOARD MEMBER ASSISTANCE WITH WHITE HOUSE AND SENATE COMMITTEE
CONFIRMATION PROCESS CONCERNING BOARD FINANCIAL DISCLOSURE REPORTING.
IEA assistance to each of the seven board members originally designated by the US executive and
legislative branches in 2016 (not including the Governor of Puerto Rico designated ex-officio board member).

FOMB CONFLICT OF INTEREST MANAGEMENT

ALLEGATIONS, REPORTS AND MEDIA REPORTS RAISING CONFLICT OF INTEREST
Questions, issues and concerns are managed on a real-time immediate basis. Whether an issue involves
an individual FOMB board member, executive or staff member or any third parties doing business with the
FOMB, upon learning of such matters, the General Counsel and IEA discuss and coordinate what steps
need to be taken to understand the issue better, make further inquiries and find a resolution or, in more
complicated cases, such matters may include the engagement by FOMB General Counsel of appropriate
outside US legal counsel for matters involving Federal law and/or outside Puerto Rico legal counsel for matters
including Puerto Rico law.

FOMB CODE OF CONDUCT, TRAINING & COMMUNICATIONS

(INCLUDING NEWLY LAUNCHED FOMB ETHICS WEBSITE)
From time to time revisions are made to the FOMB Code of Conduct when we receive relevant feedback from
board, staff or outside third parties including NGOs. Once a change is proposed, it is approved and
adopted by FOMB board resolution. We have had no such changes 2018-2019 to date. Assistance to FOMB
Staff, including Human Resources, on ethics and transparency related employee policies and issues.
The IEA conducts an annual formal FOMB Board and Executive Staff update and education session to
provide them with the most important updates on the FOMB ethics and transparency practices and
program as well as receive their feedback on issues, concerns and new requirements. This year the
Board update and education session took place in New York City on March 26, 2019.

The IEA also conducts periodic, but at least annual, new and existing FOMB Staff training on the Code of
Conduct including coverage of the main topics in the Code, and guidance on pro-actively reporting ethics
concerns to a variety of resources within the FOMB including the IEA. The ethics training involves hands-on
interactive scenario based ethical dilemmas that FOMB Staff discuss in groups and attempt to resolve. This
year such training took place in San Juan in November 2018 and is scheduled to take place in August 2019.

FOMB Ethics Media & Other Communications are also made from time to time to the press or to third parties
that have made inquiries or posted ethics or transparency related statements on media or social media.
Such engagement has also from time to time included press interviews and the writing of opinion
pieces for the Puerto Rico press. These public communications are now posted on the FOMB ethics web
pages (see below).

FOMB Ethics Website Launch. In June 2019, the stand-alone ethics web page on the FOMB website was
launched in English and Spanish containing all of the FOMB ethics and transparency program’s public
documents including all FOMB Board and executive staff financial reports filed to date, letters from the
FOMB Board Chair and the Executive Director, an introduction to the Program from the IEA, the Bylaws, Code
of Conduct, public and media communications, and an interactive Ethics Blog (see below), among other
resources.
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FOMB IEA Ethics Blog. The first ethics blog by the IEA was published in June 2019 and the
expectation is that future periodic blog posts will respond to inquiries or suggestions
received from the public via the public response button available on the ethics blog page.

FOMB ETHICS & TRANSPARENCY INQUIRIES

& INVESTIGATIONS
Any concerns or inquiries from FOMB Board, staff, third parties, media, etc., are
reviewed when warranted, a further inquiry is conducted by the General Counsel and IEA
and, when required, outside counsel is engaged to conduct an investigation.
In 2018-2019, outside counsel was engaged twice for such matters:
The NYC-based Luskin, Stern & Eisler LLP law firm (“Luskin”) was engaged to conduct an
investigation (in conjunction with the IEA and the FOMB General Counsel) into
whether third party contractor to the FOMB, McKinsey, had actual (or the appearance of)
conflicts of interest with the FOMB (as alleged in several journalistic investigations
published in the New York Times and the Wall Street Journal during 2018). The Luskin
McKinsey Report was filed publicly on the FOMB website as well as with the United
States District for the District of Puerto Rico in February 2019 (The “McKinsey Report”). Even
though no actual conflicts of interest were found via the Luskin McKinsey
investigation, several valuable lessons were learned to improve the process of third-party
conflicts of interest management. See below #5 for the implications of the McKinsey
Report.

