[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE U.S. DEPARTMENT OF THE TREASURY'S ANALYSIS
OF THE SITUATION IN PUERTO RICO
=======================================================================
OVERSIGHT HEARING
BEFORE THE
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
Thursday, February 25, 2016
__________
Serial No. 114-34
__________
Printed for the use of the Committee on Natural Resources
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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
----------
CONTENTS
----------
Page
Hearing held on Thursday, February 25, 2016...................... 1
Statement of Members:
Bishop, Hon. Rob, a Representative in Congress from the State
of Utah.................................................... 1
Prepared statement of.................................... 2
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona........................................... 3
Prepared statement of.................................... 3
Lummis, Hon. Cynthia M., a Representative in Congress from
the State of Wyoming....................................... 4
Prepared statement of.................................... 4
Pierluisi, Hon. Pedro R., a Delegate from the Territory of
Puerto Rico................................................ 4
Prepared statement of.................................... 6
Sablan, Hon. Gregorio Kilili Camacho, a Delegate from
Northern Mariana Islands, prepared statement of............ 46
Statement of Witnesses:
Weiss, Antonio, Counselor to the Secretary, U.S. Department
of the Treasury, Washington, DC............................ 7
Prepared statement of.................................... 9
Additional Materials Submitted for the Record:
Chardon, Carlos E., Position Paper, ``Is Puerto Rico a
Failing State? ''.......................................... 51
Colon-De-Armas, Carlos, Answers to Questions from a Senate
Judiciary Committee Hearing................................ 47
OVERSIGHT HEARING ON THE U.S. DEPARTMENT OF THE TREASURY'S ANALYSIS OF
THE SITUATION IN PUERTO RICO
----------
Thursday, February 25, 2016
U.S. House of Representatives
Committee on Natural Resources
Washington, DC
----------
The committee met, pursuant to notice, at 10:09 a.m., in
room 1324, Longworth House Office Building, Hon. Rob Bishop
[Chairman of the Committee] presiding.
Present: Representatives Bishop, Gohmert, Lamborn,
McClintock, Thompson, Lummis, Duncan, Labrador, LaMalfa,
Westerman, Graves, Zinke, Hice, MacArthur, Hardy, LaHood;
Grijalva, Bordallo, Tsongas, Pierluisi, Huffman, Beyer, Torres,
Dingell, Gallego, Polis, and Clay.
Also present: Representatives Serrano, Gutierrez, and
Velazquez.
The Chairman. All right, we will call this committee
hearing to order. We appreciate those who are here today, both
Members and the witnesses.
STATEMENT OF THE HON. ROB BISHOP, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF UTAH
The Chairman. This oversight hearing is the third we have
had in a couple of months, and it is going to focus on the
Administration's perspective on the Puerto Rico situation. I
appreciate Mr. Weiss being here. He is the sole witness that we
will have this morning.
If you recall the first hearing that we had, we focused on
the opportunity for private investment, the importance of
modernizing Puerto Rico's energy infrastructure, and we touched
on the potential for voluntary debt restructuring agreements
that could be reached by both creditors and debtors.
In our second hearing, we discussed the merits of
establishing some kind of an oversight body that will ensure
economic stability and revitalization in Puerto Rico. And I
think that is also one of the key elements, we have to have the
revitalization there, too. I think this committee is uniquely
situated to provide those kinds of recommendations that can
actually help grow the economy. We are not just going to try
and settle things out; we have to grow the economy, or at least
give the potential for growth in the economy that has to be
there.
There is some common ground. There are some shared ideas of
a need for strong fiscal governance and also transparency. But
we also have some shared ideas of debt restructuring, and we
must facilitate good faith negotiations between creditors and
debtors at all times. There have to be those kinds of
appropriate encouragements for all parties to reach consensual
agreements.
So, both the Administration and the committee seek to have
a productive outcome for Puerto Rico and its citizens and there
are still some open questions of how we will do that. I trust
that Mr. Weiss will be able to shed more light on the areas of
potential agreement between the Administration and this
particular committee, and I look forward to continuing the
dialogue as we reach some specific solutions that will be
introduced shortly.
[The prepared statement of Mr. Bishop follows:]
Prepared Statement of the Hon. Rob Bishop, Chairman, Committee on
Natural Resources
Let me begin by reiterating this committee's purpose and intent
concerning Puerto Rico. The bill this committee produces will be to
secure Puerto Rico's future for its 3.5 million American citizens,
respect their authority to self-govern, restore credibility to the
Puerto Rican economy, and instill principles of good governance and
fiscal transparency to encourage private investment and promote
sustainability.
Today's oversight hearing--the third in 2 months--focuses on the
Administration's perspective on the Puerto Rico situation.
During the first hearing, the committee addressed the opportunity
for private investment to modernize Puerto Rico's outdated energy
infrastructure, and touched on the potential for voluntary debt
restructuring agreements to be reached between creditors and debtors.
At the second hearing, we discussed the merit of establishing an
independent oversight body to ensure that Puerto Rico is on the path
toward economic stability and revitalization.
In some way, the conclusions reached in the first two hearings
touch on or parallel the Administration's proposals for relieving the
fiscal crisis in Puerto Rico.
There is common ground. First, there is the shared idea of a need
for strong fiscal governance and oversight that provides ``sufficient
safeguards to ensure Puerto Rico adheres to its recovery plan and fully
implements proposed reforms.'' \1\
---------------------------------------------------------------------------
\1\ This quote is taken from the White House's published plan on
Puerto Rico, entitled: ``Addressing Puerto Rico's Economic and Fiscal
Crisis and Creating a Path to Recovery: Roadmap for Congressional
Action.''
---------------------------------------------------------------------------
Such oversight is the starting point for any legislative proposal
that will be forthcoming from this committee. We must provide the
Puerto Rican economy and people a path forward--and that may only be
accomplished if an independent oversight body has the strength and
ability to encourage the reinvigoration of the island's economic
prospects.
The Administration's proposal seeks to respect the ``autonomy'' of
Puerto Rico. I hope today's discussion will provide clarity as to what
the Administration means by that term--specifically, how deferential
any oversight authority must be to the Puerto Rican government, and how
such deference is reconcilable with necessity for reform, given the
track record of the Commonwealth's government.
Another pillar supporting the Administration's platform is a call
for Puerto Rico to have access to debt restructuring. Let me be clear
on this topic, Puerto Rico already has the tools to restructure through
voluntary negotiations a large portion--if not all--of its debt.
Indeed, the restructuring of PREPA exemplifies the type of deal that
should be encouraged for as much Puerto Rican debt as possible.
Therefore, we must do all we can to facilitate the development of
consensual agreements between all creditors and debtors--and to ensure
that such negotiations occur in good faith.
Last--today's witness, Mr. Weiss through testimony before a recent
Senate hearing identified the need for measures to boost economic
growth and ensure a level playing field in Federal healthcare benefits.
Unfortunately, all of the Administration's proposals concerning the
Earned Income Tax Credit and Medicaid fall far outside the
jurisdictional bounds of this committee. That said, we are interested
in the Administration's position on what can be done to encourage
private investment to come into Puerto Rico.
It is clear, both the Administration and this committee seek a
positive outcome for Puerto Rico and its citizens. How we get there is
still an open question. I trust that Mr. Weiss will be able to shed
more light on areas of potential agreement between the Administration
and this committee, and I look forward to the dialogue toward real
solutions.
______
The Chairman. With that, I am going to yield to Mr.
Grijalva for his opening statement.
STATEMENT OF THE HON. RAUL M. GRIJALVA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Mr. Grijalva. Thank you, Mr. Chairman. I will enter my full
statement into the record, if there is no objection.
The Chairman. Can I stop you if there is an objection?
Mr. Grijalva. If you want to hear it, I would be more than
glad to----
The Chairman. No objection.
[The prepared statement of Mr. Grijalva follows:]
Prepared Statement of the Hon. Raul M. Grijalva, Ranking Member,
Committee on Natural Resources
Thank you. Mr. Chairman, I want to begin by welcoming our witness
today and to commend him for the assistance he has been providing to
leaders of Puerto Rico to deal with the crisis they are facing.
Today's hearing, Mr. Chairman, will be the third we have held in
this committee since Congress reconvened in January and since Speaker
Ryan instructed relevant committees to report out legislation on Puerto
Rico by the end of March.
While these hearings are instructive, if we are going to meet the
Speaker's deadline, we should have long since begun discussions on a
bipartisan legislative solution to the crisis. In fact, the Ranking
Member of the Judiciary Committee and I issued the same call in a
letter we sent 4 weeks ago to you, Mr. Chairman, as well as to the
Chairman of the Judiciary Committee. As of today, we are still awaiting
your invitation to begin those discussions. Maybe the invitation was
lost in the mail.
In the meantime, while we fiddle by holding yet another hearing,
Rome--which in this case is Puerto Rico--continues to burn.
As I have mentioned before, Puerto Rico is currently insolvent and
has lost access to the credit markets even at very high interest rates.
Last June, Governor Garcia Padilla announced that Puerto Rico could not
pay its debts after which his government defaulted on bond payments in
August and again this January.
Since then, the government has withheld paying tax refunds and
payments to healthcare agencies causing several hospitals to close.
Additionally, businesses are leaving the island causing the government
to collect even less revenue than expected.
This is all occurring in the face of the fact that the Puerto Rican
people have already endured more than a decade of austerity. Over the
last few years, the government of Puerto Rico has hiked the sales tax
to the highest in the United States, raised tuition at public
universities, increased the cost of water and electricity, twice upped
the tax on gasoline, and raised the retirement age. Puerto Rico now has
a 45 percent poverty rate because of these measures.
In the meantime, the island continues to bleed residents, who see
relocation to Florida or elsewhere on the mainland as their only hope
for survival. By some estimates, up to 100,000 Puerto Ricans left the
island last year.
I want to again commend you, Mr. Weiss, Secretary Lew, and
President Obama for the comprehensive proposal you put forth last year
for a legislative solution to the Puerto Rican crisis.
From what we are hearing, there appears to be agreement on the
general outline for a legislative fix for Puerto Rico: an oversight
board and broad restructuring authority. If this is indeed the case,
there is nothing preventing us, once this hearing is concluded, from
immediately drafting bipartisan legislation that can be reported to the
Floor without further delay.
As we begin our deliberations, we must ask ourselves who wins and
who loses in each scenario. As for who wins when we blindly demand more
budget cuts, a report released by my staff last summer answers that
question. So-called austerity is a tool used by hedge funds to boost
their profits at the expense of the men, women and children of Puerto
Rico. A control board that would use austerity to help hedge funds lock
in those profits, no matter the human cost, is not the answer. We can
and we must do better than that.
______
The Chairman. I now recognize Mrs. Lummis for an opening
statement from the Vice Chair.
STATEMENT OF THE HON. CYNTHIA M. LUMMIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WYOMING
Mrs. Lummis. Thank you, Mr. Chairman, and thank you for
setting up the tone of this committee today. We have with us
Mr. Antonio Weiss, Counselor of the Secretary of the Treasury.
He will share with us the U.S. Department of the Treasury's
analysis of the situation in Puerto Rico.
We hope, Mr. Weiss, that you can help the committee as we
continue to work toward legislation to advance good governance,
as well as fiscal transparency and accountability. I hope you
will also have some ideas about how we can improve the economy
of those living in Puerto Rico. We welcome continuing that
discussion, even some of those ideas that are not specifically
within the jurisdiction of the Natural Resources Committee.
We very much appreciate your being with us here today. We
look forward to hearing from you and the other Members as we
try to bring some clarity toward this issue, and bring a
solution about that is good for the people of Puerto Rico and
the United States.
Thank you, Mr. Chairman, I yield back.
[The prepared statement of Mrs. Lummis follows:]
Prepared Statement of the Hon. Cynthia M. Lummis, a Representative in
Congress from the State of Wyoming
Thank you all for joining me for this hearing of the Natural
Resources Committee to examine the ongoing economic crisis in Puerto
Rico. This is the latest in a series of hearings by the Natural
Resources Committee regarding Puerto Rico. Today we have with us Mr.
Antonio F. Weiss, Counselor to the Secretary of the Treasury. He will
share with us the U.S. Department of the Treasury's analysis of the
situation in Puerto Rico.
I hope he can help the committee as we look to work on legislation
to advance good governance as well as fiscal transparency and
accountability. I am sure he will also have some ideas about how we can
spur economic growth and improve the economy of those living in Puerto
Rico. We obviously welcome continuing that discussion, but many of the
proposals we have heard previously are not within the jurisdiction of
the Natural Resources Committee.
Mr. Weiss, I appreciate you being here with us today. I look
forward to hearing from you and the other Members as we try to bring
some clarity to what is going on here and build toward a solution.
______
The Chairman. Thank you.
And I think, Mr. Pierluisi, you are probably going to be
one of the key players in this issue, I am assuming. We will
recognize you for an opening statement, as well.
STATEMENT OF THE HON. PEDRO R. PIERLUISI, A DELEGATE FROM THE
TERRITORY OF PUERTO RICO
Mr. Pierluisi. Thank you, Chairman. At a Senate hearing
last year, the Governor of Puerto Rico compared the territory
to a ship at sea issuing a distress call to Congress. I want to
clarify this metaphor. The passengers on this ship are not only
the 3.5 million U.S. citizens that reside in Puerto Rico. They
are also individuals and institutions located in Puerto Rico
and the states that own bonds issued by the territory and its
instrumentalities.
Puerto Rico and its creditors are on the same ship. We are
going to sail safely to shore together or we are going to sink
together. Our common fate depends on whether leaders in
Washington and San Juan rise to the occasion. Principled
compromise is the only course to harbor.
How did our ship arrive in such perilous waters in the
first place? Precisely, because over the years the people of
Puerto Rico have been poorly served by their national and local
leaders. In Puerto Rico, inequality at the national level has
led to mismanagement at the local level. Federal policy toward
Puerto Rico is a national disgrace, contradicting the claim
that the United States desires democracy and dignity for all of
its citizens.
Under this policy, my constituents are American enough to
fight for this country, a duty they have performed proudly
since World War I. But they are not American enough to vote for
President, Senators, or voting Members of the House. They are
American enough to win nine Medals of Honor and to form the
backbone of a U.S. Army unit that recently earned the
Congressional Gold Medal, but they are not American enough to
receive fair treatment under Federal programs that improve
quality of life and promote work.
And so, they are moving to the states in huge numbers
because it is human nature to go where you have the best chance
to survive and thrive. The excuse given by Federal policymakers
for such disparate treatment is always the same: ``You don't
pay Federal taxes,'' they proclaim. Never mind that individuals
and businesses in Puerto Rico pay about $3.6 billion in Federal
taxes to the IRS every year. Never mind that it was Congress,
not Puerto Rico, that chose to exempt island residents from
certain Federal income taxes. And never mind that, because the
Federal tax code combines tax obligations with tax credits, the
average working family in Puerto Rico contributes more in
Federal payroll and income taxes than the average working
family in the states.
As a statehood supporter, I aspire for American citizens in
Puerto Rico to have the same rights and responsibilities as
American citizens in every state. I do not appreciate being
told the appalling treatment we receive as a territory is, in
fact, preferential treatment.
To compensate for the shortfall in Federal support,
political leaders in Puerto Rico have tended to overtax local
residents and businesses, impeding economic growth, and to
over-borrow in the bond market, creating excessive deficits and
debts. Under certain administrations in San Juan, policymaking
crossed the line from imprudent to negligent. We, in Puerto
Rico, must accept this fact, resolve to do better in the
future, and refuse to repeat the mistakes of the past.
If our ship is to weather this storm, Congress must enact
legislation that authorizes Puerto Rico to restructure a
meaningful portion of its debt in a fair and orderly manner,
which will ultimately benefit Puerto Rico and the vast majority
of its creditors.
Today, we will have a constructive conversation about the
contours of this debt restructuring mechanism, but it is no
longer reasonable to question whether such a mechanism is
needed at all.
In addition, because inequality has bred mismanagement, the
bill should address both cause and effect. The bill cannot fix
every disparity Puerto Rico faces, because only statehood can
do that. But it should make a good faith effort to rectify
certain disparities, and it is important to emphasize that
Puerto Rico and its creditors agree on this point.
Finally, I understand that the issue of an independent
oversight board is a sensitive one, especially for a territory
that has no democracy at the national level. However, if the
composition and powers of the board are properly calibrated,
the board will supplement, not displace, local elected
officials. If Puerto Rico officials act in a disciplined way,
the board will be dissolved within a short period of time. It
is my sense that the people of Puerto Rico recognize the
potential benefits of an independent board; and it is the
people, not island politicians, that matter most.
Mr. Chairman, following this hearing it is my hope and
expectation that we will craft a balanced and bipartisan bill
that can be enacted into law. Thank you.
[The prepared statement of Mr. Pierluisi follows:]
Prepared Statement of the Hon. Pedro R. Pierluisi, a Delegate from the
Territory of Puerto Rico
Thank you, Chairman Bishop. At a Senate hearing last year, the
Governor of Puerto Rico compared the territory to a ship at sea,
issuing a distress call to Congress. I want to clarify this metaphor.
The passengers on this ship are not only the 3.5 million U.S. citizens
that reside in Puerto Rico. They are also the individuals and
institutions, located in Puerto Rico and the states, that own bonds
issued by the territory and its instrumentalities.
Puerto Rico and its creditors are on the same ship. We are going to
sail safely to shore together, or we are going to sink together. Our
common fate depends on whether leaders in Washington and San Juan rise
to the occasion.
Principled compromise is the only course to harbor. How did our
ship arrive in such perilous waters in the first place? Precisely
because, over the years, the people of Puerto Rico have been poorly
served by their national and local leaders.
In Puerto Rico, inequality at the national level has led to
mismanagement at the local level. Federal policy toward Puerto Rico is
a national disgrace, contradicting the claim that the United States
desires democracy and dignity for all of its citizens. Under this
policy, my constituents are American enough to serve, fight and die for
this country--a duty they have performed proudly since World War I. But
they are not American enough to vote for President, Senators or voting
Members of the House. They are American enough to win nine Medals of
Honor, and to form the backbone of a U.S. Army unit that recently
earned the Congressional Gold Medal. But, as long as they remain in
Puerto Rico, my constituents are not American enough to receive fair
treatment under Federal programs that improve quality of life and
promote work. And so they are moving to the states in huge numbers,
because it is human nature to go where you have the best chance to
survive and to thrive.
The excuse given by Federal policymakers for such disparate
treatment is always the same. ``You don't pay Federal taxes,'' they
proclaim. Never mind that individuals and businesses in Puerto Rico pay
about $3.6 billion in Federal taxes to the IRS every year. Never mind
that it was Congress, not Puerto Rico, that chose to exempt island
residents from certain Federal income taxes. And never mind that
because the Federal tax code combines tax obligations with tax credits,
the average working family in Puerto Rico contributes more in Federal
payroll and income taxes than the average working family in the states.
As a statehood supporter, I aspire for American citizens in Puerto Rico
to have the same rights and responsibilities as American citizens in
every state. I don't appreciate being told--falsely--that the appalling
treatment we receive as a territory is, in fact, preferential
treatment.
As noted, inequality at the national level has enabled, even
compelled, mismanagement at the local level. To compensate for the
shortfall in Federal support, political leaders in Puerto Rico have
tended to over-tax local residents and businesses, impeding economic
growth, and to over-borrow in the bond market, creating excessive
deficits and debt. Under certain administrations in San Juan,
policymaking crossed the line from imprudent to negligent. We in Puerto
Rico must be candid and courageous, accepting rather than denying this
fact, resolving to do better in the future and refusing to repeat the
mistakes of the past. Discipline is required, and so disciplined we
must be.
If our ship is to weather the present storm, Congress must enact
legislation that authorizes Puerto Rico to restructure a meaningful
portion of its debt in a fair and orderly manner, a step that will
ultimately benefit Puerto Rico and the vast majority of its creditors.
Today we will have a constructive conversation about the contours of
this debt restructuring mechanism, but it is no longer reasonable to
question whether such a mechanism is needed at all.
In addition, because inequality has bred mismanagement, the bill
should address both cause and effect. With respect to the former, the
bill cannot fix every disparity Puerto Rico faces, because only
statehood can do that, but it should make a good-faith effort to
rectify certain disparities--and it is important to emphasize that
Puerto Rico and its creditors agree on the point.
With respect to the latter, I understand that the issue of an
independent oversight board is a sensitive one, especially for a
territory that has no democracy at the national level. Three points are
in order.
First, if the composition and powers of the board are properly
calibrated, the board will supplement--not displace--local elected
officials. Second, if Puerto Rico officials act in a disciplined way,
the board will be dissolved within a short period of time. Finally, it
is my sense that the people of Puerto Rico recognize the potential
benefits of a temporary board, and it is the people--not island
politicians--that matter most.
Following this hearing, it is my hope and expectation that Congress
will craft a balanced and bipartisan bill that can be enacted into law.
Thank you.
