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


 THE NEED FOR THE ESTABLISHMENT OF A PUERTO RICO FINANCIAL STABILITY 
                     AND ECONOMIC GROWTH AUTHORITY

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

                           OVERSIGHT HEARING

                               BEFORE THE
                               
                  SUBCOMMITTEE ON INDIAN, INSULAR AND
                         ALASKA NATIVE AFFAIRS

                                 OF THE
                                 
                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                       Tuesday, February 2, 2016

                               __________

                           Serial No. 114-30

                               __________

       Printed for the use of the Committee on Natural Resources
       
     
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]     


         Available via the World Wide Web: http://www.fdsys.gov
                                   or
          Committee address: http://naturalresources.house.gov
          
          
                               ___________
                               
                               
                        U.S. GOVERNMENT PUBLISHING OFFICE
98-458 PDF                    WASHINGTON : 2016                        
_______________________________________________________________________________________                     
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].  
                     
                     
                     
                     
                     
                     
                     
                     COMMITTEE ON NATURAL RESOURCES

                        ROB BISHOP, UT, Chairman
            RAUL M. GRIJALVA, AZ, Ranking Democratic Member

Don Young, AK                        Grace F. Napolitano, CA
Louie Gohmert, TX                    Madeleine Z. Bordallo, GU
Doug Lamborn, CO                     Jim Costa, CA
Robert J. Wittman, VA                Gregorio Kilili Camacho Sablan, 
John Fleming, LA                         CNMI
Tom McClintock, CA                   Niki Tsongas, MA
Glenn Thompson, PA                   Pedro R. Pierluisi, PR
Cynthia M. Lummis, WY                Jared Huffman, CA
Dan Benishek, MI                     Raul Ruiz, CA
Jeff Duncan, SC                      Alan S. Lowenthal, CA
Paul A. Gosar, AZ                    Matt Cartwright, PA
Raul R. Labrador, ID                 Donald S. Beyer, Jr., VA
Doug LaMalfa, CA                     Norma J. Torres, CA
Jeff Denham, CA                      Debbie Dingell, MI
Paul Cook, CA                        Ruben Gallego, AZ
Bruce Westerman, AR                  Lois Capps, CA
Garret Graves, LA                    Jared Polis, CO
Dan Newhouse, WA                     Wm. Lacy Clay, MO
Ryan K. Zinke, MT
Jody B. Hice, GA
Aumua Amata Coleman Radewagen, AS
Thomas MacArthur, NJ
Alexander X. Mooney, WV
Cresent Hardy, NV
Darin LaHood, IL

                       Jason Knox, Chief of Staff
                      Lisa Pittman, Chief Counsel
                David Watkins, Democratic Staff Director
                  Sarah Lim, Democratic Chief Counsel
                                 
                                 ------                                

       SUBCOMMITTEE ON INDIAN, INSULAR AND ALASKA NATIVE AFFAIRS

                        DON YOUNG, AK, Chairman
                RAUL RUIZ, CA, Ranking Democratic Member

Dan Benishek, MI                     Madeleine Z. Bordallo, GU
Paul A. Gosar, AZ                    Gregorio Kilili Camacho Sablan, 
Doug LaMalfa, CA                         CNMI
Jeff Denham, CA                      Pedro R. Pierluisi, PR
Paul Cook, CA                        Norma J. Torres, CA
Aumua Amata Coleman Radewagen, AS    Raul M. Grijalva, AZ, ex officio
Rob Bishop, UT, ex officio

                              ----------                               
                                
                                
                                CONTENTS

                              ----------                              
                                                                   Page

Hearing held on Tuesday, February 2, 2016........................     1

Statement of Members:
    Pierluisi, Hon. Pedro R., Resident Commissioner for the 
      Commonwealth of Puerto Rico................................     4
        Prepared statement of....................................     5
    Young, Hon. Don, a Representative in Congress from the State 
      of Alaska..................................................     1
        Prepared statement of....................................     3

Statement of Witnesses:
    Garcia, Carlos M., Chief Executive Officer, BayBoston 
      Managers, LLC and Former Chairman and President of the 
      Government Development Bank of Puerto Rico, Newton Centre, 
      Massachusetts..............................................    13
        Prepared statement of....................................    15
    Johnson, Simon, Professor of Global Economics and Management, 
      MIT Sloane School of Management, Cambridge, Massachusetts..    22
        Prepared statement of....................................    24
    LeCompte, Eric, Executive Director, Jubilee USA Network, 
      Washington, DC.............................................    27
        Prepared statement of....................................    29
    Mayer, Thomas Moers, Partner, Kramer Levin Naftalis & 
      Frankel, LLP, New York, New York...........................    34
        Prepared statement of....................................    36
    Williams, Hon. Anthony A., Senior Advisor, Dentons US LLP and 
      Former Mayor of Washington, DC.............................     7
        Prepared statement of....................................     9

Additional Materials Submitted for the Record:
    List of documents submitted for the record retained in the 
      Committee's official files.................................    61
                                     


 
 OVERSIGHT HEARING ON THE NEED FOR THE ESTABLISHMENT OF A PUERTO RICO 
           FINANCIAL STABILITY AND ECONOMIC GROWTH AUTHORITY

                              ----------                              


                       Tuesday, February 2, 2016

                     U.S. House of Representatives

       Subcommittee on Indian, Insular and Alaska Native Affairs

                     Committee on Natural Resources

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to notice, at 11:01 a.m., in 
room 1334, Longworth House Office Building, Hon. Don Young 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Young, Denham; Ruiz, Sablan, 
Pierluisi, Torres, and Grijalva.
    Also Present: Representatives Bishop, Labrador, Velazquez, 
Gutierrez, Serrano, and Gallego.
    Mr. Young. The Subcommittee on Indian, Insular and Alaska 
Native Affairs will come to order. The subcommittee is meeting 
today to hear testimony on the following oversight topic, ``The 
Need for the Establishment of a Puerto Rico Financial Stability 
and Economic Growth Authority.''
    Under Committee Rule 4(f), any oral opening statements at 
hearings are limited to the Chairman and Ranking Minority 
Member, and Vice Chairman and Designate of the Ranking Member. 
This will allow us to hear from the witnesses sooner and help 
the Members keep to their schedules.
    Therefore, I ask unanimous consent that all Members' 
opening statements be made part of the hearing record when they 
are submitted to the Subcommittee Clerk by 5:00 p.m. today. 
Hearing no objections, so ordered.
    I also ask unanimous consent that the gentleman from 
Arizona, Mr. Gallego; and the gentleman from Illinois, Mr. 
Gutierrez; the gentleman from Idaho, Mr. Labrador; the 
gentleman from New York, Mr. Serrano; and the gentlewoman from 
New York, Mrs. Velazquez be allowed to join us on the dais to 
be recognized and participate in today's hearing. Hearing no 
objection, so ordered.

STATEMENT OF HON. DON YOUNG, A REPRESENTATIVE IN CONGRESS FROM 
                      THE STATE OF ALASKA

    Mr. Young. The Subcommittee on Indian, Insular and Alaska 
Native Affairs meets today again, as I mentioned, on the need 
for the establishment of a Puerto Rico Financial Stability and 
Economic Growth Authority. A crisis has gripped the island of 
Puerto Rico. The Obama administration, Congressional Democrats, 
the Governor in Puerto Rico, and their local territorial 
legislation, they are all correct; it is a crisis.
    In light of that, Republicans in this committee are taking 
extra precaution to consider all the causes of this crisis and 
produce a comprehensive solution to a very complex problem. 
Some on the other side of this dais would have us believe that 
the solution to the crisis is simply providing the Puerto Rican 
government tools to restructure their enormous debt by using 
Chapter 9 of the Bankruptcy Code. I would remind everyone here 
that Chapter 9 is a process, not a solution.
    Furthermore, the claim that the island's miseries will be 
washed away by extending their government the use of Chapter 9, 
I believe is shortsighted and naive to say the least. What we 
are able to determine, despite the lack of access to accurate 
financial audits from the government of Puerto Rico, is that 
cramming down debt at this stage will only hurt the problems 
concerning their current liquidity and access to the financial 
markets.
    But the real detriment of offering shortsighted solutions 
would ignore the real cause of the problem steeped in poor 
budgeting standards, over-bloated government agencies, lack of 
fiscal transparency and accountability, and severe lack of 
credibility on the municipal bond market. The key root causes 
of the economic crisis, coupled with astronomical debt, are 
producing further deterioration of essential services being 
provided to the populace.
    In order for the island to begin to truly recover from this 
dire situation, there need to be actual reforms within the 
island. The Americans living in Puerto Rico--these are all 
Americans--are demanding strong leadership, capable of making 
the necessary structural reforms and the hard choices, to get 
the economy growing again and employment opportunities back. 
These are nothing less than the benefits that come with living 
within the United States, namely accountability in government, 
responsibility in fiscal management, and opportunities to 
create, innovate, and thrive within a tolerable business 
climate, a climate where energy prices are manageable and 
regulations do not hinder the ability for economic growth.
    If Puerto Rico is incapable or unwilling to provide these 
opportunities for these Americans, then the Federal Government 
has a responsibility to assist the island and help provide 
these opportunities that are lacking and desperately needed. To 
quote Speaker Ryan, who put it so eloquently in his address 
last December, ``What government is supposed to do is create an 
environment where the individual can thrive and communities can 
bloom. In other words, government makes things possible, but 
the people make them happen.'' Americans calling the territory 
home deserve nothing less.

    The opportunity to recover from this crisis with strong 
leadership and assistance from the Federal Government is the 
end solution we here in this committee are aiming to provide. 
We would hope our colleagues on the other side of the aisle 
heed our call for developing a real, comprehensive, and 
meaningful solution to present the President.

    We want to put Puerto Rico on a sustainable path toward 
full-term recovery and see this island thrive and prosper for 
the next 100 years and beyond. I would say one thing on my 
behalf, had we done what I wanted to do 15 years ago, we would 
not be in this mess. If we had made Puerto Rico a state, which 
they wanted to do, but Congress did not act. I will always 
blame Congress for that. This is a territory that should be a 
state, and I have been very partisan of that, not Republican or 
Democrat, but because I believe in it.

    I also suggest respectfully that this is a very difficult 
time for me because I am very strong on Puerto Rico and we do 
have a financial crisis. We are here today to try to solve that 
crisis. We would like to find out from the witnesses what they 
would suggest, and in doing so maybe we can have these 
Americans, who have put their lives on the line every day like 
every other American, be recognized. We have neglected for over 
100 years a territory that should be a state. We have neglected 
main America and this Congress. And I will say shame on us. 
With that, I recognize the Minority Member.

    [The prepared statement of Mr. Young follows:]
  Prepared Statement of the Hon. Don Young, Chairman, Subcommittee on 
               Indian, Insular and Alaska Native Affairs

    The Subcommittee on Indian, Insular and Alaska Native Affairs meets 
today for an oversight hearing on, ``The Need for the Establishment of 
a Puerto Rico Financial Stability and Economic Growth Authority.''

    A crisis has gripped the island of Puerto Rico. The Obama 
administration, Congressional Democrats, the Governor of Puerto Rico, 
their local territorial legislature, they are all correct, it is a 
crisis. And in light of that, Republicans on this committee are taking 
extra precaution to consider all the causes of this crisis and produce 
a comprehensive solution to a very complex problem.

    Some on the other side of this dais would have you believe that the 
solution to the crisis is simply providing Puerto Rico's government 
tools to restructure their enormous debt using Chapter 9 of the 
bankruptcy code. I would remind everyone here that Chapter 9 is a 
process, not a solution. Furthermore, to claim that the island's 
miseries will be washed away by extending their government the use of 
Chapter 9 is shortsighted and naive, to say the least. What we are able 
to determine, despite the lack of access to accurate financial audits 
from the government of Puerto Rico, is that cramming down debt at this 
stage will only exacerbate the problems concerning their current 
liquidity and access to the financial markets. But the real detriment 
of offering shortsighted solutions would be to ignore the real causes 
of the problem steeped in poor budgeting standards, over bloated 
government agencies, lack of fiscal transparency and accountability, 
and severe lack of credibility on the municipal bond markets. These key 
root causes of the economic crisis, coupled with the astronomical debt, 
are producing further deterioration of essential services being 
provided to the populace.

    In order for the island to begin to truly recover from this dire 
situation, there needs to be actual reforms within the island. The 
Americans living in Puerto Rico are demanding strong leadership, 
capable of making the necessary structural reforms, the hard choices, 
to get the economy growing again and the employment opportunities back. 
They deserve nothing less than the benefits that come with living 
within the United States, namely accountability in government, 
responsibility in fiscal management, and opportunities to create, 
innovate, and thrive within a tolerable business climate. A climate 
where energy prices are manageable and regulations do not hinder 
ability for economic growth. If Puerto Rico is incapable or unwilling 
to provide these opportunities for those Americans, then the Federal 
Government has a responsibility to assist the island and help provide 
those opportunities that are lacking and so desperately needed. To 
quote Speaker Ryan, who put it so eloquently in his address last 
December, ``What government is supposed to do is create an environment 
where the individual can thrive and communities can bloom. In other 
words, government makes things possible, but the people make them 
happen.'' Americans calling the territory home deserve nothing less.
    The opportunity to recover from this crisis, with strong leadership 
and assistance from the Federal Government, is the end solution we here 
on this committee are aiming to provide. We would hope our colleagues 
on the other side of the aisle heed our call for developing a real, 
comprehensive, meaningful solution to present the President. 
Republicans here in Congress are not interested in a quick, meaningless 
short-term fix. We want to put Puerto Rico on a sustainable path toward 
full long-term recovery and see that island thrive and prosper for the 
next 100 years and beyond.

                                 ______
                                 

STATEMENT OF THE HON. PEDRO R. PIERLUISI, RESIDENT COMMISSIONER 
              FOR THE COMMONWEALTH OF PUERTO RICO

    Mr. Pierluisi. Thank you, Chairman Young. Following this 
hearing, the Natural Resources Committee will craft legislation 
on Puerto Rico. To become law, the bill must be bipartisan and 
balanced. That means we are either going to pass a good bill or 
no bill at all.
    If no bill is enacted, the already grave situation in 
Puerto Rico will get worse. That would not be in the national 
interest, in the interest of my constituents, or in the 
interest of Puerto Rico's creditors, many of whom are also my 
constituents. The drafting process should be informed by two 
bills that Congress enacted for Washington, DC in 1995 and 
1997, which are best viewed as a single legislative package.
    Washington, DC and Puerto Rico are different in material 
respects, so the DC package should guide, but not dictate, the 
Puerto Rico bill. The legislation should be holistic, 
containing three elements.
    First, the Puerto Rico government has a record of fiscal 
mismanagement. We must acknowledge this painful fact, vow to do 
better for our constituents, and accept some temporary 
assistance along the way. As I have previously stated, I would 
support the creation of an independent board to approve the 
Puerto Rico government's financial plan and annual budgets, to 
confirm that the Puerto Rico government adheres to both 
throughout the fiscal year, and to ensure the publication of 
accurate and timely financial information.
    A board can serve as a bridge to a brighter future, 
enabling the Puerto Rico government to perform more effectively 
and regain access to the financial markets. The DC oversight 
board was successful in instilling fiscal discipline only 
because it had buy-in from local government, business, and 
labor leaders. To achieve similar support, the Puerto Rico 
board must be carefully calibrated. As a territory, Puerto Rico 
has no democracy at the national level. If a bill seeks to 
extinguish our democracy at the local level, I will do 
everything in my power to defeat it.
    Second, the Puerto Rico government must restructure its 
bonded debt. I say this with regret. Individuals and 
institutions loaned Puerto Rico money, and Puerto Rico promised 
to pay them back with interest. So, you will never hear me 
vilify creditors.
    However, while bond-issuing entities in Puerto Rico can pay 
some of their debts, they cannot pay all of their debts under 
the current terms and conditions, without compromising quality 
of life and economic growth in the territory to an unacceptable 
degree. This assertion should not be subject to reasonable 
dispute.
    Unlike the states, Puerto Rico has no authority under 
Federal law to restructure debt. There is a consensus among 
objective observers that Congress should grant Puerto Rico such 
authority, which would cost taxpayers nothing. I would be open 
to a provision that requires the oversight board to appoint a 
neutral third party to mediate consensual debt restructuring 
negotiations between bond issuing entities in Puerto Rico and 
their creditors, in order to reach agreements that restructure 
Puerto Rico's debt to a sustainable level, provide fair 
treatment to creditors, and can be confirmed and enforced by a 
Federal court. When it comes to restructuring authority, I will 
be flexible regarding the means to the end, but not the end 
itself.
    Finally, the legislation should provide Puerto Rico with 
more state-like treatment under Federal programs, because 
decades of neglect from Washington is the root cause of the 
territory's economic, fiscal, and migration problems. I join 
Chairman Young's statement. Puerto Rico should have been 
treated equally a long time ago. A long time ago, Puerto Rico 
should have joined this union.
    So, when we ask for state-like treatment, this is not 
charity or a bailout; this is about fundamental justice. If 
Puerto Rico were a state, the problems we confront today would 
not exist, or at least not in such severe form. Puerto Rico 
would have voting representatives in Congress to defend its 
interests, parity under all Federal programs, and access to 
Chapter 9 of the Federal Bankruptcy Code. Island leaders would 
not have to come hat in hand, imploring Congress to grant 
Puerto Rico rights and powers that every state takes for 
granted.
    More equitable treatment is consistent with precedent. The 
legislative package for Washington, DC has provided the capital 
city with billions of dollars in funding and savings. The 
forthcoming bill cannot eliminate every inequality Puerto Rico 
faces, because only statehood could accomplish that, but it 
should make a real effort to mitigate certain disparities.
    Let me close with an appeal to my colleagues. Before you 
try to come up with all sorts of clever and convoluted ways to 
respond to the crisis in Puerto Rico, you should simply extend 
to the territory those Federal programs and policies that have 
already proven effective in the states that you represent. 
Resist the urge to experiment with my constituents' lives. 
Equality is the best policy.
    Thank you, Chairman.
    [The prepared statement of Mr. Pierluisi follows:]
      Prepared Statement of the Hon. Pedro R. Pierluisi, Resident 
                      Commissioner of Puerto Rico
    Thank you, Chairman Young. Following this hearing, the Natural 
Resources Committee will spearhead an effort to craft legislation on 
Puerto Rico.
    To become law, the bill must be bipartisan and balanced. A bad bill 
will not be approved by both chambers of Congress and signed into law 
by the President. So, we are either going to pass a good bill or no 
bill at all.
    If no bill is enacted, the already-grave situation in Puerto Rico, 
a U.S. territory home to 3.5 million Americans, will get worse. That 
would not be in the national interest, in the interest of my 
constituents, or in the interest of Puerto Rico's creditors, many of 
whom are also my constituents. Therefore, this Congress should act 
swiftly and wisely.
    The drafting process should be informed by two bills that Congress 
enacted for Washington, DC in the 1990s--the District of Columbia 
Financial Responsibility and Management Assistance Act of 1995 and the 
National Capital Revitalization and Self-Government Improvement Act of 
1997, which are best viewed as a single legislative package. However, 
Washington, DC and Puerto Rico are different in material respects, so 
the DC package should guide--but not dictate--the contents of the 
Puerto Rico bill.
    To actually address the problem, the legislation must be holistic, 
containing three essential elements.
    First, the Puerto Rico government has a record of fiscal 
mismanagement. We must acknowledge this painful fact, vow to do better 
for our constituents, and accept some temporary assistance along the 
way. Accordingly, I would support the creation of an independent board 
to approve the Puerto Rico government's long-term financial plan and 
annual budgets, to help ensure that the Puerto Rico government adheres 
to both throughout the fiscal year, and to make certain that the Puerto 
Rico government publishes accurate and timely financial information. A 
good board can serve as a bridge to a brighter future, helping the 
Puerto Rico government to perform more effectively and to regain access 
to the credit markets. As Mayor Williams can attest, the DC oversight 
board--which was active for 5 years--was successful in instilling 
fiscal discipline only because it had ``buy-in'' from the DC 
government, business leaders, and labor leaders. To achieve similar 
support, the Puerto Rico board must be carefully calibrated. As a 
territory, Puerto Rico has no democracy at the national level. If the 
forthcoming bill seeks to extinguish rather than enhance our democracy 
at the local level, I will do everything within my power to defeat it.
    Second, the Puerto Rico government must restructure its bonded 
debt. I say this with genuine regret. Individuals and institutions 
loaned Puerto Rico money, and Puerto Rico promised to pay them back 
with interest. So, you will never hear me vilify creditors. But the 
reality is that, while bond-issuing entities in Puerto Rico can pay 
some of this debt, they cannot pay all of this debt, based on its 
current terms and conditions, without compromising quality of life and 
economic growth in the territory to an unacceptable degree. I don't 
believe this assertion is subject to reasonable dispute.
    Unlike the states, Puerto Rico has no authority under Federal law 
to restructure any of its debt. There is a virtual consensus among 
objective observers that Congress should grant Puerto Rico such 
authority, a measure that would cost the Federal Government and U.S. 
taxpayers nothing. As Mr. Spiotto demonstrates in his written 
testimony, there are different debt restructuring models that Congress 
can adopt for the territory. For example, I would be open to a 
provision that requires the oversight board to appoint a neutral third-
party to mediate consensual debt restructuring negotiations between 
bond-issuing entities in Puerto Rico and their creditors in order to 
reach agreements that (1) restructure Puerto Rico's outstanding debt so 
that it is sustainable, (2) provide creditors with fair and appropriate 
treatment, and (3) can be confirmed and enforced by a Federal court. In 
short, when it comes to debt adjustment, I will be flexible regarding 
the means to the end, but not regarding the end itself.
    Finally, the legislation should provide Puerto Rico with more 
equitable--that is, more state-like--treatment under Federal spending 
and tax credit programs, because decades of neglect from Washington is 
the single greatest cause of the territory's economic, fiscal and 
migration problems. This is the furthest thing from charity or a 
``bailout.'' This is about fundamental justice. The reality is that, if 
Puerto Rico were a state, the problems that the island confronts today 
would not exist, or at least would not exist in such severe form. As a 
state, Puerto Rico would have seven voting representatives in Congress 
to defend its interests, Puerto Rico would have parity under all 
Federal programs, and Puerto Rico would have access to Chapter 9 of the 
Federal bankruptcy code. Island leaders would not have to come, hat in 
hand, imploring this Congress to grant Puerto Rico rights and powers 
that every state takes for granted.
    More equitable treatment for Puerto Rico is fully consistent with 
precedent. The legislative package for Washington, DC--in particular, 
the 1997 Revitalization Act--has injected billions of dollars into the 
capital city and reduced the DC government's financial burden by 
billions of dollars as well. I recognize that the forthcoming bill 
cannot eliminate all of the disparities that Puerto Rico faces--because 
only statehood can accomplish that--but the legislation should make a 
meaningful effort to mitigate some of the key disparities.
    Let me close with an appeal to my colleagues from both parties. 
Before you try to come up with all sorts of clever and convoluted ways 
to respond to the crisis in Puerto Rico, you should simply extend to 
the territory those Federal programs and policies that have already 
proven effective in the states that you represent. This is not the time 
to experiment; equality is the best policy.
    Thank you.

                                 ______
                                 

    Mr. Young. Thank you for a very good statement, echoing my 
thoughts. You are a smart member of this committee.
    We will start with Mr. Mayor.
    And welcome, by the way, Mr. Mayor. I thought you were a 
great mayor. I don't know what your constituents thought, but I 
thought you were, so you may proceed. I am a little bit 
lenient, but I try to keep to the 5 minutes. If you are being 
very eloquent, I will let you extend it a little bit, as the 
rest of the members of this committee do, but it is usually 5 
minutes. You watch that little thing, and it will tell you what 
to do.
    Mr. Mayor, you are up, Mr. Williams.

