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 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, the Oversight Board accepted the enactment of Act 70-2023.
Act 60-2021 provides a mechanism to give tax incentives to certain medical specialists. During its review of the new law, the Oversight Board informed AAFAF it found the law inconsistent with the Certified Fiscal Plan for the Commonwealth. On June 16, 2022, the Oversight Board sent a letter to AAFAF regarding the law stating, in part: “given the Government’s clear intent to implement the Act despite our objections, the Oversight Board has reduced the FY2023 Commonwealth budget by $47 million to reflect the lost revenues from Act 60.”
On October 21, 2022, the Oversight Board sent its most recent letter to AAFAF regarding Act 60, requesting the Government submit to the Oversight Board the proposed administrative guidance regarding “binding limitations on the number of [tax incentive] decrees which can be granted” to prevent “substantial annual risks to the [certified 2022 Commonwealth] Fiscal Plan.
Act 67-2022 seeks to create the Roberto Clemente Sports District and a related District Fund. AAFAF, on behalf of the Governor, submitted an estimate and certification asserting that the law is revenue-neutral—citing funding from federal allocations and private donations. After reviewing the submission, on September 1, the Oversight Board sent AAFAF a letter requesting additional information about the proposed project. The Oversight Board and AAFAF continue to correspond regarding the requested information and the proposed project.
Act 136-2020 seeks to increase the base salary for public sector nurses and mandate that all eligible nursing personnel be compensated in accordance with a new salary scale. In its July 6, 2022 letter, the Oversight Board noted that despite the appearance of a potential six-month funding gap, the Oversight Board understood that “sufficient funds were included in the FY2023 Commonwealth budget to cover the salary increases established in Act 136 during the six-month period prior to the inception of the [Uniform Remuneration Plan],” which would provide funding beginning on January 1, 2023.
Joint Resolution 30-2021 aims to establish an emergency exception mechanism in accordance with the Puerto Rico Tax Incentives Code to grant incentives to medical specialists or subspecialists to address medical emergencies in Puerto Rico’s public health centers. After reviewing the Governor’s Section 204(a) submission regarding the resolution, on July 27, 2022, the Oversight Board sent AAFAF a letter “direct[ing] the Governor pursuant to PROMESA Section 204(a)(4) to provide a complete formal estimate and an updated certification.”
Act 52-2022 modifies the tax framework for non-Puerto Rico entities that purchase products manufactured on the Island. Following close collaboration between the Oversight Board and Hacienda, the Oversight Board and the Government reached agreement “[t]o manage [the risk of a negative impact on Commonwealth revenues], and to ensure that Act 52 is revenue neutral.” The Oversight Board’s most recent letter responds to an August 25, 2022 letter from La Fortaleza confirming the Government will implement the provisions enumerated in the Oversight Board’s August 18 letter.
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 819 seeks to reformulate the distribution and use of the Municipal Improvement Fund (MIF). Distributions of this fund among municipalities are currently handled administratively by legislators. The bill proposes to change that model into one in which 50% of the MIF is distributed equally among municipalities, with the other 50% distributed proportionally according to population, and contingent on municipalities complying with a Participatory Budget Program (PBP). The Oversight Board concluded that, as drafted, SB 819 is inconsistent with the certified 2022 Commonwealth Fiscal Plan because the ambiguities in SB 819, particularly concerning the PBP, undermine fiscal responsibility.
Senate Joint Resolution 292, among other things, orders AAFAF to identify funds from the American Rescue Plan Act of 2021 and assign $1 million to the Puerto Rico Department of Health (PRDOH) to conduct a study on the implementation of a universal health program in Puerto Rico. Similarly, Senate Joint Resolution 296 directs the Office of Management and Budget and Hacienda to allocate $1 million from the General Fund to the PRDOH to achieve the same end. The Oversight Board’s July 26, 2022 letter explains its conclusion that the bills are inconsistent with the certified Commonwealth Fiscal Plan because they propose to decrease revenues or increase expenditures without offsetting savings or providing new revenues.
Senate Bill 894 seeks to establish a base salary for social work professionals in both the public and private sectors. The bill would set base salaries at $3,989 per month or $20.77 per hour. The Oversight Board’s September 16, 2022 letter concludes that the bill is inconsistent with the certified 2022 Fiscal Plan by selectively increasing the income of certain public employees in contravention of the comprehensive Civil Service Reform initiative.
Senate Bill 903 seeks to, among other things, make an initial allocation of $100 million to the Municipal Equalization Fund, and provide recurrent funding through the transfer of 20% of the excise tax collections on crude oil and other petroleum-based products. In its August 25, 2022 letter, the Oversight Board explains its determination that the bill is inconsistent with the certified 2022 Commonwealth Fiscal Plan because it “would increase spending without providing offsetting savings or appropriate alternative revenues to address the proposed transfers to the municipalities.” The Oversight Board’s letter makes it clear that while the Oversight Board “understands the important services provided by municipalities, their funding must be achieved in a responsible manner and in compliance with the Fiscal Plan.”
Senate Joint Resolution 310 seeks to allocate $20 million from the General Budget for Fiscal Year 2022-2023 to provide funds to semi-public, public, and private entities and institutions related to social welfare, health, education, and culture programs in compliance with Act 20-2015. The Oversight Board’s July 26, 2022 letter conveyed that the Oversight Board “does not find SJR 310 to be inconsistent with the Fiscal Plan or otherwise violate PROMESA.”
Legislative Review: Bills of interest
The Oversight Board also at times comments on certain bills that may be inconsistent with a fiscal plan or PROMESA that are not submitted for review under PROMESA Section 204(a)(6).
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 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.
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. The 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.
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.
Senate Bill 728 proposes several measures for PREPA’s collection of delinquent accounts and mandated use of the proceeds, primarily by prioritizing the collection of outstanding accounts payable owed to PREPA by public entities. On October 7, 2022, the Oversight Board sent a letter to the Governor and Legislative leadership sharing its concerns that the bill was inconsistent with the Certified Commonwealth and PREPA Fiscal Plans and would impair and/or defeat PROMESA’s purposes.
House Joint Resolution 323 proposes to order the Puerto Rico Department of Education (“PRDE”) to carry out a Request for Proposals process to purchase certain air purifiers, which would be used to implement an air and surface disinfection system in all Puerto Rico public schools. On July 18, 2022, the Oversight Board sent a letter to the Governor and Legislative leadership informing them that “HJR 323 is likely inconsistent with the Fiscal Plan.” The Governor subsequently vetoed the measure.
House Bill 1383 would establish mandatory conditions on the restructuring of PREPA debt, among them that consumer rates never rise above 20¢/kWh and that PREPA’s bondholders receive no more than 25% recovery. The Oversight Board’s letter to the Governor and Legislative leadership explains that HB 1383 “negatively impacts the Oversight Board’s exclusive authority under PROMESA to file a plan of adjustment” and states that “the Oversight Board would likely determine that it impairs or defeats the purposes of PROMESA.”
House Bill 1103 seeks to reinstate the Puerto Rico Tourism Company as a public corporation of the Commonwealth of Puerto Rico attached to the Department of Economic Development and Commerce. The Oversight Board’s June 27, 2022 letter explains that the bill is inconsistent with the certified 2022 Commonwealth Fiscal Plan and its implementation would be a violation of PROMESA.