______
The Chairman. Thank you very much. I appreciate that. I am
going to ask unanimous consent that all other Members' opening
statements, if they have any, are made part of the hearing
record if they are submitted to the Clerk by 5:00 p.m. today. I
am also going to ask unanimous consent that my full statement
be added into the record, instead of giving it right now.
[No response.]
The Chairman. Without objection, so ordered.
I am also asking unanimous consent as we start, that the
gentleman from New York, Mr. Serrano; the gentlewoman from New
York, Ms. Velazquez; and the gentleman from Illinois, Mr.
Gutierrez, be allowed to sit on the dais and participate in
today's hearing.
[No response.]
The Chairman. If no objections, so ordered.
With that, we are honored to have Mr. Weiss here with us.
We are going to turn to you for your opening statement, and
then we will get to the questions that are before us.
Hopefully, you know how the clock works. It is a 5-minute
opening statement, but I think you are the only witness, so we
can be a little bit flexible if we need to.
Mr. Weiss. Thank you for that.
STATEMENT OF ANTONIO WEISS, COUNSELOR TO THE SECRETARY, U.S.
DEPARTMENT OF THE TREASURY, WASHINGTON, DC
Mr. Weiss. Chairman Bishop, Ranking Member Grijalva, and
members of the committee, thank you for inviting Treasury to
testify today. We commend this committee and its staff for its
leadership in response to the March timetable for action set by
Speaker Ryan. We look forward to working together on a
responsible solution to this crisis. There is a growing
recognition that we need to act now. We are encouraged by the
positive, bipartisan discussions that are taking place.
This is a Puerto Rican crisis, which means it is an
American crisis. Puerto Rico is home to 3.5 million Americans
whose economic well-being and safety are at stake. In the many
months that we have been traveling to Puerto Rico and meeting
with government officials, business leaders, and workers, there
is a growing sense of fear and a more urgent call to action.
Puerto Rico is already in distress. What started as a
recession has turned into a fiscal and liquidity crisis that
shows signs of becoming a humanitarian one, as well. Health,
education, and public safety services have been curtailed
because the government simply cannot pay all of its bills.
The government remains open only because the Governor has
authorized more than $1 billion in onerous and unsustainable
emergency liquidity actions. Tax refunds have been withheld
from citizens. Pension assets, already severely depleted, are
being sold to fund central government operations. Money
dedicated to one group of creditors is being taken to pay other
creditors. The inevitable defaults and litigation have already
begun.
Without action, this crisis can only escalate. The
Government Development Bank, which is at the heart of the
financial system, is dangerously under-capitalized. Debt
payments in May and July, including more than $800 million of
constitutionally prioritized debt, are unlikely to be made.
Mounting litigation will flood the courts and the central
government itself could be forced to shut down entirely.
There is no room for error in this economy. Fifty-seven
percent of children live in poverty. Unemployment is 12.2
percent, which is more than twice the national average. The
population has dropped by 10 percent in the past decade,
including 2.5 percent last year alone, as young, working-age
Puerto Ricans leave the island with their children in search of
opportunity. Their departure leaves behind an aging population
and further erodes Puerto Rico's long-term growth prospects.
Under any realistic scenario, Puerto Rico's $70 billion of
debt is not sustainable and markets know this. Puerto Rico
bonds trade between 10 and 70 cents on the dollar. The debt is
enormously complex, with 18 different issuers and 20 creditor
committees already with competing claims. As the cascading
defaults and litigation unfold, there is real risk of another
lost decade, this one more dangerous than the last.
What is the solution? In October of last year, the
Administration released a comprehensive plan to stem the crisis
and to restore economic growth. While we believe that all
elements of our plan are essential, I would like to focus today
on the most time-sensitive components: debt restructuring and
fiscal oversight.
First, restructuring. We propose a restructuring authority
pursuant to the territorial clause of the U.S. Constitution,
that would apply to all of the Commonwealth's liabilities.
Importantly, this authority would expressly not apply to
states, who have an entirely different relationship with the
Federal Government under the 10th Amendment.
In our view, all creditors must be at the table to reach a
comprehensive and sustainable solution. But we are not
advocating a one-size-fits-all approach. Restructuring
legislation can be designed to consider existing priorities and
claims. We would also favor allowing for an initial period of
voluntary negotiations with creditors, facilitated by a stay on
litigation.
Second, oversight. We propose strong, independent Federal
oversight to address the Commonwealth's long history of fiscal
mismanagement and inadequate financial disclosure. Access to a
restructuring authority should be strictly conditioned on
acceptance of this oversight. But to be effective, oversight
should be structured in a way that respects Puerto Rico's self-
governance, while assuring implementation of required reforms.
We believe Federal legislation can be crafted to achieve
that balance.
Pairing restructuring and oversight is a tried and true
combination to resolve debt crises, both domestically and
abroad. However, these two proposals must be enacted together.
One without the other will not work, and these two provisions
would cost U.S. taxpayers nothing.
Municipal bond investors tell us that an orderly
restructuring under clear Federal guidelines is also the surest
way to restore Puerto Rico's market access, and it is the best
outcome for municipal markets, far preferable to a protracted,
disorderly series of defaults of unprecedented magnitude and
complexity. The question is not whether the Commonwealth will
emerge from this crisis, but when, and at what cost to the 3.5
million Americans on the island.
In closing, we look forward to working with this committee
on legislation that will protect our fellow citizens in Puerto
Rico.
[The prepared statement of Mr. Weiss follows:]
Prepared Statement of Mr. Antonio Weiss, Counselor to the Secretary,
U.S. Department of the Treasury
Chairman Bishop, Ranking Member Grijalva, and members of the
committee, thank you for inviting Treasury to testify today. We commend
this committee for its leadership in response to the March timetable
for action set by Speaker Ryan. We look forward to working together on
a responsible solution to this crisis. There is a growing recognition
that we need to act now, and we are encouraged by the positive,
bipartisan discussions taking place.
This is a Puerto Rican crisis, which means it is an American
crisis.
Puerto Rico is home to 3.5 million Americans whose economic well-
being and safety are at stake. In the many months we have been
traveling to Puerto Rico and meeting with government officials,
business leaders and workers, there is a growing sense of fear and a
more urgent call to action.
action is needed now
Puerto Rico is already in distress. What started as a recession has
turned into a fiscal and liquidity crisis that shows signs of becoming
a humanitarian one as well.
The Commonwealth has begun defaulting on its debt. Puerto Rico no
longer has access to the credit markets, even the costliest ones.
Health, education, and public safety services have been curtailed
because the government cannot pay all of its bills. Hospitals are
closing doors and businesses are leaving the Island.
The government remains open only because the Governor authorized
more than $1 billion in onerous and unsustainable emergency liquidity
actions. Tax refunds have been withheld from citizens. Pension assets,
already severely depleted, are being sold to fund government
operations. Money dedicated to one group of creditors is being taken to
pay other creditors. The inevitable defaults and lawsuits have already
begun.
Without action, this crisis will escalate. The Government
Development Bank, which is at the heart of Puerto Rico's financial
system, is dangerously undercapitalized. Debt payments in May and July,
including nearly $800 million of constitutionally prioritized debt, are
unlikely to be made. Mounting litigation will flood the courts. And the
central government itself could be forced to shut down entirely.
There is no room for error in this economy. 57 percent of children
live in poverty. Unemployment is 12.2 percent, more than twice the
national average. At $19,000, median annual household income in Puerto
Rico is approximately one-third the U.S. median.
This crisis has sparked the largest wave of out-migration from
Puerto Rico since the 1950s. The population has dropped by nearly 10
percent in the past decade--and 2.5 percent last year alone--as young,
working age Puerto Ricans leave the Island with their children in
search of opportunity. Since World War II, no U.S. state has posted
such a large 10-year drop in population.
Puerto Ricans are leaving from across the socioeconomic spectrum.
Their departure leaves behind an aging population and further erodes
Puerto Rico's long-term growth prospects. Seniors already represent
more than 23 percent of the population, one of the highest ratios in
the country, and the number of children under 5 years of age has
decreased 37 percent since 2000.\1\ Only an end to the crisis and a
return to growth can stop this vicious cycle.
---------------------------------------------------------------------------
\1\ Puerto Rico Fiscal and Economic Growth Plan, released September
9, 2015. Page 9. Available at: http://www.gdb-pur.com/documents/
PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf.
---------------------------------------------------------------------------
the debt is not sustainable
Under any realistic scenario, Puerto Rico's $70 billion of debt is
not sustainable. Markets know this. Puerto Rico bonds trade between 10
and 70 cents on the dollar. Debt service consumes one-third of all
central government revenues, more than five times the average state. A
balanced budget would require a primary surplus of 5 percent of Gross
National Product (GNP), significantly above the level that any
distressed entity can reasonably sustain.
In addition, the Commonwealth has a $46 billion pension liability
funded by only $2 billion in net assets, the lowest level of any major
pension system in the country. More than 330,000 current and future
beneficiaries rely on the public pension system as their primary source
of retirement security. Average payments in the largest system are less
than $1,200 per month. A failure to protect those payments would
irreparably harm retirees and add greater stress to Puerto Rico's
economy.
a comprehensive response is needed
The depth and complexity of Puerto Rico's financial challenges led
the Administration to release a comprehensive legislative roadmap last
October to stem the crisis and restore growth. The plan includes a debt
restructuring authority paired with fiscal oversight, healthcare
transformation, and tax incentives to reward work.\2\ Our proposals
have drawn strong support from business, religious and labor leaders as
well as conservative economists and the Wall Street Journal.
---------------------------------------------------------------------------
\2\ ``Addressing Puerto Rico's Economic and Fiscal Crisis and
Creating a Path to Recovery: Roadmap for Congressional Action.'' Dated
October 21, 2015. Available at: https://www.whitehouse.gov/sites/
default/files/roadmap_for_congressional_action_puerto_rico_final.pdf.
---------------------------------------------------------------------------
While we believe all elements of our plan are essential to Puerto
Rico's recovery and long-term growth, the most time-sensitive
components are debt restructuring and fiscal oversight.
puerto rico needs tools to restructure all of its financial liabilities
Puerto Rico has already defaulted on its debt and is facing a
likely series of future defaults of unprecedented magnitude in the
municipal bond market. The debt is unusually complex with 18 different
issuers and 20 creditor committees with competing claims. There is
currently no way to forestall litigation or conclude a voluntary
agreement supported by a majority of creditors.
We propose a restructuring authority, pursuant to the territorial
clause of the U.S. Constitution, that would apply to all of the
Commonwealth's liabilities. This would give Puerto Rico the tools it
needs to reach a resolution with creditors and adjust its debts to a
sustainable level. Importantly, this authority would expressly not
apply to states, who have an entirely different relationship with the
Federal Government under the 10th Amendment. Accessing this territorial
restructuring authority would be conditioned on acceptance of strong,
independent Federal oversight.
A territorial restructuring framework would consist of: (1) a
temporary stay on litigation to protect the provision of vital public
services and allow time for voluntary negotiations; (2) a voting
mechanism to prevent a few hold-outs from blocking a reasonable
compromise; and (3) if negotiations fail, a court-supervised structure
to assure an orderly resolution.
Without a comprehensive restructuring framework, Puerto Rico will
continue to default on its debt, and litigation will intensify. It will
be contentious and protracted--both among competing creditor classes
and against the Commonwealth--while the economy worsens and Puerto
Rico's capacity to repay creditors collapses further. As the cascading
defaults and litigation unfold, there is real risk of another lost
decade, this one more damaging than the last.
In our view, all creditors must be at the table to reach a
comprehensive and sustainable solution. But we are not advocating a
``one size fits all'' approach; restructuring legislation can be
designed to consider existing priorities and claims. We would also
favor allowing for an initial period of voluntary negotiations with
creditors, facilitated by a stay on litigation.
Any viable solution will require restructuring Puerto Rico's
liabilities to a level its economy can safely and reasonably afford.
effective oversight is also required to strengthen puerto rico's fiscal
governance
We propose strong, independent Federal oversight to address the
Commonwealth's longstanding history of fiscal mismanagement and
inadequate financial disclosure. Accounting and payroll systems are
antiquated and insufficiently integrated. Disclosure remains opaque and
financial reporting deadlines are repeatedly missed.
Strong, independent oversight is needed. But, to be effective,
oversight should be structured in a way that respects Puerto Rico's
self-governance while assuring implementation of required reforms.
We believe Federal legislation can be crafted to achieve this
balance.
Pairing restructuring and oversight is a tried and true combination
to resolve debt crises, both domestically and abroad. However, these
two proposals must be enacted together. One without the other will not
work. Oversight and restructuring, appropriately adapted to Puerto
Rico, would put the Commonwealth on a path to fiscal recovery and
renewed economic growth.
Importantly, these two provisions would cost U.S. taxpayers
nothing.
congress must also fix puerto rico's healthcare inadequacies and reward
work
The Medicaid programs in Puerto Rico and the other the U.S.
territories are fundamentally different from the Medicaid program in
the states. Medicaid funding in the territories is capped;
beneficiaries are offered fewer benefits; and the Federal Government
contributes less on a per-capita basis than it does to the rest of the
Nation.
The Commonwealth provides health insurance coverage to
approximately 1.5 million Medicaid beneficiaries, representing nearly
half of Puerto Rico's total population.
When one-time Affordable Care Act funds are exhausted in Puerto
Rico, as early as June 2017, up to 600,000 Americans living in Puerto
Rico could lose their healthcare coverage. To avoid this calamity,
Congress needs to reform Puerto Rico's Medicaid program to raise the
standard of care and prevent Medicaid's unstable financing from
exacerbating Puerto Rico's fiscal crisis.
These constraints on Puerto Rico's Medicaid program also limit
Puerto Rico's capacity to respond to emergent healthcare threats like
the Zika virus. That is why the Department of Health and Human Services
recently requested a supplemental appropriation from Congress to enact
a temporary 1-year increase in the territories' Federal Medicaid share.
In addition to fixing Puerto Rico's inadequate healthcare
treatment, Congress must also enact some of the most proven, bipartisan
tools for stimulating economic growth and rewarding work. A large body
of economic research, including Treasury's own analysis, has found the
Earned Income Tax Credit (EITC) is one of the strongest, most powerful
policy tools to meet those objectives. As a result, Congress should
grant Puerto Rico access to an EITC.
questions from the chairman
I would now like to respond to four thoughtful questions Chairman
Bishop and his staff have raised as they work to design a responsible
legislative solution.
For those who support authorizing restructuring authority for Puerto
Rico, will the Commonwealth ever be able to access the markets
again?
Yes. An orderly restructuring framework paired with effective
oversight would help remove legal uncertainties, improve fiscal
governance and return Puerto Rico to the kind of economic growth that
attracts market capital.
Numerous U.S. cities have regained market access after fiscal
restructuring and oversight, including New York City, Washington, DC,
Cleveland and Philadelphia. Notable companies such as General Motors,
Delta, and Texaco, have also undergone restructuring and emerged
stronger and better than before. Debt investors understand
restructuring can lead to better outcomes for all parties. Puerto Rico
should expect to achieve the same result.
Puerto Rico has not had access to the municipal market for more
than 2 years. Municipal bond investors tell us that an orderly
restructuring under clear Federal guidelines is also the surest way to
restore Puerto Rico's market access. And, it is the best outcome for
municipal markets--far preferable to a protracted, disorderly series of
defaults of unprecedented magnitude and complexity. A post-restructured
Puerto Rico that can pay its debts, invest in infrastructure and
support economic growth should attract traditional investors to
consider new investment.
For those who oppose authorizing restructuring authority, will
recalcitrant creditor holdouts ever seriously negotiate without
restructuring authority?
No. Without access to territorial restructuring authority that
brings all creditors to the table, it is overwhelmingly likely that
holdouts will prevent voluntary negotiations from reaching a successful
conclusion.
In addition, proposals that only provide access to Chapter 9 of the
Bankruptcy Code will not resolve this crisis. Less than one-third of
Puerto Rico's debt would be clearly eligible for adjustment under
Chapter 9. The remaining debt is either ineligible or, like many other
recent Chapter 9 cases, would likely go through protracted litigation
regarding eligibility for restructuring. The litigation could take many
years to resolve, pushing the Commonwealth further into a downward
economic spiral. Additionally, because Chapter 9 is limited to certain
public corporations and municipalities, it leaves Puerto Rico's central
government liabilities, including general obligation bonds and employee
pensions, outside the reach of restructuring.
Chapter 9 was carefully designed for states, in conformance with
the 10th Amendment of the U.S. Constitution, to enable municipalities
to adjust their liabilities. Puerto Rico is neither a state nor a
municipality. What we need here is a tailored solution permitted under
the U.S. Constitution to address the complex, inter-connected liability
structure of an entire territory.
For those who support establishing just a Federal advisory board
without fiscal enforcement powers, will Puerto Rico ever make
the necessary reforms to improve their fiscal governance?
An advisory board is not adequate to do the job. But, there are
various ways to create a strong, independent oversight board while
simultaneously preserving Puerto Rico's self-governance.
First, Puerto Rico's access to restructuring authorities, including
an automatic stay on litigation, should be strictly conditioned on the
Commonwealth's acceptance of Federal oversight.
Second, the board should provide independent revenue forecasts and
recommend improvements to budgetary and fiscal management practices.
This includes regular, multi-year fiscal plans and budgets that are
balanced pursuant to generally accepted accounting principles. The
board should also have adequate enforcement tools to ensure necessary
adjustments are made if the government falls short of its targets.
Third, while the oversight board should not be responsible for
direct negotiations with creditors, it should support the
Commonwealth's restructuring efforts. For example, the board should
certify that any voluntary restructuring agreements between the
Commonwealth and its creditors meet certain criteria. In addition,
authorization from the board should be required before Puerto Rico gets
access to territorial restructuring authorities.
Fourth, the oversight board should be based in San Juan and have a
majority representation of Puerto Ricans, but retain the independence
that would result from appointments pursuant to Federal law. Members
must have relevant expertise and no conflicts of interest. The board
should be granted flexibility to hire professional staff with the
skills and experience to make this effort successful.
Last, an oversight board should remain in place until the necessary
fiscal reforms are carried out, budgets are balanced, and market access
returns.
For those who prefer a dominant Federal control board, how will you get
the needed buy-in to make lasting reforms that will ensure
Puerto Rico does not find itself in this position again?
Respecting Puerto Rico's heritage and self-governance is critical
for any oversight function to be accepted and effective. If that core
tenant is not observed, it will be impossible to adopt and sustain
sufficient reforms over the long-term. At the same time, the oversight
board should have sufficient powers to assure stakeholders that
necessary reforms will be implemented.
the administration's response to the crisis
I will conclude by sharing more information on the Administration's
response to the crisis.
Secretary Lew created a dedicated team within Treasury to evaluate
Puerto Rico's fiscal outlook and share our expertise with the officials
that oversee the Commonwealth's economic policies.
Since its formation, the team has visited Puerto Rico regularly to
review Puerto Rico's financial data, offer our perspectives on how
other entities have managed through similar crises, and discuss options
Puerto Rico could pursue to restore economic growth. We interact
regularly with the Governor, members of Puerto Rico's legislature,
business leaders and workers as well as creditors. We also speak every
day with the officials managing Puerto Rico's fiscal response.
In December, Congress also provided Treasury with the authority to
offer technical assistance to Puerto Rico in specialized areas such as
revenue collections and budgeting. Since then, we have worked with the
Commonwealth to assess its capacity to receive technical assistance,
identified high priority needs, and already deployed the first set of
technical advisors.
Technical assistance, while necessary, is not a solution for Puerto
Rico's fiscal challenges. These tools will benefit the financial
structure of the Island in the long-term, but Puerto Rico needs an
immediate solution to address its unstable financial outlook today.
The White House National Economic Council and Treasury are also
leading the Administration-wide effort to address the immediate crisis
and take steps to put in place a foundation for economic growth and
recovery. This longstanding effort includes the support of the White
House Task Force on Puerto Rico, the Office of Management and Budget,
the Department of Health and Human Services, the Department of Justice,
and a number of other Federal agencies that interact with Puerto Rico
on critical needs. Through this effort, the Administration has already
facilitated significant steps to strengthen the Island's healthcare
delivery, improve infrastructure, and attract new job-creating
investments.
Secretary Lew also traveled to Puerto Rico last month as part of
the Administration's continued engagement with Puerto Rico, meeting
with elected officials, labor and community leaders, and the business
community on the Island. The trip was the first of five scheduled
visits by Cabinet Secretaries to Puerto Rico, with more to come.
And, today, Secretary Foxx is in San Juan to sign an agreement with
Puerto Rico's transportation authority. The agreement will provide
Puerto Rico with technical assistance to accelerate $400 million of
available infrastructure funds. During their visits, Cabinet
Secretaries will work with Puerto Rico on the reforms needed to support
growth, including transportation infrastructure investments,
strengthening primary and secondary education, expanding agricultural
production, and addressing the impacts of drought.
While the Administration will continue to implement actions that
strengthen Puerto Rico, Congressional action is needed for Puerto Rico
to fully address its crisis.
conclusion
Puerto Rico lacks the tools required to resolve this crisis on its
own. The question is not whether the Commonwealth will restructure its
debts, but when, and at what cost to the 3.5 million Americans on the
Island.
