[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
DISCUSSION DRAFT, H.R. _____, ``PUERTO RICO OVERSIGHT, MANAGEMENT,
AND ECONOMIC STABILITY ACT (PROMESA)''
=======================================================================
LEGISLATIVE HEARING
BEFORE THE
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
Wednesday, April 13, 2016
__________
Serial No. 114-36
__________
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 Wednesday, April 13, 2016........................ 1
Statement of Members:
Bishop, Hon. Rob, a Representative in Congress from the State
of Utah.................................................... 1
Prepared statement of.................................... 3
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona........................................... 3
Prepared statement of.................................... 5
Pierluisi, Hon. Pedro R., a Representative in Congress from
the Territory of Puerto Rico............................... 6
Prepared statement of.................................... 7
Statement of Witnesses:
Johnson, Simon, Professor of Global Economics and Management,
MIT Sloan School of Management, Cambridge, Massachusetts... 45
Prepared statement of.................................... 46
Kent, Andrew, Professor of Law, Fordham University School of
Law, New York, New York.................................... 28
Prepared statement of.................................... 29
Letter to Chairman Bishop with Supplementary Testimony... 34
Kirpalani, Susheel, Partner, Quinn Emanuel Urquahart &
Sullivan, New York, New York............................... 37
Prepared statement of.................................... 39
Miller, John V., CFA, Managing Director, Co-Head of Fixed
Income, Nuveen Asset Management, Chicago, Illinois......... 15
Prepared statement of.................................... 17
White Paper submitted for the record..................... 18
Weiss, Antonio, Counselor to the Secretary, U.S. Department
of the Treasury, Washington, DC............................ 9
Prepared statement of.................................... 11
Williams, Hon. Anthony A., Senior Strategic Advisor, Dentons,
U.S. LLP, Washington, DC; Former Mayor of Washington, DC... 12
Prepared statement of.................................... 13
Additional Materials Submitted for the Record:
Associated General Contractors of America--Puerto Rico
Chapter, April 11, 2016, Letter submitted for the record... 83
CCAGW, April 19, 2016, Letter submitted for the record....... 91
Jubilee USA Network, April 13, 2016, Letter submitted for the
record..................................................... 89
List of documents submitted for the record retained in the
Committee's official files................................. 93
National Assoc. of Counties, National League of Cities, U.S.
Conference of Mayors, Government Finance Officers Assoc.,
International City/County Management Assoc., April 14,
2016, Letter submitted for the record...................... 90
Olmos, Jose O., Leader within the Veteran and Military
community in Puerto Rico, April 12, 2016, Letter submitted
for the record............................................. 85
Outdoor Alliance, April 12, 2016, Letter submitted for the
record..................................................... 87
PIMCO Blog, Congress Needs to Act on Puerto Rico's Debt
Crisis, and `PROMESA' Could Work, April 26, 2016........... 93
Plaskett. Hon. Stacey E., a Delegate in Congress from the
U.S. Virgin Islands, Prepared Statement of................. 82
Puerto Rico Builder's Association, April 12, 2016, Letter
submitted for the record................................... 88
SIFMA Asset Management Group, April 21, 2016, Letter
submitted for the record................................... 92
LEGISLATIVE HEARING ON DISCUSSION DRAFT, H.R. _____, ``PUERTO RICO
OVERSIGHT, MANAGEMENT, AND ECONOMIC STABILITY ACT (PROMESA)''
----------
Wednesday, April 13, 2016
U.S. House of Representatives
Committee on Natural Resources
Washington, DC
----------
The committee met, pursuant to call, 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, Wittman,
Fleming, McClintock, Benishek, Duncan, Gosar, Labrador,
LaMalfa, Denham, Cook, Wasterman, Graves, Newhouse, Hice,
Radewagen, MacArthur, Mooney, Hardy, LaHood, Grijalva,
Bordallo, Costa, Tsongas, Pierluisi, Huffman, Ruiz, Lowenthal,
Cartwright, Beyer, Torres, Dingell, Gallego, Polis, and Clay.
Also Present: Representatives Velazquez, Serrano, and
Gutierrez.
The Chairman. The committee is going to be in order. We are
meeting today to hear testimony on the discussion draft of the
Puerto Rico Oversight, Management, and Economic Stability Act.
Under Committee Rule 4(f), oral opening statements are
limited to the Chair, the Ranking Member, the Vice Chair, and
the designee of the Ranking Member. I am going to ask unanimous
consent that other Members' opening statements be made part of
the hearing record if they are submitted to the Clerk by 5 p.m.
today.
Hearing no objection, so ordered.
I also ask unanimous consent that Mr. Serrano, Ms.
Velazquez, and Mr. Gutierrez, if they appear, be allowed to sit
on the dais, and also Mr. Duffy as well.
Hearing no objection, so ordered.
I will also now excuse Mr. Duffy, who is a key player in
this, obviously--he is going to be the sponsor of the
legislation--who wished to be here, but he is also chairing
another subcommittee at this very moment. So, because of that
conflict, he is not going to be able to join us here now.
I now recognize myself, if I could, for a brief opening
statement.
STATEMENT OF THE HON. ROB BISHOP, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF UTAH
The Chairman. In the past couple of months, this committee
has held multiple oversight hearings on this particular issue.
This will be the fourth committee meeting we have had on
testimony related to the situation in Puerto Rico, which is a
whole lot of hearings. If you add them end to end, we would
have enough video of just these hearings for a good daytime
soap opera. We would give ``Days of Our Lives'' a run for the
money on the longest running daytime soap. And it would be just
as riveting as those shows are, as well.
But the issue that is facing us has been basically decades
in the making. There is over $118 billion in debt from bonds
and pension liabilities that are there. Puerto Rico has not had
an audited financial statement for 2 years. They are already in
default on portions of their debt. We have to do something
different.
Without the tools to ensure implementation of extensive
government and economic reforms, Puerto Rico will continue to
be on the cusp of default and run the risk of future calls for
financial assistance or bailouts.
This bill includes reforms that can begin transitioning the
island away from elements of cronyism, allow for privatization
of an energy sector, and boost domestic activity that will be
not only a short-term solution to the situation but also
provide the island the tools to revitalize their economy in the
long-term solution of it.
The Brookings Institute's Barry Bosworth recently said,
``When you can't pay, you can't argue with the terms that
much.'' Well, unfortunately, that is where we have come to. The
United States needs to create a mode of strong oversight and
reform in Puerto Rico's system, in which the government has
grown simply too big, the debts are out of control, and the
people are subject to over-regulation. Enough is enough.
Some have proposed massive Federal spending and bailouts.
This is simply a nonstarter and would pile on top of the
problems that have led to Puerto Rico's current financial
fiscal woes.
Others have sought to prioritize one group of creditors
over another. That is a nonstarter. This bill protects existing
creditor-to-debtor and creditor-to-creditor relationships
according to existing law and the Constitution. And it fosters
some much-needed change to move Puerto Rico toward economic
freedom, privatization, and prosperity, while at the same time
protecting taxpayers.
So, once again, let me emphasize, this is not going to be a
bailout. This is going to be an effort to try and establish
something based on precedents that have happened in the past to
control the economic situation that is currently there. But,
also, it is significant that within this bill are elements to
try and provide economic viability going to the future. There
has to be a way of making sure this problem does not come up
over and over again.
I think what we have done over the years--I mean, this is
also a unique process that we have tried to evolve in this
particular bill. This is, as I said, the fourth public hearing
we have had only on Puerto Rico. That is unusual. They have
sent out two discussion drafts so that people could look at
them and respond, which is unusual. We have tried to make sure
that we do this not behind closed doors but out in public. We
have received a whole bunch of recommendations from all sorts
of different groups and have tried to incorporate as many as
possible, I think most of them in this particular bill. I think
we have done a good job. This is a good bill.
I look forward to hearing the testimony from the
distinguished panel that we have here, and I appreciate you
taking the time to join us today.
[The prepared statement of Mr. Bishop follows:]
Prepared Statement of the Hon. Rob Bishop, Chairman, Committee on
Natural Resources
For the past few months, the committee has held three oversight
hearings and received testimony from a variety of stakeholders relating
to Puerto Rico. Today, the committee will review legislation to begin
addressing the deepening fiscal crisis in Puerto Rico. This situation
is the result of decades of mismanagement and a state-run economy
destined for failure. With over $118 billion in debt in the form of
bonds and unfunded pension liabilities, Puerto Rico has not produced
audited financial statements for 2 years and has already defaulted on
portions of its debt.
The situation will become much worse when Puerto Rico fails to make
debt payments in less than a month. Large-scale defaults will occur,
impacting millions of Americans both in Puerto Rico and on the
mainland. Unfortunately, because the situation has gotten so dire,
broad reforms are required now. Without tools to ensure transparency
and implementation of extensive government and economic reforms, Puerto
Rico will continue on the cusp of default and run the risk of future
calls for a financial bailout.
This legislation eliminates that risk by creating a strong,
independent oversight board to ensure needed reforms are carried out.