  STATEMENT OF THE HON. ANTHONY A. WILLIAMS, SENIOR ADVISOR, 
       DENTONS US LLP; AND FORMER MAYOR OF WASHINGTON, DC

    Mr. Williams. Well, first of all, Mr. Chairman, thank you 
for your generosity and your kind comments. And on that note, I 
probably should leave, but I will also thank the members of the 
subcommittee for inviting me today to testify on this important 
matter.
    I want to highlight just a few central points in my written 
testimony and be as brief as possible in deference to the other 
speakers and the members of the committee. I benefit from my 
experience today talking to you as CFO of a congressionally 
created entity that oversaw the fiscal recovery of our Nation's 
capital.
    Recognizing that every situation is different, I believe 
the time has come to explore the creation by Congress of an 
entity that can facilitate returning Puerto Rico to a position 
of sustained financial stability to create, as the speaker 
would say, an environment of success that induces investment.
    For the reasons I will address, I support the creation of 
such an entity with authorities and responsibilities that would 
aid and empower the Commonwealth to realize fiscal stability 
and economic growth. Let me start by initially observing that 
any solution to Puerto Rico's fiscal challenges requires that 
this entity, which the subcommittee is considering, be created 
to give focused attention to how best to resolve the island's 
myriad expected and substantial bond defaults.
    Unquestionably, the extent of impending defaults and the 
seemingly increasing inability of the Commonwealth to meet 
these obligations warrants an independent entity to be put in a 
position to help find a workable and fair solution acceptable 
not only to the people of Puerto Rico, but also to the 
creditors. And these are not only the bondholders, but other 
creditors in terms of pensioners who are owed over $70 billion.
    The fact that these problems have been the subject of 
considerable and increasing focus for more than 2 years, with 
no real signs that the various constituencies are coming to 
common ground, to me further underscores a need for a fresh and 
independent team of neutrals with expertise in addressing 
governmental financial distress to be empaneled to both help 
develop sustainable solutions and to forge trust and build 
cooperation among the competing factions.
    But let me be clear, I do not take sides about whether any 
such bondholder concessions are really needed, or how much, or 
for that matter who, other than bondholders, might also be 
expected to participate in making concessions to bring budgets 
into balance now and into the foreseeable future. Indeed, until 
the entity we suggest undertakes much of what will be tasked, 
the extent of any required concessions cannot be known. When 
you have a series of unaudited opinions, when you have a 
situation of great financial uncertainty, I think it makes 
sense to get the financial house in order, get financial 
reporting in order, get a dashboard in place before decisions 
can be made.
    Hence, what I believe is simply that an independent group 
of financial sophisticated people, who collectively bring a 
combination of government efficiency and financial distress 
expertise, can play a critical and disciplined role in first 
developing a set of financial and operating strategies, and 
then hopefully by achieving consensus among disparate 
constituencies, implement these strategies to ensure that the 
Puerto Rican government will be fiscally sound and the island's 
economy once again is growing and vibrant.
    Turning again to the wisdom of tasking the contemplated 
entity with the additional goal of fostering the island's 
economic growth, I don't think anyone can take issue with the 
view that it would be most desirable if Puerto Rico could 
increase its tax base through new inbound investments by 
mainland companies and plants in island operations, thereby 
producing new taxable income and expanding the workforce. 
Utilizing that approach to achieving revenue improvement would 
be a far preferable means to ameliorate the distress we are 
talking about then simply cramming down debt or cramming down 
liabilities to any creditor.
    To provide the most optimistic environment for growing 
Puerto Rico's economy, it is essential that the Commonwealth be 
seen as fulfilling as much of its debt obligations as possible, 
and that is why I am so pleased that the committee has 
recognized that one of the key functions of the contemplated 
authority should be to look at tangible ways for the island, to 
the fullest extent possible, grow out of its debt problems 
through stimulated economic expansion and increased tax 
revenues.
    In my view, this committee's focus on economic expansion 
can also demonstrate to the people the commitment of Congress 
to assist the island in achieving long-term financial stability 
predicated not only on finding efficiencies in delivery of 
their government services, but at least equally so on the 
healthier and growing economy that fosters new, well-paying, 
private sector jobs.
    Hearkening further to my DC experience, the subcommittee's 
apparent legislative approach appears quite similar to the 
motivation behind creating an independent authority for 
Washington, namely to provide meaningful guidance to all 
affected constituencies to help develop and fashion innovative 
approaches and to foster cooperation among all affected 
constituencies. Like the DC approach, the focus of this entity 
should certainly be forward-looking, and not to point blame on 
anyone in who shot John and all that, but forward-looking, 
solving the problem, enacting a vision based on the input from 
all the different parties.
    The problems presented by Puerto Rico's current financial 
challenges are complex. The goal of Congress, if it pursues the 
authority's creation, should be to provide Puerto Rico with the 
best means available to help remedy the fiscal distress as soon 
as possible, and in so doing to deliver the kind of economic 
expansion and settled expectations that I am talking about.
    Since my time is rapidly dwindling away, I want to focus on 
several additional key points regarding my views about the 
structure of this entity.
    One, I believe that Congress should keep the composition of 
the authority to a limited number. I think five and no more 
than seven members would achieve the right balance.
    Two, I strongly advocate that the authority appoint a CFO 
or a financial executive to be involved in the coordination of 
the authority's activities, and also to work day to day with 
the Commonwealth's administration and its legislature to create 
reliable budgets and long-term financial plans, to work with 
the government of Puerto Rico on creating reliable revenue 
estimates and expenditure forecasts, and to give this entity, 
based on that cooperation and sometimes notwithstanding that 
cooperation, the approval authority over these budgets and 
financial plans.
    Likewise, Congress should ensure that the authorities and 
members will be prepared to commit to a significant and 
sustained workload for a considerable period. It will also need 
to retain a staff of financial and legal professionals to work 
at their direction in both conceiving and effectuating various 
initiatives.
    As I said, the financial condition presented today is very 
complex, there are an array of challenges, and I think nothing 
short of a fully committed effort can be expected to accomplish 
what Congress envisions.
    Next----
    Mr. Young. Mr. Mayor, you are 2 minutes and 35----
    Mr. Williams. OK.
    Mr. Young. I was a little bit--you are close?
    Mr. Williams. One final thing. The power and authority that 
Congress vests in the authority needs to be sufficient to get 
the job done, once and for all. While, in the District there 
were two Acts that the Ranking Member recollects were part of 
our recovery, as much as possible if the work can all be done 
at one time, I think we will be that much further down the road 
to creating the kind of environment of success, the settled 
expectations that will begin to bring back the investment to 
the island, and create the kind of economic recovery that we 
are all seeking for the people there.
    Thank you, sir.
    [The prepared statement of Mr. Williams follows:]
Prepared Statement of Anthony A. Williams, Senior Strategic Advisor to 
            Dentons U.S. LLP, former Mayor of Washington, DC
    As the former CFO of Washington, DC, appointed by the 
congressionally established financial control board for the District, 
working at the direction of both, and having subsequently served for 
two terms as the Mayor of our Nation's Capital, I appreciate the 
opportunity to share my views with the subcommittee regarding the 
significant merits for creating an authority for what the subcommittee 
has noticed for hearing.
    The people of Puerto Rico are entitled to a prosperous and 
sustainable economic future. Taking the necessary steps to assist the 
Commonwealth in timely implementing solutions to its well-recognized 
financial challenges is important not only to the Island but to the 
Nation as a whole; and I believe that the legislative actions being 
considered by this subcommittee, as well as other legislative 
initiatives that are the province of yet other House committees, 
hopefully with bipartisan support, can provide the impetus and 
foundation for returning the Island to a position of fiscal strength 
and a pathway to its economic independence.
    Puerto Rico is not alone in having to address serious financial 
distress. For various reasons often unique to each locale, and despite 
best intentions, such financial challenges have arisen in other highly 
respected communities that today are financially successful. In 
addition to Washington, DC which when I assumed its reins as CFO was 
facing deep and persistent fiscal challenges, several of our other 
major cities--notably, New York, Philadelphia and Cleveland--each also 
benefited from having a financial control board assist them in emerging 
from deep financial distress and foster their successful and sustained 
economic recoveries.
    Before providing some focused observations regarding the scope of 
responsibilities of the Federal Authority which this subcommittee is 
considering, as well as other important aspects that are critical to 
its success, I wish to speak to the concerns that will unquestionably 
surface, just as they did when Congress created a Federal board to 
assume responsibility for DC's distressed fiscal affairs. Naturally, 
the assertion will be made that permitting another government to 
provide some assistance and leadership denies the populace their voice 
in self-determination. But while it is easy to adopt that rhetoric, our 
history and my personal experience as Washington's CFO, teaches that 
whatever negative hue and cry is initially heard, readily erodes as 
positive developments achieved by a neutral body start taking hold. 
This was the case with the independent financial board created for DC, 
as well as with the Metropolitan Assistance Corporation created for NY 
in the 1970s; and has proved true more recently when state fiscal 
responsibility for the cities of Detroit and Pennsylvania's capital 
city, Harrisburg, were reposed in state-appointed managers. In each of 
these situations, the residents, community leaders, civic organizations 
and business interests came to accept and indeed support the expertise 
and fresh perspective offered by the independent neutrals; and I firmly 
believe that such will be the case if Congress were to take similar 
action to meaningfully bolster Puerto Rico's prospect for prosperity 
and fiscal independence.
    Rather than independent leadership being seen in hindsight as 
troublesome, all these situations illustrate that creating something 
new, fresh with ideas, and not wedded to the notions of any particular 
constituency, can help build the belief in a bright and vibrant future 
for a financially troubled government and provide the path by which 
once divergent interests can come to a consensual understanding. Viewed 
from real examples of success and not premised on fears of 
divisiveness, congressional action to create legislation for the type 
of authority that is contemplated by this subcommittee is properly 
perceived as the optimal means, as expeditiously as possible, to 
resolve the Commonwealth's current financial difficulties. Perhaps more 
importantly, this congressional effort can be accepted as the start of 
real and meaningful solutions to grow the Commonwealth's economy, 
create private sector jobs and encourage many who have left the Island 
to return, ultimately making the people of Puerto Rico secure and 
proud.
    In my view, the time is now for Congress to create an authority 
that would have as its goals both achieving financial stability and a 
balanced budget for the Island, while also focusing on economic growth 
strategies that over time can assist the Island in gaining true 
financial independence.
    Regarding the need for a Federal Government Authority to provide 
fiscal stability leadership, both the current inability of the GDB and 
the Island's administration to solve imminent defaults, as well as the 
sheer magnitude of the debt liabilities, alone justify congressional 
action. Especially this is so when we also factor in the number of 
distinct bond issues that are expected to suffer defaults, the fact 
that the Puerto Rican administration very recently predicted even 
greater current budget shortfalls than what it saw as the case only a 
few months earlier and, significantly, the recognition that apart from 
impending bond defaults, there looms both quickly growing unfunded 
healthcare costs as well as an enormous underfunded public employee 
pension liability that some have estimated to be in the $50 billion 
range.
    Additionally, with $72 billion in Puerto Rican bond obligations at 
stake, Congress needs to be mindful of the consequences to the cost of 
municipal credit across our Nation if the Island's debt obligations are 
not resolved in a manner that the municipal bond market sees as fair 
and equitable. Our states and cities have for well over a century 
benefited from the low cost of credit extended by the bond market to 
fund essential capital expenses; and with our aging infrastructure and 
widespread concerns over the level of pension underfunding--exacerbated 
by recent turmoil in the equity markets--the need for the continuation 
of relatively low cost of credit for our states and cities cannot be 
overstated. In this context, Puerto Rico's fiscal challenges and their 
resolution are the Nation's concern since anything less than a balanced 
and fair solution to Puerto Rico's debt problems runs the real risk of 
driving up the cost of credit for our cities and states just at a time 
when they will need to borrow more.
    I recognize and acknowledge that the Puerto Rican government has 
been expending significant efforts to develop workable solutions to the 
Island's serious fiscal challenges, and that it has devoted focused 
attention to this process in earnest for the past 2 years. But the time 
and effort that has been devoted to date, with the lack of any clear 
comprehensive set of solutions at present, certainly merit pursuit of a 
new and different approach and underscores the need for a federally 
created authority composed of independent professionals to help fashion 
a resolution that all constituencies can come to perceive as both 
sustainable and balanced.
    I am most pleased that this subcommittee is not only focusing on 
creating an authority designed to solve the current budgetary 
shortfalls, but has also recognized that economic growth for Puerto 
Rico is key to the Island's future. Maximizing the extent to which 
budget shortfalls can be meaningfully narrowed over time through real 
growth in the Island's tax base is certainly preferable to relying on 
concessions from creditors, be they bondholders, the government's 
current labor force or public employee retirees, as the only means to 
bring current and future budgets into balance. Growing Puerto Rico's 
way out of its fiscal distress over time by relying on the revenues 
derived from an increase of its tax base is not only the most honorable 
path; excitement about the Commonwealth's economic resurgence can build 
on itself and make the Island a vibrant and attractive environment 
fostering fresh investments which, in turn, can create new well-paying 
jobs, reverse the recent trend of out-migration and bring back many who 
left the Island in search of opportunities.
    Believing that economic growth is one of several key components 
that can help address the Island's current fiscal distress I must be 
candid to observe that I do not believe that the authority which this 
subcommittee contemplates creating can alone provide the means to 
attract new in-bound investment in the Island's economy. 
Unquestionably, solving the Island's fiscal instability and looming 
government defaults is essential, because the current environment is 
certainly not conducive to attracting substantial investments. But 
solving the immediate fiscal crisis, while absolutely essential, will 
not alone be sufficient to bring the Island back to the position of 
economic self-sufficiency that it enjoyed as recently as a decade ago. 
Other congressional legislation is needed.
    Costs of production in Puerto Rico, not unlike other island 
economies, are significantly higher than on the Mainland; and without 
here belaboring the various causes of such incremental production and 
related transportation costs, resulting in them being meaningfully 
higher than similar Mainland production, in my opinion some form of 
favorable tax-based incentives need to be offered to businesses willing 
to locate operations on the Island to offset these higher production 
and transportation costs. Such tax incentive measures that were 
previously adopted by Congress worked to attract significant investment 
in the Commonwealth's economy; and taking those incentives away, as 
occurred in 2006, in hindsight has proven ill-advised. While another 
committee of the House, acting in concert with this subcommittee, will 
have to assess the merits of adopting carefully considered new tax 
incentive measures and their details, I believe that such legislation 
is essential if the authority contemplated by this subcommittee to 
oversee the Island's return to financial stability and economic 
independence is to be afforded the tools that will allow it, acting in 
close cooperation with the Commonwealth's economic growth 
professionals, to significantly attract meaningful in-bound investment. 
If so, there can be real hope that over time such investments can 
produce the level of tax-base growth that can play a meaningful role in 
reducing Puerto Rico's budgetary imbalances and serve as a key 
component in Puerto Rico's fiscal recovery and financial self-
sufficiency.
    Having addressed the overarching considerations that I believe 
merit the wisdom behind creating the kind of authority that this 
subcommittee is currently considering, let me complete my testimony by 
offering some general observations regarding the duties of such an 
authority, its duration and the composition of its membership.
    Starting with its duties, and without attempting here to set forth 
every component of the authority's powers, responsibilities and 
obligations, let me first briefly observe what I see as the prudent 
steps that the authority will wish to undertake to accomplish its 
congressionally established mandates. An essential first step is 
developing an agreed set of realistic and current financial data 
regarding the revenues and expenses of each unit of government 
experiencing budgetary challenges. Despite the best of intentions, the 
current environment is such that neither Congress nor any of its 
creditor constituencies have confidence in the existing and promulgated 
data; and, whether that lack of confidence is accurate or misperceived, 
it is critical that all constituencies come to agreement on an agreed 
set of financials. Clearly, the authority will play a vital role in 
assuring that all the data is transparent and that all constituencies 
can have confidence in the data that will be used to formulate 
appropriate courses of action.
    With an accurate handle on all current revenue sources, debts and 
operating expenses, the authority will then turn its intention to two 
immediate and challenging tasks; first, to explore all possible means 
to raise or collect additional tax or fee revenues and reduce operating 
costs; and second, short of developing a comprehensive fiscal recovery 
plan that will require considerable time to fashion and then negotiate, 
determine how best to address the near term anticipated financial 
defaults, while longer range solutions that can maximize the repayment 
of what Puerto Rico has borrowed are fully explored. Make no mistake, 
these initial tasks are formidable; and Congress ought to vest the 
authority with an array of powers that will permit it to do its work 
and that will both foster the willingness of all affected parties to 
actively participate in designing and implementing the optimal means to 
achieve sustainable increases in revenues and reductions in operating 
costs, and, at the same time, permit the authority to implement with 
bond creditor cooperation fair interim solutions that address 
anticipated bond payment defaults, thereby avoiding what most would 
consider non-productive related litigation.
    As all potential incremental revenue sources are explored, the 
authority ought to determine what currently non-utilized public capital 
assets are available, and the possible means to monetize those assets 
through joint ventures with private market investors. Such 
monetizations ought to be designed to provide the Puerto Rican 
government over time with additional cash-flows that can be used to 
help narrow budget shortfalls. Moreover, such joint ventures should be 
in interim solutions to the bond payment defaults structured to provide 
the Puerto Rican government with additional upsides based on 
contractual mechanisms that permit it to share in the increased value 
of such monetized assets as its economy recovers and expands.
    In assessing new revenue that can be a source of funding future 
budgets, the authority will also want to develop realistic projections 
regarding the broadened tax base that can be achieved through tax-
incentivized in-bound investment. This will require significant 
tangible proof regarding the extent and timing of additional revenues 
that these economic incentives once put in place can generate; and the 
financial markets, the Puerto Rican government and the credit rating 
agencies will all need to come to a consensus about these projections 
based on actual commitments from leading Mainland companies to invest 
on the Island.
    Ultimately, after the authority works with the cooperation of both 
the Puerto Rican government and all affected parties to implement every 
available means to increase revenues and reduce the operating expenses 
of each of the government units, it will become necessary to assess 
whether and to what extent, net of such revenue improvements and 
operating expense reductions, some budget shortfalls may still exist, 
factoring into the analysis both future underfunded pension liabilities 
and unfunded and rising healthcare obligations. Here again, we must be 
realistic and recognize that despite best efforts, some concessions may 
well be required. In such event, likely the most challenging aspect of 
the authority's work will be to address how to fairly and equitably 
allocate the need for some concessions among all constituencies. If 
that is the case, ideally, the authority can foster an atmosphere where 
required concessions can be consensually negotiated; and here again 
Congress ought to provide the authority with a variety of tools that 
both foster the authority's ability to enhance the prospect of consent 
and that afford it the flexibility to address complex issues. In the 
final analysis, all affected parties will hopefully see the virtues of 
negotiating an agreed, and therefore certain, resolution as far 
preferable to the cost and delays associated with protracted and 
uncertain litigation if the authority were to be forced to exercise 
available remedies to compel concessions.
    In the final analysis, the extensive work that will be required, 
the complexity of the issues presented, the need to harmonize divergent 
views about what is fair and the breadth of assignments that the 
authority will be required to undertake as it pursues a sustainable and 
comprehensive resolution of Puerto Rico's financial recovery are 
formidable. Unquestionably, tasking the authority with these challenges 
is a tall order. But, in my opinion, anything less robust than the work 
of such an authority is not going to provide a sustainable solution to 
Puerto Rico's serious financial challenges; and waiting any longer to 
see if somehow the situation self corrects is fundamentally misguided.
    Regarding the period of time that the authority might need to be 
kept in place, much depends on the time needed to successfully solve 
the budget deficits and the growth of the Puerto Rican economy. It is 
premature to know now when the role of the authority can be terminated 
or under what circumstances its functions and oversights can be 
narrowed. Unquestionably, if part of the debt solution will require the 
time for repayment of borrowings to be extended, bondholders are going 
to require that the authority monitor actual performance to the pro 
forma projections, and have the ability to fashion revised solutions 
if, despite best intentions, the established benchmarks are not being 
met. This kind of residual right to monitor and adjust actions, key to 
other similar control authorities, even if never utilized, provides the 
kind of comfort that creditors will justifiably demand and is 
fundamental to constituencies agreeing to the restructuring of Puerto 
Rico's financial obligations.
    Finally, permit me to comment on the composition of the authority. 
Naturally, the starting point is to ensure that its members possess the 
hands-on experience and/or professional training that brings 
sophistication, experience and expertise to address Puerto Rico's 
financial distress. The size of the authority's membership should be 
sufficient to allow for different perspectives and diverse backgrounds, 
but not so unwieldy as to make the very active work of the authority 
unmanageable. Perhaps five, but not more than seven, members would seem 
to balance these competing considerations.
    In my view, it is essential to have some of the membership of the 
authority be comprised of people who can offer the Puerto Rican 
perspective. While it is vitally important that all of the members be 
independent, and not perceived as having a conflict by reason of being 
part of the government of Puerto Rico or a creditor thereof, I think it 
is critically important to the process that Congress assure that some 
portion of the authority's membership be selected either from Puerto 
Rican residents or from those who have lived and worked for some time 
in and are of Puerto Rican ancestry. Having in-depth experience with 
Puerto Rico's economy is yet another attribute that also ought to be 
considered in selecting membership on the authority. Importantly, too, 
Congress ought to look to members that well understand the workings of 
the financial markets.
    Realistically, the authority's members will need to be prepared to 
devote significant time every week to meetings or conferences, 
especially so in the beginning several months; and members ought to be 
vetted to confirm their willingness to devote substantial energies to 
the authority's work. Certainly, the authority will require and rely 
upon a staff of financial and legal professionals that can provide 
advice to the members but, as importantly, also undertake or work on a 
variety of tasks at the direction of the authority's members. I also 
see considerable wisdom in the members selecting a CFO to coordinate 
the staff, but also actively interface regularly with the Puerto Rican 
administration on numerous matters while also frequently meeting with 
various creditor constituencies. Perhaps other duties will require 
additional appointments such as an information officer; but the members 
can consider these additional appointments as the circumstances may 
appear to warrant.
    In conclusion, I sincerely appreciate the opportunity this 
subcommittee has afforded me to address the important fiscal challenges 
that the Commonwealth of Puerto Rico is facing. Paramount in my view is 
securing a bright economic future for the people of Puerto Rico; and I 
hope my views are seen as motivated by that goal.

                                 ______
                                 

    Mr. Young. Thank you for a great testimony.
    Mr. Carlos Garcia.

    STATEMENT OF CARLOS M. GARCIA, CHIEF EXECUTIVE OFFICER, 
 BAYBOSTON MANAGERS, LLC AND FORMER CHAIRMAN AND PRESIDENT OF 
THE GOVERNMENT DEVELOPMENT BANK OF PUERTO RICO, NEWTON CENTRE, 
                         MASSACHUSETTS

    Mr. Garcia. Good morning, Chairman Young, Resident 
Commissioner Pierluisi, other distinguished members of this 
committee, and all that have an interest of Puerto Rico. My 
name is Carlos Garcia. I was the chairman, president, and CEO 
of the Government Development Bank for Puerto Rico from January 
2009 to March 2011.
    In addition, I was appointed as chairman of the Puerto Rico 
Fiscal Restructuring and Stabilization Board, a local fiscal 
control board created by law in March of 2009 with a 
comprehensive and joint mandate to address a complex fiscal 
emergency created through many years of fiscal imbalances and, 
in my opinion, the negative tail economic effect of the 
decision to repeal Section 936, which provided a manufacturing 
center for the world in Puerto Rico and was aggravated by 
Puerto Rico's failure to develop an alternative economic plan.
    The second task was to ensure the continuation of essential 
services to the people of Puerto Rico and to safeguard Puerto 
Rico's credit rating. The local control board acted swiftly by 
creating and executing a fiscal stabilization plan. It executed 
this plan with transparency to all Puerto Rico stakeholders, 
including a creation of a funded program to mitigate the socio-
economic effects of its mandate.
    It was a very difficult and unpopular job, not void of 
controversy; but by 2011, the swift actions of the local board, 
the Governor of Puerto Rico, the legislature and its cabinet 
provided a fiscal stabilization, including a double-digit 
reduction in government expenses, 2 straight years of surpassed 
government budgeted revenues, the timely delivery of financial 
statements, and an unparalleled reduction of the fiscal 
deficit.
    It re-established the access to the municipal market and 
also the first credit rating upgrades and the highest 
investment grade credit ratings in almost three decades, and 
started the beginning of an economic stabilization. The local 
control board was composed of a team of five cabinet-level 
officials with ministerial responsibilities over fiscal 
oversight, government funding, revenue expenditure, labor 
policy, and economic development.
    The work of the control board was comprehensive and 
effective as documented in the local control board report to 
the Puerto Rico legislature, dated March 31, 2011. The control 
board gave Puerto Rico a centralized implementation and 
decisionmaking arm to self-adjust itself out of its pre-2009 
fiscal crisis. It only had a 2-year mandate, which in my belief 
was too short. The local board did not have powers to eliminate 
or consolidate government agencies or to implement structural 
economic, labor, or tax measures, which was a shortcoming.
    After the local control board disbanded in 2011, the 
strength of its centralized programs as well as its 
implementation arm disappeared. What happened after the local 
control board disappeared is painfully known to all of us 
today, as many of these things could have been averted. But the 
question is: How can Puerto Rico break out of this treacherous 
downward spiral, and what can Congress do? In my opinion, it is 
imperative to create a long-term fiscal and economic authority 
to address holistically and comprehensively all of Puerto 
Rico's issues--fiscal, economic, and social, once and for all, 
in a credible, sensible, consistent, and swift manner. At this 
stage, in my opinion, the probability of success is only viable 
with the creation of a federally mandated Puerto Rico Fiscal 
and Economic Authority, enacted by Congress but with strong 
local participation.
    The authority should be provided the powers and tools to 
implement structural reforms of the government of Puerto Rico 
and its agencies; require the prior approval by the authority 
of all governmental budgets, additional indebtedness, capital 
expenditures, and employment levels; provide for a complete 
overhaul of Puerto Rico's accounting, budgeting, payroll, 
information, and other control systems, as well as its 
associated processes; and manage the restructuring and 
renegotiation process of all of Puerto Rico's obligations under 
a clear framework established in the authority's Federal 
enabling act, based on generally accepted public debt 
restructuring principles.
    There is no one-size-fits-all solution considering that 
Puerto Rico has roughly 20 issuers. The challenges are further 
compounded by the diversity of creditors that range from 
sophisticated institutional investors to `mom and pops'. The 
proposed framework should provide a speedy, predictable, and 
orderly process that protects assets, respects creditors' 
rights, but also recognizes that underlying all the formal 
debts, there are social obligations with respect to pensions, 
education, and health programs.
    The authority, as a single point of resolution, should 
arguably be better equipped by the composition of its 
government board to balance these equities than the bankruptcy 
process or other courts. As well, it is critical to attend the 
issues of the economy of Puerto Rico by creating jobs and 
generating regional activity.
    Attached to my testimony is a White Paper that outlines a 
one-time, temporary proposal that is revenue-neutral to U.S. 
taxpayers to jumpstart the economic recovery of Puerto Rico by 
permitting U.S. corporations holding funds outside of the 
United States to repatriate a limited amount of those funds 
under the requirement that at least 50 percent of those funds 
are invested in activities in Puerto Rico.
    My last recommendation is for the U.S. Congress to 
immediately confirm the current financial situation and deficit 
of the government of Puerto Rico via the Congressional Budget 
Office and require the government of Puerto Rico to issue 
promptly independent audited financial statements and provide 
monthly reporting information. One cannot fix what one cannot 
measure or monitor. I thank you for the privilege and honor to 
address you today and will gladly answer any questions on my 
testimony.