The Administration will leave no stone unturned and bring all of
our capabilities to bear in support of our fellow citizens in Puerto
Rico. But only Congress can provide the comprehensive solution Puerto
Rico requires.
There is a justifiable expectation the Administration and Congress
will work together and that Congress will ultimately act as it has
always done when there is a crisis that affects Americans. Our fellow
citizens in Puerto Rico expect Congress to do what is necessary to stem
the crisis, to protect the people of Puerto Rico, and to allow the
economy to return to a path toward growth.
We look forward to working with this committee on legislation that
will protect our fellow citizens in Puerto Rico.
______
The Chairman. Thank you. I appreciate your testimony. I
will now turn to questions from the committee.
We only have one witness, I was a little bit flexible with
that. I am not going to be flexible with you all. You have 5
minutes for the questioning period here.
And to try to get everyone--this is actually Vice Chairman
Lummis' suggestion--let's go to the beginning of our dais, and
see if we can get some other questions from those people who
usually have to sit here for a long time.
So, Mr. MacArthur, I am going to turn to you for the first
questions.
Mr. MacArthur. Thank you, Mr. Chairman. And, Mr. Weiss, I
appreciate you being here. This is, obviously, an extremely
complicated and difficult issue that we face.
You made a distinction between the territories and the
states with regard to bankruptcy and fiscal issues in your
opening statement. I just want to make sure I understand you.
Are you suggesting that a Chapter 9-like mechanism should be
extended to Puerto Rico?
Mr. Weiss. We are proposing a legislative act pursuant to
the territorial clause of the Constitution, and it is meant to
be customized to the unique conditions that face Puerto Rico in
this crisis.
It is not necessarily a version of Chapter 9, or an
expanded version of Chapter 9. It is, rather, a pairing of
oversight authorities and restructuring, which would travel
together. So, no, it is a legislative act that is tailored to
the territories.
Mr. MacArthur. Would it allow territories like Puerto Rico
to avoid debts in ways similar to how municipalities, cities,
and such avoid debt repayment in Chapter 9? Would it act in
similar ways?
Mr. Weiss. Well, our proposal is that Puerto Rico would
have the option to elect oversight, and that, as I said
earlier, there should be an initial period of negotiation. But
if that negotiation fails because of the enormous complexity of
the debt stock and the competing claims, or if that negotiation
fails to get all of the creditors to agree to the same terms,
then it would go to a court of supervision which would adjust
the remaining claims.
Mr. MacArthur. You just used the phrase Puerto Rico
electing oversight. What powers would you see this independent
authority having? And, would you see them only having these
authorities if the Puerto Rico legislature agreed to give them
these authorities?
Mr. Weiss. Well, the authorities would be enacted by
Congress, the U.S. Federal Congress. But, it is our judgment
that to be effective, we need to achieve two objectives. First,
the authorities need to be respectful of the Commonwealth's
self-governance. We think anything that falls short of that
will fail.
At the same time, there needs to be enough strength in the
oversight to remedy what is a long history of fiscal
mismanagement, inadequate financial disclosure, and to ensure
that in the initial restructuring of debts, all stakeholders
would be assured that, over time, promises would be kept,
needed reforms would be made, and that the Commonwealth would
ultimately emerge from this authority with a sustainable level
of debt and a real economic future.
Mr. MacArthur. I understand the aspiration. But the reality
on the ground is there is this much money available and this
much obligation and expectation by a lot of different people.
So it is quite conceivable to me that the legislature in Puerto
Rico might not elect to have the degree of oversight that
Congress believes is necessary to solve this.
I want to be clear. I want you to be clear. Do you believe
that we should have an oversight board that Congress gives
powers in exchange for the debt relief that is necessary? Do
you believe that the Puerto Rico legislature should have the
right to elect that before that power is given?
Mr. Weiss. Congressman, thank you for the question. It is
something that we would look to work on with this committee to
craft in a way that would be effective.
It is our judgment that, given the gravity of the crisis in
Puerto Rico, the benefits of this authority would lead to its
being broadly accepted if it is properly crafted.
Mr. MacArthur. I don't have time for you to answer this,
unless we have another round of questions. But if we do not get
back to it, I would like you to respond in writing. I think it
is important that we consider the implication on the broader
bond markets if we allow a Chapter 9-like restructuring in
Puerto Rico, and what that does to bondholders throughout the
whole municipal bond market.
Mr. Weiss. I would be----
Mr. MacArthur. I would appreciate it--you don't have time
to answer, my time is expired, but I would like to hear at some
point what you believe the potential consequences are
elsewhere. I yield back.
The Chairman. No, you owe me 11 seconds.
Mr. MacArthur. All right.
The Chairman. Mr. Grijalva.
Mr. Grijalva. Thank you, Mr. Chairman. And thank you, Mr.
Weiss. I want to thank you for a very comprehensive written
statement. It answered many questions that have been raised
about the proposal you outlined in your oral testimony.
That being said, I have one remaining question. What is
your plan B? How do we plan on averting a humanitarian crisis
in Puerto Rico that you warn of, if your efforts to get
Congress to act do not pan out? Is there a plan B?
Mr. Weiss. The only durable comprehensive solution to this
crisis is for the Administration to work together with Congress
to implement oversight with restructuring. Anything that falls
short of that will not provide a durable remedy, in our
judgment. We have spent the better part of a year analyzing
every option that is available to us, to the Administration, or
to Congress, and restructuring paired with oversight is really
the arrangement which provides the best chance for Puerto Rico
to emerge from this crisis.
Mr. Grijalva. Mr. Weiss, it has been suggested that
bankruptcy for Puerto Rico is a huge mistake, that what the
island needs is to reduce spending and simply repay its
obligation. How does Treasury feel about that assessment? Do
you agree, as others have suggested, that granting bankruptcy
or restructuring authority to Puerto Rico would be changing the
rules in the middle of the game, two issues that have come up
previously?
Mr. Weiss. Thank you. Two questions which I would like to
take in order.
Mr. Grijalva. Yes.
Mr. Weiss. I think the second one comes back to the
question of the Congressman, as well.
As to the first question, the Puerto Rican people have
already confronted a financial crisis that has gone on for the
better part of a decade. The Commonwealth has lost access to
traditional municipal bond markets 2\1/2\ years ago, and today
has access to no financing, is out of cash.
And we are really confronted with a choice between a
cascading series of defaults and intensifying litigation that,
in our judgment, could last a decade, or an orderly framework
under clear Federal guidelines that would permit the
Commonwealth to negotiate with all of its stakeholders in order
to emerge with a sustainable level of debt.
When one analyzes this from a market perspective, and you
know, we at Treasury have, obviously, given this a lot of
thought. It is our judgment that the best of the two options, a
disorderly default that cascades over time or an orderly
framework designed by Congress and federally mandated, that of
those two options, it does not come close. The best thing for
municipal bond markets is for this crisis to be brought to an
orderly resolution. Traditional investors tell us this all the
time.
Just yesterday, one of the most prominent municipal bond
investors issued a report in which they said, ``Without Federal
action that offers oversight and restructuring, there is a risk
of a decade of litigation and default, that the economy,
already strained, would be weakened, and that it would be far
preferable--and they say this as a municipal bond investor--for
there to be order restored in Puerto Rico, and that there would
be limited, if any, precedential spillover effects to the
broader municipal market.'' We share that conclusion.
Mr. Grijalva. So, essentially, for Puerto Rico to survive
and begin a renewal of their economy and deal with the action
on those two areas, the oversight and the restructuring by
Congress, mandated by Congress, is essential in moving forward
in any way. Is that the gist of everything?
Mr. Weiss. We think that that is a necessary condition to
restart growth, that there will be other measures needed in
such vital areas as health care and incentives to work, and
potentially others, but that if we want to arrest the crisis
and create that opportunity, we need to start with oversight
and restructuring.
Mr. Grijalva. Thank you.
The Chairman. Thank you.
Mr. Weiss. Thank you.
The Chairman. Mr. LaHood.
Mr. LaHood. Thank you, Mr. Chairman. And, Mr. Weiss, thank
you for being here today, and for your testimony.
In your opening remarks there, I did not hear you talk much
about how we get the private sector flourishing in Puerto Rico.
When you look at the statistics with Puerto Rico--and one theme
is really the poor business climate there, the barriers in
place that have kind of been systemic there for a while--and I
know you talked about the debt restructuring and the oversight,
but in terms of how we change the culture there to get the
private sector to flourish--I mean, you read about the
regulations, whether it is enforcing contracts, the tax system,
registering property.
Traditionally, Puerto Rico ranks very, very low, in terms
of doing that. And I know the debt is part of that, but looking
at whether we engage in this legislation, how do we reduce
those barriers? Because it seems to be a direct correlation to
the hemorrhaging of people, talent, and opportunities out of
Puerto Rico to Orlando, Florida, and lots of other places. If
we do not have that business structure reform, how is this
going to work?
Mr. Weiss. We share your frustration on this point in the
sense that there is an enormous amount of capital, in our
judgment private-sector capital, that is ready to invest in
Puerto Rico, be that in alternative sources of energy
generation or be that in modernizing the electricity grid,
which is terribly out of date.
The problem we run into time and time again when we talk to
investors is that this uncertainty that the economy faces makes
it impossible for private-sector participants to invest and
plan over any meaningful time horizon.
So, I am not saying it will solve all the problems, but if
we do not clean the debt structure and put this economy back on
a track toward a sustainable amount of debt--right now, 35
percent of central government revenues are being spent on debt
service. Out-migration has more than doubled in the past 2
years. Unless we can stem this tide and create a base for the
government and the private sector to plan against, we are
deeply concerned that all of that third-party capital will
never come into the island.
Mr. LaHood. Assuming that you get what you want in this,
what assurance do you have when it comes to those other things
I mentioned that are really prohibitive measures to investing,
whether it is the issues with contracts, registering property,
taxes--when you say there is a flood of private-sector
investment that is ready to come in, if none of those things
are changed, why would they come in?
Mr. Weiss. Congressman, again, the biggest barrier to
investment today is the uncertainty and crisis that the economy
is facing.
As to the regulatory aspects that you are referring to,
again, it comes back to a key component of our proposal, which
is to say that we believe that it is for the Puerto Rican
legislature and the Governor to identify the reforms that are
needed, the elected representatives to identify the reforms
that are needed, structurally. But we think it is equally
important--and that private capital would value this--that the
oversight board make sure that those reforms identified by
duly-elected representatives are implemented.
There is an enormous problem of over-promising and under-
delivering that has gone on for many years in Puerto Rico. In
our judgment, marrying the self-governance of elected officials
with the oversight of an independent board is exactly the
structure which can remedy this.
Mr. LaHood. Two follow-up questions. Are there currently
any existing Federal laws that, in your view, prohibit the
ability to attract private investment in Puerto Rico? That is
first. Then, second, are you confident in the legislators in
Puerto Rico that these reforms that are necessary and needed
are going to get done?
Mr. Weiss. On the first point, by far the biggest barrier
to investment in Puerto Rico--and we have spoken with capital
providers, we have spoken with potential lenders, and we have
spoken with companies which would be interested in
participating, for example, in the energy sector--the first and
most important aspect is that the economy needs to be
stabilized. No one invests in an economy that is in free fall.
We need to stabilize the economy.
Second, the Puerto Rican legislature and Governor are in an
election cycle--there will be a new governor. The current
governor has said he will not run. And those duly-elected
representatives will identify what it is that needs to be done.
But this interaction with an----
The Chairman. Mr. Weiss, I need to cut it off here, I am
sorry.
Let me just give warning to all Members. We are slipping
over time here, and that just cannot happen. So, in deference
to the witness, if you are going to ask a question, give him
enough time to answer it. If we run over the 5-minute mark, I
am going to cut you off. So a lot of yes/no answers from here
on in.
Mr. Pierluisi.
Mr. Pierluisi. Yes. This----
Mr. Weiss. No.
[Laughter.]
Mr. Pierluisi. No, no, I will be fine.
The Chairman. Yes.
Mr. Pierluisi. At this juncture, I am convinced that Puerto
Rico cannot either cut its way out of this crisis or tax its
way out of this crisis. The only way out for Puerto Rico is to
grow out of this crisis.
The critical obstacle to being able to do that is that
Puerto Rico is about to default in a massive scale on hundreds
of millions of dollars, if not billions of dollars, on payments
it owes to bondholders all over America. So, that is what we
should not ignore here.
We can have an independent board. I am running for
governor. If anybody should be opposing that board, it is Yours
Truly, and I don't. You have to understand that the board can
come up with all kinds of recommendations and guidance for
Puerto Rico to follow, but we have to address first things
first. We need to make sure that Puerto Rico has the necessary
access to the markets to comply with its payment obligations in
the markets.
Creditors and the government have not been able to engage.
I am not going to get into the blame game, but it has not
happened. So, we need to incentivize that. One way we can
incentivize that is by giving the board the necessary
restructuring authority to promote negotiation. It could be
mediation. And, short of that, or that failing, then providing
for a fair restructuring deal for all parties involved.
That is the proposal I believe Treasury is putting forth.
We can tinker with it, but let's not lose sight of the fact
that Puerto Rico is not going to be able to grow if it has no
access to the markets, if its reputation is stained in the
markets. You need access to the markets to operate the
government.
And last--and then I will let you react, Mr. Weiss--keep in
mind that these are American citizens. That is why I say we
cannot keep increasing taxes down there. That would be toxic
for the business sector. And we cannot cut away and affect
essential services, because you know what is going to happen?
My constituents are going to hop on a plane like they have been
doing, come to the mainland, and that is going to make it
impossible for the economy of Puerto Rico to grow.
That is why this is complex. We need to be fair, and I
would like you, Mr. Weiss, to react to my comment.
Mr. Weiss. Congressman, you have been a leader on this
topic and have introduced many potential legislative acts that
would make a difference, and we have greatly appreciated our
work with you.
I want to highlight something you said, which is that if
you go to Puerto Rico and you spend time with the Americans who
live in Puerto Rico--and I said this in my opening remarks--
there is actual fear of the future. The payments which are
coming due--$400 million on May 1, $2 billion on July 1--no one
knows where the money will come from to fund those payments.
And, faced with this enormous fiscal uncertainty, with
diminishing health care provision, with no jobs available on
the island, Puerto Ricans are leaving.
And it is the young, working-age Puerto Ricans who are
leaving for the most part, and they are joining us on the
mainland. On the mainland they find that they have access to
jobs, opportunities for employment, a future for their
children, and better health care. What that is doing is
dramatic. I should mention there is 2.5 percent annually in
out-migration of working-age citizens. Ten years from now, if
we do nothing to stop this, there will be no revenue base
against which to construct a viable economy.
So, we fully agree with you, Congressman, that we need to
take these actions today, and that the time for action has
really already passed.
Mr. Pierluisi. Thank you. I yield back.
The Chairman. Thank you very much. You owe me 11, you get
10, so we will go from there.
Mr. Hice, you came in a bit late. Are you prepared for
questions right now?
Dr. Hice. Yes, sir.
The Chairman. Mr. Hice, you are recognized.
Dr. Hice. Thank you, Mr. Chairman. I appreciate this very
important hearing that we are having.
Mr. Weiss, I agree with my colleague that the way out of
this, obviously, is growth. Puerto Rico has at times sought to
become a party to various U.S. income tax treaties, and yet the
Treasury Department has turned down these efforts. Given the
dire circumstances, would you support or do you favor a change
in policy in this regard?
Mr. Weiss. Congressman, the immediate problem is the
unsustainable debt. There is nothing that can be done with
respect to tax policy or even health care, as dire as that is,
that will remedy the fact that $70 billion of debt against a
$70 billion economy that consumes 35 percent of revenues has to
be reset.
Dr. Hice. I understand that. But my question is, would you
support a change in policy?
Mr. Weiss. As to the opportunities to promote growth, once
that has been done and there is an oversight board in place, we
would be happy to work with you and your staff about potential
solutions that could attract jobs, that could incentivize----
Dr. Hice. All right. You are going far beyond yes/no
answers with this. It was a relatively simple question.
It is becoming clear to me and to many others that the
emerging consensus around Congress is that there should
probably be a control board, much less consensus regarding
Federal bankruptcy protection.
You may or may not be familiar. Do you know whether or not
the District of Columbia got Chapter 9 bankruptcy protection 20
years ago?
Mr. Weiss. The District of Columbia was a fiscal crisis, as
opposed to a debt crisis. Mayor Williams has testified----
Dr. Hice. Again, that is not my question. Did they get
bankruptcy protection?
Mr. Weiss. They got a fiscal control board, because that
attacked the problem they had. Here we have an economy drowning
in debt, which requires restructuring along with oversight.
Dr. Hice. That is true. Do you believe a control board of
some sort could be effective in reorganizing Puerto Rico's
finances without filing Chapter 9 bankruptcy?
Mr. Weiss. To be clear, we are not proposing Chapter 9 or
any new chapter of the code. We are proposing a territorial
act, which would allow for restructuring authorities, only by
acting through and with an oversight board. It is our judgment
that that is the only combination that can produce a durable
solution.
We do not want to be sitting back here July 2 or July 5,
after Puerto Rico has failed to pay $2 billion, including $800
million of constitutionally prioritized debt, which would
provoke a constitutional crisis and litigation. Our interest is
in designing a permanent solution.
And it just has to be said, yes, there has been fiscal
mismanagement. Yes, there is need for oversight. But this debt
has to be reduced.
Dr. Hice. It does.
Mr. Weiss. It needs to be done fairly.
Dr. Hice. Let's go on, you are taking my time. The question
was do you believe a control board would be helpful, and you
have still not answered that question. Yes or no?
Mr. Weiss. We believe an oversight board coupled with
restructuring would be effective.
Dr. Hice. OK. Let's shift gears a little bit. You talk
about restructuring. Before any restructuring takes place,
wouldn't it be good to have some real numbers, such as
something that would come from an audit of the finances, which
has not taken place now in quite some time?
Mr. Weiss. We agree that the fiscal transparency is totally
inadequate. One affirmative obligation we would put on the
oversight board, if Congress agreed, would be actual powers to
make sure that the financial reporting systems are integrated,
modernized, and that audits are produced on a timely basis. We
think that that is necessary for all stakeholders--debtors,
investors----
Dr. Hice. Mr. Weiss, you ramble a lot. These are not
complicated questions. Can we expect an audit? Yes or no.
Mr. Weiss. Absolutely.
Dr. Hice. OK. What kind of progress is being made on that?
At what point can we expect an audit?
Mr. Weiss. Our understanding is that there has been a draft
audit released, and that the auditors have announced that they
need 2 months to review it.
It should be no surprise that an entity in distress has
difficulty getting going concern opinions for its subchapters.
This is the set of issues that Puerto Rico is facing. It is a
distressed entity.
Dr. Hice. Time has expired. I would appreciate more yes/no
answers, direct answers, but I yield back. Thank you, sir.
The Chairman. Ms. Bordallo.
Ms. Bordallo. Thank you, Mr. Chairman, and to our witness,
Mr. Weiss, for being here today.
The situation in Puerto Rico compels action, and I am very
glad we are finally here today to discuss it. I thank the
Administration for including the other territories in their
proposals to address some of Puerto Rico's most pressing
issues, and I urge leadership to also consider including the
other territories as they draft legislation.
While our challenges are nowhere near as serious as Puerto
Rico's, our territories do face challenges. I believe the
inclusion of territories would avert similar crises in the
future. To that end, I introduced legislation that would give
the Government of Guam flexibility in extending Social Security
to employees of the government. These employees are currently
not a part of the system. Our retirement fund has identified
the current pension system is fiscally unsustainable. So, we
must be proactive to address these problems.
I also hope that the committee can consider the smaller
territories as they look to other fixes for Puerto Rico, such
as cover-over for the EITC and improving the FMAC for Medicaid.
With that, I have a few questions for Mr. Weiss.
To what extend did the failure of the Puerto Rico pension
program contribute to their current economic crisis? And do you
agree that steps should be taken to prevent a similar situation
in the other territories? If you could, make your answers
short.
Mr. Weiss. We are deeply concerned about the pensions in
Puerto Rico--330,000 current and retired Puerto Rican
employees, public employees, depend on it. The pensions are,
essentially, unfunded. We are this close to being under a
regime where it is the Commonwealth itself which would have to
fund pension payments.
Ms. Bordallo. What about the other territories?
Mr. Weiss. As to the other territories, we would be happy
to work with you to look into the particulars around Guam.
Ms. Bordallo. All right. I do appreciate that the Treasury
included the smaller territories in the debt-restructuring
proposal. However, was there a consideration of including the
smaller territories in the other proposals, like cover-over for
EITC and improving the FMAC for the Medicaid program?
I would note that the President's budget includes requests
from HHS that would improve our FMAC over time. An improved
FMAC and cover-over of EITC would free up significant local
funding and put us on a fiscally sustainable path. Do you agree
with this?
Mr. Weiss. Again, our proposals are with respect to the
territories as a whole, and we would be prepared to work with
you on the particulars of Guam and the other territories.
