[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




                       PUERTO RICO'S DEBT CRISIS
                           AND ITS IMPACT ON
                            THE BOND MARKETS

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 25, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-75


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
              Subcommittee on Oversight and Investigations

                   SEAN P. DUFFY, Wisconsin, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York              EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois             KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri                 JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 25, 2016............................................     1
Appendix:
    February 25, 2016............................................    39

                               WITNESSES
                      Thursday, February 25, 2016

Batlle, Juan Carlos, Senior Managing Director, CPG Island 
  Servicing, LLC.................................................     7
Isaac, William M., Senior Managing Director and Global Head of 
  Financial Institutions, FTI Consulting.........................     8
Krueger, Anne O., Senior Research Professor of International 
  Economics, Johns Hopkins University School for Advanced 
  International Studies..........................................     5
Zandi, Mark, Chief Economist, Moody's Analytics..................    10

                                APPENDIX

Prepared statements:
    Batlle, Juan Carlos..........................................    40
    Isaac, William M.............................................    75
    Krueger, Anne O..............................................    82
    Zandi, Mark..................................................    92

              Additional Material Submitted for the Record

Mulvaney, Hon. Mick:
    Written statement of Thomas Moers Mayer......................   102
Batlle, Juan Carlos:
    Clarification Regarding Remarks by Congresswoman Nydia 
      Velazquez..................................................   129

 
                       PUERTO RICO'S DEBT CRISIS
                           AND ITS IMPACT ON
                            THE BOND MARKETS

                              ----------                              


                      Thursday, February 25, 2016

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:11 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean Duffy 
[chairman of the subcommittee] presiding.
    Members present: Representatives Duffy, Mulvaney, Tipton, 
Poliquin, Hill; Green, Cleaver, Ellison, Delaney, Heck, Sinema, 
and Vargas.
    Ex officio present: Representative Waters.
    Also present: Representatives Velazquez and Maloney.
    Chairman Duffy. The Subcommittee on Oversight and 
Investigations will come to order. Today's hearing is entitled, 
``Puerto Rico's Debt Crisis and Its Impact on the Bond 
Markets.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of this subcommittee may 
participate in today's hearing for the purposes of asking 
questions and giving an opening statement.
    Before we begin, I want to take a brief moment as we start 
today's hearing to recognize the Speaker of the Puerto Rican 
Legislative Assembly, Jaime Perello, who is here with us today. 
We are grateful for his participation and all the insight he 
has given both sides of the aisle, as we try to navigate the 
issues on Puerto Rico. So thank you for being here, Jaime.
    The Chair now recognizes himself for 5 minutes for an 
opening statement. According to the Government Accountability 
Office (GAO), individual investors account for 75 percent of 
America's nearly $3.7 trillion in the municipal bond market.
    Bonds are an important source of financing for State and 
local governments to pay for a variety of public projects, such 
as infrastructure and schools. They are also considered a 
relatively safe security for retail investors, many of whom 
depend on the income that bonds yield in their retirement.
    Despite Puerto Rico's relatively small size, it is one of 
the Nation's largest issuers of municipal bonds, in part 
because the bonds are triple tax exempt, at the Federal, state, 
and local level.
    For this reason, Forbes estimates that about 20 percent of 
U.S. bond funds hold Puerto Rican debt. However, Puerto Rico is 
now struggling with $73 billion in bonded debt, spread across 
18 different issuers, eclipsing the size of the GNP.
    In the words of one of our witnesses here today, ``Puerto 
Rico faces hard times. Structural problems, economic shocks, 
and weak public finances have yielded a decade of stagnation, 
out-migration, and debt. Financial markets once looked past 
these realities, but have since cut off the Commonwealth from 
normal market access of crisis loans.''
    But the crisis may already be here. At over 12 percent of 
the island's unemployment rate, it is nearly double the next 
State. Labor force participation is 20 points lower than on the 
mainland, and nearly half of the island's population now lives 
below the poverty line, which is absolutely unacceptable.
    It is no wonder that 7 percent of the island has left in 
the last 2 years, many of whom have come to the mainland in 
search of opportunity, after the island's economy has shrunk by 
13 percent since 2006.
    This is further compounding the island's crisis, as its 
workforce flees, as its tax base erodes, and it becomes harder 
to service the island's massive debt, which now accounts for 
one out of every three dollars the Commonwealth now spends.
    The 3.5 million Americans living in the U.S. territory 
deserve the attention and support of Congress, which is why we 
are here today. After decades of mismanagement, Puerto Rico's 
investors also deserve better. And borrowers all over the 
country, from Wisconsin to Texas to Puerto Rico should be given 
our careful consideration.
    Speaker Ryan, a great Wisconsinite, has committed this 
House to developing a responsible solution to Puerto Rico's 
debt crisis by the end of next month. We owe it to all parties 
to ensure that our response does not have negative implications 
for the rest of the bond market.
    The governors of Arizona and Iowa have both sent letters to 
leadership in the House and the Senate cautioning against 
unprecedented steps being pushed by the Obama Administration to 
address Puerto Rico's debt, which the governors warn could have 
a significant impact on the cost of borrowing for states, 
municipalities, and investors, not just in Puerto Rico, but 
across the country as a whole.
    I appreciate our witnesses being here today, including 
those whom I know have traveled some distance to be part of 
today's hearing. I look forward to learning more from all of 
you about the causes of Puerto Rico's crisis, the health of the 
island's financial services sector, and the impact on 
investors.
    Mostly, I hope to hear how Puerto Rico can return to growth 
and to the capital markets, how we can have a positive impact 
on the people and the citizens on the island. And that is what 
this is about. This is about people. This is about prosperity. 
This is about opportunity. This is about growth. This is about 
doing the right thing by the Puerto Rican people, whom, as we 
all know, are Americans.
    I am sure all of my colleagues on this committee agree with 
that assessment. And I know we are going to have a great 
bipartisan movement and effort to come up with a solution that 
works for the island.
    So with that, I yield to the ranking member of the 
subcommittee, Mr. Green from Texas, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman, and I will claim the 47 
seconds that you did not utilize, by unanimous consent. My 
consent. Thank you, again, and I thank the witnesses for being 
present today.
    And I do concur with you, Mr. Chairman. We all agree that 
we should do the right thing with reference to Puerto Rico and 
the Americans who are in Puerto Rico. The question that we will 
confront today is very simply put: Will we, in the Congress, 
allow the Americans in Puerto Rico to do the very same things 
that we allow the Americans in the 50 States to do?
    Will we allow them access to bankruptcy, as we currently do 
for the Americans in the 50 States? I am talking about under 
Chapter 9 of the Bankruptcy Code. And it is interesting to note 
that Chapter 9 applied to Puerto Rico from 1933 to 1984. And 
then mysteriously, for some reason, Puerto Rico was exempt from 
Chapter 9.
    But what the Congress giveth, the Congress can taketh away. 
And the Congress can return it, if I may coin a phrase. And I 
think that we may be at a point where we need to do so. I would 
also add this, that Chapter 9 would not be enough.
    There needs to be an opportunity to have something that 
allows us to look into the future and deal with the fiscal 
necessities of Puerto Rico. This restructuring process might be 
called some sort of independent counsel or board, if you will. 
But it has to have autonomy and independence.
    I would also add that the Administration has made a comment 
that I find favor with, the EITC, as well as helping with 
Medicaid, because a good many of the persons there have only 
Medicaid as a means of healthcare.
    This is an important issue for us. I believe that we can 
find a consensus. The mandate has been given by the Speaker. 
But it is up to us to have the will to follow through. Now, let 
me ask you this question quickly, because it will come up, the 
notion that it is unfair to change the rules in the middle of 
the game.
    I concur. It is. But the truth is, you have look at all of 
the rules. The Supreme Court has promulgated a rule that we 
have to adhere to, as well. And the Supreme Court has said 
that, because Congress has this enormous power to exercise, 
with reference to bankruptcy, that when you make these 
investments, you have to consider the fact that Congress can 
change the rules. And Congress can do so retroactively.
    So the argument that we shouldn't change the rules in the 
middle of the game is a good one. That is why we are going to 
consider all of the rules, which allows rules to be changed. I 
will say more about that, as we progress, I am sure.
    With that said, I am honored now to yield time to the 
gentlelady from New York, New York's 7th Congressional 
District, who has been a preeminent leader in this area, the 
Honorable Nydia Velazquez. My time, remainder in residue, plus 
the 47 seconds.
    Mr. Velezquez. Thank you, Mr. Chairman, and Ranking Member 
Green. After today's hearing in this committee and the 
Committee on Natural Resources, I am hopeful that we will move 
from convening hearings to drafting legislation.
    And I believe that two principles must be met. First and 
foremost, Puerto Rico needs tools to restructure its 
unsustainable debt. What is critical is that the island be 
given the authority to promptly address all of its various debt 
obligations. This means not just the $20 billion in public 
corporation debt, but, also, the remaining $50 billion in 
general obligation, Government Development Bank, and 
territorial tax revenue, or COFINA.
    By itself, Chapter 9 will address only a small sliver of 
this debt and do little to remove the black cloud hovering over 
the island. That is why we need a broader, territorial-level 
restructuring mechanism.
    Second, an oversight board must be structured in a manner 
that does not undermine Puerto Rico's autonomy. If a control 
board takes the people's power away, it would just be viewed as 
another imperialistic power grab by the U.S. Government.
    It will be the height of hypocrisy for the Federal 
Government to take away decision-making authority, due, in 
part, to the policies enacted by this very same body. Don't 
forget that Congress created and then eliminated the 
preferential tax policies that have played a massive role in 
this crisis. And I am referring to 936.
    The ranking member mentioned the fact that Puerto Rico was 
covered under bankruptcy law protection from 1933 to 1984. So 
when people talk about changing the rules of the game, let's 
look at what the United States Federal Government, U.S. 
Congress policies have produced and the implication that it has 
had in Puerto Rico.
    What they need is not only bankruptcy protection, but, 
also, economic growth. And the only way to do that and to 
accomplish that is by enacting the types of tax incentives that 
will enable investors to come and invest in Puerto Rico.
    Thank you, and I yield back.
    Chairman Duffy. The gentlelady yields back. I now want to 
welcome our witnesses. Dr. Anne Krueger is a senior research 
professor of institutional economics at the School for Advanced 
International Studies at John Hopkins University, and she is a 
graduate of the University of Wisconsin, I believe.
    Mr. Juan Carlos Batlle is a senior managing director and 
co-head of CPG Island Servicing.
    Mr. William Isaac is senior managing director and global 
head of financial institutions at FTI Consulting. He is a 
former Chair of the FDIC. I believe you were the youngest Chair 
of the FDIC, if I recall.
    And finally, we have Dr. Mark Zandi. He is the chief 
economist at Moody's Analytics and is a frequent witness on the 
Hill.
    So I thank you all for being here today. The witnesses will 
now be recognized for 5 minutes to give an oral presentation of 
your testimony. And without objection, the witnesses' written 
statements will be made a part of the record.
    Once witnesses have finished presenting their testimony, 
each member of the subcommittee will have 5 minutes within 
which to ask questions of each of the witnesses.
    As a reminder, please note you have three lights on your 
table. The green light, obviously, means go. The yellow light 
means that you have 1 minute left. And the red light means that 
your time is up.
    So if you get asked a question in yellow and you are 
finishing it, a brief time span into red, that is okay. But if 
you are going over, we will try to move on to the next witness. 
The microphones are sensitive. Please make sure you are 
speaking directly into them.
    With that, Dr. Krueger, you are now recognized for an oral 
presentation of your testimony for 5 minutes.

