Municipal Secondary Market Disclosure Information Cover ... · population declined by 14.3%5 from 2010-17, while mainland grew by 6.3%) ... Selected historical economic data, CBO,

PO Box 42001 • San Juan, PR 00940-2001 • Telephone (787) 722-2525

Municipal Secondary Market Disclosure Information Cover Sheet Municipal Securities Rulemaking Board (MSRB)

Electronic Municipal Market Access System (EMMA)

Additional / Voluntary Event-Based Disclosure

THIS FILING RELATES TO ALL OR SEVERAL SECURITIES ISSUED BY THE ISSUER, OR ALL OR SEVERAL SECURITIES OF A SPECIFIC CREDITOR:

Issuer’s Name: Commonwealth of Puerto Rico (CW) ________

Other Obligated Person’s Name (if any):

Nine-digit CUSIP* number(s): 745145; 74514L

TYPE OF INFORMATION PROVIDED:

A. Amendment to Continuing Disclosure Undertaking

B. Change in Obligated Person

C. Notice to Investor Pursuant to Bond Documents

D. Communication from the Internal Revenue Service

E. Bid for Auction Rate and Other Securities

F. Capital or Other Financing Plan

G. Litigation / Enforcement Action

H. Change of Tender Agent. Remarketing Agent or Other On-going Party

I. Derivative or Other Similar Transaction

J. Other Event-Based Disclosures: Financial Oversight and Management Board for Puerto Rico Response to CW Fiscal Plan Critique dated December 8, 2020

I represent that I am authorized by the issuer, obligor or its agent to distribute this information publicly.

/s/ Manuel Gonzalez Del Toro Manuel Gonzalez Del Toro Puerto Rico Fiscal Agency and Financial Advisory Authority, as Fiscal Agent for the Commonwealth

Dated: December 12, 2020

Provided Pursuant to Court-Ordered Mediation / Subject to FRE 408 / Preliminary and Subject to Material Revision

Response to CW Fiscal Plan Critique December 8, 2020

Pre-Decisional | Privileged & Confidential Draft | Analysis Subject to Material Change 2


Executive Summary (1/9)

The Fiscal Plan is a roadmap for Puerto Rico to achieve fiscal sustainability, return to capital markets, and create the conditions

for economic growth

▪ Section 201(b) of PROMESA establishes 14 competing requirements for the Fiscal Plan, including to provide for service delivery and

investments in economic growth while also eliminating structural deficits and enabling sustainable debt service

▪ A balanced approach that is designed to achieve long-term economic sustainability benefits all stakeholders, including creditors

Since its inception, the Board’s actions have eliminated structural deficits while making investments to boost long-term economic

growth and revenues

▪ The Fiscal Plan requires a leaner, more efficient, and more responsive government, reducing the spend on government agencies over

FY18-23 to levels comparable with US mainland states

▪ The Fiscal Plan complements these expenditure reductions with a full set of structural economic reforms currently feasible1 to promote

growth via increased investment, jobs, and opportunity; if implemented fully and on time, these reforms are projected to increase

economic growth by 0.9% per year, generating incremental revenues that increase the surplus by $25B

▪ The Board’s actions to proactively manage government spending have resulted in surpluses of ~$8.3B in FY2018-2020, which have

flowed through to the Government’s cash position and therefore are a core element of the November proposal

While the creditors’ feedback is not 100% accurate, the Board is hopeful that some of the creditors’ perspectives on additional

revenues and growth materialize to help offset considerable downside risks balancing long-term structural deficits in the Fiscal

Plan

▪ The Board assumes some level of outperformance above Fiscal Plan projections; otherwise the Commonwealth cannot afford its existing

cost structure including the currently proposed debt service. Creditors receive part of that potential outperformance through the proposed

CVI

Gap/surplus before and after measures and structural reforms, $M

2,000

-8,000

-6,000

-4,000

4,000

0

-2,000

FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY39 FY49

Gap/surplus pre-measures/structural reforms3 Gap/surplus post-measures/structural reforms3Contractual debt service2

1. Given the current macro and political environment, 2. Excludes COFINA, 3. Includes payments under COFINA settlement




Puerto Rico has been in a structural economic and demographic decline for over a decade, which has been further exacerbated

by recent events; absent structural change, the economy will continue on the same negative trajectory

▪ The Fiscal Plan must confront the stark difference between the economic performance in Puerto Rico versus the US mainland over the

past decade; PR real GNP contracted ~20% between FY2007 and FY2019, a period in which the US mainland grew by 23%1

▪ This structural decline has been fueled by economic fundamentals that continue to exist today: extremely low labor participation (e.g.,

40% in PR versus 62% on the mainland), an environment that hinders business investment (e.g., Puerto Rico’s Ease of Doing Business

Ranking2 is 65 versus 6 for the U.S.; in government effectiveness Puerto Rico is ranked in the 45th percentile worldwide, while the

mainland U.S. is ranked in the 91st percentile); it has also led to consistent outmigration to faster-growing mainland states (e.g., PR

population declined by 14.3%5 from 2010-17, while mainland grew by 6.3%)

▪ Weak financial management also contributed to this economic decline, with regular overestimation of revenues, consistent underfunding

of pensions, overreliance on debt financing, and lack of audited financials; Puerto Rico faced consistent annual structural deficits prior to

the creation of PROMESA

▪ Since 2017, Puerto Rico has faced a frequency and scale of major crises not seen by any other US jurisdiction, including Island-wide

devastation from hurricanes, widespread civil unrest leading to the resignation of an elected Governor, thousands of earthquakes, and

now the COVID-19 pandemic and its impacts on the Island

▪ Just as Puerto Rico fared worse than the mainland after the Great Recession (4 years to recover vs. 2 years on mainland), the Island is

recovering more slowly from COVID-19 (Puerto Rico has recovered only 42% of the jobs lost in April, compared to 58% in the United

States, and mortgage delinquencies in Puerto Rico are spiking again)

▪ Regardless of short-term economic realities and volatility, these are the factors that are incorporated into the long-term FP projections

1. Selected historical economic data, CBO, 2. As of 2020, 3. As of 2019, 4. U.S. GDP per United States BEA. Puerto Rico GNP per Puerto Rico Planning Board 5. Corrected figure vs 15.3 in

previous draft

Real Growth in the Puerto Rican and US economies4, %

-1.20

-2.90

-3.80-3.60

-1.70

0.50

-0.10

-1.80-0.80

-1.60

-3.20

1.90

-2.50

2.601.60 2.20 1.80

2.503.10

1.70 2.30

1009082007 141311 12 15 16 2017

-0.10

Puerto Rico US

Structural deficits prior to PROMESA, $M

09 102007 08 141211 13 15 16

10,000

20176,000

7,000

8,000

9,000

Actual Net Revenue Budgeted Revenue

Revenue

Shortfall

Revenue Shortfall




Despite some progress, the Government has not fully implemented fiscal reforms

▪ Prior to the Board, the Government had already reduced its payroll, with government headcount dropping 30% between

2007 and 2017 and employees facing a series of pension cuts and pay freezes

▪ The Board, initially working with the Government, identified a comprehensive set of reforms to consolidate the unwieldy

number of government agencies, improve alignment of front-line workers with resident service delivery, and reduce back

office and procurement inefficiencies

▪ While individual leaders have made efforts, the Government has struggled to deliver impact: only 44 of 19 expected agency1

consolidations had occurred by December 2019, under-utilized facilities have not been consolidated, no civilianization has

occurred within PRPD, and centralized procurement is yet to be fully implemented

▪ Instead of reorganizing processes, the Government has relied on broad-based voluntary retirement incentives to pay

workers to leave, a blunt instrument that has diminished agency capacity to implement change

▪ Further, the Government struggles to attract and retain talent; salaries and benefits remain below mainland in certain areas

▪ The Board is committed to pushing for full implementation of the reform agenda, but must acknowledge that

recent experience suggests that efficiency and service delivery are at risk due to challenges in government

implementation

1311092007 08 14 201710 12 15 16

183 180 180 171150 149 147 137 133 132 129

Central Government employee headcount2, Thousands

4

19

3

12

TotalCompleted In progress Pending

Status of agency consolidations3, # of agencies

1 Certified Fiscal Plan 2020, 2. Government of PR Budget Office – excludes employees of instrumentalities, 3. FOMB consolidation review analysis 4. Corrected vs 6 in previous drafts to

reflect actual number of consolidations completed to date




Similarly, the Government has not implemented structural reforms in a timely and effective manner, therefore

impacting the surplus related to growth from these initiatives

▪ PRDE’s education strategic plan (now 2022-2027) has been delayed, which has postponed potential improvement in

student outcomes and the resulting impact on labor productivity

▪ The Government implemented the Earned Income Tax Credit (EITC) without a robust plan to raise awareness of its

functioning among the population; therefore, the expected impact on labor force participation has been muted

▪ There has been slow progress in most of Ease of Doing Business and human capital reforms (e.g. simplification of permits

licensing and tax regulation, strengthening of the Island’s workforce development programs), thereby minimizing

improvements in investment and labor force competitiveness

▪ Required regulation to enable energy reform initiatives was approved in 2019; however, implementation of the complete

transaction has been delayed

Moving forward, there continues to be implementation risk around structural reforms – thus putting at risk potential

future growth, future revenues and future surpluses that are premised upon successful reforms

0.7 1.47.2

0.3 24.7

FP 2019 PPPs/Energy reformEducation reform Ease of Doing

Business reform

Human capital &

welfare reform

FP 2020

34.2

Surplus effect of delayed implementation of structural reforms, $B, FP 2019 – FP 2020 comparison

SOURCE: 2020 Certified Fiscal Plan



General Fund Revenue, $B

1. Changed formatting vs previous version (which linked to October 2018 FP) | SOURCE: Fiscal Plans, Hacienda, CBO, states of California and Florida Department of Treasury

In the context of this uncertain environment, Fiscal Plans have included the best available data at time of publication and have not

consistently underestimated performance

▪ CBO projections: The 2020 Fiscal Plan included the CBO projections that were available at the time the plan was completed. The FOMB

will continue monitoring updates and will incorporate applicable updates in the next Fiscal Plan

▪ Disaster Relief Funding: The 2020 Fiscal Plan includes the full amount of Disaster Relief Funding estimated by FEMA, CDBG, and other

public and private sources, not just obligations or disbursements to date. The forecast already includes the amounts recently announced

by FEMA related to funding for PREPA & PRDE. The Board works closely with FEMA, HUD, and COR3 to regularly update these

projections – from overall funding amount to projected roll out.

▪ Revenues: Revenues have been both over- and under-estimated across Fiscal Plans, in large part due to several major shocks / crises

– In 2018 FP the underestimations were mainly due to DRF impact on revenues, which was updated in the following FPs (adding $3.6B

in incremental revenue through 2033)

– In 2019 FP the main variance was explained by corporate income tax. The surge seen in these receipts during FY19 was correlated

with an increase in payments from the top 30 taxpayers, who paid $450M more in CIT in TY2018 then TY2016

– The revenue forecast that was used for the FY20 planning and budget cycle was $10.4B; actuals under-performed that forecast by

~$600M total, though if adjusting for a one-time payment of ~$500M from a large multinational M&A transaction which was not

anticipated at the time of the forecast, the under-performance would have been ~$1.1B

– The 2020 Fiscal Plan update resulted in a new revenue trend that pushes out growth and revenue due to the recession in FY20 and

FY21 and delays in reform efforts. Note that while the circumstances are different, the changes in the CBO’s US Federal revenue

forecast show a similar trend over the next 10 years (reductions on average of ~7% vs 2019 forecast)

– In the short term, the Board anticipates a volatile year – current revenue outperformance suggests that the reduction relative to 2019

forecast may be less than the ~$1.2B forecast; this trend is consistent across the mainland with numerous states reporting revenue

collections ahead of forecast (e.g., California 22% ahead (forecast as of Jul-20); Florida 8% ahead (forecast as of Aug-20))


9.09.3

FY18 FY19 FY20

9.08.2111.4

9.3 8.510.4 11.0

9.010.7 10.4 9.6 9.8

FP Apr 19, 2018 FP Oct 23, 2018 FP May 9, 2019 FP May 27, 2020 ActualsFP Mar 2017




The changes to the Fiscal Plan economic projections in 2020 were the result of a variety of factors

▪ In line with annual update process, the 2020 Fiscal Plan included dozens of updates that serve as inputs to the Fiscal Plan

macroeconomic model, not just updates related to COVID-19 induced recession

▪ These factors include

▪ COVID-induced recession: The impact of COVID-19 on the global and local economy (and resulting COVID-19 related stimulus

funding) are incorporated as a two-year shock, which reduces the size of the economy. After these two years, the trends

otherwise prevalent in the economy are projected to continue, but on a smaller economic base

▪ Effect of delayed structural reform implementation: Based on numerous examples of delayed or no implementation of critical

structural reforms, the 2020 Fiscal Plan lowered the expected economic impact. Examples include slow or no implementation of

regulation simplification and streamlining of the process for paying taxes, delayed implementation of education strategic plan to

improve outcomes, as well as limited outreach and awareness program to maximize impact of EITC

▪ Slower federal FEMA and CDBG disaster relief spending: Based on changes in information regarding FEMA and CDBG roll out

(including, delays due to business restrictions during the lock-down), as well as new funding for earthquakes, a short-term delay

in DRF was incorporated and new funds were added. While the timing of spend changed, the overall amount did not change

materially, and the smoothing of these funds actually added to the surplus by countering lower growth in the out-years

▪ Delay in expenditure measures due to implementation challenges: Given persistent delays in the implementation of operational

changes, from delay in value-based reforms within the healthcare system to lack of agency consolidations and no centralization

of procurement, as well as agency needs to respond to the COVID-19 pandemic (e.g., implement remote learning, add hospital

capacity), the Fiscal Plan delayed most measures to 2022 (and reduced healthcare measures)

▪ Other information updates: There were significant changes made based on other new information, including Medicaid PMPM /

enrollment changes, new Medicaid federal funding, adjustments to account for changes in the FY2020 budget, etc.

SOURCE: 2019 Certified Fiscal Plan, 2020 Certified Fiscal Plan

FP 2019 COVID-19

2-year shock

0.8

-9.6

-27.9

Revenue actuals

-1.9

14.9

Long-term reset of

macro trajectory

Structural

reform delay

6.9

FEMA, CDBG

and other FF

-16.8

Other (e.g., Medicaid

enrollment, etc.)