    Thank you, Mr. Chairman.

    [The prepared statement of Mr. Garcia follows:]
Prepared Statement of Carlos Garcia, Former Chairman, President and CEO 
of the Government Development Bank for Puerto Rico (2009-2011); Former 
  Chairman of the Puerto Rico Fiscal Restructuring and Stabilization 
   Board (2009-2011); and Former Chairman of the Puerto Rico Public 
               Private Partnership Authority (2009-2011)

    Good morning Chairman Young, Resident Commissioner Pierluisi, other 
distinguished members of this committee and the U.S. House of 
Representatives, fellow panelists, government officials, and all that 
have in-mind the best interests for Puerto Rico.

    My name is Carlos Garcia. I was the Chairman, President and CEO of 
the Government Development Bank for Puerto Rico from January 2009 to 
March 2011. In addition, I was also appointed as Chairman of the Puerto 
Rico Fiscal Restructuring and Stabilization Board (``Local Control 
Board''), a local fiscal control board created by law on March 9, 2009, 
with a joint and comprehensive mandate from the executive and 
legislative arms of Puerto Rico, to:

  1.  Address a complex fiscal emergency created through many years of 
            fiscal imbalances and, in my opinion, the negative tail 
            economic effect of the decision in 1996 to terminate Puerto 
            Rico's favorable Federal tax regime set up under Section 
            936 of the U.S. Internal Revenue Code which helped 
            establish Puerto Rico as a manufacturing center for the 
            world and further aggravated by Puerto Rico's failure to 
            develop an alternative economic plan during the 10-year 
            phase-out of Section 936 or persuade Congress to assist 
            with a substitute regime;

  2.  Ensure the continuation of essential services to the people of 
            Puerto Rico; and

  3.  Safeguard Puerto Rico's credit rating.

    The Local Control Board acted swiftly by creating and executing a 
comprehensive fiscal stabilization plan. It executed this plan with 
transparency to all Puerto Rico stakeholders, including a continuous, 
open dialog with labor and private sector leaders as well as 
bondholders, constant information provided to the Puerto Rico 
Legislature and local media, and the creation of a funded program to 
mitigate the socio-economic effects of the implementation of its 
mandate. It was a difficult and very unpopular job, not void of 
controversy, but by 2011 the swift actions of the Local Control Board, 
the Governor of Puerto Rico and its cabinet members resulted in:

  1.  The fiscal stabilization of Puerto Rico finances, including a 
            double digit reduction in government expenses, two straight 
            years of surpassed government budgeted revenue estimates, 
            the timely delivery of audited financial statements for 
            Fiscal Years 2010 and 2011, and an unparalleled reduction 
            of the fiscal deficit--in 22 months Puerto Rico's deficit 
            in comparison to the U.S. states went from the worst (#51) 
            to the middle of the pack (#20) \1\;
---------------------------------------------------------------------------
    \1\ Based on data from the Center on Budget and Policy Priorities 
and the Government Development Bank for Puerto Rico.

  2.  Re-establishing access to the U.S. municipal securities market 
            and obtaining the first credit rating upgrades and the 
            highest investment grade credit ratings in almost three 
---------------------------------------------------------------------------
            decades; and

  3.  The economic stabilization of Puerto Rico (as evidenced by the 
            Puerto Rico Economic Activity Index) after coordinating the 
            framework and deployment of Federal and local stimulus 
            funds, implementing a public private partnership program, 
            enacting a comprehensive tax reform reducing individual and 
            corporate income tax rates, restructuring the local banking 
            sector in coordination with Federal authorities, and 
            tapping into new sources of tax revenue without permanently 
            increasing the tax burden on its citizens or on Puerto 
            Rico's local commercial sectors.

    The Local Control Board was composed of a team of five cabinet-
level officials with ministerial responsibility for fiscal oversight, 
government funding, government revenue, government expenditures, labor 
policy and economic development, namely the President of the Government 
Development Bank (chairman), the Secretary of the Treasury, the 
Director of the Office of Management and Budget, the Secretary of Labor 
and the Secretary of Economic Development and Commerce. The Local 
Control Board's mandate was mostly focused on fiscal matters, although 
it promoted several economic initiatives and carefully calibrated 
fiscal measures with the input of an economic council (composed of top 
private sector economists). The Local Control Board's efforts also had 
the support of over 30 dedicated professional staff members and a large 
number of hired contractors with expertise on fiscal restructurings who 
were physically deployed throughout the principal agencies of the 
government of Puerto Rico.
    Under a ``trust but verify'' approach, the Local Control Board 
representatives worked side by side with all impacted government 
agencies. The Local Control Board also created a $1 billion program to 
mitigate the adverse socio-economic consequences of reducing government 
employment by providing counseling programs via regional centers, 
temporary health insurance, informational fairs, and grants to promote 
re-training, furthering educational attainment and entrepreneurialism.
    The work of the Local Control Board was comprehensive and effective 
as documented in the Local Control Board report to the Puerto Rico 
Legislature dated March 31, 2011 (the report in Spanish is attached to 
my testimony). The Control Board gave Puerto Rico a centralized 
implementation and decisionmaking arm to self-adjust itself out of its 
pre-2009 fiscal crisis. The Local Control Board's report provides a 
complete and consolidated account of all the actions taken, and it 
presented a comprehensive picture of Puerto Rico's overall 
indebtedness. The Local Control Board found almost $4 billion of 
unrecognized and unpaid obligations, accumulated fiscal deficits, loans 
without sources of repayment and other legal liabilities that had been 
incurred prior to 2009. All of these issues had contributed to the 
Puerto Rico fiscal emergency.
    The Local Control Board discovered that total Puerto Rico 
government indebtedness in December 2008 (before the Local Control 
Board commenced its work) was $57.5 billion \2\ and not $53.8 billion. 
The Local Control Board kept a tight grip on Puerto Rico's debt with a 
net $2.7 billion, or 5 percent, increase from December 2008 to December 
2010 (versus the $33 billion or 135 percent debt increase from 2000 to 
2008), and bonded-out currently payable obligations to longer 
maturities at a lower cost via a dedicated and segregated sales tax 
revenue authority called Puerto Rico Sales Tax Financing Corporation 
(better known for its Spanish acronym, COFINA). The aggregate amount of 
extra-constitutional debt obligations contracted prior to 2009 and 
bonded out by COFINA from 2007 to 2010 was $9.4 billion.\3\
---------------------------------------------------------------------------
    \2\ See pages 11-12 of the Local Control Board report to the Puerto 
Rico Legislature and Annex A-4. Total Puerto Rico Government, excluding 
municipalities.
    \3\ See Annex A-6 of the Local Control Board report to the Puerto 
Rico Legislature for details on the use of COFINA bond proceeds.
---------------------------------------------------------------------------
    The Local Control Board had a 2-year mandate, which I believe was 
too short. It had restructuring powers that were conferred by the 
Puerto Rico Legislature; its work was augmented by the support of the 
Governor of Puerto Rico and by virtue of the dual roles of its members, 
who were both cabinet members of the government of Puerto Rico as well 
as the members of the Local Control Board. Its principal powers were 
the ability to:

  1.  Design and implement a multi-year plan to achieve fiscal balance;

  2.  Implement legislated temporary tax revenue measures to deal with 
            the fiscal emergency;

  3.  Cutback on expenditures and implement a multi-step plan to reduce 
            the size of the government's payroll; and

  4.  Execute financial measures to provide the liquidity required to 
            guaranty the essential services to the people of Puerto 
            Rico and to fund the extra-constitutional debt (i.e. 
            accumulated budgetary deficits, unrecognized indebtedness 
            and unpaid bills) and a transition period to fiscal 
            balance.

    The Local Control Board's mandate was limited to Puerto Rico's 
central government. It did not include the Puerto Rico public 
corporations. The Local Control Board did not have powers to eliminate 
or consolidate government agencies or to implement structural economic, 
labor or tax measures. All of these measures were required to be 
presented to the Puerto Rico Legislature. The Local Control Board and 
its members were successful in coordinating efforts with the Puerto 
Rico Legislature to enact several reforms to promote economic growth or 
improve the fiscal situation, such as the Puerto Rico public-
partnership authority, a permits reform, a tax reform, an excise tax on 
foreign corporations, and an energy reform. Efforts to enact a labor 
reform and an overhaul of the government agencies were not successful.
    After the Local Control Board disbanded in 2011, the strength of 
its centralized budgeting, expense control, fiscal oversight and 
transparency reporting programs as well as its implementation arm 
disappeared. What happened after the Local Control Board disappeared is 
painfully known to all of us as we sit here today trying to find 
constructive solutions for a re-enacted Puerto Rico crisis that could 
have and should have been averted by the continued service of a control 
board.
    I want to share with you my recommendations based on the lessons 
learned and the struggles confronted by acting as chairman of the only 
fiscal control board created in recent Puerto Rico history, in the hope 
that it will provide insights to this Congress to act decisively and 
provide Puerto Rico with the necessary tools to bring it back from its 
decade long recession, and for the benefit of the over 7 million Puerto 
Ricans that are citizens of the United States of America and represent 
the second largest Hispanic population in the United States.

    But before I do so, please allow me the opportunity to state, in my 
opinion, the root cause of Puerto Rico's problems:

     The fiscal and economic troubles of Puerto Rico are due to 
            the implementation of inconsistent local fiscal and 
            economic policies through several decades and exacerbated 
            by the 10-year phase out, beginning in 1996, of Puerto 
            Rico's special fiscal tax regime, which was Section 936 of 
            the U.S. Internal Revenue Code. Section 936 provided tax 
            incentives for manufacturers to locate its operations in 
            Puerto Rico, and was repealed without any substitute 
            economic growth strategy or plan. It was Puerto Rico's main 
            economic engine, fostering a manufacturing sector that 
            represented 50 percent of Puerto Rico's gross domestic 
            product and generated over $30 billion in low-cost funding 
            to the local banking system that trickled down to small 
            businesses and consumers

     This loss prompted outsized government overspending and 
            hiring in an unsuccessful and unsustainable effort to 
            revive the economy--mostly financed in the U.S. municipal 
            capital markets or as part of the accumulated deficits and 
            other debt obligations without a source of repayment (such 
            as the ones discovered by the Local Control Board); and 
            aggravated by inefficient public corporations and 
            monopolies that became too complex to manage and 
            technologically outdated. Puerto Rico therefore lost its 
            competitive edge and the ability to generate any meaningful 
            new economic activity.

     The end result, almost two decades after, has been the 
            large accumulation of recurring fiscal deficits, over $70 
            billion in debt, and an economy incapable of generating 
            jobs that has prompted the recent migration to the U.S. 
            mainland of over 200,000 people who have felt that the 
            ``American Dream'' is not feasible on the Island. By the 
            time of the full phase-out of Section 936 in 2006, the 
            Puerto Rico economy had already completely decoupled from 
            the U.S. mainland economy, breaking with its historical 
            trend as a regional economy that closely tracked the United 
            States. Its initial manifestation was a local government 
            shutdown in May 2006, which clearly marked the start of 
            Puerto Rico's now long-lived economic downturn.

     With no special tax regime and an inefficient utilities 
            offering, Puerto Rico quickly lost its manufacturing 
            economic engine, and what remains today is not even a 
            shadow of what it was, with the added threat that a 
            significant part of the existing manufacturing production 
            base will disappear in coming years as many of its leading 
            products face patent protection expirations.

     Since 1996, the U.S. Government quiet response has been 
            the continuous yearly increase of Federal transfer payments 
            to individuals furthering the welfare state that creates a 
            disincentive to labor force participation and providing 
            little motivation for national and local private 
            enterprises that cater to consumers funded from the welfare 
            state to put capital at risk for new ventures that could 
            generate economic activity and jobs.

     Puerto Rico is and must be accountable for its 
            shortcomings, but nevertheless concrete action is required 
            from this U.S. Congress to help Puerto Rico find a 
            prosperous path again.

    How can Puerto Rico break out of this treacherous, downward spiral 
and what can this U.S. Congress do to assist?

    It is imperative to create a long-term fiscal and economic 
authority to address holistically and comprehensively all of Puerto 
Rico's issues--fiscal, economic and social, once and for all, in a 
credible, sensible, consistent and swift manner. The models for such an 
authority are the experiences learned by the city of New York in 1970s, 
Washington, DC in the 1990s and the Puerto Rico Control Board in 2009 
to 2011.
    At this stage, in my opinion, the probability of success is only 
viable with the creation of a federally mandated Puerto Rico Fiscal and 
Economic Authority (``Authority''), enacted by U.S. Congress but with 
strong local membership. In other words, Congress should provide the 
framework and the tools while qualified members of the at-large Puerto 
Rico community will be responsible to manage the affairs of the 
Authority under congressional oversight and progress reporting to the 
Puerto Rico Legislature.
    The Authority should be composed of five members, including its 
chairman. The chairman should be a federally appointed, independent, 
full-time expert in fiscal and economic matters. The Authority should 
have appropriate, qualified and strong representation from the 
government of Puerto Rico, Puerto Rico's organized labor, Puerto Rico's 
private sector and Puerto Rico's civic/not-for-profit sector. Its five 
members should be appointed for 5-year terms after a vetting process 
that evaluates their qualifications and expertise to serve in this 
capacity. The Authority should be allocated with sufficient resources 
to carry out its purposes, including Federal funding to ensure its 
independence, and provided with technical assistance from the U.S. 
Treasury department and the I.R.S., among other Federal agencies, as 
well as designated liaisons with the White House and both chambers of 
U.S. Congress.

    The Authority should be provided the powers and tools to:

  1.  Implement structural reforms of the government of Puerto Rico and 
            its political sub-divisions (currently, over 130 agencies 
            and public corporations and 78 municipalities) with the 
            intent to create a more efficient and agile structure at 
            the service of the people of Puerto Rico, which can be 
            fully supported by the current and recurring financial 
            means of Puerto Rico. This will require a careful review of 
            the essential governmental activities that should be 
            offered by the government versus the ones that should be 
            jointly served via public-private partnerships, privatized 
            or terminated;

  2.  Require the prior approval by the Authority of all governmental 
            budgets, additional indebtedness, capital expenditures, and 
            employment levels;

  3.  Complete overhaul of Puerto Rico's accounting, budgeting, 
            payroll, information and fiscal control systems, and its 
            associated processes;

  4.  Manage the restructuring and re-negotiation process of all of 
            Puerto Rico's obligations under a clear framework 
            established in the Authority's Federal enabling act, based 
            on generally accepted public debt restructuring principles, 
            including the following powers, among others:

          a.  The ability to call for a mandatory collective 
        negotiation with all creditors;

          b.   The ability to impose a stay on creditors during the 
        negotiation process while also being able to impose provisions 
        that protect creditors' interests during the stay period;

          c.   The ability to provide liquidity to the government of 
        Puerto Rico via direct access to a secured line of credit from 
        the U.S. Treasury Department following similar precedents such 
        as the Tennessee Valley Authority and Bonneville Power 
        Administration, both created by Congressional legislation; and

          d.   A provision that binds all creditors upon reaching an 
        agreement with a majority of creditors (i.e. cramdown 
        provision).

      There is no ``one-size-fits-all'' solution considering that 
            Puerto Rico has roughly 20 issuers with different sources 
            of revenue, debt covenants, priority of payments and 
            bondholder rights and protections. The challenges are 
            compounded by the diversity of creditors that range from 
            sophisticated institutional investors to ``mom and pops'' 
            who trusted their lifetime savings to the credit worthiness 
            and promises made by the government of Puerto Rico. The 
            proposed framework should provide a speedy, predictable and 
            orderly process that protects assets, respects creditors' 
            rights but also recognizes that underlying all the formal 
            debts there are social obligations with respect to 
            pensions, education and health programs, among others. The 
            Authority, as a single point of resolution, should arguably 
            be better equipped by the composition of its governing 
            members to balance these equities than the bankruptcy 
            process or the courts. Nevertheless, the Authority's 
            effectiveness may be enhanced by providing access via the 
            Authority and as a last resource to Chapter 9 bankruptcy 
            protection for some of the most troubled Puerto Rico public 
            corporations only;

  5.  Design and implement a new economic model for Puerto Rico to 
            create jobs and generate regional economic activity 
            throughout the Island, including recommendations for tax 
            and labor reforms as well as a sustainable fiscal control 
            framework.

      Attached to my testimony is a white paper that outlines a one-
            time, temporary proposed measure to jumpstart the economic 
            recovery of Puerto Rico by permitting U.S. corporations 
            holding funds outside the United States to repatriate a 
            limited amount of those funds under the requirement that at 
            least 50 percent of the repatriated funds be invested in 
            activities that generate economic prosperity and jobs in 
            Puerto Rico, in sectors such as energy, manufacturing, 
            tourism, education, health, and rum production. This 
            proposal should have a minimal or revenue neutral impact to 
            U.S. taxpayers while also achieving the objective of 
            bringing these funds into the United States;

  6.  Evaluate the effect of Federal policies and programs on Puerto 
            Rico, such as Federal welfare programs, minimum wage, 
            Medicaid, Medicare, Jones Act, etc., and provide 
            recommendations for possible changes; and

  7.  Provide permanent fiscal oversight. The Authority should be a 
            fully functional control board until Puerto Rico achieves a 
            newfound path to prosperity as defined goals are achieved 
            and shown to be effective. At that point, the Authority 
            would convert to an oversight board.
    My last recommendation is for U.S. Congress to immediately confirm 
the current financial situation and deficit of the government of Puerto 
Rico, working through the Congressional Budget Office, and require the 
government of Puerto Rico to:

  1.  Issue promptly independent audited financial statements (even if 
            issued with qualified opinion); and

  2.  Provide monthly, publicly available, detailed reports of its 
            revenues, expenses, cash-flows, debt, payroll, performance 
            versus budget, level of governmental employment, and key 
            labor and economic indicators.

    This will provide essential information for the Authority to 
commence its work.

    One cannot fix, what one cannot measure or monitor.

    I thank you for the privilege and honor to address you today. I 
would gladly answer any questions related to my testimony and offer my 
pro-bono collaboration for advancing the work of this committee and of 
this U.S. Congress in delivering practical and urgent relief measures 
to Puerto Rico.

Attachments (Reference Materials)

1.   Puerto Rico Fiscal Restructuring and Stability Board Comprehensive 
            Final Report to the Puerto Rico Legislature including 
            Annexes, dated March 30, 2011 (in Spanish)

        [Due to size limitations (114 pages), this document is not 
        included in this printed version. It is being retained in the 
        Committee's official files.]

2.   Puerto Rico Reconstruction Plan, dated March 5, 2009, as presented 
            to the Puerto Rico Legislature (in English)

        [Due to size limitations (60 pages), this document is not 
        included in this printed version. It is being retained in the 
        Committee's official files.]

3.   Puerto Rico Government Progress Report Presentation to the Obama 
            Administration, dated November 23, 2010 (in English)

        [Due to size limitations (30 pages), this document is not 
        included in this printed version. It is being retained in the 
        Committee's official files.]

4.   White Paper: ``A Proposal to Jumpstart Economic Activity in Puerto 
            Rico with a Minimal to Revenue Neutral Impact to U.S. 
            Taxpayers'' by Carlos Garcia, dated January 31, 2016 [See 
            below]

                                 *****

                               ATTACHMENT

   ``A Proposal to Jumpstart Economic Activity in Puerto Rico With a 
         Minimal to Revenue Neutral Impact to U.S. Taxpayers''

                            By Carlos Garcia

                            January 31, 2016

                              WHITE PAPER

Proposal

    U.S. taxpayers would be permitted to repatriate funds regarded as 
permanently invested outside the United States for financial accounting 
purposes up to $40 billion in the aggregate under the conditions that:

  1.  the repatriated funds would be subject to rules generally 
            consistent with the rules of former section 965, which 
            provided an elective, temporary 85-percent dividends-
            received deduction for certain dividends received by a 
            domestic corporation from foreign controlled corporations, 
            subject to various conditions and limitations; and
  2.  at least one half of the amount of such funds that are 
            repatriated by any taxpayer are invested in assets used (or 
            to be used within 5 years) in the active conduct of a trade 
            or business carried on by the taxpayer (or an affiliate) in 
            Puerto Rico or invested in activities or financial 
            instruments that create jobs and promote economic activity 
            in Puerto Rico, with priority given to the following:

          a.  Developing energy and infrastructure projects;

          b.   Facilitating the creation and expansion of small and 
        medium-size businesses as well as the export of products and 
        services;

          c.  Furthering education at all levels;

          d.  Conducting scientific and medical research;

          e.  Creating a STEM innovation district;

          f.  Creating a Latin American medical-tourism and veterinary 
        hub;

          g.  Reinvigorating local rum production and other 
        agricultural products; and

          h.   Promoting regional initiatives designed to make Puerto 
        Rico a low-cost tourism alternative by among other means, re-
        developing the former Roosevelt Roads naval base and the Ramey 
        air base, cleaning the Island of Vieques, etc.

Other Conditions and Considerations
    As stated above, the repatriated funds would be subject to rules 
generally consistent with former Internal Revenue Code section 965, 
enacted in 2004 as part of the American Jobs Creation Act to provide a 
temporary tax holiday for repatriated corporate earnings. The rules, 
among other things, would provide an elective, temporary 85-percent 
dividends-received deduction for certain dividends received by a 
domestic corporation from foreign controlled corporations, subject to 
various conditions and limitations.
    Because the aggregate amount of funds that could be repatriated is 
limited, a taxpayer would file an application with the U.S. Treasury 
Department, Office of the Fiscal Assistant Secretary, requesting 
permission to repatriate a specified amount of funds. The maximum 
amount that could be repatriated by a taxpayer (including all members 
of its affiliated group) would be $2 billion. Applications could be 
filed in the 120-day period following the date of enactment of the 
statute. If applications were filed for repatriations in excess of $40 
billion, the Office of the Fiscal Assistant Secretary would have the 
authority to allocate the repatriations based upon criteria it would 
develop, including the number of jobs to be created in Puerto Rico and 
the purchases of goods and services in connection with the investment 
in the active conduct of a trade or business in Puerto Rico. If 
applications of less than $40 billion were filed, the Office of the 
Fiscal Assistant Secretary could extend the 120-day period for 
applications.
Revenue Estimate
    I anticipate that the proposal will have only a minimal to revenue 
neutral effect on Federal income tax revenues, as per the analysis 
provided below and summarize on the attached table.
    As background information, the Chief of Staff of the Joint 
Committee on Taxation in a letter to Senator Orrin Hatch dated June 6, 
2014 estimated that if section 965 were re-enacted, based on the $1.5 
trillion estimated amount of ``offshore cash,'' tax revenues would be 
reduced by $95.8 billion for the period 2014 through 2024. The estimate 
was based on an analysis of the impact of the 2004 enactment of section 
965.
    The Joint Committee on Taxation noted four major factors at play in 
this estimate of revenue impact. The first was the loss in revenue 
associated with dividends that taxpayers would be predicted to 
repatriate even in the absence of enactment of the proposal. The second 
factor dealt with the U.S. tax effects associated with taxpayers 
changing their dividend repatriation amounts and/or timing in response 
to the proposal. There would be increases or decreases in revenues 
during the budget period based on whether repatriations were 
accelerated into the budget period. The third factor reflected the 
moral hazard problem if taxpayers anticipate that similar legislation 
may be enacted in the future that would enable them to repatriate 
dividends at a lower tax cost. The fourth factor was the predicted 
distribution of the repatriated funds to shareholders in the form of 
dividends or share repurchases, and the subsequent changes in 
individual income tax liability.
    I would like to address the factors set out by the Joint Committee 
on Taxation in the context of this proposal. Under this proposal, the 
assumed repatriated amount would be $40 billion, which is 2.7% of the 
$1.5 trillion estimated ``off-shore cash'' in the Joint Committee 
study. A repatriation of $40 billion would result in an increase in tax 
receipts of $2.1 billion ($40 billion less 85% dividend received 
deduction on $40 billion times 35% tax rate) or 5.25% of $40 billion.
    Of that repatriated amount, half ($20 billion) would have to be 
invested in Puerto Rico. This $20 billion results in tax receipts of 
$1.05 billion. Addressing the first and second factors in the Joint 
Committee study, it seems quite likely that that $20 billion required 
to be invested in Puerto Rico would not otherwise have been 
repatriated. Thus, without this repatriation plan, those tax receipts 
of $1.05 billion probably would never have been realized.
    With respect to the $20 billion of the $40 billion that is not 
required to be invested in Puerto Rico, it may be reasonable to assume 
that 30% of the $20 billion ($6 billion) would have otherwise been 
repatriated. The maximum revenue loss with respect to such funds would 
be $1.785 billion ($6 billion times 35% tax rate less $6 billion times 
the 5.25% tax paid or $2.1 billion less $315 million). The increase in 
federal revenues on the remaining $14 billion that would not otherwise 
have been repatriated would be $735 million.
    In these circumstances, the net revenue estimate for the proposal 
would be zero--$1.785 billion (maximum revenue loss on funds that would 
have been repatriated anyhow) less the sum of $1.05 billion and $735 
million (revenue on funds that otherwise would not have been 
repatriated).
    With respect to the third factor--moral hazard concern, because the 
proposal is targeted for very specific investments, it seems unlikely 
that there would be any moral hazard.
    This revenue estimate does not consider fourth factor--the 
shareholder level effects of repatriation. It seems likely, however, 
that there would be additional collections of individual taxes from 
shareholders from the repatriation of funds, thereby further reducing 
the tax revenue estimate of the proposal.
    In fact, given the design of the proposal, the likelihood of 
providing benefits to otherwise already planned repatriations is 
modest. As a consequence, there may be minimal revenue losses and 
perhaps even revenue gains from implementation of the proposal.
Economic Impact in Puerto Rico
    Puerto Rico has suffered an economic depression now for over a 
decade. This proposal would be major step in reversing this decline. 
Puerto Rico's economy currently lacks funds for investment conducive to 
the generation of new economic activity and jobs. Upon successful 
implementation of this proposal, the investment of up to $20 billion 
through repatriation would represent in a period of 5 years a much 
needed injection of approximately 20% of Puerto Rico's gross domestic 
product (GDP) or an average of 4% of GDP per year. A more detailed 
analysis as to the economic impact and number of potential new jobs to 
be generated from this proposal could be provided upon request.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 

    Mr. Young. Thank you, Mr. Garcia.
    We now have Professor Simon Johnson.