Ms. Bordallo. So then, Mr. Weiss, I would like to make it
very clear. Do you agree that inclusion of the territories in
the Puerto Rico relief package would help to avert similar
crises in the territories in the future?
Mr. Weiss. We would be happy to come meet with you and
discuss the ways in which that would be possible with the
appropriate staff.
Ms. Bordallo. Thank you. And, Mr. Chairman, I go on record
in full support of solving the Puerto Rico financial crisis
and, of course, the inclusion of the other territories in this
legislation. I yield back.
The Chairman. Now I owe you a minute-and-a-half. Sheesh.
[Laughter.]
The Chairman. Mr. Duncan, I realize I have you in No Man's
Land. Regardless of where I start, you are going to be last.
But I understand that you have another commitment you have to
be at right now, so let me recognize you for 5 minutes for
questions.
Mr. Duncan. Thank you, Mr. Chairman. I appreciate what you
are doing. I have been a freshman Member and have not had an
opportunity to ask questions in the past, so thank you on
behalf of----
The Chairman. Now you are a more advanced Member that does
not have the chance to ask questions.
[Laughter.]
Mr. Duncan. Thank you. I do have John Kerry in Foreign
Affairs, and that is an important topic for me.
I want to follow the line of Mr. Hice from Georgia, in that
Puerto Rico has not issued an audited financial statement and
they won't until April, according to the Governor--and there is
a letter in Reuters over that. Paul Ryan has requested we take
action by March, but we are not going to have an audited
financial statement until April. So, I think Congress is flying
blind, and I do not believe we should take any action until we
truly know an audited financial picture of the Commonwealth.
But I will say this, following the gentleman's line earlier
about bankruptcy and access to capital markets, I believe
bankruptcy will actually close access to financial markets for
Puerto Rico for an indeterminate number of years and that would
be detrimental, I think, to rebuilding and some of the quality
of life issues.
When I study this and I look at the amount of money that
may be available for debt service, there are a lot of different
figures thrown around. So, Mr. Weiss, I would ask what you
believe the amount of money available for debt service, in
terms of percentage of the budget, would be for 2016?
Mr. Weiss. As I mentioned earlier, the debt service figures
are approximately a third of central government revenues. The
Commonwealth itself has proposed a voluntary exchange offer----
Mr. Duncan. So, you are sticking to that 42 percent number
that has been touted by a lot of different sources?
Mr. Weiss. Depending on the year, it is about a third, or
higher than a third.
Mr. Duncan. I realize that some of the government borrowing
and loans and other things cannot be used to pay debt service,
and that is common. But those can be used to provide for other
services that the government provides. That frees up money that
is not being used in these calculations that is available for
debt service.
I am going to ask to submit for the record testimony to the
Senate Committee on the Judiciary, Orrin Hatch's committee, by
Carlos Colon-De-Armas, Mr. Chairman. I believe with him that
that number is closer to 16 percent. So, I think we need to get
a better handle on what monies are available for Puerto Rico
for true debt service, and what monies are available for Puerto
Rico for public services other than debt service, so that we
can truly compare apples to apples and not be an alarmist and
say that only 42 percent of the total available resources for
Puerto Rico are obligated.
Mr. Chairman, I don't have a lot of questions. I wanted to
make those points, and I do want to provide this for the record
because I think it is so important. With that, I will yield
back.
The Chairman. Thank you.
Ms. Tsongas.
Ms. Tsongas. Thank you, Mr. Chairman, and thank you, Mr.
Weiss, for being here with us today. This is a complicated
issue. I appreciate your insights and the deep thought that the
Administration has given to the most productive way forward.
And just to sort of frame this in a slightly different
path, I think what happens in Puerto Rico, as you have said, at
the very least in sort of the out-migration that is taking
place, will come and be part of our country. And my district is
very reflective of that. One in five of my constituents
identify as Hispanic or Latino, and 40 percent of them are from
Puerto Rico. So many of them have friends and family who still
live there, and they have seen firsthand the devastating
effects that the 10-year recession and the debt crisis have had
on the island. This is something that those of us who represent
significant Puerto Rican populations have to take very
seriously, what the most productive way forward is.
A lot of the debate is whether a voluntary agreement--or
really, I think the crux of the debate is whether voluntary
agreements alone are a sufficient way forward, versus whether
you need to have a restructuring option at hand, as well.
And again, you have given some testimony to this effect.
But, I would like your thoughts as to the many complexities of
the voluntary path, and solely that path, without the
restructuring option at hand. And I will give you some time to
answer that.
Mr. Weiss. Thank you, Congresswoman. That is the right way
to frame the question in our judgment.
So today, without any tools to restructure the debt, Puerto
Rico is faced with 20 different creditor classes and 18
different issuers with competing claims.
On December 1, just to take one example, the Governor
decided to not pay three debts in order to pay other debts.
This has immediately prompted litigation by the three creditors
who were not paid. As this unfolds and the maturities come that
Congressman Pierluisi was referring to, this will magnify and
intensify.
There are really two major problems in a voluntary
discussion. First is that there is no stay on litigation. So,
litigation as to priority of payment, as to eligibility for any
particular agreement, will ensue. Second is that there is no
way to reach agreement with a majority of creditors in any
given class and know that the minority creditors will go along.
And there have been many examples of this around the world.
And we do worry that the compounding effects of litigation
and an inability to conclude agreements with any creditor class
could turn a purely voluntary process into a decade-long
crisis. So that restructuring authority that you mentioned is
really what is needed at the back end.
We support an initial period of voluntary discussions. We
think that those voluntary discussions can only succeed with
this kind of back-end authority.
Ms. Tsongas. What would be the impact on the citizens of
Puerto Rico if--and the lengthy process of a solely voluntary
way forward--what would be the impact on the citizens?
Mr. Weiss. The Governor has already been forced to curtail
services, as I mentioned in my opening remarks. As the debt
payments become larger, as the most senior debt becomes due,
$800 million of constitutionally-protected debt on July 1, the
decisions become more difficult and the litigation becomes more
severe.
And this is not lost on the citizens of Puerto Rico. And
you have them in your district, but I can tell you that our
fellow citizens in Puerto Rico are acutely aware of the kind of
trade-offs that the government could face if these maturities
come due, litigation builds, and the services need to be traded
off against constitutionally-protected debt.
Ms. Tsongas. Thank you for your testimony, and I yield
back.
The Chairman. Thank you.
Mr. Zinke.
Mr. Zinke. Thank you, Mr. Chairman, and thank you for
holding what appears to be a bipartisan effort to fix the
problem.
It is interesting that Montana is about a million people,
Puerto Rico is about three times the size. And we are not a
territory, we are a state. But clearly I looked at the
Constitution--and I will quote--``The Congress shall have the
power to dispose and make all needful rules and regulations
respecting the territory or the property belonging to the
United States.'' Clearly, Congress has the power.
And to your point, in the 1990s, Congress did look at
Washington, DC, and the District, and there seems to be a great
bit of difference between the two, particularly in the debt.
And as I look at it, the discussion is on the control
board, what power? On one side you have an advisory board. On
the other side controlling every aspect of the Puerto Rican
Commonwealth.
I guess my question to you is what do you believe are the
core explicit powers that the Federal oversight should have?
Mr. Weiss. I am going to give you a couple of examples of
this, and thank you for the question.
We totally agree that an advisory board is insufficient,
and we totally agree that a takeover of the Commonwealth
through direct control will be ineffective.
So, in that middle space the concept is that the elected
officials of Puerto Rico would retain their rights to tax,
spend, and govern the Commonwealth. They are closest to it, and
there is enormous complexity in the existing economy. But the
oversight board would ensure that whatever promises are made,
those promises are adhered to.
They would provide guardrails on the economy such that, for
example, if there is an initial plan to restructure the debt
based on 5 years of projections and the first budget comes up
and that budget is not consistent with that 5-year plan, then
the oversight board should get involved and enter into
discussions such that that budget conforms to the 5-year plan.
If into that year actual performance is short of budget,
again, the oversight board should make it known that there
needs to be action. But we do not believe in an oversight board
deciding which taxes to adjust or which expenses to cut. Those
are decisions that need to remain with the Commonwealth.
Mr. Zinke. Where would you place a priority of an
independent audit?
Mr. Weiss. If this is where you are going, we agree that we
think there needs to be an ability to audit independently at
the level of the oversight board, and to produce revenue
forecasts that are independent. What this does is it respects
the political process of the elected officials in the
Commonwealth, but also creates a second board which is outside
of the political process and will last through election cycles,
and which will produce credible, independent revenue
statements.
One thing I mentioned earlier is, we also think that that
board has a role to play--there have been a lot of comments on
audits and financial systems and such, which we agree are
antiquated. That is fixable. And that oversight board should be
charged with making sure that that gets fixed.
Mr. Zinke. I look to my colleague's point about the
economy. I don't know a lot about Puerto Rico, but I have
looked into--a lot of the baseline economy is the ability to
produce power at a rate that is reliable and affordable. If we
are going to look at manufacturing, certainly that has to be a
part of it.
And my understanding is the power plant, the structure of
it gets their fuel load at an excessive price, and there has
not been a lot of investment into that power plant. If we are
going to look at driving the economy as far as jobs, that power
plant has to be part of it. Is there any idea how to address
that portion of it?
Mr. Weiss. You know, we agree. The power generation in
Puerto Rico is really oil and coal, very little else. But the
good news here is there is serious appetite on the part of
companies and investors to invest in Puerto Rico to modernize
the sources of power generation.
So, we do believe that the private sector has an important
role to play. If we fix the level of debt and we create durable
fiscal governance, we think private capital will come.
Mr. Zinke. Thank you, Mr. Chairman, and I yield back.
Mr. Huffman. Thank you, Mr. Chair. I will yield the balance
of my time to my colleague from Puerto Rico, Mr. Pierluisi.
Mr. Pierluisi. Thank you. Mr. Chairman, I will respect the
time constraints so that we keep going forward expeditiously.
Mr. Weiss, at a recent event you stated that there is no
question that status is vitally important when looking at the
situation, the fiscal and economic crisis that Puerto Rico is
facing.
And I should say that back in 2010, when Congress was
considering and enacted the Affordable Care Act, we had a great
opportunity to provide parity, equal treatment to all the
territories under the Medicaid program. I fought for that; my
colleagues, the delegates for the territories, fought for that;
and my fellow Members of Congress from Puerto Rico fought for
that. Unfortunately, the Congress fell short. Because now
Puerto Rico faces a very serious cliff, in terms of the lack of
funding it has under the Medicaid program.
Let me explain this. It is not only affecting our ability
to provide adequate care for the medically indigent. It also
exerts an incredible fiscal pressure on the territorial
government. I give that as an example. We should do much better
there.
I would like you, Mr. Weiss, to elaborate on this point:
ways in which, apart from creating a board and providing a fair
and debt restructuring mechanism, ways in which Congress can
assist Puerto Rico while dealing with the disparities we face
as a territory.
Mr. Weiss. Congressman, we believe that status has played a
role in the development of the fiscal crisis over many, many
years in Puerto Rico. And we believe that status should be
determined by the people in Puerto Rico in a process, and we
have supported that in the President's last budgets. But, why
are we proposing restructuring authorities, EITC, and Medicaid
funding as part of our comprehensive plan? Well, it is because
the Commonwealth status has not afforded it equitable treatment
in those three areas.
That said, this crisis is upon us today. And today, in
order for Puerto Rico to have any long-term future under any
status, we do need to act in the two ways which I have
mentioned earlier: oversight with restructuring authorities.
Mr. Pierluisi. I yield back.
Mr. Huffman. Thank you, Mr. Chairman.
The Chairman. Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman, and Mr. Weiss, thank
you for being here. Your testimony has been very informative,
so thank you.
A question for you in following up on previous questions
from my neighbor, here. The Puerto Rican Constitution, the
territory's Constitution, as I understand, prioritizes debt
over all other expenditures. Obviously, the whole issue on
balancing autonomy with proper fiscal reform and oversight is
going to be an interesting balance.
It is my understanding that last year when legislation was
brought up that was going to change the Constitution to provide
for more flexibility there, that the Governor opposed it, and
that some of the legislators indicated their opposition, as
well. Changing the Constitution, as I understand it, would
require a two-thirds vote in the legislature, and be presented
to the folks in Puerto Rico under referendum.
How do you balance the autonomy issue with, as I hear you
saying--and I do not want to put words in your mouth--but as I
hear you saying, effectively coming in and restructuring their
debt to where the oversight board would have the ability to
trump the Constitution?
Mr. Weiss. Again, our basic philosophy on this is that the
restructuring should include all of the debt, that all of the
debt is part of the unsustainable $70 billion. But we are not
proposing a one-size-fits-all solution. So, we are not saying
that the GO debt, which has a Puerto Rican constitutional
priority, or some of the revenue bonds which have a claim on
certain streams, that those all need to be treated equally.
This is not one-size-fits-all.
So, what we can do, working together, is to design a
restructuring authority whereby everybody is part of the
discussion, but that there is a differentiated treatment per
existing priorities and plans----
Mr. Graves. I have two other questions. I appreciate the
thorough answer, and certainly want to get those, but being
respectful of time here, very quickly, I will perhaps ask it
this way. Is it your view that the territory clause in the U.S.
Constitution trumps the prioritization of expenditure and debt
clause in the Puerto Rican Constitution? Yes or no, please.
Mr. Weiss. We believe that we can construct this under the
territorial clause.
Mr. Graves. Thank you. Next question. I was looking around
at different options here, trying to understand this.
Obviously, the issue as indicated by Mr. MacArthur earlier is a
big concern. But in the past, Puerto Rico has issued tax
anticipation notes in order to cover expenditures. This year,
as I understand it, is the first year they have not issued an
appropriate level to cover their expenses.
I understand that Mr. Pierluisi introduced legislation that
would allow for the Federal Reserve Bank to acquire those
notes. Have you all taken a position on that, and is that a
component of what you see as being a long-term solution?
Mr. Weiss. We are not proposing that the Federal Government
take on liabilities of the Commonwealth, or guarantee
liabilities of the Commonwealth. They did lose access to that
financing. It is not that they elected not to use it, they just
did not have any access.
Mr. Graves. Another question--and I apologize, I had not
had a chance to confirm this with the FERC, but it is my
understanding--there were questions earlier that were brought
up in regard to power. Obviously, the electricity prices there
are significant compared to other parts of the United States.
It is my understanding that there has been a gas terminal
permit sitting on the FERC's desk for some period of time now
that would provide for natural gas as a fuel stocked for
electricity production, which again, when you look around the
country, should provide significant relief in regard to rates.
I understand you are with Treasury, but just curious if
that is on your radar, if that might be something that you are
aware of?
Mr. Weiss. I am aware of it, but I would have to come back
to you with the appropriate----
Mr. Graves. I would appreciate it. And again, I know you
are not FERC.
Last question. I would actually like to follow up on Mr.
MacArthur's question in regard to the bond market implications
and precedent he was concerned about before. Forty-five
seconds.
Mr. Weiss. I will just read a couple sentences from a
report issued yesterday, and it will not take more than 20
seconds. This is from a Nuveen report issued yesterday. They
are one of the largest traditional municipal bond investors,
and they say that Puerto Rico--and I quote--``Without some form
of bankruptcy, Puerto Rico is destined for years of
litigation,'' and they say that ``the restructuring provides
greater value to creditors than maintaining the status quo, and
that municipal investors rightly continue to differentiate
among individual credits, and we see no reason this will change
based on how Congress addresses Puerto Rico's situation.'' They
see no spillover effects.
Mr. Graves. I yield back.
The Chairman. Thank you, appreciate that.
Mr. Clay, I think you are next.
Mr. Clay. Thank you, Mr. Chairman, and thank you for
conducting this hearing.
Mr. Weiss, a key element of the economic crisis in Puerto
Rico is its impact on Puerto Rico health care and the system.
Since passage of the ACA, the Secretary of HHS has used her
existing discretionary authority to interpret most of the ACA
as not applying to Puerto Rico and the territories. The
territories, therefore, have no exchanges, no premium support,
no coverage mandates, and no standards for health insurance
plans. Yet the ACA's health insurance provider tax still
applies to the territories.
Is it logical that the Administration uses its interpretive
authority to relieve the territories of the benefits of the
ACA, but it declines to use its interpretive authority to
relieve them of the ACA's burdens? And do you foresee any
relief for the island?
Mr. Weiss. I would like to come back to you with HHS
personnel for the detail. I will give you a general point of
view.
That ACA funding is a fiscal issue, in the end. The reason
that we have proposed that Medicaid funding be included is
that, as best we can tell, the allotment that Puerto Rico
received at the time of the passage of the Affordable Care Act
is going to be fully exhausted by March of 2018, if not sooner.
So, this does need to be addressed urgently and it is a key
component of our legislative package.
Mr. Clay. Yes, and I am glad to hear that it is on your
radar because, apparently, relief is needed.
One other question. We have heard that the consequences of
a comprehensive debt restructuring for Puerto Rico would be far
reaching and drive up the cost of borrowing for Puerto Rico in
the long term, making sustainable economic development unlikely
for the island. Will the enactment of debt restructuring for
Puerto Rico result in increased borrowing costs for the island?
Mr. Weiss. Congressman, we believe just the opposite is
true. We believe that this is a choice between no access to
credit, which is Puerto Rico's current state; a cascading
series of defaults; mounting litigation; and an inability to
conclude a voluntary negotiation or an orderly process under
Federal guidelines, such that there is an end to this fiscal
crisis; and that there will be market access, as there has been
in many regions that have gone through the same problem.
Mr. Clay. So you don't see the costs being driven up for
borrowing?
Mr. Weiss. We see no access without it.
Mr. Clay. I see. I would like to yield to my colleague from
Illinois, Mr. Gutierrez, the remaining time.
Mr. Gutierrez. Thank you, sir. Thank you so much. I
appreciate the gentleman from Missouri yielding to me. And
welcome, Mr. Weiss.
I just want to use this intervention to say that we have
talked about fiscal mismanagement in Puerto Rico. You have
talked about transparency in the budget. You said that promises
need to be kept, reduce spending, and pay its obligations.
Where are the jobs? Where is the economic opportunity?
Where is the possibility for the people of Puerto Rico? And I
would simply suggest with the 50 seconds that I have that one
of the things that was recommended is that--you said it, Mr.
Weiss--visit, talk. You said you have been down there. When are
we going to go down and listen to the people of Puerto Rico,
and have a hearing there, front and center, so that we can hear
what their dreams and aspirations are, so that we can see their
lives?
It is good to go down to Puerto Rico to fill our campaign
coffers and war chests, but we should also go to Puerto Rico
not simply for partisan political reasons, to fill our campaign
coffers, but we should go down there to fill our minds with
their ideas, their aspirations, and their dreams. Because
otherwise, I would suggest, Mr. Chairman--and I thank you--
these hearings are simply seen as a way to humiliate the people
of Puerto Rico, instead of lift them.
The Chairman. First, you came in late--I am going to give
you a chance to catch your--let me go back to Mr. Labrador, you
have been sitting here in No Man's Land again--and give you a
chance to ask questions. Then we will catch up with some of the
others who have been here.
Mr. Labrador. Thank you, Mr. Chairman. And I found that
rather unfortunate, I think. That was the first time that
partisanship has been brought up in this hearing today and Luis
is a good friend. I was sad to hear that.
And I want to thank you. You have been going through a
pretty good hearing today, a lot of really tough questions. And
I don't know you, but it sounds to me like you are at least
trying to find a solution to this problem, and I want to thank
you for your efforts. We do not agree on every one of your
solutions, not everything that you have said, but I can tell
that the Administration--this is a Republican speaking here--at
least is acting in good faith, trying to find a good solution
to this problem that we all want to find a solution for.
Mr. Weiss. Thank you, Congressman.
Mr. Labrador. Absolutely. I want to make something clear.
There has been a lot of talk about Chapter 9. You said in your
statement, and I think this has been missed, that Chapter 9 was
carefully designed for states in conformance with the 10th
Amendment. So, in other words, you don't think Chapter 9
applies to this situation. Is that correct?
Mr. Weiss. We don't think Chapter 9 solves the problem.
Mr. Labrador. OK, thank you. I just wanted to make that
clear, because I don't think that was heard by all those people
that are asking questions. Thank you.
You also stated that the plan proposed by the
Administration includes a debt restructuring authority paired
with fiscal oversight, health care transformation, and tax
incentives to reward work. I want to speak to you for a few
minutes about a few of these elements.
First, the Administration has called for an independent
Federal oversight authority that respects Puerto Rican
autonomy. Could you explain what the Administration means when
it says such authority must respect Puerto Rican autonomy?
Mr. Weiss. Thanks for the question. I tried to provide a
partial answer to this earlier. In essence, the elected
government of Puerto Rico, in our concept--and this is a
principle--should continue to set forth the major taxing and
spending decisions that are necessary to run the economy. No
Federal authority can stand in the place of these duly-elected
officials to determine what is required.