  STATEMENT OF ANNE O. KRUEGER, SENIOR RESEARCH PROFESSOR OF 
 INTERNATIONAL ECONOMICS, JOHNS HOPKINS UNIVERSITY SCHOOL FOR 
                 ADVANCED INTERNATIONAL STUDIES

    Ms. Krueger. Thank you, Mr. Chairman, and members of the 
subcommittee. I am very pleased to be here. I have submitted 
written testimony, and I will try to keep my opening statement 
very short.
    Puerto Rico is a beautiful island, and it should be the 
jewel of the Caribbean. It has all kinds of advantages, 
including, of course, English and Spanish, including, of 
course, the U.S. dollar, U.S. law and order.
    It also has some disadvantages coming from the United 
States Federal Government, as well. Unfortunately, over the 
past 10 or 15 years, the disadvantages that it has done to 
itself, plus those done by the Federal Government, plus those 
inflicted by the world economy have led Puerto Rico into a very 
long period of stagnation.
    As the chairman already mentioned, Puerto Rican income per 
capita is down, population is down, labor force participation 
is less than 40 percent, contrasted with 62 percent on the 
mainland, and we are worried that is too low. And there are 
other problems.
    Many of these problems have causes that can be, at least 
partially corrected. And there are three things that have to 
happen in order to get things sorted out. Puerto Rico has to 
resume growth. Without growth, there is no hope over the longer 
term for any solution.
    To resume growth, however, its fiscal policies have to be 
amended in such a way as to become sustainable, which they are 
not currently. That is the second thing. And the third thing is 
that there has to be some kind of debt restructuring.
    Debt, in the short run, is not sustainable, consistent with 
Puerto Rican growth. I will take my time, briefly, on each of 
these. No matter what happens, there is no way that today 
Puerto Rico could cut expenditures enough and raise taxes 
enough, quickly, to make a difference, in terms of the 
sustainability of its debt over the next several years.
    Tax receipts don't come in sharply after you change taxes. 
And, indeed, in Puerto Rico's case, the likelihood is that, if 
taxes rose very much (except for reforms in the tax structure) 
what would happen is that, first, Puerto Ricans would leave the 
island. More would go on welfare and there would be a lower 
participation rate and more in the informal sector.
    Restructuring debt has to happen, because the government 
just can't pay everything, especially going forward, where 
there are pension liabilities and other things. But the thing I 
will focus a minute on is growth.
    Growth has to resume. Without it, nobody can borrow, 
because future receipts will not be enough to cover it. And 
they are not going to be able to borrow, given the current 
state. Puerto Rico has lost market access. So that is critical.
    What else is needed for growth? The fiscal situation must 
be addressed, but, also, there are a number of things, both 
Federal and Commonwealth, that have impeded growth measures and 
need to be changed. Some of these are things where something 
can be done and should be done, by the Commonwealth.
    They include things to make a more level playing field for 
business. Right now Puerto Rico, by the World Bank, is ranked 
49th in ease of doing business, in the world economy. The 
United States mainland is ranked seventh, which gives you some 
idea.
    Some things take years in Puerto Rico. Registering property 
is a good example. There has not been property revaluation 
since 1954. There are a number of things that could be done. 
The Puerto Rican government itself could become much more 
efficient.
    The number of school teachers has increased about 30 
percent over the past several decades, while the number of 
students has dropped about the same amount. Some things need 
correcting within the public sector, but, also, in a way that 
Puerto Rico treats business.
    There are other things to be done that would help a great 
deal. The Treasury's proposal for the Earned Income Tax Credit 
would certainly make a difference. Finding a fairer formula for 
Medicaid and block grants would be important in all of this.
    There are a number of other things that can be done, at 
both the Federal and the State level. But, above all, we can't 
get very far without debt restructuring. And debt restructuring 
would be a long, drawn out process without some kind of legal 
framework for it, which now does not exist.
    As you know, the Commonwealth tried to do it, itself. That 
was thrown out. It is a Federal responsibility. But, at the 
Federal level, right now, as someone mentioned, there are 18 
different issuers of debt in Puerto Rico. And without somehow 
cleaning that up, there is going to be enough uncertainty 
hanging over markets and hanging over potential investors in 
Puerto Rico, that it will forestall growth.
    So simply addressing the debt is a first prerequisite, 
along with, then, doing things to restore growth and getting 
the fiscal situation, going forward, straightened out.
    Thank you very much.
    [The prepared statement of Dr. Krueger can be found on page 
82 of the appendix.]
    Chairman Duffy. Thank you.
    Mr. Batlle, you are recognized for 5 minutes.

STATEMENT OF JUAN CARLOS BATLLE, SENIOR MANAGING DIRECTOR, CPG 
                     ISLAND SERVICING, LLC

    Mr. Batlle. Thank you, Chairman Duffy, and distinguished 
members of the subcommittee. From 2011 to 2012, I served as 
president of the Government Development Bank for Puerto Rico 
and previously held senior positions with Banco Santander's 
investment banking arm on the island, working primarily in 
public finance matters of the municipal market for 15 years.
    Focusing concurrently on the root causes of our problems, 
our banking sector, and the impact of the crisis on the 
municipal market makes it evident that we are faced with a 
dynamic situation, whose eventual resolution will rest on the 
actions or inaction of Congress and Puerto Rico.
    In my view, the root causes for our problems are many. A 
lack of execution and follow through, as our leaders have put 
forth economic development plans that all shared similar 
principles, but all failed, not because they were flawed, but 
because we were unable to implement them.
    An unwillingness to change and adapt, during and after the 
State filed a Section 936. Petty political parties infighting 
prevailed, and we failed to compromise and to execute. Decades 
of fiscal mismanagement, insatiable public sector crowded out 
the private sector. And the lack of adequate regulation over 
the Government Development Bank.
    A fragmented government-wide technological structure, 
exemplified by the recent dismantling of the Office of the 
Chief Information Officer, after significant progress that 
included a pilot project to produce real-time financial data 
and financial statements. Ironically, our best talent from this 
office now works for the United States Digital Service here in 
Washington.
    A completely dysfunctional Internal Revenue Service that 
facilitates tax evasion. Unfair and discriminatory funding of 
Federal health programs that aggravate budget deficits. The 
enactment of tax laws that encourage over-concentration of 
local wealth in Puerto Rico-only assets, resulting in 
unimaginable loss of wealth.
    And lack of trustworthy and timely financial data and 
budgetary forecasts that eventually led to a complete loss of 
market confidence and market access. Our failure to execute on 
politically unpopular matters, given excessive partisan 
politics and a self-centered private sector are the main 
reasons that a fiscal oversight and control board is necessary.
    Since 2006, our banking sector has lost 43 percent and 31 
percent of its assets and deposits, respectively, and gone 
through four FDIC-assisted consolidations. Last year, over 
4,000 homes were foreclosed, 27,000 since 2008, and over 20,000 
are currently in the foreclosure process.
    Today, this sector, the banking sector, has achieved 
healthy capital ratios and stabled delinquency ratios, after a 
costly transformation. But a banking sector can't really be 
healthy when a government and economy are not. And it is the 
subject of excessive regulatory examinations and stifling 
reporting requirements.
    Under a fiscal oversight and control board, regulators 
could provide relief and additional technical assistance, 
without abandoning their obligations, allowing banks to direct 
resources towards more agile lending and fueling economic 
activity.
    Puerto Rico's bonded debt represents approximately 1.8 
percent of the $3.7 trillion bond market. Roughly 80 percent of 
this debt is held directly, or indirectly, by individuals in 
their own accounts, or through pension and mutual funds.
    A restructuring of public debt through any mechanism other 
than good faith, consensual negotiations, or existing tools, 
like Chapter 9, could further delay Puerto Rico's ability to 
recover its credibility and market access, with additional and 
collateral damage spreading to the banking sector, credit 
unions on the island, retirees nationwide and locally, and 
other individuals.
    The overall municipal bond market also stands to lose. An 
unfamiliar or disorderly debt restructuring process would have 
negative effects on the entire municipal bond market, given its 
reliance on the rule of law and certainty.
    A fiscal oversight and control board, with a trusted and 
familiar tool, like Chapter 9, preceded by mediated, consensual 
negotiations, would mitigate the impact on investors and the 
municipal bond market.
    Mr. Chairman, upon reviewing testimony from prior 
Congressional hearings, it dawned on me that we seem to forget 
we all are, and have been, responsible parties to our problems. 
Everyone blames politicians. Politicians blame each other. And 
all the ones who do the blaming forget, we were part of the 
problem, too, the 3.5 million citizens in Puerto Rico, this 
U.S. Congress, the White House, bond holders, and all 
stakeholders alike.
    But crisis is the mother of opportunity. The situation we 
face today gives us a unique chance to shape our future. Our 
failure to execute, compromise, and live within our means, and 
the lack of action by Congress in the past, have left no other 
choice--an independent fiscal oversight and control board with 
a debt-restructuring mechanism that incentivizes consensual 
negotiations with access to Chapter 9, as a last resort, 
complemented by meaningful economic stimulus, are necessary.
    However, bear in mind that you don't fix someone's mistake 
by fixing it for them, but rather by fixing it with them.
    Thank you very much.
    [The prepared statement of Mr. Batlle can be found on page 
40 of the appendix.]
    Chairman Duffy. Thank you.
    Mr. Isaac, you are recognized for 5 minutes.

  STATEMENT OF WILLIAM M. ISAAC, SENIOR MANAGING DIRECTOR AND 
     GLOBAL HEAD OF FINANCIAL INSTITUTIONS, FTI CONSULTING

    Mr. Isaac. Thank you. It is a pleasure to be here today, 
talking about Puerto Rico. Toward the end of my career, which 
has now spanned some 50 years, nearly 50 years, and, believe 
me, I hope it goes on another 50 years, or at least a lot 
longer. I am not ready to retire.
    The situation in Puerto Rico takes me back to the beginning 
of my time at the FDIC, in March of 1978, when I was appointed 
by President Carter and confirmed by the Senate to be one of 
three Directors of the FDIC.
    My then current employer, which, at the time, was the 
largest bank in Kentucky, had a going away dinner for me one 
evening, shortly before I left. The Executive Secretary of the 
FDIC flew to Louisville that evening, on the evening of my 
dinner. And the next morning, I met with him in the lobby of 
the hotel where he was staying, and he swore me in.
    We then drove straight to the airport to fly to Puerto Rico 
to handle the failure of one of the island's largest banks, 
Banco Credito. That was my first day in office. There was no 
Chairman of the FDIC at that time. The position was vacant, as 
was the Comptroller of the Currency position, the other Board 
Member of the FDIC.
    So the 34-year-old, newly minted Board Member of the FDIC 
was about to be tested under fire. I remember saying that day 
to the professional FDIC staff, ``I hope somebody in this room 
knows what they are doing, because I don't.''
    Banco Credito was a very large bank, by the standards of 
those years, and there were few potential buyers in Puerto 
Rico. So we broke the bank into two pieces, sold two-thirds of 
the bank to Banco Popular, the largest bank in Puerto Rico. And 
we sold the other one-third to the Spanish bank, Santander.
    That was my first several days at the FDIC. My tenure as 
the Director of the Board lasted 2 years. And then, when 
President Reagan was elected, he appointed me as Chairman of 
the FDIC in 1981.
    It was an extremely tumultuous time. We dealt with some 
3,000 bank and thrift failures, including Continental Illinois, 
9 of the 10 largest banks in Texas, and many other large banks 
throughout the country, and thrifts.
    The problems we are addressing today are largely due to 
some of the unique features of Puerto Rico's relationship with 
the United States. While the challenges faced by the 
Commonwealth are substantial, I believe there is a way to 
assist the Commonwealth in organizing its finances and 
restructuring a portion of its debt within existing legal 
frameworks.
    Successfully doing so will help position the Commonwealth 
for much-needed economic growth and restore confidence. But we 
need to go about it the right way. Specifically, I am very 
concerned about proposals coming from the Treasury, which 
propose so-called Super Chapter 9 bankruptcy, or a super 
control board, that would provide for the restructuring of all 
of Puerto Rico's debt, even its constitutional debt.
    Granting this authority would be unprecedented and would 
have far-reaching implications, including, most certainly, 
raising the cost of borrowing for the 50 States. Moreover, 
long-term financial stability for Puerto Rico's government will 
require continued access to financial markets, which will be 
difficult and more expensive, if the Treasury plan should be 
enacted.
    I believe the best approach to address Puerto Rico's 
challenges would be comprised of two parts. First, Congress 
should treat Puerto Rico like any U.S. State, by allowing the 
Commonwealth's municipalities to access Chapter 9 for 
bankruptcy.
    This would allow Puerto Rico to legally restructure 75 
percent of its debt, including debt incurred by COFINA, a 
public corporation created by the Commonwealth to circumvent 
its constitutional debt limit.
    That said, because of Puerto Rico's track record in 
managing its finances, and its failure to produce reliable 
financial data, the idea of granting it Chapter 9 has been 
controversial. That brings me to the second part of my 
recommendation. Congress should create a Federal control board 
to oversee Puerto Rico's finances.
    The control board should not have the ability to negotiate 
with creditors or to restructure debt. But it could be 
empowered with the ability to recommend normal Chapter 9 
bankruptcy for specific instrumentalities of the Commonwealth, 
subject to appropriate financial tests.
    I close by thanking you, Chairman Duffy, Ranking Member 
Green, and the members of the subcommittee. I understand you 
received a copy of my testimony, and I would be happy to 
respond to any questions you might have.
    [The statement of Mr. Isaac can be found on page 75 of the 
appendix.]
    Chairman Duffy. Thank you.
    And Dr. Zandi, you are recognized for 5 minutes.

