[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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