But, due to the long-standing nature, and I have to go back
to the fiscal mismanagement which has taken place in the sense
of systematic under-estimating of expenses and over-forecasting
of revenues, investors have lost confidence in the numbers; the
people have lost confidence in the numbers. And we actually
think getting the numbers right makes a different here and can
lead to greater opportunity, greater investment, and greater
job employment.
Mr. Labrador. Thank you----
Mr. Weiss. So, we see that the oversight board plays that
essential function.
Mr. Labrador. At the prior two hearings, I have highlighted
the importance of Puerto Rico to continue enacting necessary
reforms and negotiating voluntary debt restructuring agreements
with their creditors.
I am concerned because there was an article in El Nuevo Dia
on February 18 that stated that Puerto Rican legislators will
dam up--they will stop, dam, d-a-m, up--the legislation if the
legislation we craft seeks their ratification to impose Federal
oversight authority. The article is here.
So I want to know--I see the president of the Puerto Rican
Senate is behind you and he is nodding his head, but that is
what some people said in the article. I am concerned about
that. Do you have any concerns that the Puerto Rican government
would try to stop any kind of restructuring board or anything?
Mr. Weiss. May I cede my time to Senator Bhatia?
[Laughter.]
Mr. Labrador. I will speak with--I was glad to see him
nodding his head no, because there are actually some statements
in here that talk about that. It would be impossible, I think,
for a reporter to get something wrong, because you know that
never happens.
Do you think we can rely on the legislature to make the
difficult decisions when some legislators are publicly vowing
to oppose oversight authority?
Mr. Weiss. I think that the legislature does not fully
understand what this oversight authority would consist of, nor
do the people of Puerto Rico, for one simple reason: we have
not presented it to them. I mean we are talking about it.
We are very appreciative of Chairman Bishop and his staff,
and we are actually starting to put some details in place. But
we will have to design this all the way into its detail, and
convince the legislature and the people of Puerto Rico that it
can be effective.
Mr. Labrador. OK. Finally, I also want to talk a little bit
about promoting economic growth for Puerto Rico. I believe that
the only way to get out of this crisis is to have fiscal
promise by economic growth. Do you have concrete proposals for
stimulating the economic growth?
Mr. Weiss. We do, and we are open to other ideas than the
ones we have proposed. But we have looked at various levers.
The Earned Income Tax Credit is one we think would be very
effective.
Mr. Labrador. Thank you very much.
The Chairman. This is where you say, ``Yes.'' And you
should know in this part of the building you can cede to anyone
except a Senator.
[Laughter.]
The Chairman. If you had been in the House, you would have
been OK, but no, it doesn't work at all.
[Laughter.]
The Chairman. Mr. Beyer.
Mr. Beyer. Thank you, Mr. Chairman, and thank you, Mr.
Weiss.
Representative Pierluisi spoke eloquently of the disparate
treatment that Puerto Ricans have now under Federal law. And
you talked about the oversight board, the fiscal restructuring.
Can long-term fiscal stability come to Puerto Rico without
addressing Medicare, Medicaid, EITC, and other stuff?
Mr. Weiss. We think long-term growth cannot. We think that
long-term stability, the Number One important element is to
restructure the debt and to do it with an independent oversight
board. It is necessary, but not sufficient for growth. Other
things have to be enacted for growth.
Mr. Beyer. I am told that, without really even looking at
Medicare, you are going to be permanently structurally
imbalanced for the long term, putting Puerto Rico back in the
same position.
Mr. Weiss. Medicaid funding will run out by most estimates
in March 2018. This does create a hole in the numbers that is
considerable and it is why we have included it in our plan.
Mr. Beyer. You talked about $70 billion in debt, the
declining population, and an aging population--2\1/2\ percent
lost just last year. Is there any possible way to support $70
billion, even restructure, without significant haircuts to
existing bondholders?
Mr. Weiss. No.
Mr. Beyer. So, it is imperative that some of the existing
debt be written off in order to get it to a balanced----
Mr. Weiss. We would not prescribe what gets written off,
what gets reprofiled, what gets restructured, and other means.
But the absolute debt burden is clearly unsustainable,
uncontroversially unsustainable.
Mr. Beyer. Yes. You talked about the oversight board, but
also maintaining the local government autonomy. Can you talk
about the dangers when there is not local government autonomy?
And all of us are painfully aware of what happened in Flint
recently, so----
Mr. Weiss. Well, we have with us a Congressman of Puerto
Rican descent who is deeply familiar with the heritage and
self-governing authorities of the Commonwealth. It would simply
be rejected, in our judgment. A takeover of Puerto Rico by the
Federal Government, we think, would be universally rejected.
The reforms would never be implemented. So, it is simply not an
option that Congress should consider.
Mr. Beyer. One question has been brought up a number of
times, especially by my friends in the Majority, that the
prospect of Puerto Rico really re-entering the bond market in a
meaningful way after the write-offs, after whatever--if not
Chapter 9, some type of fiscal restructuring. Are there
examples in the past, other places, of successfully re-entering
the credit markets after a restructuring?
Mr. Weiss. As I said, this is a tried-and-true combination.
To pair oversight with restructuring has worked domestically
many times. It has worked internationally many times. Cities
like New York City, Washington, DC--notwithstanding that it was
a fiscal, rather than debt crisis--and Philadelphia. Major
companies, by the way, have gone through a restructuring and
re-accessed markets. Markets inherently look forward, and what
markets see when they look forward in Puerto Rico today is 10
years of cascading defaults, litigation, out-migration, and
economic decline. No wonder Puerto Rico lost access 2\1/2\
years ago to traditional bond investors.
This needs to be stabilized. Once it is stabilized, and
with the additional credibility afforded by independent
oversight, it is our judgment that the credit markets will
reopen.
Mr. Beyer. Thank you. Mr. Chair, I yield back.
The Chairman. Thank you.
Mr. Westerman.
Mr. Westerman. Thank you, Mr. Chairman, and thank you, Mr.
Weiss. I will reiterate the words from my colleague, Mr.
Labrador. I appreciate your honest approach to this, and the
Administration's efforts to try to come up with a real solution
here----
Mr. Weiss. Thank you.
Mr. Westerman [continuing]. And being transparent in
identifying where the issues are.
As it has been noted, Puerto Rico has lost about 10 percent
of its population and over 250,000 jobs in the last 10 years.
Much of this is due to the lack of opportunities on the island,
and also for the citizens' ability to move freely to the United
States.
I know in some of the solutions you have proposed to try to
help stem some of the out-migration, you have talked about
extending programs like Medicaid and the Earned Income Tax
Credit, to make it equal to what we have here in the states.
As I look at out-migration or migration into the states
here, we see that there is a lot of data that shows that people
move to states where there are more job opportunities. They may
even move from states where there may be more Federal benefit
programs to states where they have more job opportunities. I am
wondering if in the analysis in coming up with these solutions,
did you do any kind of a survey on when there is out-migration
from Puerto Rico to the states, which states they are moving
to, and what is attracting them to those states.
Mr. Weiss. Well, Congressman, it is definitely the case
that we see Puerto Rican citizens moving for opportunity. I
mean they are clearly moving for opportunity, because the vast
majority are working age with families. These are not mainly
retirees. They really see opportunity throughout the United
States.
I would be happy to come back to you with a list of the
states which are attracting the most Puerto Rican citizens, but
it is really broad spread. It is everywhere from Florida, to
New York, to Pennsylvania, to Texas, to Ohio. It is really
quite a long list, and what that means is that the opportunity
pretty much anywhere outside Puerto Rico is far greater than
what is available in the Commonwealth.
Mr. Westerman. I am guessing it would be similar to what we
see here, where they are probably attracted to areas that have
higher job growth and more job opportunities.
With that said, does the Administration have any proposals
to attract growth on the island?
Mr. Weiss. We believe that there needs to be two phases to
this. In the first phase, the debt needs to be restructured and
there needs to be oversight. That will restore confidence in
the numbers and it will stem the crisis. But in the second
phase, there needs to be greater economic opportunity for the
people in Puerto Rico, because we would like to not just see
out-migration stop, but to see the many Puerto Ricans who live
on the mainland have the opportunity to move back to Puerto
Rico.
There are 5 million-plus Puerto Ricans in mainland United
States versus 3.5 million on the island. Success here means
that the flow moves in the other direction. So, yes, we have
proposed an EITC. We think there are things the Puerto Rican
legislature can do. As I mentioned earlier, we think there is a
substantial role for industry and private capital, but none of
those are going to get in place unless we stop this free fall
of the crisis that we are in today.
Mr. Westerman. And, as my colleagues from Montana and
Louisiana talked about, energy issues on the island--I believe
they pay approximately twice the cost per kilowatt hour for
electricity as Americans pay, on average. Have there been any
ideas or proposals to reform the energy sector on the island?
Because obviously, low energy costs will help attract
manufacturers and good jobs.
Mr. Weiss. Congressman, not only are there ideas, there are
proposals. There are companies, investors, who would like to
help migrate from oil and coal to alternative energy and
modernize the grid. We agree, it is a dire problem. None of
those investors and none of those companies are going to invest
in the chaos of the current economy. It needs to be stabilized,
but we do think that there is capital that can come in to solve
this.
Mr. Westerman. I yield back, Mr. Chairman.
The Chairman. Mr. Gallego.
Mr. Gallego. Thank you, Mr. Chair.
Mr. Weiss, you have mentioned about the need to have
economic development as the three-step process to right the
ship of Puerto Rico. So far you mentioned EITC. I have some
concerns with this. I represent what you could also describe as
areas that are mini-Puerto Ricos, 12 percent unemployment,
businesses not moving in, things of that nature.
But EITC is very helpful for my constituents because it
does bring a little more extra income into their family. And it
is also great for the economy because it spurs economic growth.
The problem with that is, when you have 12 percent unemployment
and growing, many, many people in Puerto Rico are not going to
be benefiting from EITC. In terms of spurring the economy, what
it will do is spur retail work, but not necessarily any other
type of economic jobs, because they still import about 85
percent of everything into that island.
One of the areas I would like to see if we could explore--
in my younger years, I worked for the city of Phoenix, and we
did some work in terms of economic development--is maybe
looking at trying to bring the HUBZone status to the whole
island. That has been very helpful for my area, in terms of
bringing economic productivity, some new industries, especially
light manufacturing, which could be very beneficial to Puerto
Rico, as well as potentially trying to use either IDAs or New
Market Tax Credits, any creative way possible to basically
bring a lot more interest back to Puerto Rico.
I believe with the proper set of tools that could
potentially come from this oversight committee in terms of
recommendations, or us, as Members of Congress, actually
passing these types of policies that would be helpful, that we
could actually help spur that. Are there any other ideas
besides EITC that you all are thinking about doing?
Mr. Weiss. We would be open to working with you on
additional ideas.
EITC does three things in Puerto Rico. Number one, it puts
money in the pockets of hard-working families. The average wage
in Puerto Rico is $19,000. This would be spent. Second, it
provides an incentive to join the formal workforce. There is a
40 percent labor force participation rate in Puerto Rico. And,
third, we talked about long-term revenues. Over time it expands
the revenue base as people join that workforce.
But we don't mean to propose this to the exclusion of other
creative ideas, and we would be happy to work with your office
in identifying other options.
Mr. Gallego. Thank you. And I yield back the remainder of
my time to Congressman Gutierrez.
Mr. Gutierrez. Thank you so much, Congressman.
Again, Mr. Weiss, it is interesting to hear that we talk
first about a control board, a control board accepted by the
people in Puerto Rico. But of course, you have to accept the
control board to move forward. You are still imposing a control
board, because if you don't, then there is no solution to the
current crisis in Puerto Rico. Again, the solution emanates
without a fair distribution of power between the people of
Puerto Rico and the Congress of the United States.
My point is the following. I am sorry my friend, Mr.
Labrador, a fellow Puerto Rican, has suggested that it is not
being bipartisan to suggest that the House of Representatives,
the People's House, simply listen to the people of Puerto Rico
and travel there. And to suggest that the people of Puerto Rico
simply feel that this Congress is putting all of the burden,
much as you have suggested, Mr. Weiss, you have never come here
to talk about the merchant marine tax of billions of dollars on
the people of Puerto Rico, billions of dollars, because we must
use U.S. flag ships, you have not talked about that. You have
not talked about the unilateral defunding of the economic tool
under section 936 that the Congress of the United States--you
have not spoken about the decimation of the agriculture in
Puerto Rico because of policies conducted right here from
Washington, DC.
All I am saying is, if the people of Puerto Rico are going
to have energy and they can harness their wind, they can
harness their sun, why don't we talk about those kinds of--see,
then, as I have spoken to the people of Puerto Rico, they feel
that there is a balance. They are saying there is a joint
responsibility, but it seems to me that all of the
responsibility seems to be weighed on the people of Puerto
Rico. I think that that is an unfair development. Let's listen
to them. Thank you so much.
Mrs. Lummis [presiding]. The gentleman's time has expired.
The Chair recognizes Mr. Hardy.
Mr. Hardy. Thank you. Mr. Weiss, thank you for being here.
You mentioned that the Puerto Rican debt payments of nearly
$800 million in constitutionally prioritized debt are unlikely
to be made. What impact--and I apologize if any of these
questions have been asked since I was late--but what impact
will that have, not only on if they fail and are prioritized
over the credit markets, what will that do to not only the
structure and future bonding of government GO bonds in the
future to Puerto Rico, but what will it do outside of the
market, over the country?
Mr. Weiss. In our judgment, those payments in July, if they
are not made, will provoke chaos in the Puerto Rican municipal
bond market. At the same time, I should mention there is a
history of setting aside monthly amounts to build up these
lump-sum payments as they come due. One of the actions that the
Governor and the local legislature have taken was to stop
making those set-asides. So there is no assurance that that
payment can be made.
And I should mention this is why we need to act now--
because the consequences of a non-payment of that debt in July
would be devastating for the economy of Puerto Rico. And this
talk of audited financials, I would like to be clear, we do not
need the audited financials to know that there is a crisis.
There is a crisis.
There is plenty of information that has been released by
forensic accountants. There is no doubt, even by bond
investors, that there is default risk. All of the rating
agencies have put these bonds at the lowest possible rating as
prime for default. So yes, we need to produce audited
financials. But there is a crisis, and we need to act now.
Mr. Hardy. But to add to that question, what I was trying
to ask is--default happens--if it happens, does that cause
concerns outside of Puerto Rico to bond shareholders for future
GO bonds?
Mr. Weiss. I mentioned a report that was issued by Nuveen,
one of the largest municipal bond traditional investors, just
yesterday. They say very clearly that the best thing that can
happen for municipal markets is for the Puerto Rican crisis to
be resolved quickly, in a framework of Federal restructuring,
and that the worst outcome for municipal markets is a
protracted, disorderly default.
Mr. Hardy. You talked earlier about how this independent
board has worked in other avenues for restructuring debt. Would
you mind telling me what the make up of this board would be,
overall? What individuals would be on this board?
Mr. Weiss. In our written testimony, we gave some
particulars--we think that a majority of the board should be
Puerto Rican residents, and that there obviously needs to be
substantial expertise, not just in financial restructuring but
economic expertise should be representative of stakeholders.
And importantly, it should be fully independent of the
political process, which is to say not elected officials, and
no real or perceived conflicts of interest.
Mr. Hardy. If individuals from Puerto Rico are added to
this board, does that possibly create a political challenge
there? Or does this independence--will it look at it in an
objective way to make sure that we always are moving forward in
the right direction to solve this problem versus maybe some
combative areas of it, or how does that----
Mr. Weiss. I mean----
Mr. Hardy. Any concern at all?
Mr. Weiss. Based on all of our interactions with the Puerto
Rican business leaders and workers, we believe that there is a
real and deep base of independent problem-solving Puerto Rican
residents who would be ideally suited to this kind of
responsibility.
Mr. Hardy. Thank you, and I yield back.
The Chairman [presiding]. Mr. Polis.
Mr. Polis. Thank you, Mr. Chairman. We all know that this
is the third hearing we have had regarding the Puerto Rican
debt crisis. Frankly, I am disappointed we have not gotten to
the point where we can have meaningful discussions about
imminent action that needs to occur with regard to the
financial crisis occurring every day in Puerto Rico, with over
$70 billion in public debt. I think we are obligated to have an
open dialogue about the use of Chapter 9 or other innovative
options. We need to consider restructuring the debt in a
responsible manner for any of these growth scenarios to be able
to take hold.
Mr. Weiss, since this is the third hearing on the Puerto
Rico debt crisis in our committee, can you speak to the urgency
of taking immediate action for the people of Puerto Rico?
Mr. Weiss. Thank you for that question. The urgency could
not be more apparent. When I testified before the Senate in
October, I said that there could be a humanitarian crisis. I
said today that I think there are already signs of humanitarian
crisis. Out-migration has doubled in the last year. Again, it
is 2.5 percent, as 85,000 Puerto Ricans are out-migrating
today, versus 40,000 just 2 years ago. There are hospitals that
have been forced to close doors.
And again, the Government Development Bank is dangerously
under-capitalized. The payments which are coming in May and in
July are unlikely to be made. There has already been default,
there is already litigation----
Mr. Polis. And speaking of the urgency, whatever the
restructuring, the rebuilding, and the recapitalization steps
that occur, do they get easier or harder if Congress continues
to delay?
Mr. Weiss. There is no ability to delay.
Mr. Polis. There is no ability to delay. Thank you.
I want to also talk about a lot of the testimony that was
about ideas for growth and how we can grow the Puerto Rican
economy. One of the pillars, of course, promotion of economic
measures aimed at growth. But the only economic measures
specifically I have heard from you relate to the EITC, which
you mentioned earlier. There is also the treatment of Medicaid
benefits.
I fear that those are far too mild for what we actually
need to encourage economic growth in Puerto Rico. Would the
Treasury consider exploring additional growth options, like
using the tax code to provide incentives for new corporate
investments in Puerto Rico? I would certainly be willing to
work with you on those kinds of proposals. Are those the kinds
of things that you would be open to?
Mr. Weiss. Yes. The necessary conditions are restructuring
and oversight, but we are open to other ideas that would
stimulate long-term growth.
Mr. Polis. I thank you, and I yield the remainder of my
time to Mr. Pierluisi from Puerto Rico.
Mr. Pierluisi. Thank you. I should state for the record
that I am the duly-elected representative of Puerto Rico in
this Congress. And even though not everybody in Puerto Rico
voted for me, when I raise my voice on the Floor of the House
or at this hearing, I am speaking for the people of Puerto
Rico.
So, the notion that the people of Puerto Rico are not being
heard in Congress or by this committee is wrong. I do
appreciate when my fellow Puerto Ricans who are actually voting
Members in this Congress come to assist me, and I know that
they identify themselves with my constituents. But let's not
lose sight of that fact.
I vouch for the fact that Chairman Bishop has been working
closely with me, and I look forward to continuing to work
closely with Chairman Bishop so we come up with adequate
bipartisan legislation to deal with this crisis.
Having said that, I am very concerned, Mr. Weiss, about the
impending defaults either in May, or looks definitely like in
July. What is Treasury doing to encourage creditors to provide
necessary short-term financing, or necessary forbearance, so
that Puerto Rico does not go there?
Mr. Weiss. Over a cliff?
Mr. Pierluisi. Yes.
Mr. Weiss. We are deeply concerned with the same payments.
Just last week, Secretary Lew has convened creditors in
different bonds to send the message that we are determined to
see a solution here. The Puerto Rican people have sacrificed,
and for there to be a viable solution, there needs to be broad
sacrifice across all stakeholders. It cannot just come on the
back of the Puerto Rican people.
And I would say that those discussions were constructive,
but there will be no substitute, for the reasons that I have
articulated earlier, for a comprehensive restructuring
authority across the debt.
The Chairman. Thank you.
Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman.
Mr. Weiss, if we rewrote the rules on Puerto Rico's
sovereign debt now, what would that do to the sovereign debts
of the 50 states? They borrow at much lower interest rates
precisely because of the rules that are in place. Puerto Rico
got lower interest rates to borrow precisely because of this
assurance of stability. By rewriting the laws, you shatter that
understanding of stability. And this calls into question every
other sovereign debt.
I am afraid the credit markets are going to say, ``Well,
wait a second. If they can do that to the Puerto Rican debt,
they can do that for California, Illinois, and New York,'' and
markets will respond to that by assessing this additional risk
and increasing interest costs to reflect that risk. That could
sink a state like California, for example, that is carrying
enormous debt right now.
In fact, the governors of Alabama, Arizona, Maine, New
Mexico, Nebraska, and North Dakota wrote a letter to this
effect just this past month. They said, ``Of most concern to us
as governors, granting Puerto Rico such unprecedented
bankruptcy authority would likely raise the borrowing costs of
our states, reducing our ability to invest in vital services
and eroding investor confidence in the whole notion of full
faith and credit debt.''
Indeed, the National Governors Association has already
warned against this in 2011, noting that states should not be
given the right to declare bankruptcy themselves because the
result in market volatility would raise the cost of state
governments precipitously.
Now, I realize we are not talking about Chapter 9
bankruptcy, per se, but the same principle applies to rewriting
the rules after they have been agreed to and loans have been
made under those rules. What is your response to that?