 STATEMENT OF SIMON JOHNSON, PROFESSOR OF GLOBAL ECONOMICS AND 
    MANAGEMENT, MIT SLOANE SCHOOL OF MANAGEMENT, CAMBRIDGE, 
                         MASSACHUSETTS

    Mr. Johnson. Thank you, Mr. Chairman. I am a professor at 
MIT's Sloane School of Management. I have worked on economic 
crises around the world for 30 years. In 2007 and 2008, I was 
the chief economist of the International Monetary Fund.
    I would like to make three points. First of all, Mr. 
Chairman, I think you put your finger on the key issue already, 
which is if Puerto Rico were a state or had been allowed to 
become a state, we would not be here today. The safety 
mechanisms, the automatic stabilizers that states have in the 
United States, while not perfect, are not available to Puerto 
Rico. As a result, triggered in part by the economic crisis and 
other circumstances you have identified, when Puerto Rico 
started downhill, there was not enough force to pull it back 
up. Now we face what is, I'm afraid, an extremely serious debt 
crisis.
    And I would emphasize, Mr. Chairman, one very important 
compounding factor, which I believe has never been seen to this 
extent in any other crisis around the world, and that is 
migration. There are 3\1/2\ million U.S. citizens. They will 
leave, and the people who leave are the people who pay taxes.
    If the solution--and I don't believe it is what we are 
discussing today--but if the solution is austerity, wage cuts, 
benefits cut, they will leave. They will come to the United 
States, and they will take advantage, for example, of the 
earned income tax credit, which is a very good anti-poverty and 
pro-employment participation scheme that is available to 
everyone who lives in the 50 states, but not to people in 
Puerto Rico.
    So in that context, I would emphasize--and I think I am 
agreeing with the two previous witnesses--these points. First 
of all, yes, a growth authority is a good idea under these 
circumstances. And, yes, audited financials and an 
understanding of exactly the situation today and realistic 
projections, of course that is absolutely a requirement. That 
is what every country in crisis needs.
    But you have very little time. This is a serious crisis 
that has been growing for a long period, as you identified, Mr. 
Chairman. And I think Speaker Ryan is exactly right to 
emphasize that we need a plan, you need to act on legislation 
by the end of March. If you wait, the crisis will become 
considerably worse, more people will leave, the tax base will 
further disintegrate, and the creditors will get even less. 
Everyone loses in that situation.
    The second point I would make is that I agree completely 
with Resident Commissioner Pierluisi on the issue of local 
democracy. Again, experience around the world is that when 
measures are taken under such difficult circumstances, if 
people feel that they are imposed from the outside, if local 
democracy is extinguished or felt to be extinguished, you do 
not have good outcomes. You have to have buy-in, and I think 
this is what Mr. Garcia was saying.
    As a former constituent of Mr. Williams, I would say there 
was buy-in, and I would say he did a great job with the support 
of the local population. That is what you need to aim for in 
Puerto Rico. It is not easy, but I think there is a way forward 
as the Resident Commissioner has identified.
    The third point, the most sensitive and perhaps the most 
emotional today, is the debt and the extent to which 
restructuring is needed and what kind of debt needs to be 
restructured. I think it is uncontroversial, but we will see, 
that the U.S. Government and Congress sits relative to Puerto 
Rico very much as a state sits relative to a city in other 
parts of the United States, in the 50 states.
    And, you have the ability, the responsibility, and 
absolutely the legal authority to create a board or a growth 
authority that has the ability to restructure the debt and to 
potentially restructure all of the debt that has been issued by 
Puerto Rico. Obviously, not all creditors are the same, not all 
creditors have the same seniority, there are different terms, 
and different contracts. I really hope that a voluntary debt 
exchange can be agreed to.
    But again, the experience around the world is that when you 
have a complex set of claims, as in Puerto Rico, and different 
kinds of creditors, they almost always have overly optimistic 
expectations about how much they can get if they wait and if 
they delay and if they don't agree to a voluntary exchange.
    So, I think that you really must create the context of an 
authority that has this investigative ability, has the 
oversight ability, and does not extinguish democracy. That 
authority working, hopefully, with the established court 
system, which I think is very strong on many of these issues, 
must have the ability to restructure potentially all of the 
debt that has been issued by Puerto Rico. Thank you very much.

    [The prepared statement of Mr. Johnson follows:]
    Prepared Statement of Simon Johnson, Ronald Kurtz Professor of 
   Entrepreneurship, MIT Sloan School of Management; Senior Fellow, 
   Peterson Institute for International Economics; and co-founder of 
                    http://BaselineScenario.com \1\
---------------------------------------------------------------------------
    \1\ Also a member of the Federal Deposit Insurance Corporation's 
Systemic Resolution Advisory Committee, the Office of Financial 
Research's Financial Research Advisory Committee, and the independent 
Systemic Risk Council (created by Sheila Bair). All the views expressed 
here are mine alone. Underlined text indicates links to supplementary 
material; to see this, please access an electronic version of this 
document, e.g., at http://BaselineScenario.com. For important 
disclosures, see http://baselinescenario.com/about/.

---------------------------------------------------------------------------
A. Main Points

   1.   Puerto Rico faces a serious and immediate debt crisis--
            scheduled payments have been missed, the government is 
            forced to resort to emergency liquidity measures, and 
            arrears to suppliers are building up.

   2.   Given recent economic outcomes and likely immediate prospects, 
            it is clear that the government and its various agencies 
            borrowed too much. At the same time, creditors must have 
            been aware of the risks--Puerto Rico's economy has 
            struggled over more than a decade and bond yields have long 
            reflected the elevated risk of default.

   3.   The question now is how to put Puerto Rico back on the path to 
            prosperity. A return to broad-based growth will permit 
            rising living standards at the same time as ensuring the 
            best possible outcomes for existing bondholders.

   4.   Puerto Rico needs a new set of economic policies--oriented 
            toward boosting growth through reducing the cost of doing 
            business and investing in productive opportunities.

   5.   One reaction is to demand further austerity, for example in the 
            form of wage reductions and healthcare cuts. But residents 
            of Puerto Rico are also U.S. citizens and they vote with 
            their feet--the population has fallen from 3.9 million to 
            3.5 million in recent years as talented and energetic 
            people have moved to Florida, Texas, and other parts of the 
            mainland.

   6.   The situation is complicated by the fact that much of Puerto 
            Rico's $70 billion debt was issued by government 
            corporations.\2\ Federal law allows such municipal debt to 
            be restructured under Chapter 9 of the bankruptcy code in 
            all 50 states but not in Puerto Rico, which is the largest 
            U.S. territory. A protracted series of confusing legal 
            battles and selective defaults looms. The cost of essential 
            infrastructure services--electricity, water, sewer, 
            transportation--will go up while quality declines.
---------------------------------------------------------------------------
    \2\ There are various estimates of the precise debt outstanding for 
which the government of Puerto Rico is responsible; $70 billion is a 
reasonable baseline number to use for gross public debt.

   7.   The more that creditors demand lower living standards and 
            higher taxes, the more the tax base (i.e., people) will 
            simply leave the island--and bondholders will only 
---------------------------------------------------------------------------
            experience greater loss.

   8.   Disorganized public corporation default will also make it hard 
            for any part of the private credit system to function. As 
            private credit becomes harder to obtain, the real economy 
            will decline further.

   9.   Leading voices--including at the Hoover Institution (http://
            www.hoover.org/research/lets-end-too-big-fail)--have long 
            argued in favor of using established court-run process when 
            large financial firms fail.\3\ The same logic applies here: 
            a judge can rely on precedent and ensure fairness across 
            creditor classes, based on seniority and the precise terms 
            under which loans were obtained.
---------------------------------------------------------------------------
    \3\ There is a debate about whether bankruptcy can be used to deal 
with the largest financial firms, because of potential systemic risk 
spillover effects--i.e., the failure of one firm causes other firms to 
fail. These concerns do not seem to apply in the case of Puerto Rico's 
debt.

  10.   A judge--for example, responsible for administering a broad 
            restructuring authority--can remove any doubt that actual 
            insolvency in fact exists, while also ensuring that credit 
            remains available during a restructuring. A well-designed 
            restructuring authority can also forestall disruptive 
---------------------------------------------------------------------------
            litigation and prevent holdouts by a few creditors.

  11.   For a sustained economic recovery, Puerto Rico needs private 
            sector investment, and this requires three steps.

          a.   First, bureaucratic hurdles to job creation should be 
        eliminated, including by using state-of-the-art technology to 
        make government more transparent.

          b.   Second, the cost of essential inputs for industry needs 
        to fall. Electricity on Puerto Rico is significantly more 
        expensive than in Florida, in part because of underinvestment. 
        More broadly, there are pressing needs for public investment to 
        improve infrastructure and this includes great opportunities 
        for private sector participation--but none of this will happen 
        until the debt overhang is removed.

          c.   Third, Puerto Rico needs better fiscal management. The 
        island's idiosyncratic tax and expenditure system--and the lack 
        of effective local fiscal control--has become part of the 
        longer-term problem. Puerto Rico should, over time, become more 
        like one of the 50 states in its fiscal relationship with the 
        Federal Government. If Congress is willing to commit to that 
        path, a reasonable quid pro quo would be strong fiscal rules--
        and a powerful monitoring body.

  12.   With congressional support and pro-growth policies, Puerto Rico 
            can attract talented Americans (and legal immigrants) to 
            move to the island, to start companies, and to work hard. 
            Higher education in Puerto Rico remains strong--but over 
            80,000 people leave to live and work elsewhere every year 
            (while only 20,000 move in).

  13.   In part this is because the healthcare system in Puerto Rico is 
            badly frayed. The Federal Government provides significantly 
            more support to every state healthcare system through 
            Medicaid and Medicare, despite the fact that Puerto Ricans 
            pay the same Federal payroll taxes that fund much of the 
            Medicare program.

  14.   And hard-working low income Puerto Ricans are eligible for more 
            robust support, including through the earned income tax 
            credit (EITC)--a program supported by leading 
            conservatives, such as Speaker of the House of 
            Representatives Paul Ryan--but only if they move to one of 
            the 50 states.

  15.   Puerto Rico does not need a bailout. It needs to reduce the 
            cost of doing business, encourage investment, and attract 
            people to work (and pay tax). It also needs to move away 
            from an unsustainable fiscal deal vis-a-vis the Federal 
            Government--and toward the same kind of arrangement that is 
            available to all 50 states.

B. Lessons from International Experience
    Puerto Rico's current situation is unusual for the United States, 
but there are definite recent parallels with the experience of 
countries around the world.
    Governments borrow when times are good--or when investors are 
willing to bet on an improvement in economic conditions. Some of this 
borrowing may be directly onto the government's balance sheet, but it 
is also quite common to take on debt through various quasi-government 
agencies that have an explicit or implicit guarantee.
    During a boom, investors are typically willing to ignore or play 
down the potential risks--and there is not enough thinking about what 
exactly will happen in a downside scenario.
    As credit conditions tighten and expectations become more 
pessimistic, bond yields go up--reflecting the additional risks. As 
this happens, it is quite common for a different kind of investor to 
become involved, e.g., hedge funds. The risks of default are clearly 
higher but some investors still feel that the additional return 
justifies buying the debt.
    At this stage, there is usually an active secondary market for 
debt--as investors who like risk buy up debt at a deep discount. Some 
investors may also take the view that they are acquiring more senior 
claims--or claims that will have advantageous treatment in the event of 
a restructuring.
    When a country loses access to debt markets and is generally 
regarded as having unsustainable fiscal policies, some form of crisis 
ensues.
    The main issue then becomes: How much will the existing debt be 
restructured? At the country-level there is a longstanding problem 
because there is no agreed mechanism (or court-run process) to 
determine a fair amount of debt reduction. As a result, there is 
reliance in the first instance on voluntary debt swaps (e.g., reducing 
the present value of payments but not always lowering principal). If 
this approach does not work, the International Monetary Fund often 
becomes involved--and the extent and nature of IMF support becomes part 
of the conversation with creditors.
    IMF support comes with strings attached, including detailed 
monitoring of fiscal flows (and related monetary developments). 
However, IMF programs only work when there is substantial local buy-in. 
Imposing austerity from outside is never a good idea.
    The viability of any IMF program (and related international 
assistance) always depends on getting debt payments down to a 
sustainable level. In this context, it is best if the payments can be 
made contingent on outcomes, i.e., if the economy recovers, then 
bondholders receive more.
    A sovereign debt restructuring mechanism (SDRM) has been proposed 
in the past--and was given serious consideration by the George W. Bush 
administration. Unfortunately, we do not currently have an SDRM at the 
international level--and this makes debt restructuring more time 
consuming and harder to implement. In particular, some investors decide 
to hold out for full repayment and this can greatly complicate a return 
to capital markets for the government.
    Compared with international experiences, Puerto Rico has the 
potential advantage that a restructuring mechanism could be put in 
place. Municipal bankruptcy (within the United States) is one obvious 
precedent, but a broader process--to include all debt--may also be 
considered.
    In any such process, not all creditors will be treated alike--
depending on the precise nature of the commitment to pay them 
(seniority of claim, broadly defined). The point is to have a fair, 
transparent, and politically legitimate process to decide on these 
payments. Running such a process through a judge (and the court system) 
has a great deal of appeal in the United States.
    All such debt restructurings are contentious and no one ends up 
completely happy. But creditors were taking on well-documented risks 
when they lent to Puerto Rico. And the Federal Government has long made 
it clear that it does not stand behind the obligations of states or 
state-backed municipal lenders.
    The reaction of debt markets to developments in Puerto Rico so far 
has been muted--and this is further confirmation that investors 
understand the risks with this kind of lending are quite differentiated 
across borrowers.
    The biggest danger for Puerto Rico is that there will be no 
comprehensive debt restructuring. Without further congressional action, 
the terms on some loans will be changed, but only partially and likely 
not enough to return the territory to fiscal sustainability.
    One potential historical parallel is Latin America during the 
1980s. Following a debt crisis that began in 1982, there was a long 
period of stagnation--until the U.S. Treasury helped to facilitate a 
restructuring at the end of the decade.
    Puerto Rico could easily experience a lost decade of growth. And 
outcomes (in terms of economic aggregates in Puerto Rico) could even be 
dramatic because residents can move to the 50 states. In modern times 
we have never experienced this particular dimension of a debt crisis--
the relatively easy exit of a population.\4\
---------------------------------------------------------------------------
    \4\ Some euro area countries now experience substantial out-
migration, including for young and educated people. But it is harder to 
move within the euro area--for cultural and linguistic reasons--than it 
is to move from Puerto Rico to Florida, Texas, or other states.
---------------------------------------------------------------------------
    International experience teaches us that economic recoveries are 
possible, even from apparently dire circumstances. Puerto Rico does not 
have its own currency, so recovery through devaluation is not an 
option. And reducing wages in Puerto Rico would induce more people to 
leave--this should be regarded as an important constraint on policy.
    But international experience also suggests there is a sensible way 
forward if Congress and the government of Puerto Rico are willing to 
support: significant debt restructuring in a court-run process; 
improvement in fiscal management, including with external oversight; a 
reduction in the cost of doing business; and an investment-led 
recovery.

                                 ______
                                 

    Mr. Young. I hope we have the intelligence to call upon 
these witnesses to help us write a piece of legislation because 
I can guarantee if we write it by ourselves, we will screw it 
up.
    So, Mr. Eric LeCompte.

  STATEMENT OF ERIC LeCOMPTE, EXECUTIVE DIRECTOR, JUBILEE USA 
                    NETWORK, WASHINGTON, DC

    Mr. LeCompte. I truly appreciate your opening comments in 
terms of framing the crisis and the situation that we are 
dealing with. I also want to thank the previous panelists and 
also certainly identify my remarks with Professor Simon 
Johnson's, who I think gave a very good assessment of the needs 
and the situation.
    Mr. Young. Eric, excuse me, you with the gray hair, would 
you quit bobbing around? It bothers me when people are 
testifying. When someone is testifying, I don't like 
distractions.
    Go ahead, Eric.
    Mr. LeCompte. I am the Executive Director of Jubilee USA. 
We represent national religious bodies, congregations, and 
institutions. Our founders and member groups in the United 
States range from the U.S. Conference of Catholic Bishops, to 
American Jewish World Service, to most of the national 
protestant denominations. We represent 550 faith communities 
across our great country, and we focus on how the most 
vulnerable are impacted by global issues such as trade, debt, 
corruption, and taxes.
    We have worked with Congress and successive administrations 
on global debt issues for almost 20 years. Because of the 
agreements we have achieved together, our financial system is 
more responsible and transparent, and developing countries have 
seen over $130 billion in debt relief to build schools and 
medical centers around the world.
    It is thanks to President George W. Bush that in 2005 the 
cornerstone of U.S. bipartisan policy on debt restructuring and 
financial accountability was laid, the Multi-Lateral Debt 
Relief Initiative. Not only did this legislation enable 
innovative financing to countries who needed to deal with poor 
populations, it also set standards around government 
accountability and public budget transparency.
    In Puerto Rico, in particular, we partnered with religious 
leaders representing more than 95 percent of the island's 
population. The leaders include the Catholic Archbishop of San 
Juan and the head of Puerto Rico's Bible Society. Along with my 
testimony, I submit an August statement signed by all of Puerto 
Rico's major religious leaders asking Congress to take action 
regarding the crisis in Puerto Rico. I also submit a letter 
from Archbishop Wenski on behalf of the U.S. Conference of 
Catholic Bishops urging Congress to pass bankruptcy protection 
for the indebted territory.
    From a religious perspective, we recognize, as you laid 
out, Chairman Young, that this is not simply a debt crisis; 
this is a humanitarian crisis. Consider that nearly 50 percent 
of Puerto Rico's people live in poverty, 50 percent of Puerto 
Rico's children live in homes that receive some form of welfare 
benefits, and 80 percent of Puerto Rico's children live in high 
poverty areas. Because pension accounts have been used to pay 
the debt, government pensions may not have enough funds to meet 
their obligations by 2020; the current unemployment rate of 
Puerto Rico is over 12 percent; and over the past decade, 10 
percent of the population has left for the U.S. mainland in 
search of work.
    Like our religious partners on the island, we pray for two 
things: first, long-term solutions to Puerto Rico's economic 
troubles that address the underlying problems that led to this 
mess in the first place; and second, immediate measures to help 
Puerto Rico's people who are suffering right now.
    This committee has a very important role to play in both 
the short term and long term. In the short term, the reality is 
that Puerto Rico cannot cut its way out of this crisis. It 
cannot tax its way out of this crisis. There is no path to 
economic growth in Puerto Rico that does not start with debt 
restructuring.
    Self-imposed austerity in Puerto Rico is already proving 
harmful and counterproductive. Funding for law enforcement has 
dropped 3 years in a row; special education teachers are no 
longer being paid, directly harming some of the most vulnerable 
kids on the island; 200 schools have closed; Puerto Rico cut 
its health spending by $42 million this year, and this takes 
place as the Zika virus now spreads in Puerto Rico.
    These types of measures push more people on the island to 
leave for the U.S. mainland, which further erodes Puerto Rico's 
tax base. It is a cycle that is only getting worse.
    The good news is that we can solve this crisis in ways that 
promote economic growth and reduce child poverty. A step in 
this direction is enacting bankruptcy protection for Puerto 
Rico, the same type of protection U.S. municipalities have 
access to. We applaud the efforts of Representatives Duffy and 
Pierluisi for introducing bankruptcy legislation. We are very 
grateful to Speaker Ryan for setting a timeline for action.
    Our opposition to austerity should not be confused with 
opposition to reform. At the root of today's hearing lies the 
question: How do we prevent future debt crises in Puerto Rico, 
and how do we ensure greater accountability from Puerto Rico's 
government?
    Part of the answer to this question is that through an 
orderly debt restructuring process we bring the debt back to 
sustainable, payable levels. However, this committee is 
concerned also with how there needs to be more accountability 
from Puerto Rico's government itself.
    From the beginning of this crisis, Jubilee USA and its 
religious partners in Puerto Rico called for increased budget 
transparency and accountability in the island's government. We 
want more citizens' participation in economic decisionmaking, 
policies that we have pursued successfully on other heavily-
indebted Caribbean islands and countries around the world.
    To this end, we are pleased that the Puerto Rico Audit 
Commission has begun its work. We support Congress' action to 
make available Treasury's Office of Technical Assistance. This 
particular action that you all enacted with the omnibus can 
help Puerto Rico keep its debt stock in order, become more 
accountable to its citizens, and raise revenues. This action 
can show powerful results.
    I think, in closing, in terms of the question of the 
financial control board that this committee is looking at 
today, we have seen this type of fiscal authority utilized 
during other economic crises in the United States. In terms of 
Puerto Rico, the White House has acknowledged the need for some 
authority, and Representative Duffy's legislation details how 
one would be constructed.
    As Congress looks to pass bankruptcy and greater 
accountability provisions, any control board must look at how 
Puerto Rico is represented in the process. If Congress passes 
bankruptcy protection with a control board, Congress should 
ensure that such a control board is co-chaired by appointments 
from the Federal Government and the government of Puerto Rico. 
Local democracy must be respected.
    In the long term, we believe the island needs reforms that 
will ensure that Puerto Rico's economy serves its people, debt 
restructuring to allow for economic growth, and accountability 
measures to stave corruption. Currently, 3.5 million Americans 
face a humanitarian crisis. We look forward to working with the 
committee to find a solution to end the crisis, promote 
economic growth, and ensure greater transparency.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. LeCompte follows:]
 Prepared Statement of Eric LeCompte, Executive Director, Jubilee USA 
                                Network
    Thank you Chairman Young, Ranking Member Grijalva and members of 
the committee.
    I am the Executive Director of Jubilee USA--and we represent 
national U.S. religious bodies, congregations and institutions. Our 
founders and member groups range from the U.S. Conference of Catholic 
Bishops to American Jewish World Service to most of the national 
Protestant denominations. We represent 550 faith communities across our 
great country. We focus on how the most vulnerable are impacted by 
global issues such as trade, debt, corruption and taxes.
    We've worked with Congress and successive administrations on global 
debt issues for almost 20 years. Because of the agreements we've 
achieved together, our financial system is more responsible and 
transparent and developing countries have seen over $130 billion in 
debt relief to build schools and medical centers. It is thanks to 
President George W. Bush that in 2005 the cornerstone of U.S. policy on 
debt restructuring and financial accountability was laid, the Multi-
Lateral Debt Relief Initiative (MDRI). Not only did this legislation 
enable innovative financing to countries who need it most for poor 
populations, it also set standards around government accountability and 
public budget transparency.
    In Puerto Rico we partner with religious leaders representing more 
than 95 percent of the island's people. These leaders include the 
Catholic Archbishop of San Juan and the head of Puerto Rico's Bible 
Society. Along with my testimony, I submit an August statement signed 
by all of Puerto Rico's major religious leaders asking Congress to take 
action regarding the crisis in Puerto Rico. I also submit a letter from 
Archbishop Wenski on behalf of the U.S. Conference of Catholic Bishops 
urging Congress to pass bankruptcy protection for the indebted 
territory.

    From a religious perspective, we recognize that this is not simply 
a debt crisis--this is a humanitarian crisis. Consider:

     Nearly 50 percent of Puerto Rico's people live in poverty;

     50 percent of Puerto Rico's children live in homes that 
            receive some form of welfare benefits;

     80 percent of Puerto Rico's children live in high-poverty 
            areas;

     Because pension accounts have been used to pay the debt, 
            government pensions may not have enough funds to meet their 
            obligations by 2020;

     The current unemployment rate in Puerto Rico is over 12 
            percent;

     Over the past decade, 10 percent of the population has 
            left for the U.S. mainland in search of work.

    Like our religious partners on the island, we pray for two things:

    First: long-term solutions to Puerto Rico's economic troubles that 
address the underlying problems that led the island into this mess in 
the first place.

    Second: immediate measures to help Puerto Rico's people who are 
suffering right now.

    This committee has an important role to play in both the short-term 
and the long-term.

    In the short-term, the reality is, Puerto Rico can't cut its way 
out of this crisis. It can't tax its way out of this crisis. There is 
no path to economic growth for Puerto Rico that doesn't include debt 
restructuring.

    Self-imposed austerity in Puerto Rico is already proving harmful 
and counter-productive:

     Funding for law enforcement has dropped 3 years in a row;

     Special education teachers are no longer being paid, 
            directly harming some of the most vulnerable kids on the 
            island;

     200 schools have closed;

     Puerto Rico cut its health spending by $42 million this 
            year. This takes place as the Zika virus now spreads in 
            Puerto Rico.