The Board will be empowered to audit the Puerto Rican government and
its corporations to see what's on the books and identify needed reforms
and efficiencies. This will greatly aid with ongoing voluntary debt
restructuring.
The bill includes reforms to begin transitioning the Island away
from decades of state-run cronyism--allowing for privatization of its
energy sector and a boost to domestic economic activity.
Let me be very clear of what this bill is not. It is not Chapter
9--a tool designed specifically by statute for municipalities of
sovereign states. Puerto Rico is a U.S. territory. This bill is also
not ``Super'' Chapter 9. To the contrary, it would ensure that no such
dangerous precedent is set for states or in municipal bond markets by
addressing the unique legal status of territories.
Certain groups are irresponsibly and falsely claiming that this
bill is a bailout of Puerto Rico, which I vigorously oppose. Nothing
could be further from the truth. This bill protects taxpayers by
ensuring not one dime of taxpayer money is used to pay Puerto Rico's
debt or otherwise bailout its government.
Recently, Brooking Institution economist Barry Bosworth said ``when
you can't pay, you can't argue over the terms that much.''
Unfortunately, it has come to that: the United States needs to create a
mode of strong oversight and reform to rein in Puerto Rico's system in
which the government has grown too big, the debts are out of control,
and its people are subject to over-regulation and cronyism. Enough is
enough.
Some have proposed massive new Federal spending. This is simply a
non-starter and would pile on top of the problems that have led to
Puerto Rico's current fiscal woes. Others have sought to prioritize one
group of creditors over another. This is also a non-starter.
This bill protects existing creditor-to-debtor and creditor-to-
creditor relationships according to existing law and the United States
Constitution. It fosters much needed changes to move Puerto Rico toward
economic freedom, privatization and prosperity, while at the same time
protecting taxpayers.
It is a good bill and I look forward to hearing testimony from the
distinguished panel here today.
______
The Chairman. With that, I will recognize Mr. Grijalva if
he has an opening statement.
STATEMENT OF THE HON. RAUL M. GRIJALVA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Mr. Grijalva. Thank you, Mr. Chairman.
Today, we are continuing the process toward passing
legislation to help the people of Puerto Rico deal with a
humanitarian crisis because of over $70 billion in unpayable
debt.
It is worth stressing that we are here because the people
of Puerto Rico need our help. Residents of Puerto Rico are
struggling to receive basic services, with some hospitals now
quite literally in the dark. On top of that, the Zika virus
continues to ravage the island. Officials at the Centers for
Disease Control and Prevention recently stated that they are
quite concerned about the U.S. territory and tourist
designation of Puerto Rico, stressing that one out of every
four in Puerto Rico could host the Zika virus within a year.
In the meantime, wealthy Wall Street hedge funds that hold
Puerto Rican bonds are spending millions of dollars to spread
misinformation in an effort to block congressional action.
These vulture funds are now aggressively campaigning against a
solution to help the island relieve its debt. They are more
interested in padding their profits than ensuring the well-
being of American families suffering in Puerto Rico.
As Members of Congress, we have to decide tomorrow who
comes first: vulture funds and others who steadfastly refuse to
join other investors in good faith on a compromised solution or
the American people in Puerto Rico.
The leadership of the House, Republicans and Democrats, has
been working with Chairman Bishop and the Treasury Department
to develop legislation that we can all support to provide
Puerto Rico with the tools that they will need to solve this
crisis.
Today, we are discussing the results of these bipartisan
discussions, and we are all hopeful that the bill, as proposed,
will work. To quote Secretary of Treasury, Jack Lew, ``The
question to us is, does the bill's restructuring authority
work? It has to work, or it is not going to be acceptable.''
This will be one of the key questions we will look to our
distinguished panel of witnesses to answer.
While the bill contains a strong oversight board to ensure
that Puerto Rico will make the tough decisions to get on a path
of a balanced budget and sound fiscal practices, there are a
number of other concerns we have with the bill and the process.
We continue to insist that the oversight board should not
impose further austerity, which will be counterproductive
toward efforts to restore the island's economy.
We question the merit of authorizing a transfer of
thousands of acres of the Vieques National Wildlife Refuge away
from all the American people.
We also stress, as the Treasury Department does, that
Puerto Rico will be unable to make any fiscal plan work going
forward without the Medicaid support that is called for in the
Treasury proposal and that such assistance be provided to
smaller territories, as well. Puerto Rico's underfunded
pensions should not be raided to help pay the debt, and the
pensioners must be made whole.
We cannot see the logic behind lowering the minimum wage to
$4.25 an hour for the very group of people we need to stay on
the island in order to anchor this recovery.
Mr. Chairman, you and your staff deserve to be commended
for your willingness to work in an honest and open process to
address the crisis in Puerto Rico. To that end, I remain
hopeful that we will be able to pass a bill out of committee
tomorrow that will enjoy the support of all members, and I
continue to pledge to work with you to realize that goal.
The people of Puerto Rico deserve no less, and the effort
on their behalf should be constant with the perspective that I
think is needed in this discussion: something that will help
the people of Puerto Rico and not something that will satisfy a
particular political agenda or be the vehicle to assure that
the vulture fund holders receive their full reimbursement that
they are holding out for.
With that, I yield back and thank you, Mr. Chairman.
[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. Today we are continuing the process toward
passing legislation to help the people of Puerto Rico deal with a
humanitarian crisis because of over $70 billion in unpayable debt.
It is worth stressing that we are here because the people of Puerto
Rico need our help! Residents of Puerto Rico are struggling to receive
basic services, with some hospitals now quite literally in the dark. On
top of this, the Zika virus continues to ravage the island. Officials
at the Centers for Disease Control and Prevention (CDC) recently stated
that they are ``quite concerned'' about the U.S. territory and tourist
destination Puerto Rico, stressing that one out of every four people in
Puerto could host the Zika virus within a year.
In the meantime, wealthy Wall Street hedge funds that hold Puerto
Rican bonds are spending millions of dollars to spread misinformation
in an effort to block congressional action. These vulture funds are now
aggressively campaigning against a solution to help the island relieve
some of its debt. They are more interested in padding their profits
than ensuring the well-being of American families suffering in Puerto
Rico.
As Members of Congress, we have to decide tomorrow who comes
first--vulture funds and others who steadfastly refuse to join other
investors in a good faith, compromise solution, or, the American people
in Puerto Rico.
The leadership of the House--Republicans and Democrats--has been
working with Chairman Bishop and the Treasury Department to develop
legislation that we can all support to provide Puerto Rico with the
tools they will need to solve the crisis.
Today we will be discussing the result of these bipartisan
discussions and we are all hopeful that the bill as proposed will work.
To quote Secretary of the Treasury Jack Lew: ``The question to us is
does that bill's restructuring authority work? It has to work or it's
not going to be acceptable.''
This will be one of the key questions we will look to our
distinguished panel of witnesses to answer. While the bill contains a
strong Oversight Board to ensure that Puerto Rico will make the tough
decisions to get on a path of balanced budgets and sound fiscal
practices, there are a number of other concerns we have about the bill
and the process:
We continue to insist that the Oversight Board should not
impose further austerity, which will be counterproductive
toward efforts to restore the island's economy.
We question the merit of authorizing the transfer of
thousands of acres of the Vieques National Wildlife Refuge
away from the American people.
We also stress, as the Treasury Department does, that
Puerto Rico will be unable to make any fiscal plan work
going forward, without the Medicaid support that is called
for in the Treasury proposal and that such assistance be
provided to the smaller territories as well.
That Puerto Rico's underfunded pensions should not be
raided to pay debt and that pensioners must be made whole.
We cannot see the logic behind lowering the minimum wage
to $4.25 an hour for the very group of people we need to
stay on the island to anchor the recovery.
Mr. Chairman, you and your staff deserve to be commended for your
willingness to work in an honest and forthright way to address the
crisis in Puerto Rico. To that end I remain hopeful that we will be
able to pass a bill out of the committee tomorrow that will enjoy the
support of all Members and I continue to pledge to work with you to
realize this goal. The people of Puerto Rico deserve no less.
______
The Chairman. Thank you.
The Vice Chair is not here and I would like to get to the
panel as quickly as possible, but would be remiss if we do not
get to the designee of the Ranking Minority Member, Mr.
Pierluisi, since he has a little bit to do with this particular
topic.
Mr. Pierluisi, you are recognized for an opening statement.
STATEMENT OF THE HON. PEDRO R. PIERLUISI, A REPRESENTATIVE IN
CONGRESS FROM THE TERRITORY OF PUERTO RICO
Mr. Pierluisi. Thank you.
Chairman Bishop, I want to begin by thanking you and your
staff for the hard work you have put into this bill. You have
been a gentleman, tough when you need to be, but always open
and fair.
The Chairman. Wait, would you say that one more time? I
will give you an extra 15 seconds. Especially after last night,
would you say that just one more time?
Mr. Pierluisi. You have been a gentleman, tough when you
need to be, but always open and fair.
