Input:
	Background

		Puerto Rico’s Territorial Status and Residents’ Status

Puerto Rico is the most populous U.S. territory with approximately 3.3  million residents. Puerto Rico and its residents are generally subject to  the same federal laws as the states and their residents, except in cases  where specific exemptions have been made, such as with certain federal  programs. Individuals born in Puerto Rico are U.S. citizens and can  migrate freely to the states.

		Hurricane Maria

On September 20, 2017, Hurricane Maria, a category 4 storm, devastated  Puerto Rico and left nearly all its residents without potable running water  and electricity. In addition, the existing infrastructure for cellular and  wireless service was rendered virtually useless, hampering  communication. Four months after Hurricane Maria, more than a third of  Puerto Rico’s energy customers remained without power. The lack of  power and communication impeded residents’ ability to return to work.  According to the Federal Emergency Management Agency (FEMA),  rebuilding will take years.

		Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)

PROMESA established a Financial Oversight and Management Board for  Puerto Rico (Oversight Board), and granted it broad powers of fiscal and  budgetary control over Puerto Rico. The Oversight Board is comprised of  seven members appointed by the President of the United States from a  list of recommendations from House and Senate Leadership and one ex- officio member designated by the Governor of Puerto Rico. PROMESA  also established a mechanism through which the Oversight Board could  petition U.S. courts on Puerto Rico’s behalf to restructure debt.

		Government Assessment of Puerto Rico’s Economic Condition

Under Puerto Rico law, the Puerto Rico Planning Board (Planning Board)  has the legal responsibility of developing an economic outlook and a  detailed analysis of the economy, including gross domestic product  (GDP), and producing an annual Economic Report to the governor and to  the legislature. The Planning Board Chairperson releases GDP  measures only after approval from the governor’s office, according to  Planning Board officials.
The Department of Commerce’s Bureau of Economic Analysis (BEA)  produces economic accounts statistics that enable government and  business decision-makers, researchers, and the American public to follow  and understand the performance of the nation’s economy. To do this,  BEA collects source data, conducts research and analysis, develops and  implements estimation methodologies, and disseminates statistics to the  public. BEA calculates GDP for the United States, including for the  territories of American Samoa, Guam, the U.S. Virgin Islands and the  Commonwealth of the Northern Mariana Islands. Since 2009 the  Department of the Interior’s Office of Insular Affairs has reimbursed BEA  for estimating and publishing GDP for these territories. This office carries  out the administrative responsibilities of the Secretary of the Interior and  the Assistant Secretary for Insular Areas by coordinating federal policy for  these territories, but does not for Puerto Rico.
Census in cooperation with the Department of Labor’s Bureau of Labor  Statistics (BLS) produces the Current Population Survey (CPS), which  provides statistics on work, earnings, and education. CPS is one of the  oldest, largest, and most well-recognized surveys in the United States,  according to Census. In addition to being the primary source of monthly  labor force statistics, the CPS is used to collect data for a variety of other  studies that provide information on economic and social well-being  factors. The CPS does not collect or report data for Puerto Rico or any of  the other U.S. territories.
Census also produces the American Community Survey (ACS). It is an  ongoing survey that provides national information on a yearly basis that  includes information for the States, as well as for Puerto Rico. The ACS  includes data on jobs and occupations, educational attainment, veterans,  whether people own or rent their homes, and other topics. Information  from the survey generates data that help determine how more than $675  billion in federal and state funds are distributed each year.

		Federal Labor Laws

DOL’s Wage and Hour Division (WHD) administers the wage, hour, and  child labor provisions of the Fair Labor Standards Act of 1938 (as  amended) that sets the minimum wage and overtime pay standards  applicable to most U.S. workers. The Fair Labor Standards Act (FLSA)  requires employers to compensate employees who are covered by the  act and not specifically exempt from its provisions, at least federal  minimum wage (currently $7.25 per hour) and with premium pay (at one- and-one-half the regular rate) for overtime hours worked in excess of 40  hours in a workweek. There are a number of exemptions from the  requirements of the FLSA. For example, employees working in a “bona  fide executive, administrative, or professional capacity” (EAP) are not  entitled to premium pay for overtime.
The FLSA was enacted to address problems associated with substandard  working conditions by, in part, establishing a floor on wages and a ceiling  on hours, beyond which the employer is required to pay extra wages.  With a requirement for overtime pay, employers would either have to hire  more workers or assume extra wage costs in order to achieve the same  amount of work. Employees would be assured additional pay to  compensate them for the burden of a workweek in excess of 40 hours.  The Minimum Wage Study Commission of 1981 justified the EAP  exemption in part because these employees are associated with higher  base pay, higher promotion potential, and greater job security than most  of the U.S. labor force.
For employers and employees, the practical effects of the exempt  employee classification can be important. An exempt employee may be  required to work as many hours as it takes to complete a task. Although  this may be more than 40 hours per week, the employee will not be  entitled to overtime pay. Thus, an exempt financial manager may be  required to work 60 hours a week and be paid a set weekly salary. On the  other hand, a nonexempt bookkeeper may be required to work 60 hours  per week, but must be paid for 20 hours of overtime, in addition to a set  weekly salary.
The FLSA authorizes DOL to define EAP exemptions. Balancing the  competing interests of expanding exemptions and restricting them, DOL  regulations establish specific tests that must be met before an employee  may be classified as an EAP and exempt from overtime. In general, there  are three tests:
Salary Basis Test. The employee must be paid on a salary basis,  rather than an hourly basis. This means that the employee must be  paid at least the guaranteed amount, regardless of the number of  hours actually worked and the quality or quantity of worked  performed.
Salary Level Test. The employee must meet a minimum salary level  that indicates managerial or professional status.
Duties Test. The employee must have duties and responsibilities  associated with an exempt EAP position.
In 2003, DOL reviewed the regulations for EAP exemptions in response  to a GAO recommendation. Based on its review, in 2004 DOL increased  the minimum “salary level” threshold for an employee to be exempt from  receiving overtime pay to $23,660. In May 2016, DOL again updated  minimum the salary level threshold for EAP employees to be exempt from  receiving overtime pay to $47,476 in the 2016 Overtime Rule (see fig. 1).

