Legislative Review Process
The legislative review process of the Financial Oversight and Management Board for Puerto Rico is an important component of its mission to help Puerto Rico achieve and sustain fiscal responsibility.
PROMESA requires the Governor to submit each enacted law to the Oversight Board with a formal estimate of the impact, if any, that the law will have on expenditures and revenues, as well as a certification finding that the law is or is not significantly inconsistent with the applicable certified fiscal plan. PROMESA also allows the Legislature to seek a non-binding preliminary review from the Oversight Board regarding pending legislation to determine whether legislative bills are consistent with the applicable certified fiscal plan.
Legislative Review: Acts
Section 204(a) of PROMESA requires the Governor of Puerto Rico to submit any new law to the Oversight Board for review within seven business days of the law’s enactment.
The Governor’s submission must include a formal estimate of the impact, if any, that the new law will have on expenditures and revenues. This estimate must be prepared by an appropriate entity of the Government of Puerto Rico with expertise in budgets and financial management.
The same government entity must also certify whether the law under review is or is not significantly inconsistent with the applicable certified fiscal plan. PROMESA Section 204(a)(2) outlines this process in detail.
Act 119 amends Act 26-2017 to increase the rate at which public employees accumulate vacation days from 1.25 to 2 days a month, resulting in 24 vacation days a year compared to the current 15.
A January 17, 2024 letter from the Oversight Board noted that the annual cost of Act 119 is estimated at $58.3 million. However, the Government has not identified how it would pay for this new and unbudgeted expense. As a result, the Oversight Board determined that Act 119 is significantly inconsistent with the Commonwealth Fiscal Plan, violates PROMESA, and cannot be implemented.
Act 5 amends Act 60-2019, known as the “Puerto Rico Incentives Code,” to expand eligibility for certain green energy tax incentives, among other tax credits.
A January 11, 2024 letter from the Oversight Board noted that the Government intends to propose regulations to implement the provisions of Act 5 related specifically to the green tax incentives. The Oversight Board does not expect such regulations to be inconsistent with the Commonwealth Fiscal Plan. Such regulations must be submitted to the Oversight Board for review and approval before promulgation and implementation.
Act 97 exempts from income taxes the salary increase payments made retroactively to civilian employees of the Puerto Rico Police Bureau granted pursuant to Act 164-2003.
In a letter dated December 26, 2023, the Oversight Board said it is reviewing the Governor’s PROMESA § 204(a) submission and is arranging meetings with interested parties and relevant government entities to discuss Act 97 and the retroactive payments. While the discussions are ongoing, the Oversight Board noted that the Government should not implement Act 97.
Act 70-2023 amends four existing laws to help the Puerto Rico and Caribbean Cardiovascular Center (PRCCC) recruit and retain certain healthcare professionals. The main amendment provides special tax incentives to cardiovascular surgeons, with the stated aim of attracting more of these professionals to the PRCCC.
In a November 13, 2023 letter the Oversight Board stated that, even though Government’s submitted materials did not comply with PROMESA section 204(a)(2), the Government’s explanations and justifications for the Act’s implementation are reasonable. Accordingly, and on a non-precedential basis, the Oversight Board accepted the enactment of Act 70-2023.
A November 27, 2023 letter from the Oversight Board provided an update of the Government and the Oversight Board’s joint effort to partially implement the early retirement program contemplated by Act 80-2020. The U.S. District Court for the District of Puerto Rico ordered that Act 80 can only be implemented when an agreement is reached on a program that will achieve savings and essential services will continue.
The Oversight Board and Government have agreed to permanently eliminate only non-essential positions so that government services will not be affected, and savings will be achieved. The Oversight Board and the Government continue to work together on a final stipulation so that the partial implementation of Act 80 can occur in the spring of 2024.
Other Acts
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Legislative Review: Bills
The Puerto Rico Legislature can also seek preliminary review from the Oversight Board regarding pending legislation and its consistency with the applicable certified fiscal plan, as outlined in PROMESA Section 204(a)(6).
During the review process, the Oversight Board determines whether the legislation, as proposed, is or is not consistent with the applicable certified fiscal plan. If it finds the proposed law is not consistent with the applicable certified fiscal plan, or determines the law would violate other provisions of PROMESA, the Oversight Board will explain its determination to the requesting legislator and, where appropriate, offer to collaborate with the legislator on reforming the measure to make it consistent with the certified fiscal plan.
Recognizing the review of pending legislation is preliminary, and bills may change prior to passage, PROMESA provides that preliminary review determinations are not binding and, if bills eventually are enacted into law, the Governor is still required to comply with the process for submitting newly enacted laws for review discussed above and in PROMESA Section 204(a)(1)-(5).
Senate Bill 1298 (SB 1298), among other things, seeks to implement a tax reform for individual taxpayers and corporations. A January 16, 2024, letter from the Oversight Board noted that the Bill is pending in the Legislative Assembly and has not yet become law.
The Board’s preliminary review has found the Bill, as drafted, is inconsistent with the Commonwealth Fiscal Plan. SB 1298’s total fiscal impact is $819 million in fiscal year 2024 and $3 billion over five years. The Bill would threaten the Government’s fiscal stability and push the budget back into deficit. Hence, SB 1298 is significantly inconsistent with the Fiscal Plan, current fiscal year budget, and PROMESA.
The Legislature passed the Substitute Bill to House Bill 1839 (HB 1839), which seeks to implement one of the largest tax cuts in Puerto Rico’s recent history by adjusting individual income-tax brackets and reducing the corporate income-tax rate.
In a November 16, 2023 letter, the Oversight Board states that HB 1839 is not revenue neutral and will cause losses of $750 million for fiscal year 2024, and almost $3 billion over the next five years. As such, the Oversight Board states that HB 1839 is inconsistent with the Commonwealth Fiscal Plan, the fiscal year 2024 Budget and PROMESA, and urges the Governor not to sign it into law. The Oversight Board is working with the Government and the Legislature to provide potential one-time, non-recurring relief to individual income tax filers.
House Bill 1651 (HB 1651) seeks to repeal certain portions of Act 4-2017 and to reestablish many of the labor restrictions that had previously existed, as well as create new labor restrictions. These include eliminating reforms on vacation and sick days accrual and changing the probationary period and Christmas bonus eligibility for employees.
In a November 8, 2023 letter, the Oversight Board notes that HB 1651 is virtually identical to Act 41-2022, which was recently nullified under PROMESA by the United States District Court for the District of Puerto Rico. The Oversight Board also notes that HB 1651 is inconsistent with the Commonwealth Government’s Fiscal Plan because it would negatively impact Puerto Rico’s labor market. As such, the Oversight Board urged the Legislature to pause the legislative process until the economic analysis commissioned by the Governor and AAFAF is finalized, and all parties are able to have a full dialogue about the Bill’s impact.
The Legislature is currently evaluating at least four pieces of legislation, Senate Bills 776, 795, and 1383, and House Joint Resolution 574, that consider the partial or complete elimination of various oil and derivative excise taxes (commonly referred to as “la crudita”).
The Oversight Board reviewed and expressed specific concerns about Senate Bills 776 and 795 in its June 24, 2022, letter as part of the PROMESA process, stating that both bills are inconsistent with the Fiscal Plan and their approval would violate PROMESA.
The Oversight Board’s November 1, 2023 letter explains that it is currently reviewing Senate Bill 1383 and House Joint Resolution 574 and encourages the Legislature and Governor to consider the loss of revenues that eliminating taxes on fuel oil products would entail.
Other Bills
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