  STATEMENT OF MARK ZANDI, CHIEF ECONOMIST, MOODY'S ANALYTICS

    Mr. Zandi. Thank you, Chairman Duffy, and members of the 
subcommittee, for the opportunity to be here today. The views 
that I am going to express are my own, and not those of Moody's 
Analytics or the Moody's Corporation.
    I will make three points in my remarks. Point number one, 
which is now the obvious, the Puerto Rican economic and 
financial crisis is very severe. You provided a long list of 
statistics to demonstrate that.
    For me, the most telling is the fact that the job base of 
the island has declined by 10 percent over the past 10 years. 
Just for context, in the financial crisis that we went through 
a few years ago, peak-to-trough employment nationally fell by 6 
percent. And, of course, the island's recession continues on. 
It is unabated.
    The fiscal situation is very dark, $70 billion in debt, 
another $45 billion or so in unfunded pension liabilities. You 
add it up, divide by GNP, which is the Gross National Product 
of the island, the resources that the island has to pay on the 
debt, it is 160 percent.
    Just for context, Illinois, which is the State under the 
most significant financial stress, has a debt plus unfunded 
pension liability to GDP ratio of closer to 20 percent; New 
Jersey, 15 percent; and in my own home State of Pennsylvania, 
which has had its own fiscal issues, it is 5 percent. So the 
situation is very dark.
    Point number two, the legislation you sponsored, H.R. 4199, 
is a very positive step in the right direction. I think the two 
key aspects of that are very good steps. The first, obviously, 
is Chapter 9 bankruptcy for Puerto Rican municipalities and 
public corporations.
    Obviously, that is a necessary condition for putting the 
fiscal situation on sounder ground. The quid pro quo for that 
is the opting in by Puerto Rican lawmakers to a financial 
stability council, a board that has--I think it has a nice 
balance of authority to get what needs to get done, done, but, 
also, respect the sovereignty of the island. I think you did a 
nice job of accomplishing that balance.
    Point number three, I think lawmakers should do more. I 
don't think your legislation is enough. The Chapter 9 
bankruptcy for municipalities and corporations covers, for 
sure, about 30 percent of the island's debt. There is some 
debate, reasonable debate, as to does it cover other 
liabilities.
    And that will have to be adjudicated, go through some court 
process. And judging by what Detroit has gone through, that 
could take a long time. And I don't think we have time.
    So I would recommend that you shift from Chapter 9 
bankruptcy to a broader restructuring framework that would 
maintain the board, as you have described it, an opt-in for the 
lawmakers of Puerto Rico, but they have broader authority 
around all of the liabilities that the island is struggling 
with, beyond just the debt of the corporations and the 
municipalities, including the GO debt and the unfunded pension 
liabilities.
    This authority, this restructuring framework, should also 
allow for a timeout to, against litigation, let everyone sort 
this thing through and kind of nail things down. There needs to 
be a voting mechanism to ensure that a handful of creditors 
can't stop the way. And, as Mr. Isaac pointed out, I believe, 
there are 20 different creditor groups. It clearly suggests a 
very messy process.
    Ultimately, if they can't come to an agreement, there is 
some kind of court process to work through the problems. So I 
would counsel that what you propose is great. I just don't 
think it is going to put the island on a sustainable path.
    Then the other thing I say that I would recommend that you 
address is, and this goes to Dr. Krueger's comment. She is 
absolutely right, nothing works unless the economy's growing. 
And I, in my written testimony, talk and lay out a number of 
different economic policy proposals that I would consider to 
help the island.
    But most importantly, most critically, you have to get 
Medicaid on sound ground here. Under current law, Medicaid 
funding is going to decline beginning mid-2017, 2018. And half 
of the residents of Puerto Rico rely on Medicaid and hundreds 
of thousands of people will be affected by this. And I think it 
is very important to put that on sounder ground.
    Thank you, again, for the opportunity, and I look forward 
to your questions.
    [The prepared statement of Dr. Zandi can be found on page 
92 of the appendix.]
    Chairman Duffy. I appreciate the panel's opening 
statements. The Chair now recognizes himself for 5 minutes for 
questions.
    Dr. Zandi, I will probably come back to you, if I have 
time, at the end. But you mentioned we deal with 30 percent of 
our debt, but I know there is some debate. Mr. Isaac brought 
this up, but depending on where COFINA falls, it looks like we 
could actually deal with 75 percent of Puerto Rican debt, 
excluding the GO bonds, which would probably be a lot closer to 
where you would like to be. But that is a conversation, I 
think, that we have to continue to have.
    I will move on, though. Mr. Batlle, I mentioned in my 
opening that Terry Branstad, the Governor of Iowa, recently 
wrote Congressional leaders, in both the House and the Senate, 
and expressed some concern about Treasury's plan, which is 
probably consistent with Mr. Zandi's testimony, about a 
restructuring that would violate the constitution of Puerto 
Rico, offering broad restructuring, including general 
obligation bonds.
    And you kind of mentioned this, but could you go a little 
further? Does that set a dangerous precedence? And would it, 
likely, raise the borrowing cost, not just in Puerto Rico, but 
would it raise the costs in other parts of the country, have an 
impact on other states and municipalities?
    Mr. Batlle. Yes. Thank you for that question, Mr. Chairman. 
And I do think going down the path of a more broad 
restructuring regime would definitely have an impact on the 
overall municipal market.
    I think the best way I would describe the municipal market, 
not to be disrespectful to it, but it is a very boring market, 
I would say. It likes predictability, stability, and it doesn't 
like surprises. It is a market used by a lot of both 
individuals, retirees, and this investment vehicle is looking 
for a stable, fixed income into their accounts.
    And, I think, introducing an alien or new mechanism, that 
is completely unfamiliar and unknown, to an otherwise stable 
and very large market, on which the 50 States and the 
territories depend, or, say, subdivisions of the states and the 
territories rely on to raise necessary capital for 
infrastructure development and many other needs, would set a 
very dangerous precedent.
    I think it would be highly speculative to go into any 
discussions as to what type of financial impact it would have, 
but, at the least, it would definitely create volatility, 
uncertainty, which would translate, naturally, into higher 
costs or higher losses, depending on which side of the aisle 
you sit.
    Chairman Duffy. And you live on the island, right? You live 
in Puerto Rico?
    Mr. Batlle. Yes.
    Chairman Duffy. And, so, going to the fiscal stability 
board and opportunity growth board, some will say a control 
board. I meet with a lot of the elected officials on the island 
and I get some pushback. And, as Ms. Velazquez mentioned, there 
is concern about sovereignty and perceptions.
    And I am very sensitive to that. I think we want to have 
complete buy-in to a plan that comes from Congress. I hear from 
politicians, with maybe one perspective, but do you know where 
the people in Puerto Rico fall on this issue? Do they support 
some form of board that can help get the finances and the 
budgeting in order? Can you speak for them, by chance?
    Mr. Batlle. If I were to speak for them, and I will say 
this is my personal opinion on what I hear from the people I 
talk to, I do think, and I actually do strongly believe, that 
there would be strong support for a fiscal oversight and 
control board.
    And on, if I expand just 1 minute, the proposal or the type 
of structure that I propose in my written testimony, it is 
actually something that I think would get in the buy-in 
necessary from the politicians, also, on the island, from 
leaders.
    That is why I call it an oversight and control, where you 
would have an initial phase, during which Puerto Rico would get 
the chance to deliver on the compromises and promises that we 
need to make to get things moving forward on the fiscal and 
economic side, and also on the debt restructuring side.
    But there has to be very specific metrics, very specific 
milestones to be accomplished. And any non-compliance under 
this would automatically convert this oversight board into a 
control board that would have a lot more teeth into the 
decision-making process in Puerto Rico.
    But I do think there will be acceptance within the 
population for that type of structure.
    Chairman Duffy. And the 5 minutes is just not enough time, 
but I want to go to you, Dr. Krueger. Quickly, you talk about 
growth, and I think growth is so important. You just can't have 
one component of some form of bankruptcy and oversight. We have 
to have growth on the island.
    If you are thinking outside the box, and I don't have a lot 
of time left, can you give me some ideas on what we could do, 
in Congress, that could stimulate or incentivize growth and 
investment on the island?
    Ms. Krueger. I think there are a number of things. There 
are Federal laws that really impede Puerto Rico. For example, 
the Jones Act on shipping, which I know is a political hot 
potato, but Puerto Rico lies right next to some other Caribbean 
islands. All of them are dependent on oil for their fuel, for 
electricity generation.
    Puerto Rico pays 40 percent more than the other islands and 
there are other factors. Puerto Rico is not eligible for the 
Earned Income Tax Credit. Getting that through, which Treasury 
has proposed, would, indeed, very likely increase the formal 
participation rate, which would help.
    Puerto Rico is subject to the mainland minimum wage law, 
and Puerto Rico per capita income is well below that of the 
poorest U.S. mainland State. Doing something to amend that so 
there could be, for example, a period of apprenticeship or a 
period for young people, youth employment, to learn skills on 
the island would make a difference.
    It would not do it all overnight, however. All of these 
things would take some period of time. I know I have to stop 
here.
    Chairman Duffy. Thank you. And I would have asked you--
going into the red zone. But thank you. My time has expired.
    The Chair now recognizes Mr. Delaney for 5 minutes.
    Mr. Delaney. Thank you, Mr. Chairman. I just have a quick 
question, and it is related, but not directly on point to the 
bankruptcy.
    Maybe for Dr. Zandi, Puerto Rico is unique in terms of 
their ability to offer tax incentives to U.S. citizens who 
domicile in Puerto Rico for 183 days. And they maintain their 
status as citizens of the United States.
    And I have no issue with people who have done that, because 
it is perfectly permissible and perfectly legal under the laws, 
as they are now. But have you thought about the potential drain 
that has on the U.S. income tax base? And should we be thinking 
about that, as part of other aid we provide Puerto Rico? You 
mentioned Medicaid, which I do agree with you. I think should 
be funded, so that we can stabilize that situation.
    And, I guess, set the most efficient way to get Federal 
dollars into the Puerto Rican economy and would we be better 
off doing things more directly and not allowing them to put in 
place a scheme that would continue to drain or reduce the U.S. 
tax base?
    Mr. Zandi. Yes, I am sympathetic to what you are saying. I 
think that there are many other more effective ways of helping 
the island's economy. And the most obvious to me is the Earned 
Income Tax Credit, the EITC, which has a lot of bipartisan 
support.
    We have a lot of evidence of it working, and it is 
particularly critical to Puerto Rico, because it will bring 
people out of the underground economy, the shadow economy. 
Someone made the point that labor force participation in Puerto 
Rico is 40, 45 percent, the lowest anywhere in the country.
    Bring them back into the taxable base and establish a 
broader culture of paying your taxes. So if I were king for the 
day, I would take the tax benefit you described and use that to 
pay for, or help pay for, the EITC. I think that would be the 
best step to help the island, long run.
    Mr. Delaney. I yield back my time. Thank you.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentleman from South Carolina, Mr. Mulvaney, for 
5 minutes.
    Mr. Mulvaney. I thank the chairman. I want to talk about 
what both the chairman and the ranking member mentioned in 
their opening statements, which is their concern, and my 
concern, our concern, that this is about people, because it is 
about people, but not about maybe the people they were 
mentioning.
    There is a New York Times article out this morning, and I 
will quote from it. It says that, ``Most Puerto Rican debt is 
held by individuals. They are mostly over 65. They mostly have 
incomes of less than $100,000 a year. They are not vulture 
funds, they are your friends and neighbors.''
    I understand that the Treasury's plan would change the 
prioritization of payments in Puerto Rico to prioritize 
payments to Puerto Rican pensioners, before bond holders get 
paid. So the Treasury plan would pay pensioners in Puerto Rico, 
before we pay the pensioners who lent Puerto Rico money in the 
first place.
    And I want to know how that is fair, because it strikes me 
as not being fair. In fact, it reminds me, Mr. Chairman, of 
something that many of us in the Class of 2010 ran against 
when, during the Chrysler bankruptcy, we changed the laws in 
this body to give priority to unions over the pensioners from 
the Indiana Teachers and Firemen's Fund. It wasn't fair then, 
and it wouldn't be fair now.
    I also understand, in doing some research, that some of the 
debt revolves around the state or the government-owned electric 
company, which has not raised its rates on its people since 
1989.
    So, again, I ask, is it fair for us to ask pensioners and 
retirees, some of whom may live in South Carolina, to incur 
greater debts on their own debt, in the future, or to lose 
prioritization here, so that the Puerto Rican government can 