    These types of measures push more people on the island to leave for 
the U.S. Mainland, which further erodes Puerto Rico's tax base. It's a 
cycle that's only getting worse.
    The good news is that we can solve this crisis in ways that promote 
economic growth and reduce child poverty. A step in this direction is 
enacting bankruptcy protection for Puerto Rico--the same type of 
protection U.S. municipalities have access to. We applaud the efforts 
of Representatives Duffy and Pierluisi for introducing bankruptcy 
legislation. We are grateful to Speaker Ryan for setting a timeline for 
action.

    Our opposition to austerity should not be confused with opposition 
to reform.

    At the root of today's hearing lie the questions, ``How do we 
prevent future debt crises in Puerto Rico and how do we ensure greater 
accountability from Puerto Rico's government? ''
    Part of the answer to this question is that through an orderly debt 
restructuring process we bring the debt back to sustainable, payable 
levels. However, this committee is concerned also with how there is 
more accountability from Puerto Rico's government.
    From the beginning of this crisis, Jubilee USA and its religious 
partners in Puerto Rico called for increased budget transparency and 
accountability in the island's government. We want more citizen 
participation in economic decisionmaking, policies that we've pursued 
successfully on other heavily indebted Caribbean islands and countries 
around the world. To this end, we are pleased with that Puerto Rico's 
audit commission has begun its work.
    We also believe that Congress should make immediately available 
Treasury's Office of Technical Assistance (OTA) to the government of 
Puerto Rico. Because of Puerto Rico's status, it can't access this 
vital expertise from Treasury that helps countries all over the world 
raise revenues, keep their debt stock in order and become more 
accountable to their citizens. This is an easy action Congress can take 
that would show powerful results.
    In terms of the financial control board that this committee is 
looking at today. We've seen this type of fiscal authority utilized 
during other economic crises in the United States. In terms of Puerto 
Rico, the White House has acknowledged the need for some authority and 
Representative Duffy's legislation details how one would be 
constructed. As Congress looks to pass bankruptcy and greater 
accountability provisions, any control board must look at how Puerto 
Rico is represented in the process. If Congress passes bankruptcy 
protection with a control board, Congress should ensure that such a 
control board is co-chaired by appointments from the Federal Government 
and the government of Puerto Rico.
    In the long-run, we believe the island needs reforms that ensure 
Puerto Rico's economy serves its people, debt restructuring that 
invests in economic growth and accountability measures that stave 
corruption--3.5 million Americans face a humanitarian crisis. We look 
forward to working with the committee to find a solution to end the 
crisis, promote economic growth and ensure greater transparency.

    Thank you.

Attachments:

Letter from U.S. Conference of Catholic Bishops to Congress in support 
of legislation granting Puerto Rico access to Chapter 9 bankruptcy 
protection

Statement from Puerto Rico religious leaders calling for solutions to 
the island's debt crisis

                                 *****

                              ATTACHMENTS

           Committee on Domestic Justice and Human 
                                       Development,
                                            Washington, DC,

                                                  December 1, 2015.

United States Senate,
Washington, DC 20510.

    Dear Senator:

    The people of Puerto Rico are suffering from painful poverty and 
hunger, persistent joblessness, and other social problems, as a result 
of the financial crisis gripping the Commonwealth's economy. They bear 
little responsibility for the situation yet suffer most of the 
consequences. Congress can and should remedy this situation by 
advancing the Puerto Rico Chapter 9 Uniformity Act.

    The Compendium of the Social Doctrine of the Church teaches:

        The right to development must be taken into account when 
        considering questions related to the debt crisis of many poor 
        countries . . . Complex causes of various types lie at the 
        origin of the debt crisis, [but] . . . [t]he greatest 
        sufferings, which can be traced back both to structural 
        questions as well as personal behaviour, strike the people of 
        poor and indebted countries who are not responsible for this 
        situation. The international community cannot ignore this fact 
        . . . (No. 450)

    Earlier this year, Pope Francis affirmed this to the General 
Assembly of the United Nations, decrying lending systems that ``subject 
people to mechanisms which generate greater poverty, exclusion and 
dependence.'' Financial instruments should encourage development, not 
deprivation. We all have a shared responsibility to protect our poor 
and vulnerable brothers and sisters around the world.

    The government of Puerto Rico's political status has made it 
difficult to fulfill adequately its obligation to ensure human needs 
are met and advance the common good. Because it is not a sovereign 
nation, it cannot access financial assistance from the International 
Monetary Fund; because it is not a state, federal law exempts it from 
crucial protections in the bankruptcy code. With virtually no other 
option at its disposal currently, Puerto Rico remains at the mercy of 
creditors with seemingly little concern for the pain and suffering 
caused to the people and families of Puerto Rico.
    The Bankruptcy Code explicitly and inexplicably excludes Puerto 
Rico from the definition of `state' for the purpose of seeking 
protection under Chapter 9. The Puerto Rico Chapter 9 Uniformity Act 
would allow the Puerto Rican people, through their government, to take 
greater control of their development and destiny. I encourage you to 
support this legislation.

            Sincerely,

                            Most Reverend Thomas G. Wenski,
                                                          Chairman.

                                  ***

  A CALL FROM THE ECUMENICAL AND INTER-RELIGIOUS COALITION AND OTHER 
   RELIGIOUS LEADERS FOR A JUBILEE FOR PUERTO RICO: THE FISCAL CRISIS

                            AUGUST 31, 2015

Brothers and Sisters,

    Puerto Rico is embroiled in a debt crisis. This crisis further 
threatens nearly half of our people living in poverty. As leaders of 
the faith community, we are concerned about the debt, with the 
consequences defaulting on it and above all with the proposals that 
would reduce wages, layoffs of workers, reducing employee benefits, and 
a reduction in health services. As a society, we cannot allow more 
austerity measures that adversely affect the poor and needy in Puerto 
Rico. Those who lend money at high interest rates knowing that it is a 
heavy burden to the fiscal health of the people have no moral strength 
to demand austerity measures affecting essential services, jobs and 
opportunities of an economic resurgence.

    We know how complicated these issues and their causes are. Our 
country is $72 billion in debt and that represents $20,000 of debt for 
every man, woman and child of Puerto Rico. Not only has the debt 
already impacted our social services, too many of our people are 
fleeing to the United States in search of work. As we struggle, we are 
also concerned with predatory hedge funds which seek to benefit from 
our distress and push our economy to the brink of collapse.

    Today, we look to the Bible for a solution. The solution first 
appears in Leviticus and becomes a central theme in the Gospels. The 
solution is Jubilee:

        ``. . . and you shall consecrate the fiftieth year and proclaim 
        liberty throughout the land to all its inhabitants. It shall be 
        a jubilee for you, when each of you shall return to his 
        property . . .''  (Leviticus 25:10)

    And then reiterated by Christ's first public act in Luke, where he 
said the prophesy of Isaiah to end inequality was fulfilled:

        ``THE SPIRIT OF THE LORD IS UPON ME, BECAUSE HE ANOINTED ME TO 
        PREACH THE GOSPEL TO THE POOR. HE HAS SENT ME TO PROCLAIM 
        RELEASE TO THE CAPTIVES, AND RECOVERY OF SIGHT TO THE BLIND, TO 
        SET FREE THOSE WHO ARE OPPRESSED, TO PROCLAIM THE FAVORABLE 
        YEAR OF THE LORD.''  (Luke 4:18-19)

    Today we too call for a JUBILEE. We call for freedom from debt, for 
relief for our people. As Isaiah and Jesus called, we call for a 
Jubilee for Puerto Rico's people. We are a part of a story bigger than 
just us.

    In the 1990s, religious leaders called for a Jubilee or debt relief 
for developing countries. Those calls ensured that more than $115 
billion in debt relief was won to create access to education and 
healthcare. Now as Puerto Rico faces a debt crisis, as the religious 
community, we raise our voices for Jubilee. Puerto Rico needs debt 
relief and a debt restructuring that invests in Puerto Rico's people.

    As religious leaders we know how deeply this crisis impacts the 
poor and how deeply it impacts all of our people. We ask that the 
following principles guide how this financial crisis is resolved:

  1.  In any solution that is reached, there should be no more 
            austerity policies affecting people and poor families and 
            young people who are the most vulnerable.

  2.  Any solution must create an investment in the Puerto Rican people 
            and seek to grow our economy.

  3.  We need enough debt relief to bring our total debt back to 
            sustainable levels.

  4.  We encourage all solutions that enhance Puerto Rico's laws on 
            budget transparency.

  5.  We seek greater participation in resolving this crisis and 
            working with the government on solutions that protect 
            Puerto Rico's people.

  6.  In addition to the participation of the religious sector, we call 
            for a multi-sectorial participation in which our people are 
            well represented. A representation that also includes the 
            poorest because they are always the most affected.

    We understand that some processes and options typically available 
to indebted governments are not available to ours. Because Puerto Rico 
is not a sovereign country, we can't receive low-interest loans or 
emergency financing from the International Monetary Fund. Because 
Puerto Rico is not a U.S. state or city, we can't access U.S. 
bankruptcy laws. In the absence of Congress extending bankruptcy 
protection to Puerto Rico, we must call for greater involvement from 
the Federal Reserve to act and to arbitrate our debt according to our 
six principles to protect the common good. The Federal Reserve has the 
power to act and should act. The Federal Reserve has the ability to 
restructure our debt in ways that limit austerity and ensure debt 
relief without harmful conditions.

    As we call for a Jubilee for Puerto Rico's people, we call for a 
Jubilee for all people. We call for economies to serve people, not for 
people to serve economies.

    Puerto Rico is not alone in its suffering from debt. Our brothers 
and sisters in the Caribbean are facing high debt burdens and poverty 
rates made worse by increasingly frequent storms. Farther south, 
Argentina continues its standoff with hedge funds that pushed it into 
default as part of a messy debt dispute. Nearly 50 of the world's 
poorest countries face worrying levels of debt distress. We've even 
seen debt and austerity push a third of Greece's population below the 
poverty line. We call for a global bankruptcy process that addresses 
debt crises in every corner of the world, whether they be in the 
Caribbean, Africa or Eastern Europe.

    As people of faith we are called to be present always to the most 
vulnerable among us. As people of faith, we believe that we are closest 
to the Creator when we are sharing God's abundant creation among us. As 
people of faith we pray for an end of poverty and inequality. As people 
of faith, we call for relief and Jubilee for all people.

        Mons. Roberto O. Gonzalez 
        Nieves,                       Rev. Heriberto Martinez Rivera,
        Metropolitan Archbishop of 
        San Juan de Puerto Rico       General Secretary--Bible Society 
                                      of Puerto Rico

        Mons. Ruben Gonzalez Medina 
        CMF,                          Rev. Juan A. Vera Mendez,
        Bishop of Caguas              Emeritus Bishop, Methodist Church 
                                      of Puerto Rico

        Mons. Felix Lazaro 
        Martinez, Sc. P.,             Rev. Rafael Moreno Rivas,
        Bishop of Ponce               Bishop--Methodist Church in P.R.  
                                                President of P.R. 
                                      Council of Churches

        Mons. Alvaro Corrada del 
        Rio, S.J.,                    Rev. Felipe Lozada Montanez,
        Bishop of Mayaguez            Bishop--Evangelic Lutheran Church 
                                      in Puerto Rico

        Mons. Eusebio Ramos 
        Morales,                      Rev. Miguel A. Morales Castro,
        Bishop of Fajardo-Humacao     General Pastor--Christian Church 
                                      (Disciples of Christ) in P.R.

        Rev. Adalberto Rodriguez,     Rev. Edward Rivera Santiago,
        President--Pentecostal 
        Fraternity of Puerto Rico     General Pastor--United 
                                      Evangelical Church of Puerto Rico
        Rev. Roberto Dieppa Baez,     Rev. Hector Soto Velez,
        Executive Minister--Baptist 
        Churches of Puerto Rico       Executive Secretary--Council of 
                                      Churches of Puerto Rico

        Rev. Eunice Santana 
        Melecio,                      Rev. Ricardo Cortes Aleman,
        Director--Caribbean Inst. 
        of Ecumenical Action and 
        Formation                     Missions Director--Defenders of 
                                      the Christian Faith of Puerto 
                                      Rico

        Rev. Ricardo Lopez Ortiz 
        Rev.,                         Esteban Gonzalez Dobles,
        Administrator Bishop--
        Church of God Mission Board 
        of P.R. Church                Former General Pastor--Christian 
                                      (Disciples of Christ) in P.R.


                                 ______
                                 

    Mr. Young. Thank you, sir.
    Mr. Mayer, you are last, but I am not going to say that you 
are best yet. We will see what happens.

STATEMENT OF THOMAS MOERS MAYER, PARTNER, KRAMER LEVIN NAFTALIS 
               & FRANKEL, LLP, NEW YORK, NEW YORK

    Mr. Mayer. Thank you, Chairman Young, Ranking Member Ruiz, 
and the members of the subcommittee for inviting me to testify 
today. My name is Thomas Moers Mayer, and I represent mutual 
funds managed by Franklin Advisers and Oppenheimer Funds that 
collectively own $10 billion of Puerto Rico debt securities. We 
think we are the largest creditors of the island.
    We invest on behalf of hundreds of thousands of individual 
investors. Franklin and Oppenheimer collectively have over 
600,000 shareholders in their municipal bond funds--and 
municipal bond investors, ladies and gentlemen, they are 
individuals. Most Puerto Rican debt is held by individuals, 
including as Representative Pierluisi acknowledged, Puerto 
Ricans themselves both on- and off-island, and these investors, 
they are mostly over 65, and they mostly have an income of less 
than $100,000 a year. They are not vulture funds. They are your 
friends and neighbors, and they are not the problem.
    We believe that a substantial amount of the problem, 
perhaps all of the problem, is found in misgovernment and not 
in investment. The Commonwealth itself fails to collect $2.5 
billion a year in taxes that its own consultants say it has the 
ability to collect. At the governmental corporation level, the 
electric company, PREPA, with which I am quite familiar, it 
sells power to government corporations that do not pay. It pays 
an annual salary to employees for as little as 9 months work, 
and it is run by 200 political appointees.
    A bipartisan authority, a strong authority, can address 
these problems. We would urge that this authority be appointed 
by the President, confirmed by the Senate, and it must be 
acceptable to Puerto Rico. We believe the authority should have 
the power to address the problems that need to be addressed, 
most particularly the power of the purse. Access to Federal 
funds should be conditioned on the authority approval of Puerto 
Rico's budget. That is exactly the setup that applied in the DC 
Control Board.
    With respect to government-operating corporations like the 
electric company, sewer company, and the highway company, these 
are the entities that Chapter 9 applies to. I will come back to 
that. The authority needs to have the power to fix the 
problems, the power to fire and hire and renegotiate contracts, 
restructure pensions, and restructure operations. And when it 
has done that, yes, then we think it should have the power to 
restructure its debt with a majority of the bondholders voting 
in favor, which is I think something the IMF has tried to 
install in the international arena.
    The one power neither the authority nor Puerto Rico should 
have, in our view, is access to Chapter 9. Chapter 9 is a way 
to avoid reforms rather than implement them, and we think it 
causes far more problems than it solves.
    First, it does not help. The crisis that everybody refers 
to is in the general government. Chapter 9 does not apply to 
the general government--and no one that I've heard in Congress, 
including Representative Pierluisi, has suggested that it 
should--because then it would be equivalent to applying Chapter 
9 to a state, which Congress has never done.
    So, with respect to the government corporations that 
Chapter 9 would apply to, let's enumerate the problems. First, 
it does not raise money. Every now and then I hear that 
corporations can go into bankruptcy and they can raise money. 
Well, I have been practicing bankruptcy law a long time, and 
lenders do not lend money in any bankrupt situation unless they 
have collateral. And with respect to the government 
corporations in Puerto Rico, there is no collateral. All the 
money has been pledged to the bondholders.
    The only source of liquidity is a deal with the 
bondholders; and we have such a deal. We have a deal at the 
Puerto Rican Electric Power Authority. We negotiated it months 
ago. It is waiting for legislation in Puerto Rico to be 
effectuated. There was a liquidity problem at the Puerto Rican 
Electric Power Authority, and we fixed it. We loaned the money. 
We suggest that as a template for how to deal with Puerto 
Rico's other governmental corporations.
    Chapter 9 does not implement reforms. I ask you to compare 
the experience of the District of Columbia with the city of 
Detroit. The District of Columbia, actually there was a 
consideration of giving DC Chapter 9. It is in their 
congressional reports, and it was debated. And Congress said 
no, Chapter 9 does not fix problems. So they established a 
control board, and the control board did what needed to be 
done. It cut the size of government. It eliminated the deficit, 
turned it to surplus, brought the bonds back to investment 
grade. The private sector flourished, and the results you have 
today, the District is an AA-rated entity.
    Now let's take a look at Detroit, which some people like to 
mention as a success. Detroit went into Chapter 9, and it used 
Chapter 9 to crush its bondholders, to largely isolate the 
pensions from any change. It went into Chapter 9 with 28 city 
agencies, and it came out of Chapter 9 with 28 city agencies. 
And as a result today, despite what you may have heard, Detroit 
has no access to municipal finance. It can only borrow through 
the state of Michigan. Detroit's own paper trades at 23 cents 
on the dollar.
    Like Detroit, Puerto Rico has a gross abundance of 
government agencies. It has 120 government agencies, which one 
of the witnesses testified he could not fix. If you give 
Chapter 9 to Puerto Rico, it will not reduce this problem. And 
unlike Detroit, Puerto Rico does not have Michigan. It has the 
Federal Government. If you give it Chapter 9, it is going to be 
back. My people have been investing in Puerto Rico for 30 
years. We would like to invest for another 30 years. We are not 
short-term players. We look forward to working with this 
committee to craft a solution that works for everyone. Thank 
you.
    [The prepared statement of Mr. Mayer follows:]
    Prepared Statement of Thomas Moers Mayer, Partner and Co-Chair, 
 Corporate Restructuring and Bankruptcy Group, Kramer Levin Naftalis & 
                       Frankel, LLP, New York, NY
    Chairman Young, Ranking Member Ruiz, and members of the 
subcommittee--thank you for inviting me to testify on the Need for the 
Establishment of a Puerto Rico Financial Stability and Economic Growth 
Authority, which I will refer to as an ``Authority.''
    My name is Thomas Moers Mayer.\1\ I have spent the better part of a 
decade working on municipal insolvencies and observing how municipal 
insolvencies work in and out of bankruptcy, and I have spent the last 
year examining the Commonwealth's fiscal situation and economy in light 
of its claim that it cannot pay its bondholders.
---------------------------------------------------------------------------
    \1\ I am a partner and co-chair of the Corporate Restructuring and 
Bankruptcy Group at Kramer Levin Naftalis & Frankel, LLP. See Exhibit 
A. I am also a member of the National Bankruptcy Conference (the 
``NBC''), which provided its own statement in support of a predecessor 
to H.R. 870. I was not a signatory to the NBC's statement and abstained 
from a vote on it. My testimony today is not on behalf of the NBC, 
which has not reviewed it.
---------------------------------------------------------------------------
    I offer that experience and my views today on behalf of my clients, 
certain funds managed by Franklin Advisers (``Franklin'') and by 
OppenheimerFunds, Inc. (``Oppenheimer'') in connection with their 
investment in approximately $10 billion of bonds issued by the 
Commonwealth of Puerto Rico and most of its 16 governmental 
corporations.
                      who invests in puerto rico?
    Franklin and Oppenheimer have for many years been two of the 
largest investors in bonds issued by Puerto Rico and its governmental 
corporations; to the best of my knowledge, my clients collectively 
constitute the largest holders of Puerto Rico bonds.
    Franklin and Oppenheimer are mutual funds who invest on behalf of 
hundreds of thousands of retail investors. Franklin alone has 
approximately 200,000 investors in the funds that own bonds issued by 
Puerto Rico and its government corporations; Oppenheimer has over 
400,000 individual investors in its municipal bond funds, most of which 
hold Puerto Rico bonds.
    These bondholders are individual savers who receive tax-exempt 
income derived from Puerto Rico municipal bond holdings. Most tax 
returns showing tax-exempt income are filed by taxpayers over 65 \2\ 
and most report incomes under $100,000.\3\ The average investment in 
one of Oppenheimer's funds is $50,000.
---------------------------------------------------------------------------
    \2\ Statistics of Income, 2013 Individual Income Tax Returns, Publ. 
1304, U.S. DEP'T OF THE TREASURY, INTERNAL REVENUE SERVICE, Table 1.5 
at 81 (2013), https://www.irs.gov/pub/irs-soi/13inalcr.pdf (hereinafter 
``IRS Publ. 1304'').
    \3\ Id. Table 1.4 at 43.
---------------------------------------------------------------------------
    These people live on Main Street, not Wall Street.\4\ These 
investors are ordinary people who invest for retirement and for their 
children's education. They are taxpayers who want to buy tax-free 
bonds. Indeed, about 9.5 million U.S. taxpayers invest in municipal 
bonds to get tax-free income, either directly or through funds like 
Franklin's and Oppenheimer's.\5\
---------------------------------------------------------------------------
    \4\ The ``household sector'' held almost 42% of all municipal bonds 
as of September 30, 2015. Federal Reserve Statistical Release Z.1, 
Financial Accounts of the United States, Flow of Funds, Balance Sheets, 
and Integrated Macroeconomic Accounts, Third Quarter 2015, Bd. of 
Governors of the Fed. Reserve Sys. 101 (Dec. 10, 2015), http://
www.federalreserve.gov/releases/z1/current/z1.pdf. Mutual funds 
together held an additional 19%. Id.
    \5\ In 2013, 5,987,263 tax returns reported tax exempt income, 
comprised of 3,556,447 tax returns from married couples filing jointly, 
or 7,112,894 individuals, and 2,430,817 other individual tax returns, 
for a total of 9,543,711 individuals. IRS Publ. 1304, supra note 2, 
Table 1.3 at 40.
---------------------------------------------------------------------------
    Puerto Rico is the only large issuer whose bonds are tax-free in 
every state of the union,\6\ and it is likely that most municipal 
bondholders (or fund holders) hold, directly or indirectly, Puerto Rico 
bonds.
---------------------------------------------------------------------------
    \6\ See 48 U.S.C. Sec. 745.
---------------------------------------------------------------------------
    These investors bought their bonds after Congress expressly 
excluded Puerto Rico from using Chapter 9. My own clients--on behalf of 
more than half a million investors--bought their bonds in reliance on 
Puerto Rico's exclusion from Chapter 9.
    How Congress decides to address Puerto Rico's fiscal situation 
could directly impact millions of Americans in every state of the Union 
and the Commonwealth of Puerto Rico. Indeed, it is probable that more 
citizens invest in Puerto Rico bonds than still live in Puerto Rico.
    Finally, it is important to remember that many Puerto Ricans invest 
in Puerto Rican bonds. We estimate that $15 billion of Puerto Rico 
bonds were purchased by Puerto Ricans. These are Puerto Rico's own 
hardworking citizens who pay Puerto Rico taxes \7\--or they are former 
residents of Puerto Rico who have moved to the mainland and depend on 
the bonds of their native Commonwealth for income.
---------------------------------------------------------------------------
    \7\ As discussed below, Puerto Ricans do not pay Federal income 
tax, but they do pay the Federal Insurance Contributions Act tax.
---------------------------------------------------------------------------
    These Puerto Rican investors, like mainland investors, bought their 
bonds after Puerto Rico was excluded from Chapter 9.
    It is these on-island and mainland investors whose money has gone 
to build and operate Puerto Rico's firehouses, police stations, 
schools, sewer and water systems, highways, convention center and 
electrical plants. It is these investors, on-island and mainland, who 
have been champions of Puerto Rico and have interests that align with 
those of the people of Puerto Rico in seeing the Commonwealth thrive 
over the long-run.
    And it is these individual, retail investors who Puerto Rico needs. 
Puerto Rico needed their investment in the past and Puerto Rico will 
need their investment in the future. Puerto Rico needs to raise 
billions of dollars for new electrical plants to meet air pollution 
regulations, for new water lines to avoid droughts in San Juan, for new 
sewer lines to meet water quality requirements, for maintenance of 
highways and bridges, for ordinary short term financing that every 
government needs to finance expenses between one tax collection cycle 
and the next.
    A municipality that forces a restructuring on its bondholders will 
be locked out of the market for low-cost investment grade municipal 
bonds.\8\ Thus, harming Puerto Rico's investor base as part of a 
restructuring will only make Puerto Rico's recovery harder, if not 
impossible, by shutting Puerto Rico out of the normal low-cost 
investment grade municipal bond market. It will leave Puerto Rico no 
recourse except to lenders who charge extraordinarily high rates to 
compensate for risk, or--in the end--the U.S. Treasury. It will also 
have a negative effect on the value of the $15 billion in Puerto Rico 
debt owned by on-island investors, leading to less money spent in the 
economy.
---------------------------------------------------------------------------
    \8\ See, e.g., Ratings Methodology: U.S. Local Government General 
Obligation Debt, MOODY'S INVESTORS SERVICE 21 (Jan. 15, 2014) 
(considering defaults or ``government's willingness and/or ability to 
meet financial obligations'' as a factor in methodology for rating U.S. 
local government general obligation debt).
---------------------------------------------------------------------------
    The only way to assure the Main Street retail investors who have 
entrusted their savings to Puerto Rico in the past that they can do so 
in the future is the creation of a strong, independent and federally 
appointed Authority.
                        the problem to be solved
    The Commonwealth blames its problems on the individual retail 
investors who trusted the Commonwealth with their money. We submit that 
the Commonwealth created its own problems through over-optimistic 
revenue forecasting when budgeting, an economy with too much government 
and too little private enterprise, and poor management of public 
resources.