The San Juan, Puerto Rico, based law firm Mendoza Law Office was engaged by
FOMB General Counsel to conduct an investigation involving allegations of possible
conflicts of interest by FOMB staff regarding the Viewpoint on Roosevelt Project. The
independent investigation did not identify any improper conduct or activity by any Board
member, staff or advisor in connection with the Board’s consideration of the Project as a
critical project under Title V of PROMESA that would amount to an actual or apparent
conflict of interest.

FOMB THIRD PARTY CONTRACTOR ETHICS

& TRANSPARENCY MANAGEMENT
Even though the FOMB form of third party contractor agreement always required a
wide variety of representations, covenants and commitments to ethical and
compliant conduct and the absence of conflicts of interest, through the McKinsey
matter described in #4 above, the FOMB learned that certain improvements could be made
to broaden and deepen such third party conflict of interest compliance

The McKinsey Report yielded a set of 8 recommendations which the IEA, FOMB
General Counsel and FOMB staff have been implementing over the past few months
which include a variety of third-party conflict of interest process and
practice improvements including to the standard form of third-party contractor
agreement. These enhancements were approved by the FOMB Board by unanimous
resolution dated July 15, 2019 and are summarized in Table 2 in the next page.

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FOMB THIRD PARTY CONTRACTOR ETHICS & TRANSPARENCY MANAGEMENT

TABLE 2
SUMMARY RECOMMENDATIONS FROM THE LUSKIN MCKINSEY
REPORT OF FEBRUARY 2019
CURRENTLY UNDER IMPLEMENTATION BY THE FOMB

1. CONTRACTORS SHOULD DISCLOSE AFFILIATE RELATIONS

2. HE INTERESTED PARTIES LIST SHOULD BE EXPANDED
3. DIRECT RELATIONSHIPS, AND TO WHAT EXTENT, IF ANY, THEY RAISE CONFLICTS SHOULD BE DESCRIBED
WITH PARTICULARITY
4. INDIRECT RELATIONSHIPS, AND TO WHAT EXTENT, IF ANY, THEY RAISE CONFLICTS SHOULD BE DESCRIBED
WITH PARTICULARITY
5. CONTRACTORS SHOULD DISCLOSE RELEVANT DATA IN THEIR PUBLIC FILINGS
6. CONTRACTORS SHOULD DESCRIBE THE POLICIES, PRACTICES AND PROCEDURES THAT THEY HAVE OR WILL
HAVE TO GUARD AGAINST CONFLICTS
7. DISCLOSURES MUST BE UPDATED AND CERTIFIED PERIODICALLY
8. FOMB FORMS SHOULD BE REVIEWED AND REVISED

FOMB STAKEHOLDER ENGAGEMENT ON ETHICS & TRANSPARENCY ISSUES

The IEA, together with FOMB staff, has met with a variety of stakeholders including NGOs and
governmental representatives from time to time to discuss ethics and transparency matters of mutual
concern and interest.

Such meetings have included meeting with the Government Ethics Office of Puerto Rico, the Executive
Director and staff of Espacios Abiertos, the Government of Puerto Rico Controller’s Office, and a variety of
third-party advisers to the FOMB representing FOMB in Washington DC.

The IEA has also interacted with US Government officials including from the White House ethics
counsel’s office and the US Government Ethics Office for purposes of the Senate FOMB Board member
confirmation hearings to take place in the second half of 2019.

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RECOMMENDATIONS
TO THE FEDERAL
GOVERNMENT
F I S C A L Y E A R 2 0 1 9

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FOMB continues to believe that the Commonwealth’s recovery and fulfillment of PROMESA’s objectives
will be significantly aided by the Federal Government’s support in the following key Executive and
Legislative areas:

1. Disaster Relief

• FOMB strongly supports the Federal Government’s swift actions to provide disaster relief funding for
Puerto Rico in the light of the destruction caused by Hurricanes Irma and María. The funding is
welcomed, deserved and much needed by the U.S. citizens living in Puerto Rico.