I know the responsibility you have been handed is heavy and
at times thankless, but you and I, and our colleagues, should
not lose sight of the stakes here and never forget how much
what we are doing matters to regular people, whether it is a
teacher in Aguadilla, a doctor in Ponce, a policeman in
Mayaguez, a special-needs student in Caguas, or a middle-class
family in San Juan or Salt Lake City who bought a Puerto Rico
government bond and are concerned about their investment. If we
cannot get a balanced, bipartisan bill to the President's desk,
the consequences for Puerto Rico and the island's creditors are
likely to be grave.
Trust me, there are provisions in this bill that I dislike,
and there are items not in the bill, like equity under Medicaid
and refundable tax credits, that I believe should have been
included. It is easy to object to a bad provision in a bill or
to the exclusion of a good provision from a bill and therefore
to say ``no'' to a bill. But I respect those on both sides of
the aisle who are looking at the bill holistically and working
hard to get to a ``yes.''
The broad question I will pose to our witnesses today is
this: Does the bill achieve its intended purpose, which is to
help Puerto Rico address its current crisis and create the
foundation for a brighter future?
Let me break the bill down into its component parts.
First, Title I and Title II establish a seven-member,
temporary, independent oversight board, subject to strong
ethics and conflict-of-interest rules, given specific
responsibilities, that will terminate once certain conditions
are satisfied.
Chairman Bishop and I worked together on those titles, and
while this point is subject to reasonable debate, I believe
these titles are a dramatic improvement over the earlier
version of the bill and now, more or less, strike the
appropriate balance between effectiveness in instilling fiscal
discipline and respect for the democratic process.
The board's main function is to provide broad oversight
over fiscal policymaking in Puerto Rico. The board will provide
guardrails for the government of Puerto Rico, but in no way
supplant the territory's elected leaders. The Governor will be
responsible for developing a long-term fiscal plan, and the
Governor and Legislative Assembly will be responsible for
crafting annual budgets in line with that fiscal plan, subject
to the board's ultimate approval.
During the fiscal year, compliance with the budget will be
monitored, and any material variances between what was
projected to occur and what is actually occurring will be
identified. And Puerto Rico's elected leaders will have
multiple opportunities to take remedial action as they deem
appropriate. In short, the board will have a supervisory role
and will only assume a more active, hands-on role as a last
resort.
I will ask the witnesses whether they believe the board's
powers are properly calibrated.
Second, section 206, Title III and Title IV, taken
together, provide Puerto Rico with a debt-restructuring
mechanism. Section 407 provides a territory government with a
temporary stay of litigation, which, let me underscore, is
intended to create an environment for consensual negotiations
with creditors, not to encourage otherwise avoidable defaults.
Under the collective-action provision in Title VI, the
oversight board will help debt-issuing entities in Puerto Rico
and their creditors to try to reach voluntary agreements to
restructure debt. If any entity reaches an agreement with a
sufficient number of creditors, who will be grouped into pools
or classes, that agreement will become binding on all the
creditors in that pool. However, if an agreement cannot be
reached, the board may authorize the entity to go to court and
adjust that using the Bankruptcy Code provisions that apply in
every state in the Nation.
So you see, the board is overseeing the debt-restructuring
mechanism. I will ask the witnesses, especially Mr. Weiss,
about these provisions of the bill, whether they are workable,
and, if not, what changes need to be made to make them work.
Let me just give you the bottom line. This is the bottom
line: My constituents and I will accept this oversight,
provided--let me say again--provided we also get a meaningful
debt-restructuring mechanism. Unless I get the witnesses and
experts on this, starting with Treasury, to vouch that the
debt-restructuring mechanism in this bill is acceptable and is
going to provide the necessary relief to the government of
Puerto Rico, I will not go for this bill.
And let me emphasize, we need to work, both sides of the
aisle here. Otherwise, this is not going to happen. Puerto Rico
is going to continue deteriorating, people are going to
continue migrating to the states, and it is going to be an
embarrassment not only for Puerto Rico, but for the United
States at large.
That is the bottom line. Let's work. Let's work this bill.
Let's get it done.
The Chairman. Thank you.
Mr. Pierluisi. Thank you.
[The prepared statement of Mr. Pierluisi follows:]
Prepared Statement of the Hon. Pedro R. Pierluisi, a Representative in
Congress from the Territory of Puerto Rico
Chairman Bishop, I want to begin by thanking you and your staff for
the hard work you have put into this bill. You have been a gentleman--
tough when you need to be, but always open and fair. I know the
responsibility you have been handed is heavy and, at times, thankless.
But you, and I, and our colleagues should not lose sight of the stakes
here, and never forget how much what we are doing matters to regular
people, whether it is a teacher in Aguadilla, a doctor in Ponce, a
policeman in Mayaguez, a special needs student in Caguas, or a middle-
class family in San Juan or Salt Lake City who bought a Puerto Rico
government bond and is concerned about their investment. If we cannot
get a balanced, bipartisan bill to the President's desk, the
consequences for Puerto Rico and the island's creditors are likely to
be grave. Trust me, there are provisions in this bill that I dislike,
and there are items not in the bill--like equity under Medicaid and
refundable tax credits--that I believe should have been included. It is
easy to object to a bad provision in the bill, or to the exclusion of a
good provision from the bill, and therefore to say ``no'' to the entire
bill. But I respect those on both sides of the aisle who are looking at
the bill holistically and working hard to get to ``yes.''
The broad question I will pose to our witnesses today is this: Does
the bill achieve its intended purpose, which is to help Puerto Rico
address its current crisis, and create the foundation for a brighter
future?
Let me break the bill down into its component parts.
First, Title I and Title II establish a seven-member, temporary,
independent oversight board, subject to strong ethics and conflict-of-
interest rules, given specific responsibilities, that will terminate
once certain conditions are satisfied. Chairman Bishop and I worked
together on these titles, and--while this point is subject to
reasonable debate--I believe these titles are a dramatic improvement
over the earlier version of the bill and now more or less strike the
appropriate balance between effectiveness in instilling fiscal
discipline and respect for the democratic process. The board's main
function is to provide broad oversight of fiscal policymaking in Puerto
Rico. The board will provide guardrails for the government of Puerto
Rico, but in no way supplant the territory's elected leaders. The
Governor will be responsible for developing a long-term fiscal plan,
and the Governor and legislative assembly will be responsible for
crafting annual budgets in line with that fiscal plan, subject to the
board's ultimate approval. During the fiscal year, compliance with the
budget will be monitored, any material variances between what was
projected to occur and what is actually occurring will be identified,
and Puerto Rico's elected leaders will have multiple opportunities to
take remedial action as they deem appropriate. In short, the board will
have a supervisory role and will only assume a more active, hands-on
role as a last resort. I will ask the witnesses whether they believe
the board's powers are properly calibrated.
Second, Section 206, Title III, and Title VI, taken together,
provide Puerto Rico with a debt restructuring mechanism. Section 407
provides the territory government with a temporary stay of litigation,
which--let me underscore--is intended to create an environment for
consensual negotiations with creditors and not to encourage otherwise
avoidable defaults. Under the collective action provision in Title VI,
the oversight board will help debt-issuing entities in Puerto Rico and
their creditors try to reach voluntary agreements to restructure debt.
If an entity reaches an agreement with a sufficient number of
creditors, who will be grouped into pools or classes, that agreement
will become binding on all creditors in that pool. However, if an
agreement cannot be reached, the board may authorize the entity to go
to court and adjust debt using the bankruptcy code provisions that
apply in every state in the Nation. I will ask the witnesses,
especially Mr. Weiss, about these provisions of the bill, whether they
are workable, and--if not--what changes need to be made to make them
work.
Thank you.
______
The Chairman. Let me now introduce our witnesses.
I appreciate all of you coming, many of you for a second
time, to be with us here.
First, Mr. Antonio Weiss, who is the Counselor to the
Secretary of the U.S. Department of the Treasury.
Thank you. Sorry you had such a difficult time in traffic
getting up here.
The Honorable Anthony Williams, Senior Advisor for Dentons
U.S. LLP and former Mayor of Washington, DC, as well as
somebody who has been involved in these types of boards in the
past.
Mr. John Miller, CFA, who is the Managing Director and Co-
Head of Fixed Income, Nuveen Asset Management, from Chicago.
Thanks for being here.
Professor Andrew Kent, Professor of Law at Fordham
University in New York.
Mr. Susheel Kirpalani--did I come close? Susheel. No, I
wasn't even close. He is a partner from Quinn Emanuel Urquahart
& Sullivan--even the company has a long name--also from New
York.
Thank you for being here. And I will try to get the name
right as we go from here on in.
And also, Professor Simon Johnson, who is a Professor of
Global Economics and Management at MIT Sloan School of
Management in Cambridge.
I also would like to mention that we did invite Mr. Timothy
Lee from the Center for Individual Freedom to testify. However,
he was obviously busy and declined to actually come and talk to
us directly.
Let me remind the witnesses of the rule here. Your entire
testimony is part of the record. The oral part we have right
now has to be limited to 5 minutes. I would just remind you, I
think you have all been here before, but if not, the lights in
front of you, green is we are on a roll. When you have a minute
left, the yellow light will appear. And when it is red, I
really want you to stop in mid-sentence so we can get
everything through. We will try and keep that 5 minutes as
sacrosanct.