continue to provide below-market, subsidized electricity to 
their residents? That doesn't strike me as fair.
    And I know I don't have many questions, because, honestly, 
I don't know who to ask the question of, but this--
    Mr. Delaney. If the gentleman would yield, I would--
    Mr. Mulvaney. I would be happy to. Yes, sir.
    Mr. Delaney. Thank you. With reference to the power plant, 
when you are in Chapter 9 bankruptcy, you have to demonstrate 
that you have made a good faith effort. That would be part of 
the evidence that would be presented to the court. And if the 
concludes that the good faith effort has been made--
    Mr. Mulvaney. Reclaiming my time. And I appreciate that, 
and that is fine. But, I guess, doesn't solve my original 
question, which is we would be asking pensioners in this 
country to help make up for the fact that, for the last 25 
years, there have been no raises. And I will come back to you 
at the end, I promise, but let me finish my thought on this.
    Look, I am sympathetic to what the island is going through. 
It strikes me that most of the ills are self-inflicted. Dr. 
Krueger made, perhaps, what I thought were the most positive 
comments so far, which is ways that we have actually made 
things worse.
    We could fix the Jones Act. We could provide exemptions 
from the minimum wage laws, and those are positive things that 
don't really cost my folks any money. And maybe that is where I 
think we should be focusing our attention.
    But everything else that we have talked about today smacks, 
to me, of a bailout, which I thought my party was supposed to 
be against. So I am curious to see how we proceed, Mr. 
Chairman. Again, I apologize for not having any specific 
questions, but, really, I am not really sure how to ask.
    I tell you what, let's just wrap up with this point. And if 
anybody wants to respond to any of that, I would be more than 
happy to give you what little time I have left. Or not.
    Chairman Duffy. I believe Dr. Krueger wanted to--
    Mr. Mulvaney. Dr. Krueger, okay, sure.
    Ms. Krueger. I am afraid the situation is so dire that the 
question is not whether some of the bond holders will, but 
whether they will lose a lot or lose less. If there is no legal 
framework, all the lawyers I know, and I am not a lawyer, say 
that it will be a messy, long, drawn-out process.
    I am an economist, and, as long as that is going on, the 
likelihood that there will be new investors and there will be 
others in Puerto Rico--or, sorry, and other growth in Puerto 
Rico will be very limited.
    As to the PREPA, the electric company, it has been high 
cost. It has lost money most of those years, unfortunately, 
despite what you call socialization. It is very high cost, 
$0.27 a kilowatt hour, remember, after the oil price decrease. 
So that is well above U.S. levels.
    Mr. Mulvaney. As an economist, let me ask, in my last few 
seconds, don't you think we set a dangerous precedent by 
changing the law so that, after the fact, pensioners and 
retirees in Puerto Rico would be paid before pensioners and 
retirees in the States, who have loaned them money? That is to 
you, Dr. Krueger.
    Ms. Krueger. Very quickly, the problem is that, somehow or 
other, Puerto Rico can't make all those payments. If it were 
required to do so--I don't know how you would require it, but 
if you did, the lights would go out. There would be no fire or 
police. The very basic things of government have to continue.
    And I think they would choose that at a critical point. It 
hasn't happened yet, and I hope it won't happen. I hope we can 
address the issue sooner, as the chairman suggested that 
Speaker Ryan has wanted to do, and I think is the appropriate 
thing to do. But the alternative is really awful.
    Mr. Mulvaney. Thank you, Doctor. Thank you, everyone.
    Chairman Duffy. Before you yield back, I would ask for 
unanimous consent for 15 extra seconds. I just want to be 
clear--I think the gentleman from South Carolina made a really 
good point, but I just want to be clear--when you talk about a 
bailout, are we talking about a bailout of pensions over 
creditors, or are we saying that bankruptcy is a bailout? I 
just wasn't sure what the point was.
    Mr. Mulvaney. No, it is just, I guess, my objection is to 
using the term ``creditors,'' because in here we are always 
saying that the creditors are bad people. Creditors are big 
banks. They are vulture funds. And the municipal bond market, 
more so than perhaps any financial security, the overwhelming 
group of investors are these same retirees and same pensioners.
    Chairman Duffy. Okay.
    Mr. Mulvaney. It is just in a different place.
    Chairman Duffy. Thank you. The gentleman yields back. The 
Chair now recognizes the gentleman from Missouri, Mr. Cleaver, 
for 5 minutes.
    Mr. Cleaver. Thank you. Thank you, Mr. Chairman. This is, I 
think, heartwarming to see that, for the most part, we are all 
trying to figure out a way to solve a major crisis.
    And, Dr. Zandi, in your simulations, it was a little 
chilling to assume that, by 2020, if nothing happens, we end up 
with a population in Puerto Rico of about 3.3 million, which 
means that the migration would increase significantly to this 
country.
    So the truth of the matter is, we are going to pay, one way 
or another. Am I going down the right road?
    Mr. Zandi. I think that is entirely correct, yes. If you 
just kind of connect the dots, it is pretty dire for Puerto 
Rico and that, obviously, is going to be a cost to all of the 
mainland, as well.
    Mr. Cleaver. Yes. I think we are weird in the English 
language. We make some terms toxic, and then we can't use them. 
So we don't need to call it, but I would call it, let's say, 
``sweet juice.'' If we ``sweet juice'' Puerto Rico, we are 
going to have to do it one way or another.
    And I am concerned. Would you have any response to the 
gentleman from South Carolina?
    Mr. Zandi. Yes. To the initial point you made about 
prioritization of the liabilities, putting the pensioners ahead 
of the creditors, the GO bonds, I would say two things. First, 
I think that should be left up to the restructuring framework.
    Empower an entity, like the Financial Stability Council, to 
go through and figure that out. What is in the best interest of 
the island's residents and for everyone, all the stakeholders 
involved, including the creditors and the pensioners. So I 
think that is something that should be left to that entity.
    The second thing I would say, just as a point of something 
to consider in the prioritization process, is that, of course, 
the pensioners, and we are talking about, at least the data I 
have seen, 330,000 current and future pensioners, they are 
residents of the island, for the most part.
    And if they don't get their pension payment, then that is 
just going to exacerbate, severely exacerbate, the economic 
effect on the island. The creditors, the folks who own the 
bonds, they are distributed around the world. And you are 
right, they are me, they are you, in the funds that we own. But 
the pain of that would be distributed much more widely across 
the globe.
    But the pensioners are sitting on the island, and 
obviously, it just complicates the matters for the island's 
economy.
    Mr. Cleaver. Thank you. So, if we do nothing, unemployment 
is going to fall, because people are going to leave. And if the 
unemployment begins to drop, the tax base, is even further 
eroded.
    So there should be little doubt that we have to do 
something. The question, I think, is what exactly we are going 
to do. And, frankly, Newt Gingrich was probably the most 
articulate person who proposed that we allow States to enter 
into bankruptcy. Now, Puerto Rico is a territory, but we do 
municipalities.
    I know the municipal bond markets would tremble at the 
thought of any kind of bankruptcy, because it might damage the, 
I think, $3 trillion municipal bond market. And all of you 
gave, I think, fabulous responses in your opening statements.
    So if the four of you were able to sit in a room together, 
being as brilliant and smart as you are, and probably all of 
you are members of MENSA, what do you think you could work on, 
just off the bat, assuming that we would agree with what you 
presented?
    Mr. Zandi. Just very quickly, I think, listening to the 
testimony, there is significant agreement. The only point of 
contention that I could hear was around how broad the 
restructuring framework should be. Should it be solely Chapter 
9, or should it be something broader than that?
    And there is a lot of debate, reasonable debate and 
discussion, around that issue. And that is where we would 
probably have the conversation. And I think it would be 
important to have here, as well.
    Mr. Cleaver. Mr. Batlle, you were trying to say something?
    Mr. Batlle. I just wanted to add that I think you touched 
upon the most important point here. I don't know what would 
come out of that meeting between the four of us, but that is 
what needs to happen.
    I think what we have missed so far is a genuine good faith 
sit down, face-to-face, between creditors, the government, not 
their advisors, the government, and a truthful discussion with 
real numbers that both sides can agree on, because right now 
the relationship between the two sides, from where I stand, 
outside--I am not part of any of the discussions--it seems to 
me that discussion is not happening.
    And I think that is the first step for any type of 
resolution going forward.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Isaac. If I could just get one word in there--
    Chairman Duffy. Very quickly.
    Mr. Isaac. --I disagree a little bit with Dr. Zandi. I 
believe that, from my experience trying to run the FDIC during 
a banking crisis, the most important thing to do right now is 
don't let this thing spread more broadly than it already is.
    And right now there is a problem that is small enough and 
isolated enough that it can be identified, and it can be fixed. 
If we start changing bankruptcy rules, I don't know where that 
goes, but nothing good is going to happen from that.
    If you say, we are going to go ahead and use bankruptcy 
rules on State debts and allow them to reorganize, Illinois or 
whatever the State is, and I think that is taking us down a 
road we don't want to go down. And it will be very, very costly 
and extremely disruptive of the markets.
    Chairman Duffy. The gentleman's time has expired. The Chair 
now recognizes the gentleman from Colorado, Mr. Tipton, for 5 
minutes.
    Mr. Tipton. Thank you, Mr. Chairman. Just by way of 
preamble, when Dr. Krueger's point that she had made that the 
situation is so dire, Mr. Zandi's point saying that we need to 
be able to spread the pain, and then Mr. Isaac's comment that 
right now we have a somewhat isolated problem and we need to be 
able to address it before it spreads.
    I truly think that there is a broader lesson for 
government, not just in Puerto Rico, at the Commonwealth level, 
but for our States, for our Federal Government, as well, when 
we look over to Greece.
    When governments over-promise and under-perform, simply by 
ability and through mismanagement, you create real problems 
that ultimately spread the pain far further than I think any of 
us want.
    And I think that we need to be addressing some of those 
root causes, as well, rather than being reactive, be proactive. 
And Washington would be a great starting point for a lot of 
that.
    Mr. Isaac, I would like to first go to you. You commented a 
little bit on the super committee that is being proposed by 
Treasury. Would you, perhaps, like to expand a little bit on 
why this might be a mistake, in regards to allowing Puerto Rico 
to be able to restructure all of its debt, including its 
general obligation funds, and how this plan could hurt other 
State and municipal debt owners or issuers in the United 
States?
    Mr. Isaac. I would be happy to. First of all, it is hard 
for me to comment on what the Treasury is proposing, because it 
seems to change with regularity. So and I am not sure what 
their current proposal is. I guess they are testifying this 
afternoon or sometime today, and maybe we will learn more about 
where they are right now.
    I believe that it would be a serious mistake to restructure 
the general obligation bonds. The government of Puerto Rico, 
when it created COFINA, knew that it was violating the law. It 
said so, publicly. It was violating its own constitution. They 
called these extra constitutional bonds.
    So everybody knew what the game was, and they were heading 
down the path they should not have headed down. And they 
shouldn't take this period right now as an opportunity to go 
ahead and make these bonds superior, or even pro gratis or Pari 
Passu with the general obligation bonds.
    If they do that, and if Congress allows them to do that, I 
don't know where it stops throughout the United States. Every 
State will be tempted to do it, or, at least, a lot of the 
States will be tempted to do it.
    And the credit markets, I believe, would be in a state of 
chaos and it will affect a lot of banks, because banks are big 
holders of municipal debt. And, in terms of our own banking 
system, I shudder at the thought of that.
    Mr. Tipton. Following that line of thought, we would 
probably see rates increase, causing more pain, and ultimately, 
more cost.
    Mr. Isaac. Certainly, the borrowing costs on municipal debt 
and State debt would go up a lot.
    Mr. Tipton. In order to try and be a little bit solutions-
oriented, the District of Columbia obviously had some 
challenges. Chairman Duffy actually has a piece of legislation 
that is going to allow for a limited duration council, only if 
the island's elected leaders are willing to be able to accept 
the council, somewhat a little bit similarly to what happened 
to challenges that were right here in the District of Columbia.
    Is a financial stability council important to the 
rehabilitation in Puerto Rico's finances?
    Mr. Isaac. I believe it is critical, and I believe that 
D.C. is a good example, and we should emulate that. It was 
very, very successful what was done in the district. And 
something along those lines, I think, would work very well in 
Puerto Rico.
    Mr. Tipton. Great. Just to broaden this net a little bit, 
we have a piece of legislation that Senator Hatch has put 
forward, in regards to the Puerto Rico Systems Act. And the 