		Status of the 2016 Overtime Rule

In July 2015, DOL proposed updating the overtime regulations relating to  the EAP exemption, and published a notice of proposed rulemaking.  After receiving approximately 294,000 comments, the Secretary of Labor  published the final rule on May 23, 2016 (2016 Overtime Rule). The major  changes included increasing the salary level threshold from $455 per  week ($23,660 annually) to $913 per week ($47,476 annually) and  providing an automatic update to the salary level every 3 years. DOL  estimated that about 4.2 million EAP employees in the states would  become newly entitled to overtime pay under the revised salary level  threshold. At the time of publication, the 2016 Overtime Rule would have  applied to Puerto Rico; however, on June 30, 2016, prior to the rule’s  effective date of December 1, 2016, PROMESA was enacted which, in  part, delayed the applicability of this rule to Puerto Rico.
Prior to the 2016 Overtime Rule going into effect, several states and  various business groups challenged the rule in the Federal District Court  of the Eastern District of Texas. On November 22, 2016, this court issued  a nationwide preliminary injunction preventing DOL from implementing  and enforcing the 2016 Overtime Rule for the duration of the case. In  the interim, the 2004 Overtime Rule salary level threshold for EAP  employees of $23,660 remained in effect. In July 2017, DOL published a  Request for Information to gather additional information to begin the  rulemaking process to replace and update the overtime regulations. In  August 2017, the district court determined that the 2016 Overtime Rule  was unlawful and ordered it invalidated. In October 2017, DOL filed a motion to appeal that ruling with the Fifth Circuit Court of Appeals. In  November 2017, DOL filed a motion to stay the appeal pending the  outcome of its rulemaking, and the Fifth Circuit granted this motion.  DOL’s comment period for the Request for Information ended on  September 25, 2017, and the agency currently is reviewing submissions.  DOL plans to publish a Notice of Proposed Rulemaking on the salary  level threshold for EAP employees in October 2018. Meanwhile, the  2004 Overtime Rule continues to remain in effect as of today, while the  appeal and rulemaking are pending.

		Puerto Rico’s Labor Laws

In addition to FLSA, workers and employers in Puerto Rico may be  subject to various other federal, Puerto Rican, and local labor laws or  regulations depending on eligibility, exemptions, and other limitations. In  some cases, including sick leave, vacation leave, mandatory meal period,  weekly day of rest, and maternity leave, these laws may be more  generous to workers than federal law, according to Puerto Rico  Department of Labor officials.
Sick leave. Non-exempt employees in Puerto Rico are entitled to  accrue at least 1 day of paid sick leave after working at least 130  hours per month.
Vacation leave. Non-exempt employees in Puerto Rico are entitled to  accrue paid vacation after working at least 130 hours per month. Non- exempt employees hired before January 26, 2017, are entitled to a  minimum monthly vacation leave accrual rate of one-and-a-quarter  days. Non-exempt employees hired on or after January 26, 2017, are  entitled to a minimum monthly vacation leave accrual rate of a half- day during the first year of service; three-quarters of a day after the  first year of service up to the fifth year of service; 1 day after the fifth  year of service up to the fifteenth year of service; and one-and-a- quarter days after the fifteenth year of service. However, in the case  of Puerto Rico resident employers who have less than 12 employees,  the minimum monthly vacation leave accrual rate is a half-day.
Mandatory meal period. Non-exempt employees in Puerto Rico are  entitled to a mandatory meal period between the third and sixth  consecutive hour of work. In general, any employer that employs or  allows an employee to work during the meal period is required to pay  said period or fraction thereof at a pay rate equal to twice or one and  one-half times the regular pay rate, as applicable.
Weekly day of rest. Non-exempt employees in Puerto Rico are  entitled to a mandatory weekly day of rest for every six consecutive  days of work. Work performed during the day of rest is considered  overtime and requires extraordinary compensation, regardless of the  total number of hours that the non-exempt employee worked in the  preceding 6 days.
Maternity leave. Pregnant women in Puerto Rico are entitled to paid  maternity leave 4 weeks before and 4 weeks after childbirth. Working  mothers may opt to take only 1 week of pre-natal leave and extend  post-natal leave up to 7 weeks. Women who adopt a child 5 years old  or younger are entitled to 8 weeks of maternity leave.

		Possessions Tax Credit

The Tax Reform Act of 1976 created the possessions tax credit to assist  Puerto Rico and other insular areas in obtaining employment-producing  investments. The credit effectively reduced federal taxes on income  earned by qualifying U.S. corporations from operations in U.S. insular  areas. However, the credit was repealed in 1996, but existing claimants  were allowed to continue to use the credit during a 10-year phaseout  period ending in 2006. In 2006, we reported that U.S. corporations  claiming the credit dominated Puerto Rico’s manufacturing sector in the  late 1990s and that after the tax credit began to phase out in 1996, the  activities of these corporations decreased significantly.

	Unreliable Economic Data Make Conditions in Puerto Rico Difficult to Evaluate

		Prior to Hurricane Maria, Puerto Rico Had Already Experienced Prolonged Economic Decline