    Consider:

     KPMG, the Commonwealth's own consultant, estimates that 
            the Commonwealth could have obtained an additional $2.5 
            billion in revenue each year by improving tax collections 
            and simplifying its tax structure.\9\ This problem, again, 
            is not new--it was highlighted in a 2006 report by the 
            Brookings Institution.\10\
---------------------------------------------------------------------------
    \9\ See excerpts from KPMG, Unified Tax Code of Puerto Rico: Tax 
Policy Implementation Options Executive Summary (Oct. 31, 2014), 
available at http://www.hacienda.gobierno.pr/sites/default/files/
unified_tax_code_of_pr_executive_summary_0.pdf (attached hereto as 
Exhibit B) (hereinafter the ``KPMG Report'').
    \10\ James Alm, Assessing Puerto Rico's Fiscal Policies, in 
RESTORING GROWTH IN PUERTO RICO: OVERVIEW AND POLICY OPTIONS 71 (Susan 
M. Collins et al. eds. 2006) (hereinafter ``RESTORING GROWTH IN PUERTO 
RICO'').

     KPMG likewise reports that the Commonwealth collects only 
            56 percent of its sales and use taxes.\11\
---------------------------------------------------------------------------
    \11\ See excerpts from KPMG Report, supra note 9 (attached hereto 
as Exhibit B).

     The Commonwealth's funding gap is in material part due to 
            municipal subsidies. These are required because 
            municipalities base their property taxes on assessed 
            valuations from the 1950s.\12\
---------------------------------------------------------------------------
    \12\ Anne O. Krueger, et al., Puerto Rico--A Way Forward, 20 (July 
13, 2015), available at http://www.bgfpr.com/documents/
FinalUpdatedReport7-13-15.pdf (hereinafter ``Krueger Report'').

     The Commonwealth has failed to file audited financial 
---------------------------------------------------------------------------
            statements for 2 years.

    Similar problems arise at the level of governmental corporations. 
The Puerto Rico Electric Power Authority, or PREPA, provides the best 
example.

     PREPA bills governmental corporations for power but 
            historically has not collected what it is owed.\13\
---------------------------------------------------------------------------
    \13\ Accounts Receivable and CILT Report, FTI Capital Advisors, 
LLC, 16 (Nov. 15, 2014), http://www.aeepr.com/Docs/restructuracion/
PREPA%20AR%20and%20CILT%20Report%20Final.pdf.

     PREPA allows private customer bills to go unpaid for 
            months before shut-off--and then instantly re-connects on 
            payment without an adequate security deposit, effectively 
            giving its customers months and months of credit. As of 
            January 2015, PREPA suffered a 6 percent theft rate--the 
            highest of any utility in the United States.\14\
---------------------------------------------------------------------------
    \14\ Id. at 45, 49; Siemens PTI Report Number R054-15, Integrated 
Resource Plan, Addendum I: Losses Considerations (July 15, 2015), 
available at http://www.aeepr.com/Docs/Ley57/
PREPA%20IRP%20Addendum%20I%20%E2%80%93%20Draft%20for%20PREC%20review%20-
% 20July%207-2015%20-%20Losses%20Consideration.pdf.

     PREPA's current labor contract allows employees to get a 
            year's pay for 9 months of work, and an employee earns 
            overtime for more than 8 hours on any day even if the 
            employee works less than 40 hours a week.\15\
---------------------------------------------------------------------------
    \15\ Krueger Report, supra note 12, at 18; Collective Bargaining 
Agreement Between PREPA and the Union of Electrical and Irrigation 
Industry Workers of Puerto Rico (Aug. 24, 2008), available at http://
www.utier.org/Contenido/CONVENIOFINALWEB.pdf. Employees receive 30 paid 
vacation days, 19 paid sick days and 20 paid holidays, for a total of 
69 paid days off each year. Id. Assuming there are 260 working days in 
a year, PREPA employees accrue paid time for approximately 25%, or 
about 3 months, of each year. Unused vacation days can be carried over 
for a year; sick days can be accumulated and carried over from year to 
year without limit. Id.

     PREPA's 200 top managers are politically appointed and 
            change with every administration.\16\
---------------------------------------------------------------------------
    \16\ Hearing Before the Puerto Rico Senate Committee on Energy 
Matters and Water Resources (Apr. 14, 2015) (Testimony of Lisa Donahue, 
Chief Restructuring Officer of PREPA).

     According to publicly filed contracts, PREPA plans to 
            dramatically over-pay for solar and wind--buying such power 
            at an average cost of about 17 cents per KwH,\17\ greatly 
            in excess of PREPA's average cost of producing additional 
            power at 11.33 cents per KwH in 2016 \18\ and double the 
            8.6 cents which Lazard estimates is the levelized cost of 
            utility-scale solar power nationwide.\19\
---------------------------------------------------------------------------
    \17\ C. Kunkel et al., Opportunity for a New Direction for Puerto 
Rico's Electric System, INSTITUTE FOR ENERGY ECONOMICS AND FINANCIAL 
ANALYSIS (Sept. 10, 2015), available at http://ieefa.org/wp-content/
uploads/2015/09/Opportunity-for-A-New-Direction-for-Puerto-Ricos-
Electric-System-Sept-10-2015.pdf.
    \18\ See PREPA, PREPA's Transformation: A Path to Sustainability, 
9, as set forth in PREPA Public Disclosure (July 22, 2015), available 
at http://emma.msrb.org/ER906457-ER708173-ER1109700.pdf. PREPA's July 
2015 report estimated the 11.33 cents cost of buying additional power 
based on current and currently projected natural gas and oil prices. 
The IEEFA's September 2015 Report, although issued 2 months later, used 
2014 natural gas and oil prices (more than twice as high) to support 
IEEFA's conclusion that renewable power is cheaper than conventional 
power.
    \19\ LAZARD, Levelized Cost of Energy Analysis--Version 8.0, 2 
(2014), available at www.lazard.com/media/1777/
levelized_cost_of_energy_-_version_80.pdf.

    These facts illuminate why PREPA is a poster child for the creation 
of a strong Authority. First, a strong authority could provide a 
credible assessment of PREPA's financial condition that could provide 
the basis for reforms. Second, a strong authority could enact the 
reforms that so far the Commonwealth and its municipalities have 
refused to adopt.
               a strong authority can fix these problems
    In light of the Puerto Rico government's inability to manage its 
profound fiscal and operational problems, Congress should consider 
establishing an Authority for Puerto Rico based on what Congress did 
with a control board for the District of Columbia back in the 1990s, 
when the District of Columbia had its financial problems. Many 
observers agree that the control board which Congress created for the 
District of Columbia was instrumental in the District's dramatic 
revitalization that is evident today.
    Moreover, I would note that, when Congress examined legislative 
proposals to help the District of Columbia in the 1990s, opting for a 
control board, it also considered permitting the District of Columbia 
to access Chapter 9--but it expressly rejected that option because it 
found that:

        [T]he Bankruptcy Code as it stands is neither intended to nor 
        designed to promote judicial restructuring of a municipal 
        government that suffers chronic, structural budget deficits. . 
        . . Unlike a Control Board, the [Bankruptcy] Court provides no 
        mechanism for acquiring independent financial expertise 
        services. Nor can it provide legally binding guidance to the 
        debtor on administrative or structural reform.\20\
---------------------------------------------------------------------------
    \20\ District of Columbia Financial Responsibility and Management 
Assistance Act of 1995, H.R. Rep. No. 104-96, at 17 (1995).

    If Congress were to create an Authority for Puerto Rico and also 
grant Chapter 9 for Puerto Rico, Chapter 9 would not only: (1) 
undermine the rule of law and result in a bailout of Puerto Rico on the 
backs of well over a million U.S. taxpayers throughout the mainland 
(and Puerto Rico) who are retail investors in Puerto Rico bonds, but 
also (2) undermine the reforms hoped to be achieved through an 
Authority, as Puerto Rico could simply repudiate its debts through 
bankruptcy, thereby alleviating the political imperative to implement 
tough reforms recommended by the Authority.
    A strong Authority provides the best chance to fix the problems of 
Puerto Rico and its governmental corporations. The Authority should 
have a small number of board members--I suggest 5--because the smaller 
the board the stronger it will be.
    A strong Authority must have board members from both Puerto Rico 
and the mainland that are acceptable to both Congress and Puerto Rico. 
The board should be bipartisan, appointed by the President and 
confirmed by the Senate, have experience in municipal finance and 
inspire the trust and confidence of Puerto Rico's creditors.
    The board members will be asked to work long and hard on the 
problems of Puerto Rico. Their terms should be several years because 
Puerto Rico's problems will not be solved quickly. Further, board 
members should be compensated so that the Authority obtains the 
committed service of the most serious, experienced and best people--and 
Congress should seek out members who are preferably fluent in Puerto 
Rico's two official languages, English and Spanish, to help ensure 
effective communication with both Congress and the people of Puerto 
Rico.
    The Authority should retain an executive director of unquestioned 
competence, stature and dedication, and the Authority should have the 
resources to hire committed, experienced, knowledgeable and bilingual 
financial professionals.
    The powers of the Authority should be broad and must include the 
power of the purse, but they need not trespass on the sovereignty of 
the Commonwealth.
    The U.S. Treasury already funds billions of dollars to Puerto Rico 
every year and the Commonwealth is asking for more--more Medicaid and 
Federal credit support. The continuation of, or increase in, any 
support from the Federal Government can be conditioned on the 
Authority's approval of the Commonwealth's budget on a yearly basis--
just as the District of Columbia Control Board's approval was required 
for the District to have access to Federal funding.
    With respect to the Commonwealth's government corporations, the 
Authority should have the same power that Michigan had over Detroit and 
has over its other cities: the appointment of a manager with power to 
hire, fire, reject and renegotiate contracts, revise work rules, and 
restructure pensions.\21\
---------------------------------------------------------------------------
    \21\ See generally 2012 Mich. Pub. Act 436, the Local Financial 
Stability and Choice Act.
---------------------------------------------------------------------------
    A strong Authority can bring expenditures under control. I cite the 
financial problems and recovery of New York City in the mid to late 
1970s as the largest example. New York's budget had ballooned in the 
1960s and 1970s as government grew bigger and bigger.\22\
---------------------------------------------------------------------------
    \22\ See Exhibit C.
---------------------------------------------------------------------------
    Only outside intervention brought New York City's budget under 
control. Everyone remembers New York State's imposition of the 
Municipal Assistance Corporation, which to this day ensures that the 
City keeps its books in accordance with Governmental Accounting 
Standards. Fewer people remember that the U.S. Treasury also exercised 
oversight over New York--there was a special office created in 
Washington to deal with New York City.\23\
---------------------------------------------------------------------------
    \23\ MARTIN SHEFTER, POLITICAL CRISIS FISCAL CRISIS: THE COLLAPSE 
AND REVIVAL OF NEW YORK CITY 134, 151 (Columbia Univ. Press Morningside 
ed. 1992).
---------------------------------------------------------------------------
    The oversight was effective, its results well known. New York City 
brought its labor costs under control, cut the size of its government 
and set the stage for an economic recovery.
    More recently, the District of Columbia Control Board, with Anthony 
Williams as chief financial officer and later mayor, brought the 
District from deficit and fiscal crisis to surplus in less than 2 
years.\24\
---------------------------------------------------------------------------
    \24\ See ALICE RIVLIN, ET AL., BUILDING THE BEST CAPITAL CITY IN 
THE WORLD, A REPORT BY DC APPLESEED AND OUR NATION'S CAPITAL 109 
(2008), http://www.brookings.edu//media/Research/Files/Reports/2008/
12/18-dc-revitalization-garrison-rivlin/appendix.pdf (hereinafter the 
``BROOKINGS REPORT'') (attached hereto as Exhibit D).
---------------------------------------------------------------------------
    The Authority's role should not be permanent. Just as with the 
District of Columbia Control Board, the Authority's control should 
expire upon a congressionally approved determination of success, which 
should include, among other factors, access to short and long term 
capital markets at reasonable rates, a balanced budget for a few years 
in a row, and audited, credible financial statements.
    Only after maximum operational changes have been made and maximum 
operational savings have been achieved, and only if debt restructuring 
is still necessary, the manager could then have the power to negotiate 
and implement a restructuring with the vote of two-thirds of the debt 
to be restructured.
    Finally, it is critical that neither the Authority nor Puerto Rico 
have the authority to authorize Chapter 9 filings because Chapter 9 in 
its current form allows municipal debtors to do as little possible by 
paying creditors as little as possible.
    Chapter 9 used to give creditors a vote--indeed, prior to 1978, it 
required agreement by a majority of bonds to even begin a case \25\--
but the 1978 statute reduced the vote to a formality. So long as a 
Chapter 9 plan has been accepted by one class of creditors, no matter 
how small, it can be confirmed over the objection of all other 
creditors, no matter how large or how many.\26\
---------------------------------------------------------------------------
    \25\ Section 83(a) of the Bankruptcy Act of 1898, as amended by The 
Municipal Bankruptcy Act of 1937, Pub. L. No. 302, 50 Stat. 652 (1937) 
(codified at 11 U.S.C. Sec. 403(a) (1970)).
    \26\ 11 U.S.C. Sec. 901(a) (incorporating Sec. 1129(a)(10)). 
Chapter 9 also allows debtors to classify disparate creditors together, 
even if the results will be inequitable. In Stockton's bankruptcy case, 
unsecured bond claims were classified with the much larger retiree 
medical claims, even though retiree medical claimants could also look 
to a spouse's insurance, the Affordable Care Act, and their pension 
claims, which were being paid in full. See In re City of Stockton, 
Cal., 526 B.R. 35, 62 (Bankr. E.D. Cal. 2015) aff'd in part, dismissed 
in part, 542 B.R. 261 (B.A.P. 9th Cir. 2015).
---------------------------------------------------------------------------
    Chapter 9's other requirements--that the plan be ``fair and 
equitable,'' ``not discriminate unfairly'' and be ``in the best 
interests of creditors''--provide little protection to creditors,\27\ 
who do not even have the ability to propose their own plan.\28\
---------------------------------------------------------------------------
    \27\ In Detroit's bankruptcy case, In re City of Detroit, Mich., 
524 B.R. 147 (Bankr. E.D. Mich. 2014), Bankruptcy Judge Rhodes held 
that paying one group of bondholders 13 cents while pensioners received 
59-60 cents was not ``unfair discrimination'' because it did not offend 
``the judgment of conscience,'' including ``the Court's experience and 
sense of morality.'' This standard--which had never before been applied 
to ``unfair discrimination''--allowed the court to confirm the plan 
irrespective of the bondholder vote. Id. at 253, 256-58.

    The ``best interests of creditors'' test also does little to 
protect creditors. In the Detroit case, Judge Rhodes further held that 
the plan was in the best interests of creditors because bondholder 
remedies would not yield a better result outside of bankruptcy. City of 
Detroit, 524 B.R. at 213-17. Precedent under old Chapter IX required a 
municipality to do what it could to pay creditors. See Fano v. Newport 
Heights Irrigation District, 114 F.2d 563, 565-66 (9th Cir. 1940).
    \28\ 11 U.S.C. Sec. 941.
---------------------------------------------------------------------------
    Once in Chapter 9, the Bankruptcy Code bars the court from ordering 
the municipality to do anything \29\--the municipality cannot be 
compelled to cut its costs, raise its revenues, collect its taxes, 
renegotiate its contracts, restructure its pensions, reform its 
budgets, anything. The only thing a court can do is dismiss the case.
---------------------------------------------------------------------------
    \29\ 11 U.S.C. Sec. Sec. 903-904.
---------------------------------------------------------------------------
    So the argument often heard, that Chapter 9 ``builds consensus,'' 
is fake. A municipality is free to make minimal operational changes, 
cut a deal with one favored class of creditors, and tell all other 
classes that their votes mean nothing. The only remedy that creditors 
have in Chapter 9, and the only power a court has with respect to the 
municipal debtor, is to get out of Chapter 9.
    No matter how strong the Authority or its emergency managers, the 
availability of Chapter 9 or any compulsory debt restructuring reduces 
the incentive of any government to enact real reforms, will cut access 
to the capital markets and inevitably lead the Commonwealth and its 
governmental corporations returning to Congress for financial 
support.\30\
---------------------------------------------------------------------------
    \30\ Some witnesses have predicted that governmental corporations 
can obtain ``debtor in possession'' or ``DIP'' financing in a Chapter 9 
bankruptcy case. There is no basis for this prediction. No private 
sector lender makes a DIP unless secured by a first lien on collateral. 
The government corporations cannot grant such a lien because most of 
them have already pledged all their collateral to existing bondholders. 
Therefore, if Puerto Rico's government corporations were given access 
to Chapter 9, any bankruptcy case would be like General Motors and 
Chrysler--the only entity that would provide DIP financing would be the 
U.S. Government.
---------------------------------------------------------------------------
            chapter 9 would hinder, not help, the authority
    A comparison of the District of Columbia (which had a control board 
but no access to bankruptcy via Chapter 9), with Jefferson County, 
Alabama (Chapter 9, no control board) and the city of Detroit (Chapter 
9, 18-month emergency manager \31\) shows why a strong control board is 
required and why Chapter 9 is an impediment to required reform.
---------------------------------------------------------------------------
    \31\ The statute providing for the appointment of Detroit's 
emergency manager gave the manager a term of 18 months.
---------------------------------------------------------------------------
    The District of Columbia Control Board closed D.C. General Hospital 
over the objections of the D.C. City Council because the District had 
to cover deficits of $90 million--and because a local system of clinics 
and hospitals could provide better and less expensive medical care for 
residents.
    By contrast, there was no control board for Jefferson County, 
Alabama. Jefferson County's Cooper-Green Medical Center was costing the 
county $10 million a year to employ over 528 staff with fewer than 38 
patients, even though it had 100 available beds.\32\ The world-class 
University of Alabama/Birmingham Hospital is literally across the 
street with capacity to take Cooper-Green's patients. It took years--
including 2 years in Chapter 9--for the County Commissioners to 
transition Cooper Green to an urgent care clinic.\33\
---------------------------------------------------------------------------
    \32\ See Barnett Wright, Dr. Sandral Hullett of Cooper Green 
Hospital, Among 210 Who Received Lay Off Notices, THE BIRMINGHAM NEWS 
(Dec. 20, 2012), http:/blog.al.com/spotnews/2012/
dr_sandral_hullett_ceo_of_coop.html; B. Wright, Cooper Green Ending 
Inpatient, Emergency Room Services, THE BIRMINGHAM NEWS (Dec. 12, 
2012), http://blog.al.com/spotnews/2012/
12cooper_green_mercy_hospital_to_2.html.
    \33\ Id.

---------------------------------------------------------------------------
    Detroit had similar problems when it resorted to Chapter 9.

    Kevyn Orr, the emergency manager appointed by Governor Snyder, had 
an 18-month term to solve a range of problems.\34\ Orr cut debt service 
and moved retiree medical benefits off the City's budget and onto the 
Federal Government through the Affordable Care Act, but he made minimal 
cuts to pension--zero reduction in current benefits for police and 
fire,\35\ a 4.5 percent cut for general employees,\36\ and he allowed 
the City to adopt some of the same questionable practices that led to 
pension underfunding in the first place.
---------------------------------------------------------------------------
    \34\ Mr. Orr ended up serving as Detroit's emergency manager from 
his appointment on March 2013 until Detroit emerged from bankruptcy in 
December 2014. Della Cassia, Emergency Manager Kevyn Orr Steps Down as 
Detroit Emerges From Bankruptcy, PBS Newshour (Dec. 12, 2014), http://
www.pbs.org/newshour/rundown/emergency-manager-kevyn-orr-steps-detroit-
emerges-bankruptcy.
    \35\ The cost of living adjustment was eliminated for police and 
fire retirees.
    \36\ Chris Christoff, Detroit Pension Cuts from Bankruptcy Prompt 
Cries of Betrayal, BLOOMBERG (Feb. 2, 2015), http://www.bloomberg.com/
news/articles/2015-02-05/detroit-pension-cuts-from-bankruptcy-prompt-
cries-of-betrayal.
---------------------------------------------------------------------------
    Detroit's pension problems are far from solved. Detroit's plan put 
in place a 10-year moratorium on pension funding, but Detroit must make 
yearly payments thereafter. Recent projections show that the balloon 
payment due in 2024 has risen to $195 million, approximately 71 percent 
higher than the $114 million originally projected.\37\ Even former 
Bankruptcy Judge Rhodes, now a consultant to the Puerto Rico 
government, who confirmed the City's plan of adjustment, has admitted 
that Detroit's bankruptcy was a ``missed opportunity'' for greater 
pension reform.\38\
---------------------------------------------------------------------------
    \37\ See Matthew Dolan et al., $195M pension payment might derail 
Detroit's Recovery, DETROIT FREE PRESS (Nov. 15, 2015), http://
www.freep.com/story/news/local/detroit-bankruptcy/2015/11/14/detroit-
pension-balloon-payment-estimated-195m/75657200.
    \38\ Id.
---------------------------------------------------------------------------
    Lingering pension issues are one of many reasons that even now, 
over a year after Detroit emerged from bankruptcy, Detroit has no 
access to the low-cost ordinary municipal market. Detroit as an issuer 
still has a junk credit rating. Its new unsecured notes, issued under 
its bankruptcy plan, trade at around 23 cents on the dollar. Following 
its bankruptcy, Detroit has been able to access the credit markets only 
through secured debt issued by a State of Michigan entity secured by 
income tax revenues that the City never touches.\39\ Puerto Rico has no 
entity to enable it to access the credit markets other than the U.S. 
Treasury.
---------------------------------------------------------------------------
    \39\ See Michigan Finance Authority Offering Memorandum for Local 
Government Loan Program Revenue Bonds, Series 2014F (City of Detroit 
Financial Recovery Income Tax Revenue and Refunding Local Project 
Bonds) (Dec. 10, 2014).
---------------------------------------------------------------------------
    By contrast, the D.C. Control Board was able to restore the 
District's access to the markets. By 2001, all three major rating 
agencies deemed the District's bonds investment grade.\40\ One of my 
clients, Franklin Advisers, was an early investor in bonds issued by 
the District under the Control Board. Standard & Poor's now rates the 
District at AA--several notches above investment grade.
---------------------------------------------------------------------------
    \40\ D.C.'s general obligation bonds were rated below investment 
grade in 1995; starting in 1998, as a result of the District's 
financial turnaround, the rating agencies began steadily increasing the 
ratings. See U.S. General Accounting Office, Testimony Before the 
Subcommittee on the District of Columbia, Committee on Government 
Reform, House of Representatives and Subcommittee on Oversight of 
Government Management, Restructuring and the District of Columbia, 
Committee on Governmental Affairs, U.S. Senate, ``District of Columbia: 
Oversight in the Post-Control Board Period'' 6 (June 8, 2001), http://
www.gao.gov/assets/110/108870.pdf.
---------------------------------------------------------------------------
    Orr made no structural changes to the Detroit government. The City 
exited Chapter 9 with the same 28 government agencies it had when it 
entered bankruptcy.\41\ Note that Puerto Rico has at least 120 
government agencies and 78 municipalities for an island with 3.5 
million people.\42\
---------------------------------------------------------------------------
    \41\ City of Detroit--Expert Witness Report of Stephen J. Spencer 
(July 2014).
    \42\ Annual Estimates of the Resident Population: April 1, 2010 to 
July 1, 2015, U.S. CENSUS BUREAU (Jan. 22, 2016, 10:15 PM), http://
factfinder.census.gov/faces/tableservices/jsf/pages/
productview.xhtml?pid=PEP_2014_PEPANNRES&src=pt; Agency Directory, 
PR.GOV (Jan. 24, 2016, 12:30 PM), http://www2.pr.gov/Directorios/ 
Pages/DirectoriodeAgencias.aspx; Steven J. Davis & Luis A. Rivera-
Batiz, The Climate for Business Development and Employment Growth, in 
RESTORING GROWTH IN PUERTO RICO, supra note 10, at 57.
---------------------------------------------------------------------------
    By contrast, Mayor Anthony Williams and the D.C. Control Board 
focused on reducing government, collecting (not raising) taxes and 
attracting private sector employers to the District. The comparison of 
the District of Columbia with Puerto Rico is instructive. Puerto Rico's 
collection rates are extremely low:

        Some analysts estimate that uncollected personal income taxes 
        amounted to 29.7 percent of actual income tax revenues in 1987 
        and 24.9 percent of tax revenues in 1992.\43\
---------------------------------------------------------------------------
    \43\ James Alm, Assessing Puerto Rico's Fiscal Policies, in 
RESTORING GROWTH IN PUERTO RICO, supra note 10, at 71.

    The District recognized the importance of improving collections as 
---------------------------------------------------------------------------
a fundamental part of its turnaround:

        In addition to strictly managing expenditures, the District's 
        growth in revenue generation since FY 1997 is a striking 
        success. Total tax revenue grew by 92 percent and gross 
        revenues increased almost 53 percent from FY 1997 to 2007. The 
        District took three important steps to make this possible: (1) 
        DC made improvements to its current revenue collection 
        capacity; (2) it improved its overall financial health, and, 
        thus, its capacity to generate revenue, especially through the 
        real estate market; and (3) it developed cautious estimates of 
        future revenues.\44\
---------------------------------------------------------------------------
    \44\ THE BROOKINGS REPORT, supra note 24, at 113.