bill addresses Puerto Rico's financial crisis, but it also 
includes provisions intended to be able to reform the public 
retirement systems outside of Puerto Rico.
    Specifically, this bill does include provisions that it 
would impose new disclosure obligations on the State and local 
government plans, as well as creations of a new type of plan 
designed for State and local governments that would not impose 
future liability on plan sponsor.
    And, one of the reasons for that inclusion into the Puerto 
Rico debt crisis has been exacerbated by severely underfunded 
plans, obviously, in Puerto Rico's public employee plans. With 
the aggregate under being that we are seeing at the State and 
local defined benefit pension plans in the United States 
exceeding about $4 four trillion right now, how important, Dr. 
Isaac, is it for us to be able to move forward with mandatory 
necessary reforms?
    Mr. Isaac. I am not an expert on Senator Hatch's plans. I 
have reviewed it, but not in any depth. I would tell you that I 
know him and have for a long time. And I think he is brilliant. 
He is a very public-spirited representative of our government, 
and I would think anything he proposed is certainly worth 
merit, has a lot of merit and is worth considering seriously.
    But I am not an expert on his particular provisions, and so 
I would hate to go much further than that.
    Mr. Tipton. Okay. Thank you. My time has expired, Mr. 
Chairman.
    Mr. Mulvaney [presiding]. The gentleman's time has expired. 
We now recognize the gentlewoman from New York, Ms. Velazquez, 
for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Zandi, we have 
heard how so many people are concerned about the U.S. municipal 
bond market. Given that the island has already defaulted on 
some issues, has the U.S. bond market been impacted?
    Mr. Zandi. No. There is no evidence of that.
    Ms. Velazquez. Many of the island's bonds are covered by 
bonds insurance. How does this help insulate the market from 
the impact of defaults?
    Mr. Zandi. The insurance will pay out under conditions, 
certain conditions of default and help cushion the blow to the 
bond holder. So it reduces the cost to the bond holders. Of 
course, the insurance companies have to pay it out.
    Ms. Velazquez. Right. When it comes to providing Puerto 
Rico with debt restructuring authority, some are suggesting 
that this, by itself, could undermine the U.S. municipal bond 
market. Several municipalities have declared bankruptcy, 
however, including Detroit. Did this situation impact the U.S. 
municipal bond market over the long term?
    Mr. Zandi. No, there is no evidence of that. If you look at 
yield spreads in the bond market, municipal bond yield relative 
to risk-free Treasury rates, they have shown no impact. And, of 
course, Puerto Rico has been under severe financial stress for 
more than 2 years, and this thing has been gathering steam.
    And it is pretty obvious that there are going to be 
defaults and restructuring. And there has been no impact on any 
of the rest of the municipal bond market. There has been, 
obviously, an impact on the Puerto Rican debt. It is trading, 
depending on what you are looking at, at less than 50 cents on 
the dollar, but the rest of the bond market has been 
unaffected.
    The other thing to point out is, there is no effect on 
flows into mutual funds, municipal bond funds.
    Ms. Velazquez. So, what you are saying is that--
    Mr. Zandi. None.
    Mr. Velezquez. --establishment of a debt restructuring--
    Mr. Zandi. Investors have said, quite clearly, in their 
voting with their money, that Puerto Rico's situation is Puerto 
Rico's situation. It is no one else's problem.
    Ms. Velazquez. Right. In the next 6 months, there is nearly 
$3 billion due in bond payments, of which half is for GDB, GO, 
and COFINA debt. Do you believe the island will be able to make 
this payment?
    Mr. Zandi. I think it would be incredibly difficult, and 
the governor has pretty much said no. The bond market 
investors, the guys who put the money on the line, are saying, 
no, this isn't going to happen. They are not going to be able 
to make those payments.
    Ms. Velazquez. If Chapter 9, alone, was enacted, would it 
allow Puerto Rico to restructure all of these pending debt 
payments?
    Mr. Zandi. No. Chapter 9 for municipals and public 
corporations, again, is a very positive, big step in the right 
direction, but it doesn't put Puerto Rico on a sustainable 
path. And I think, if we are going to empower an entity, like 
the financial stability council, to get this on a sustainable 
path, we have to give that council all the tools that it needs 
to be able to do that. And that means broader restructuring 
authority.
    Limiting it to Chapter 9 for municipalities, and for--now, 
it could be I am wrong. It is possible, rare, but possible. But 
we should give the tools to this entity just in case, because 
there is no room for error, here.
    Ms. Velazquez. So, Mr. Zandi, Puerto Rico already does not 
have access to the credit market. In that sense, it is not 
Greece. Greece has access to the credit markets. What this 
means for Puerto Rico is that the islands only children's 
hospital, large CT, and MRI machines, and has 70 vacant nursing 
positions, that therapy sessions for special education students 
are at risk, that supplies of gasoline for ambulances, police 
cars, and fire engines, were nearly cut off, that towns have 
gone without water, due to the lack of vendor payment, that 
food supply for inmates were almost cut because suppliers were 
not paid, that contractors, now, wait on average 4 months or 
more for the government to pay their bills.
    The reality is that, after facing payment delays, some 
suppliers are threatening, or have shut off the provision of 
important public--there is a lot of blame to go around, 
mismanagement of the Puerto Rican government.
    Mr. Batlle, you worked for the Government Bank, and, while 
you were in office, the debt doubled. So there is a lot of 
blame to go around, including this same body, because we lack 
public policy uniformity when it comes to the U.S. territories.
    So look at how much reimbursement they get when it comes to 
Medicare and Medicaid. We subject Puerto Rico to the same 
standards that we subject hospitals here and any other 
institution, and, yet, they don't have the resources to abide 
or to comply with those standards.
    When it comes to the Jones Act, when it comes to so many 
other issues, we give and we take away. We promote economic 
growth in Puerto Rico by providing Section 936 when we needed 
to showcase Puerto Rico, as Ms. Krueger said, as the jewel of 
the Caribbean, sending a message, what, to Cuba, Fidel Castro, 
this is what it takes to be a good partner?
    But now that Puerto Rico is not needed to showcase what a 
good relationship with the United States means, no longer is an 
asterisk, Puerto Rico cannot be a nuance for the United States 
Government. And you know what? We will pay. We will provide the 
tools, or we will pay later.
    One point two million Puerto Ricans, basically, have left 
the island. And they are living in Florida. So be prepared to 
provide for their legal education and healthcare in your own 
Congressional districts.
    Thank you.
    Chairman Duffy. The gentlelady yields back. The Chair now 
recognizes the gentleman from Maine, Mr. Poliquin, for 5 
minutes.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very 
much. My heart goes out to the families in Puerto Rico. I don't 
know how you got into this mess. Your economy is shrinking. 
Forty percent of the adults on the island have jobs, working-
age adults. Twenty-five percent of the total jobs are for the 
government. Half of the population lives below the poverty 
line. The young are leaving.
    This is a mess. Now, the folks who run the government down 
there, I don't know what they have been doing. There is a 
constitutional mandate on the territory, unless I am mistaken, 
that limits debt to about 15 percent of the tax revenues on the 
island. But COFINA was created to circumvent that law, to add 
to the debt level.
    So, now, you have $73 billion of debt, GOs, and revenue 
bonds. Thirty-six percent of the tax revenues generated on the 
island goes to pay the interest and principal payments on the 
debt. And you have a $2 billion interest payment in a couple of 
months. Who in the heck is responsible? And where are those 
people now?
    Now, I represent Maine's second district. The real Maine, 
not Northern Massachusetts, the real Maine. We are hardworking 
people, and we are honest people. We struggle for every buck we 
can make, struggling through the worst economy in 70 years. And 
a lot of these retirees own Puerto Rican bonds. They have lent 
money to the territory.
    And so, now, you folks come to us, wanting what? So I will 
tell you Mr. Chairman, I am all about solving this problem. For 
me, and for the people I represent in Maine, any solution has 
to include a structural fit for the government structure on 
this island, who got us into this mess, so it doesn't happen 
again, because it is just not fair.
    Now, Detroit has gone through some really tough times. And 
they were able to solve their problems and hold people 
accountable. So I don't know which of you individuals up here 
today can answer the question.
    But I am going to ask you, Mr. Batlle, are the people who 
were responsible for this mess still running the government 
down in Puerto Rico?
    Mr. Batlle. I would say that, as I mentioned in my oral 
testimony, everybody here is accountable for what happened. So, 
no, some of them are and some of them aren't, but all--
    Mr. Poliquin. Okay. Let me ask you another question. I am 
the former State Treasurer in Maine, so we deal with the muni 
market all the time, and we deal with incentives all the time. 
Were there any incentives in place then, or now, in the folks 
who are running the government, to increase their debt levels, 
beyond levels that are clearly unsustainable?
    Mr. Batlle. Incentives for--
    Mr. Poliquin. Yes, are there any electoral or governance 
incentives, right now, in the territory, that would incent 
people who run the government to increase their debt levels?
    Mr. Batlle. Not to my knowledge.
    Mr. Poliquin. Then how did you get in this mess? Ms. 
Krueger?
    Ms. Krueger. If I may, and there are problems within the 
government, in terms of the inefficiency of tax collection, and 
administration in general that have accounted for it. It is no 
individual, but it is the system, which you are quite correct.
    Mr. Poliquin. All right. Let's dig into that a little bit. 
My understanding is that only 56 percent of the taxes owed in 
the territory are actually collected. Is that right? Why?
    Ms. Krueger. It is hard to know a number, because there is 
a large informal sector--
    Mr. Poliquin. Okay, fine. That is the report I have. It is 
about 56 percent. Why?
    Ms. Krueger. There is a large informal sector, because, 
indeed--
    Mr. Poliquin. What does an informal sector mean, people 
don't want to pay their taxes?
    Ms. Krueger. People who are working and not paying taxes, 
yes, outside--
    Mr. Poliquin. Well, no one wants to pay their taxes, but if 
you owe your taxes, you pay them, right? So why aren't these 
taxes collected? Mr. Batlle?
    Mr. Batlle. Sir, the taxing authority in Puerto Rico is a 
very dysfunctional entity.
    Mr. Poliquin. It is a cultural thing? Did I hear that 
right?
    Mr. Batlle. Dysfunctional. The taxing authority.
    Mr. Poliquin. It is dysfunctional. What makes it 
dysfunctional? It is dysfunctional in Greece, too.
    Mr. Batlle. I will tell you that the--
    Mr. Poliquin. People don't want to pay their taxes there, 
and then you complain because you can't run the government. And 
you have to borrow more, and it puts everybody at risk. I know 
it is dysfunctional. How do you fix it?
    Mr. Batlle. There has to be consequences to people who 
don't pay taxes.
    Mr. Poliquin. What kind of consequences?
    Mr. Batlle. Whatever consequences could be incorporated 
into the system.
    Mr. Poliquin. Okay.
    Mr. Batlle. I am not an expert on that in my area, but--
    Mr. Poliquin. Mr. Chairman--
    Mr. Batlle. --there have to be consequences.
    Mr. Poliquin. Thank you, sir. And I am not trying to badger 
anybody, it is just that I represent people who are coming to 
us to ask to be on the hook to bail out people who weren't 
responsible. There has been reckless behavior down in this 
territory, and in other parts of this country. It is not just 
the territory. Other parts of this country, including, here, in 
Washington.
    They are looking for bailouts. So I will tell you, Mr. 
Chairman, I am out of time. I am all for a solution, as long as 
there are structural changes to fix this problem, so that we 
don't go down this path again. Thank you.
    Chairman Duffy. The gentlemen yields back. The Chair now 
recognizes Mrs. Maloney from New York for 5 minutes.
    Mrs. Maloney. All right. I want to thank you, Mr. Chairman 
and Mr. Ranking Member, for allowing me to participate in this 
hearing and, really, for having this very important hearing. 
Puerto Rico is home to 3.5 million American citizens, and they 
face a severe financial crisis. I believe we have an obligation 
to help our fellow citizens.
    And New York City has a long history with Puerto Rico. The 
very first, a Puerto Rican veteran, was from El Barrio in East 
Harlem of New York. The very first elected party official, 
first elected official, many leadership and the arts came from 
what we call the cradle of Puerto Rican advancement in the 
United States, East Harlem or El Barrio.
    Now, I would like to just note and put into historical 
reference what we are confronting today. New York City, the 
city that I am proud to represent, also faced a huge financial 
crisis back in the 1970s, and there was a reaction by some in 
Congress to do nothing. Let them die. Let's do nothing to help 
New York.
    Gratefully, the Majority in Congress responded to the 
crisis in New York, and helped the City and its people rebuild. 
And that was to the benefit of our entire Nation, not just to 
the City and State, but our entire Nation. And the solution 
that Congress put forward involved a control board, a 
restructuring law, and a $2.3 billion loan from the Federal 
Government.
    We faced a similar crisis with the auto industry in New 
York, and again, not in New York, in our country, out in 
Michigan. And, again, our country responded by restructuring, 