			Overall Economic Decline

Puerto Rico Planning Board (Planning Board) data show that Puerto Rico  has been in an economic decline for more than a decade. From 2005 to  2016, Puerto Rico’s GDP decreased by over 9 percent, after adjusting for  inflation. Beginning in 2006, Puerto Rico’s economy experienced declines  in real output in 9 of the next 11 years, as measured by real GDP (see fig.  2). While we have concerns about the precision of the Planning Board’s real GDP measure from year to year, as discussed later, we are confident  in the downward direction of growth.
Puerto Rico officials described the economic contraction as a downward  spiral, where negative economic growth spurred outmigration by skilled  workers, leading to decreased tax revenue and thereby increasing public  debt per capita. This, in turn, they said decreases new investment and the  cycle repeats.
Five Main Factors that Contributed to  Puerto Rico’s Economic Condition  In May 2018, GAO reported on five main  factors it identified through discussions with  officials and experts and a review of literature.  The factors were:  Outmigration and diminished labor force.  Some experts tied Puerto Rico’s negative  economic growth to a steady decline in its  population and labor force since 2005.  According to Census data, Puerto Rico’s  aging population means there are  proportionally fewer individuals of working  age.   Regulatory challenges of doing business  in Puerto Rico. Some experts cited the high  cost to businesses of complying with Puerto  Rico’s regulations, such as the permitting  process for new businesses, and federal laws,  such as the minimum wage law.  High cost of importing goods and energy.  Many of the goods used by businesses in  Puerto Rico must be imported, significantly  increasing their costs and in turn the cost of  doing business. Petroleum, the main source  of electronical energy generation, is a good  whose high cost was particularly  consequential to Puerto Rico’s economic  struggles, according to Puerto Rico  government officials, experts, and a literature  reviews.  Phaseout of the possessions tax credit.  The loss of the tax credit was been cited by  some as a potential cause of Puerto Rico’s  economic decline since 2006; however, there  was no consensus as to the magnitude.  Banking and housing struggles. Puerto  Rico’s banks have struggled and several have  closed. Puerto Rico’s housing prices peaked  in 2009, but fell 25 percent by January 2017,  according to Federal Housing Finance Agency  data.
In our May 2018 report examining the Puerto Rico debt crises, we spoke  with officials and experts, and conducted a literature review, and identified  five main factors contributing to Puerto Rico’s current economic condition:  outmigration and a diminished labor force; regulatory challenges of doing  business in Puerto Rico; the high cost of importing goods and energy; the  phaseout of the possessions tax credit; and banking and housing  struggles (see sidebar).

			Hurricane Maria’s Economic Impact

Puerto Rico was already experiencing a long economic contraction when  Hurricane Maria made landfall in September 2017. Previous U.S. natural  disasters, such as Hurricane Katrina in the Gulf Coast, have had  significant adverse impacts on the economies of the affected regions,  including significant outmigration. Immediately following Hurricane  Katrina, the Gulf Coast experienced a number of challenges to its  economy including a rise in unemployment; an increase in outmigration  and decrease in housing units; a decline in state tax revenue; and a  decline in imports and exports. Puerto Rico may experience similar  challenges. For example, a February 2018 Federal Reserve Bank of New  York press briefing on the impact of Hurricanes Maria and Irma  characterized the 4 percent local job losses in Puerto Rico as  substantial. Further, the briefing indicated that the true economic cost  may be understated because some workers who are still employed likely  suffered a drop in income, there may be unmeasured effects on the  informal economy, and the value people place on quality of life issues are  not measured.
The substantial damage to the territory also accelerated outmigration and  will likely worsen its economic condition. A January 2018 report from the  Puerto Rico government identified the 2017 hurricanes as having a  significant impact on the economy and projected that the population will  decline by 10 percent over the next 2 years and could decline by nearly  20 percent over the next 5 years as people leave the island due to poor  economic conditions. Initial data from the U.S. Bureau of Transportation  Statistics show that 92,284 more people flew out of Puerto Rico with one- way tickets than flew into Puerto Rico in October 2017, the first full month  after Hurricane Maria. That number represents a 255 percent increase  over similar statistics in August 2017 and a 1,195 percent increase over  October 2016 (see fig. 3). By December 2017, 17,281 more people flew  out of Puerto Rico with one-way tickets than flew into Puerto Rico. This is  149 percent increase over similar statistics for December 2016. While the  extent to which citizens of Puerto Rico may return to the territory is  unclear, the initial outmigration could prolong negative economic growth.

		Methods Currently Used To Measure Puerto Rico’s Economy Are Outdated and Lead to Unreliable Measures