Delay & reduction

in measures

FP 2020

11.4 -22.2

Change in surplus between 2019 FP and 2020 FP breakdown, $B




The Board is committed to updating future fiscal plans with the latest confirmed information available

▪ Each year, the Board conducts a comprehensive update of the fiscal plan projections, including changes to US government forecasts,

federal funding actuals/forecasts, PR government implementation progress, local revenue collections, etc.

▪ As a provisional update, in October the Board illustrated the impact of incorporating the September 2020 CBO projections for US GDP

(+$14B in additional surplus, improvement in cashflow); the Board expects additional updates from CBO before the next Fiscal Plan

▪ The Board – like all stakeholders – is monitoring current COVID trends with concern as increasing cases require policymakers, including the

Governor of Puerto Rico, to re-initiate closures and limitations of business activity

▪ The Board is tracking myriad federal government actions for potential inclusion in future fiscal plan(s); examples include additional federal

relief related to COVID recovery, changes to FEMA and/or CDBG funding, legislative changes to Medicaid funding, and any potential

change in the federal government’s current litigation position that it will not provide SSI, SNAP, and LIS benefits to the people of Puerto Rico

▪ The Board has actively sought to increase the profile of the pharmaceutical and medical device manufacturing sectors in Puerto Rico;

should those efforts gain meaningful traction (e.g., via federal legislation), the Board would incorporate these effects

▪ The Board closely tracks Puerto Rico government revenues and expenditures, and will update future plans with observed performance.

Underspend observed in FY20 may be due to challenges the government faced in functioning during COVID-19 lockdowns, and will be

monitored during FY21. FY21 Q1 revenue outperformance may not be indicative of the full year of expected performance, but to the extent

that the consumer-based economy is stronger than forecast, outperformance will be shared with creditors via the CVI.

Cash flow projection: Ending cash balance post-proposed debt service, $M

10,000

-20,000

-30,000

-40,000

-10,000

0

22 403125 484223FY21 24 26 3927 4728 29 4330 32 33 34 35 36 37 38 41 44 45 46 2049

Fiscal Plan Minimum cash balanceCBO Macro Update

SOURCE: CBO, FOMB – Presentation – 21st Public Board Meeting, Puerto Rico Office of the Commissioner of Financial Institutions

Even after considering the updated CBO projections, the fiscal projections result in material cash deficits starting in FY 2035

that will need to be addressed.




The Fiscal Plan has accounted for the unique

nature of Puerto Rico as it relates to debt

sustainability

▪ Several factors distinguish the Commonwealth

from mainland U.S. states, including:

– Puerto Rico has three and a half times more

child poverty rate than the average mainland

child poverty rate

– The island also has significantly lower GDP

per capita, as compared to the ten lowest-

producing states

▪ Given the stark differences between the

mainland U.S. states and the Commonwealth on

a variety of metrics, simply applying debt service

as a % of own-source revenue as the only metric

of sustainability would provide an incomplete

view

– Based on these factors, the Board

determined that $1.05bn was a sustainable

level of debt service, which also

corresponds to the average of the top-25

most indebted states

▪ As a result, the Board has taken a holistic

approach to assessing debt sustainability that

not only takes into account peer state

comparables, but also various economic metrics,

on-the-ground information, near-term and long-

term liquidity, and revenue / expense projections

1. US Census Bureau (2019), 2. Children’s Defense. 2018 Under 18 Poverty Rate, 3. Medicaid and CHIP Payment and Access Commission (MACPAC) (June 2019, p.77) Report to Congress

on Medicaid and CHIP, 4. GINI U.S. Census Bureau. 2019 data, 5. U.S. Energy Information Administration, 6. Nation’s Report Card, 7. U.S. figures per BLS. Puerto Rico figures per

Mercado Laboral, 8. See appendix for full list of sources,

Indicator8 Puerto Rico Mainland US

Poverty rate1, % of families under poverty line (2019) 39.5% 8.6%

Child poverty rate2, % under 18y.o. under poverty line (2014-2018) 56.8% 16.2%

GDP per capita, US$ 2019 22,972 65,118

Population on Medicaid3, % of population (2017) 46.9% 20.6%

GINI Index4, income distribution (2019) 0.55 0.48

Unemployment, Total unemployed as a % of the labor force (2020) 11.3% 6.9%

Cost of electricity per kWh5, Industrial rates cents/kWh (2020) 19.45 6.71

Average Grade 4 Mathematics Standardized Testing Score6, (2019) 185 249

Median household income1, US$ (2019) 20,474 65,712

Population with bachelor's degree or higher, % of total population,

percent of persons age 25 years+ (2014-2018)25.3% 31.5%

High school graduation rate, % of persons age 25 years+ (2014-

2018) 75.5% 87.7%

Population change over past ten years, growth rate as % (2010-

2019)-14.3% 6.3%

Years of consecutive economic recession, number of years (2019) 14 0

Mean years of schooling, education attainment for 25 years above

(2018)12.3 13.7

Life expectancy at birth, years (2017) 78.1 78.6

Number of patents per year, per 1,000 pop. (2015) 0.4400.009

Labor Force Participation Rate7, % (2020) 61.7%40.1%

Population on food stamps program, % of total population (2020) 43% 12%

Internet users, % of adult population with access (2017 PR, 2019 US) 70.4% 79.4%

Population with disability, % of total population (2014-2018) 12.6%21.4%




Under PROMESA, the Fiscal Plan requires a delicate balance between 14 competing priorities, not just one above

all others

The Fiscal Plan is a living document that is always updated to reflect the latest available information, including

additional revenues, actual performance, and implementation risks

▪ The recently announced disaster aid funds, and related expenses, are already incorporated in the Fiscal Plan

▪ Including federal funds not yet appropriated by Congress could put government services at risk if they don’t materialize

▪ Additional Federal Funds will also likely come with additional cost requirements

The projections must account for Puerto Rico’s long-term economic, fiscal, and political trends which have faced

considerable challenges over the past decade and continues to exhibit a negative outlook

▪ Incremental outperformance and additional actions will be needed to close long-term fiscal deficits that will reemerge

▪ The likelihood of that happening is much higher if Puerto Rico has balanced budgets, sustainable debt, structural reforms

and access to capital markets

The Fiscal Plan’s financial controls also work to center government focus around efficiency, growth, and financial

discipline through the utilization of a considerable number of measures and structural reforms

The Fiscal Plan and recently proposed offer reflect and incorporate all of these challenges, including:

▪ Considerable number of structural reforms

▪ Significant reductions in cost and improvement in agency efficiencies

▪ Where and why Puerto Rico is different from the U.S. mainland

▪ Funds we know exist by law

▪ A contingent value instrument (“CVI”) to capture a portion of potential outperformance

▪ Significant cash component reflecting recent actual performance



The creditor group raised four core questions

1. Will the FOMB consider updating any of its May 2020 economic assumptions based on the balance of 2020?

a. Will the FOMB update its Certified Fiscal Plan to account for hurricane relief funds distributed (and expected) in

FY2021, and the additional $11.5BN FEMA obligated in September 2020?

b. Will the FOMB update its Certified Fiscal Plan to account for potential reimbursements for COVID-19 related

expenses?

c. What portion of cash outperformance will be distributed to creditors? If the Commonwealth has $1BN of

unrestricted cash not previously contemplated, what percent of that cash will be allocated to creditor recoveries?

How much outperformance cannot be disregarded as aberrational?

d. Why is it fair to assume FMAP reimbursement will drop to ~19% when yet another year has passed with 80%+

FMAP Medicaid reimbursement and when all signs from the President-Elect suggest greater equality in

treatment (certainly not less than the outgoing administration) for Puerto Ricans?

2. How will new COVID-19 developments be taken into account?

a. Even U.S. states that have been harder hit by COVID-19 do not agree it spells doom and gloom for the next

three decades

b. The island is significantly outperforming FY2021 projections YTD. Puerto Rico is rapidly on its way to a full

recovery

c. Highly effective vaccines will be distributed within weeks

3. After bargaining so hard to get agreement to the FOMB's original debt service-to-revenue ratio of 9.2%, why did FOMB

move the goal post?

a. Why does FOMB insist on a maximum ratio that is less than even the outdated Moody’s figure cited by FOMB?

4. The difference in annual debt service required to bridge to a deal with creditors is very small in the context of a $22BN

budget and $70BN economy, both of which continue to outperform. How can the bid/ask on annual debt service and

cash be the impasse preventing Puerto Rico from exiting bankruptcy?



Detailed response



Detailed response

Debt



Critique

▪ The 2020 CFP moves the goalpost on debt service capacity in terms of debt service as a percentage of own-

source revenues and relies on stale data

Response

▪ At the time of beginning work on the 2020 DSA, the analysis used Moody’s metrics from 2019 and ran formulas

using the CFP projections as prepared by the Board’s advisors on a variety of metrics. The 2020 Moody’s

metrics were not yet available at the time FOMB started

▪ Even if the Board had used the 2020 Moody’s metrics for own-source revenues, which were more positive on a

top 10 state basis and neutral on a top 25 state basis, the updated Moody’s metrics would have been irrelevant

to where the Board ended up in its August proposal. The Board’s approach is rooted in a holistic perspective

on the Fiscal Plan and the greater Commonwealth environment. This includes the Fiscal Plan cash flow

projections and liquidity and is not solely based on a formula

▪ To further illustrate that the updated metrics would have been irrelevant, the $1.05 billion annual debt service

cap is closer to the top 25 based on Moody’s metrics, rather than the Top 10 (~$1.3bn w/ 2019 Moody’s &

~$1.4bn w/ 2020 Moody’s)

▪ The August mediation proposal that was publicly released discussed the liquidity impact of the combined

annual debt service between the previously restructured COFINA debt and the proposed General Obligation

debt. This approach by the Board to de-risk / deleverage took into account the effects of the pandemic and its

shut downs with the backdrop of an economy already weakened by hurricanes and earthquakes.

▪ Additionally, the DSA section in the CFP has always provided a range of metrics to use in assessing the

sustainability of any current and future debt of the Commonwealth and was meant to be used as a guideline in

conjunction with CFP projections

Debt Capacity and Stale Data



20-Year Municipal Debt

Critique

▪ The debt contemplated as part of the PSA fully amortizes in only 20 years, an unheard-of assumption in

municipal finance

Response

▪ The Municipal Market, unlike other debt markets, is unique in its annual amortization structure of debt

– Amortization typically occurs throughout a 30 year period from issuance and the length of the debt depends

on a variety of factors (e.g., issuer, security, revenue vs general obligation, etc.)

▪ Using issuance data from 2019 and 2020, the overall amortization in the municipal market prior to year 20 was

as follows.

– 2019: 66.6%

– 2020 YTD: 73.0%

▪ Using issuance data from 2019 and 2020, the amortization of solely GO issuance in the municipal market prior

to year 20 was as follows:

– 2019: 85.0%

– 2020 YTD: 86.2%

▪ While revenue bonds typically have longer amortization structures due to a variety of factors, its important to

note that State GO bonds typically run shorter

– Certain States have legal GO maturity limits (e.g., MD 15 years; CT 20 years; IL 25 years; e.g. HI 25 years)

or practices of limiting GO maximum maturities (e.g., WI 20 years; UT 15 years; OH 20 years; HI 20 years)

*Above analysis includes both new money and refunding issuances.



Debt Comparables and Fixed Costs

Critique

▪ The FOMB debt capacity analysis also fails to account for significant differences in public services, and corresponding debt

burden, provided by U.S. states and the Commonwealth. (…) Additionally, the FOMB should account for fixed costs such as

pensions.

Response (see additional page for more information)

▪ US States are appropriate as peer comparables but key differences remain:

– Puerto Rico is in a structural recession and has, to date, not done anything to reverse this or change the structure of the

economy; unlike most mainland states

– Like U.S. states, the Commonwealth does not control its currency, has no access to IMF support like some sovereigns,

has been reliant on the municipal market for borrowing for capital needs, and has been rated by the same rating agencies

that rate state governments

– While Commonwealth residents do not pay federal income taxes, they do pay Social Security and Medicare

▫ Additionally, the Commonwealth has a graduated income tax structure for residents that is comparable to Federal

income tax rates and unlike state income tax rates

– It is important to note that many Puerto Ricans are in a tax bracket where they would otherwise pay little or no federal

income tax and have a smaller safety net relative to residents in the U.S. states

▫ The poorest U.S. state, Mississippi, has double the median income of CW residents ($42.8k vs $20.2k)1

– Unlike Puerto Rico, most states maintain ratings at or above A level, have better economic statistics (both overall and on

a per capita basis), and importantly the states do not have access to Chapter 9 bankruptcy

– While the Commonwealth does provide some additional services relative to States, cities / counties remain a poor

comparable given the limited amount of services they provide relative to state-level services and they do not have certain

state-level expenses (e.g., Medicaid)

▪ The 2020 Fiscal Plan’s DSA section included a discussion and analysis related to the Commonwealth’s Pension PAYGO

expenses that show debt capacity would be decreased rather than increased

SOURCE: US Census data

1 Uses 2018 US Census data



Debt Comparables and Fixed Costs: Additional information

Debt Service as a Percent of Own-Source Revenue

Note: Ratios as reported by Moody’s related to that year. In some cases, Moody’s made revisions to prior years.

Source: Moody’s Investor Service “State Government – U.S. Medians”; 2010-2020.

Fiscal Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Avg.

Mean 5.3% 5.3% 5.2% 4.6% 4.6% 4.6% 4.4% 4.5% 4.3% 4.3% 4.7%

Median 4.9% 4.9% 4.8% 4.4% 4.4% 4.2% 4.1% 4.2% 4.1% 3.8% 4.4%

Top 10 10.3% 10.1% 10.1% 8.7% 8.8% 8.9% 8.8% 9.2% 8.6% 9.2% 9.3%

Top 25 7.9% 7.8% 7.8% 6.9% 7.0% 6.8% 6.6% 6.5% 6.4% 6.5% 7.0%

Top 35 6.8% 6.8% 6.7% 6.0% 6.0% 5.9% 5.7% 5.8% 5.5% 5.6% 6.1%

Mississippi 7.4% 7.4% 7.2% 6.9% 5.9% 6.0% 6.3% 6.9% 7.8% 6.4% 6.8%

▪ Over the last 10 years, the metric related to debt service as a percentage of own-source revenues has

increased or decreased depending on the economic health of the country and the related states

▪ The poorest U.S. state during this time, which is still wealthier than the Commonwealth in many metrics, has

averaged a ratio of 6.8% during this time period as compared to 6.9% which is incorporated into the proposal’s

$1.05B MADS cap target



Treatment of GO bondholders

Critique

▪ The Commonwealth’s fiscal plans start from the flawed premise that cash available for debt service is determined by

considering the surplus after all other projected expenses are paid. This implicitly treats GO bondholders, who have first

priority under the Puerto Rico Constitution, as if they hold an equity instrument, which is a premise that we reject.