Mr. Weiss. Respectfully, Congressman, we do not share that
analysis. As Treasury, we have given this substantial thought.
First, Puerto Rico, to state the obvious, is not----
Mr. McClintock. But if you do not share that concern that
has been expressed by many other governors, it is being
expressed universally throughout the credit markets, that is a
reflection on the bad advice and thinking that is going on in
Treasury right now, and that is even a bigger concern.
Mr. Weiss. Again, traditional municipal bond investors--
Nuveen, Blackrock, agencies such as Moody's--nearly universally
say that the healthiest thing that could happen for municipal
bond investors would be for there to be a federally legislated
restructuring----
Mr. McClintock. With all due respect, that is precisely the
opposite of what the investors are saying, and they are the
ones that will be charging the interest costs to every other
state in the country.
As a result of this action that you are proposing, I am
concerned that we are going to see a rapid escalation of
borrowing costs for the states that right now enjoy the
understanding that there is a stability to the rules under
which they are making these loans.
Mr. Weiss. Congressman, there are material differences
between Puerto Rico, states, and municipalities. First, it is
completely cordoned off by investors. There have been no
traditional municipal bond new issuances----
Mr. McClintock. But the principle remains and the principle
adheres to the sovereign debts of every one of the 50 states,
which you would be directly undermining by this reckless----
Mr. Weiss. We face----
Mr. McClintock [continuing]. Policy. Let me go on. Puerto
Rico seems to me to be a poster child for a heavily regulated
and government-managed economy and Keynesian deficit stimulus
spending. It has a bloated government workforce, and all of
these policies have been a complete and unmitigated disaster
for the economy of Puerto Rico. It seems to me the economy does
not need more regulation in government management, it needs
less.
It seems to me that this is an opportunity to make Puerto
Rico an enterprise zone, to dramatically reduce the tax and
regulatory burdens, and turn Puerto Rico into a Hong Kong of
the Caribbean. That means providing relief from the Federal
corporate tax rates, getting rid of the capital gains taxes on
investment in Puerto Rico, a FICA holiday, energy de-
regulation, obviously exemption from the Jones Act to spur
maritime commerce, and relief from the minimum wage to spur
hiring.
Puerto Rico is a cruise ship destination, for heaven's
sake. It is one of the most beautiful parts of the world. They
have the most fertile soil and climate imaginable. They have
access to Atlantic shipping and trade. The only thing they lack
is wise public policy. If we were to make these changes,
wouldn't we be likely to see rapid recapitalization of the
economy, as corporations around the world assess these changes
and realize they can enjoy both a free market and live in an
island paradise?
Mr. Weiss. Congressman, what are we to do when the $2
billion of debt comes due on July 1?
Mr. McClintock. Administer them as the current rules
provide.
The Chairman. I am sorry, everyone owes me 5 seconds now.
Mr. Serrano, our rules say we have to have the committee
first, but I am going to let you go before I do. But let me
finish the rest of this committee first, if possible.
Mr. Gohmert.
Mr. Gohmert. Thank you, Mr. Chairman. And thank you,
Counselor, for being here. Have you ever done manual labor,
like with a shovel, digging?
Mr. Weiss. Yes.
Mr. Gohmert. Oh, good. You had me worried there, because of
the long pause.
Mr. Weiss. Oh, I actually did not hear the example you
gave.
Mr. Gohmert. Oh, OK, yes. Just have you ever used a shovel
and dug a hole.
Mr. Weiss. A lot.
Mr. Gohmert. So I would take it, then, you have filled one
in before.
Mr. Weiss. Yes.
Mr. Gohmert. Yes.
Mr. Weiss. With my sons, yes.
Mr. Gohmert. Yes. And that makes it interesting with your
sons. Because it seems like what we have seen in Puerto Rico,
they have dug themselves a hole and, as has been fully
discussed here today, they are needing help getting out of the
hole.
But I also recall my friend, Luis Fortuno, trying to get
Puerto Rico on the right track. And my recollection of events,
he laid off thousands of government workers, trying to get on
track.
Mr. Weiss. Tens of thousands.
Mr. Gohmert. Tens of thousands. Yes, around 30,000, was
that right?
Mr. Weiss. I think so.
Mr. Gohmert. Yes, and thinking that if we can show the
total United States, show the world investors we can get our
debt under control, we can stop digging a hole, then we have a
chance to get on track and the money will be well invested here
in Puerto Rico. Obviously, he lost the next election because
they did not want a governor who was laying off that many
government workers.
I pulled up--this says it is copyright 2016--but a list of
cities in Puerto Rico by population and by percent of
government employees. Apparently, Culebra, 1,868 population,
percent government employees, 45.28; then--sorry if I butcher
the name--Utuado, Puerto Rico, 35,015 and 40.06 percent of
their population is government workers; and next, 27,913
population, 39.07 percent is government workers.
It seems like if we set up some kind of plan--and there are
indications they are going to need Federal money, Federal
help--we would be taking a shovel and trying to fill the hole
back in. The trouble seems to be, with the high percentage of
government workers in Puerto Rico, that they are going to be
digging the hole at the same time we are trying to fill it in.
I do not see how that would encourage capital to come rushing
in, especially when they see the example that people are not
going to get a dollar for a dollar that was invested in the
original bonds.
So, I know you are Counselor to the Secretary of the
Treasury. I looked that up during the long time we were
waiting. It is a person trained to give guidance. I would take
it you give the Secretary of the Treasury guidance, correct?
Mr. Weiss. Yes, sir.
Mr. Gohmert. What kind of guidance do you give the
Secretary of the Treasury on helping a gorgeous place like
Puerto Rico, who continues to dig the hole while you are
wanting to give advice on filling the hole? I mean do you tell
him that they are continuing to dig the hole, the percentage of
government workers is still going to be just a powerful suck on
the amount of capital there is in the country?
Mr. Weiss. Congressman, this is an enormously difficult
problem, but it is also a great opportunity. And what I have
said, and what the Administration believes, is this is one of
those rare chances where we, working with Congress, can
actually solve something, which no governor of the last five
has been able to do on their own.
If we restructure the debt under appropriate oversight with
real fiscal planning, real budgeting, and performance in line
with budgets, that is what is going to get stability back on
the island.
Mr. Gohmert. And then that is going to send a message to
the people of the island, ``We can keep electing governors who
will not get the percentage of employees to the government
under control, so we can keep digging while they are filling it
in.'' That is my concern. Thank you, I yield back.
The Chairman. Thank you. I know we told you we would be
here until noon, but if you give me another 15 minutes we can
get everything done.
Mr. Weiss. Yes, sir.
The Chairman. Mrs. Lummis.
Mrs. Lummis. Well, I want to thank you for your ideas on
oversight and orderly restructuring. I believe in the short
term that is an essential component to moving forward. If we
could sort of marry the short-term idea of oversight and
orderly restructuring with some of the other longer term ideas
that were expressed by members of this committee, I think that
Puerto Rico will not only survive this, but thrive this. Thank
you very much for working with our committee.
Mr. Chairman, thank you for holding this hearing. I yield
back the balance of my time.
Mr. Weiss. Thank you, Congresswoman.
The Chairman. Mr. Serrano, before I ask my questions, let
me yield to you so you have a chance to talk to the witness.
Mr. Serrano. Thank you, Mr. Chairman. I also want to join
you and the other Members in thanking you for holding the
hearing, and for giving me an opportunity, as a non-member of
this committee, to participate.
Mr. Weiss, I believe that you are a friend of Puerto Rico,
and I believe that you want to solve the issue. But we keep
making a mistake in this Congress and the Administration, and
it does not matter what party is in power, we make the mistake.
Whenever we speak of status, we make it sound like status is
not the issue, that the time is not right to discuss status. I
would argue that status is the problem, and it is always the
right time to discuss status.
You, yourself, when asked about status, you kind of glossed
over it, and I say this with all due respect and admiration.
You said, ``The people of Puerto Rico,'' I think you said,
``have to resolve this. We agree that it has to be done.''
First of all, that is a mistake. The people of Puerto Rico
did not invade the United States. The United States invaded the
people of Puerto Rico. At the minimum, the U.S. Congress has to
tell Puerto Rico what is available on the table for a change in
status. It is obvious that the present status is a problem. Why
is it a problem?
If there has ever been a need for proof that Puerto Rico is
a colony, we just found it. Puerto Rico cannot restructure its
debt without permission from the United States. Puerto Rico
cannot apply Chapter 9 without being included again. I have
heard people who believe in Puerto Rico sovereignty, and even
Puerto Rico independence, total independence, say, ``We don't
have the tools.'' Those tools are acquired through statehood,
independence, or free association.
My question to you is--well, not this part, because this
part is my comment. I think that what we are doing now is
putting a Band-Aid on a major issue, because 2 years from now,
5 years from now, 10 years from now, the issue will be back
again because Puerto Rico does not have the ability to resolve.
I read recently or heard recently, just to give you an
example of where Puerto Rico finds itself, Mr. Chairman--I may
be wrong, so I will stand corrected ahead of time, but I heard
that Puerto Rico was going to buy plantains from the Dominican
Republic and was told by the Federal Government it could not do
so without its approval. That is how bad it has gotten at
times.
I remember once Puerto Rico was going to have a foreign
country irrigate some lands, and they were told by the State
Department, ``You cannot ask that foreign country to irrigate
any land.'' So you know what Puerto Rico is? It is not treated
equally. Only in war time is it treated equally.
So, my question to you is--you will be consulted as this
bill is put together. You will be more than consulted, not you,
but the Treasury Department and you, probably, one of the
leaders in it. Would the Treasury Department consider making
sure that that bill has language that says, ``But we cannot
ignore the fact that the status issue has to be resolved, and
resolved once and for all'' ? Or are we going to continue to
say that it is up to the people of Puerto Rico, the recipients
of colonialism, that have to undo colonialism?
Because I can tell you, as a member of the Appropriations
Committee, and I was born in the colony and now oversee the
colony, so I probably need a psychiatrist on colonialism to
deal with my situation, but I can tell you, as a member of the
Appropriations Committee, that all the states get what applies
to them, and then whatever is left over--even to get Puerto
Rico on the back of a quarter during that program where we had
states on the back of a quarter, I had to include special
legislation to get Puerto Rico on the back of a quarter. Not a
big deal, but it makes the point.
So, my question to you is, can we have the Treasury
Department suggest strong language that says, ``But don't
forget, you have to resolve the status question'' ?
Mr. Weiss. Congressman, thank you for your compliments at
your opening. I would like to return them. I have learned an
enormous amount in our interactions with you.
Status is vitally important. Where I would like to
disagree, respectfully, this is not a Band-Aid. This is a life-
saving procedure that we are discussing. If we do not
restructure this debt, if we are faced with the events that
Congressman Pierluisi described in May and July, Puerto Rico's
very survival is at stake. We don't think about this as a Band-
Aid, we think about it as an absolutely necessary action.
Mr. Serrano. Reclaiming my 5 seconds, it is a Band-Aid in
my opinion, because we will resolve it for today, but we will
not resolve it for 5 years from now, and that has to be dealt
with at some time. Thank you, Mr. Chairman.
The Chairman. Thank you.
Mr. Lamborn. Better late than never.
Mr. Lamborn. Thank you, Mr. Chairman, for having this
hearing. Mr. Weiss, thank you for being here. I apologize I was
not here earlier, I was in a mark-up in another committee. But
I just wanted to get a little bit of background, take advantage
of the work you have done in working on a plan.
Let me ask a little bit about prioritization. If you had
your way in the plan that the Treasury Department is working
on, how specifically--for instance, would government workers
with pensions be treated under the plan that you are proposing?
Mr. Weiss. We believe that all of the debt needs to be part
of the discussion, but that we would be open to respecting
existing priorities and claims within that.
As to pensions, it was incorrectly reported this morning
that we thought that should be prioritized above everything.
But I do need to say these pensions are completely unfunded,
and we are deeply concerned that they be protected. There is
about a 2 percent funding ratio on a pension that supports
330,000 Americans working for the public municipalities and
government in Puerto Rico. That is a completely unheard-of
funding ratio. And these are not gold-plated pensions. The
average monthly payment is around $1,200, sometimes less.
So, yes, we believe pensions need to be protected, but we
would like to work together with you, and we really have had
good bipartisan discussions with the Chairman and his staff
about how to put all of the pieces of this together such that
there is the most fair and equitable treatment we can design
for all stakeholders.
Mr. Lamborn. OK, thank you. Let me ask about the energy
angle on this, and PREPA, and the electrical generation. What
are some of your thoughts or recommendations on that debt,
which is about, I think, 11 or 12 percent of the total debt?
Mr. Weiss. Yes, the PREPA debt is around 11 or 12 percent
of the total debt. There is a voluntary agreement that is in
place that has been worked on for about a year-and-a-half. It
has, I believe, 70 percent creditor approval. And it would be
helped by orderly restructuring, because they could then go on
and finalize it. They would not face the problem of having to
deal with the remaining 30 percent who are holding out, hoping
for a better deal, or hoping for some other outcome.
So, we think our restructuring authority could be used to
help solve PREPA, and we discussed earlier that we do think
that the energy grid and the energy generation sources in
Puerto Rico badly need to be modernized, upgraded, and
diversified away from oil, gas, and coal. But we also are
optimistic on that score. We think, if we pursue this plan and
stabilize the economy, that there will be ample third-party
capital and third-party industry that will be interested in
investing in those areas.
Mr. Lamborn. In order to modernize and to do it quickly, I
think you would agree with me time is of the essence. Would we
want to have some kind of ability to cut through red tape that
would currently maybe make a project that could--you know, a
construction project that would take 1 or 2 years, when you add
all the layers of regulatory reviews, may take 5 or 10 years.
Would you agree with me that we can do better in cutting
through red tape?
Mr. Weiss. You know, we have heard the same, anecdotally,
complaints from investors in respect of the permitting and
bureaucratic process. But the real problem that investors face
today is like in any case: nobody is going to put money to work
in an economy that is in free fall and in full-blown financial
crisis.
We need to stem this crisis. Once we stem the crisis, there
is capital. There are people of good will who want to invest in
Puerto Rico, and there is a future for the people of Puerto
Rico. There are going to be new jobs. There will be new
investment. And it is ultimately our hope that all of those who
have out-migrated will see that opportunity and will begin to
return.
Mr. Lamborn. OK. I look forward to working with you and the
Chairman and every interested party, trying to make this work
as efficiently as possible and in an expedited way. I can think
of examples of red tape that we might want to look at as part
of this whole process.
Mr. Chairman, thanks for having this hearing, and I yield
back.
The Chairman. Thank you.
Mr. Weiss, let me ask the last questions here. I like going
last, because there are basically very few people around to
hear me.
So, in an effort simply to capture what the breadth of this
situation is, let me quickly summarize. Puerto Rico has about
$70 billion in debt from bonds. The pension liability is $46
billion, they have $2 billion in assets to cover it. They do
not have access to credit markets or to borrow money. There is
significant out-migration, as you have mentioned. The
Government Development Bank, where many of their deposits are
held, is in peril. The Governor has authorized a billion
dollars in some unsustainable liquidity actions, including
withholding tax refunds; selling assets from pension funds;
taking money dedicated to one group of creditors to pay others;
and the fact is there could easily be a central government that
would be forced to shut down.
With that background, and based on Treasury's analysis of
the situation, should there be any sacred cows that are put on
the table? Is anything so sacrosanct that it cannot be
discussed by any kind of oversight board or institution in
seeking a solution?
Mr. Weiss. We believe that we all must be prepared to
question our basic tenets. We appreciate the bipartisan spirit
of the discussion that we have had with you and your staff. We
would not want to compromise the self-governance of Puerto Rico
in the process. We would not want to put at risk the payments
that are due to pensioners.
The Chairman. OK, we have that down well, yes.
Mr. Weiss. But fundamentally, we think this has required
enormous sacrifice on the part of the people of Puerto Rico,
and that all of us who are part of this solution should work in
an open-minded way in order to construct something. Time is the
chief enemy of this crisis.
The Chairman. In regard to the bonds that are outstanding,
does Treasury have any estimate as to how many of those bonds
are actually held by pensioners in the United States?
Mr. Weiss. There are not precise estimates of this. We
think that a substantial portion are held through a couple of
mutual funds who have stayed substantially invested in Puerto
Rico. Most mutual funds, when non-investment grade happened
2\1/2\ years ago, sold out. We think that there are about 30-35
percent of the bonds there held by hedge funds.
The Chairman. You noted in your testimony, as well, that
Puerto Rico's debt is unusually complex. In your experience,
how would you rate that complexity with debts to other
situations in which you have encountered.
Mr. Weiss. Very creative.
The Chairman. Well then, we will be creative when we come
up with something here.
In a previous hearing, Mayor Williams was asked how a
strong oversight board could respect Puerto Rico's self-
government. We have touched on that with many Members here
today. In essence, his answer was the oversight board needed to
hire good people who will work with the Commonwealth's
government and its affiliates to promote the trust that is
required for a good working relationship. Do you agree with
that assessment?
Mr. Weiss. We believe that there are people of good will
across Puerto Rico and across the United States in general who
would feel a mission in solving this crisis that is of such
historic magnitude. We think that there is an ample talent
pool, both on the island and across the mainland, of people who
would feel extraordinarily motivated. Because again, this is
not just a crisis, it is an amazing opportunity. It is one of
those rare cases where we, collectively, can put an end to this
crisis. That is a calling that we think that many would respond
to.
The Chairman. Thank you. I appreciate that. Let me ask one
last question, if I can get it in here.
Based on Treasury's analysis, is it clear how the debt
would be classified? Like, Commonwealth debt versus public
corporation debt.
Mr. Weiss. Yes, we think that there is about $50 billion of
debt that is supported by the taxing authority of the
Commonwealth, that there is a little under $20 billion that is
either public corporation, like PREPA and the municipalities.
And it is that $50 billion where there is the biggest problem,
because it is the $50 billion that is paid out of the general
fund.
So, all of the debt needs to be restructured within the $50
billion. There are revenue bonds, there are general obligation
bonds. We would be happy to send you our schedule of what we
think is outstanding.
The Chairman. All right. I appreciate that. Mr. Weiss, I
appreciate you being here, for your patience with us, answering
all the questions that have been thrown at you. It is also very
difficult, I realize, because you are the only person on the
panel. Usually you have a chance to take a breather and let
somebody else answer a question, eventually. But you did it
all.
Mr. Weiss. May I exceed by 10 seconds to thank you, this
committee, and your staff? I opened on a note of optimism. I
hope I may close on a note of optimism. We think there is broad
recognition of this crisis today, and we do think there are
very positive discussions taking place. We may have
disagreements amongst us, but there is a sense of urgency. If
there is a will, there is a way.
The Chairman. If you are going to thank us, I will give you
another 10.
[Laughter.]
The Chairman. That is OK, we got it. There are a couple of
documents that were presented that need a unanimous consent to
be added to the record. We have the documents here.
[No response.]
The Chairman. If there is no objection, great.
We do have a Committee Rule 4(h) that is--yes, 4(h), cute
name--that says that the Committee Record is going to be held
open for at least 10 business days. If other Members have
questions, we may be asking you to respond to those questions
that are submitted in writing.
If there is no further business, with my appreciation to
the witness, appreciation to the committee members, as well as
our guests for being here, we thank you. This committee stands
adjourned.
[Whereupon, at 12:20 p.m., the committee was adjourned.]
[ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD]
Prepared Statement of the Hon. Gregorio Kilili Camacho Sablan, a
Delegate from the Northern Mariana Islands
Mr. Chairman, thank you for the opportunity to add a few comments
to the record of today's hearing on ``The U.S. Department of the
Treasury's Analysis of the Situation in Puerto Rico.''
I understand our focus is on Puerto Rico, because that part of our
Nation is defaulting on its debt, something that has not occurred in my
district, the Northern Mariana Islands, or other U.S. insular areas.
But it could. Just this week the Marianas government on court order
had to scrape together $1.8 million to pay its retirees after cutting
their bi-monthly pensions by 25 percent earlier in the month. But there
remains an unfunded pension liability in the hundreds of millions of
dollars.
What is happening now in Puerto Rico should be a warning of what
could happen in other U.S. insular areas. And it would be wise policy
and an exercise in foresight to address root causes of the fiscal
problems in all the islands, when we address the problem in Puerto
Rico.
In fact, the Treasury Department and the Administration have
already put one idea on the table that would help with solvency in all
the insular areas. This is to bring the islands closer to the national
Medicaid program in which the Federal Government pays more of state
health care costs, depending on the proportion of low-income persons in
that state.
The islands bear a disproportionate share of those Medicaid costs.
And this burden contributes to fiscal stress and reduces the quality of
health care in the insular areas.
Treasury proposed in its Puerto Rico roadmap last fall that
Congress remove the cap on Medicaid and increase the Federal Medicaid
match for Puerto Rico. And the President confirmed in his budget
submission this month that it is intended that this Medicaid reform
apply to all the U.S. insular areas.
I support that proposal.