With that, the Chair now recognizes Mr. Weiss for your
testimony.
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 are encouraged by the seriousness of purpose that the
committee has brought to this task. Significant progress has
been made in designing the elements of the bill. But more work
is required, as I will describe, to ensure a responsible
solution to the escalating crisis in Puerto Rico. We look
forward to continue working with you and your staff to further
refine the legislation immediately following today's hearing.
As this committee is well aware, Puerto Rico is already in
distress. The Commonwealth has already defaulted on its debt.
Litigation is mounting. Puerto Rico has no access to credit
markets, even the costliest ones.
The effects of the crisis become more evident each passing
day. Health, education, and public safety services have been
curtailed because the government is out of cash and cannot pay
its bills. Suppliers are owed more than $2 billion. Hospitals
have closed floors and terminated employees. The largest
hospital system in Puerto Rico just notified its staff that it
must lay off nearly 500 workers, 10 percent of its workforce.
Last week, the Governor was forced to declare a state of
emergency for the GDB, the Commonwealth's key fiscal agent and
lender of last resort. That action restricts the ability of
Puerto Rico's agencies, municipalities, and other public
instrumentalities from withdrawing deposits at the bank, and it
threatens to disrupt many programs and services throughout the
island. A moratorium on all debts of the Commonwealth has been
authorized by the local legislature and may be invoked for the
GDB, which has a major payment coming due in just 2 weeks.
In October of last year, as this committee knows, the
Administration introduced a comprehensive plan that included
four key elements: broad restructuring authorities, independent
oversight, adequate funding of healthcare services, and
incentives to drive economic growth.
While the Administration believes all elements of its
legislative proposal are essential to arrest the crisis in
Puerto Rico and set the stage for economic renewal, the
legislation under consideration today attempts to address the
two most urgent requirements: debt restructuring and fiscal
oversight.
I commend the committee for producing draft legislation
that seeks to provide Puerto Rico with those essential tools
and attempts to do so in a way that provides the ability to
reach a sustainable solution for all of Puerto Rico's debts.
However, despite the progress that has been made, there are
still vital questions of workability in the draft bill that
must be resolved.
First, we support tools that facilitate voluntary
restructurings, but the bill's version of a collective action
clause imposes, in our judgment, an unworkable, mandatory
process that will only delay the ability to reach a
comprehensive resolution. Under the proposed approach, all of
Puerto Rico's numerous debtors would have to complete a
complicated process before any single entity could begin to
restructure.
Second, any stay on litigation must ensure that the
Commonwealth has sufficient breathing space to allow for
voluntary negotiations, which we strongly support. A stay must
also allow for a transition without interruption from these
voluntary negotiations into a period of restructuring if it is
needed. As drafted, there is risk that a stay may terminate
prior to the commencement of restructuring, resulting in a gap
and a chaotic race to the courthouse.
Third, the process for entering restructuring should not
require a supermajority of the board. A minority of the board
should not have veto power at the critical juncture when all
other options have been exhausted.
Finally, the legislation must more evenly balance competing
policy priorities. Undermining the minimum wage and overtime
rules in Puerto Rico, thereby increasing disparities in pay
between Puerto Rico and the mainland, is not a recipe for
economic growth. And the legislation must offer a responsible
process to ensure the retirement security of the 330,000
citizens in Puerto Rico that will depend on their pension
benefits.
In short, while the committee has made great progress,
there is additional work to do. If Congress does not act, the
situation can only grow worse. Action is required today to
protect the safety and economic well-being of the 3.5 million
American----
The Chairman. Mr. Weiss, you have 2 seconds to finish up
here.
Mr. Weiss [continuing]. Citizens of Puerto Rico. And we
look forward to continuing working with you after this hearing.
[The prepared statement of Mr. Weiss follows:]
Prepared Statement of Mr. Antonio Weiss, Counselor to the Secretary,
U.S. Department of the Treasury, Washington, DC
Chairman Bishop, Ranking Member Grijalva, and members of the
committee, thank you for inviting Treasury to testify today. We are
encouraged by the seriousness of purpose that the committee has brought
to this task. Significant progress has been made in designing the
elements of the bill. But more work is required to ensure a responsible
solution to the escalating crisis in Puerto Rico.
We look forward to continue working with you and your staff to
further refine the legislation immediately following today's hearing.
urgent situation in puerto rico
As this committee is well aware, Puerto Rico is already in
distress. The Commonwealth has already defaulted on its debt.
Litigation is mounting. Puerto Rico has no access to credit markets,
even the costliest ones. Puerto Rico's debt trades at prices between 10
and 70 cents on the dollar.
The effects of the crisis become more evident by the day. Health,
education, and public safety services have been curtailed because the
government is out of cash and cannot pay its bills. Suppliers are owed
more than $2 billion. Hospitals have closed floors and terminated
employees. The largest private hospital system in Puerto Rico recently
notified its staff that it must layoff nearly 500 workers, 10 percent
of its workforce.
There are inadequate funds to respond to the spreading Zika virus.
Fuel supplies for the government's ambulances, police cars, and fire
trucks are dangerously close to being cut off.
Last week, the Governor was forced to declare a state of emergency
for the Government Development Bank (GDB), the Commonwealth's key
fiscal agent and lender of last resort. That action restricts the
ability of Puerto Rico's agencies, municipalities, and other public
instrumentalities from withdrawing deposits held at the Bank. It also
threatens to disrupt many programs and services throughout the Island.
A moratorium on all debts of the Commonwealth has been authorized
and may be invoked for the GDB, which has a major payment coming due in
2 weeks.
comments on the proposed legislation
In October of last year, the Administration introduced a
comprehensive plan that included four core elements: broad
restructuring authorities, independent oversight, adequate funding of
healthcare services, and incentives to drive economic growth.\1\
---------------------------------------------------------------------------
\1\ 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 the Administration believes all elements of its legislative
proposal are essential to arrest the crisis in Puerto Rico and set the
stage for economic renewal, the legislation under consideration today
attempts to address the two most urgent requirements: debt
restructuring and fiscal oversight.
I commend the committee for producing draft legislation that seeks
to provide Puerto Rico with those essential tools and attempts to do so
in a way that provides the ability to reach a sustainable solution
across all of Puerto Rico's debts. However, despite the progress that
has been made, there are still vital questions of workability in the
draft bill that must be resolved.
First, we support tools that facilitate voluntary restructurings.
But the bill's version of a collective action clause imposes an
unworkable, mandatory process that will only delay the ability to reach
a comprehensive resolution. Under the proposed approach, all of Puerto
Rico's numerous debtors would have to complete a complicated process
before any single entity could begin to restructure.
Second, any stay on litigation must ensure that the Commonwealth
has sufficient breathing space to allow for voluntary negotiations. A
stay must also allow for a transition without interruption from
voluntary negotiations to a period of restructuring, if needed. As
drafted, there is a risk the stay may terminate prior to the
commencement of a restructuring, resulting in a chaotic race to the
courthouse.
Third, the process for entering restructuring should not require a
super-majority vote of the Board. A minority of the Board should not
have veto power at the critical juncture when all other options have
been exhausted.
Finally, the legislation must more evenly balance competing policy
priorities. Undermining the minimum wage and overtime rules in Puerto
Rico, thereby increasing the disparities in pay between Puerto Rico and
the mainland, is not a recipe for economic growth. Rather, we believe a
locally administered Earned Income Tax Credit is a more powerful and
effective way to stimulate the economy and encourage work. The
Administration also opposes efforts to undermine the protection of the
Vieques National Wildlife Refuge and other wildlife refuges nationally
from development and environmental destruction.
And, the legislation must offer a responsible process to ensure the
retirement security of the 330,000 citizens in Puerto Rico that will
depend on their pension benefits.
conclusion
In short, while the committee has made progress, there is
additional work to do. If Congress does not act, the situation will
only get worse. Action is required now to protect the safety and
economic well-being of the 3.5 million American citizens in Puerto
Rico.
______
The Chairman. Good answer.
Mayor Williams, we will turn to you, please.
STATEMENT OF THE HON. ANTHONY A. WILLIAMS, SENIOR STRATEGIC
ADVISOR, DENTONS, U.S. LLP, WASHINGTON, DC; FORMER MAYOR OF
WASHINGTON, DC
Mr. Williams. Mr. Chairman, Ranking Member, members of the
committee, I think you will be pleased to know that I am going
to summarize my oral testimony and just make some key points:
one point being I applaud the committee, its staff, and
Treasury for working together on a consensus approach to a
pressing problem, not just for Puerto Rico, but a national
problem as well. I speak as an American citizen with some
experience in these matters, having served as a CFO under the
control board, so to speak, in Washington, DC, and then later
as mayor.
And the observations I would make would be, number one, I
think the bill does well in installing a competent group of
noninterested, disinterested if you will, professionals who can
serve on the oversight board. As well, I would also observe and
applaud the fact that the board will be equipped with the
resources of skilled professional staff in order to perform its
oversight duties.