Response

▪ Whether the Go bondholders have first priority under the Puerto Rico Constitution is a matter subject to interpretation and

litigation, as shown by the objections filed by the UCC.

– The initial plan of adjustment, negotiated by the LCDC and other PBA bondholders, offered GO bondholders the

opportunity to compromise and settle such issue or preserve the right to litigate the question, among other things, of

priority with excess recoveries being distributed among other creditors if they lost.

– The existing plan of adjustment, negotiated and accepted by the PSA Creditors, compromises and settles the priority

issues and provides GO bondholders priority viz-a-viz virtually all other general unsecured creditors, including revenue

bondholders whose claims asserted against the Commonwealth remain disputed. The proposed plan provides for the

accumulated clawback revenues to be paid to service GO debt. As part of the settlement, the existing plan of adjustment

provides a recovery to non-priority unsecured claimholders, albeit limited and effectively junior to GO bondholders.

▪ To date, the Commonwealth’s certified fiscal plans have honored the GO priority claim by (a) retaining the clawback revenues

on several theories including the priority theory, and (b) reducing expenses. Additionally, the Oversight Board has opposed

the litigations brought by the Monolines to take control of the clawback revenues.

▪ The Board has also protected the surplus available by initiating litigation against the Commonwealth and invalidating laws

when appropriate



Detailed response

CBO projections



Outdated CBO projections

Critique

▪ The 2020 CFP is based on outdated CBO projections (uses April 2020 CBO projections for U.S. mainland real GDP growth of

2.8% for 2021, while revised projections had increased to 4.0% for that year)

Response

▪ FOMB agrees that estimates for the US economy used for the May 2020 FP (those published by CBO in April 24 th) are not

updated to CBO’s most recent projections; after 2020 FP was certified on May 27th, the Congressional Budget Office has

published multiple new sets of economic estimates

▪ The Board provided a preliminary analysis of the impact of using the September CBO estimates in its October public meeting,

and will continue to monitor future changes, particularly given recent surges in COVID cases and rolling back of re-opening

activities in large portions of the country

▪ The estimated effect of September figures would result in a $0.7B increase in surplus in FY21-24 and $13.7B in FY21-49,

which would make the proposal made by the Board more feasible and sustainable, but does not imply significantly greater debt

sustainability (see next page)

▪ Due to the extraordinary nature of the events that have shaped the trend of the global economy during 2020 and that will

continue affecting it for the next months, expected behavior of US GDP is still uncertain; reference forecasting sources like

CBO and IMF are continuously revising their projections for 2021, publishing updates every 3-4 months on average (see graph

below)

▪ Future Fiscal Plans will incorporate the latest CBO projections

Estimated growth rate for US economy in 2021, percentage points

SOURCE: Economic Outlook 2020-2030, CBO; World Economic Outlook, IMF; Macro Outlook 2021, Goldman Sachs Economics Research; Global Economic Outlook for Investors,

Morgan Stanley Research

2

4

6

Apr Jun DecMay Jul Aug Sep Oct Nov

IMFCBO Goldman Sachs Morgan Stanley



Outdated CBO projections

CBO projection update impact on cash balance

Ending cash balance post-proposed debt service per 2020 Fiscal Plan, $ millions

-5,000

-40,000

-10,000

-35,000

-15,000

-25,000

-30,000

0

-20,000

5,000

34 4032 4622 33FY21 23 24 483526 27 28 3829 30 31 36 37 39 41 42 204943 44 45 4725

SOURCE: CBO, FOMB – Presentation – 21st Public Board Meeting

Minimum cash balanceEnding cash balance in Fiscal Plan1

Ending cash balance with Sep. CBO macro update1

1 Without accounting for the minimum cash balance



Detailed response

Macroeconomic indicators for Puerto Rico



Claims of Puerto Rico’s recovery

SOURCE: OECD Economic Outlook, Interim Report, September 2020; World Economic Outlook, October 2020: A Long and Difficult Ascent, Global Financial Stability Report,

October 2020, IMF; 2020 Certified Fiscal Plan; Board’s economist, Ganoc et. al., 2020

Sub-claim

▪ Auto sales have increased

23.7% YoY to 10,672 units in

October 2020

▪ Q1 FY2021 bank loans and

leases increased 1.8% YoY and

Q1 FY2021 total deposits

increased 26.2% YoY

▪ Banco Popular’s Q3 2020 YTD

debit and credit card sales were

7% higher than Q3 2019 YTD

Claim

▪ Economic indicators in both

Puerto Rico and U.S.

economies point to a recovery

Response

▪ Not all economic indicators are positive for Puerto Rico.

− For example, Puerto Rico COVID impact as measured by the ratio of continued claims to covered

employment is 37.8%, the highest compared to all US states. The second highest after that is Michigan, with

28.7% and the lowest is Idaho, with 4.8%.

▪ Increases in categories of consumption and related indicators (e.g. auto sales, broadband subscribers, debit and

credit card sales) is likely due to the impact of COVID-19 related stimulus

− Given that earnings in PR are far below the average in the mainland (median weekly household income is

$420 in PR, compared to over $1,000 in the US), a much higher share of income was replaced in PR by

FPUC benefits relative to the states.

− In the US, the median income replacement rate from the program is estimated to range from 134% to 145%

(in PR it could be much higher as "a typical worker in the bottom two deciles of the income distribution -

earning less than $394 per week- has a replacement rate of more than 200%" (Ganoc et. al., 2020)).

− Thus, the additional $600 supplement had a greater effect on Puerto Rico relative to the mainland given that

pre-pandemic earnings were lower on average in PR, reflected in the recent uptick in these indicators, with

most of them projected to slow down and return to pre-pandemic negative trends after the additional aid

expires.

▪ Stimulus will likely have little impact on the structural factors that are driving the economy’s secular decline since

2006. Another slowdown is widely anticipated in the second half of the year, absent additional federal stimulus

and management of recent outbreaks

− Institutions like the IMF are adjusting their forecasts to include potential permanent income loss from the

pandemic or longer recovery periods which would call into question the transitory nature of COVID-19 related

effects; argued reasons for this change are expectations on new virus outbreaks, projected long periods of

weak investments due to depressed demand and high uncertainty on government’s aid packages, new

restrictions imposed on global trade, and data on global recovery slowdown since June 2020 and on its

propensity to setbacks, as mentioned in post-COVID-19 Economic Outlook and Global Financial Stability

reports from the OECD and the IMF

▪ The Board recognizes that the year ahead is one of considerable uncertainty. The critique consistently

selects optimistic statistics and scenarios. This document outlines a broader set of statistics and scenarios. Any of

these outcomes are possibilities, but none of them affect the long-term economic trajectories in Puerto Rico

Overall response



-120

-100

-80

-60

-40

-20

0

20

40 Lockdown Employees Working (PR) Employees Working (US)

Claim of Puerto Rico’s recovery

Retail sales, hotel occupancy rates, and Employees working in PR

Hotel Occupancy Rates, October 2019 – October 2020, %

Employees Working, March 2020 – November 2020

0%

20%

40%

60%

80%

10/1/2019 11/1/2019 12/1/2019 1/1/2020 2/1/2020 3/1/2020 4/1/2020 5/1/2020 6/1/2020 7/1/2020 8/1/2020 9/1/2020 10/1/2020

SOURCE: Discover Puerto Rico, Homebase database, Puerto Rico Economic Data, Economic Development Bank for Puerto Rico

Retail sales, $B

Feb.20Jul.19

3

Jan.20Aug.190

Sep.19 Oct.19

1

Nov.19 Abr.20Dec.19 Mar.20 May.20 Jun.20 Jul.20 Aug.20

2

4



Claim of Puerto Rico’s recovery

Puerto Rico’s resilience, vaccines and manufacturing index

▪ As PR’s economy and history have observed, in the immediate aftermath of a disaster event,

extraordinary funds injected to the economy in the form of federal aid act as strong stimulus

to the economic activity

▪ In the case of COVID, recent research form the National Bureau of Economic Research and

the White House have stated that recent bumps on disposable income and consumption are

strongly related to COVID-19 income replacement dispersed funds. At the same time, IMF

projections based on historical data suggest that long-term economic consequences could

persist for a generation or more

▪ For PR, on top of what academics, economists, and researchers point in terms of the long-

term challenges that developing economies would face during their recovery period,

recuperation will occur on a context of six consecutive years of economic contraction (FY13-

FY18)

▪ As was the case following Hurricane

Maria, Puerto Rico’s residents and

its economy have demonstrated

significant resiliency

Sub-claim Response

SOURCE: 2020 Certified Fiscal Plan, Board’s economist, The effect of fiscal stimulus: Evidence from COVID-19, National Bureau of Economic Research; Evaluating the Effects of the

economic response to COVID-19, The Council of Economic Advisers; The long economic hangover of pandemics, IMF, Estadísticas Puerto Rico

▪ The Manufacturing Purchasing

Management Index increased

18.0% YoY to 51.7 in September

2020(4)

▪ The same indicator for Puerto Rico’s manufacturing sector decreased to 47.9 in October (-

7% vs Sep-20 and -1% YoY). Factors affected by the pandemic in the manufacturing sector

were: a reduction in suppliers’ deliveries (38%), a reduction in demand (46%), a reduction in

staff (38%), a reduction in inventory (33%), and others (8%)1

1 Link to see the full report: https://estadisticas.pr/inventario-de-estadisticas/purchasing_managers_index

▪ In November 2020, Puerto Rico

announced it expects to receive the

first COVID-19 vaccines by mid-

December

▪ It is not clear that the government’s expectations of receiving vaccines by December will

materialize, as there is considerable uncertainty around the amount of vaccines expected, the

population that would have access to the vaccines once they become available and the

potential logistics of distribution. According to the CDC, as of December 3rd, no vaccine to

prevent COVID-19 had been authorized or approved for massive production and distribution.

Dr. Birx, White House coordinator of COVID-19 response, has stated that even vulnerable

populations would not see access to the vaccine until at least February and it will not become

widely available until later next year



Unemployment rate

▪ The scope of the unemployment statistic cited is not comparable with the unemployment

estimates used in the Fiscal Plan to calculate economic impact

▪ The Fiscal Plan unemployment forecast was based on unemployment claims filed and

captures the broadest measure of unemployment as a way to measure both lost income,

as well as replaced income via unemployment benefits, as a result of the expansion of

the labor force covered due to the CARES Act

▪ These broader measures of unemployment – e.g., U6 unemployment – more accurately

reflect the scope of claims and the economic effects captured in the fiscal plan forecast

▪ Relative to the 2020 Fiscal Plan estimates, the Board’s latest estimates show a higher

peak unemployment in May (468K vs 401K in June in the fiscal plan) with modestly

faster recovery in June and July, returning to the forecasted trend in August

▪ The headline “official” 8.4% unemployment rate fails to account for a widely publicized

survey interpretation problem that has understated unemployment on the US mainland

and on Puerto Rico. Adjusting for this problem raises Puerto Rico’s “official”

unemployment rate to be between 13% and 14%

▪ Given unemployment on the mainland and PR’s historical unemployment, the current

survey results seem unlikely to accurately reflect the employment situation in Puerto

Rico. For example, as of October, Mississippi’s unemployment rate remained 35%

above its pre-COVID level. In addition, PR’s extremely high share of covered

employment receiving unemployment benefits (38%) casts further doubt on the low

“official” unemployment rate.

▪ As of October 2020, Puerto

Rico’s unemployment rate

was 8.4%, which was 10.9%

lower than the 2020 CFP

base case

Sub-claim Response

SOURCE: Puerto Rico DOL survey



Unemployment rate

Trends in unemployment

Critique

▪ Unemployment data has steadily improved since the beginning of the COVID-19 pandemic

Response

• FOMB agrees that unemployment data has improved since the onset of the COVID-19 pandemic. However, the rate of job recovery for Puerto Rico

has been slow, particularly in comparison with Mainland US numbers; with added concerns over the ability to recover jobs lost

• In Puerto Rico, 46% of the jobs lost in April were recovered by October, compared to 67% in the United States.

− Leisure and hospitality is one of the hardest hit sectors in Puerto Rico, with 43% of employment lost in April (~35,000 jobs). Roughly 41% of the

lost jobs were recovered by October. During the same timeframe, the US has recovered about 67% of lost jobs.

− Trade, transportation, and utilities lost about 42,000 jobs in April and recovered 69% of these by October. This compares to a recovery of 82% of

the lost jobs in the mainland U.S.

− Construction lost about 10,000 jobs in April and recovered 54% of the jobs by October. This compares to 126% recovery in the mainland United

States

• The expectation is that not all lost jobs will be recovered, and local economists are estimating as many as 100,000 jobs could be permanently lost1

Average drop in employment by sector, from March to November Employment (non-farm) change from March 20202, %

1 This is in their report Preliminary Estimate of the Economic Impact of the COVID-19 Virus in Puerto Rico Update May 18, 2020 on p. 3

2 Not seasonally adjusted

SOURCE: Bureau of Labor Statistics (BLS), Homebase (Homebase is a payroll company that monitors the number of employees, hours worked, and locations open of its client

organizations. They track only 750 companies on the island and their sample is weighted towards food service and accommodations)

mar.-200

may.-20ene.-20 jul.-20 sep.-20

-10%

nov.-20

-15

-5

5

-7.3%

-4.3%

Puerto Rico United StatesSector

Retail

Home and repair

Beauty & Personal Care

Health Care & Fitness

Leisure & Entertainment

Professional Services

Transportation

Overall

-14%

-17%

-41%

-21%

-38%

-24%

-23%

-26%

United StatesPuerto Rico

-25%

-18%

-56%

-5%

-53%

-55%

na

-31%



Economic Activity Index

SOURCE: 2020 Certified Fiscal Plan, The Puerto Rico Economic Activity Index (EDB-EAI) September 2020, Economic Development Bank for Puerto Rico

▪ Even though the EAI has shown a gradual recovery since July, as of September it is

still 6 percentage points below Pre-COVID levels

▪ Also, as the Economic Development Bank for Puerto Rico (EDB) asserts1, the EAI is

an indicator of general economic activity, not a direct measurement of Puerto Rico’s

real GNP, thus the annual growth rate of the EAI is not the same as the annual

growth rate of the Island’s real GNP (see graph on next page for a EAI-GNP series

comparison)

▪ It is important to note that while historically the EAI has correlated with GNP growth,

in times of a great natural disaster it has not proven to be as reliable an indicator for

overall GNP activity

– The EAI previously missed the mark in 2017 with Hurricane Maria, suggesting

0.7% decline in GNP, while actual real GNP was down -3.0%

– Similarly, the EAI also failed to capture the full downturn during 2007-2009 during

the US Great Recession.