    The contrasting experiences of Detroit and DC provide valuable 
instruction on the benefits of employing a strong control board to 
address the Commonwealth's problem and the dangers of resorting to 
Chapter 9.
                               conclusion
    Puerto Rico's problem in a nutshell is that its private sector 
employs too low a percentage of working-age citizens, its public 
resources are mismanaged and its government employs too great a 
percentage of its working-age citizens. The Commonwealth's cry of 
``humanitarian crisis'' is nothing more than a plea for third parties--
bondholders through cuts to debt service, the Federal Government 
through loans, grants or subsidies--to maintain the size of an un-
maintainable and poorly managed government, to fund the patient's 
illness, not to cure it.
    If Puerto Rico is to survive and flourish, it must create an island 
economy where the private sector generates income for its citizens and 
supports its own government. Supporting or increasing government 
expenditures will not work. Cutting debt service to maintain government 
spending will not work. A strong Authority which reduces government, 
enhances management of public resources and supports the private sector 
has a chance of doing so--as it did in DC and New York City. Any other 
solution leads the Commonwealth, as it led General Motors and Chrysler, 
back to the Federal Government for cash the private markets will no 
longer supply. In addition to eliminating access to private markets, 
access to Chapter 9 would hurt individual investors--the very people 
who were willing to invest in Puerto Rico's infrastructure and 
development in the first place.

                                  ***

[Attachments to Mr. Mayer's Prepared Statement (Exhibits A-D) are not 
included in the printed hearing. These documents are included in the 
hearing record and are being retained in the Committee's official 
files.]

                                 ______
                                 

    Mr. Young. Thank you, sir. I listened to your proposal on 
the heel of the Ranking Member. You said one word that disturbs 
me a great deal, the appointment of the control board confirmed 
by the Senate. Let's forget that part because it will never 
happen. I'm serious about that. I watched this. So, we will 
eliminate that word. That is a dark hole.
    Mr. Mayer. Mr. Chairman, I apologize. I am really far more 
focused on making sure the control board has the quality people 
that it needs than how----
    Mr. Young. You will have it confirmed by the House. How's 
that? That would be a lot better.
    Mr. Mayer. Yes, Mr. Chairman.
    Mr. Young. Mr. Pierluisi.
    Mr. Pierluisi. Thank you, Chairman. I am going to try to 
lay out a couple of facts that I believe are beyond dispute, or 
at the very least are supported by the vast majority of my 
constituents.
    The first one is that Puerto Rico is facing a very serious, 
unprecedented liquidity crisis. There are payments in the 
immediate horizon that, for all intents and purposes, unless 
the government of Puerto Rico obtains adequate access to the 
markets, the government is going to fail in making it. You are 
going to have massive defaults starting possibly in May of this 
year, in all likelihood in July of this year. And that is not 
good for anybody. It is not good for creditors. It is not good 
for the people of Puerto Rico. It is not good for Congress. It 
is not good for the municipal markets, and I can go on. So, we 
need to deal with that.
    Another fact, the budgeting system of the government of 
Puerto Rico, the accounting system, the financial reporting 
system, leaves a lot to be desired. It needs to be reformed 
drastically. Everybody agrees.
    Third uncontested fact, the amount of public debt in Puerto 
Rico equals Puerto Rico's GNP. By any measure, that is a lot of 
debt. And Puerto Rico has not been growing significantly ever 
since 8 or 9 years ago. So, that is the scenario.
    With that scenario in mind, I tell you, Mayor Williams, I 
believe that the majority of people of Puerto Rico support the 
concept of a Federal oversight board assisting Puerto Rico in 
putting our fiscal house in order within reason. But the board 
itself is not going to be a solution. You also need to provide 
Puerto Rico with either better treatment in Federal programs or 
otherwise access to the financial markets so that we do not 
fail to comply with our obligations in the markets. That is the 
challenge that we should address here and I hope that you can 
comment on that.
    Last, and let me be specific about a couple of examples: 
DC, the way that the Medicaid programs work in the states, the 
Federal Government provides a substantial amount of the 
funding. In the case of DC, the Federal Government was giving 
you 50 percent, Mayor Williams. You know that. Then as a result 
of the Revitalization Act, which was part of the legislative 
package, the Congress increased it to 70 percent, and it 
assisted DC.
    Professor Johnson mentions the EITC program, earned income 
tax credit program, which is the best anti-poverty program in 
the states. In Puerto Rico, we have an extremely low labor 
participation rate. We need to create jobs, get the people to 
work in the formal economy. That would be a great tool. I will 
leave it at that. I would like both of you to comment on 
specific measures apart from instituting a board that could 
assist Puerto Rico in getting into a path toward recovery.
    Mr. Williams. I think the entity in Washington, DC was able 
to do something very important, and that, I think, was to begin 
establishing an environment of success, a climate for 
investment, very importantly for citizens and investors. I 
think these issues about migration, it created an environment 
for investment where people wanted to invest, again, where they 
wanted to live. How was that done? Create reliable financial 
information. Create reliable government financial operations.
    Before you ask for anything, make sure you are collecting, 
not only collecting your revenue, but cashing your checks. We 
had checks in bundles on a floor in a room. We were not even 
cashing checks. So cash your checks, collect your revenue, 
manage your government operations, create settled expectations.
    Begin bringing down the size of government. Not that the 
size of government alone is a solution, but how can you create 
confidence unless you are addressing fundamental governmental 
operations. Building on that and on that basis, then you are 
looking at your balance sheet and you are saying, ``OK, on the 
basis of all this, we are collecting the revenue we can, we 
have reduced government operations. You know what? We still 
need to look at our relationship with the Federal Government.'' 
I think that ought to be the approach here. Look at 
restructuring debt, look at the relationship with the Federal 
Government, look at these things after you have put the basic 
housekeeping in order. And while you are doing that, you 
certainly need liquidity, but that is different to me than 
doing the Chapter 9 kind of solution in Detroit.
    Mr. Young. I am going to let Professor Johnson comment for 
1 minute. He used most of his time up giving a great 
presentation, but I will let Mr. Johnson have 1 minute. Start 
that time over.
    Mr. Johnson. Thank you, Mr. Chairman. Yes, these programs 
were exactly what I had in mind when I agreed with you at the 
beginning. If Puerto Rico were a state, we would not have the 
same crisis today. The cap on Medicaid for Puerto Rico, which 
does not exist for the states; EITC, absolutely a very 
important program for states with lots of poor people, not 
available at all to Puerto Rico; and the child tax credit as 
well, Mr. Pierluisi, which you have proposed to extend to 
Puerto Rico. Again, it makes complete sense.
    Now, this would change the terms of the financial 
relationship between Puerto Rico and the Federal Government and 
it would be taking on some additional obligations for the 
Federal Government. I understand that, too.
    I think there are two reasons to consider this, one is you 
treated Puerto Rico more like a state, and that is how Puerto 
Rico should be treated in this fiscal relationship.
    The second thing is in the historical precedence that we 
have including, particularly, DC. My understanding as a DC 
taxpayer is that the relationship between the Federal 
Government and the DC government changed in terms of what the 
Federal Government was responsible for. Those terms were 
adjusted in favor of DC, and I think it is that adjustment that 
would be very helpful and appropriate to Puerto Rico right now.
    Mr. Young. Thank you. And with that, Mr. Labrador.
    Mr. Labrador, would you like--you are not a member of the 
subcommittee, but you are welcome to go ahead, especially when 
you start mimicking me. I really appreciate it.
    Mr. Labrador. I am trying to be as handsome as you are.
    Mr. Young. Well, oh--do you want 10 minutes? No, go ahead.
    Mr. Labrador. Thank you, Mr. Chairman. Thank you, Mr. 
Pierluisi. Thank you everyone, and especially the witnesses for 
being here. This is a very important issue. I happen to serve 
on both committees that are dealing with this issue. I am 
serving in the Judiciary Committee, where we will be looking at 
the bankruptcy issue; and I am serving in this committee, where 
we are looking at the oversight board.
    I really appreciate the work that has been done by a lot of 
people. At the Energy and Mineral Resources Subcommittee's 
hearing last month, I made the point that nothing said at the 
hearing or elsewhere should really be interpreted as 
encouraging the government of Puerto Rico to delay any kind of 
actions that they need to do right now. I think there are some 
things that they should be doing right now that will help us in 
our understanding of where they want to go with this fiscal 
situation. I think that is important for them.
    I had the great privilege of meeting with the Speaker of 
the House of Puerto Rico, and we had a really fantastic 
conversation about what they are trying to do, and I am 
encouraging them to take some steps right now before we even 
decide in Congress what we are going to be doing.
    I have a couple of questions for you, Mr. Williams, and I 
appreciate your vast experience in dealing with this. I wonder 
if you could comment on what Mr. Moers Mayer--I think I am 
saying your name correctly--what he said about the financial--
he talked about the difference between Detroit and Washington, 
DC, and he said that you guys did not--and I hope I understood 
this correctly--you guys did not have Chapter 9. All you had 
was the oversight board.
    And he talked about the difference in the result of what 
happened with Chapter 9 where Detroit now is still financially 
unstable, but it seems like Washington, DC is doing much 
better. Could you please speak to those comments that he made?
    Mr. Williams. Timing is of the essence, but I think it is 
important to build confidence, create these expectations I am 
talking about before you ask for incentives, however they are 
warranted by past experience, and they certainly were warranted 
in DC, before you ask for additional changes in relationship 
with the Federal Government.
    A great example would be Medicaid. We did not really get 
the Medicaid change until I was Mayor, and it was based on the 
confidence we had built in reforming the government that the 
House and the Senate Appropriation Committees finally gave us a 
70/30 versus a 50/50 Medicaid. And, likewise with the 
Revitalization Act and the spinoff of a number of things that 
our government was doing that we should not have been doing.
    If we had tried to do that at the beginning with the lack 
of confidence we had, I think it would have been a nonstarter. 
So, I think these things are essential, this relationship with 
the Federal Government is essential, but you have to create a 
climate of confidence, settled expectations before you can 
begin to look at these larger issues.
    Mr. Labrador. I think you are hitting my point exactly, 
because I understand that we need a financial control board. I 
am undecided about the bankruptcy, but I am open to it. I am 
open to the bankruptcy protections, but it seems to me that 
bankruptcy is not a plan. Bankruptcy is a step in a plan. And I 
am not sure where that bankruptcy protection should come in, if 
at all.
    Mr. Carlos Garcia, could you speak to that issue a little 
bit and specifically to what Mr. Williams is saying that the 
government of Puerto Rico needs to build, and I agree with him 
100 percent, the confidence that they are moving forward with 
the appropriate plan.
    Mr. Garcia. I agree with that, and that is the reason why I 
shared some of our experience when we had the control board 
from 2009, 2011, and that was the first point, being able to 
establish the confidence of all the stakeholders. It was not 
only the bondholders, but it was everybody and all the 
constituents. It was a lot of hard work, but by doing that hard 
work, it is what gains the confidence of everybody else to be 
able to manage all the other issues.
    In regards to the restructuring mechanisms, I mean I agree 
it is a tool. But right now, the consequences and the issues of 
Puerto Rico, it is not only solving a very complicated fiscal 
situation, but it is trying to find a path that finally 
provides the opportunity for Puerto Rico to be able to grow, so 
we don't have to be dealing with this again in 2 years, in 5 
years, or 10 years. So, it has to be a comprehensive solution. 
As I mentioned in my testimony, it has to do a lot with the 
loss of an economic model in Puerto Rico if you are not able to 
combine those two measures.
    And finally, if you do not provide a single resolution 
mechanism that allows them to be able to balance the equities, 
as I mentioned, the formal debts are very important, but all 
the other compromise and commitments that Puerto Rico had made 
to their pensioners, to health, and to the well-being of Puerto 
Rico need to be balanced. And I think that doing it through the 
authority in combination with all other powers will be the best 
way to go at this time.
    Mr. Labrador. Thank you. And, Mr. Moers Mayer, if the 
people of Puerto Rico and the government of Puerto Rico do all 
the things that are necessary to gain that financial stability 
and to gain that financial confidence, and we still see that 
the bankruptcy should be a step in the process, why would you 
be opposed to that?
    Mr. Mayer. Thank you for asking that question. All we want 
is the vote. We want the ability to vote on a restructuring 
plan for the governmental corporations, and it is important to 
mention again. When we talk about the crisis, and we talk about 
healthcare, and when we talk about payments of pensions, you 
are always talking about obligations of the Commonwealth of 
Puerto Rico itself with respect to which Chapter 9 simply would 
not apply. And if Puerto Rico were a state, Chapter 9 would 
definitely not apply, and there might even be constitutional 
issues as to whether or not Chapter 9 could apply.
    So, you are only talking about governmental corporations. 
You are talking about the electric company, the sewer company, 
and the highway company. And, yes, we think an authority could 
provide solutions to the operating problems of those 
authorities. And when it does, our people would be prepared to 
vote by the right majorities to do a deal. We did that in the 
Puerto Rican Electric Power Authority, and the model for that 
is apparently acceptable enough that legislators in Puerto Rico 
are thinking about applying it to the sewer authority.
    So, you have a limited number of government corporations 
that are in the process of working this out. And would we 
accept a majority rules clause with respect to that corporate 
debt? Yes, we would, after the improvements had been made.
    Mr. Labrador. OK. Thank you. My time has expired.
    Mr. Young. Thank you, sir. The Ranking Member of the Full 
Committee, Mr. Grijalva.
    Mr. Grijalva. Thank you very much, Mr. Chairman. And when 
you were admonishing the person with the white hair for bopping 
up and down, I was glad it was not Chairman Bishop that you 
were looking at at that point.
    Mr. Young. I was looking to my left.
    Mr. Grijalva. We were both relieved. The debt crisis in 
Puerto Rico, Mr. Chairman, is a major part of the problem we 
are facing, which makes to some extent the comparisons to DC a 
little off. In fact, I don't think it is the right comparison.
    When we talk about control boards, unbridled full control 
boards, answerable to no constituency or other elected 
officials being made irrelevant in the process and other 
specific organizations participating, I think we should 
probably be comparing Puerto Rico in that absolute sense to 
Flint, Michigan, where austerity, as the main vehicle for 
balancing books and bringing things into line, has produced the 
crisis that we see now with lead poisoning.
    I think the definition of what we mean by oversight is 
critical in any legislation, and I think that the issue of all 
the stakeholders being part of the process is fine with me, but 
I think there is humanity involved here, and that has to be 
taken into account.
    I wanted to ask you, Mr. LeCompte, Bloomberg Government 
recently released an analysis of lobbying data and found that 
in the second and third quarter of 2015 alone over $47 million 
was spent lobbying on Puerto Rican issues. The numbers give you 
some idea as to the scale of profit at stake here. The business 
of spending this much money on lobbying--see their level of 
spending on lobbying as a worthwhile investment toward profits, 
which means they are probably significantly bigger.
    A dollar that goes into that process to hedge funds, other 
investors being the first in line, is a dollar that does not go 
to schools, nurses, police, and fire protection. You mention 
austerity that has already visited the families of Puerto Rico. 
Can you expand on what it looks like day to day without any 
mechanism for restructuring and without any oversight mechanism 
that still respects the citizens?
    Mr. LeCompte. Congressman Grijalva, the situation on the 
ground is absolutely grave. Working with the religious leaders 
and the religious institutions that are really on the front 
lines of dealing with the crisis, where nearly one out of two 
people already live in poverty, we are seeing daily self-
imposed austerity continue on the island.
    The most recent being that special ed teachers had their 
salaries cut, greater cuts to healthcare on the island. It is 
absolutely desperate. I think it is also important because I 
certainly agree with my colleagues on the panel and the 
different viewpoints that have been lifted by the various 
members of the committee.
    The creditors themselves are a diverse group. The religious 
institutions that we represent, the catholic church, all of the 
mainline protestant groups in Puerto Rico, are creditors. The 
various unions in Puerto Rico are creditors. These are groups 
that own Puerto Rico bonds and have substantial commitments. At 
the same time, they understand very clearly that there needs to 
be haircut to get the debt back to sustainable levels.
    I think in terms of the lobbying issues that you have 
raised, there are many creditors that have very legitimate 
stakes and want a resolution that makes the most sense to 
benefit the people of Puerto Rico, and also to be able to get 
some economic growth back behind their investment. But I think 
there is a small group of investors that is trying to prevent 
any kind of process from moving forward, and I think that group 
does not care about the austerity that is continuing. They just 
care about getting paid.
    Mr. Grijalva. Thank you. Mr. Johnson, there is a consensus 
that Puerto Rico's capacity to repay its debt ultimately 
depends on restoring economic growth on the island and that 
there can be no economic recovery without significant 
restructuring of the debt. While I am aware that there are 
negotiations ongoing between the government of Puerto Rico and 
its creditors on an agreement to restructuring the debt, 
wouldn't a process, such as Chapter 9 or some other similar 
regimen, be a more effective way to obtain true debt 
restructuring rather than a voluntary agreement where all sides 
could walk away at any time?
    Mr. Johnson. Congressman, that is absolutely a key question 
to be asking today. And I would emphasize, there is a continuum 
of choices for Congress to make. On the one hand, you could 
choose to allow bankruptcy, the Chapter 9 which had already 
been discussed. On the other hand, you could prefer to leave it 
entirely as a voluntary process, which is hard. There are also 
some intermediate approaches, and I think this is why having a 
growth authority approach is a very good one.
    The growth authority could have the ability to negotiate 
these deals and, subject to some voting and if the creditors 
are willing to be reasonable, that is absolutely the best way 
forward subject to being able to get growth back, which is 
important for the creditors as well as for all the citizens of 
Puerto Rico.
    In the intermediate case, you probably do need permission--
you need some sort of arrangement where a court would approve, 
let's say, a prepackaged restructuring in order to prevent a 
relatively few creditors from holding out. Now what Mr. Mayer 
was talking about with the majority voting, typically if you 
have a majority, then the holdouts have to surrender their debt 
on the same terms.
    So, I think you want to think comprehensively, and what I 
am also talking about with the intermediate solution is not 
just the municipal debt, not just the debt that sometimes you 
will talk about that could be under Chapter 9 if this were a 
state--I am suggesting that all of the obligations, all Puerto 
Rico be reviewed and assessed by this growth authority with a 
view to restructuring that is fair and equitable, does not 
treat all creditors the same way, because there are different 
classes of creditors, but all of the debt should be included in 
that assessment that will be delegated presumably to the 
authority with the backing of the court system.
    Mr. Mayer. But it is important to note that such authority 
has never been granted to any state in the Union. If you want 
Puerto Rico to be treated like a state, then you have to treat 
the obligations of the Commonwealth as you would treat the 
state obligations.
    Mr. Johnson. Yes, you cannot grant this to a state. Puerto 
Rico is not a state, and it is not being treated like a state.
    Mr. Young. Mr. Johnson, please.
    Mr. Ruiz.
    Mr. Ruiz. Thank you, Mr. Chairman. Puerto Rico is part of 
our Nation, and we have a responsibility to the Puerto Rican 
people to provide them with the tools and opportunities to 
achieve the American dream. It is nearly undisputable at this 
point that Puerto Rico is faced with a debt crisis, a crisis 
that if we fail to address will break our promise to the Puerto 
Rican people, to our fellow American citizens.
    I appreciate that this hearing has been convened to explore 
how we can become part of the solution and what pragmatic steps 
should be taken to empower Puerto Rico to succeed. I also want 
to remind everybody that a budget is a reflection of our values 
and that people are more than a spreadsheet. Numbers in that 
spreadsheet have a story and they have lives.
    We want to set up the restructuring process to help set up 
Puerto Rico to succeed. In most of these committees and 
counsels that have financial responsibility and advice, there 
is a lot of cutting, there are a lot of austerity measures that 
do not really deal with the growth of a community such as 
Puerto Rico. So, the things that we want for growth include the 
education, the workforce development, the infrastructure 
development, job training, and also healthcare.
    How will those factors play into a committee such as the 
one we are thinking of, the board? Anybody?
    Mr. Williams. I think the right kind of entity can create a 
level of confidence where economic incentives begin to work, 
where the right restructuring of government begins to feed into 
that--basically turning a vicious cycle into a virtuous cycle, 
creating economic investment. And I would respectfully disagree 
with the Congressman--I think the experience in DC, the 
experience in Philadelphia, the experience in New York, the 
experience in Cleveland with then-Mayor Voinovich, is that the 
right kind of leadership with the right control entity can not 
only right-size a government, if you will, but as everyone is 
saying and most importantly, begin to create a climate for 
economic investment and growth.
    Mr. Ruiz. Well, I don't think there was any disagreement in 
that statement, because I think the counsel can do both or the 
board can do both, and that was my point.
    Professor Johnson?
    Mr. Johnson. Congressman, if you take the example of the 
cost of energy in Puerto Rico, I think this is very important, 
it is expensive, and it is much more expensive, for example, 
than in Florida, in part because the plant used is out of date 
and they do not use natural gas, for example, that would be 
considerably cheaper. So, this is a sector that is crying out 
for investment. It is essential to all parts of the economy. 
You are not going to get investment in that sector unless you 
sort out the debt overhang issue.
    And going forward, presumably there is a role for some 
public sector, but also the private sector. I think the 
Chairman, again, put his finger on it at the beginning when he 
said you want to create an environment for investment, and that 
is what Mr. Williams is saying as well----
    Mr. Mayer. Thank you. With respect to Professor Johnson, 
there is a deal to create that investment. We have spent 18 
months negotiating it.
    Mr. Ruiz. Thank you very much. This is my last question to 
Mr. LeCompte. Self-empowerment is very important to the people 
of Puerto Rico. It is very important to me. How can we 
incorporate citizen participation in this process?
    Mr. LeCompte. Thank you. I think that is absolutely 
critical, and I think any process that moves forward must not 
only include the people of Puerto Rico, but it also must move 
forward a process where there is greater accountability to the 
people of Puerto Rico from their government itself.
    I think that has been a key reason why the Archbishop of 
San Juan and the other religious leaders have continued to call 
for public budget transparency in this process. I certainly 
agree with Mr. Mayer in terms of what he is putting out in 
terms of bankruptcy is not comprehensive in itself. Bankruptcy 
is one part of a process that needs to take place just like 
greater degrees of accountability and transparency.
    There are several ways that that can move forward. I think 
the most important way is one of the actions Congress has 
already taken, which is being able to provide assistance from 
the U.S. Treasury and their Office of Technical Assistance, 
which I think is one of the greatest programs at U.S. Treasury. 
This in itself can provide Puerto Rico with critical advice to 
keep their debt stock in good order; but even more importantly, 
it can create greater accountability mechanisms with the people 
of Puerto Rico to the government itself.
    I think these are very important. I think that on any 
particular conversation around a fiscal control board or a 
growth authority for representation, it is absolutely critical 
that you have equal representation from Puerto Rico, the 
Federal Government, and certainly the kind of staffing that 
Mayor Williams has talked about in terms of being able to have 
the kind of technical expertise to support the process.
    Mr. Young. The gentleman's time has expired. Mr. Bishop.
    Mr. Bishop. Thank you. I appreciate the witnesses being 
here. I actually have four questions. I am going to ask two to 
Mr. Mayer and two to Mayor Williams. So, let me go with those 
as we talk about them. But before I do that, Mayor Williams, 
anyone who can do as much as you did to bring baseball to 
Washington, I have confidence that we can solve this problem as 
well. And when there is a big league team in San Juan, then we 
will have arrived.
    And, by the way, that is more important than this issue. 
Very soon, this committee, with Pierluisi's assistance, is 
going to be drafting legislation that is going to address the 
situation in Puerto Rico. There are some questions I think are 
really important just on the overall level to them.
    Mr. Mayer, I am going to ask you for those who advocate 
simply bankruptcy protection from Puerto Rico, the question is: 
How will Puerto Rico ever get back into the bond market for 
financing of infrastructure that they are going to definitely 
have to have? And those who advocate against bankruptcy, how 
will Puerto Rico bring recalcitrant creditors to the table to 
discuss debt restructuring.
    Now let me go the other two questions, you can think about 
that. Mayor Williams, for those who advocate an advisory-type 
board: How will the government of Puerto Rico convince anybody 
it is going to follow the board's advice when it appears that 
the government has already taken sound advice and has ignored 
that advice. But for those who advocate a strong control board, 
how will such a board carry out its purpose and have the proper 
respect for the people of the island and the integrity of their 
government?
    So Mr. Mayer, if I could ask you those first two, and then 
Mayor Williams.
    Mr. Mayer. Thank you, Chairman Bishop. I don't think Puerto 
Rico will easily recover access to the capital markets if it 
ever uses Chapter 9. And I think that it will have serious 
knock-on effects across the country. Just last week, the 
Chicago Board of Education came to market with an $800 million 
bond issue. But because of the concerns about Puerto Rico and 
because Illinois is considering giving Chicago Chapter 9, it 
could not sell the paper.
    So, the history--if you take a look at the last five or six 
big cases, if you look at Detroit, if you look at the 
California cases, none of these municipalities has been able to 
go back to the market unless they have a special structure 
through a state, as Detroit had through Michigan. This is one 
of the reasons why we have focused on a restructuring with a 
creditor vote, a real vote where the bondholders feel they have 
a chance to vote yes or no, rather than a Chapter 9 which 
pretends to have a creditor vote but does not really, where 
creditor votes are not important and are routinely disregarded.
    So, in answer to your question, I don't think Puerto Rico 
will regain access to the capital markets if it is given 
Chapter 9, that it authorizes the public corporations to do so. 
Right now, the electric company has access to the capital 
markets if it implements our deal. It does not need Professor 
Johnson's government intervention. And that deal is being 
talked about as a template for the sewer company. You have a 
limited number of governmental corporations even if they have 
$20 billion of debt. This process can work out, if you let it 
do so.
    Mr. Bishop. Let me turn to the Mayor. These are the 
fundamental questions we have to address as a committee. So, if 
it is an advisory-type board, based on the record, how do we 
ensure that it is going to happen? If it is a strong board, how 
do we ensure that we respect the rights of the people of the 
government of Puerto Rico?
    Mr. Williams. Congressman, first of all, I am glad you 
enjoy the games. I appreciate that. But, you know, I spoke at 
an event----
    Mr. Bishop. Except when they were playing the Mets. Those 
sucked. But other than that, yes.
    Mr. Williams [continuing]. With Speaker Gingrich, who was 
one of the leaders in the DC recovery along with President 
Clinton. What the Speaker and I were talking about is, with a 
board you really need two things, we keep reiterating to 
everybody here: you need the control and the oversight. You 
need to look at the break-even at the government and get it to 
the right level, but you also need economic growth. And I 
believe that only a strong board puts you in a position to do 
that; so I would go with the latter.
    That said, it is very important that this board be able to 
work with people on the ground--everybody from the business 
community, to the unions, to the pensioners, the teachers, and 
nongovernmental community--to put in place a vision for 
recovery. Again, I think in the cities that I have mentioned, 
you have seen that. And, I think you can see this on the 
island. I have spoken down in San Juan to the people in the 
government about this. So what I am saying, I believe strongly.
    I believe that this notion that a strong entity is like 
Darth Vader, and everybody is going to run for the hills. If it 
is done in conjunction with the people on the ground, in 
conjunction with the government, I think it can work.
    Mr. Bishop. I think you are all talking about having the 
right people involved in making those decisions. I think Mr. 
Garcia was saying the same thing, competency precedes before 
the incentives that have to be there. I appreciate that very 
much, and I also thank you for mentioning one of the concepts. 
This committee has already explored the idea of energy 
development. Obviously, the energy costs in Puerto Rico are 
significantly higher than the rest of the country, and it is 
part of the problem they have with their economic development. 
If we don't address that at the same time, we are missing an 
opportunity of what has to be done.
    I yield back. Sorry to go over.
    Mr. Young. Mrs. Torres.
    Mrs. Torres. Thank you, Mr. Chairman. In 2009, as a new 
Member of the House in the state of California, I saw the 
eighth largest economy dwindle down to junk bond status. We had 
a $15 billion deficit, and it was a very, very difficult time 
in the state managing finances. The House, the Senate could not 
agree on cuts or a lot of things that we needed to do.
    The one thing that helped us out of that mess was greater 
transparency. We began to put our budget on the Web site. We 
began a process of seeking input from citizens all across the 
state asking: How would you balance your budget? If you were 
limited to this much money, what would that look like for you 
and what are your priorities?
    And, certainly, there were a lot of difficult votes in 
that. Today we are seeing the negative part of that with 
teachers that have left the state, and we are unable to recruit 
good teachers, and that is something that the current 
legislature is having to deal with.
    Mr. Williams, you were the mayor of Washington when the 
control board was put in place, correct?
    Mr. Williams. Yes.
    Mrs. Torres. Can you share with us what were some of the 
positive as well as negative issues that you saw when that 
board was implemented? And how did the people of Washington, 
how were the residents able to make opinions and have their 
voices heard, and the government, how were they--you as a 
mayor, how was your voice heard?
    Mr. Williams. I came into the control board as a CFO. As a 
CFO, I thought it was really important, first and foremost, to 
put our financial affairs in order to create the right kind of 
organizational systems and financial reporting, just to get to 
ground zero, very, very important. Then on that basis, 
restoring fundamental financial operations like paying the 
bills. I know this sounds ridiculous, but like paying the 
bills----
    Mrs. Torres. But that was not a priority for you before 
that, to pay the bills?
    Mr. Williams. Yes, we had lines of people, I mean literally 
out the door, with receivables demanding to be paid, checks 
that were not cashed, let alone receivables that were not 
properly managed and recorded. As we began doing that, I saw 
there was a need and I thought it was very important to go out 
to the neighborhoods and give understanding, a briefing to the 
citizens of the city.
    I was just the financial guy. Give a briefing to the 
citizens of the city about what was going on. The analogy I 
used was that we were on a really hard road as a city in a 
really overloaded car that was badly driven and underpowered.
    Mrs. Torres. But what were the positive and the negatives 
of that board, sir?
    Mr. Williams. One of the positives of the board was that it 
had the authority to comprehensively deal with all the issues 
we are talking about----
    Mrs. Torres. Over-riding the authority of the local elected 
officials?
    Mr. Williams. No, it had the authority to supersede in the 
breach of decisions of the local officials; but actually as a 
process, worked in collaboration with the Congress and with the 
local officials.
    Mrs. Torres. Was there a lot of cooperation from your 
perspective?
    Mr. Williams. What I was trying to say was I tried to 
ensure that there was cooperation with the counsel----
    Mrs. Torres. OK. Tried and succeed are two different 
things. Was there cooperation, yes or no?
    Mr. Williams. Yes, we tried and we succeeded in building 
cooperation with the local citizenry. The fact that I was 
elected mayor after representing the control board I think 
speaks to the rapport I was able to achieve.
    Mrs. Torres. All right. Thank you.
    Mr. Young. Thank you. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman, for allowing us to 
participate in this hearing. I do not have to explain how 
important this is for all the Puerto Rican Members of Congress. 
We have families in Puerto Rico. All my family is in Puerto 
Rico.
    As we have stated before, not only are we concerned about 
the ability of Puerto Rico to restructure its debt, but about 
the humanitarian crisis that is already unfolding if we do not 
approach this issue in a comprehensive way. Here we are talking 
about a financial control board, and reading the wonderful memo 
that was put together, it says here that in New York, the 
emergency financial control board reduced a huge deficit by 
forcing the city to shed 60,000 employees, 20 percent of the 
workforce. And then it went on to talk about Washington, DC.
    Well, let me tell you what Puerto Rico has been doing 
without a control board. It has raised its sales tax to 11.5 
percent, the highest in the Nation; reduced government 
employment by 13,000 over the last 3 years; and cut expenses by 
20 percent. It has also undertaken pension reform, froze 
collective bargaining agreements, and consolidated hundreds of 
schools.
    And Puerto Rico is already taking emergency measures to 
avoid defaulting on its general obligation bonds. It has done 
so by borrowing $400 million from the workers' compensation 
fund, liquidating assets from pension funds, extending third-
party payables to almost $2 billion, and defaulting on junior 
debts in the outstanding principal amount of $7 billion.
    We can keep going down this path, but the truth is that the 
course is set and there is no turning back for Puerto Rico 
without help from the U.S. Congress.
    Mr. Mayor--Mr. Williams, you are here to discuss how 
effective the control board was to return DC to manage its 
financial crisis. I would like to ask you--When a control board 
was created for Washington, DC, how critical of an issue was 
the district debt load?
    Mr. Williams. Congresswoman, I am not an expert on the 
debt, and I do not think I am really here as an expert on the 
debt. I am really here on the experience of the board in 
executing a financial recovery and the different aspects we 
talked about. The situations are different, the debt situation 
in the District is clearly and markedly different from the debt 
situation in Puerto Rico.
    Ms. Velazquez. Mr. Johnson, do you believe that given 
Puerto Rico's debt problem, that a control board alone will 
permit the island to recover, or does it need a restructuring 
authority as well? And to go beyond Chapter 9, a broader 
version of restructuring?
    Mr. Johnson. I think, Ms. Velazquez, you put it exactly 
right. Puerto Rico is on a downward path right now with partial 
debt restructurings, agreements, and so on. The territory will 
continue on that downward path unless a sharp change is made. I 
support having a growth authority as part of that change. I 
think you also should change the fiscal relationship with the 
Federal Government, which is part of what you are talking 
about.
    And I do think that even in the positive scenarios as 
growth comes back, that some fair, equitable debt restructuring 
should be on the table, and the growth authority hopefully will 
have the power to take that on and to do that in a responsible 
and equitable way. Yes, I think all of the debt----
    Ms. Velazquez. Thank you. Mr. Johnson, you stated in your 
testimony that creditors were taking on well-documented risks 
when they lent to Puerto Rico, and that the biggest danger for 
Puerto Rico is that there will be no comprehensive debt 
restructuring. What do you say to those that suggest that it is 
unfair for creditors to suffer losses due to a potential debt 
restructuring?
    Mr. Johnson. In such situations, of course creditors are 
never happy, nor are the people of Puerto Rico happy. This is 
not where you want to be. But I have not heard anyone today, or 
any other day recently, say that there is anything surprising 
about this situation. I think all of our accounts--we may 
differ on precisely what happened--but all of our accounts 
begin 10, 20 years ago at least in terms of the unraveling of 
public finances in Puerto Rico.
    Mr. Mayer. Two years ago----
    Ms. Velazquez. And my understanding is that the hedge funds 
that bought the totality of Puerto Rico's bond issuers in 2014 
did so without current audited financial statements. So, for 
those who are saying that Puerto Rico does not provide the type 
of statements that are necessary, they knew prior to buying 
those bonds the financial conditions of Puerto Rico.
    Mr. Mayer. Congresswoman----
    Mr. Young. Gentleman, time is up. Mr. Gutierrez.
    Mr. Gutierrez. Thank you so much, Mr. Chairman, Ranking 
Member, and Resident Commissioner Pierluisi, for allowing me to 
participate today.
    I just wanted to make a few points, and that is--I am just 
going to go back to the memorandum that was issued to everyone 
here. At the end of the second paragraph on background it says, 
``Congress retains plenary authority under Article 4, Section 
3, Clause 2 of the U.S. Constitution to determine the ultimate 
disposition of the political status of Puerto Rico.''
    The fact is that the Congress of the United States retains 
plenary powers over everything in Puerto Rico, not just the 
status of Puerto Rico. That is fundamentally what should be at 
issue, too, at this hearing, because you cannot resolve one 
without the other. You want to take the government of Puerto 
Rico that does not control how merchandise is brought in or out 
because the Jones Act says we must use the U.S. Merchant 
Marines.
    We are not going to discuss that here today, tomorrow, or 
any time between now and March 31. Yet the consumers in Puerto 
Rico need--you want to talk about economic development? How do 
you have economic development if your energy is outlandishly 
expensive and if you do not invest in making sure that you have 
a clear water supply on a tropical island?
    So look, there are a lot of things, but fundamentally let's 
deal with one thing because the background statement does not 
say it. Why don't we all come to the conclusion which I am sure 
Mr. Pierluisi agrees with as the Resident Commissioner of 
Puerto Rico? Puerto Rico is a colony of the United States of 
America. Puerto Rico is war booty from the war in 1898. How did 
Puerto Rico become part of the United States of America? It was 
not like the Puerto Ricans all got together one day, held a 
convention and said would you allow us. No. It was military 
intervention in Puerto Rico.
    Now, I would like to say to the Resident Commissioner--I 
agree, and I am going to fight with you to maintain some sense 
of reliability between what we do here and the functioning of 
the people of Puerto Rico over their future. But I fear that we 
might be trying to make a distinction without a difference in 
that the truth is that in Puerto Rico we do not control any of 
the basic things. We do not control who comes to the island or 
who leaves the island because that is controlled by the Federal 
Government.
    Our court system? No, you simply appeal to the Supreme 
Court. I mean you simply send it to a Federal court and the 
Supreme Court of the United States, and the laws that we pass 
here. So when people say, oh, the people of Puerto Rico, they 
are responsible for everything that happened bad there and they 
need to take responsibility--no, the Congress of the United 
States has to assume responsibility over Puerto Rico because we 
have, as is stated here, plenary powers over the people of 
Puerto Rico.
    Why are we having this hearing here? And why aren't they 
having it in Puerto Rico? Because they cannot have it there 
because they do not have those plenary powers. So look, I am 
concerned about senior citizens, Mr. Mayer. I am hopeful that 
the Franklin Fund has diversified their funds to the point 
because I do not want you to make it sound like the only thing 
in that fund are Puerto Rican bonds because they are not. I 
checked before I came to this hearing. You are a very well 
diversified fund, and I hope you fulfilled your fiduciary 
responsibilities to the people that you sold the bonds to and 
informed them of the precarious situation of the very bonds 
that you were purchasing.
    So, don't put on us the responsibility of something that 
you sold to senior citizens. OK? Make sure that you understand 
that you, too, have a responsibility as the market in the 
United States of America. I just want to say, look, everything 
is different in Puerto Rico. Everything is. You cannot even go 
to McDonald's. The menu is in Spanish. Everything is different, 
because Puerto Rico belongs to, but is not a part of the United 
States of America.
    And I am not saying that. That is what the Supreme Court of 
the United States of America has stated. Puerto Rico is a 
colony of the United States. There is no way around it. 
Otherwise we would not be here and the statement as made by the 
committee very ably that we have plenary powers over Puerto 
Rico.
    Here is what I would suggest. Number one, let's restructure 
this debt, fully. It is not a state. I did not come here to try 
to make Puerto Rico more like a state. I came here to make the 
Puerto Rican people whole so that they could have a future. 
Let's restore the ability of the people of Puerto Rico to 
invite people to Puerto Rico. Let's stop fighting over what is 
the reality of Puerto Rico and what they need.
    Last, Mr. Chairman, can't we provide the people of Puerto 
Rico the incentives to create jobs, jobs, jobs? Economic 
activity instead of expansion of more welfare programs in 
Puerto Rico? What we need is jobs so that the people of Puerto 
Rico can use their intelligence, because when the people of 
Puerto Rico leave and vanish from that island to come to the 
United States of America, guess what they do, they come here to 
work because they are bright, intelligent people.
    Let the Congress of the United States take the heel off the 
people of Puerto Rico and let them live prosperously. Let them 
have the economic development that they so deserve. Thank you 
very much, Mr. Chairman, and thank you for having these 
hearings. I look for a resolution by March 31 of this year, as 
Speaker Ryan has so promised.
    Mr. Young. Mr. Serrano. Sorry, you were first here and had 
to be the last. I do apologize.
    Mr. Serrano. That's OK, Mr. Chairman. And thank you and all 
the other committee leaders for allowing the three non-members 
of the committee to participate. I was very interested in Mr. 
Gutierrez's statement. I am not going to say that he says the 
same thing I have been saying; that would be unfair. But it 
sounded similar to something I have been saying all along, 
which is what we are doing here is putting a Band-Aid on a 
larger problem.
    The problem is the status of Puerto Rico. As long as Puerto 
Rico is a colony of the United States, these kinds of issues 
will recur, and recur, and recur. The only solution is to 
resolve the political status--117 years is a long, long time 
for Puerto Rico to be a colony, and it is about time that it 
ended. I am supportive of anything that ends the colonial 
status, as long as the people who are much better than I on 
this issue come to me and say Puerto Rico is no longer a 
territory of the United States, then whatever the change is, I 
will be fine with. I think I am hearing more and more folks who 
were opposed to change saying we do not have the power, 
therefore we need change, and that is very important.
    Mr. Williams, Mayor Williams, I lived with you the whole 
time. I was Chairman and Ranking Member of the subcommittee, 
the first subcommittee on appropriations when DC was a 
committee by itself. You recall those days. Then you became 
part of financial services, where I am Ranking Member now. And 
I have to tell you, when Members spoke to us within ourselves, 
which we often do regardless of what the public thinks, you got 
a lot of credit for what happened in DC because you did 
something that should not be lost on this argument, this 
hearing, which is you demanded respect for Washington with a 
control board, but you were willing to work with the Federal 
Government to resolve the problem. Let me repeat that. You 
demanded respect.
    And I remember you in front of us at the committee hearing 
saying you are asking me to do something that is not dignified 
for the people of Washington, DC, while understanding that you 
had to work with us. And many, many people said at that time, 
Members of Congress, we are not crazy about DC. DC has always 
been the place that people beat up on. I think the history 
books will say that, besides the Nationals, you did a lot for 
this city during that period of time, and I applaud you for 
that.
    But incidentally, Mr. Chairman, all the city council 
members who gave him a hard time about the Nationals showed up 
on opening day because I was there, and they were taking credit 
for it.
    Mr. Mayer, I am a little confused. According to my 
information--and you correct me if I am wrong--you are a member 
of the National Bankruptcy Conference. Is that correct?
    Mr. Mayer. That is correct.
    Mr. Serrano. But the conference supports Chapter 9 
extension to Puerto Rico, and you do not.
    Mr. Mayer. That is also correct. I abstained from the 
debate at the conference on that topic, and my views are not 
the views of the conference.
    Mr. Serrano. OK. And the conference knows that you are 
testifying or that you disagree with them and are testifying in 
that way saying that you do not support Chapter 9 while the 
conference does?
    Mr. Mayer. That is correct, yes.
    Mr. Serrano. OK. Mr. Chairman, just a note. Our biggest 
challenge will not be finding a solution or getting what 
Speaker Ryan has promised to take place. It is going back to 
the same issue of how do you give the territory the needed 
assistance while not making it more of a colony. Not more 
colonialism. And you are going to have Members of Congress who 
are not going to think that way, who are going to say if they 
are going to get help, they have to pay.
    An oversight board is fine. The Resident Commissioner has 
said that oversight is fine. Oversight exists already. Every 
single dollar that goes to Puerto Rico, or to any state, or to 
any municipality, you have to answer to the Federal Government 
for it. You have to answer to the Appropriations Committee for 
it. That should be the case. But to bring Puerto Rico to its 
knees when it is already on one knee would just be adding more 
pain to a situation that is very painful.
    I find myself in a unique situation. I was born in the 
colony and now I am a Member of Congress of the group that 
holds the colony, and so sometimes I think Puerto Ricans need a 
national psychiatrist to deal with this issue of how we deal 
with both issues at once. I mean we love the place we were born 
in, we love the place whose Army we served in and we grew up 
in. I came to New York when I was 7 years old.
    But I think it is about time that the place I was raised in 
solve the issue of the place I was born in. And I think you 
could go a long way, because, Mr. Chairman, you have been a 
very strong supporter. You have gone a step forward, above and 
beyond. You have actually asked for statehood for Puerto Rico.
    The strongest point you have made is that you want change, 
dignity, and respect; and I thank you for that both as an 
American and as an American who was born in Puerto Rico and one 
who lived in Alaska. By the way, this may be a hearing about 
Puerto Rico, but you notice it has gotten colder as the hearing 
went on. That is the influence of the Alaskan Chairman. Thank 
you, Mr. Chairman.
    Mr. Young. Thank you, Mr. Serrano. I appreciate it.
    Mr. Garcia, in your testimony, you cite the powers and 
tools that should be vested with the authority. Focused on the 
first bullet point in that section of your testimony--implement 
structural reforms in the government of Puerto Rico and its 
political subdivision--why do you feel it is necessary that 
this is a power of the authority? Is the current or future 
government of Puerto Rico able to make the necessary structural 
reforms on its own?
    Mr. Garcia. Mr. Chairman, based on my experience during 
2009 and 2011, there was always a lot of great political will 
to be able to go and do the restructuring, but it is always a 
very hard process to be agreed upon. Lots of analysis, lots of 
conversations happened. One of the things that we were not able 
to achieve on the control board was to be able to affect good 
reforms in the structure of the government of Puerto Rico.
    So, I think this is a great, unique opportunity based on a 
Federal control board that will be seeking both interests, not 
only the fiscal, but the economic part to finally be able to 
analyze the situation and work with the people of Puerto Rico 
to implement a government that will work for its people in a 
very efficient and agile manner.
    Mr. Young. Thank you. Mr. Mayer, you mentioned the energy 
board has reached an agreement, negotiated with the 
bondholders. Is that correct?
    Mr. Mayer. Yes, Mr. Chairman.
    Mr. Young. Why does the legislature have to approve that?
    Mr. Mayer. The agreement is structured in a way where the 
debt moves off the balance sheet of the electric company and 
onto a special purpose vehicle which is paid out of a cents per 
kilowatt hour charge. That has to be established by 
legislation. It could be established by an authority, but it 
has to be established by legislation.
    And the result of this transaction is that the total debt 
load goes down. The total amount of debt goes down by 15 
percent, the interest rate drops, and there is a 5-year holiday 
on principal repayments. So, hundreds of millions of dollars in 
cash flow are freed up for the electric company to make the 
investment in natural gas and other plants that need to be 
made. And this requires the Puerto Rican legislature to change 
Puerto Rican law so that it all works.
    Measures have been before the legislature now for probably 
a month and a half, 2 months, and the deadline for having it 
passed has already been extended by the bondholders. Every day 
that goes by without passing this legislation probably costs in 
interest rate relief alone $250,000 a day, because that is the 
amount of relief that would happen. So, if the legislature 
passes the law, then this restructuring can go forward that 
will save everybody a lot of money and it will make capital 
available to PREPA to make the investments that need to be 
made.
    Mr. Young. I am concerned that energy is what drives the 
economy. The energy of Puerto Rico is extremely high. That is 
something we are going to have to address somewhere in this 
Congress, too, that either we go nuclear, which Puerto Ricans 
may not want, natural gas can possibly work, restructure is 
extremely expensive. It is something we are going to have to 
look at.
    I am going to yield to the Resident Commissioner, 2 minutes 
for his time to make a statement or ask a question.
    Mr. Pierluisi. Thank you so much, Chairman--Chairman Young, 
Chairman Bishop, all of those present at this hearing, I 
believe that we should put the blame game aside. I believe that 
we should do all we can to transcend partisan politics.
    And I believe that we should come up with a legislative 
package for Puerto Rico that makes sense, given the crisis 
Puerto Rico is facing, given the status of Puerto Rico, and 
given the reality that this is not a foreign country or foreign 
nationals. You are talking about American citizens who can hop 
on a plane from one day to the next if the going is tough down 
there and nobody can blame them.
    I can say this with credibility because on the one hand I 
represent all of the American citizens living in Puerto Rico in 
this Congress. In addition, I chair the New Progressive Party 
of Puerto Rico, the pro-statehood party of Puerto Rico. And I 
am running for governor.
    And yet, I am saying we need to assist the current 
administration of Puerto Rico. We need to give the government 
of Puerto Rico the necessary tools to put its fiscal house in 
order and to, yes, restructure its debts. Now ideally, we 
should do that on a negotiated basis, on a consensual basis. 
But it is not happening. It has not happened for too long. So, 
the concept of having a board that would assist Puerto Rico in 
getting its fiscal house in order, and that would have a key 
role in promoting the restructuring and facilitating the debt 
restructuring, makes sense.
    And to the extent states do not have that tool, I should 
say I am the first one who does not like the current status of 
Puerto Rico, but I have to recognize that Congress does have 
plenary power over the territory of Puerto Rico. That is why 
this committee has primary jurisdiction over this issue. So, 
that is the challenge.
    Chairman, I believe we can work it out. We can provide 
Puerto Rico the tools to get back on a path to recovery, get 
its fiscal house in order, and in the process be fair to 
creditors, both institutional and individual, including my 
constituents. Thank you.
    Mr. Young. I thank the gentleman. I can only say that I 
have listened to Mr. Serrano and yourself and the other 
witnesses. If we had done what I said 15 years ago that we 
should have, we would not be here today. And I would like to 
suggest, respectfully, we are trying to solve an immediate 
problem which is serious and that does not stop me from still 
pushing statehood. I know there is no chance in--can I say hell 
in this committee--no chance in hell of that happening----
    Mr. Pierluisi. Say heck.
    Mr. Young [continuing]. Under the present climate. But that 
does not preclude this from coming up again if everybody gets 
their house in order, and that is what we are going to try to 
do. I want to thank the witnesses. This is one of the best 
panels I have been able to be Chair of. You had good ideas and 
good thoughts, and with your permission we will probably call 
on you for a little bit of sage advice. As I mentioned before 
what will happen if we don't, and we will do the best we can. 
With that, if there are no other comments, this meeting is 
adjourned.