But there is one other policy reform that would improve the fiscal
situation in all the islands that--inexplicably--the Administration has
confined to Puerto Rico. This is extension of the Earned Income Tax
Credit.
There is broad agreement on both sides of the aisle that the EITC
is a policy that supports economic growth and, thus, improves the
fiscal health of a community. Speaker Ryan is a fan, because the EITC,
unlike conventional welfare programs, rewards work. It encourages those
who are unemployed to get a job, support themselves and their families,
become contributing members of society.
And the Administration has proposed--both in the Treasury roadmap
and in the President's budget for fiscal 2017--using the EITC to bring
people into the workforce in Puerto Rico. But not in any of the other
insular areas.
This week at the annual meeting of the Interagency Group on Insular
Affairs, the Administration explained that extending the Earned Income
Tax Credit to the Northern Marianas, American Samoa, Guam, and the
Virgin Islands was not necessary, because those areas ``are not in dire
straits.''
I ask you, do we have to see an insular area in fiscal collapse
before we take action? Or do we help avoid the kind of problem we now
have in Puerto Rico by taking action to treat U.S. citizens living in
all the insular areas more like they would be treated if they lived in
any U.S. state?
My fellow Delegates from American Samoa, and Guam are co-sponsors
of my legislation, H.R. 4309, that would provide Federal support for
the Earned Income Tax Credit in our jurisdictions. And I strongly
recommend that this committee assure that in any legislation,
addressing the fiscal crisis in Puerto Rico and including reform of the
Medicaid program and extension of EITC to Puerto Rico, all of the U.S.
insular areas we represent be equally included.
Thank you.
______
Carlos A. Colon-De-Armas, Ph.D.
Professor of Finance, Graduate School of Business, University of Puerto
Rico
Answers to the Questions for the Record
Submitted by Senator Orrin G. Hatch
U.S. Senate Committee on the Judiciary
Hearing on Puerto Rico's Fiscal Problems: Examining the Source and
Exploring the Solution
December 1, 2015, Washington, DC
The three questions submitted revolve around the issue of extending
to the Government of Puerto Rico access to bankruptcy proceedings.
Therefore, it seems important to preface my answers by expressing my
two main objections to the use of bankruptcy as the way to solve the
fiscal problems faced by the Government of the Island: (1) it would
worsen the economic situation in Puerto Rico, and (2) it is not
supported by the available evidence.
In my written testimony, and in the Q&A portion of the hearing, I
addressed the impact of bankruptcy to the economy. In essence, I
explained that the fiscal crisis was not caused by a weakening economy,
but rather, that it was the government, in the way it handled its
finances, that damaged the economy. It did so by using its limited
borrowing capacity, that was supposed to be utilized only to finance
public investments, and used it instead to finance spending. As a
result, an already fragile economy experienced a significant loss of
investments and deteriorated even more. To revert this trend, and to
fix the economic crisis, public and private investments on the Island
must be increased and the business climate in Puerto Rico should be
improved. For these investments to take place, financing is necessary.
for which access to financial markets is essential. Bankruptcy,
however, would close access to financial markets for Puerto Rico for an
indeterminate number of years, to the detriment of the quality of life
of the residents of the Island.
Regarding the reason to seek bankruptcy, it is important to
understand the debt burden calculation that serves as the basis for
that option. To start, consider the consolidated budget for the entire
Government of Puerto Rico, for fiscal year 2016, which totals $28,808
million. Within that budget, the aggregate debt service for the entire
public debt of Puerto Rico, including General Obligations, COFINA, all
public corporations, and all other debts, amounts to $4,491 million.
That debt service payment represents 16% of the entire consolidated
budget. Nevertheless, on page 17 of The Puerto Rico Fiscal and Economic
Growth Plan, prepared by the Working Group for the Fiscal and Economic
Recovery of Puerto Rico pursuant to Puerto Rico Executive Order 2015-
022, dated September 9, 2015, the debt service as a percent of revenues
for fiscal year 2016 is calculated to be 42%. On that same page, they
make the same calculations for the projected figures for fiscal years
2017 through 2020 and the result amounts to approximately 40% for the
five years presented. That 40% figure is cited by many people as the
public debt burden of the Government of Puerto Rico, and it is used as
the justification for seeking the right to declare bankruptcy. On
closer examination, it is easy to see that the calculation of a 40%
debt burden is wrong. To see why, let's examine the detailed
calculations for fiscal year 2016 presented in the following table.
Puerto Rico Public Debt Burden for Fiscal Year 2016:
Working Group vs. Consolidated Budget
------------------------------------------------------------------------
Consolidated
Working Group Budget
------------------------------------------------------------------------
Revenues
General Fund and other select $8,503 $8,503
revenues (1).....................
GDB net operating revenues (1).. (96) (96)
COFINA (1)...................... 696 696
HTA revenues (1)................ 677 677
Increased sales tax and VAT (2). 1,121
Other revenues (plug)........... 10,535
Federal transfers (1)........... 6,477
Loans and bond issues (2)....... 895
-------------------------------------
Total revenues................ $9,780 $28,808
========================================================================
Debt service
GOs and selected agencies (1)... $4,130 $4,130
Other debt service (plug)....... 361
-------------------------------------
Total debt service............ $4,130 $4,491
========================================================================
Debt service as a percent of total 42% 16%
revenues.........................
------------------------------------------------------------------------
(1) From page 17 of The Puerto Rico Fiscal and Economic Growth Plan
(``FEGP'') prepared by the Working Group for the Fiscal and Economic
Recovery of Puerto Rico pursuant to Puerto Rico Executive Order 2015-
022, dated September 9, 2015.
(2) Available at: http://www2.pr.gov/presupuestos/
presupuestoaprobado2015-2016/Pages/default.aspx.
As can be seen from the table, to make its calculations, the
Working Group uses only $9,780 of revenues, which represent only 34% of
the consolidated budget, but includes $4,130 for debt service, which
represents 92% of the entire aggregate debt service required for the
year. When you include the rest of the resources available in the
budget, even when you add the rest of the debt service, the proper debt
service as a percent of the total budget is significantly lower, at
16%.
The Working Group performed its calculation using as its basis the
report by Krueger, Anne 0., Ranjit Teja, and Andrew Wolfe, Puerto
Rico--A Way Forward, June 29, 2015 (updated on July 13, 2015), the so
called ``Krueger Report''. Accordingly, the argument is that ``the
General Fund alone . . . does not adequately capture the total
financing needs of the Commonwealth.'' (See the FEGP, p. 15.)
Although it may be true that the General Fund represents only a
portion of the Government of Puerto Rico, and although certain items in
the consolidated budget (e.g., federal funds, loans and bond issues)
are not available to pay debt service, the entire consolidated budget
represents the total amount of resources available to the Government of
Puerto Rico to pay debt service and to provide services to the people.
Therefore, if we accept the premise of the Governor of Puerto Rico,
that in this fiscal crisis the debt payments must be balanced against
the need to provide services to the people of the Island, the entire
consolidated budget should be the basis of the analysis. After all, the
funds that are not available to pay debt service may be used to provide
services to the citizens. The usage of these funds for these purposes,
therefore, would liberate resources that then could be used to pay debt
service. Accordingly, the needs of the people and the commitments to
honor debt obligations, would be effectively balanced.
It must be noted that the Krueger Report ``was prepared at the
request of legal counsel.'' (See the Krueger Report, p. 2.) As such, it
may well serve as the basis for a particular legal strategy like, for
example, bankruptcy. It is doubtful, however, that it should serve as
the basis upon which to base a sound public policy.
Based on the above, the proper debt service burden of the
Government of Puerto Rico, when correctly calculated, is 16%,\1\ and
not 40%. In that regard, it is worth mentioning that in a report by
Moody's Analytics (Zandi, Mark, Dan White, and Bernard Yaros, Puerto
Rico Looks Into the Abyss, November 2015), that unquestioningly accepts
the 40% debt service figure calculated by the Working Group, the
authors argue that a debt service burden of 20% of government revenues
is ``sustainable'' (p. 1). By the same logic, if 20% is sustainable, a
16% debt burden does not justify the use of bankruptcy.
---------------------------------------------------------------------------
\1\ In my written testimony at the hearing I indicated that the
debt service represents 16.8% of the consolidated budget of the
Government of Puerto Rico. That calculation was based on the proposed
budget. Based on the budget that was finally approved, the debt service
is 16%, like it was indicated above.
In summary, the use of bankruptcy is not justified by the available
---------------------------------------------------------------------------
evidence.
I now proceed to answer each of the questions specifically.
Question #1: Would extending Chapter 9 to Puerto Rico carry any
negative consequences for the island? I'm not talking just about
bondholders. I'm talking about the commonwealth as an entity. If
Congress extended Chapter 9 to Puerto Rico and island municipalities
began taking advantage of Chapter 9, how would that impact the island's
bond rating, its creditworthiness, its attractiveness as an investment
location, etc.? Is there a scenario under which extending Chapter 9 to
Puerto Rico would actually make the island's fiscal situation worse?
Answer to Question #1: First, it is important to make the
distinction between having access to bankruptcy proceedings and
actually using it. That distinction is relevant because every state of
the Union has access to bankruptcy protection for their public
corporations and that access does not seem to have affected their
credit quality.
As I indicated in the introduction, if the Government of Puerto
Rico were to use bankruptcy as the way to solve its fiscal crisis that
would worsen the economic situation of the Island because it would
close access to financial markets for an indefinite number of years
which would make it impossible to undertake necessary investments on
the Island. That outcome would come about, at least, for three reasons:
1. The use of bankruptcy is not justified and to argue otherwise the
government and its consultants had to resort to data
manipulation, as I demonstrated in the introduction.
2. Reneging on its debt commitments would constitute a drastic
change in the financial tradition of the Government of
Puerto Rico that, until now, had an unblemished record of
meeting its debt commitments.
3. Using bankruptcy protection would constitute a change of the
rules under which bonds were issued. This change of rules
not only could constitute a violation of constitutional
provisions that protect contractual relations, but it also
would erode the confidence on the Island of potential
investors.
That situation would be even worse under the proposal by the
Department of Treasury that would allow the Government of Puerto Rico
to seek bankruptcy protection even for debt guaranteed by the Island's
Constitution.
Naturally, any situation that weakens the economy of Puerto Rico
would make the fiscal situation even worse.
Question #2: We've heard arguments that extending Chapter 9 to
Puerto Rico would be unfair to bondholders because it would reduce
their return on their investments. Some have argued that any Chapter 9
extension should apply only to future debts. As an initial matter, it
would be helpful to know whether past bankruptcy code reforms have
applied to existing debts, or whether bankruptcy reforms have typically
applied only to future debts. Can you offer any insight on this matter?
And if past reforms have applied to existing debts, have any of those
reforms been analogous to what we're considering here--namely,
extension of bankruptcy access to entities who previously had no such
access? I asked this question at the hearing, but I didn't get a
complete answer and I believe it's extremely important.
Answer to Question #2: I am aware of the constitutional
impediments, both locally and at the federal level, to enact laws that
may affect contractual relationships. At the same time, I am also
cognizant of the fact that those very same Constitutions protect the
power of Congress, at the federal level, and of state legislatures, at
the local level, to approve laws. Balancing those two constitutional
provisions is not an easy task and may require court intervention.
Given that my area of expertise is not the law, on this question, I
defer to those who do have that expertise.
From an economic standpoint, however, even if it were legally
permissible, granting Puerto Rico access to bankruptcy protection for
its existing debts is both troublesome and extremely dangerous.
Utilizing bankruptcy when the debt service burden is 16% is equivalent
to saying that ``we can pay our debts, but we rather not pay them.''
Any jurisdiction acting that way, and one that does it with the express
approval of Congress (via the contemporaneous extension of Chapter 9),
will find it incredibly difficult to access the markets thereafter,
since they are, plain and simply, refusing to pay their debts. In fact,
it seems fair to say that an act of Congress that would allow a
jurisdiction to avoid paying debts that it can otherwise pay would not
only be unique, but it also would have disastrous consequences.
Question #3: Another question on Chapter 9 and retroactivity: If
Congress steps in and changes the rules of the game after the fact to
allow municipalities to discharge existing debts, do we need to worry
about the message that sends to other debtors and other creditors
across the country? Parties negotiate contracts according to existing
laws. If we step in and suddenly change the rules, does that tell
parties in other situations that the rules are actually more up for
grabs than they might think? Does that tell other states or other
municipalities outside Puerto Rico that if things get bad enough,
Congress will simply change the rules to help ease the pressure?
Answer to Question #3: To ascertain whether granting Puerto Rico
access to bankruptcy proceedings would constitute a change in the rules
under which bonds were sold, I examined the official statements issued
by the government of the Island as part of prior bond offerings. I did
not find a direct reference to the issue of bankruptcy until the
official statement issued in March 11, 2014, in which case the
following disclosure was included:
The Commonwealth is not currently eligible to seek relief under
Chapter 9 of the United States Bankruptcy Code. In the future,
however, new legislation could be enacted by the U.S. Congress
or by the Legislative Assembly that would entitle the
Commonwealth to seek the protection of a statute providing for
restructuring, moratorium and similar laws affecting creditors'
rights. This could affect the rights and remedies of the
holders of general obligation bonds and notes of the
Commonwealth, including the Bonds, and the enforceability of
the Commonwealth's obligation to make payments on such general
obligation bonds and notes. (Commonwealth of Puerto Rico,
Official Statement issued in relation with the issuance of the
$3,500,000,000 General Obligation Bonds of 2014, Series A,
March 11, 2014, page 9.)
This disclosure constitutes an admission by the Government of
Puerto Rico that if it were granted bankruptcy protection the rules
under which bonds were issued would change. Otherwise, they would not
have felt obligated to make the aforementioned disclosure.
Since it would constitute a change of rules, that would be another
reason not to advocate bankruptcy as the tool to use to solve Puerto
Rico's fiscal crisis. Thus, the only way in which Puerto Rico should be
given access to bankruptcy protection is through a process in which
that protection, instead of the primary objective, would be incidental
to another decision as would be, for example, as a result of a change
in the political status of Puerto Rico. Even under those conditions,
however, for the reasons indicated before, I would not advocate for the
Island to use that mechanism.
______
Position Paper
Submitted by Carlos E. Chardon, Former Executive Director of the
Republican Party, San Juan, Puerto Rico
Is Puerto Rico a Failing State?
Introduction
Puerto Rico has most of the characteristics of a failing state, yet
its government, is still performing most of its responsibilities but
for paying what it owes (bonds, suppliers, commitments to retirement
funds and some operational expenditures). Non-payment of bond holders
produced a crisis in 2015 which resulted in three Senate Hearings and
extended into the House with two Hearings in February 2016. Those that
depend on their retirement income and those that provided services (not
only construction but services such as therapy for handicapped
children) do not have the presence (votes) in Congress, so they are of
no account. They are collateral damage.
The extent of its crisis will be gauged once the 2013-2014
certified audit (CAEP) is known and projections from thence on are
known. Thus the viability of a state is a question of degree and of
more or less adequately discharging the responsibilities of governance,
but more importantly on who is affected by non-performance.
Its fiscal crisis is clear although not fully quantified before the
CAEP is made public and, then, accounting artistry will shield the
period since the certified audit. There is no reason why government
practices should change overnight unless a third party becomes the
arbiter of truth. This might be a function of a financial board
impressed by Congress on Puerto Rico. If this were its only
responsibility it would allow the population to learn what has been
done with its tax money and could even identify sources for payment of
debts, but would not solve the greater issue of profligate spending. It
would not solve minor but important issues to a significant part of the
population: who gets paid first, retirees with whom government made a
commitment before the bonds were issued and the bond holders. It would
not solve the possibility of a balance between woefully low pensions
with no Social Security payments to supplement them (significantly
below the poverty level) and pensions three and four times the average
income of the population.
The nation is likely to face the issue of pensions in states and
jurisdictions important electorally for coming elections and its cost
could be extremely high; but they have Senators and Representatives in
Congress; the elderly in the U.S. vote in disproportionately high
numbers, so it is quite likely that the treatment of pensioners who
vote in national elections be different from those that do not have a
vote as is the case of Puerto Rico.
Puerto Rico has been compared to Greece and Argentina, and to
Detroit, Washington, D.C. and New York City. Nevertheless, none of
these entities had a relationship with another country similar or
parallel to Puerto Rico's with the United States. Even in the case of
Greece that is beholden to the European financial system, it is still a
sovereign country, something that in the case of Puerto Rico is up for
a decision by the U.S. Supreme Court. It's telling that whatever the
outcome, the decision will be made by the U.S., not Puerto Rico.
Puerto Rico is inside the U.S. for most government issues and
outside for commercial and income tax issues. The decision was not
Puerto Rico's but again the U.S. Supreme Court enacting a relationship
left undefined by Congress in some of its crucial aspects. These
decisions are known as the Insular Cases. Even if Islanders on
approving the Constitution written in 1952 through a referendum exerted
some kind of sovereignty, it was not the result of Islanders making the
claim or wresting the power from the U.S. government; the territorial
Constitution was possible only because of an act of Congress and the
end result was approved by Congress.
If Puerto Rico must be compared with another jurisdiction this
might be Canada's Newfoundland in the 1930s. Newfoundland was a
separate colony from Canada that was given autonomy by the British
Crown. Newfoundlanders used that autonomy to destroy its finances and
economy through profligate spending by its elected officials, much as
was done in Puerto Rico. A British commission (perhaps the
Congressionally appointed finance board) brought it back within the
fold of governments responsible for its finances.
So much for the simile, for the British Royal Commission also
sacked the profligate administrators, thrashed the autonomy, and forces
political parties into a route for the reconstruction of the colony.
Congress is unlikely to treat into these issues. The end result of the
Commission was to set Newfoundland on the road to statehood within
Canada (becoming a province)--again something Congress will not do
given the extent of nativism and the support of discourses in the
Presidential campaign of 2016 tied in the past to racism.
Still, in the chiaroscuro of governmental relations it might be
argued that the parallelism of the condition of Newfoundland that led
to intervention with that of Puerto Rico is astounding, although the
ultimate result--integration of Newfoundland as province of Canada--is
no where in an alternative. For practical matters, if it were so, the
rejection of the finance board by a substantial portion of the
population would be significant. It would be the equivalent of bringing
statehood through the kitchen door, an old Puerto Rican political
adage, but applied to independence in the past.
There seems to be absolutely no interest by the federal government
to turn Puerto Rico into a state. On the other hand, there is clearly
an interest in up-righting its finances so that bondholders,
particularly those that speculated by buying what were fast becoming
junk bonds, can get their share of the spoils of the colony.
Because of the excruciatingly slow process for decision-making in
the nation (a Democratic President at war with a Republican Congress
atop the deliberative nature of Congress itself), it is likely that
things will get worse before they get any better. This is aided and
abetted by a territorial administration that exacerbates the
differences between Congress and the Executive on trying to extract
from the U.S. government unique concessions that would allow it to
maintain its over 100 plus state agencies, including over three dozen
public corporations, some of which are the key culprits in the
financial failure of Puerto Rico.
There is surreal parallelism in the Caribbean possible: an island
whose governments allowed it to slip under the sea, a metaphor in
Isabel Allende's novel on Haiti on becoming independent (An Island
under the Sea).
Puerto Rico has yet to slip under the sea on the destruction by its
own elected representatives; most likely it will not ``slip under the
sea.'' Like Haiti and France Puerto Rico was the darling of American
possessions. Mismanagement by the metropolitan power of the
relationship between the two led to the creation of the republic of
Haiti in 1904. Decisions were made tardily and clumsily in Napoleonic
France. So dear had Haiti been to France that Napoleon sent his
brother-in-law to put down the revolution. Leclerc came with a part of
the Grand Armee and a bevy of notables to straighten out the finances
of the colony. Yellow fever, the 19th century version of Zika, did not
allow for French control to be reinstated. Allende's metaphor is
jolting because Haiti effectively ceased to exist for the purposes of
the rest of the world. While not slipping under the sea, for it is
buoyed by substantial federal financial transfers, to the rest of the
world Puerto Rico is fast becoming a non-entity.
Alejo Carpentier in the novel The Kingdom of this World also
explored the theme of Haiti and the destruction by its native rulers.
They proclaimed themselves emperors and disposed freely of life and
estate. His principal character is a remarkably resilient ex-slave, Ti
Noel, who hunkered down in Haiti, surviving the Revolution, always with
his freedom in mind, and hunkered down when his master took him to
Cuba, preserving what little he had. On his escape from Cuba and
returns to Haiti, he hunkered down again in order to preserve his
freedom in a limited space.
Most Islanders will hunker down like Ti Noel waiting for the bad
times to exhaust themselves.
Is hunkering down an adequate strategy?
It has worked for over five hundred years. There is a clear
parallelism with that post-WWII expression in American politics of
``staying under the radar.''
In practically every home, rich or poor, Islanders built a
tormentera by burying at a thirty degree angle half of a long tree
trunk and sheathing the extruded half with wooden planks placed at an
angle. Since storms did not announce themselves, this was the way they
protected themselves during the summer and early autumn months--the
storm season for several hundred years. They were still in use in the
1950s. During the rest of the year, distance from the capital city of
San Juan and an immense distance from Spain allowed for Islanders an
equal respite from political storms as long as they were not noticed by
the territorial government.