▪ Regarding its recent improvement, this indicator is heavily weighted to four indicators;

the only one from these with a strong rebound in recent months is cement sales.

Probably related to delayed purchases from construction that was to take place

during the lockdown and disaster relief funds bolstering construction

– While the EAI fell 2.1% in FY20, FOMB is estimating for the year a GNP decline

of 4%, as the large service sector, which is at best indirectly captured in the EAI,

has faced a significant negative impact from the pandemic (Professional and

Business Services sector reported an average reduction of 12% in the total

number of jobs during Mar-Oct, compared with -1% in Manufacturing)

▪ The Economic Activity Index

has increased 5.8% YTD to

115.1 in September 2020 from

a June 2020 low of 108.8

▪ Based on June 2020 YTD

actuals, the EAI implied

FY2020 real GNP growth of -

1.2% versus the -4.0% in the

2020 CFP

Sub-claim Response

1 The Puerto Rico Economic Activity Index (EDB-EAI) September 2020, Economic Development Bank for Puerto Rico in (https://www.bde.pr.gov/BdeSite/PREDDOCS/EDB-EAI.pdf)



Economic Activity Index

EAI versus GNP growth rate

0706

-10

052002 03 04 08 09 10 11 1512 13 14 16 17 2018

-5

0

5

EAI and GNP growth rate comparison, percentage points

Period of impact

and recovery

Great recession

of 2008Hurricanes Irma

& Maria

When annualized, the level of EAI is highly correlated with the level of real GNP during stable years. However,

during periods of crisis, it has not proven to be as reliable an indicator for overall GNP activity as economic

activity is affected by variables not included in the EAI design

Period of

impact

and

recovery

EAI growth rate Actual GNP growth rateGNP growth rate (estimated using EAI)

SOURCE: The Puerto Rico Economic Activity Index (EDB-EAI) September 2020, Economic Development Bank for Puerto Rico



Banking industry sentiment

Critique

Based on the Puerto Rico banks’ Q3 2020 earnings transcripts, they believe Puerto Rico’s economy will continue to rebound

Response

▪ Referenced institutions and individuals assert that recently observed enhancement of PR’s financial metrics, like loans

demand, credit repayment, and total assets of financial institutions, are mostly driven by public deposits of aid-related funds,

and by the population’s unprecedent liquidity levels also propelled by income support and stimulus dispersion

▪ Given that this funding is temporary and the Federal Government is yet to announce its continuity and additional duration, the

overall tone of quarterly reports, press releases, and earnings call transcripts all reflect the uncertainty that exists around

economic activity. It is fair to say that the claims could be perceived as moderate to conservative rather than categorically

optimistic, when considered in their entirety

Supporting quotes

“As of the end of the third quarter, Puerto Rico public deposits were roughly $14.5 billion, about $500 million higher than

in Q2. We continue to expect public deposits to come down over the mid to long-term. Under the CARES Act, for

example, assistance funds provided to the governments of Puerto Rico must be used by year end” – Carlos Vazquez,

CFO, Popular Bank

“To talk about the macro, for sure, we see the beginnings of an economic rebound and we are encouraged and we see a

brighter kind of feature for Puerto Rico. But, […] -- there are tremendous uncertainties and there is tremendous challenges

and there are still several things that need to settle in the near future and beyond for the Puerto Rico economy to have

safe sailings into the future” – Jose Rafael Fernandez, President, CEO, and Vice Chairman, OFG Bancorp

“Importantly, to support this economy, there is still over $60 billion of pandemic and hurricane relief. So those are numbers that

are big for this economy and there's a lot of going on regarding reconstruction. Those funds are being deployed and they're

definitely showing the liquidity and activity” – Aurelio Aleman, President and CEO, First Bancorp

SOURCE: Popular Bank Q3 2020 Earnings call transcript (https://www.fool.com/earnings/call-transcripts/2020/10/28/popular-inc-bpop-q3-2020-earnings-call-transcript/); First

Bancorp Q3 2020 Earnings call transcript (https://www.fool.com/earnings/call-transcripts/2020/10/30/first-bancorp-fbp-q3-2020-earnings-call-transcript/); OFG Bancorp Q3

2020 Earnings call transcript (https://www.fool.com/earnings/call-transcripts/2020/10/23/ofg-bancorp-ofg-q3-2020-earnings-call-transcript/)



Banking industry sentiment

Mortgage 90-day delinquency rate Jan-Nov 2020

“The government stimulus deferrals granted under resumption of collection activity has had a significant impact in

the delinquency of our portfolios. […] our loan portfolio attributed stable credit quality metrics during the third quarter, aided

by the payment deferrals, government stimulus and the resumption of collection efforts. […] We will continue to carefully

monitor the exposure of the portfolios to pandemic related risk, changes in the economic outlook and how delinquencies and

net charge-offs evolve over the next few quarters.” – Lidio Soriano, Executive Vice President of Risk Management, Popular

Bank

SOURCE: Puerto Rico Office of the Commissioner of Financial Institutions, Popular Bank Q3 2020 Earnings call transcript

ma

r.-1

7

en

e.-

17

en

e.-

16

se

p.-

16

ma

y.-1

8

ma

r.-1

6

ma

y.-1

6

jul.-1

6

ma

y.-1

7

no

v.-1

6

se

p.-

19

jul.-1

7

jul.-2

0

se

p.-

17

no

v.-1

7

6e

ne

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8

ma

r.-1

8

jul.-1

8

se

p.-

18

ma

y.-2

0

no

v.-1

9

no

v.-1

8

en

e.-

19

ma

r.-1

9

ma

y.-1

9

se

p.-

20

jul.-1

9

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r.-2

0

no

v.-2

0

en

e.-

20

2

20

4

8

18

12

14

16

22

10

Mortgage 90-day delinquency rate (by amount), %

Hurricane

Maria

COVID-19



Broadband & PREPA

Sub-claim Response

SOURCE: 2020 Certified Fiscal Plan, Board’s economist; New York Times; The Business Journals; El Nuevo Dia; Caribbean Business Report

▪ Liberty Puerto Rico’s broadband

subscribers increased 15.5%

since December 2019,

significantly higher than the 3.7%

increase in U.S. broadband

subscribers, indicative of the

recovering Puerto Rico economy

▪ An increase in broadband subscribers would be expected as the population adjusts to

remote/virtual learning and working.

▪ As more businesses make incremental use of virtual platforms, this may reduce labor

demand or widen disparities forward

▪ Moreover, the Commonwealth is currently subsidizing broadband access:

– The 2020 CFP estimated ~$255M to distance learning support through funds

made available by the CARES Act.

– The Government has announced the use of ~$90M of those funds toward directly

subsidizing internet access for public school students and teachers, at an amount

of ~$50 per month until the end of May 2021.

▪ Additionally, the internet service provider referenced above is one of the companies

able to provide the subsidy offered by the Government.

▪ The June 29, 2020 PREPA

Certified Fiscal Plan projects that

crude oil prices will return to

longer run averages starting in

FY2022 and continuing through

FY2023, despite the near-term

demand shock from COVID-19

▪ Projections are based on fuel price forecasts using the IRP methodology for natural

gas at the Henry Hub, crude oil (West Texas Intermediate or WTI), oil-derivate

products of diesel, and residual fuel oil. The forecast has updated refined fuel prices

for the near term based on financial futures pricing and current PREPA contract

adders. Fuel prices are projected to remain depressed for the next fiscal year, as the

oil market begins to rebalance and recover from the COVID-19 demand shock.

Starting in FY2022 and continuing through FY2023, prices for crude oil and refined

product are projected to return to longer run averages.



Economic indicators in both Puerto Rico and U.S.

PR structural decline in years prior to Fiscal Plan

Puerto Rico Real GNP Growth1, %

2.1%

2.7%

1.8%

0.5%

-1.2%

-2.9%

-3.8%

-3.6%

-1.7%

0.5%

-0.1%

-1.8%

-0.8%

-1.6%

-3.2%

-4.3%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

End of 936

Phaseout

Structural

Recession

Begins

Effect of ARRA

Stimulus

Great

Recession

1 PR Real GNP (FY)

SOURCE: Puerto Rico Planning Board




Expenditures per capita in US states versus Puerto Rico

Average of 50 US states Puerto Rico

Ratio (Puerto Rico compared to

US states)

$ in dollars

State and local

governments

(per capita)

State governments

only (per capita)

Commonwealth and

municipality

(per capita)

Commonwealth only

(per capita) State and local State-level only

Education $2,133 $1,292 $409 $409 0.19 0.32

Department of Justice $144 $91 $27 $27 0.19 0.30

Public works $1,407 $626 $110 $7 0.08 0.01

Fire department $148 $0 $17 $17 0.12 --

Health services $832 $463 $98 $63 0.12 0.14

Police department $326 $61 $245 $245 0.75 3.98

Total expenditure $10,210 $6,755 $3,253 $2,652 0.32 0.39

SOURCE: 2017 Census Survey of Government, Puerto Rico Department of Treasury FY2019 budget, Puerto Rico FY2019 municipal fiscal plan

$1,292

$91

$626

$0

$463

$61

$409

$27 $7 $17 $63$245

$0

$500

$1,000

$1,500

Education Department ofJustice

Public works Fire department Health services Police department

Average of 50 US state governments (2017) Puerto Rico (FY 2019)

State-level only expenditure per capita – Puerto Rico Commonwealth compared to US state governments

Expenditure per capita – US state and local governments, US state governments, Puerto Rico Commonwealth and aggregate of Puerto

Rico Commonwealth and municipality

Total Expenditure per

capita

- Average of 50 states:

- Puerto Rico:

$2,652

$6,755

Note: For the state and local level comparison, the expenditures of the 50 US states include only direct expenditures by state and local

governments. Puerto Rico’s state and local expenditures include Commonwealth general fund expenditures and all 78 municipalities’ expenditures.

For the state-only comparison, the expenditures of the 50 US states include both direct and indirect expenditure by state governments. Puerto

Rico’s state-only expenditures include only commonwealth general fund expenditures.




Own source revenue as a share of personal income, Puerto Rico v US states

Average of 50 US states Puerto Rico

Deviation (Puerto Rico - US

states)State and local

governments

(share of personal

income)

State

governments

only (share of

personal income)

Commonwealth

and municipality

(share of personal

income)

Commonwealth only

(share of personal

income) State and local State-level only

Total own source revenue (as

a share of personal income) 14.5% 8.6% 33.6% 28.6% 19.2% 20.0%

SOURCE: 2017 Census Survey of Government, Puerto Rico Department of Treasury FY2019 budget, Puerto Rico FY2019 municipal fiscal plan, Bureau of Economic Analysis (BEA)

Total own source revenue as a share of state aggregate personal income – Puerto Rico Commonwealth compared to US states

Total own source revenue as a share of state aggregate personal income – US state and local governments, US state governments,

Puerto Rico Commonwealth and aggregate of Puerto Rico Commonwealth and municipality

14.5%

8.6%

33.6%

28.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

State and local State only

Average of 50 US states (2017) PR (FY2019)

• Own source government revenue as a share of

state aggregate personal income serves as a

rough estimate for tax burden.

• On both the state level and the combined

state and local level, Puerto Rico’s tax

burdens are significantly (at least 19%)

higher than the average of the 50 U.S

states.

Note: For the state and local level comparison, the total revenue of the 50 US states includes own-source revenues generated by state and local

governments. Puerto Rico’s state and local revenue includes commonwealth general fund revenue and all 78 municipalities’ total revenue. For the

state-only comparison, the revenue of the 50 US states includes own-source revenues generated by state governments. Puerto Rico’s state-only

revenues include only commonwealth general fund revenue.




Additional information

SOURCE: See page on the appendix for a comprehensive list of sources

Indicator Puerto Rico Mainland US Mississippi

Cost of electricity per kWh, Industrial rates cents/kWh (2020) 19.45 6.71 5.64

Population on Medicaid, % of population (2017) 46.9 20.6 N/A

Population, % change (2010-2019) -14.3 6.3 0.3

Population with disability, % of total population (2018) 21.4 12.6 16.5

Category

Annual growth rate of real GDP per capita, % (2019) 1.20 1.80 0.32

Years of consecutive economic recession, number of years (2019) 14 0 0

Business considered small businesses, % of total businesses (2018 PR, 2017 US) 99.7 99.7 99.3

GDP per capita, US$ (2019) 22,972 65,118 38,948Economics

Unemployment, Total unemployed as a % of the labor force (2020) 11.3 6.9 7.4

Median household income, US$ (2019) 20,474 65,712 45,792

Labor Force Participation Rate, % (2020) 40.1 61.7 56.4Labor

Average Grade 4 Mathematics Standardized Testing Score , (2019) 185 249 241

Population with bachelor's degree or higher, % of total population, percent of

persons age 25 years+ (2014-2018)

25.3 31.5 21.8

Population w. high school diploma or higher, % of persons age 25 years+ (2014-

2018)

75.5 87.7 83.9

Mean years of schooling, education attainment for 25 years above (2018) 12.3 13.7 13.3

Number of patents per year, per 1,000 pop. (2015) 0.009 0.440 0.046

Literacy rate, % of people of ages 15 and above (PR 2017, US 2018) 92 99 N/A

Mathematics NAEP proficiency rate (8th grade), % (2019) 1 40 N/A

Education

Homicide rate, per 100K pop. (2018) 21 5 13.4

Internet users, % of adult population with access (2017 PR, 2019 US) 70.4 79.4 75.9

Traffic deaths per population, (2018) 7.8 11.2 22.2

Number of police cars, per 10k residents (PR 2020, US 2013) 4.26 10.87 N/A

Response time for Emergency Medical Services, mins (2017) 21 8-10 N/A

Infrastructure

& services

Demographics

Poverty rate, % of families under poverty line (2019) 39.5 8.6 14.8

Child poverty rate, % under 18y.o. under poverty line (2019) 56.8 16.2 27.8

GINI Index, income distribution (2019) 0.55 0.48 0.49

Population on food stamps program, % of total population (2020) 43 12 15

Social

development



Detailed response

Population projections



Population decline forecast in 2020 FP

2010 24 3026 32

3,000

4628 36 38

3,600

40

3,400

22 4218

2,400

484420 50120

16

2,800

34

3,200

3,800

14

2,600

Historical May 2019 FP May 2020 FP

2,875

2,813 2,453

2,461

2,143

2,152

Population projection, thousands

FY25 FY39 FY49

Critique

▪ Despite a stable population in FY2019, the 2020 CFP projects that Puerto Rico will experience a more significant population decline

than the 2019 CFP. No explanation is provided for the more negative population forecast. Puerto Rico’s 2018 population is

approximately 3.2MM as of July 2018 per the Economic Development Bank

Response

▪ Population in FY2019 was not stable but declined by 2%1

▪ The 2020 Fiscal Plan continues to use population projections through FY2049 provided by the Board’s demographer.