I would further observe that an important part of the
board's work would be working with officials in Puerto Rico on
the establishment of a long-term budget and financial plan--and
I think this is crucially important--and using that budget and
financial plan as a basis, that financial information and
settled expectations as a basis, for any debt restructuring or
concessions that have to be made, recognizing--and I applaud
this element of the bill--that the oversight board will
ultimately serve as a facilitator and a convener to allow
elected officials to take the first opportunity to seize
advantage and see opportunity in this crisis.
An example of one area where I hope the board will use its
influence with elected officials going forward is using its
influence with elected officials to establish in Puerto Rico a
strong financial entity--you could call it a financial
director, you could call it a CFO--but, I would argue, to
consolidate the treasury functions, the controllership
functions, the budget functions in one person who has some
degree--even after the control period, some degree of autonomy
so that you have an umpire in the situation to call balls and
strikes, set a revenue estimate that everybody respects.
The final observation I would make is, once the work of
this bill is in place, expectations settled, and good
stewardship has been established on the island, I would agree
with the observation of Mr. Weiss that it is crucially
important that economic incentives be in place to allow the
economic renewal in Puerto Rico to go forward.
Those are my observations in summary, Mr. Chairman, and I
look forward to answering your questions.
[The prepared statement of Mr. Williams follows:]
Prepared Statement of Anthony A. Williams, Senior Strategic Advisor to
Dentons, U.S. LLP; Former Mayor of Washington, DC
On January 26, I submitted testimony to this committee in support
of a bill the purpose of which was to provide Federal support to
constructively address Puerto Rico's fiscal challenges and assist in
its economic recovery. At the time, there was no bill, and, as such, my
comments, drawn from my experience in working in concert with the
control board that Congress created for Washington, DC, and later as
its Mayor, were necessarily to provide a set of general considerations
that this committee ought to consider in fashioning legislation. Now,
only 2 months later, with much thanks for the earnest efforts of this
committee and its seasoned and highly skilled professional staff, with
the benefit of important insights and perspectives offered by the
leadership at Treasury, there is such a bill and I wish to supplement
my prior testimony to comment on it.
I am most pleased about the contents of the draft legislation and I
come before this committee to endorse both its balance and the
bipartisan efforts that necessarily were at the cornerstone of crafting
it. Like most bills that gain support from competing perspectives, this
bill, which offers a realistic set of provisions than can lead to a
sustainable solution and a vibrant and financially healthy Puerto Rico,
has aspects that each constituency likes and others that are less
desired by the same constituency. Other constituencies have yet
different likes about the bill and aspects they wish could be
otherwise. But such is the nature of compromise, just as fostering
compromise and consensual agreement are also to be at the heart of the
contemplated oversight board's role if the legislation is enacted.
So why do I endorse the proposed bill and urge its adoption? At the
outset, permit me to observe that many of the concepts that I felt
would be fundamental to fiscal recovery legislation for Puerto Rico
when I last spoke to this committee are in fact present in the proposed
bill. Because many of the principles that made DC's board successful
are also key elements of the Puerto Rican oversight legislation, I wish
to highlight them as well as a couple of additional components that are
especially well suited to address Puerto Rico's fiscal challenges.
First, the criteria established for selecting the oversight board's
composition will assure input from seven well experienced professional
members who will understand the complexities of government budgeting
and operations and relevant legal and financial considerations that
arise in fiscal distress situations. Importantly, too, some of its
members are expected to either now live, grew up on the Island or have
been involved in businesses there, and, as such, will have a deep
appreciation for the culture and values of its people and institutions.
Second, the board is going to be fully staffed with an executive
director and other important senior officials; and that's critical.
There is much to be done; and to do its work, the board needs to
develop a comprehensive understanding of the structures, workings and
financial processes of the executive and legislative branches of Puerto
Rico's government. Assembling a meaningful complement of sophisticated
board employees, some importantly drawn from the Island's populace, is
needed. Then, too, the board needs a talented team of legal and
financial professionals to interface with similar professional who have
been representing the Puerto Rican government and its creditors; and
the legislation anticipates such retentions as well. As for the board's
offices, the legislation contemplates that the board will be well
staffed both in DC and in San Juan, and that, too, is vital to the
board's success.
Third, Title II of the draft legislation gives the board a robust
set of tools to work with Puerto Rican officials to develop viable cost
saving solutions; and, clearly, the intent of the legislation is to
have the board forge cooperation and reach a consensus among the
government entities and their creditors to implement a series of well-
conceived initiatives that are both tangible and attainable from the
Commonwealth's perspective, yet also factor in and respect the
perspective of the Commonwealth's creditors. Unquestionably, there will
need to be some belt-tightening if the board is to effectively fulfill
its mandate; and the legislation confers on the board the means to
fashion real solutions that will narrow the budgetary gaps being
experienced by many of Puerto Rico's territorial-level government
components--and, to the fullest extent possible, accomplish its cost
containment goals through hands-on consensus building.
This leads to a fourth virtue of the legislation, namely, that
before there were to be any allocation of creditor concessions that
might be needed to achieve the legislatively required balanced budgets,
whether any such concessions would need to come from labor interests or
from bondholders, all reasonable means should first be employed to
narrow the extent of budget deficits. As such, the centerpiece of the
board's work will be to look for ways to makes budget narrowing
initiatives as palatable and constructive as possible, recognizing that
accomplishing what the government can itself achieve through fiscal
discipline is its fundamental obligation before being entitled to ask
others to contribute to a solution.
Fifth, and related, Title III of the bill vests the board with the
ability to exercise debt adjustment powers, something that I stated in
my prior testimony is a vitally necessary if the oversight board is to
be effective. But, importantly, the legislation clearly directs the
board to invoke its debt adjustment powers only as a last resort. What
the bill, instead, unmistakably favors is that the board act as a
facilitator and honest broker in assisting creditors and the
Commonwealth's various governments in reaching an equitable resolution
to allocate any shortfall that cannot be solved through operational
efficiencies and other cost saving. While having such debt adjustment
powers is vital to the board's ability to effectively encourage the
parties to reach consensual accords, a resolution borne out of
compromise is always preferable. Settlement of the challenging and
complex issues that will arise is certainly favored by the bill's
requirement that all consensual solutions be exhausted before any
resort to the board's debt adjustment authority can be invoked.
Implicit in that directive is the recognition that reaching an agreed
set of solutions not only expedites the resolution process, it reduces
both the cost and delays of an adversarial process, and brings with it
finality and certainty. The experience of contested proceedings in
similar types of matters teaches that each of the benefits that can be
achieved through a consensual and non-judicial resolution process are
real and meaningful, and far preferable to a litigated battle over
competing perspectives about what is fair.
With those observations about what commends adoption of this
committee's well-conceived legislative proposal, afford me to conclude
with two other observations:
While not in the present bill, I'd like to see Congress also
consider legislation that can provide economic incentives for new and
meaningful investment in the Island's economy. Too many talented people
of Puerto Rico have found it necessary to leave their homeland in
search of jobs in the states; and affording a constructive and
financially feasible opportunity for those who would like to return is
both the right thing to do and could bring with it real excitement for
businesses and entrepreneurs to invest in the Island's future. Puerto
Rico has a rich and healthy past, and there are compelling reasons for
its economy to once again flourish. Legislation that can help promote
real economic growth opportunities on the Island ought to be something
Congress ought soon adopt.
Let me close by addressing again the anxieties that naturally arise
when some form of government oversight is part of a resolution process.
Yes, every situation is unique; and while Puerto Rico's situation is
clearly not the same as Washington, Detroit, New York, Cleveland or
Harrisburg, all of which have been under some form of an oversight
regime, at the outset of every such oversight process, there has always
been strenuously voiced complaints about having an additional
governmentally-created body be given authority to assist local elected
leaders in finding and guiding needed solutions. But the lessons drawn
from other notable places that were subject to oversight does instruct
that if done with due respect for those in public office, and with keen
awareness of both community leadership and an eye on business
interests, good and sustainable solutions can and have occurred. New
York, once in serious financial troubles in the late 70s, is as vibrant
and financially robust as any large city in the world; and first hand I
can attest to the fiscal distress that was the marque of this city and
that led Congress to act only 20 years ago; but look at us now.
So, too, I believe if the oversight board does its job well, rather
than disaffecting the populace simply because it has been called into
action, it can instead help forge hope, cooperation, belief in a strong
future, and generate a real desire of the people of Puerto Rico to get
behind and be part of the Island's financial and economic rebirth.
Unquestionably, these goals clearly stand at the heart of the proposed
legislation; and I do believe it will not be long before we will be
looking back at today, appreciating both the bipartisan leadership of
Congress as well as the understanding of the Commonwealth Government
and its creditors, who with their hard work and in the spirit of
compromise have collectively brought us the legislation now proposed--
legislation poised to help foster an exciting and sustainable future
that Puerto Rico justly deserves while fairly treating its creditors.
______
The Chairman. Thank you.
Mr. Miller.