			Measuring GDP in Puerto Rico

Outdated methods for measuring GDP make it difficult for the Puerto Rico  government to fully analyze specific economic needs and develop long- range plans. There is no federal statistical measure of Puerto Rico’s  GDP. The U.S. Census’ Economic Census of Island Areas provides  some limited insights into Puerto Rico’s economic performance by  industry, including revenue, payroll, employee count, and inventories.  The Economic Census of Island Areas is updated every 5 years, but does  not include total GDP. Instead, each year, BEA calculates GDP for four  other territories and is reimbursed by the Department of the Interior’s  Office of Insular Affairs for the estimation and publication of this  information.
In contrast, Puerto Rico’s Planning Board calculates GDP, but its  methods are outdated and therefore unreliable, as they do not provide a  precise measure of economic activity. Specifically, a 2011 White House  Task Force Report examining Puerto Rico’s economic challenges found  the Planning Board’s methods were outdated because they did not follow  the same standards used for the rest of the United States. The Task  Force also found that the methodology was not in line with modern  statistical techniques, resulting in a less precise measure of Puerto Rico’s  economic activity. Accurately calculating GDP is necessary to  adequately measure total output of goods and services in Puerto Rico.  GDP is also useful in measuring productivity and conducting monetary  policy, and may be used to develop and apply appropriate policies for  promoting economic growth. For example, a reliable and timely measure  of GDP helps government officials calculate more accurate projections of  tax revenue.
The Planning Board’s method for calculating GDP does not effectively  adjust for inflation because, the methodology uses a fixed-weighted index  method that assumes the structure of the economy—what is being  produced and prices of what is being produced relative to each other—is  roughly constant over time. Further, the Planning Board is using this  method to report inflation adjusted GDP based on the prices in a 1978  “market basket”—a fixed set of goods and services that people buy for  day-to-day living. The Planning Board then uses 1954 as the reference  year in its inflation adjustment to report GDP based on the price of goods  and services. Consequently, the Planning Board’s real GDP measure  may not be accurately adjusted to reflect current purchasing patterns and  inflation in the prices of purchased products.
BEA provides Puerto Rico’s Planning Board with some support in its  calculation of GDP, but does not verify the accuracy of the calculation. In  response to the 2011 White House Task Force findings, BEA began  providing technical assistance and support to the Planning Board in  updating its methods to adjust GDP for inflation and developed a report  with recommendations for updating economic accounts. BEA found that  the Planning Board’s methods did not comply with the internationally  agreed upon standards for compiling measures of economic activity.  Officials said that BEA was helping the Planning Board update its  methods; however, a change in the level of communication slowed the  update from 2013 through 2014. As a result, the Planning Board  continued to use the same outdated methods.
In January 2017, the Planning Board and BEA signed an agreement to  modernize Puerto Rico’s economic accounts and align them with  international guidelines. The agreement also tasked the Planning Board  with providing deliverables in regular intervals beginning in spring 2017,  including publication of alternative estimates of GDP that implement steps  towards modernization. BEA officials told us that they are providing  support to the Planning Board, and Planning Board officials told us they  are working on updating the methodology. However, as of March 2018,  the Planning Board had not yet produced all of the agreement  deliverables, including publication of alternative GDP estimates.
Given the impact of Hurricane Maria, it may be challenging for Puerto  Rico to modernize its GDP measures. Planning Board officials told us in  August 2017 that they were working to update their GDP methodology, so  that it is similar to the one used by BEA, and that they would be updating  to a 2007 “market basket.” Board officials said the new GDP figures  were expected to be completed in December 2017. Their release was  delayed in the aftermath of Hurricane Maria, but officials said they now  expect to release GDP measures using the new methodology in summer  2018. Officials added that they plan to continue publishing GDP  measures using the old methodology along with the new one for trend  comparisons. The Planning Board and BEA estimated the cost to the  Puerto Rico government to modernize its GDP measure is $2 million — including staff time and computing infrastructure.
A 2016 bi-partisan Congressional Task Force on Economic Growth in  Puerto Rico (2016 Congressional Task Force) recommended BEA  calculate GDP for Puerto Rico as it does for the states and other  territories, and BEA’s long-term goals include this objective. Further, in  February 2018, the Financial Oversight and Management Board for  Puerto Rico recommended that the Governor of Puerto Rico support  efforts to implement the Congressional Task Force recommendation. BEA  officials told us one of the agency’s long-term goals is calculating GDP for  Puerto Rico and they have discussed including Puerto Rico in its  reporting of GDP. Officials noted that including Puerto Rico in GDP  reporting would require additional funds similar to reimbursements it  received for the other four territories’ calculations.
BEA’s mission is to promote a better understanding of the entire U.S.  economy by providing the most timely, relevant, and accurate economic  accounts data in an objective and cost-effective manner. BEA has  provided technical assistance and support for 6 years; however the  Planning Board has not yet modernized its methods to report a reliable  GDP measure, and BEA has not included Puerto Rico in its reporting  efforts. Federal standards for internal control state that management  should use quality information to achieve the entity’s objectives. The  lack of a federal GDP measure for Puerto Rico makes it difficult to make  reasoned policy recommendations, adds uncertainty around issues  affecting Puerto Rico’s economy, and makes it more difficult to identify  fiscal and economic recovery plan priorities. Without modernized GDP  methods, it remains difficult to compare Puerto Rico’s GDP with the rest  of the United States and the other four territories for which BEA calculates  GDP. Finally, without such a measure of GDP, federal policy makers and  private investors must rely on various and sometimes unreliable data  sources to try to establish common facts about Puerto Rico’s economic  condition—an impediment in reaching consensus, engaging in meaningful  policy discourse, and investment.

			U.S. Government Labor Statistics for Puerto Rico

Federal labor statistics for Puerto Rico are incomplete because the  Current Population Survey (CPS) does not include Puerto Rico and four  other U.S. territories, and the American Community Survey (ACS)  primarily provides data on population and housing, rather than labor.  PROMESA recognized this and recommended that Census consider the  feasibility of including Puerto Rico, and the other territories in the CPS.  Specifically, PROMESA suggested that Census conduct a study to  determine the feasibility of expanding data collection to include Puerto  Rico and the other four U.S. territories in the CPS and if necessary,  request the funding required to conduct this feasibility study as part of its  budget submission to Congress for fiscal year 2018. Census officials  told us they estimate a feasibility study including all of the U.S. territories  will cost $1.1 million in fiscal year 2018, but did not request funding. The  2016 Congressional Task Force also recommended that BLS and Census  take reasonable steps to include the territories.
Federal standards for internal control state that management should use  quality information to achieve the entity’s objectives. CPS data are  intended to provide a comprehensive body of labor data that can be used  to keep the nation informed about the economic and social well-being of  its people, but Census and BLS are unable to report on the economic and  social well-being of a segment of the nation and its people. Census  officials told us they are concerned about unduly burdening Puerto Rico  citizens with data collection efforts that would provide state level  estimates. However, Census has not studied the feasibility of including  Puerto Rico in the CPS, which would inform officials’ decision on whether  to include Puerto Rico and the other territories in the CPS. By conducting  such a study, Census would better understand the tradeoffs of including  or continuing to omit Puerto Rico from CPS, including the extent to which  it can be considered in public policy decisions, such as the 2016 Overtime  Rule.

	Increasing the Overtime Threshold Would Affect a Small Percentage of Workers in Puerto Rico and Could Affect Employment Conditions

		The 2016 Overtime Threshold Increase Would Likely Affect Less Than 5 Percent of the Workforce in Puerto Rico