▪ The population projections in the 2020 CFP are updated from the 2019 CFP to include the latest macroeconomic projections, as well as

updated birth, death, and outmigration statistics. These factors combined have led to a more negative forecast, mostly due to a more

negative macroeconomic picture (due to COVID-19 and delay in structural reforms)

SOURCE: 2020 Certified Fiscal Plan, 2019 Certified Fiscal Plan, U.S. Census Bureau

The Census Bureau estimates that Puerto Rico’s population declined by 14.3% from 2010-2019, while mainland population grew by 6.3%

during the same time period

1 Puerto Rico Planning Board with Intercensal data released July 2019 (U.S. Census Bureau)



Detailed response

Revenues



Change in long-term revenue forecast

Critique

▪ The 2020 CFP assumes that the pandemic will have a permanent negative impact on revenues and surplus from which

Puerto Rico’s economy will never recover as the deficit is projected to increase starting in FY2032

– The 2020 CFP projects $40BN less in own-source revenue and $39BN less in surplus from FY2020 through FY2049

relative to the prior fiscal plan, suggesting no reduction in expenses despite forecasts of reduced economic activity

– The 2020 CFP projects a 6.2% YoY decline in FY2021 General Fund revenues despite projected Nominal GNP growth of

0.8% in FY2021

Response

▪ The 2020 Fiscal Plan included dozens of updates and the resulting economic trends are not exclusively the result of the

pandemic – e.g., the reduction in impact of the structural reforms also lowered expectations of growth

▪ CBO updates to US federal revenue forecasts show similar pattern of changes from 2019 to 2020, with the same 7.4%

average reduction over 10 years starting in 2020 that the 2020 Fiscal Plan projects in Puerto Rico (note: the precision of the

match is coincidental, the analogy is provided for directional comparison)

▪ For FY2021, there were multiple one-time adjustments that do not affect long-term revenue trends, such as: ~$250M million

one-time reduction as $4.9B in typically taxable income from earned income was replaced by unemployment benefits that are

not taxable in Puerto Rico, and $50 million in below-trend Non-Resident Withholding collections

Change in revenue forecasts from 2019 plan to 2020 plan, %

262019 20 2221 2423 25 27 28 2029-20

-10

0

10CBO estimate of federal revenues Fiscal Plan’s estimate of PR revenues Average decline between FY20-29

-7.42%

X

-7.43%

SOURCE: CBO Revenue projections, 2020 Certified Fiscal Plan, 2019 Certified Fiscal Plan



Outperformance vs forecasts

Critique

▪ FY2020 General Fund revenue was at least $153MM higher than the 2020 CFP projection. YTD FY2021 through September, the Board

estimates collections outperformance of $329MM (or 18%) higher than the 2020 CFP. AAFAF’s TSA report shows collections are

$675MM (or 22%) higher compared to Liquidity Plan (translation of the CFP and Certified Budget into a cash flow forecast) as of Nov- 13

– The Board has certified intra-year fiscal plans in 2017 and 2018 and could certify a revised 2020 CFP to incorporate new data

– General Fund revenue has consistently outperformed the respective fiscal plans, despite the fiscal plans being certified just a few

months before the end of the fiscal year (see page 18)

– Actual General Fund revenues have significantly outperformed the projections in the March 13, 2017 CFP (“2017 CFP”), which was

created pre-September 2017 hurricanes, pre-2019 and 2020 earthquakes and pre-COVID, by $3.3BN from FY2017 – FY2020

– Actual FY2020 General Fund surplus was ~$1.6BN higher than the FY2020 Fiscal Plan projection

– This continues the trend of actual performance consistently exceeding fiscal plan projections by a significant margin

Response

▪ Annual forecasts of revenues for the Fiscal Year ahead have shown no consistent pattern of over or under-performance (FY18 revenues

were in line with forecast, FY19 revenues were above forecast, and FY20 revenues were below forecast)

▪ Each year has presented unforeseen events impacting revenues that have been incorporated into fiscal plan updates. Examples include:

– In FY18, the FP underestimated the impact of federal relief spending on revenues. The approach was updated and the current 2020

Fiscal Plan includes $3.6 billion in revenue collections related to DRF spending over 15 years above and beyond the DRF contribution

to general economic growth

– In FY19, there was a highly concentrated surge in corporate tax receipts that has since subsided (the top 30 taxpayers accounted for

$450 million more in receipts in TY 2018 than they did in TY2016)

– In FY20, actuals under-performed the initial forecast by ~$600 million; if adjusting for a one-time payment of ~$500 million from a

large multinational M&A transaction which was not anticipated at the time of the forecast, the under-performance would have been

~$1.1 billion.

SOURCE: Tax Revenue Response to the Business Cycle - IMF Working Paper (March 2010), Hacienda estimates of YTD revenues as of November 19, 2020; Hacienda monthly revenue

estimates as of September 23, 2020, US mainland state’s Department of Treasury, Certified Fiscal Plans




Critique

▪ FY2020 General Fund revenue was at least $153MM higher than the 2020 CFP projection. YTD FY2021 through September, the Board

estimates collections outperformance of $329MM (or 18%) higher than the 2020 CFP. AAFAF’s TSA report shows collections are

$675MM (or 22%) higher compared to Liquidity Plan (translation of the CFP and Certified Budget into a cash flow forecast) as of Nov- 13

– The Board has certified intra-year fiscal plans in 2017 and 2018 and could certify a revised 2020 CFP to incorporate new data

– General Fund revenue has consistently outperformed the respective fiscal plans, despite the fiscal plans being certified just a few

months before the end of the fiscal year (see page 18)

– Actual General Fund revenues have significantly outperformed the projections in the March 13, 2017 CFP (“2017 CFP”), which was

created pre-September 2017 hurricanes, pre-2019 and 2020 earthquakes and pre-COVID, by $3.3BN from FY2017 – FY2020

– Actual FY2020 General Fund surplus was ~$1.6BN higher than the FY2020 Fiscal Plan projection

– This continues the trend of actual performance consistently exceeding fiscal plan projections by a significant margin

Response (cont.)

▪ For FY21 year to date:

– Revenue performance month to month is volatile because timing of receipts varies, and because monthly targets are imprecise

– Hacienda reports that YTD GF revenues are 18% above forecasts. About half of the outperformance relates to above trend tax

collections in taxes related to economic performance, while the other half relates to “Other general fund revenues” where Hacienda

is still working to clarify the nature of the outperformance, and whether it is expected to persist.

– The full year picture is uncertain: Q1 2021 included the support of $600 week incremental unemployment, as well as $1,200

economic impact payments. It also may have included “catch up” consumption post-spring lockdown measures. None of those

sources of stimulus are present in Q2, with the Government returning to more restrictive lock down measures.

– The outperformance YTD seen in Puerto Rico is consistent with mainland states (e.g., California 22% ahead of its June 2020

forecast, Florida 8% ahead of its August 2020 forecast)

– Note: the 2020 Fiscal Plan reflects a ~$1.2 billion reduction in FY21 revenues relative to the 2019 Fiscal Plan; current performance

suggests the full-year reduction may be less

SOURCE: Tax Revenue Response to the Business Cycle - IMF Working Paper (March 2010), Hacienda estimates of YTD revenues as of November 19, 2020; Hacienda monthly revenue

estimates as of September 23, 2020, US mainland state’s Department of Treasury




Comparison of Fiscal Plan GF revenue forecasts versus actuals

General Fund Revenue, $B

FP Apr 19, 2018 FP Oct 23, 2018 FP May 9, 2019 FP May 27, 2020 Actuals

SOURCE: Fiscal Plans, Hacienda

9.8

10.4

9.09.3

FY18

8.21

FY19

9.3

FY20

9.08.5

11.011.4

9.0

10.710.4

9.6

FP 2017

1 Changed formatting vs previous version (which linked to October 2018 FP)




Outperformance in YTD FY21 GF revenues across Mainland states

General Fund Revenue actual vs forecast by forecast publication, %, YTD actuals1

1 As of September, 2020 or October, 2020 depending on the state

SOURCE: State's Department of Treasury

NON-EXHAUSTIVE

18

22

17

10

13

9

5

8

3

May, 2020 June, 2020 July, 2020 August, 2020

Puerto

Rico

Cali-

fornia

Tenne-

ssee

Okla-

homa

Utah Illinois Idaho Virgi-

nia

Florida



Impact of the $12.8B in FEMA funds on revenues

Critique

▪ On September 18, 2020, the Commonwealth and U.S. government officials announced a $12.8B Federal

Emergency Management Agency relief package for Puerto Rico, which includes $10.5BN of funding ($9.4BN from FEMA) for

PREPA and $2.3B of funding ($2.1BN from FEMA) for the Education Department

Response

The funds are already part of the overall allocation of DRF funds in the 2020 CFP

▪ FEMA announced obligations of $12.8B in Public Assistance for new infrastructure grants to Puerto Rico

○ $10.5B is for PREPA restoration of the electrical grid, and $2.3B is for the Department of Education

○ According to the releases, the Federal Government will cover $11.6B ($9.6B for PREPA and $2.0B for PRDE), with the

rest assumed to be covered by local cost match (e.g., PREPA will need to cover ~$1.0B, and the Commonwealth will

need to cover ~$0.2B for PRDE)

▪ The announcement could help refine the allocation of FEMA funds, as well as the estimated rollout of spending

SOURCE: White House announcement, FEMA website, 2020 Certified Fiscal Plan

Individual Assistance

Hazard Mitigation

Total 47.8

Public Assistance

Mission Assignments

36.3

4.3

4.6

2.5

FEMA funds in the 2020 CFP, $B

– The $11.6B of funding from the

Federal Government is part of

the Public Assistance

category in the Certified FP

– The local share of the funds fall

under the cost-match

assumptions in the model



Impact of SSI, SNAP, and LIS programs on revenues

Critique

▪ On August 3, 2020, Judge William Young of the U.S. District Court issued a findings of fact and ordered the exclusion of Puerto Rico

residents from Supplemental Security Income (“SSI”), Supplemental Nutritional Assistance Program (“SNAP”) and the Low-Income

Subsidy (“LIS”) for Medicare Part D benefits as unconstitutional. These benefits would increase federal funds to Puerto Rico residents by

$4.3BN annually, and are not included in 2020 CFP

Response

▪ FOMB agrees that if these programs were to be rolled out at scale in Puerto Rico, it would have an impact on the economy. The Board

is actively studying and thinking through how to assess the impact of the potential change, including impacts on consumption and labor

participation

▪ It is the Board’s understanding that the federal government has not agreed to deliver these benefits, and is in active litigation on this

matter1

▪ Once there is resolution of this proceeding, and the nature of the resolution is clear, including parameters such as the scope of

beneficiaries, and implementation timeline/approach, the Board will consider relevant changes to future fiscal plans

▪ The creditors overestimate the assumed impact of SSI, SNAP and LIS on Puerto Rico’s projected surplus for the following reasons:

− A conversion factor of ~30% of revenues to nominal GNP is applied to estimate the GNP impact on surplus. However, it considers the

revenues post measures, which include all three fund types: General Fund, Special Revenue Funds and Federal Funds. The federal

aid programs will not have an impact on Special Revenue Funds and Federal funds, so the value attributed is likely overstated.

− Much of the direct purchasing from additional nutritional assistance funding would be for tax exempt goods and, given income

distribution levels, it is not clear other income would be for taxable goods as well. This combination implies the net effect from a NAP

to SNAP transition would have a lower multiplier effect in the economy.

− The creditors assume that the estimated value of the LIS is about $5,000 per year. This contradicts published administrative reports,

which estimate that the incurred reimbursement amount is much smaller. The LIS benefit is also a transfer from the federal

government to pharmaceutical companies via insurers. Because the benefits do not accrue directly to individuals, the multiplier effect

is likely to be lower than the 1.34x estimate assumed by the creditors.

− Finally, offsetting behavioral impacts on the propensity and disincentives to work in the formal economy must also be considered.

SOURCE: https://www.supremecourt.gov/DocketPDF/20/20-303/153244/20200904184238974_Vaello-Madero%20Pet.pdf; https://www.cms.gov/files/document/2020-medicare-trustees-

report.pdf

1 United States v. Vaello-Madero, 956 F.3d (1st Cir.)



Impact of pharma and medical manufacturing companies on revenues

Critique

▪ According to Boston Consulting Group, Puerto Rico may gain as much as $325MM in new tax revenue if pharmaceutical and medical

manufacturing increase on the island in a push to develop more drugs and medical equipment

Response

▪ The Board has actively supported efforts to increase the role of Puerto Rico in manufacturing critically important pharmaceuticals. This

has included commissioning the report that is mentioned, holding public meetings on the topic, and communicating with federal and local

policy makers on the issue.

– If and when there is more clarity around the future trajectory of these efforts (e.g., via Congressional legislation), the economic

impacts will be included in the following fiscal plans.

▪ Lastly, the aforementioned BCG report did not assume the tax decrees exempting firms from legislated taxes, which will also alter its

impact

Additional investments in Puerto Rico

▪ The Board is currently aware of 5 announced investments. There is also at least 1 withdrawal. These investments are being analyzed to

understand potential increases in revenues; which will be included in the following fiscal plans. Additional revenues’ projections will

depend on tax decrees negotiated privately with each party.