offering loans, and we now have an auto industry that survived 
and is now exporting and creating American jobs.
    So I feel we have a responsibility to get in there and 
help, and help them restructure it and help them rebuild. I 
would like to ask, and I would like to really comment on Dr. 
Zandi's testimony that what we should approach what is 
confronting us now is a territorial bankruptcy regime that 
would, when you said that it would not disrupt the broader 
municipal bond market, that seems that should be the way that 
we would go. And I think that is really important, your 
testimony that it would not disrupt the municipal bond market.
    A territorial bankruptcy regime, by definition, would not 
be available to States. It would only be available to the five 
territories that we have, or it could be drafted specifically 
for Puerto Rico.
    I want to compliment and applaud Chairman Duffy. He is the 
only Republican, that I am aware of, who has tried to confront 
this problem and come forward with constructive solutions. He 
has introduced a bill that grants Puerto Rico access to Chapter 
9 bankruptcy, just like every other State has.
    And there is absolutely no justification, in any way, 
shape, or form, for excluding Puerto Rico from Chapter 9. And I 
want to thank Chairman Duffy for his leadership in putting this 
forward.
    But I think it is also important to remember that much of 
Puerto Rico's $72 billion worth of debt is what is known as 
special revenue debt, which enjoys unique protections under 
Chapter 9.
    So even if they had Chapter 9, there would be a whole area 
that would be protected from restructuring. I hear that, 
roughly, only 30 percent of the debt would be available for 
restructuring under Chapter 9. Is that correct, Dr. Zandi? If 
we had Chapter 9, how much of Puerto Rico's debt could be 
restructured?
    Mr. Zandi. For sure, 30 percent of the debt. There is a 
reasonable debate as to whether the other debt, parts of the 
debt, would fall under Chapter 9. But that would have to 
adjudicated, and it would go through a court process.
    And just looking, a similar kind of question came up in the 
Detroit bankruptcy about eligibility, and that just dragged on 
for 12, 18 months. And Puerto Rico doesn't have that time.
    Mrs. Maloney. So I think we have to consider a more 
comprehensive option, like a broader restructuring regime, that 
can bring in all of the creditors to the table, including the 
secured creditors.
    And that is why I believe, Mr. Duffy, we have to look at 
expanding it to a territorial restructuring and put everybody 
at the table.
    But my question is for Dr. Zandi: What difficulties would 
Puerto Rico face in negotiating a restructuring under a regime 
that coves only roughly 30 percent of their debt?
    Mr. Zandi. I think if you do the arithmetic, if they can 
only get 30 percent of the debt restructured, that wouldn't put 
Puerto Rico on a sustainable path. They would continue to have 
significant fiscal problems, economic problems, and you would 
not have solved the issue. It would be back here. We would be 
back here, again, discussing this and trying to figure out what 
to do.
    So I don't believe that is sufficient to solve this problem 
in a sustainable way, as other Congressmen have said that we 
should.
    Mrs. Maloney. So we need to consider stronger tools than 
Chapter 9, you would say, Dr. Zandi, correct?
    Mr. Zandi. Yes, I do. And I don't say this lightly, because 
I do think we need to be cognizant of the cost, potential cost. 
I think Mr. Isaac brings up an important point that we need to 
think through.
    But I think, at the end of the day, Puerto Rico is not a 
State. States, under the 10th Amendment of the Constitution, 
will never go down the path that was being proposed here for 
Puerto Rico.
    And, again, the proof, or the basis, for this perspective 
that gives me confidence is in the marketplace. Investors who 
have money on the line are saying that this is not going to be 
an issue for the rest of the country.
    Mrs. Maloney. Okay. So do you think a territorial 
bankruptcy regime would be sufficient?
    Mr. Zandi. Yes. And just a restructuring framework. It 
doesn't necessarily have to be bankruptcy. That is perhaps the 
cleanest way. But there are other ways of doing it. But there 
has to be a framework to allow a restructuring of all of the 
liabilities that the island is struggling with, all of the 
debt, and all of the unfunded pension liabilities.
    Mrs. Maloney. And that would have the least impact on 
taxpayers, too.
    Mr. Zandi. I think, at the end of the day, that is the only 
way to put Puerto Rico on a sustainable path and limit the 
fallout on the rest of the municipal bond market economy and 
financial system.
    Mrs. Maloney. Thank you very much.
    My time has expired. Thank you very much, Chairman Duffy 
and Ranking Member Green, for your work on this. And I thank 
all the panelists for your thoughtful presentations today.
    Chairman Duffy. And I appreciate your positive comments, 
Mrs. Maloney, but your time has expired. Thank you.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Green, for 5 
minutes.
    Mr. Green. Thank you very much, Mr. Chairman.
    Let's start with bankruptcy, in general. I must tell you, 
friends, I marvel at how bankruptcy has become a taboo for the 
committee, when, for many years now, there has been this 
clarion call, if you will, to eviscerate Dodd-Frank and replace 
it with some sort of super bankruptcy for the big banks.
    It just seems to me that if bankruptcy is good enough for 
the big banks--and that is a bailout if you want to call it 
such--it seems like it ought to be good enough for Puerto Rico. 
It just seems to me that we can do for Puerto Rico what persons 
are proposing currently to do for the big banks.
    Literally, eviscerate--well, if not eviscerate, emasculate 
Dodd-Frank, so that there will not be the opportunity to have 
the orderly liquidation of these huge mega banks. Now, with 
reference to someone indicating that it was unfair, or it would 
create some sort of--disrupt the balance, if we moved to change 
the bankruptcy rules, we did it in 1984.
    And it seems to me that things are still functioning fairly 
well. And, immediately after 1984, there was not this great 
disruption in the markets. We changed it, 1984. The law allows 
for it to be done.
    Investors who invest understand that it can be done when 
they make the investments. They understand this. These are very 
sophisticated investors, the people who actually make the 
investments. So they understand that Congress can change the 
rules retroactively, because we have changed the rules 
retroactively. Nothing new. It happens.
    I don't advocate doing it on some sort of routine basis, 
but I do believe that, when we have a crisis of this magnitude, 
such that we will, with our inaction, allow Puerto Rico to 
become the Greece of the western hemisphere, I think we ought 
to act. We ought not just allow this to occur.
    Now, with reference to the 30 percent, Mr. Zandi, this is 
the case, because of the specific revenue bonds. And for 
edification purposes, these are bonds that, in a Chapter 9 
bankruptcy, when you get the automatic stay, you are still 
going to be paying the principal and interest on those, under 
the automatic stay.
    The others, the 30 percent you are talking about, will be 
subject to the automatic stay, which is why you have to have 
some methodology by which you can bring everybody to the table 
at the same time, if you are going to get a long-term solution 
to a crisis of this magnitude.
    I believe that Detroit has benefited greatly. I think that 
those who prefer D.C., I am not going to argue with you about 
it. But I think that a good argument can be made that, if we 
can do it for Detroit, we can do it for Puerto Rico, as well.
    And, finally, before we go to another round, if there is 
going to be another round, Mr. Chairman, I would like to go to 
Mr. Zandi and ask him the following.
    Sir, with reference to the broadening of this, beyond what 
Chapter 9 will afford, if we broaden, and we bring everybody to 
the table, would you juxtapose that to what happens if we only 
bring--and I think you have done this, but I would like for you 
to do it again, to help provide additional clarity, if you only 
bring that 30 percent that we are talking about, that Chapter 9 
might afford us, what will the difference be?
    Mr. Zandi. If we only get the 30 percent through the 
bankruptcy, Chapter 9 bankruptcy, and you do the arithmetic, it 
is very likely that we haven't solved Puerto Rico's problems. 
It is unsustainable.
    So I think it is important. And, again, that is my 
arithmetic, but I think it is important to provide the tools 
necessary for other people to do this work in more detail and 
to figure it out. And give them the tools to be able to 
restructure the liabilities more broadly, if necessary, to put 
Puerto Rico on solid ground.
    And I do think it is reasonable to treat Puerto Rico 
differently than a State. It is not a State. It is a territory. 
It has the same relationship to the Federal Government as does 
Detroit has to the State of Michigan. And that is why I think 
it is perfectly reasonable and ultimately vital that we allow 
for this broader restructuring framework to go forward.
    Otherwise, my sense is, my view is this problem will not be 
solved, and we will be back here, again, trying to figure it 
out.
    Mr. Green. I yield back, Mr. Chairman.
    Chairman Duffy. The gentleman yields back. For those who 
are willing to participate, and if the panel is okay with it, 
we would like to do a second round. We have lost a few Members, 
so it won't take as long. So, with no objection, the Chair 
recognizes himself for 5 minutes.
    I have to say, Mr. Zandi, I would have to imagine that, if 
that statement was made to the residents of Puerto Rico, that 
the relationship of Puerto Rico to the United States is that of 
Detroit to Michigan, I would have to imagine you would probably 
get some pretty significant objections.
    But with that said, I want to look at the debt that is out 
there. And, to your point, you have indicated that, well, if 
you offer Chapter 9, that might only be 30 percent, and 30 
percent isn't enough to deal with the issues on the island. Is 
that a fair enough statement that you have made at today's 
hearing?
    Mr. Zandi. Yes, just to clarify, to your previous point, I 
said that in the context of the debt, not in the context of the 
broader frame that you put it in.
    Chairman Duffy. Okay. But you would also agree that we are 
having a conversation about what is the solution.
    Mr. Zandi. Yes.
    Chairman Duffy. What do we do, as Congress, so we have the 
power to decide whether it is 30 percent, whether it is 100 
percent, or whether it is 75 percent. I am not advocating that 
COFINA be included, but I am not saying that it shouldn't be 
included.
    But if COFINA is included, we are not at 30 percent. We are 
going to get up to 75 percent.
    Mr. Zandi. You are right.
    Chairman Duffy. And if we choose, as legislators, to do 
that, is the 75 percent of debt restructuring sufficient to 
address the issues on the island and still protect Wisconsin 
and Texas, States and municipalities, from increases in 
interest rates?
    Mr. Zandi. Yes, in theory. This is a matter of theory and 
practice. Are you going to actually accomplish what you want to 
accomplish with your legislation?
    Chairman Duffy. That is always a question for Congress, 
theories and--
    Mr. Zandi. Well, no. You are trying to solve a problem. So 
are we going to solve this problem or not?
    Chairman Duffy. That is why we are here today. We are 
trying to solve the problem, right? That is the point of the 
hearing. That is the point of the testimony. But I don't want 
people to be misled that our proposal can only hit 30 percent.
    Mr. Zandi. You are absolutely right. And I tried to say, 
every single time that this question has been asked, because it 
is a key question, and I say, ``For sure, 30 percent.''
    Chairman Duffy. And this will be a question for us, what--
    Mr. Zandi. Yes.
    Chairman Duffy. --how do we structure--
    Mr. Zandi. Right. Yes.
    Chairman Duffy. --bankruptcy and how much of the debt does 
it touch?
    Mr. Zandi. But you are absolutely--I don't want to mislead 
anybody.
    Chairman Duffy. Thank you. So, I know. I wanted to make 
sure we were clear on that.
    Mr. Zandi. Right.
    Chairman Duffy. Mr. Isaac, former Chair of the FDIC, I 
think you recently said, ``Puerto Rico's debt situation has a 
potential of significantly rattling the financial markets, and 
banks need to take notice.'' What is at stake? Why? With regard 
to banks? If this question isn't properly handled?
    Mr. Isaac. Pardon?
    Chairman Duffy. If this question isn't properly handled, 
what do you mean by that?
    Mr. Isaac. I am concerned that the banks have made loans 
all over the country, in reliance on certain rules of 
bankruptcy. They understand the rules. They understand what 
general obligation bonds mean. And they understand the 
difference between a general obligation bond and a revenue 
bond.
    And, if we say that, through our actions in Puerto Rico, 
that all those distinctions that you have been relying on don't 
work anymore, you are no longer in favored status when you have 
a general obligation bond--
    Chairman Duffy. That would create uncertainty, right?
    Mr. Isaac. Enormous uncertainty.
    Chairman Duffy. And is uncertainty bad for our markets?
    Mr. Isaac. As former Chairman of the FDIC, I used to hate 
uncertainty. I wanted to know what was going to happen each day 
when I woke up.
    Chairman Duffy. Thank you for that.
    Dr. Krueger, as the former chief economist for the World 
Bank and the managing director of the IMF, it is my 
understanding that, when we have distressed countries, the 
benchmark for debt servicing has been 18 to 22 percent. I think 
that is--I read that somewhere.
    The proposal from Puerto Rico has been that 15 percent of 
revenue would go to debt servicing. Does that make sense? 
Should it be 15 percent? Should we get up to 18 to 22? Where 
should that number be--or percent be, I should say?
    Ms. Krueger. That number depends, in part, of course, on 
the country situation. And it varies a bit, of course, by 
country. I think more accurately what the Fund does is try to 
look at what needs to be done, structurally, to change growth 