STATEMENT OF JOHN V. MILLER, CFA, MANAGING DIRECTOR, CO-HEAD OF
FIXED INCOME, NUVEEN ASSET MANAGEMENT, CHICAGO, ILLINOIS
Mr. Miller. Thank you, Chairman Bishop and Ranking Member
Grijalva, for the committee's leadership on Puerto Rico and for
the opportunity to speak with you today regarding the draft
legislation to address the fiscal crisis in Puerto Rico. My
name is John Miller, and I am Managing Director and Co-Head of
Fixed Income at Nuveen Asset Management. I have spent my entire
23-year career researching and managing municipal bonds on
behalf of investors, the last 20 years with Nuveen.
The team that I oversee currently manages over $113 billion
in municipal securities, and within that team I am directly
managing approximately $20 billion in the most credit-
sensitive, high-yield municipal securities. In these roles, I
am making investment decisions and transacting in the municipal
market every day. And because I do so on behalf of Nuveen's
clients, I am also speaking with financial advisers to
individual investors nearly every day.
I highlight this in order to emphasize that I am in
continuous contact with the concerns of long-term, dedicated
municipal bond investors and I have a deep understanding of
what drives increases and decreases in demand for municipal
bonds over time and through historically significant municipal
credit events such as this, as well as how investors evaluate a
diverse array of credit risks in the marketplace.
So I am not here in an attempt to promote or degrade any
specific Puerto Rican security. Nuveen has invested in a few
Puerto Rican bonds in a few of our products, but our overall
exposure is relatively small. However, I do care deeply about
what happens next in Puerto Rico, what potential outcomes could
mean for the broader municipal bond market, what could
constitute positive or negative precedent, and what could
constitute market contagion risk.
It is important to acknowledge that the financial distress
already exists in Puerto Rico as well as the numerous complex,
competing stakeholder claims, the nonpayment of which are very
likely to trigger a massive amount of litigation in the
relatively near future. Given the worsening conditions, Nuveen
Asset Management believes that this draft legislation has the
potential to create a framework under which orderly, fair, and
transparent resolution can be achieved for bondholders while
also fostering the conditions necessary for economic growth in
Puerto Rico.
It is clear that the marketplace for Puerto Rican bonds is
already anticipating restructuring. The highest valued
security, which is the general obligation debt, is priced in
trading generally between 58 cents on the dollar to 67 cents on
the dollar. Yields for Puerto Rico debt average above 12
percent, while the yields of AAA municipal securities average
just 2.6 percent. So, current pricing and current yields
demonstrate that the market is already recognizing that default
and debt restructuring are inevitable.
Even while Puerto Rican securities have fallen into this
distressed territory, the broader municipal bond market has
experienced consistent and steady appreciation since the end of
the year 2013. And this appreciation has been coincident with
individual investor demand growing, as measured by strong
municipal bond mutual fund inflows, during each of the last 10
calendar quarters.
Much of the investor base in Puerto Rican securities has
shifted from traditional mutual funds to nontraditional or
opportunistic hedge funds. According to Morningstar, 75 percent
of municipal bond mutual funds owned Puerto Rican securities in
2013, but that figure had dropped to less than 50 percent by
the end of the year 2015. So this shift in holdings to hedge
funds from mutual funds I think mitigates the risk to
individual investors that are long-term dedicated to the muni
market.
In addition to the shifts in investor allocations which
have already occurred in anticipation of Puerto Rican
restructuring, the draft legislation serves to substantially
mitigate, if not eliminate, the concerns around negative legal
precedent from municipal securities.
And I would highlight the critical difference between a
U.S. territory, which is ultimately subject to the control of
the U.S. Congress, versus a state, which has sovereignty in its
fiscal matters. If the proposed legislation were to become law,
this would be a territory-specific law and therefore not
applicable to 98 percent of the municipal bonds in the
marketplace, as they are issued by entities that are on the
mainland.
It is our opinion that there is no legal budgetary or
market-based reason to believe that a territorial-specific law
would set a precedent for even the most fiscally stressed
states. Even lower-rated states, such as Illinois, do not need
and would not benefit from restructuring of their bonded debt.
Admittedly, Illinois is currently mired in political gridlock
and that clouds our near-term outlook, but we feel the state
has the economic base and fiscal capacity to independently
address its own budget and pension challenges.
Since the draft legislation began to circulate roughly 2
weeks ago, the municipal bond market has generally been steady
and has continued to strengthen, with continued inflows into
municipal bond mutual funds around the industry. In addition,
Puerto Rican bond valuations specifically did not move down in
reaction to the draft or the release of the draft. And, in
contrast, it was the imposition of the Commonwealth debt
moratorium which did serve to weaken Puerto Rican-specific
securities in the marketplace, but not the possibility of U.S.
congressional involvement.
The horizon to measure market reaction has been short-
lived, but we believe that the territorial-specific nature of
the legislation, the strength of an independent control board,
the transparency, and fairness of a more orderly process, would
all be features that are welcomed by the municipal bond market.
Thank you very much.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of John Miller, Managing Director, Co-Head of Fixed
Income, Nuveen Asset Management, Chicago, Illinois
Thank you, Chairman Bishop and Ranking Member Grijalva, for the
committee's leadership on Puerto Rico and for the opportunity to speak
with you today regarding the Draft Legislation to address Puerto Rico's
fiscal crisis. My name is John Miller. I'm Managing Director and Co-
Head of Fixed Income at Nuveen Asset Management. I have spent my entire
23-year career researching and managing municipal bonds on behalf of
investors, the last 20 with Nuveen. The team that I oversee currently
manages over $113 billion of tax-exempt municipals. Within that team, I
directly manage approximately $20 billion of the most credit sensitive,
high-yield municipal securities. In these roles, I am making
investments and transacting in the municipal market every day, and
because I do so on behalf of Nuveen's clients, I am also speaking with
Financial Advisors to individual investors nearly every day. I
highlight this in order to emphasize that I am in continuous contact
with the concerns of long-term dedicated municipal bond investors. I
have a deep understanding of what drives increases and decreases in
demand for municipal bonds over time and through historically
significant municipal credit events such as this, as well as how
investors evaluate a diverse array of credit risks in the marketplace.
I am not here in an attempt to promote or degrade any specific
Puerto Rican security. While Nuveen is invested in a few Puerto Rican
bonds in a few of our products, our overall exposure on behalf of
clients is relatively small. However, I care deeply about what happens
next in Puerto Rico, and what the potential outcomes could mean for the
broader municipal bond market, what could constitute a positive or a
negative precedent, and what could constitute market contagion risk.
It is important to acknowledge the financial distress that already
exists in Puerto Rico, as well as the numerous and complex competing
stakeholder claims, the non-payment of which are very likely to trigger
a massive amount of prolonged litigation in the near future. Given
these worsening conditions, we at Nuveen Asset Management believe the
draft legislation has the potential to create a framework under which
an orderly, fair and transparent resolution can be achieved for
bondholders, while also fostering the conditions necessary for economic
growth in Puerto Rico.
It is clear that the marketplace for Puerto Rican bonds is already
anticipating a restructuring. The highest valued security, General
Obligation or GO debt, is currently priced at between $58 and $64 per
$100 of outstanding debt. Yields for Puerto Rico's debt average above
12 percent while the yields of AAA municipal securities average 2.6
percent. Current pricing and yields demonstrate the market already
recognizes default and debt restructuring are inevitable.
Even while Puerto Rican securities have fallen into this distressed
territory, the broader municipal bond market has experienced a
consistent and steady appreciation since year-end 2013, and this
appreciation has been coincident with steady increases in individual
investor demand as measured by strong municipal bond mutual fund in-
flows during each of the last 10 calendar quarters.
Much of the investor base of Puerto Rican securities has shifted
from traditional mutual funds to non-traditional or opportunistic hedge
funds. According to Morningstar, 75 percent of municipal bond mutual
funds owned some Puerto Rican securities in 2013, versus less than 50
percent by the end of 2015. This shift in holdings to hedge funds from
mutual funds mitigates the risks to retail investors.
In addition to the shifts in investor allocations which have
already occurred in anticipation of a Puerto Rican restructuring, the
draft legislation serves to substantially mitigate, if not eliminate,
the concerns around negative legal precedent for municipal securities.
I would highlight the critical difference between a U.S. Territory,
which is ultimately subject to the control of the U.S. Congress, versus
a state which has sovereignty in its fiscal matters. If the proposed
legislation were to become Law, this would be a Territory specific law,
and therefore not applicable to 98 percent of the municipal bonds in
the marketplace as they are issued by entities that are on the
mainland.
It is our opinion there is no legal, budgetary or market-based
reason to believe that this Territorial-specific legislation would set
a precedent for even the most fiscally stressed states. Even lower
rated states, like Illinois, do not need and would not benefit from
restructuring bonded debt. While admittedly Illinois is currently mired
in political gridlock which clouds our near-term outlook, the state
still has the economic base and fiscal capacity to independently
address its budget and pension challenges.