Becton

Boston Scientific

Pall Life Sciences

Retention of 256 jobs

80 new jobs


$23

$15

$10

Company

CooperVision

Fresenius Kabi

# Jobs

226 new jobs


Investment, $M

$150

$30

Investments announced since July, 2020 Confirmed losses

Company

Roche

# Jobs

200 jobs lost

Invest.,$M

NA

SOURCE: The Weekly Journal, Local news, DFC, DDEC



Detailed response

Investments



Committing future year funds for priority investments


Critique

▪ Over $1BN in priority investments are funded upfront, despite being spent in later years

– For example, the 2020 CFP assumes $400MM telecom broadband infrastructure investment is funded in FY2021,

however the funds will be actually be spent in FY2021 to FY2023

– $650MM in healthcare investments funded in FY2020 – FY2022 and spent from FY2020 – FY2025

– $50MM 21st Century Technical and Business Education Fund

Response

▪ In order to attract private capital to specific sectors, the Board made a decision to commit upfront multi-year investments in

broadband infrastructure (See table on following page)

– Telecom broadband infrastructure investment ($400M): to accelerate growth in broadband access and expand

resident adoption and use of online resources in Puerto Rico, the 2020 Fiscal Plan allocates $400 million in FY2021 (to

be used over three years) to incentivize private sector investments in broadband build-out and to improve access to

faster speed offerings in underserved areas.

– 21st Century Technical and Business Education Fund ($50M): to address the need for additional short-duration

technical and business education opportunities that require forceful and forward-thinking leadership.

▪ Meanwhile, for healthcare investments, most funds are required to be encumbered in current year, even if implementation

may take several years

– Healthcare investments ($650M) including capital improvements in public hospitals, public hospital IT, Telehealth

infrastructure, supporting opioid treatment, capital expansions at public hospitals, among others.

▪ Broadband infrastructure and the 21st Century Technical and Business education fund will be managed by a third party, and

therefore require the funds in order to implement the project and involve the private sector

▪ For these specific investments, the funds were meant to be spent in later years and/or the macroeconomic effect was

projected to be presented in later years due to the nature of that type of expenditure

▪ There is no impact on fiscal plan surplus as long as the funds are spent as planned; this is only a question of timing



Committing future year funds for priority investments

Summary of investments with future year implications


Notes

Health system

Technology

sector

Total

Sub-total: Investments in Healthcare

Value, $M

▪ Capital improvements to public hospitals (e.g., new air conditioning system)

▪ Public hospital IT (e.g., Electronic Health Records, clinical operations) 253

650

▪ Increased number of public school nurses

▪ Opioid treatment programs 90

▪ Scholarship fund for those pursuing medical/clinical careers and who

commit to practice in underserved areas

▪ Major capital expansions at public hospitals (e.g., new wing)145

▪ Telehealth infrastructure

162▪ Bonus for public and private sector nurses and technicians

Description

▪ Universal broadband access

450▪ Establishment of a 21st Century Technical and Business Education Fund

1,1001

▪ Funds to be committed in year, given

need to establish Fund and attract

private sector investment into broadband

▪ Other health system investments (e.g., Medicaid IT)

▪ Immediate respond to COVID-19; must

be funded immediately

▪ Capital investment to be encumbered in

year, macro impact could be felt in future

years as projects are initiated

▪ Capital investment to be encumbered in

year, macro impact could be felt in future

years as projects are initiated

Total priority investments committed for future years

1 This total is preliminary and may be adjusted based on final FY21 budget and discussions with the Government on priority investments

▪ Funds will be committed in year to

establish programs and scholarship



Detailed response

Measures and structural reforms



Fiscal Measures relief in response to current circumstances


Critique

▪ The 2020 CFP further reduces and delays critical fiscal measures and structural reforms previously identified by the FOMB

– Implementation of the fiscal measures included in the 2019 CFP would add an additional $33BN of surplus over the 30 year

projection period compared to those in the 2020 CFP

Response

▪ Fiscal measures have been delayed one year due to:

– Lack of implementation: Government has been slow to make meaningful progress regarding the necessary measures to

sustainably reduce the cost of operations by transforming its processes and organizational structures, creating precarious risk to

government service delivery

▫ To achieve personnel savings, the Government has primarily utilized broad-based early or incentivized retirement programs,

instead of driving optimization of back office roles or initiatives to align front-office roles with benchmarks from mainland US states

▫ To achieve non-personnel savings, the Government has made little to no changes in the procurement processes or the

organization of operations

▫ For example there is lack of progress on consolidation of agencies (e.g., Finance Commission, Family, Labor), reversal of the

consolidation of Forensics, delayed implementation of time and attendance reporting, delays in system integration (e.g., ERP and

accounting systems are still disconnected), substantial delays in issuance of the Government´s Comprehensive Annual Financial

Reports (as of May 2020, the FY17-FY19 CAFRs had not been issued), and six months delay in implementing police social

security

– COVID-19: Given the current circumstances (Earthquakes, COVID-19, etc.), Puerto Rican residents are further reliant on the

Government to effectively and promptly provide them the public services that enable life to recover and continue; the Government

will need to invest time and effort in achieving the measures previously required and not yet implemented, while supporting PR

residents

▪ The Fiscal Plan therefore includes a pause for agency efficiency, subsidy, pensions, revenues, and health measures (representing

~$1.2B) in order to enable agencies to redouble the focus on implementation of those measures not implemented to date

▪ The Oversight Board also included implementation budget incentives in FY2021 to encourage accelerated implementation of reforms

that would bring Puerto Rico a step closer to a sustainable government



Structural reforms delay and reduction

Critique

▪ The 2020 CFP further reduces and delays implementation of fiscal measures and critical structural reforms previously identified by the FOMB,

lowering surplus by at least $43B over the 30-year projection period compared to the 2019 CFP

− Implementation of the structural reforms included in the 2019 CFP would add an additional $10BN of surplus over the 30 year projection

period compared to those in the 2020 CFP

Response

▪ Structural reforms impact on GNP is dependent on its timely and effective implementation, and each fiscal plan reviews progress to date to

calibrate the expected economic benefits; doing differently would result in an evident overestimation of future PR’s economy size and growth

rate

▪ FOMB agrees that previous FPs have included a structural reform implementation schedule that would add an additional ~$9.6B1 in revenues.

However, while Fiscal Plans have been able to outline potential major improvements, progress within the Government has been slow overall,

requiring revisions to the expected economic impact from reforms that are not implemented (either fully, or at all)

− The Government has implemented very few of the required Ease of Doing Business reforms (regulation simplification, paying taxes

streamlining, electricity reliability and cost improvement, tourism attraction increase, among others) in a way that would make the Island

substantially more competitive and attractive to investors

− These delays have prevented the enhancement of the current state of PR’s challenging business environment:

− Construction permits: firms spend 165 days filing applications for 22 procedures and pay for the equivalent of 6.7% of project’s future

value to obtain permits, on average (vs. 81 days, 16 procedures, and 0.7% of project’s future value on average on mainland states).

− Property registration regulation: Companies must invest significant amounts of time (190 days) and effort (eight procedures), on

average, to register property (vs. 15 days and four procedures on average on mainland). Working at this pace has created a backlog of

unprocessed applications that is estimated it will take around 12 years to clear

− Progress of implementation have further slowed-down during the pandemic; ~80% of EODB reform initiatives were delayed or incomplete

as of November 2020, while the numbers of processed applications has decreased 12%, and the number of days to process a Single

Permit application has increased from 52 days on average in March to 81 days on average in October

− Other implementation delays include a delayed start up of the education strategic plan and the energy reform execution, the Earned Income

Tax Credit going live without a strategy to raise awareness of its benefits, and the lack of progress in the implementation of the workforce

development programs

1 From 2019 FP to 2020 FP

SOURCE: 2020 Certified Fiscal Plan, Single Business Portal (Adjusted vs previous version)




Impact of delay on surplus from structural reforms

Change in Structural Reforms impact in surplus for FY20-49 period due to delays in implementation by the Government,

$ billions, FP 2019 vs 2020

3.0

4.2

FP 2019

31.2

Education reform1 Ease of Doing

Business reform

PPPs/Energy reform

7.2

Human capital &

welfare reform

FP 2020

34.2 0.71.4

0.3 24.7

-9.6


Delayed impact Reduced impact

1 Impact reduction due to a delay in benefits recognition from 2033 to 2037, however that movement delayed impact past the period of interest (after 2049), thus reducing accounted benefits




Detailed examples of lack of implementation

SOURCE: Doing Business annual reports, World Bank Group, WGI from World Bank (https://info.worldbank.org/governance/wgi/)

Estimated impact of structural reforms has been decreasing across Fiscal Plans due to the delay of key initiatives start up, some

examples are:

▪ Delayed implementation of education strategic plan (now 2022-2027) and postponed recognition of benefits (pushed forward to

2037 from 2033)

▪ Implementation of Earned Income Tax Credit (EITC) without an according plan to raise awareness of its functioning among the

population

▪ Slow progress in most of Ease of doing business and human capital reforms (e.g. simplification of permits licensing and tax

regulation, strengthening of the Island’s workforce development programs)

▪ Required regulation to enable energy reform initiatives was approved in 2019, however implementation started w/ a 1-year delay

Implementation of structural reforms detail

80

20

40

60

Puerto Rico in Doing Business ranking, position in ranking

Puerto Rico Government Effectiveness indicator, Quality of governance; from -2.5 (weak) to 2.5 (strong) performance

22 19 28 35 35 47 43 41 40 47 57 55 64 64 65

0.6 0.6 0.6 0.4 0.3 0.3 0.4 0.4 0.4 0.4 0.4 -0.1 -0.2 -0.2

122006

0.5

0

13 151411 20201807 161008 09 17 19-0.5

1.0

NA



Detailed response

Medicaid



Federal funding for Puerto Rico Medicaid program

Critique

▪ The 2020 CFP relies on historically flawed Medicaid reimbursement assumptions

– Despite increased levels of federal reimbursement since 2011, the 2020 CFP assumes a Medicaid cliff in FY2022

– Even assuming the conservative statutory FMAP of 55% (currently FMAP is 82.5%) would reduce the Commonwealth-

Funded Medicaid expenditures by over $700MM annually

Response

▪ FOMB agrees that the 2020 CFP assumes a “Medicaid cliff” in FY2022. The 2020 CFP reflects that there is no incremental

federal funding legislated beyond the end of Federal Fiscal Year 2021. The Fiscal Plan cannot assume or predict future

legislation changes. The Fiscal Plan ensures that the Commonwealth is fiscally responsible under current law, and factors in

the cost of Medicaid going forward in the absence of incremental legislation. (See detail on the next page)

▪ Any additional funds legislated will be incorporated into the Fiscal Plan projections upon promulgation.

▪ FOMB agrees that Puerto Rico has received increased levels of federal funding for Medicaid since 2011. However, federal

funding has varied significantly over the last 10 years due to several pieces of ad hoc and short-term legislation. (See table

on following page)

– Current legislation relevant to Federal FY211 provides ~$3B, subject to an FMAP of 82.2% for most populations, and the

Fiscal Plan reflects this legislation. The available supplemental federal funds and higher FMAP will both return to

standard levels in October 2021 without new federal legislation.

▪ Additionally, it is not possible to assume what incremental costs might occur in conjunction with incremental funding.

– For instance, in the Further Consolidated Appropriations Act, 2020, $200M of incremental funding was conditional on

Puerto Rico establishing a reimbursement floor for physician services covered under Medicare Part B at 70% of the

Medicare fee-for-service rate. Per the 2020 CFP, ~$100M of Commonwealth funding was allocated to satisfying this

requirement.

▪ The Fiscal Plan incorporates the statutory FMAP of 55% for the non-expansion federally-eligible Medicaid population, but its

effect is muted due to the statutory cap of $400M (in FY21, grows by 3%) on Medicaid federal funds, as outlined in the Social

Security Act


1 Corrected from FY22 in previous version



456

FY20

1,076

FY21

566

452

527

927

1,930

FY23

457

582

FY22 FY24 FY25

2,4562,387

1,037

546

Social Security Section 1108, CHIP, and other standard Federal allocations

2020 Further Consolidated Appropriations Act & subsequent relief funding (temporary)

2018 Bipartisan Budget Act & Affordable Care Act funding (temporary)

Medicaid Federal funding sources, $M, pre-measures


Current Medicaid federal funding in Fiscal Plan

Sub-claim: The 2020 CFP assumes that Puerto Rico will receive zero incremental Medicaid reimbursement from the federal government starting in

FY2022 and continuing in perpetuity. This effectively does not account for any incremental Medicaid federal funding after September 2021 above the

currently-legislated federal funding amount of ~$550MM / year, which is equivalent to a federal matching percentage (“FMAP”) of just 19% of aggregate

projected Medicaid expenses from FY2023 – FY2025

Response: The 2020 CFP reflects that there is no incremental federal funding legislated beyond the end of Federal Fiscal Year 2021. The Fiscal Plan

cannot assume or predict future legislation changes. The Fiscal Plan ensures that the Commonwealth is fiscally responsible under current law, and factors

in the cost of Medicaid going forward in the absence of incremental legislation to ensure coverage to those currently enrolled in Medicaid – currently over

45% of the population.

The Fiscal Plan accounts for the statutory cap on federal funding for Medicaid to grow with inflation as per the statute. Per Section 1108(b)(f)(1), the cap on

federal funding for Medicaid increases annually by the percentage increase in the medical care component of the consumer price index for all urban

consumers (as published by the Bureau of Labor Statistics). The Fiscal Plan projects currently legislated federal funding for Medicaid to be ~$600M in

FY28, ~$800M in FY35, and ~$1B by 2042. Note that this amount includes ~$100M (FY20) to $150M (FY25) per year of funding for CHIP expenditures,

which are not subject to a cap.

SOURCE: 2020 Certified Fiscal Plan, Social Security Act (https://www.ssa.gov/OP_Home/ssact/title11/1108.htm)




Recent legislation related to Medicaid federal funding

Sub-claim: Congress has consistently appropriated far greater reimbursement amounts to Puerto Rico

Response: FOMB agrees that Congress has in recent years appropriated higher amounts of funding for Puerto Rico’s Medicaid Program. However, the

supplemental federal funding has been through several temporary pieces of ad hoc and short-term legislation.