2. Medicaid and Medicare

• Legislate a long-term Medicaid program solution to mitigate the drastic reduction in federal funding
for healthcare in Puerto Rico that will happen next year. Although Congress has provided Puerto Rico
with additional Medicaid funding to finance Mi Salud (the state-run insurance program) at 100
percent Federal Medical Assistance Percentages (FMAP) for two years, this is not a long term or
sustainable solution for Puerto Rico’s healthcare crisis. It is important to provide fair treatment to the
residents of Puerto Rico, to ensure the stability of the Island’s healthcare system, and to avoid further
outmigration. Currently, over 40% of the residents of Puerto Rico live under the federal poverty line
and more than 45% of Puerto Ricans received their health coverage through the Commonwealth’s Mi
Salud, a higher proportion than the 50 states and D.C.

• Amend federal law so that Medicare beneficiaries in Puerto Rico are automatically enrolled in
Medicare Part B with the option to opt out of coverage, the same way their counterparts in every state
and other territory are treated.

• Provide fair and equitable treatment to residents of Puerto Rico in all Medicare programs. Residents
of Puerto Rico pay the same level of Medicare taxes as mainland residents, but the Island receives
substantially lower payments in Medicare programs.

3. Tax Provisions to Promote Economic Development

• Recommend that Congress explore ways to minimize the challenges and maximize the opportunities
of extending an Earned Income Tax Credit to residents of Puerto Rico.

4. Infrastructure, Housing, and Transportation

• Remove regulatory burden inhibiting cargo commerce between Puerto Rico, the mainland, and
international markets to establish Puerto Rico as a regional logistics hub for air cargo by supporting
waivers for the Century of Aviation Reauthorization Act. Current law prohibits foreign civil aircraft
from exchanging cargo in the United States unless the aircraft is specifically authorized to do so or the
exchange occurs in Alaska. This change would apply air cargo regulation to Puerto Rico in the same
way that it applies to Alaska, thus allowing foreign civil aircraft to stop in Puerto Rico and exchange
cargo with other air carriers.

• Eliminate the Electronic Export Information filing requirement for goods shipped between the mainland
and Puerto Rico.

• Direct relevant agencies to support bankable infrastructure projects through reduced red tape,
targeted investments, and increased access to credit e.g. supporting monetization of toll credits, and
to keep Puerto Rico top-of-mind for infrastructure funding and improvements.
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 • Allow authorities to use disaster relief funds to cover land surveys, land titles, and
any other taxes or fees associated with property transfer.

• Encourage the U.S. Army Corps of Engineers and ENLACE to finalize the Project
Partnership Agreement for the Caño Martín Peña project.

5. Benefits Reform

• Extend the full federal Child Tax Credit to residents of Puerto Rico to allow otherwise
eligible families in Puerto Rico with one child or two children to claim the additional
child tax credit. This legislative change will provide the same treatment to families
in Puerto Rico with one child or two children that is currently provided to Island
families with three or more children and to families across the 50 states and the
District of Columbia. The Congressional Task Force Report includes estimates claiming
that this proposal could benefit about 355,000 newly-eligible families and 404,000
newly-eligible children in Puerto Rico, with an average credit for all Puerto Rico
families of $770, which will help reduce child poverty on the Island.

• Work with the Government of Puerto Rico to institute a work requirement for able-
bodied participants aged 18-59 to receive the Nutritional Assistance Program (NAP),
which is Puerto Rico’s largest welfare program. This work requirement should be
established in accordance with the Commonwealth Fiscal Plan. In general, working-
age Supplemental Nutrition Assistance Program beneficiaries on the mainland must
register for work, cannot turn down a job if offered, and may be required by the state
to attend education or work training classes.

• Direct the Health Resources and Services Administration to utilize the Puerto Rico
Community Survey when allocating funds to Puerto Rico under the Maternal, Infant,
and Early Childhood Home Visiting Program.

6. Education and Employment

• Ask the Department of Labor to partner with the Commonwealth to enable

the expansion of apprenticeship programs to link education with marketable skills
and employment in order to ensure the workforce is prepared for the jobs of the
future.