Our estimates suggest that a larger percentage (about 4.5 percent) of  Puerto Rico’s total workforce would have been affected by the Overtime  Rule than the states (about 2.6 percent), based on our analysis of ACS  data and DOL’s analysis of CPS data. Specifically, DOL’s analysis  estimated that of 159.9 million wage and salary workers in the states,  about 4.2 million (or about 2.6 percent) might be directly affected by the  2016 Overtime Rule. In our analysis of the Overtime Rule for Puerto  Rico, we estimated that about 47,250 (about 4.5 percent) of 1.06 million  wage and salary workers in Puerto Rico would have been directly  affected (see fig. 4).
The lack of data from CPS on Puerto Rico and the effects of Hurricane  Maria hinder our ability to fully assess the potential effect of the 2016  Overtime Rule on Puerto Rico. Instead, we used data from the 2015 5- year ACS to estimate the impact of the Overtime Rule on Puerto Rico.  The ACS employment data lack multiple variables available in the CPS;  hence, we were limited in what we could estimate. For example, DOL’s  estimate for the states included the wealth transfer from employers to  employees, which is important for understanding the economic effects of  the 2016 Overtime Rule. We do not provide similar insights because of the difference in variables in the ACS and CPS. (See table 2 in appendix I  for the differences between our analysis and that of DOL.) Additionally,  DOL estimated the effect the Overtime Rule would have on the probability  that a worker had multiple jobs, but the limitations of the data we used  kept us from performing this analysis.
Our analysis estimates that the impact of the 2016 Overtime Rule in  Puerto Rico would have been largely concentrated in four industries:  education and health services, wholesale and retail trade, public  administration, and financial activities. We estimated that in these four  industries about 76 percent (about 36,000) of our approximate 47,250  total workers would have been directly affected (see table 1). The largest  directly affected industry, education and health services, makes up about  43 percent (about 20,000) of this total.

		Raising the Overtime Threshold Could Increase Wages for Some, but Reduce Overall Hours and Employment in Certain Industries

Depending on how employers respond to an increase in the overtime  threshold, the effect of amending the overtime regulations could vary  across employees. Similar to employers in the states, employers in  Puerto Rico could respond to changes in the overtime regulations based  on the current employee’s salary and work schedule by: 1) making no  changes, 2) paying overtime, 3) raising salaries, or 4) adjusting hours  worked (see fig. 5). In its analysis of the impact of the 2016 Overtime  Rule in the states, DOL estimated the largest impact would be an  aggregate transfer of income from employers to employees, which would  be seen as a positive for some employees (e.g., increased pay, fewer  hours for same pay, or new hires) and a negative for others (e.g.,  employers in our facilitated discussion groups said they would have  layoffs, move employees from salaried to hourly, or lower benefit  amounts).
While we were unable to conduct a full impact analysis identical to DOL’s  because of data limitations, we held facilitated discussion groups, to gain  insight into how employers would have responded if the 2016 Overtime  Rule was implemented in Puerto Rico. Views reported by participants in  these groups may not be representative of all Puerto Rico employers, but  they provide illustrative examples of the types of steps employers might  have taken if the 2016 Overtime Rule were implemented. Employers in 2  of our 10 discussion groups said they would make staff adjustments by  increasing the salary of some employees while, in some cases,  minimizing the role of others. However, employers in 9 of our 10 of our  discussion groups said they might also need to convert the remaining  employees to part-time or hourly work, reduce their hours, or lay them off. “We have 125 exempt employees. The rule  change would impact our labor costs a lot. We  would need to minimize employees/hours to  reduce the labor costs. We may adjust our  contribution to medical plans to make up for  the increased labor costs.”  “With the new rule, half  would  need to be paid overtime or increase salary.  This would leave us not enough flexibility to  cover the hours or operation.”  “We have a total of 850 employees. About 8  would be affected by the change. Of those 8,  3 we would boost their salary; the others will  be switched to hourly. This may affect their  benefits.”
Through these facilitated discussion groups, we also learned that  employer responses to the 2016 Overtime Rule may differ by industry.  Employers in 3 of 10 industry discussion groups said they would be able  to absorb some of the higher costs associated with an increase in the  Overtime Rule threshold. For example, some manufacturers told us it  would not be difficult for their businesses to absorb these additional costs,  particularly if the salary threshold was at a somewhat lower level.  Similarly, some hotel employers told us they would be able to absorb  costs associated with the change across their many hotel locations, but  others said they may not be able to assimilate the threshold increase.  Hospital employers who participated in our facilitated discussion groups  told us they have lower margins and face threats of closure even without  the threshold increase. Some restaurant and hotel employers who  participated in our facilitated discussion groups said they may be unable  to pass associated increased labor costs to consumers; some would have  to require exempt workers to work longer hours and reduce the number of  full time employees or hours (see sidebar).
Employers could respond by adjusting staff if the 2016 Overtime Rule  goes into effect, but the impacts to employers may be limited and the  workforce could benefit from the 2016 Overtime Rule change according to  our interviews with 1 economist and 1 labor group official. One   economist suggested that instead of having two employees who work 60  hours each, an employer might hire a third employee so that each works  40 hours. Additionally, this economist said an increase to the threshold  would not be as burdensome to business, because employee wages  have risen above the current overtime salary threshold. One labor group  representative suggested that the 2016 Overtime Rule would have a  minimal impact because very few workers in Puerto Rico earn enough to  meet the 2004 salary threshold. Further, one economist said that under  the current threshold, workers work excessive hours and do not have the  same bargaining power. An increased overtime threshold would improve  these dire working conditions. Specifically, this economist said that  implementing the 2016 Overtime Rule would encourage firms to hire  more workers, provide employees with more bargaining power, and help  prevent worker exploitation.
One economist said implementing the 2016 Overtime Rule only in the  states could increase the wage differential between Puerto Rico and in  turn increase outmigration from Puerto Rico. One member of the Puerto  Rico Economic Administration said that if Puerto Rico were to have a  lower threshold than the U.S. mainland the effects might be worse than  those caused by the increased labor costs of implementing the higher  threshold. Another economist said that while hours may be adjusted or  layoffs may occur immediately following implementation of the Overtime  Rule, these impacts would not be a major concern within 3 to 4 years.

	Conclusions

Puerto Rico has long been experiencing severe economic challenges and  its default on over a billion dollars of debt payments since 2015 has  focused the need for attention to this territory. As Puerto Rico officials  were in the process of taking action to update their methodology for  reporting inflation-adjusted GDP, Hurricane Maria exacerbated the  territory’s economic challenges. FEMA estimates that it may take years  for Puerto Rico to recover. The lack of accurate economic and  comprehensive labor data hinders policymaking, including a  determination of the potential impact of changes to the overtime  regulations. To help address Puerto Rico’s economic challenges now and  in the future, the federal government and investors need updated and  reliable data. Going forward, having BEA include Puerto Rico in its  calculation of GDP would provide federal and local authorities, as well as  businesses and investors, with reliable data on Puerto Rico’s economic  condition that can be directly compared with the United States and other  territories. BEA’s long-term goals include measuring Puerto Rico’s GDP,  but having reliable data now would help address significant economic  challenges in the short term. Likewise, studying whether including Puerto  Rico in the Current Population Survey is feasible would allow DOL and  other policymakers to be better positioned to fully consider the cost of  including the territory against the implications of exclusion.