Date Legislation Funding FMAP change Time period available

02/17/2009 American Recovery and Reinvestment Act [1] $142M 50% FMAP October 2008 through December 2010

03/23/2010 Affordable Care Act [2] $5.4B 55% FMAP July 2011 through September 2019

03/23/2010 Affordable Care Act [2] $925M 55% FMAP Through December 2019

05/05/2017 Consolidated Appropriations Act, 2017 [3] $296M 55% FMAP Through September 2019

02/09/2018 Bipartisan Budget Act of 2018 [4] $4.8B 100% FMAP January 2018 through September 2019

12/20/2019 Further Consolidated Appropriations Act, 2020 (year 1) [5] $2.8B 76% FMAP December 2019 through September 2020

12/20/2019 Further Consolidated Appropriations Act, 2020 (year 2) [5] $2.9B 76% FMAP October 2020 through September 2021

03/18/2020 Families First Coronavirus Response Act (year 1) [6] $90M 82.2% FMAP March 2019 through September 2020

03/18/2020 Families First Coronavirus Response Act (year 2) [6] $93M 82.2% FMAP October 2020 through September 2021

SOURCE: [1] https://www.congress.gov/bill/111th-congress/house-bill/1/text, https://www.kff.org/wp-content/uploads/2013/01/7872.pdf [2] https://www.congress.gov/bill/111th-congress/house-

bill/3590/text, [3] https://www.congress.gov/bill/115th-congress/house-bill/244/text, [4] https://www.congress.gov/bill/115th-congress/house-bill/1892/text, [5]

https://www.congress.gov/bill/116th-congress/house-bill/1865/text, [6] https://www.congress.gov/bill/116th-congress/house-bill/6201/text

The following table provides a list of recent relevant legislation and the time period such funds were (or are) available. Typically, supplemental federal

funding has come through two primary levers: increases to the annual Section 1108 capped allotment, and/or temporary increases in the federal medical

assistance percentage (FMAP). In cases where Puerto Rico is likely to hit the maximum Medicaid allotment, increases in FMAP will not have budgetary

impact other than to increase the rate at which cap is reached.

Additional information

“These cycles of crisis and congressional response have caused a great deal of uncertainty and make it difficult for Puerto Rico to make long-term

plans or improvement efforts… an additional time limited allotment … would not address existing challenges with Puerto Rico’s Medicaid

financing structure or support Puerto Rico’s ability to plan, manage, and sustain an effective Medicaid program that offers long-term, reliable access to

care for its beneficiaries.”

MACPAC Report to Congress (https://www.macpac.gov/wp-content/uploads/2019/06/Mandated-Report-Medicaid-in-Puerto-Rico.pdf)



Growth in Medicaid expenditures

Critique

▪ The 2020 CFP also assumes that overall inflation will be lower than in the 2019 CFP, but that Medicaid costs will increase at

a higher rate of inflation than in the prior fiscal plan

– Despite lower inflation in the 2020 CFP, the monthly Medicaid premiums increase by an average of 5.3% from FY2021 –

FY2024 pre-measures and an average of 3.3% post-measures, significantly higher than the 4.8% and 1.2% in the 2019

CFP, respectively

Response

▪ There is not a direct correlation between growth in Puerto Rico Medicaid expenditures and overall inflation, for a number of

reasons:

– The growth rate in Medicaid expenditures reflects multiple factors such as enrollment, benefits, demographic change,

healthcare costs, and the per-member, per-month (PMPM) rates contractually agreed upon between ASES and the

Managed Care Organizations (MCOs)

– Furthermore, the growth rate in PR PMPMs has historically been substantially higher than – and not clearly correlated

with – general PR inflation.

▫ PMPM baseline growth in the Fiscal Plan is not based on the same inflation rate as other expenditures, but rather

represents the changes in healthcare price levels, utilization, and population mix for Medicaid covered healthcare

expenditures as estimated by the Board’s Actuary

▪ FOMB agrees that projected growth in Medicaid expenditures from FY2021 – FY2024 is higher in the 2020 CFP than in the

2019 CFP. However, the 2020 CFP describes a number of reasons for these changes, including:

– Updated PMPM growth rate projections, as estimated by the Board’s Actuary. [See detail on following page]

– Updated actual PMPM rates for FY20, based on ASES negotiations with MCOs

▫ The 2019 MCO contract amendments were approved after the 2019 CFP was published. The 2020 CFP incorporates

the actual FY20 PMPMs as agreed between ASES and the MCOs

– Incremental Medicaid investments in the 2020 CFP, as approved by the Board in agreement with the Government




Growth in Medicaid expenditures

Comparison of Medicaid inflation to Puerto Rico inflation

Year over year inflation rates, USD / %

1613

14

-4

2011 12 1714

10

-215 18 19 20 21 2022

0

2

4

6

8

12

Puerto Rico PMPM1

Puerto Rico inflation2

U.S. per-member Medicaid expenditures3

%

Fiscal

year

Historical data Projections

1 Growth in PMPMs is sometimes referred to as “Medicaid inflation.” The PMPM growth rate is not simply “healthcare inflation,” but rather represents changes in price levels, utilization, and population mix for Medicaid

covered healthcare expenditures. Data for fiscal years 2011 through 2017 are based on historical data submitted by ASES. Data for fiscal years 2018 through 2022 are projected in the Fiscal Plan as determined by the

Board’s actuary. Note that the 2018 through 2022 PMPM growth rates are baseline, or pre-measures, growth.

2 Puerto Rico inflation represents a change in the overall Puerto Rico price level. Data for fiscal years 2011 through 2017 are based on historical data prepared by the Board’s actuary. Data for fiscal years 2018 through

2022 are projected in the Fiscal Plan as determined by the Board’s actuary.

3 U.S. average Medicaid benefit expenditures per enrollee, as projected by CMS 2018 Actuarial Report (https://www.cms.gov/files/document/2018-report.pdf)

SOURCE: ASES, 2020 Certified Fiscal Plan, CMS

Sub-claim: There is no reason why the Medicaid inflation assumptions would not go down with the overall inflation assumption, much less why they would

increase

Response: Historically, growth in Puerto Rico Medicaid expenditures – as proxied by growth in Puerto Rico per-member, per-month (PMPM) rates – has

been both higher than and not clearly correlated with overall inflation. Similarly, in the mainland U.S. per-member Medicaid expenditures have not been

directly correlated with inflation. Furthermore, healthcare costs in general have been rising at a higher rate than overall inflation in both Puerto Rico and

the rest of the U.S.

National healthcare prices grew about 16% over 2012-2016 – about

three times the inflation rate

Modern Healthcarehttps://www.modernhealthcare.com/article/20181025/NEWS/181029946/healthcare-price-growth-significantly-outpaces-

inflation

Healthcare spending is projected to grow faster than GDP from 2019

to 2027

Peterson Foundation https://www.pgpf.org/blog/2019/05/healthcare-costs-for-americans-projected-to-grow-at-an-alarmingly-high-rate

CMS projects that healthcare prices will grow at an average annual

rate of 2.5 percent over the next decade

Peterson Foundationhttps://www.pgpf.org/blog/2019/05/healthcare-costs-for-americans-projected-to-grow-at-an-alarmingly-high-rate

Over 2020-27, growth in Medicaid spending is projected to rise further to an

average of 6.0 percent per year, due to faster per enrollee spending growth

CMShttps://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf



Change in Medicaid reform measures

Critique

▪ Post-measures Medicaid expenditures increase, despite lower Medicaid enrollment, due to significantly reduced Medicaid reform and

high Medicaid inflation rates

Response

▪ FOMB agrees that the 2020 CFP reduces the projected impact of Medicaid reform measures compared to the 2019 CFP:

– Puerto Rico’s healthcare system has faced significant challenges from recent events. Unfavorable trends instigated by the hurricane

(e.g., provider shortages, outstanding infrastructure needs) persist, and have been amplified by the earthquakes and COVID-19

pandemic

– The Government has completed the transition to a single region managed care model for Medicaid. However, the Government has

stalled in pursuing value-based health payment reforms and completing fraud, waste, and abuse initiatives

– As a result, the projected impact of Medicaid measures was both delayed and decreased in the 2020 CFP compared to the 2019

CFP (reducing total savings target across FY2020 – FY2025 by ~$2 billion)

▪ The Board has continued to press the Government to urgently implement value-based reforms that deliver both improvements in health

services and savings to the Commonwealth

Summary of annual Medicaid reform impact, $M

SOURCE: 2020 and 2019 Certified Fiscal Plans

347

478

615 638 663

62

147

235

328

0

FY23FY22FY21 FY25FY24

2019 CFP 2020 CFP



Detailed response

Disaster relief funding & COVID-19 stimulus funding



Effect of COVID-19 on timing of disaster-relief funds into the Puerto Rico

economy

▪ The 2020 CFP vastly exaggerates the effect of COVID-19 on timing of disaster-relief funds into the Puerto Rico economy

– The 2019 CFP assumed $36BN in FEMA and Community Development Block Grant (“CDBG”) spending from FY2020 – FY2024

– The 2020 CFP revises that downward by $15BN over the same period, but the only explanation offered is that “restrictions on

movement, materials, and travel will result in a six-to-nine month delay in the ability to disburse federal funding”

– It is not plausible that a 6 – 9 month delay due to COVID-19 could generate $15BN in delays over a five-year periodResponse

▪ FOMB agrees there is a change in the roll-out of the FEMA and CDBG-DR funding in 2020 CFP, as compared to CFP 2019. However,

the roll out update does not imply a change in the total amount to FEMA and CDBG funding from CFP2019 to CFP2020, only a delay in

the roll out (see details in the following page), which actually enhances the estimated growth in later years.

− In fact, there is more overall FEMA and CDBG disaster relief funding in the 2020 Certified Fiscal Plan versus the 2019 Certified

Fiscal Plan ($56.8B versus $54.7B), in part due to new earthquake related funding

▪ The vast majority of the roll out change in the 2020 CFP was an update to the pace of CDBG-DR spending based on data from agencies’

reporting, which shows that the flow of funds into the island has been slower than originally expected. For example, the 2019 CFP

estimated $2B in funding in FY20 from CDBG, but only $127M was actually disbursed

− This update to the pace of funding was unrelated to COVID and made to most accurately represent expected impact of funds

▪ On top of the update, the 2020 CFP takes into account a temporary six- to nine-month delay in the ability to disburse federal funding due

to COVID-19 restrictions on movement, materials, and travel. This delay in the roll-out of funds does not have an effect on long-term

impact, only on timing, as spending supports growth in whatever year it occurs

▪ The CFP FEMA figures are estimates of when the funds will impact the economy, which in most cases will be between the officially

reported levels of obligation and disbursement. This is due to the timing lag between obligation, the reconstruction activity, and

disbursement of such funding


Critique



Effect of COVID-19 on timing of disaster-relief funds

FEMA & CDBG funding in 2019 FP versus 2020 FP


The 2020 Certified Fiscal Plan updates the estimated roll out of disaster relief funding to reflect agencies’ information on the pace of the

funding, as well as expected effects of the COVID-19 pandemic

▪ CDBG-DR funding is rolled out over 15 years (FY18 to FY32) given agencies’ reports of slower that expected progress of fund disbursement

to date and historical data on other disasters, for which funding has been extended as necessary

▪ Additionally, the 2020 CFP takes into account a temporary six- to nine-month delay in the ability to disburse federal funding due to COVID-

19 restrictions on movement, materials, and travel

FEMA and CDBG roll out update

FEMA and CDBG funding in 2020 CFP, $B

0

4

6

10

8

2 3.41.4

3.5

01.3

5.03.5

4.9

3.5

3.10

3.501.21.42.1

3.5

3.50 1.4 0

1.4 1.4

4.0

8.4

0

3.5

3.2

8.5

0

6.16.6

1.4

4.8

6.6

3.5

1.4 1.21.4

FEMA CDBG

2

4

6

0

10

8

2.1

3.3 3.0

4.3

2.3

0.1

2032212020

5.6

1.2

3.3

1.5

2.7

25

0.7

2.2

3.3

3122

2.0 2.2

2623

0.9

2.8

2.1

24

1.4

3.3

2.1

3.3

2.2

3.3

27 28

1.5

3029

2.5

1.2

3.4

4.9 5.3 5.65.5 5.5 5.2

3.9

1.2

3.53.0

FEMA and CDBG funding in 2019 CFP, $B

x FY20-32 total FEMA and CDBG estimated funding

54.7

56.8



Effects of COVID-19 stimulus funds

Critique

▪ The 2020 CFP predicts significant economic downturn from COVID-19, but vastly understates economic effects of COVID-19

stimulus funds by assuming low pass-through percentages for a vast majority of these stimulus funds

1 After applying a marginal propensity to consume factor and the 2020 CFP model impact multiplier


Response

▪ 2020 CFP considers $14.6B COVID-19 related funds coming from both CW General Funds and an estimation of the

resources the federal government would allocate to Puerto Rico from all announced relief packages as of May 2020

▪ The 2020 Fiscal Plan estimates these resources’ effect assigning them a pass-through rate based on its destination (income

support or government expenditures and programs), and using the same approach as for disaster relief funding

▪ Around 60% of all COVID-19 funds are allocated to income support programs and are estimated to have a 100% pass-

through rate, directly supporting the PR economy on a dollar-for-dollar basis

▪ After applying pass-through rates to COVID-19-related funds, the 2020 CFP estimates a total of $9.6B flowing to the

economy as direct income support and additional fiscal measures that, after compensating the $6.7B of estimated income

loss due to the pandemic, result in a positive impact to PR’s economy of $1.6B1 for FY20-21, equivalent to 2.3% of the

Island’s FY20 nominal GNP



Effects of COVID-19 stimulus funds

Overview of COVID-19 federal funds and pass through rates

Category Specific concepts included

Pass-through

rate

Consumption and income

support

100.0%USDA Consumption support

Health, nutrition, housing, and sick leave assistance; unemployment insurance; individual

assistance economic impact payments; public service employee bonuses; employer tax credits;

one-time cash transfers to self-employed and small businesses; student loans

Government spending in

programs and services

23.5%Debris removal (Cat A - FEMA); protective (Cat B - FEMA) and hazard mitigation measures;

contractors payments (HM, FDRC); mission assignments; individual assistance services (e.g., crisis

counseling, disaster legal services, housing assistance, disaster case management, immediate

needs, mobile homes); CDBG funding to programs; private insurance selected concepts

