On June 30, 2016, President Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) into law, providing a mechanism for focused improvement of the fiscal affairs of Puerto Rico and restructuring its economy and debt. The law was signed one day before the Government of Puerto Rico was set to default on a major debt payment. Key to the law is the establishment of an Oversight Board with budget and financial decision-making authority over Puerto Rico. The Board’s responsibilities include the following:
- Submitting recommendations on how to comply with the fiscal plan and promote financial stability;
- Enforcing budgets and ordering any necessary spending reductions;
- Reviewing laws, contracts, rules, regulations, or executive orders for compliance with the fiscal plan;
- Acting as the representative for Puerto Rico in proposing a plan of restructuring of its debt
Overall, the PROMESA legislation offers the opportunity for Puerto Rico to fundamentally reshape its economic and fiscal prospects and create a basis for sustained growth. Based on our understanding of the situation in Puerto Rico, the Board will need to establish a sound governance structure to effectively discharge its vast responsibilities and authorities. It will then need to focus on three inter-locking areas of effort – all of which must be executed for long-term success. A substantial effort will be expended to restructure Puerto Rico’s debt. But without thoughtful, sustained focus on the other elements, any effort is bound to be suboptimal. Systematic fiscal control – both spending control and revenue enhancement – is critical. It requires careful planning, budgeting, internal control, but also significant changes in the role of government, how it is organized and operates, and even the culture within government. Similarly, enhanced economic growth is needed within Puerto Rico to help create a better future, and PROMESA affords an opportunity to make structural changes to Puerto Rico’s economy to provide for that growth.
Puerto Rico Economic Restructuring: Areas of Focus Fiscal Control
- Establish governance
- Assess financial systems
- Review & create policies
- Establish internal control and ERM environment
- Assess & refresh financial management workforce
- Create a multi year spend plan
- Prepare budget
- Assess integrity of financial information
- Implement financial systems
- Assess costs & benefits of various options create risk-based framework for assessing cost reduction trade offs
- Enhance revenue
- Address tax evasion/compliance
- Create strategy for corporate tax posture
- Prioritize & pursue tax policy changes
- Update property registry
- Reprioritize & reduce spending
- Organize classes of creditors
- Litigation status
- Cost basis
- Create timeline for repayment
- Negotiate with creditors and manage expectations
- Develop communications strategy
- Track and interact with public social media updates
- Track and analyze media information
- Prioritize & restructure various sectors & systems
- Pursue privatization of state-owned enterprises
- Assess and reform pension system
- Assess and reform health programs
- Restructure human capital system (employee classification, performance management, and compensation systems)
- Prioritize & pursue policy changes (Jones Act, ACA, EITC, etc)
- Assess application of policies at commonwealth, state, and municipality level
- Create long term tax strategy
- Assess Puerto Rican organizational model
- Assess needed labor market reforms
- Assess competitive posture of Puerto Rican tourism compared to Caribbean nations
- Board stand-up
- Establish policies (human capital, contracting)
- Develop communications protocols (governmental entities, press, general public, other stakeholders)
- Staffing & resourcing
- Establish governance (chain of command, conflicts management, reporting, communications)
- Define success
- Establish performance metrics to track & plan to measure
- Implement Enterprise Risk Management
- Implement“program management office” policies and processes
Critical Steps to Establishing and Operating the Oversight Board
It is clear from the legislation that the Oversight Board will play a vital role in helping to ensure a viable financial and economic restructuring Puerto Rico and setting it on a sustainable economic footing, while working closely with the government of Puerto Rico. The Board will need its own resources to perform its functions, and its first few weeks and actions will be critical. Some initial activities that the Board can focus on to move forward demonstrably in a rapid fashion include:
- Governance: Developing plans, policies, procedures, and protocols, appointing core staff, and defining the roles and responsibilities of the Board and its members.
- Internal operations: Resourcing including hiring, procurement, and internal controls.
- Year one goals: Publicly setting forth goals and a “100 day plan” or similar set of intentions.
- Analysis of current state: Confirming the baseline situation from which to set performance measures for success.
- Communications: Establishing a public engagement strategy by announcing timelines
Guidehouse, formerly PwC Public Sector LLP, has extensive experience with similar efforts and challenges to those facing the Fiscal Oversight Board. Both domestically and internationally, Guidehouse advises our public and private sector clients on governance, transparency and integrity strategies to advance transformational initiatives that positively impacting civil society and citizenry. Below are some examples of our experience:
Troubled Asset Relief Program (TARP):
In 2008 when the United States faced a major economic crisis, Guidehouse assisted and supported the Department of the Treasury, Office of Financial Stability (OFS) in its efforts related to the Troubled Asset Relief Program (TARP) from inception. Our team advised on the design of initial operating capabilities and assisted in evolving its operations and 12 programs to a sustainable model. Guidehouse’s support covered a range of programs and functions: implementation of internal controls; support of program compliance; IT governance structure, systems requirements, analysis, and planning; and project management offices
Outcome: With Guidehouse’s support, OFS incorporated adequate controls over operations while designing programs in a constantly changing start-up environment, achieving an unqualified audit opinion on its financial statements for fiscal year (FY) 2009 through FY 2012
City of Detroit:
Similarly, in the City of Detroit, the Regional Economic Development organization engaged Guidehouse for strategy and implementation. The greater Detroit region experienced a historic decline in population, business, and infrastructure. Decades of disinvestment and city/suburb rivalries left the region fragmented; the region needed to grow its economy and population to rebuild. Guidehouse was engaged to conduct a current state assessment of economic development in the greater Detroit area to address the need for regional economic growth, improved business attraction, and increased investments. The team facilitated interviews with key public and private sector leadership and studied trends in the city, as well as other successful regions around the globe.
Outcome: The outcome was a new consensus among the most powerful stakeholders in the Detroit community on next steps for addressing regional gaps including a leadership forum, a strong execution organization, and coordinated marketing. Guidehouse designed a strategy for how to close current gaps and many of the recommendations are currently being implemented.
Guidehouse is working with several business and government organizations to make the public case for needed financial reforms, especially in connection with unfunded pension and retiree health care obligations. In other situations, Guidehouse is helping foreign governments design transparency and integrity strategies to enhance their attractiveness as an investment target for the private sector thereby promoting trade and foreign direct investment.
In 2014, PwC’s public sector practice (now Guidehouse) was the first and only professional services firm to win the prestigious Malcolm Baldrige National Quality Award. Guidehouse has unparalleled experience at managing large, visible government programs which can’t afford to fail (e.g., TARP, The Recovery Act, The 9/11 Victims’ Compensation Fund, BP Oil Spill Recovery).