Frequently asked questions
Frequently Asked Questions about PROMESA and the Fiscal Oversight and Management Board for Puerto Rico
The answers in this FAQ attempt to summarize the law and state it in understandable terms for non-lawyers. To the extent the PROMESA statute differs from any answers, the statute governs.
- The Puerto Rico Oversight, Management, and Economic Stability Act, (PROMESA) was signed into law by President Barack Obama on June 30, 2016, to allow Puerto Rico to restructure its debt and achieve fiscal responsibility.
- PROMESA established the Financial Oversight and Management Board for Puerto Rico to provide a method for a covered territory to achieve fiscal responsibility and access to the capital markets (PROMESA, Sec. 101 (a)).
- Before PROMESA, Puerto Rico faced an unsustainable burden of more than $72 billion in debt and more than $55 billion in unfunded pension liabilities with no legal way to restructure the liabilities or reduce debt payments. Puerto Rico Governor Alejandro García Padilla had declared the debt could not be paid.
- Puerto Rico’s bonds were issued by more than a dozen public entities. The borrowers range from the central government to public utilities.
PROMESA provides two mechanisms for restructuring this debt.
- One set of procedures, PROMESA’s Title III, follows roughly the U.S. bankruptcy law. Puerto Rico’s creditors are separated into groups based on the different legal rights of their claims, such as the kind of bonds they own or other claims, such as pensions. The Oversight Board negotiates plans of adjustments to lower Puerto Rico’s debt to sustainable levels, subject to a confirmation process by the federal court. Some creditor groups might reject the plan, but once the court confirms the plan it becomes binding on all groups, even those who rejected it.
- The other mechanism, PROMESA’s Title VI, requires that all groups of creditors accept the plan before the court can confirm it, and is primarily aimed at financial debt, not pensions or other types of claims.
PROMESA also requires the Government of Puerto Rico and the Oversight Board to develop a fiscal plan that provides a method to achieve fiscal responsibility and access to the capital markets. The Fiscal Plan provides estimates of revenues and expenditures, ensures the funding of essential public services, provides adequate funding for public pension systems, provides for the elimination of structural deficits through efficiency measures, and provides for capital expenditures and investments necessary to promote economic growth, among other requirements.
- The Oversight Board is an entity within the Puerto Rico Government (PROMESA, Sec. 5 (19) (B) and Sec. 101 (C) (1)).
- The seven members of the Oversight Board are volunteers. They do not receive pay or other compensation (PROMESA, Sec. 101 (g)).
- All seven members are appointed by the President of the United States. Six of the members are selected from lists provided to the President by the majority and the minority leaders in the U.S. Senate and House of Representatives. One member is appointed at the President’s sole discretion. The members serve a three-year term, and thereafter until replaced by newly appointed members. (PROMESA, Sec. 101 (e) (2)).
- The Governor of Puerto Rico, or the Governor’s designee, is an ex officio member of the Oversight Board without voting rights. (PROMESA, Sec. 101 (e) (3)).
- PROMESA gives the Oversight Board two mandates: To help Puerto Rico achieve fiscal responsibility with pro-growth fiscal reforms and renew access to capital markets. (PROMESA, Sec. 101 (a)).
- Access to capital markets requires debt restructurings because the market will not buy new debt of Puerto Rico before it can handle its existing debt. The Oversight Board represents the Puerto Rico Government entities having debt in the debt restructuring process.
- The Oversight Board is an independent entity within the Puerto Rico Government, not an agency, department, establishment, or instrumentality of the federal government (PROMESA, Sec. 101 (c)).
- Neither the Governor nor the Legislature may exercise any control, supervision, oversight, or review over the Oversight Board or its activities (PROMESA, Sec. 108).
- No. Congress made the Oversight Board an entity within the Commonwealth government. The Oversight Board is granted certain powers that otherwise would be exercised by the Governor and Legislature. These powers primarily deal with fiscal plans, budgets, debt restructurings, and policies, rules, laws, and orders impacting the purposes of the statute, PROMESA.
The Oversight Board may also submit recommendations to the Governor or the Legislature on actions the government may take to ensure compliance with the Fiscal Plan, or to otherwise promote financial stability, economic growth, and the efficient delivery of government services (PROMESA, Sec. 205). If a recommendation is not accepted, the Oversight Board may include it in the Certified Fiscal Plan.
- The Oversight Board will terminate when Puerto Rico has adequate access to short-term and long-term credit markets at reasonable interest rates to meet the borrowing needs of the Government, which will only be possible once the Commonwealth is able to restructure all its debt.
- In addition, Puerto Rico must balance its budget for at least four consecutive fiscal years in accordance with modified accrual accounting standards (PROMESA, Sec. 209) before the Oversight Board terminates. A balanced budget includes payments on the restructured debt.
- No. The members of the Oversight Board serve without pay. The members may receive reimbursement for reasonable and necessary expenses incurred, such as travel to Puerto Rico. (PROMESA, Sec. 101 (g)).