Since the draft legislation began to circulate roughly 2 weeks ago,
the municipal bond market has generally been steady and has actually
strengthened, with continued inflows into municipal bond funds across
the industry. In addition, Puerto Rican bonds valuations specifically
did not move down in reaction to the release of the Draft. In contrast,
it was actually the Commonwealth's debt moratorium legislation which
served to weaken the marketplace for Puerto Rican securities recently,
not the possibility of U.S. congressional involvement. While the time
horizon to measure market reaction has been short lived, we believe the
Territorial-specific nature of the legislation, the strength of an
independent control board, the transparency and fairness that a more
orderly process could bring, would all be features welcomed by the
municipal bond market.
Thank you for the opportunity to testify today and I welcome your
questions.
*****
White Paper Submitted for the Record by Mr. Miller
Puerto Rico's Course Forward
NUVEEN Asset Management
Market Commentary
February 2016
By: Molly Shellhorn, Vice President, Senior Research Analyst and Shawn
P. O'Leary, Senior Vice President, Senior Research Analyst
The next few months will be critical to determining Puerto Rico's
future. With large debt service payments looming in May and July, and
Congressional action becoming increasingly likely, events are quickly
moving the Commonwealth to a point where the government's stance toward
creditors could become more adversarial in the near term. In this paper
we briefly review Puerto Rico's current fiscal situation, the
Commonwealth's proposals thus far, and what we expect from the federal
government.
We also explore how the Commonwealth's competing priorities are
likely to stack up against one another given limited resources to pay
all obligations in full. General obligation and COFINA (Puerto Rico
Sales Tax Financing Corporation) bondholders may soon be engaged in a
bitter inter-creditor battle while simultaneously competing with more
sympathetic pensioners.
We then consider whether debt restructuring in Puerto Rico actually
threatens the stability of the municipal market. Puerto Rico's unique
situation will not likely set a broad precedent for either the market
or other municipal issuers, but opponents of restructuring have claimed
otherwise. We'll demonstrate that Puerto Rico truly is an outlier, and
why we think its fiscal distress should stay contained to the island.
Regardless of what transpires going forward, untangling Puerto Rico's
difficulties will be a lengthy process. Investors should not expect a
quick resolution.
Puerto Rico's Economic Situation Is Critical
Puerto Rico's economic challenges persist, and the catalyst for a
turnaround is unclear. The Commonwealth has been in recession since
2006 primarily due to the expiration of federal tax incentives that
previously incentivized U.S. firms to operate on island. Between 2009
and 2014, Puerto Rico's real national product declined 2.3%. Puerto
Rico's planning board estimates another decline of 0.7% for the current
fiscal year.
Unemployment remains very high at 12.2% as of December 2015, and
labor force participation remains well below average at 45.5%. Median
family income in Puerto Rico is just 34.4% of the U.S., and the poverty
rate is an elevated 46.2%. Total nonfarm employment has stabilized,
down only 0.3% year-over-year in December 2015, but employment is still
15% below peak levels reached in 2005.
Economic contraction and a lack of job opportunities have
encouraged significant out-migration, particularly among working-age
residents and young families. Between 2010 and 2015, Puerto Rico's
population dropped an estimated 6.7%. Out-migration threatens to
permanently erode Puerto Rico's economic base and ultimately the
government's ability to structurally balance the budget.
As tax revenues suffered over the last decade, the government
relied on tax increases and long-term borrowing to cover annual
operating deficits rather than cut expenditures or address
inefficiencies, poor tax compliance and corruption. A long history of
overestimating revenues and lack of budgetary control only exacerbated
the structural budget gap and overreliance on debt to fund operating
expenses.
Following significant rating downgrades into junk territory and
growing market concern about debt affordability, Puerto Rico has
essentially lost market access to continue borrowing for cash flow. The
government recently lowered general fund revenue expectations to $9.21
billion from $9.46 billion for the current fiscal year, and projects
the government is at ``risk of not having sufficient liquid resources
to meet obligations as they come due.''
Specifically, the government warned that Puerto Rico may be unable
to make the Government Development Bank's (GDB) $422 million debt
service payment due May 1, followed by a significant $1.3 billion
payment due July 1 for general obligation (GO) and Commonwealth-
guaranteed debt.
Restructuring Efforts Fall Short
It is against this context Puerto Rico is struggling to find a
sustainable path forward. Months after Governor Alejandro Garcia
Padilla declared the Commonwealth's debt unpayable (signaling the
potential for future debt impairment), creditors have generally
dismissed the government's attempts to demonstrate the severity of
Puerto Rico's fiscal gap. Last fall, the governor's working group
released a Fiscal and Economic Growth Plan (FEGP), providing a
multiyear projection of revenues and expenses that identified a
cumulative $14 billion financing gap over the next five years. In
January, the 5-year gap was revised up to $16.1 billion, and the 10-
year financing gap was pegged at nearly $24 billion.
Sizeable multiyear deficit projections underlie the Commonwealth's
recent offer to creditors to exchange existing bonds for new
securities. The exchange, which we view as highly unlikely to be
accepted by creditors outside of a formal restructuring process that
includes a means of binding holdout creditors, would provide holders of
$49.2 billion of various classifications of Puerto Rico debt with two
new securities: $26.5 billion of base bonds and $22.7 billion of growth
bonds. The plan cuts the debt by approximately 46% and includes a
moratorium on all debt service through 2018, and then only interest
payments until 2021.
The exchange offer proposes that holders of GO, sales tax-backed
and other securities would exchange their bonds for differing amounts
of base bonds, thus yielding varying levels of haircuts for different
classifications of bondholders. The base bonds would be guaranteed by a
new securitization of various government revenues and provide Puerto
Rico with a lower, more level debt service structure. The growth bonds
would only be paid if Puerto Rico's economic activity and resultant
revenue collection meets or exceeds certain benchmarks.
In our view, there is little chance bondholders will readily
exchange their securities in numbers sufficient to generate the savings
contemplated by the Commonwealth. We believe the exchange offer is
actually the Commonwealth's attempt to demonstrate to Congress the
futility of reaching an orderly adjustment of debts outside the
confines of a formal debt restructuring process supervised by a control
board and/or federal courts.
Congress May Be Ready to Act
Until recently, it was unclear if Puerto Rico would generate enough
momentum to motivate Congress to address the island's distress. U.S.
lawmakers, now educated on Puerto Rico's precarious situation, may
finally be ready to act. House Speaker Paul Ryan promised that Congress
would address Puerto Rico's crisis by March 31, and his intent to get
new legislation passed appears to be serious.
Initially, the division between Republicans and Democrats was
clear. Republicans rejected anything considered a bailout for Puerto
Rico and advocated further austerity measures. In contrast, Senate
Democrats sent a letter to House leadership at the end ofJanuary urging
quick passage of legislation granting the Commonwealth access to
Chapter 9 bankruptcy. The letter said any bill that does not include
bankruptcy would not be a ``real solution'' for Puerto Rico. U.S.
Treasury Secretary Jack Lew has been clear about the current
administration's support for both funding equity for federal programs
and access to a broad debt restructuring regime.
Several Republican bills were proposed at the end of 2015. One
granted the Commonwealth access to Chapter 9 if Puerto Rico agreed to a
strong fiscal control board. Another called for a control board and
provided additional aid. Given recent Congressional hearings and
statements from ranking members, we expect additional legislative
proposals to emerge soon. Senate Finance Committee Chair Orrin Hatch
announced his intention to bring another bill in the near term and meet
Speaker Ryan's March 31 deadline for Congressional action. Additional
hearings are scheduled in February.
We expect legislation providing a fiscal control or fiscal
stabilization board with broad authority to be introduced and
considered in the near term. Puerto Rico's long record of poor fiscal
management, overlaid on a sprawling web of interconnected events and
overly complex debt structure, demonstrates the need for federal
intervention.
We now believe Congressional action appears both likely and
necessary. A strong federal control board now seems to be inevitable
and the opposition on the island has softened. External control and
enforcement is likely the only way Puerto Rico can achieve structural
reforms, implement difficult but necessary budgetary realignment,
establish the conditions for economic growth and reestablish
credibility with investors and thus access to the traditional municipal
market.
The debate is not about whether a control board is necessary, but
about how much authority the board should be given. The structure and
authority of the new oversight entity must be carefully crafted to
respect Puerto Rico's right to self-governance and hopefully be
oriented toward establishing a foundation for future economic growth.
Governmental reforms, improving fiscal policies, tax compliance and
financial reporting are all critical to restoring credit quality and
market credibility.
It remains unclear if legislation establishing a control board will
be paired with a legal framework to adjust Puerto Rico's long-term debt
and pension liabilities. The Commonwealth has attempted a consensual
debt restructuring, but we are not surprised that these efforts have
not yet gained sufficient traction with creditors, especially in light
of the initial proposal.
Given the wide variety and complexity of Puerto Rico's debt
obligations, the diversity of bondholders and interests involved, and
the competing security pledges, realists will acknowledge there is
little to no hope of a consensual resolution. Without some mechanism to
bind holdout creditors, either through some form of bankruptcy or a
broader collective action clause that would allow a majority bondholder
vote to impose terms on holdouts, Puerto Rico is destined for years of
litigation.
Treasury officials estimate it could take a decade to untangle
competing creditor claims if the situation devolves into a web of
competing litigation. Years of litigation and inter-creditor disputes
will only stifle economic growth and accelerate out-migration, further
diminishing the tax base available to pay off creditors.
