[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
__________
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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.
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\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.
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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.
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\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.
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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\
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\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.
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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.
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\6\ See 48 U.S.C. Sec. 745.
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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.
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\7\ As discussed below, Puerto Ricans do not pay Federal income
tax, but they do pay the Federal Insurance Contributions Act tax.
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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.
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\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).
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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\
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\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\
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\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\
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\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
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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\
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\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\
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\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\
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\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\
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\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\
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\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\
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\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\
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\21\ See generally 2012 Mich. Pub. Act 436, the Local Financial
Stability and Choice Act.
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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\
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\22\ See Exhibit C.
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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\
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\23\ MARTIN SHEFTER, POLITICAL CRISIS FISCAL CRISIS: THE COLLAPSE
AND REVIVAL OF NEW YORK CITY 134, 151 (Columbia Univ. Press Morningside
ed. 1992).
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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\
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\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).
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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\
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\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).
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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\
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\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.
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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.
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\29\ 11 U.S.C. Sec. Sec. 903-904.
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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\
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\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.
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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.
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\31\ The statute providing for the appointment of Detroit's
emergency manager gave the manager a term of 18 months.
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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.
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\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).
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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]