- Members of the Oversight Board provide financial disclosures that are made public.
- The Oversight Board itself has rigorous financial disclosure requirements in place for the board members and senior executive staff to prevent any potential conflicts of interest. Those financial disclosures are public on the Oversight Board’s website. The Oversight Board has an independent Ethics Advisor to handle financial disclosure, conflicts of interest, code of conduct and related ethics issues that may arise from time to time.
- Further, the Oversight Board has a code of conduct and a strong Third-Party Anti-Lobbying/Anti-Influence Policy to ensure that that no third party exerts any influence on board members, executives, and staff members. For more information, please visit the ethics web page.
- Independent Boards that oversee fiscal matters have been installed by states or the federal government in many places from Detroit to Washington, D.C. with various levels of authority and control.
- Fiscal boards of many different types have been around since the late 19th century and growing in number since the Great Depression of the 1930s. For the most part, previous fiscal boards were installed in U.S. cities in financial distress. Detroit, for example, has had two different fiscal boards imposed by the state since 2013.
- One of the most well-known fiscal boards is the New York State Financial Control Board, created in 1975 by New York State after a financial crisis developed in New York City. Although its control over the city’s budget ended in 1986, the entity continues to monitor its finances.
- In Washington D.C., the federal government enacted a law creating the District of Columbia Financial Responsibility and Management Assistance Authority, which operated from 1995 to 2001.
- The Oversight Board retained experts, including accountants, to investigate Puerto Rico’s debt. In August 2018, the Oversight Board presented a more than a 600-page investigative report about the debt and the factors that contributed to Puerto Rico’s fiscal crisis, the result of an independent investigation by the law firm, Kobre & Kim LLC.
- The report investigates Puerto Rico’s about $72 billion in debt and about $55 billion in pension liabilities piled up by more than 90 entities, including the Commonwealth’s government and its instrumentalities, going back to 2006. It investigates how much debt was issued and the use of the proceeds. It digs deep into debt issuance and selling practices; the range of debt instruments; how Puerto Rico’s debt practices compare to those of states and large municipal jurisdictions; and how it contributed to Puerto Rico’s structural budget deficit.
- The independent investigator reviewed approximately 260,800 documents consisting of approximately 2.7 million pages and interviewed 120 witnesses, including former and current senior government officers, underwriters, rating agencies, and outside professionals and advisors. It identified potential recoveries.
No. The Oversight Board can commence Title III and Title VI cases under PROMESA which can result in the discharge of debt on terms similar to the terms of Bankruptcy Code chapter 9 for municipalities in the United States. The goal of the restructurings is to lower the debt, and debt payments, to sustainable levels.
PROMESA provides two main procedures to restructure Puerto Rico’s debt:
- Title III follows roughly the U.S. bankruptcy law. The Oversight Board negotiates plans of adjustments approved by a federal court that is applied to all claims, including claims held by non-consenting creditors.
- Title VI restructuring plans require creditor consent and are subject to court approval.
The Oversight Board has already used both procedures. For details on the debt restructuring, please visit the FOMB’s Debt page.
- PROMESA assigns the Oversight Board the statutory mission to restore fiscal responsibility and market access. Fiscal responsibility is not austerity. Fiscal responsibility is about prioritizing investment of taxpayer money. The Certified Fiscal Plan for Puerto Rico that the Government and the Oversight Board created lays out the steps necessary for the level of public spending to be compatible with a growing and sustainable economy.
- The Certified Fiscal Plan ensures adequate funding for public services the people of Puerto Rico need and deserve while maintaining fiscal balance. For example, the Fiscal Plan ensures that government expenditures per capita for social purposes and education will increase.
- The Certified Fiscal Plan includes the consolidation of over 110 government agencies to 49 agency groupings and independent agencies to eliminate competing efforts of multiple agencies and adjust for a declining population. Most right sizing measures are aimed at back office, procurement, and other administrative staff.
- Further, the Certified Fiscal Plan includes structural reforms that would transform Puerto Rico’s education system, transform its energy supply, make it easier to invest, and provide incentives to lift Puerto Rico’s underground economy above ground.
- The result of rightsizing the government is a focus on what is important, what services are more important than others, what investments need to be made today to build our tomorrow.
- PROMESA does not make the Oversight Board a legislature but does empower it to formulate and certify budgets as if approved by the Governor and Legislature.
- PROMESA mandates that the Governor must submit any new law, executive order, joint resolution, rule, or regulation to the Oversight Board for review. The Governor must include a formal estimate of the impact, if any, that the new law will have on Government expenditures and revenues. The Government must also provide the Oversight Board with a certification concerning the impact of the new law on the Certified Fiscal Plan for Puerto Rico (PROMESA, Sec. 204(a)).
- The Governor must submit the new law, along with the formal estimate and the certification, to the Oversight Board within seven business days of enacting any law.
- If the Governor fails to submit a compliant formal estimate and certification, the Oversight Board can take legal action to nullify or cease implementation of the law to ensure that the Government remains in compliance with the Certified Fiscal Plan and that the law does not impair or defeat PROMESA’s purposes.