    [Whereupon, at 12:51 p.m., the subcommittee was adjourned.]

[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE COMMITTEE'S 
                            OFFICIAL FILES]

  --  April 14, 2011, Carlos Garcia, Junta De Restructuracion Y 
Estabilizacion Fiscal, Letter and proposal submitted to 
Governor Luis G. Fortuno, Hon. Jennifer Gonzalez Rico, and Hon. 
Thomas Rivera Schatz. 39 pages.

  --  December 1, 2015, James E. Spiotto, ``Is Chapter 9 
Bankruptcy the Ultimate Remedy for Financially Distressed 
Territories and Sovereigns Such as Puerto Rico: Are There 
Better Resolution Mechanisms? '' Testimony submitted to U.S. 
Senate Committee on the Judiciary. 54 pages.

  --  December 1, 2015, James E. Spiotto, PowerPoint 
Presentation, ``Lessons Learned From Financially Distressed 
Governments and A Resulting Proposed Sovereign Recovery Debt 
Adjustment Mechanism.'' Presentation submitted to U.S. Senate 
Committee on the Judiciary. 146 pages.

  --  February 2, 2016, Congresswoman Stacey E. Plaskett, 
Statement submitted to House Committee on Natural Resources, 
Subcommittee on Indian, Insular, and Alaska Native Affairs. 3 
pages.

  --  February 2, 2016, James E. Spiotto, Testimony submitted 
to Chairman Young regarding the establishment of a Puerto Rico 
Financial Stability and Economic Growth Authority. 12 pages.

  --  February 2, 2016, Ricardo Rossello, PhD, Statement 
submitted to House Committee on Natural Resources, Subcommittee 
on Indian, Insular, and Alaska Native Affairs. 10 pages.

  --  February 2, 2016, Mike Orr, Sitnasuak Native Corporation, 
Testimony submitted to Chairman Young and House Committee on 
Natural Resources, Subcommittee on Indian, Insular, and Alaska 
Native Affairs. 2 pages.

  --  February 2, 2016, Miriam J. Ramirez, MD, Statement 
submitted to House Committee on Natural Resources, Subcommittee 
on Indian, Insular, and Alaska Native Affairs. 3 pages.

  --  February 25, 2016, Arnaldo Vargas-Nin, Statement 
submitted to House Committee on Natural Resources. 4 pages.

                                 [all]