	Recommendations for Executive Action

We are making a total of three recommendations, including two to  Commerce and one to DOL. Specifically:  The Secretary of Commerce should ensure that the Bureau of Economic  Analysis includes Puerto Rico in its reporting on gross domestic product,  as it does for four other U.S. territories. (Recommendation 1)
The Secretary of Commerce, in cooperation with DOL’s Bureau of Labor  Statistics, should conduct a study on the feasibility of including Puerto  Rico in its reporting of the Current Population Survey. (Recommendation  2)
The Secretary of Labor, in cooperation with the Commerce’s Census  Bureau, should conduct a study on the feasibility of including Puerto Rico  in its reporting of the Current Population Survey. (Recommendation 3)

	Agency Comments and Our Evaluation

We provided a draft of the report to the Government of Puerto Rico, the  Department of Commerce (Commerce), and the Department of Labor  (DOL) for review and comment. In written comments that are reproduced  in appendix IV, Commerce agreed with the recommendations made to it.  In an email, DOL’s Deputy Assistant Secretary for Policy stated that the  agency did not have any comments on the report. In addition, Commerce  and the Government of Puerto Rico provided technical comments, which  we incorporated into the report as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Government of Puerto Rico, the Secretary of the  Department of Commerce, the Secretary of the Department of Labor, and  other interested parties. In addition, this report is available at no charge  on the GAO website at http://gao.gov.
If you or your staff have any questions about this report, please contact  Cindy Brown Barnes at (202) 512-7215 or Oliver Richard at (202) 512-  8424.You may also reach us by e-mail at brownbarnesc@gao.gov or  richardo@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made key contributions to this report are listed in appendix  V.

Appendix I: Objectives, Scope, and Methodology

Our review addressed: (1) the economic conditions in Puerto Rico as of  the end of 2016; and (2) the potential effects of implementing the 2016  Overtime Rule on Puerto Rico’s economy.
To evaluate the current economic conditions in Puerto Rico quantitatively,  we analyzed (1) data from the Puerto Rico Planning Board’s (Planning  Board) Statistical Appendix for the Governor that includes data on Puerto  Rico’s gross domestic product (GDP) from 1990 through 2016 and (2)  passenger data for Puerto Rican airports for years 2016 and 2017 from  the Bureau of Transportation Statistics (BTS).
To analyze the real GDP of Puerto Rico from 1990 through 2016 and  Puerto Rico GDP by industry for 2016, we relied on data from the  Planning Board’s Statistical Appendix for the Governor. We interviewed  Planning Board officials responsible for producing the annual GDP  estimates to understand how the data were prepared and any limitations  to the data, and concluded that the while we have concerns over the  precision of real GDP data, they were sufficiently reliable for our purposes  of determining the direction of growth.
To analyze the flow of passengers through Puerto Rican airports before  and after Hurricane Maria, we relied on the BTS’ monthly passenger data  for 2016 and 2017 as accessed through Diio Mi: Market Intelligence for  the Aviation Industry. Diio Mi is a private contractor that provides online  access to U.S. airline financial, operation, and passenger data. We  reviewed the relevant documentation of the dataset and previous GAO  reports and found the dataset sufficiently reliable for our purposes.
To assess the potential effects of the 2016 Overtime Rule on Puerto Rico  quantitatively, we analyzed and reported data from the American  Community Survey (ACS) for calendar year 2015, because DOL used  2015 data in its impact analysis of the Overtime Rule on the states. The  ACS is a national survey designed and administered by the Census  Bureau (Census), and it contains data on individual earnings. Since 2005,  the ACS has also included the Puerto Rico Community Survey (PRCS)  which extends the survey through Puerto Rico. Our data set selection  process included interviews with current and former agency officials as  well as review of dataset documentation such as data handbooks, data  dictionaries, and guidance on the different versions of data available. The  ACS is conducted annually with estimates based on 1-year and 5-year  data with benefits and drawbacks for each version. The 1-year ACS is  updated the earliest and gives the most current data; however, according  to Census’ guidance on the different ACS samples, it also contains the  smallest sample size and is more appropriate for analyzing large  populations than small ones. The 5-year ACS is the most reliable data,  according to Census’ ACS guidance, as it includes the largest population  size, which can be used to analyze small populations; however, the 5- year ACS is the least current version of the data. Additionally, while the  2015 5-year ACS data were not the most recent available, we used them  because the Department of Labor (DOL) used 2015 data in its impact  analysis of the 2016 Overtime Rule for the states. Based on these  benefits and limitations, we chose to use the 2015 ACS 5-year  estimates. Estimates produced from ACS data are subject to sampling  error. For all of our estimates we weighted observations based on the  individual weight. We compared our estimates of values derived from our  weighting procedures to those published by the DOL and found them to  be consistent. In addition to estimates, we generated standard errors or  the margin of error for the 95 percent confidence interval, and report them  with estimates in figures and tables. Based on our data checks, reviews  of documentation and interviews with agency officials, we found the ACS  data to be sufficiently reliable for our purposes.
In addition to the quantitative data collected, we reviewed relevant federal  laws, regulations, court documents, agency guidance, and internal  controls related to the 2016 Overtime Rule, labor in Puerto Rico, and  federal statistical measures for Puerto Rico. Additionally, we reviewed  previous GAO reports on Puerto Rico and its economy. We interviewed  DOL and Commerce officials at the national level. We interviewed Puerto  Rican government officials to better understand current economic  conditions and the statistical measure used to reflect the economic  conditions. We interviewed representatives of national and Puerto Rican  employer and labor organizations to gain their perspectives on the impact  of the 2016 Overtime Rule and the condition of the economy. We  conducted 10 facilitated group discussions with Puerto Rican employers  in the manufacturing, restaurant, hotel, hospital, and professional services  industries.  These are some of the industries that employ the largest  number of people in Puerto Rico and are among the most likely to be  impacted by the 2016 Overtime Rule. Employers were selected to  represent both large and small business perspectives in each industry.  Views reported by participants in these groups are not representative of  those of all Puerto Rico employers and for that reason are not  generalizable. We also interviewed four economists, identified from prior  work and interviews with agency officials, industry groups, and labor  groups as having expertise relating to the 2016 Overtime Rule or the  Puerto Rico economy, regarding the economic conditions of Puerto Rico  and the potential economic impacts of the 2016 Overtime Rule.