prospects, at the same time as to get whatever tax and 
expenditure adjustments are necessary, and then look 
prospectively at what we call the primary surplus will be going 
forward.
    It is defined as the amount of revenue, over and above 
other government expenditures, that will come in. And, in 
general, we look at the primary surplus, rather than an 18 or 
22 percent number to ask what could be reasonable.
    And those numbers vary all over the place. When I was 
there, I think we had one country where, indeed, something like 
20 percent of GDP was primary surplus going to debt service for 
a year or two. Another country it was three. It makes a big 
difference what the inflation rate is and things like that.
    I don't think there is any hard and fast rule on 15 or 18 
percent. There are many other things to be taken into account.
    Chairman Duffy. Okay. I think everybody would understand 
and agree that this institution is very sensitive to taking 
taxpayer money and using it in the form of a bailout. If you 
haven't noticed that, you haven't been paying attention.
    And, so, there is some conversation about bankruptcy being 
a bailout. Now, I would ask the panel, I would normally think 
of a bailout as this institution taking Federal taxpayer money 
and giving it to another institution to bail them out.
    Do you all see bankruptcy as a bailout? Yes? Dr. Krueger?
    Ms. Krueger. Do you want me to start? Bankruptcy comes 
about when there is no alternative, which is, I am afraid, the 
Puerto Rican case, or, more accurately, when the alternative is 
worse. And the alternative, in this case, for Puerto Rico, of 
not getting something now means probably no growth, which, as I 
said, also means some other things, and continuing fiscal 
unsustainability, which leads to uncertainty, which leads to 
more problems. The normal--
    Chairman Duffy. And could that lead to the call for this 
institution actually to bail them out? To actually send 
taxpayer money to the island?
    Ms. Krueger. The normal procedure is, when things get to 
that shape in countries, what happens is that without some 
short-term money, things are grinding to a halt, and the 
downward spiral is making things even worse.
    So that sometimes what happens is money comes with it, but 
that normally is repaid. Now the art of bankruptcy is to find a 
law which gives enough room so that when their things are 
really in dire, dire straits, so there is no alternative, there 
can be a mechanism so that you just don't go downhill forever.
    But, at the same time, creditor rights are protected, as 
much as you possibly can, because otherwise creditors aren't 
going to lend. So finding that balance is what is really hard.
    Chairman Duffy. What is key. Thank you. Just quickly, and I 
am done, but does anyone disagree with that point that 
bankruptcy is a bailout? No one is raising their hand. I will 
take that as you don't agree that bankruptcy's a bailout.
    With that, my time expired long ago. The Chair now 
recognizes the ranking member of the subcommittee, the 
gentleman from Texas, Mr. Green, for 5 minutes.
    Mr. Green. I thank you, Mr. Chairman. Let's continue with 
the bailout proposition, because it is important to note that 
when you are in bankruptcy, the creditors come to the table, 
and it is all about trying to get some agreement as to how the 
creditors will go forward.
    And if there is a loss, it is the creditors, not the 
citizens, who are not a party to the bankruptcy, who end up 
taking the loss. The creditors, not the citizens. Now, 
taxpayers can be involved in business, but it is not because 
they are citizen taxpayers that they are at the table. They are 
at the table, because there was some investment.
    So it is those who have invested. And we have to make that 
clear, because there seems to be a belief, among some of us, 
that in bankruptcy the court orders money from the Treasury to 
be used to satisfy some need, which is absolutely, totally, and 
completely untrue. It is not the case.
    Now, moving forward, let's see a show of hands of the 
persons who are here with us today as witnesses, and I thank 
you, of those who would favor bankruptcy. You may favor more, 
but see bankruptcy as a part of the solution. If you think 
bankruptcy is a part of the solution, I just want to get this 
on the record, would you kindly raise your hand?
    All right. Let the record reflect that all of the members 
of the panel--you may lower your hands--see bankruptcy as a 
part of the solution.
    Now, Mr. Isaac, you have been in the banking business for 
some time. And you are aware of bankruptcy laws, to a great 
extent. I am assuming this, okay? But when it comes to banks, 
when they have a problem, they usually close them on Friday. 
The FDIC comes in. then, they open them up on Monday, generally 
speaking. Is that a fair statement?
    Mr. Isaac. That is a fair statement.
    Mr. Green. All right. And so, if in banking--and by the 
way, FDIC is sort of a fund that is developed from a premium 
paid by banks. Is that a fair statement?
    Mr. Isaac. That is correct.
    Mr. Green. Okay. So you have the FDIC, you have the banks. 
Now, if banks made an investment in some aspect of the Puerto 
Rican economy, they did so understanding that they might make 
money or they may lose money. Even banks can lose money. Would 
you agree that they would have to do that with that 
understanding, that they would make or lose? It is not always a 
winning proposition. You can't arbitrage a bank.
    Mr. Isaac. That is correct. It is a risk business.
    Mr. Green. Right. Although, I do confess that there is a 
way, sometimes, to arbitrage with the spread and something that 
we went through in 2008. But that is not a part of this 
hearing.
    So if banks can lose money, then this may be one of those 
times when banks may have to take a haircut--haircut is another 
way of saying lose some money--just as other investors may have 
to take a haircut.
    And, by the way, I am not in favor of having anybody lose 
money. But we have a crisis that we have to resolve. And we are 
not going to resolve the crisis by allowing it to continue 
without some intervention. So the question is, to what extent 
do we intervene?
    I remember in 2008, Mr. Zandi, when--and I think you were 
around and a part of many of these discussions, trying to 
determine what the amount of the--what was it, the TARP?
    Mr. Zandi. TARP. TARP program.
    Mr. Green. TARP. Yes, trying to determine the TARP was a 
big question. We had someone to come in and testify that we 
needed a certain amount of money, with about five sheets of 
paper.
    Mr. Zandi. Yes.
    Mr. Green. And with those five sheets of paper, we started 
a process. But we had a big debate about how big it should be. 
So we are into that big debate now about how big this should 
be.
    It is what we have done before. We do this. This is why we 
are here, to have these debates. And Mr. Duffy and I will, 
hopefully, try to come to a consensus so that we can resolve 
this and not have a measure that doesn't go far enough, because 
we have seen what happens when you don't go far enough.
    You can actually exacerbate the problem. And that is not 
what we want to do. We want to resolve the problem.
    With that said, Mr. Chairman, I yield back.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the ranking member of the full Financial Services 
Committee, the gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you so very much, Mr. Duffy. Let me tell 
you how pleased I am that you are holding this hearing. I think 
this absolutely needed to be done, and I am very appreciative 
that you are doing this.
    Let me direct a question to Dr. Zandi and, perhaps, Dr. 
Krueger, too. Throughout your testimony, you have spoken of the 
importance of expanding the Medicaid program to improve health 
outcomes and of introducing the Earned Income Tax Credit, as a 
strong incentive to find taxable employment.
    Chairman Duffy. If I could just briefly interrupt the 
ranking member, if you could speak a little bit louder, I think 
the panelists are having a hard time hearing you. I'm sorry.
    Ms. Waters. They can't hear me? Usually, that is not the 
case.
    Chairman Duffy. That is usually not the problem.
    Ms. Waters. What is wrong today? Okay. The questions that I 
have are for Dr. Zandi and, I believe, Dr. Krueger. Throughout 
your testimony, you have spoken of the importance of expanding 
the Medicaid program to improve health outcomes and of 
introducing the Earned Income Tax Credit, as a strong incentive 
to find taxable employment.
    Specifically, I am told you mentioned that the cost of 
these proposals, when fully operational, would be roughly $2 
billion a year. Will you please explain how the cost of these 
programs would be offset by the expected increase in labor 
force participation and tax revenues and anticipated decrease 
in healthcare expenditures?
    Secondly, what would be the expected costs if these 
critical social welfare programs were not made available? Is it 
possible that the lost revenues and unemployment expenses could 
exceed $2 billion per year? Starting with Dr. Zandi.
    Mr. Zandi. Okay. So just to be clear on Medicaid, all I am 
arguing is that the funding for Medicaid in Puerto Rico should 
be the same as the funding on the mainland. If you have that 
same threshold, then, I think, you have gone a long way to 
helping Puerto Rico, because under current law that is not the 
case. And the funding will decline in late 2017, 2018.
    And this is key for Puerto Rico, because half of the 
population is on Medicaid. And without those benefits, this 
will be very serious. That, just to be precise there, my 
calculation of the cost is $2 billion per annum on a present 
value basis.
    So over the next 10 years. So $20 billion, over the next 10 
years, on a present value basis. If you do it by CBO 
accounting, it probably comes closer to $30 billion. That is in 
nominal dollars.
    You make an excellent point, and that is, if we don't take 
steps like funding Medicaid fully and adopting an EITC, and 
other steps, the economy of Puerto Rico will continue to 
shrink, which means the fiscal situation will continue to 
erode, which means we will be back here, again, talking about 
Puerto Rico's problems.
    It means the tax base erodes. It means less tax revenue, 
and the costs will continue to mount. If we do these things, in 
addition to some other things I propose in the written 
testimony, get Puerto Rico moving in a positive direction, that 
gives you positive revenue growth.
    And I haven't done the calculation, whether that pays fully 
for the Medicaid expansion and EITC, but it probably comes 
pretty close, yes. So I think it is a very reasonable thing to 
do. And, frankly, I don't see any other option, because if we 
don't get Puerto Rico moving north, as opposed to south, 
nothing works. Nothing works.
    Ms. Waters. Thank you very much.
    Dr. Krueger, you have a minute or so to add to that.
    Ms. Krueger. First, I agree with everything that Dr. Zandi 
said, but I would make the point even more strongly. If the 
formula for providing Medicaid to block grants were the same 
for Puerto Rico, that be a huge difference in Puerto Rican 
payments.
    And the current payments are expected to expire in 2017, 
which, if something is not done, is going to be another big 
hole in the Puerto Rican budget, because they are mandated that 
they must do it.
    And it is not that healthcare would improve. It is that the 
funding must be done by the Commonwealth, by Federal law. And 
any other State in the United States gets more funding for the 
same--if you use the same formula, Puerto Rico would get more, 
too.
    As to EITC, obviously, if more people enter the formal 
labor force and start paying taxes, even though they get EITC, 
there is a huge offset there, but the big offset, I think, is 
in getting Puerto Rico turned around and on a proper growth 
path.
    Costs of welfare, in general, will go up across Medicaid, 
everything, until such time as the Commonwealth turns around. 
And they will come either on the island, or on the mainland, if 
people leave.
    So it is not a U.S. choice to avoid. It is only a question 
of where the pain comes and how much there is, I think.
    Mr. Zandi. Just one quick point, Congresswoman? All of the 
budgeting that is being done now is under the assumption that 
this Medicaid fix will occur. If it does not take place, then 
all of these budget assumptions that are being--with the 
governors putting forward and what the bond holders are 
assuming, everything, it is just not going to work. It is going 
to be many times worse than what we expect right now.
    So this is a working assumption of everyone out there, that 
this is going to happen.
    Ms. Waters. All right. Thank you very much, and I yield 
back.
    Chairman Duffy. The gentlelady yields back. The Chair now 
recognizes the gentleman from Minnesota, Mr. Ellison, for 5 
minutes.
    Mr. Ellison. Thank you, Mr. Chairman, and thanks to the 
ranking member, as well. And, also, thank you to the panel.
    Dr. Zandi, thanks for being here. I have read that some 
economists believe that Puerto Rico's current problems began 
with the winding down of Section 936. Section 936, for the 
record, provided American companies with incentives to invest 
and create jobs in Puerto Rico.
    Would bringing back Section 936 generate economic activity 
and jobs? Would restoring it enable Puerto Rico to pay off its 
creditors in time?
    Mr. Zandi. I think the expiration of 936, and it was 
completely wound down by the year 2006. And that was the year 
that the economy peaked in Puerto Rico. Employment peaked, 
population peaked.
    So, yes, I think the expiration of the tax benefit under 
936 has contributed. There are many other factors, obviously, 
but it is one factor in the 10-year long recession in Puerto 
Rico. Would I bring it back? I think if--we were talking about 
this earlier--if I were king for the day, I would say no.
    I would use that resource and that money, and I would use 
it to fund the EITC, a Child Tax Credit, which, by the way, 
also incents work. But we want to get a culture of people 
paying their taxes. It has been aptly demonstrated here that 
there is a big underground economy. People don't trust the 
system, and they are not paying.
    And, so, we have to change that. And the EITC and the Child 
Tax Credit would go a long way to incenting people to get into 