(automobiles, private flood, and a proportion of government and pending claims); all earthquake

disaster funding; related management and administrative costs

National guard and law enforcement & justice additional expenditures

Measures intended to

prevent revenue and job

loss

Captured elsewhere

in the model

Federal FMAP rate increase; hospital and public safety equipment acquisition and additional

funding; nurses bonuses; reimbursements to municipalities for lost revenue; economic

stabilization loans to small businesses, states, and governments; tax incentives for businesses;

education payroll additional resources; transit and infrastructure maintenance; SBA - EIDL

loans and grants

Cost-match funds Captured elsewhere

in the model

Disaster relief cost-match obligations

Acquisition of goods that

will predominantly be

sourced off-Island

5.5%Research, diagnosis, vaccination, prevention & preparedness acquisitions (medical and pharma

supplies); evacuating diplomats expenditures; online learning hardware and software; other Div

B emergency appropriations

Capital growth in non-

specialized construction

categories (i.e. housing

and public buildings)

23.5%Public Buildings (Cat E - FEMA); other facilities (Cat G - FEMA); HM grants ceiling; CDBG

funding for capital stock formation; private insurance selected concepts (residential property,

commercial property, and a proportion of government and pending claims)

Capital growth in

specialized construction

categories (i.e. utilities

infrastructure)

15.5%Roads and bridges (Cat C - FEMA); water control facilities (Cat D - FEMA); Public utilities (Cat

F - FEMA);

Disaster relief funds COVID-19 related funds




Detailed response

GF underspend



General Fund expenses overestimation in the FP

Critique

▪ FY2020 General Fund expenses were ~$2.0BN lower than AAFAF’s budget and ~$1.5BN lower than the FY2020 General

Fund expense projection (post-measures) in the 2020 CFP

▪ FY2020 General Fund surplus was approximately $1.6BN greater than the projections in the 2020 CFP

Response

▪ The comparison between FY20 Budget and 2020 CFP is not accurate because the fiscal plan eliminates intergovernmental

expenses which are included in the budget

▪ That said, the way the Fiscal Plan presents General Fund expenses in different sections, it appears to understate GF

expenses (e.g., cap ex, policy back pay, GF portion of IFCU expenses are in separate areas within the FP)

▪ Additionally, the FY20 GF actual expenses are understated because

– The Government is delayed in recording expenses primarily due to COVID-19 and is still reconciling expenses

– Certain FY20 expenses were carried forward to FY21 per Section 7 of the GF Budget Control Language

– See next page for reconciliation of FY20 budget to actual expenses



General Fund expenses overestimation in the FP

Comparison of FY20 reported expenditures to FY20 budget

$ in millions

265335

564

808 53

434

7,000

8,000

1,000

7,500

10,000

9,500

9,000

0

500

6,500

8,500

Potential

Underspend

PayGo Remaining

Emergency

Reserves

FY20 BudgetFY20 Fund

Extensions

FY20 Reported

Expenditures

7,092

9,551

Add’l expense

(9/30 update)

Unrecorded

agency

expenditures

Updated FY20

file provided by

AAFAF in Nov

2020 has higher

expenditures

Paygo is not

fully

recorded in

the PRIFAS

system

• Repayment of Fed Funds held at GDB - $76m

• COVID Support Package - $129m

• ASES transfer - $378m

• Education - ($43)

• Hacienda - $17

• Health - $8

Total Unrecorded Disbursements: $564

• Capex Extensions: $462m

• Other Operating Extensions:

• COVID-19: $192m

• Other: $136m

• Utilities Reserve: $17m

Total Extension: $808m

Approximately

$210m is the

preliminary opex

underspend related

to COVID-19

Government

closures

Unrecorded Expenses

$1,164



Potential inflation of 2020 FP expenses

Critique

▪ The expenses included in the 2020 CFP are materially inflated

– Among other issues, the fiscal plan does not reconcile expenses against actual cash reserves and implied reserves, leading

to double-counting of either expenses or cash and reserves, and pension expenses are at the same time unaudited and

plainly overstated

Response

▪ Cash balances earmarked for specific purposes are not included in the Fiscal Plan and hence there is no double counting

▪ Pension Paygo projections are based on third party actuarial estimates, and may have some variation to actuals based on death

and retirements

Min.

cash

balance

$2500

10,000

0

25,000

5,000

20,000

15,000

$

Cash and

investments

$1,500

CW

restricted

$8,166

Available

balance

FY21

primary

surplus

$88

FY21

interest

FY21

ending

cash

balance

Adjusted

cash

balance

6/30/2020

$5,984

Cash

consideration

System

2000

$648

Payment

to unions,

retirees,

and other

claims

$10,470

Emergency

reserve

$650

$2,338

Timing Adj.Assumed

unavailable

or not

reviewed

$348 $355

$5,413

Separate

public

corporations

$894

$24,802

$10,027



Needs for minimum cash balances

Critique

▪ Expenditures in the 2020 CFP contain overly conservative assumptions around Medicaid funding, need for working capital

and reserve funds and ongoing restructuring costs.

– The 2020 CFP includes a $750MM Working Capital Fund and a $600MM cost-match reserve

Response

▪ $2.5B in minimum cash requirement is included under the revised PSA proposal presented on August 18th and October 30th,

which includes:

– Minimum cash level to ensure proper functioning of government operations, supported by Pew and GFOA guidelines,

among others

– $750M in a disaster aid revolver to fund major FEMA DRF-related capital projects. This is the same Working Capital Fund

referenced in the 2020 Fiscal Plan

– Funds that the CW is expected to advance to PREPA related to contractual LUMA payments

▪ The annual emergency reserve fund is exclusively allocated to ensure that Puerto Rico can respond quickly to emergencies,

including natural disasters (of which there have been several in the last few years).

▪ The Board will further address this topic during the cash discussion



Detailed response

PRASA



PRASA debt refinancing

Critique

▪ PRASA subordinated bonds are Commonwealth guaranteed debt, so the refinancing will reduce the P&I guaranteed by the

Commonwealth and provide additional debt capacity for Puerto Rico

Response

▪ If the issuance is successful, the 2008 Subordinate PRASA Bonds that had a Commonwealth guarantee will be replaced by

2020 Senior Lien PRASA Bonds without a Commonwealth Guarantee

▪ Since the Commonwealth Fiscal Plan does not assume that any of PRASA’s debt is paid via the CW guarantee and the

refunding savings do not impact the cash flow position of the Commonwealth.

− PRASA’s Subordinate Bonds that have a CW guarantee have not been previously included in prior discussions /

February POA because PRASA is not in Title III.

− These bonds are still being paid via PRASA’s revenues and the CW guarantee will only be triggered if PRASA defaults,

which has not occurred.

− The refunding that was announced is being done for annual savings and will only improve PRASA’s operating position.



Government response



Government Response

The Government agrees with most of the responses the FOMB has provided in their presentation, such as the

Oversight Board’s assessment of: (i) Debt Sustainability Analysis; (ii) FEMA recent obligations for PREPA &

Schools; (iii) Incremental Federal Funds: Supplemental Nutritional Assistance Program, Supplemental Social

Security and Low‐Income Subsidy (Medicaid part d); (iv) Economic backdrop. Additionally, we do want to address

several specific items:

• The Government agrees public sector employees should be better compensated. To that extent, the Government

has proposed a uniform remuneration plan as part of a broader civil service reform. This includes providing

up‐to‐date compensation for public sector employees. Unfortunately, FOMB has so far rejected this proposal.

• The Government has reduced expenses in a material way, but we also believe that the FOMB has gone too far and

that part of the problem with the lack of execution in some areas is that the Government does not have the

necessary resources to carry out some of its functions, suggesting that the targets set by the FOMB have been too

aggressive. Further blanket cuts based on arbitrary benchmarks are unwarranted. The best evidence of this is the

data points provided by the FOMB on page 34 of the CW Fiscal Plan Critique‐Response presentation.

• The Government’s fiscal plan submission dated May 3, 2020 establishes what the current Government priorities are.

It is also important to note that the Governor‐Elect has laid out in his Government Platform document some of his

public policy priorities, which among other things includes no further cuts to the University of Puerto Rico and

municipalities.

• The Government disagrees with FOMB on some policy issues but will not engage in fruitless debates with the

Oversight Board at this time. We do want to reiterate one more time that both Governor Vázquez and Governor‐Elect Pierluisi have stated their opposition to pension cuts as part of any Plan of Adjustment. Pensioners have

already had their obligations restructured downwards from their original expectations and rights. Further reductions

in pensions will only force the government to increase social service and welfare obligations to make up for

increased poverty.



Government Response (cont.)

The Government believes the Creditors’ Perspectives on the Certified Fiscal Plan presentation selectively presents

information that is taken out of context and does not reflect a holistic view of the economic landscape in Puerto Rico. For

example, using increased broadband usage and banking sector data as indicators of a sustained economic recovery when

in reality, they are being supported by temporary federal relief funds.

We wish we could say that we have turned the corner on the negative impact of COVID‐19, but that is not the case.

Following concerns raised by the Puerto Rico Department of Health and the medical community about increases in

infections, hospitalizations, and related deaths, on December 3, 2020, the Governor signed a new Executive Order which

imposed additional restrictions on commercial activities to prevent mass gatherings and to help control the spread of the

virus. This Executive Order will be in effect from December 7, 2020 until January 7, 2020. These measures are necessary

to prevent a potential collapse of the health system and to reduce the chances of greater restrictions in the future, but we

recognize that they also come at a great cost to the economy.

In addition, the Creditors’ Perspective presentation erroneously adds significant potential revenue streams or expense

reductions that are simply speculative or plain wrong, such as incremental FEMA funding or the impact of the SSI decision

(including the methodology used).

It is the desire of the Government to exit Title III as quickly as possible, avoid costly litigation and reduce the significant

expenses related to the restructuring and move forward in improving the lives of our citizens. And finally, and no less

important, get rid of the undemocratic Oversight Board. In that sense, it is imperative that any future Plan of Adjustment

should have Government support. The examples of the COFINA Plan of Adjustment, as well as the GDB Title VI

restructuring, and the Section 207 PRASA deal, show that with Government cooperation, successful restructuring can

occur under PROMESA. Without Government support, significant legal challenges will remain. But the settlement has to

be sustainable. Except for the reduction in pension benefits, we believe that the way the latest FOMB proposal was

structured is the right path to achieve this.



Supplemental Disclosure of MNPI Pursuant to Mediation Process

December 12, 2020

In the course of discussing the written materials disclosed contemporaneously herewith, representatives of

the Puerto Rico Fiscal Agency and Financial Advisory Authority and the Financial Oversight and Management

Board for Puerto Rico acknowledged that, of the approximately $787 million of COVID-related expenses

incurred by the Commonwealth to date, $657 million was disbursed from the Commonwealth’s general fund

(and therefore may be eligible for reimbursement) and $130 million was federal funds (with the example given

being federal funds made available for the purchase of laptop computers).



Appendix



Economic indicators in both Puerto Rico and U.S.: Sources

Indicator Sources

Poverty rate, % of families under poverty line (2019) U.S. Census Bureau

Child poverty rate, % under 18y.o. under poverty line (2018) Children’s Defense 2018 Under 18 Poverty Rate

Annual growth rate of real GDP per capita, % (2019) (PR & US: World Bank; MS Dept of Numbers

Population on Medicaid, % of population (2017) Medicaid and CHIP Payment and Access Commission (MACPAC)

GINI Index, income distribution (2019) U.S. Census Bureau

Unemployment, Total unemployed as a % of the labor force (2020) DOL

Cost of electricity per kWh, Industrial rates cents/kWh (2020) U.S. Energy Information Administration

Average Grade 4 Mathematics Standardized Testing Score , (2019) Nation’s Report Card

Median household income, US$ (2019) U.S. Census Bureau

Population with bachelor's degree or higher, % of persons age 25 years+ (2014-2018) U.S. Census Bureau

Population w. high school diploma or higher, % of persons age 25 years + (2014-2018) U.S. Census Bureau

Population, change (2010 - 2019) U.S. Census Bureau

Years of consecutive economic recession, number of years (2019) World Bank

Homicide rate, per 100K pop. (2018) World Bank; CDC for MS

Mean years of schooling, education attainment for 25 years above (2018) U.S. Census Bureau

Number of patents per year, per 1,000 pop. (2015) U.S. Patent and Trademark Office

Labor Force Participation Rate, % (2020) U.S. figures per BLS. Puerto Rico figures per Mercado Laboral

Population on food stamps program, % of total population (2020) CBPP, A closer look at who benefits from SNAP, 3/19/20, Vázquez

Garced's 5/18/20 press release

Business considered small businesses, % of total businesses (2018 PR, 2017 US) U.S. Census Bureau

Internet users, % of adult population with access (2017 PR, 2019 US) U.S. Census Bureau

Population with disability, % of total population (2018) U.S. Census Bureau

GDP per capita, US$ (2019) U.S. Census Bureau

Traffic deaths per population, (2018) Insurance Institute for Highway Safety

Number of police cars, per 10k residents (PR 2020, US 2013) DPS, Bureau of Justice Statistics

Response time for Emergency Medical Services, mins (2017) CAD Historical data- DPS; DPS

Literacy rate, % of people of ages 15 and above (PR 2017, US 2018) World Bank

Mathematics NAEP proficiency rate (8th grade), % (2019) National Center for Education Statistics



Macro - Economic indicators

▪ According to the US Census Bureau, only 8.6%

of US families were under the poverty line in

2019, compared to 39.5% of families in the

case of Puerto Rico.

– The island is also significantly poorer than the

poorest US state (Mississippi), where 14.8%

of families were under the poverty level.

▪ Puerto Rico also has a higher proportion of

families living just above the poverty line (125% of

poverty level).

– In the US, 3.2% of families found themselves

living only slightly above the poverty line,

compared to 8.8% of families in Puerto Rico.

▪ The recent spike in participants in Puerto Rico’s

Nutritional Assistance Program suggests many of

these Puerto Rican families may have already

fallen below the poverty level.

– Percentage of total population

participating in NAP rose from 43%

(January 2020) to 50% in September 2020

due to the pandemic.

– As of November 2020, NAP participation

has remained at these elevated levels.

▪ This will also contribute to a much slower

recovery in the case of Puerto Rico

1,000,000

1,100,000

1,200,000

1,300,000

1,400,000

1,500,000

1,600,000

Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20

NAP Participants in Puerto Rico, #

LockdownHurricane

Maria

SOURCE: US Census Bureau