	Analysis of American Community Survey Data

For our analysis of the effects of the 2016 Overtime Rule on Puerto Rico,  we mirrored the analysis conducted by DOL for the impacts of the rule on  the United States. While the methodologies are similar, the DOL analysis  used the Current Population Survey (CPS) data that do not include  Puerto Rico. The ACS data we use serves a similar role; however, we  made a few adjustments to the analysis in light of available data.  Specifically, in the ACS, there is no variable identifying whether the  individual works an hourly job. In order to simulate the removal of hourly  workers from the sample, we randomly assign hourly worker designation  to the same proportion of the population that are classified as hourly  workers in DOL’s analysis (41.01 percent). A few assumptions are  associated with this manipulation: 1) We are assuming that the proportion  of the population that works an hourly job in Puerto Rico is similar to that  of the 50 states, and 2) when we perform industry and region analyses,  we assume the same hourly worker proportion across all industries and  regions. Additionally, in its final rule, DOL analyzes the impact of the 2016  Overtime Rule on individual worker’s propensity to work multiple jobs; the  ACS does not identify workers employed in multiple jobs and we could  not perform this analysis. Also, the CPS data contain several variables on  the number of hours worked that allowed DOL to analyze who likely  works overtime on a regular basis. While the ACS includes a variable  indicating the usual number of hours worked per week over the past year,  we found it does not capture the schedule fluctuations as accurately as  the CPS variables. As such, we do not calculate the dollar amount  transfers from employers to employees and dead weight losses, or the  loss in economic efficiency from the rule that DOL shows in its analyses.  To the extent possible, we used DOL’s methodology to determine the  potential effect of the 2016 Overtime Rule in Puerto Rico. However, due  to data limitations there were some ways in which our approach differed  from the approach used by DOL.
In DOL’s analysis, the sample includes only the workers covered by its  regulation. We adapt the sample to match the DOL’s analysis as follows:  1) remove military personnel, unpaid volunteers, self-employed  individuals, clergy and other religious workers, and federal employees, 2)  remove blue-collar workers and workers paid hourly; and 3) remove  workers who are categorized under occupation and industry codes that  are generally exempt under other exemptions.
For consistency, our analysis makes the same adjustments to our sample  that DOL makes in its analysis. Since we use the 2015, 5-year ACS data,  we first put all wages into 2015 levels using ACS defined variables. Next,  we inflate from 2015 to 2017 levels using the calendar year consumer  price index (CPI-U). Just as in DOL’s analysis, we do not know whether  any specific worker satisfies the duties test of the 2016 Overtime Rule, so  we follow the same steps DOL took in its final rule. These steps include  using DOL’s probabilities that specific job codes meet the duties test and  assigning the probability to individual workers using the gamma  distribution with the shape parameter alpha was set to the squared  quotient of the sample mean divided by the sample standard deviation,  and the scale parameter beta was set to the sample variance divided by  the sample mean. Additionally, DOL explicitly removes certain industries  and occupations from the sample and we follow its methodology exactly  to remove these. Finally, to estimate the population that would have been  affected by the 2016 Overtime Rule, we limit the sample to only those  above the 2004 overtime salary threshold ($23,660) and below the 2016  salary threshold ($47,476) just as DOL did in its analysis.
DOL’s estimates for industries and regions use different groupings than  those provided in the ACS; however, since the ACS variables use the  same coding but, a finer level, we can recreate the variables used in  DOL’s analysis. For example, we used Census guidance on converting  2012 industry codes to create a major industry variable from the ACS  industry codes. Similarly, to compare our estimates to DOL estimates by  region, we take the ACS data, which is reported state-by-state, and put it  into larger regions, such as “Northeast.”
We conducted this performance audit from September 2016 to June 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Effects of Implementing Alternative Overtime Rule Thresholds on Puerto Rico

Table 3 shows how different populations of workers would be affected by  applying alternative overtime thresholds in Puerto Rico. For our analysis,  in order to more closely replicate Department of Labor’s (DOL) design, we  use the same alternative salary thresholds DOL analyzed in its final rule,  which are defined as follows:
Alternative 1: Inflate the 2004 Level - takes the 2004 overtime  threshold and inflates it to fiscal year 2015 dollars using the consumer  price index. This method leads to an overtime threshold of $570 per  week or $29,640 per year.
Alternative 2: 2004 Methodology - uses the 2004 final rule and  updates it with data from the third quarter of 2015. This method leads  to an overtime threshold of $596 per week or $31,015 per year.
Alternative 3: Kantor Long Test - is based on a 1958 Report and  Recommendations on Proposed Revision of Regulations, Part 541, by  Harry S. Kantor. This methodology uses data collected on actual  salaries paid to executive, administrative, or professional (EAP)  employees grouped by geographic region, industry group, number of  employees, and city size. DOL then used the long-duties test such  that no more than about 10 percent of exempt EAP employees in the  lowest-wage region, lowest-wage industry, smallest establishment  group, or smallest city group will fail to meet the test. This method  leads to a threshold of $684 per week or $35,568 per year.
Alternative 4: 40th Percentile of Full-time Salaried Workers  (Nationally) - takes all full-time salaried workers in the United States  and calculates the 40th percentile of their wages. This method leads  to a threshold of $972 per week or $50,544 per year.
Alternative 5: Kantor Short Test - is also based on the Kantor method  described in the third alternative, but uses the methodology  associated with the short-duties test instead of the long-duties test. To  do this, DOL took the $684 per week of the Kantor Long Test and  inflated it by the average percent wage difference between the long  and short test from 1949 through 1975 (149 percent). Multiplying $684 per week by 149 percent yields a Kantor Short Test threshold of  $1,019 per week or $52,984 per year.
Alternative 6: Inflate 1975 Short Test Level - takes the 1975 short- duties test salary level and inflates it to fiscal year 2015 dollars. This  leads to a threshold level of $1,100 per week or $57,205 per year.