the formal economy, start paying their taxes. It will make this 
whole thing work out a lot better. So, if I were doing this, 
that is where I would spend my attention and the resources.
    Mr. Ellison. Thank you. Also, do any of the other panelists 
have any comments on that? Yes, Dr. Krueger?
    Ms. Krueger. Yes, I would agree with Dr. Zandi, but add 
that, indeed, even the 936, when it came, brought in the high-
value added skill using things, and that is not Puerto Rico's 
comparative advantage, first.
    But, secondly, we did it once. We took it back once. What 
would convince people that Congress, if they did it again, 
would not take it back at some later date? And I would think 
the effects of it, the second time around, would be far smaller 
than they were the first time. And the first time, it helped 
the people who didn't need the help as much.
    Mr. Ellison. Yes. Thank you for your thoughts on that. And 
here is another question for the panel. What sectors of the 
Puerto Rican economy have the most potential to grow? You can 
start, Doctor.
    Ms. Krueger. I can take a crack at it.
    Mr. Ellison. Okay.
    Ms. Krueger. The first thing I ever taught in an 
international trade course was that you can never tell what 
will spring up when you change incentives. And that is true. 
The things that become big industries and big users of the 
labor force very often are things that nobody ever dreamt of 
ahead of time. So it is very hard to tell.
    But tourism in Puerto Rico has not thrived, except at the 
high end, partly because of minimum wage. Dominican Republic's 
minimum wage is very low. Puerto Ricans are competing when 
their minimum wage is about 10 times as high. Not that it 
should be that low, but it should be somewhere in between, 
probably, for that purpose.
    But tourism, there are very few more tourist spends now 
than there were in 1980, despite the boom of tourism all around 
the Caribbean. It doesn't make any sense. I think that there 
should be a booming corporate headquarters for companies, 
probably mostly European, that do business in both North and 
South America.
    It hasn't happened. And I think a lot of this problem we 
have been discussing accounted for it. But Puerto Rico should 
be a major corporate headquarters sector, provide financial 
services for both North and South America, and other things 
that would take advantage of the U.S. dollar, U.S. law and 
order, U.S. protection of various kinds, and the advantage of 
the geographic location, and the Spanish and English 
connection.
    Mr. Ellison. Great. Others?
    Mr. Zandi. Yes, I would agree. The most obvious is the 
tourism industry, which has languished for lots of reasons. And 
the infrastructure of Puerto Rico is quickly eroding and making 
it more difficult for that to be a mass market for tourism.
    But that is the most obvious comparative advantage. And I 
do think financial services is a place where there would be 
significant potential. There is a lot of capital flowing from 
South America, Central America, into the United States.
    Now, right now, it is mostly going into Miami, in Florida. 
But I don't see any reason why Puerto Rico couldn't get its 
fair share of that capital flow. And I think that would be a 
significant boon to the economy.
    Mr. Ellison. Good.
    I will yield back and say thank you, again, to the panel 
and to the chairman and the ranking member.
    Chairman Duffy. The gentleman yields back. The Chair now 
recognizes the gentleman from South Carolina, Mr. Mulvaney, for 
5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman. I thank the panel 
for sticking around. Mostly, I want to talk to my colleagues, 
if I may, because a couple of items have come up, from both Mr. 
Green and Mr. Duffy, regarding bankruptcy.
    I think it was referred to as a taboo. Some question 
whether or not some of us thought it was a bailout. Certainly, 
no one here, gentlemen, is suggesting that a bankruptcy filing 
is somehow a transfer from the Treasury to the island 
government. That is not the point.
    The point, to my friend Mr. Green, would be that the 
understanding of the lenders, which you talked about at some 
length, is critical here and central to the issue. And you used 
the word banks. I will use retirees. But when the retirees in 
my district invested in these bonds, they did so under a 
certain understanding.
    Yes, part of the understanding was that they could lose 
money. But another part of the understanding was that the 
general obligation, the taxing authority of the island was 
pledged as security. And, in exchange for that promise, that 
legal promise, that contract, my retirees accepted a lower rate 
of interest.
    If they had known that maybe the pensioners would go first 
on the island of Puerto Rico, that they might be made 
subordinate to that flow of funds, they may have demanded a 
higher rate of interest. But it was a legal contract.
    And what we are talking about here is not allowing 
bankruptcy. I used to practice bankruptcy law a little bit. I 
know what it is. I know that it can be helpful at particular 
times. But what we are talking about here is allowing 
bankruptcy after the fact. My folks have lent to Puerto Rico--
    Mr. Green. Will the gentleman yield, since he has invited 
me into the conversation by naming me?
    Mr. Mulvaney. I will. And I think Mr. Duffy will be a 
little bit liberal with the time, since this is the end of the 
discussion. But my folks have lent money under the 
understanding that it be repaid in a certain fashion and that 
bankruptcy could not be used, as it is used in other States or 
as it is used in corporations, that it was different.
    And, in exchange for that set of facts, they were willing 
to accept a lower rate of interest. We are not suggesting that 
bankruptcy, by itself, is a bailout. We are certainly not 
suggesting that bankruptcy is somehow a transfer from the 
Treasury.
    What we are suggesting is that it is unfair to change the 
rules on the people who have lent money, in good faith and with 
a certain legal understanding as to how they might be repaid. 
Yes, there was a risk that they would not get repaid. But 
bankruptcy was not one of the risks they signed up for.
    And, with that, I will yield to the gentleman, to my 
friend, and I will be happy to enter into a colloquy, if you 
would like to.
    Mr. Green. Thank you very much. I concur with you, to a 
great extent, but I do have to acknowledge that the Supreme 
Court weighed in on this. And the Supreme Court indicated that, 
because Congress has this awesome authority to regulate 
bankruptcy, that Congress can change the rules.
    And the Supreme Court has gone so far as to say the rules 
can be changed retroactively. And the people who make these 
deals, who make the deals, not some of the people that you may 
be addressing--and I don't want to see anybody hurt--but these 
are, by definition, sophisticated investors, persons who 
understand what they are doing, and are in a position to 
sometimes lose.
    That is unfortunate. I don't want to see anybody lose, but 
that is the case sometimes. And with reference specifically to 
Puerto Rico, we are talking about Americans there, Americans 
here, as well. It just seems to me that there should be some 
accommodation. There will have to be some compromise.
    And I am willing to work out a compromise. And my trust and 
belief is that you are willing to do so, as well.
    Mr. Mulvaney. I appreciate that, and I will reclaim my 
time. And I tend to agree with you. I have read the case that 
the governor sent us from the Supreme Court from the 1930s. It 
makes it clear that Congress does have the authority to do 
this.
    Of course, we did this, again, in the Chrysler bankruptcy, 
during the auto bailout. But I would suggest to my friends, on 
both sides of the aisle, that just because we have the 
authority to do so does not mean that it is fair for us to do 
so, or that it is right for us to do so.
    So I don't think anyone is arguing here whether or not we 
have the legal authority, the legislative authority, to do what 
the Treasury, specifically, is suggesting. My question is 
should we do it? Is it fair?
    Is this one of those circumstances that is so extreme and 
so unfortunate? For example, when the case from the 1930s 
references the Great Depression in California, a national 
calamity. From what I have read so far, much of the ills that 
have befallen Puerto Rico are specific to Puerto Rico and 
specific to the management of the company.
    I, specifically, referenced earlier the experience with the 
electric company choosing, of its own free will, not to raise 
rates, money that could have been used to help pay back the 
bond holders.
    And I do look forward to continuing the conversation. I 
want to ask one or two more questions before we leave.
    Specifically, Dr. Zandi. And I want to put you on the spot, 
because you weren't the only one who said this, but you were 
the most recent one, so it sort of stuck in mind. We have to do 
something to get Puerto Rico going. We have to do something to 
fix it. I think Dr. Krueger mentioned it. Everybody agrees that 
we have to have growth in Puerto Rico and have some 
restructuring and so forth.
    Why do we think we are better at it than the Puerto Ricans?
    Mr. Zandi. I think that we aren't. They have their own 
views and perspectives, and I think they should be considered. 
But there are things that Congress can do and, I think, would 
be very helpful to the Puerto Rican economy, that the Puerto 
Ricans would welcome and that would be beneficial to U.S. 
taxpayers, in the long run.
    If we don't address Puerto Rico now, and the Puerto Rican 
economy, I think, most of us would agree will continue to be in 
recession and sink, it is going to cost taxpayers, U.S. 
taxpayers, your constituents, me, money.
    So we need to address this. And I think they will welcome 
proposals like EITC. But, at the end of the day, they are a 
sovereign entity. And they have to be involved in the decision-
making process and be involved, because they are going to have 
to solve the problem and get on a sustainable path by 
themselves.
    Mr. Mulvaney. And if that is a basis for understanding 
going forward, if we talk about the Jones Act, talk about the 
EITC, we talk about tourism, we talk about the minimum wage 
exemptions, that may be a basis for a future understanding.
    Last question--I appreciate the chairman's liberalness, 
with a small L, with the time--which is I heard something at 
the very end and it struck me, which is that these assumptions, 
we are making assumptions about a change in, is it Medicaid 
reimbursements?
    Mr. Zandi. Yes.
    Mr. Mulvaney. So my understanding, and it is just very 
basic, is that the current law of this country is that those 
payments will go down fairly dramatically in the next couple of 
years. What you are telling us is that the assumptions that 
everyone has made is that Congress will change the law, in 
order to fairly dramatically increase Medicaid reimbursements 
to Puerto Rico in, I think, it is 2018. Is that correct?
    Mr. Zandi. Yes. When I say everyone, I am saying market 
participants--
    Mr. Mulvaney. Right.
    Mr. Zandi. --people who are looking at this, people who are 
doing the budgeting in Puerto Rico. You have to make 
assumptions when you do a projection.
    Mr. Mulvaney. Absolutely.
    Mr. Zandi. And one of the key assumptions, is, yes, that is 
going to be patched.
    Mr. Mulvaney. How much is that? Does anybody know?
    Mr. Zandi. By my calculation, I calculated on a CBO basis, 
over a 10-year period, it will probably cost $25 to $30 billion 
per annum.
    Mr. Mulvaney. ``Billion'' with a ``B?''
    Mr. Zandi. ``Billion'' with a ``B.''
    Mr. Mulvaney. So the assumption is that we will increase 
the Medicaid reimbursement to Puerto Rico, beginning in 2018--
    Mr. Zandi. Yes. And because you might have missed this, 
what this will do is ensure that the Medicaid reimbursement to 
Puerto Ricans is exactly the same as the reimbursement to you 
and I, here on the mainland.
    Mr. Mulvaney. Right. But it is different in the law, now.
    Mr. Zandi. It is different in the law now.
    Mr. Mulvaney. Okay. All right.
    Mr. Chairman, thank you very much.
    Chairman Duffy. The gentleman yields back. I am going to 
ask unanimous consent to recognize the gentleman from Texas for 
1 minute.
    Mr. Green. Thank you, Mr. Chairman. I believe that Dr. King 
addressed this question of it is only Puerto Rico. And I would 
like to share his thoughts with you. He reminds us that life is 
an inescapable network of mutuality, tied to a single garment 
of destiny. What impacts one directly, impacts all indirectly.
    What happened to Greece, we thought, was a problem for a 
given country. But we now understand that these problems can 
exacerbate other problems in the world. What happened with 
credit default swaps, we thought would impact just some, maybe 
in a certain market. But we found out that it could impact the 
entire economy.
    So I think we have to step back and get a sense that this 
may not end at the water's edge in Puerto Rico. It has a 
potential to surf its way all the way to the USA. I yield back.
    Chairman Duffy. The gentleman yields back. I always 
appreciate that I get some of the best Dr. King quotes from the 
ranking member. He always puts them in so well, and I thank him 
for that. And I thank the panel for coming in today.
    This has been a really great discussion, and I hope that 
you take away that we are all engaged in trying to find a 
solution that works for Puerto Rico, that works for our 
government, and that is fair, by way of everybody.
    And I think it is a conversation that puts everything on 
the table and looks at Puerto Rico as a whole. And we have an 
eye towards the people of Puerto Rico and making sure their 
lives are better, their opportunities are better, and their 
future is better and brighter.
    And, if they want to stay on the island, in their 
neighborhoods and in their communities, they will have that 
option. If they want to come to the mainland, they can make 
that choice, too. But a lack of opportunity should not be the 
reason why they can't stay.
    So, again, I want to thank the panel for being here and for 
your time and for your insightful testimony.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And, with that, without objection, this hearing is 
adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]

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