• Encourage Department of Homeland Security to carve out a lower investment floor

for EB-5 visas relative to states to tailor visa programs to Puerto Rico’s needs.

• Encourage the National Science Foundation to collaborate with all possible

stakeholders to avoid funding loss for the Arecibo Observatory and to increase
science and education-focused operations.

7. Manufacturing
• Establish a Manufacturing USA institute in Puerto Rico to equip Puerto Rico with
the partnerships and resources necessary to continue developing as a world-
renowned pharmaceutical manufacturing center and to become a global biotech
innovation hub.

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8. Small Business

• Provide greater flexibility for Small Business Administration Programs to help Puerto Rico’s small
business owners during the prolonged economic crisis. This includes many of the recommendations
included in the Congressional Task Force Report: enact legislation to increase the guaranty rate and
require a separate subsidy calculation for 7(a) loans made in Puerto Rico; consider reducing the small
business contribution and increasing the Certified Development Companies (CDC) contribution; consider
increasing that aggregate limit for the Microloan program in the case of intermediaries located in Puerto
Rico; authorize an intermediary in the Microloan program to use more than 25 percent of its SBA-
provided technical assistance grants on pre-loan assistance if the intermediary provides at least 25
percent of its loans to small firms in Puerto Rico; establish a contracting preference for small businesses
in Puerto Rico with respect to federal contracts performed in Puerto Rico; and require the SBA to make
an annual FAST partnership grant to a Puerto Rico grantee, and to waive the local matching requirement.

9. Tourism

• Request that the Secretary of Commerce appoint at least one member who has special expertise on
tourism in Puerto Rico to the United States Travel and Tourism Advisory Board.

10. Financial Institutions

• Request that the Community Development Financial Institutions Fund website update its maps to
represent visually that Puerto Rico is eligible for its programs, encourage it to increase the number of
Community Development Financial Institutions in Puerto Rico, ask that it assist FDIC-insured banks in
Puerto Rico regarding the Bank Enterprise Award program, and encourage it to appoint an individual
with experience and expertise in Puerto Rico to the Community Development Advisory Board.

11. Statistics

• Direct the Census Bureau, Bureau of Labor Statistics, Bureau of Justice Statistics, Bureau of Economic
Analysis, National Center for Education Statistics, National Center for Health Statistics, and Substance
Abuse and Mental Health Services Administration to include Puerto Rico in their respective programs
and to collect and publish data for Puerto Rico on the same basis as the states to the greatest extent
possible.

• Assign funds to the Census Bureau to perform a Special Census of Governments for Puerto Rico for
2017, that would provide much needed up-to-date comparable financial information for credit markets.

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SUPPORT FOR PENDING LEGISLATION
The FOMB supports the following non-exhaustive list of pending legislation:

•H.R. 225 – Puerto Rico Small Business Assistance Act of 2019

•H.R. 302 – Child Tax Credit Equity for Puerto Rico Act of 2019
•H.R. 683 – Puerto Rico Recovery Accuracy in Disclosures Act of 2019
•H.R. 947 – Supplemental Security Income Equality Act
•H.R. 1405 – Puerto Rico Data Collection Equality Act
•H.R. 2172 – To amend title XIX of the Social Security Act to remove the matching requirement for a
territory to use specially allocated Federal funds for Medicare covered part D drugs for
low-income individuals.
•H.R. 2310 – Fairness in Medicare Part B Enrollment Act of 2019
•H.R. 2357 – Puerto Rico Air Cargo Industry Empowerment Act
•H.R. 2649 – Tax Equity and Prosperity for Puerto Rican Families Act of 2019
•H.R. 3300 – Economic Mobility Act of 2019
•H.R. 3307 – To amend the Internal Revenue Code of 1986 to provide for payments to possessions of
the United States related to the application of the earned income tax credit in such
possessions.
•H.R. 3371 – Puerto Rico Health Care Fairness, Accountability, and Beneficiary Access Act of 2019
•H.R. 3372 – Small Business Contracting Credit Act of 2019
•H.R. 3631 – Territories Health Care Improvement Act

FOMB looks forward to working with the Federal Government on the aforementioned areas.

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