- If the Oversight Board determines a law, policy, rule, or resolution is significantly inconsistent with the Fiscal Plan and therefore would impair or defeat PROMESA’s purposes and provides notice of its determination, the Governor and Legislature may not enact or implement the law, policy, rule, or resolution.
- The Certified Fiscal Plan is the road map for Puerto Rico’s recovery and prosperity. It outlines necessary government action to improve fiscal responsibility and foster economic growth.
- PROMESA mandates a Fiscal Plan that provides a method to achieve fiscal responsibility and access to the capital markets (PROMESA, Sec. 201). The Fiscal Plan provides an estimate of the Puerto Rico Government’s revenue and expenditure over at least five years, and must meet several criteria outlined in PROMESA, including the elimination of budget deficits; providing adequate funding of pensions; ensuring the funding of essential public services; and improving fiscal governance, accountability, and controls.
- For the Fiscal Plan for the respective covered entities, please visit the Certified Fiscal Plans page.
- The Fiscal Plan is a living document that changes with Puerto Rico’s economic reality. It is updated at least annually to reflect Puerto Rico’s reality, the latest developments, and current fiscal and economic data.
- The Government submits a proposed Fiscal Plan to the Oversight Board and the Oversight Board must certify that the proposal satisfies the requirements under PROMESA, or if the Oversight Board determines the Government’s proposal does not satisfy the requirements under PROMESA, it will send the Government a notice of violation with recommendations for revisions and the Government may submit a revised Fiscal Plan.
- Should the Oversight Board determine the Government’s revised Fiscal Plan does not satisfy the requirements under PROMESA, the Oversight Board is required to develop and submit to the Governor and the Legislature its own Fiscal Plan that it certifies, and that is deemed approved by the Governor and the Legislature.
The process to create an annual budget for Puerto Rico includes the Governor, the Legislature, and the Oversight Board. Under section 202, PROMESA mandates that the Puerto Rico government budget must comply with the Fiscal Plan.
To ensure compliance, the process to create a budget includes several steps:
- The Oversight Board provides the Governor and Legislature a forecast of revenues for the coming fiscal year for use by the Governor in developing the budget (PROMESA, Sec. 202 (b)).
- Then the Governor submits a proposed budget for the Commonwealth to the Oversight Board. The Oversight Board then determines whether the proposed budget is compliant with the Certified Fiscal Plan as mandated by PROMESA.
- If the Oversight Board determines the budget is compliant with the Certified Fiscal Plan, the Oversight Board will submit the budget to the Legislature.
- If the Oversight Board determines that the budget is not compliant with the Certified Fiscal Plan, the Oversight Board sends the Governor a notice of violation that includes a description of any necessary changes and the Governor may submit a revised budget proposal.
- If Governor fails to develop a budget that the Oversight Board determines is compliant with the Certified Fiscal Plan following the notice of violation, the Oversight Board develops and submits a revised compliant budget to the Governor and the Legislature.
- Next, the Legislature submits the budget it adopted to the Oversight Board, and the Oversight Board then determines whether the budget adopted by the Legislature is compliant with the Certified Fiscal Plan.
- If the Oversight Board determines that the adopted budget is compliant with the Certified Fiscal Plan, the Oversight Board will issue a compliance certification and the budget will be enacted.
- If the Oversight Board determines that the adopted budget is not compliant with the Certified Fiscal Plan, the Oversight Board sends the Legislature a notice of violation that includes a description of any necessary changes and the Legislature may submit a revised budget proposal.
- If Legislature fails to develop a budget that the Oversight Board determines is compliant with the Certified Fiscal Plan following the notice of violation, the Oversight Board develops a compliant budget and submits it to the Governor and the Legislature.
If the Governor and the Legislature fail to develop and approve a budget that is compliant with the Certified Fiscal Plan by the day before the new fiscal year begins, the Oversight Board submits a budget to the Governor and Legislature that the Oversight Board certifies as compliant with the Certified Fiscal Plan and that budget is full force and effect on the first day of the fiscal year. The statute provides the Governor and Legislature are deemed to approve that budget.
A covered entity is any instrumentality designated by the Oversight Board to be subject to the requirements of PROMESA. (PROMESA, Sec. 5 (7)).
The covered entities currently required to submit a Fiscal Plan and budget are:
- Commonwealth of Puerto Rico
- Puerto Rico Sales Tax Financing Corporation (COFINA)
- Puerto Rico Electric Power Authority (PREPA)
- Puerto Rico Aqueduct and Sewer Authority (PRASA)
- Puerto Rico Highway and Transportation Authority (HTA)
- University of Puerto Rico (UPR)
- Puerto Rico Government Developing Bank
- Public Corporation for the Supervision and Insurance of Cooperatives (COSSEC)
- Municipal Revenue Collection Center (CRIM)
For the Budgets for the respective covered entities, please visit the Certified Budgets page.