Appendix III: Data Checks for American Community Survey

The following tables show how the Department of Labor’s (DOL) analysis  of the 2016 Overtime Rule in the United States using the analysis of  Current Population Survey (CPS) data compares to our analysis using the  American Community Survey (ACS) data. This analysis was conducted  to support using ACS data as an alternative to CPS data. The  methodologies used in our analysis and the DOL analysis are similar, but  some adjustments were made to our analysis to attempt to replicate the  DOL’s analysis of CPS data because variables were missing from the  ACS data. Between the slightly different methodologies and different data  sets, we expect the estimates to be of similar magnitudes, but not  necessarily identical. The results indicate that our adjustments to the  methodology and use of a different data yield similar results and add  validity to our estimates for Puerto Rico.

Appendix IV: Comments from the Department of Commerce

Appendix V: GAO Contacts and Staff Acknowledgments

	GAO Contacts

	GAO Acknowledgments

In addition to those named above, Kimberley Granger and Seyda  Wentworth, Assistant Directors; Amber Yancey-Carroll, Analyst-in- Charge; Pedro Almoguera and Michael Naretta made key contributions to  this report. Also contributing to this report were Jeffrey Arkin, David  Blanding, David Chrisinger, Sarah Gilliland, Robin Marion, Jonathan S.  McMurray, Sheila R. McCoy, Thomas Moscovitch, Dominic Nadarski,  Mimi Nguyen, Karissa Robie, Benjamin Sinoff, Almeta Spencer, Amy  Sweet, Anjali Tekchandani, Rosemary Torres Lerma, and Kathleen van  Gelder.

Output:
Why GAO Did This Study

Puerto Rico, the largest and most populous territory of the United States, is subject to congressional authority, although it has broad authority over matters of internal governance. After it defaulted on over $1.5 billion in public debt since 2015, Congress passed PROMESA to establish federal oversight of fiscal affairs. This debt crisis coincided with DOL finalizing the 2016 Overtime Rule, which was invalidated in federal court and is being appealed. PROMESA included a provision for GAO to assess the rule's impact on Puerto Rico and examine its economic condition.
This report (1) examines the economic conditions in Puerto Rico as of the end of 2016, and (2) assesses the potential effects of applying the 2016 Overtime Rule to Puerto Rico. GAO analyzed 1990-2016 economic data and replicated DOL's impact analysis of the 2016 Overtime Rule using 2015 ACS data, the same year used by DOL in its analysis. GAO also reviewed federal laws, regulations, court documents, agency guidance, and criteria related to the federal overtime rule; facilitated group discussions with employers in Puerto Rico from industries most likely to be impacted by the rule; and interviewed relevant stakeholders and labor groups.

What GAO Found

Unreliable economic and limited labor data make conditions in Puerto Rico difficult to evaluate.
Puerto Rico Planning Board data show that from 2005 to 2016 Puerto Rico's gross domestic product (GDP), a principal economic indicator, decreased by over 9 percent, after adjusting for inflation, and the devastation brought by Hurricane Maria in 2017 has worsened economic conditions. While the overall downward trend is reliable, GAO found that the Planning Board uses outdated methods to calculate GDP, which results in unreliable data from year to year and can make it difficult for policymakers to fully analyze specific economic needs and develop long-range plans. The Bureau of Economic Analysis (BEA), within the U.S. Department of Commerce (Commerce), does not calculate GDP for Puerto Rico, as it does for the other U.S. territories. For 6 years, BEA has provided technical support to the Planning Board to update its methods and Planning Board officials described plans to do so, but its methods remain outdated. A 2016 Congressional Task Force recommended that BEA calculate Puerto Rico's GDP, and BEA considers it a long-term goal; however, BEA has not taken steps to do so.
Further, Puert Rico has limited labor statistics because it is not included in the Current Population Survey (CPS), which is produced by Commerce's Census Bureau (Census) and Department of Labor's (DOL) Bureau of Labor Statistics (BLS). CPS provides detailed information about employment, such as hours of work and earnings. The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) suggested that Census conduct a study to determine the feasibility of expanding data collection to include Puerto Rico. Census officials said that they estimated the cost of such a study but have not yet conducted it. Census officials also cited concerns with data collection burdens. However, without CPS data on Puerto Rico, policymakers are limited in estimating the full economic impact of different policy changes. For example, DOL did not have the data needed to include Puerto Rico in its assessment of the economic impact of DOL's 2016 Overtime Rule. Conducting such a study would help policymakers consider the tradeoffs of including Puerto Rico in the CPS.
GAO used a different dataset—American Community Survey (ACS)—to assess the potential effects of applying the 2016 Overtime Rule, which would have increased the salary level threshold from $23,660 to $47,476 at which executive, administrative, and professional workers would not be eligible for overtime pay. GAO estimated that about 47,250 of 1.06 million workers in Puerto Rico would be affected—that is, they would become eligible for overtime pay. In response to a salary level threshold increase, employers from selected industries in Puerto Rico told GAO that they might increase certain workers' salaries, but cut overtime hours for other workers, and adjust the number of staff. An economist and a labor group official said that employers could respond by adjusting the number of staff or their hours, but the impacts to employers may be limited and the workforce could benefit. In 2017, a federal district court invalidated the 2016 Overtime Rule and the overtime salary threshold remains at $23,660, but that decision is currently on appeal.

What GAO Recommends

GAO recommends that BEA include Puerto Rico in its reporting on GDP and that Census and BLS study the feasibility of including Puerto Rico in the CPS. Commerce agreed with our recommendations and DOL did not have any comments on the report.