Hunkering down seems to be part of the cultural DNA or what Roger
Bartra calls the exocerebrum (Anthropology of the Brain: Consciousness,
Culture, and Free Will, inbunden, 2014), a phenomenon in the mind and
culture consisting of the network of beliefs, ways of doing things,
ways of thinking including approaching power relationships, language,
and even cooking and dress. These constitute a symbolic system that
protects every human being from the outside. Every Puerto Rican has his
personal tormentera.
Hunkering down is part of the Puerto Rican exocerebrum. This is
precisely what led the previous administrations into the destruction of
the finances of the territory as economic developed began to slow down
in the 1960s; they hunkered down and continued their ways of government
waiting for the U.S. to change the relationship imposed on them. This
way of government--depleting territorial resources when the economy did
not provide--was based on the expectancy that the U.S. would provide
another way of government. It became more marked in the 1970s: the U.S.
strengthened it by coming through with additional and increases in
existing federal programs, transfers and gimmicks (Economic Opportunity
grants, Elementary and Secondary Education, Food stamps, Medicaid and,
of a different nature but very important for the finance industry,
Section 936.)
Hunkering down in order not to change its ways worked under the
U.S.! The U.S. always provided! But by the second decade of 21st
century there was no more to fritter away.
Is Puerto Rico different?
Ab initio, it was different from anything the U.S. ruled in 1900,
even from the Philippines. The U.S. consigned some of the differences
in its structure of government; in the relationship with the U.S.
Puerto Rico had no say, and still has no vote in Congress (nor does it
vote for the President). Puerto Rico was made politically and
constitutionally different by the U.S. from anything the U.S. had
before the Spanish American war except for the Guano Islands in the
Pacific and the Caribbean. The U.S. has tried to maintain said
difference.
Puerto Ricans, in their efforts to have political storms pass over
them has played the game by making difference a status. They changed
the name in the Constitution and endowed it with everything that the
U.S. would allow (some parts of the Constitution were disallowed by
Congress). In so doing, they pleased the master.
Differential rule applied and allowed in Puerto Rico is a key to
its failing condition as a state.
Unlike other major jurisdictions in the United States with failing
finances, Puerto Rico is not part of the covey protected by equal
application of the law. Unlike with other major jurisdiction, the U.S.
can dispose of Puerto Rico at will; the nature of the relationship is
chattel, a point repeatedly made by the executive branch since the two
White House reports (G.W. Bush and Obama) and by the Attorney General
in Hearings in 2015 and 2016 in Congress. During the past forty years
efforts to have the U.S. Supreme Court decide on this condition, albeit
indirectly, have failed (colonialism, like Medusa's head, turned into
stone anyone that looked at it directly); but it agreed to look into
the issue during its 2016 spring term when money of American taxpayers
was threatened by a local Bankruptcy Law and also on an issue of
sovereignty (double exposure in court--the argument being that if
Puerto Rico does not have sovereignty or the semblance of sovereignty,
cases tried in state court cannot be retried in federal courts).
Puerto Rico is not protected, either, by the national political
system of giving and taking for it has no votes in the House or the
Senate or the Electoral College. While like Washington D.C. it is sui
generis; the similarity stops there. They are both unique and uniquely
different in the nation. Washington, D.C. houses the nation's
government, thus is unlike anything else in the U.S. The image, the
politics, and the mere fact that the rulers on the nation meet in
Washington D.C. makes it different from anything else in the U.S.
The only protection of Islanders from its rulers for 500 years has
been hunkering down and waiting for something to generate relief. Under
Spain it was the situado, the ship laden with silver that stopped in
Puerto Rico from Mexico and through the Isthmus of Panama from Peru,
and left some of its silver to run the Island government. This is now
the federal transfers, their increase eagerly awaited so that Islanders
can continue doing their thing the same way they have had for five
hundred years, but subsidized more significantly by the U.S.
What is a failing state?
State failure is the inability or incapacity of a government to
provide the services that it determines are absolutely necessary to its
population. Thus, if a government tries to provide services that it
deems necessary for its population and cannot pay for them or does not
have the structure to deliver them, it can drive itself into failure.
It is said it is overstretched and that it does not have the income to
do provide what it promised. The issue is not that government is too
big (this is an ideological presumption; the reality is that the income
that the territory can provide its government through taxes and fees is
insufficient. This is the case of Puerto Rico.
Particularly damning is the unwillingness or inability of the
territorial government to collect taxes. The estimate is of 60%
collection of consumer taxes which have piled on each other as each tax
fails to meet the required income projections. Rather than go against
tax scoffers, a new tax is implemented. The gray economy is estimated
at somewhere around 35%. In fact, consumer taxes were instituted to tax
consumption of those that did not pay income taxes due by them. This is
the acceptance by government of its incapacity or unwillingness to
govern, a characteristic of a failing state.
Quinones and Seda (Argeo T Quinones-Perez and Ian J. Seda-Irizarry,
``Wealth Extraction, Governmental Servitude, and Social Disintegration
in Colonial Puerto Rico,'' New Politics, Winter 2016) point out this
problem directly.
Furthermore, every instance of tax reform from the mid-1980s until
2010 involved lowering taxes in order to promote economic growth--a
failed supply side strategy for growth but a very effective tool for
income and wealth redistribution to the top. Intensive and
indiscriminate use of tax exemptions has made of Puerto Rico a free-
for-all fiscal paradise, eroding the tax ethic and tax base of the
system. A growing sense of unfairness permeates public opinion. Some
events that highlight Puerto Rico's lack of fiscal control are:
More than 20,000 businesses did not submit income tax
reports in April 2014, which meant a loss of revenue on the
order of $400 million.
Big businesses in manufacturing, retail, and other sectors
report minimal profits, losses, or breaking even, hiding
their revenues through ``profit-stripping'' strategies with
transfer pricing and income shifting.
Real estate investment trusts siphon hundreds of millions
of dollars out of Puerto Rico without paying taxes or being
authorized to do business on the island.
Government bailout payments for debt service of luxury
hotels amounted to $400 million during 2012 and 2013.
Four billion dollars in tax debts went uncollected in
2015. The overall rate of evasion is close to 30% of
potential revenues.
Eighty tax exemption laws together cost over $1 billion in
lost revenues yearly.
Dwindling resources at the Treasury Department for tax
enforcement has led to the loss of personnel, intellectual
expertise, and technological know-how.
Tax subsidies at the municipal level, granted by central
government, result in $850 million per year in revenue
losses for cash-strapped towns.
Waste of public funds amounts to 10% of the budget
according to past comptrollers (equivalent to $900 million
of the general fund-backed budget and $2.9 billion of the
consolidated budget). Corruption has mounted to almost $900
million of public funds per year, according to FBI figures.
Governor Alejandro Garcia Padilla, on declaring unpayable the
public corporation and Commonwealth debt on July 31, 2015, defined
Puerto Rico as a failing state and then hunkered down to let the storm
pass over him. Jon Purdue (http://www.investors.com/ politics/
perspective/ is-puerto-rico-bankrupt-or-just-unwilling-to-reform/)
counters the position of the Governor and summarizes the issues
challenging the Governor's position:
Two of the biggest questions surrounding the debate about Puerto
Rico's fiscal and economic crises are whether there should be a fiscal
control board to oversee a restructuring of the commonwealth's
finances, as was done previously with New York and Washington, D.C.,
and whether Puerto Rico should be granted access to Chapter 9
bankruptcy in order to reorganize portions of its debt.
But perhaps the biggest unresolved question in this debate is
whether Puerto Rico is actually insolvent or not. It has so far been
unable to produce audited financials for fiscal 2014, despite numerous
requests from Congress, while it has been warning of an impending
``humanitarian crisis'' if it is rebuffed.
But this apocalyptic language was absent when the commonwealth was
touting the bonds to investors from which it now wants relief. Thomas
Moers Mayer, a representative of two of the largest groups of Puerto
Rico bondholders, recently recalled at a forum at the American
Enterprise Institute that, ``only two years ago the Government
Development Bank of Puerto Rico told investors that Puerto Rico could
easily repay its debts, that it had one of the lowest ratios of debt
per American citizen, because unlike other American citizens, Puerto
Ricans are not responsible for the debt of the United States Treasury
in that they don't pay federal income taxes.''
The Government Development Bank and members of the Puerto Rican
government have been telling a different story as of late. Their 2015
``Puerto Rico Fiscal and Economic Growth Plan,'' put out numbers that
claimed that the commonwealth's debt service represents 40% of the
general operating budget. That number was disputed in recent
congressional testimony by Carlos Colon De Armas, a professor of
finance at the University of Puerto Rico, who put the number closer to
16%, when the consolidated budget numbers and alternate revenues are
added in. A 40% debt-service load could almost certainly be grounds for
claiming insolvency, whereas debt loads of 20% or less have
historically been repaid with relatively painless budget restraint. As
Colon De Armas puts it, ``Utilizing bankruptcy when the debt service
burden is 16% is equivalent to saying that `we can pay our debts, but
we'd rather not pay them.' ''
Clearly there is a crisis, not humanitarian but of credibility.
Purdue follows the analysis of Colon de Armas who suggests that the
entire issue is a cover-up for avoiding a serious restructuring of
government. Herein is a list of some activities of the territorial
Governor.
He has tried to negotiate some of the debt outside the
1984 Bankruptcy Law (for which Puerto Rico, like other
territories, is not eligible).
He has clawed back on separation of funds to tend to what
is essentially preferred debt (Constitutionally guaranteed)
reneging on payment of other types of public debt.
He is accelerating the failure of the public retirement
systems by not matching each employee's payment and thus
violating the law.
He has failed to reduce payroll expenses and has publicly
said he will not reduce payroll to pay debt. He is driving
government service providers into bankruptcy by withholding
payments to contractors but also to small businesses and
professionals, including payments for services to special
children in public schools.
As of March 2016 he had failed to provide the audited
statements of government finances so no one really knows
the condition of Puerto Rico's finances except what he
shares with the press.
These efforts, whether part of a grander strategy to allow
continued hunkering down and maintaining the current government
structure or coping with a desperate situation (or both) are moot. The
final determination on what a territorial government can or cannot do
lies in the federal government. This has been the executive policy and
generally the Congressional thrust since the 1990s.
When necessary the Governors will appeal to important world opinion
for a with absolutely no hold on the U.S. For example, in February 2016
Governor Garcia Padilla noted that he will appeal to the United Nations
(that has absolutely no power or jurisdiction over the U.S.) if the
decision by the Supreme Court on double jeopardy in the Sanchez Valle
case it will hear in March determines that Puerto Rico lacks even a
limited sovereignty for very specific instances of the law.
Another aspect of the relationship with the U.S. brought out by
this case is the excruciatingly slow process to even clear up a
technical though important aspect of the relationship. When the
sovereign does not answer immediately, there is a likelihood of
paralysis which is the case of the way the Senate and House have looked
into the financial disaster of Puerto Rico. Of course, this is the
deliberative nature of the legal system (and also of the legislature).
This is the argument of Posner and Vermeule in their thesis of the
administrative state that Congress' ways have allowed to administrative
state to take over many of its decision-making powers (Eric Posner and
Adrian Vermeule, The Executive Unbound: After the Madisonian Republic,
Oxford, 2011). Puerto Rico has not been singled out by Congress; it is
a victim of a structure that no one controls.
If the territorial government is ineffective in discharging its duties,
would Civil Society not impress itself on the leadership to
change its ways?
No. There is too much money at stake, even if the Island goes
bankrupt.
Civil society, which is the watchdog of government ethics, ceased
to discharge this role, and served itself rather than society at large:
the assets of government have been filtered into the hands of those
that should be its guarantors. Banks, bondholders, unions, NGOs are
phagocytic in Puerto Rico. But then this was the pattern carefully
taught by the U.S. to Puerto Ricans: allowing corporate America to
exploited islanders much as it exploited Latin America for most of the
20th century; President Taft's Dollar Diplomacy seems to be the
unaltered policy in the relationship with Puerto Rico.
Civil society is as much at fault as the politicians on whom it
calls to protect their assets. Political parties are part of the
problem. They are run by elements at times directly in cahoots with
unions (which duly re-elect them) and with bonding houses and banks
that finance them.
In Puerto Rico, the electoral system ceased to be a mechanism for
change in a failed state because political parties, which are an
important part of civil society, merely recycle those that are dipping
their hands in the till for their favorite factions, defending the few
for the many even while mouthing populist slogans.
Civil society absconded with the government til in Puerto Rico. The
problem is not only mismanagement by the territorial government but
rampant corruption. (See one the last point made by Quinones and Seda).
This includes for profit corporations posing as NGOs; for profit
corporations, banking and financial institutions that have become
rentists like Section 936 corporations in the past and foreign
corporations (Controlled Foreign Corporations) with substantial federal
tax abatement; land and assets speculators that have been given local
tax abatement in exchange for living in Puerto Rico; government unions
that can sway elections through their organizing power thus assuring a
drain in resources of public corporations. Churches are part of the
institutional network that lives and thrives in clientelism thus it is
not in their interest to recognize moral and ethical dilemmas.
Why is there no mention of the fragility of the state in Puerto Rico?
America does not fail. Commonwealth is a creation of Congress, with
the support of the Presidency and the Supreme Court. American endeavors
are not supposed to fail, and when they fail, they are buried under
tons of dollars. Puerto Ricans are cognizant of Congress' penchant to
throw money at problems so they are demanding a ton of dollars that on
burying Commonwealth will, paradoxically, save it. Civil society is
particularly avid of mana from Washington, D.C. The continued failure
of Puerto Rico is in the interest of many since it will be propped up
by Congress just as it was by Section 936.
It is under the political radar of the nation except in
exceptional circumstances (the Vieques fracas) when major
factions of the nation could be affected (in Vieques, it
the rejection of militarism as represented by the U.S.
Navy). Were Puerto Rico able to pay what it owes, it would
be under the radar and, effectively, it is under the radar
for the purposes of factions other than financial that
spurred Congress into action. Also, Puerto Rico is
effectively propped by federal transfers.
On the other hand, recognition of failure might lead the
federal government to change the relationship that led to
this disaster. There are too many other interests
buttressing the current relationship; it is good business
to significant groups in the nation. Given the political
implications of this financial problem (not unlike Vieques)
it is possible that the current administration claim that
had Puerto Rico had the powers that the Popular Democratic
Party (from 1953 through 1968 and from 1984 thought 1992)
and the people of Puerto Rico requested in the 1967
plebiscite (60.1%), it would possible have been able to
avert failure. Speculative? Yes. But a possible perception.
Is the nation endangered by the crisis in Puerto Rico?
Clearly not, but it has been systematically threatened by
the national administration and the local administration
with a humanitarian crisis. (Effectively this was the
argument sustaining the issue of Vieques, a humanitarian
crisis in the lives of some 12,000 persons).
While it is also speculative that the territorial
administration is trying to generate a humanitarian crisis,
it is clearly trying to generate conditions not dissimilar
to Vieques that attracted national attention. The
Governor's statement that Puerto Rico cannot pay back its
debt must be supported by certified audit of government
income and expenditures and operations. The 2013-2014
statement has yet to be issue in February 2016.
Locally, the territorial government shields the
territorial civil society and its government employment
payroll in refusing to share information on its finances.
It speaks of decreases in debt (from $71 billion to $69)
but is driving the retirement systems into faster
bankruptcy by withholding matching payments made by
retirees and has over $1.8 billion in unpaid debts to
suppliers.
The economic disaster brewing since the oil shock of 1973
was not critical to the nation; it came slowly and quietly,
(Carl Sandberg would have said ``on little cat's `feet'.''
Federal transfer payments masked the problem which is quite
different from that of the financial crisis. An
economically disastrous decade (2006-1015) confirming
Puerto Rico's development failure did not generate a crisis
in the nation. It has no votes in Congress and has zero
presidential electors.
The Obama administration emphasis on Cuba will soon have
its political effects on Puerto Rico. How can so much
attention be paid to a foreign country and so little to a
territory of the nation peopled by U.S. citizens?
Who is responsible for this mess?
This is the question to ask when someone seeks a whipping boy.
The problem is structural and has been building up for a long time.
By nature, Congress is deliberative, not given the action or execution
of programs. The problem is not that it has failed its ministerial duty
but that it is not in its design to act as an executive. The last two
administrations provided some guidance but no action with two White
House Presidential reports on the condition of Puerto Rico, insisting
that it is for Congress to act. Furthermore the Administrative State,
the real Fourth power of the nation, is quite content with fiddling
with the problem and recommending piecemeal actions when a concerted
approach is necessary.
The issue is not who is right or not (Congress, the Executive or
the Administrative State) or who brought about this disaster (Islanders
or the federal government). The problem is how are we to prevent it
from happening again once it is up righted. Islanders have provided
only tentative answers and suggestions, which is understandable. It is
an election year and administrations have changed in the last four
elections.
In a representative government only those that vote matter, except
in a crisis that turns into a political embarrassment: the indifference
shown to the problems besetting Commonwealth since mid-century as a
result of the Truman Doctrine of disengagement from Puerto Rico and
particularly since 2006, and the attention paid to one or another
corporate group, defense interest, or financial institutions requires
serious attention. These paragraphs do not fulfill such a requirement
but should work as an enticement in that direction.
From 1970 to 2015 Puerto Rico went from the darling in U.S. foreign
policy to accursed.
What has happened? Puerto Rico is no longer important for foreign
policy, defense, and commerce; only to a small group of bond holders.
Will it continue to be disposable once the bond holders are insulated
from greater damage?
The federal government has repeatedly said there are no other
changes possible than independence or statehood; the two White House
reports on Puerto Rico 2009 (Bush) and 2011 (Obama) confirmed it. A
continuation of the current relationship, now proven toxic, might be
possible with some temporary concessions by Congress.
Special Concessions do not make for economic development
What happened the last time the some concessions were made? When
Congress finds better things to do with those concessions, it will take
them away. Puerto Rico is powerless to defend itself from Congress. But
then, this is the nature of republican government. This is why the
Senate hearings were critical to Puerto Rico.
The grand concession in mid-century was unique access to the U.S.
market and tax abatement. Subsequently, the U.S. market was opened to
most of the Third World and, the same time, labor and other
environmental demands by the federal government made its light
manufacturing less competitive. When the condition of Puerto Rico was
recognized as dire in 1973 as a result of the oil crisis, tax abatement
was enhanced (Section 936, 1976). Twenty years later Section 936 was
struck by Congress. If past Congressional action is an indication of
future action, Puerto Rico can expect something to mask its condition
but not solve it. There are too many interests propping up
Commonwealth. A Financial Board is a possibility, but can it preserve
(or recognize) some autonomy for the territorial government? Would it
have the power to withhold money from agencies, thus eliminating some
of them? Is this a goal? Would it have the power to determine an order
of payment of debts (bonds vs retirement, the currently retired vs
those to retire in the future?) Will it allow for some kind or limited
debt restructuring outside of the Bankruptcy Act of 1984?
Possibly the most important question is how would its action could
lead into strengthening the economy rather than just solve the
immediate conundrum of debt payment? Most economists agree that the
economic problems are based on the relationship with the U.S. What
Congress gives, Congress can take away without any consideration as to
the welfare or well-being of Puerto Rico and Puerto Rican islanders.
When Congress legislates, it can leave Puerto Rico out as in the 1984
Bankruptcy Act, include it as a special consideration for some faction
in Congress as in section 936, or make it part of a law applicable to
the entire nation as environmental protection laws and minimum wage and
other aspects of labor protection.
In answering these questions, Congress might consider that the
fight for the political parties (outside of the corruption that feeds
them on winning an election) is centered on imposing one or another
status solution. Profligate spending was tied with the generation of
jobs that, in turn, generated votes. The context was a tanking economy.
Congress has been provided with two different points of view by
businessmen and economists.
1. The financial crisis is the product of profligacy and a tanking
economy, so it must be solved through bankruptcy
proceedings and additional funds from Congress plus
concessions such as elimination of minimum wage and of
cabotage laws. It essentially leaves out restructuring and
downsizing of government as a principal activity.
2. The financial crisis is the product of profligacy but not of the
tanking economy, so it must be solved through belt
tightening, restructuring government, and reorganization
and direction of the income of the territory in activities
with a clear return on investment (including examining all
tax abatement measures).
The second point seems to have the attention of most Republicans in
Congress since ideologically all territories must pay their way. It
would be shortsighted, although still an immense relief, if Congress
were to adopt the second point of view without looking into the need of
changing the relationship of Puerto Rico and the United States now
recognized as toxic for economic development. There should be minimally
two agendas: an action agenda on the debt (including all government
debt and retirement program shortfalls), and a study and deliberative
agenda on the relationship of Puerto Rico and the U.S. with
recommendations for actions. In both agendas having such actions
triggered by companion actions by the territorial government. If you do
this, we will do this. thus the final decision is of the territorial
government.
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