We believe the final legislation must include a path for Puerto
Rico to restructure these liabilities. We don't advocate for
restructuring authority lightly. As investors, we prefer political
solutions that avert restructurings whenever possible. Yet we believe
when an issuer reaches the point where debt reduction becomes
inevitable, any delay only serves to engage in value destruction
through additional unsustainable borrowings, economic contraction and/
or population loss due to reduced government services.
Thus the restructuring--painful as it may be--provides greater
value to creditors than lobbying for maintaining the status quo. Puerto
Rico's recent trend of increasingly expensive and onerous debt to
bridge one fiscal year to the next offered the Commonwealth little
chance of addressing its core problems: economic contraction, a
declining population, a bureaucratic and inefficient government and a
back-ended debt structure requiring annual cycles of painful budgetary
decisions coupled with new and/or higher taxes. As municipal asset
managers and creditors, we are reluctant to support any adjustment of
debts by issuers, but we believe it is both inevitable and necessary
for Puerto Rico.
Priorities Compete: GO, COFINA and Pensions
The absolute size of Puerto Rico's true fiscal gap is still
unknown. The impact of future expenditure cuts and potential economic
growth will hopefully moderate the $16 billion five-year gap projected
by the governor's working group. However, even if the gap is reduced,
it's clear to most that Puerto Rico will struggle to fully fund all
general obligation (GO) and guaranteed debt while leaving COFINA
obligations and pensions unimpaired.
We see GO, COFINA and pensions as the three main expenditures in
direct competition for the government's limited resources. It is
difficult to envision a scenario that avoids an inter-creditor legal
battle between GO and COFINA bondholders, and we see all creditors in
direct competition with pension beneficiaries.
GO and COFINA bondholders' interests are in direct opposition. GO
debt benefits from a constitutional first priority on Commonwealth
resources, but the COFINA corporation was constructed with the
intention of exempting sales tax revenues from the definition of
available resources for GO debt.
If GO debt is ever impaired in a future default, potentially as
soon as this year, Puerto Rico will face lawsuits from GO investors
demanding the government reclassify sales/VAT taxes to be considered
available revenues to be redirected to GO debt service first.
Similarly, should the government attempt to divert sales tax
revenues away from COFINA to GO debt, COFINA bondholders will litigate
to protect their revenue pledge. It does not escape notice that the
current debt restructuring proposal contemplates replacing COFINA's
arguably successful securitization structure with a new securitized
debt structure--essentially threatening to blow up one securitization
in favor of another.
GO and guaranteed debt and COFINA debt represent the two largest
categories of tax-supported debt. Given that these two together
represent over 60% of tax supported debt and as the government is
saying it can only afford to fund a much smaller fraction of current
debt service, it is unlikely both will emerge from this process
unscathed. Some creditors and on-island politicians have argued
passionately that the constitutional priority of GO debt must be upheld
and the rule of law cannot be set aside. However, we believe many
market commentators and some Puerto Rican elected officials too
liberally interpret the Puerto Rico Constitution to mean that GO bonds
and other forms of guaranteed public debt cannot be restructured. A
plain reading of the constitution reveals there is no such protection
from an adjustment of the terms of Puerto Rico's constitutionally
guaranteed debt.
The Puerto Rican constitution clearly establishes that GO and
guaranteed debt have first priority on available resources. Existing
statutes further support the constitutional priority establishing
priority norms for the disbursement of public funds. Payment of
principal and interest on debt service is specified as the first
priority, specifically senior to expenditures for health, safety,
education, welfare and retirement systems, which all rank third on the
priority list. This should not, in our opinion, be read to describe
anything other than a year-to-year prioritization of debt service
coming due for the purposes of constructing a budget.
We believe Puerto Rico could theoretically implement a
restructuring process for GO and Commonwealth-guaranteed debt, reduce
the principle amount outstanding through that process and assert that
their constitutional burden is met by making the now-reduced public
debt the first budgetary priority. In other words, the constitution
says only that public debt has a first priority on resources--whether
that debt represents legacy debt at 100-cents on the dollar or
restructured debt at 50-cents on the dollar. It is silent as to the
adjustment of public debt.
The constitutional first priority on available resources for the
benefit of public debt does not, in our opinion, preclude the
possibility of debt restructuring or impairment. Puerto Rico could
attempt to restructure constitutionally guaranteed obligations and
subsequently argue that the new debt will maintain a first payment
priority, post-restructuring. Puerto Rico has warned for years of the
potential need to reprioritize essential services ahead of other
obligations, including the public debt. In practical terms, this means
subverting the ``priority norms'' established by law to the extent
resources are insufficient to meet both debt service and the cost of
providing essential services.
Though some observers point to the constitution and priority norms
as evidence GO debt cannot be impaired, this idea has been undermined
repeatedly by the territory's own risk disclosure statements in
investor communications. For example, in March 2014, officials
disclosed that ``to the extent Commonwealth resources are diverted to
such essential services, there is no assurance that the Commonwealth
will have sufficient revenues to pay debt service on GO debt.''
More recently, in the unaudited draft Fiscal 2014 Basic Financial
Statements, the government stated it may amend the Organic Act that
establishes these priorities or enact new emergency legislation that
could include a debt moratorium on the payment of debt service. In
short, Puerto Rico has been signaling to investors for years its
intention to reprioritize essential services over debt.
Whether pension payments will be prioritized over debt is not yet
apparent. In the government's first debt restructuring proposal to
creditors, both GO and COFINA bonds received significant haircuts while
pensions were notably absent. Puerto Rico's pension obligations are
virtually entirely unfunded and growing rapidly. As of June 30, 2014,
the unfunded pension liability is estimated at $43.6 billion across
three retirement systems. The Employees Retirement System has the
largest liability, at $30.2 billion, and the lowest funded ratio at
0.42%. Pension costs will soon be funded on a pay-go basis, increasing
budgetary pressure. By fiscal 2018, pay-go pension payments could reach
$2 billion per year, or nearly 20% of general fund revenues.
Preserving pension security is one of the administration's stated
objectives. We believe the government will attempt to keep pensions
free from impairment and prioritize these payments above debt service,
regardless of current statutes that prioritize debt service ahead of
annual pension costs. Threats to enact new legislation reversing the
priority of payments support this. Additionally, the administration's
current debt restructuring proposal does not include any changes or
reductions for pension beneficiaries. We believe Puerto Rico intends to
leave pension benefits untouched while attempting to impose haircut on
all other long-term liabilities, even those with a guarantee and a
dedicated pledged revenue.
Contagion Risk Is Low
Municipal investors are asking if a Puerto Rico restructuring will
negatively impact the broader market. Growing evidence suggests Puerto
Rico is now effectively separated from the traditional high yield
market, let alone the overall municipal market. We believe most
institutional investors understand Puerto Rico's unique situation, and
the coming debt restructuring will not create widespread negative
credit implications for other issuers.
Municipal investors should note that recent debt adjustments in a
handful of California cities, Detroit and other jurisdictions did not
disrupt the market. Detroit filed for bankruptcy protection on July 18,
2013, and on that day the AAA Municipal Market Data (MMD) 30-year yield
was 4.03%. By December 31, 2015, the AAA MMD yield rallied by 121 basis
points to 2.82%. As of this writing on February 19, 2016, AAA MMD
stands at 2.78%, 125 basis points tighter than the day Detroit filed
for bankruptcy.
Simultaneously, Puerto Rico's stance toward financial market
creditors became increasingly hostile, from proposals to restructure
debt and the beginning of what we expect will be a string of ongoing
defaults. Municipal investors, rightly, continue to differentiate
between individual pockets of credit stress and the much healthier
overall market. We see no reason this will change based on how Congress
addresses Puerto Rico's situation.
Market differentiation between Puerto Rican bonds and other high
yield municipal bonds started even before the rating agencies
downgraded Puerto Rico debt to below investment grade in 2013. Since
then, divergence between Puerto Rico and the rest of the high yield
market can been seen in credit spreads, fund flows and total returns.
Exhibit 1 shows credit spreads for high yield indices with and
without Puerto Rico. Since the beginning of 2014, high yield credit
spreads excluding Puerto Rico securities narrowed 30 basis points,
while spreads including Puerto Rico securities widened over 120 basis
points. The market has clearly identified elevated risk for Puerto Rico
debt, while spreads for other high yield municipals are more in line
with historic norms.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Investors have already differentiated between funds with and
without Puerto Rico holdings. The difference in net flows for funds
with elevated Puerto Rico exposure versus funds with minimal Puerto
Rico exposure is notable. Since the beginning of 2014, funds with a
less than 5% allocation of net assets to Puerto Rico reported inflows
of $12.6 billion, equivalent to 40% of beginning assets under
management (AUM), as shown in Exhibit 2. Over the same time period,
high yield funds with more than 5% allocated to Puerto Rico have
experienced outflows totaling 8.75% of AUM. This trend of diverging
investor flows was sizable, orderly and largely unnoticed by market
participants.
High yield municipal funds with less than 5% allocation to Puerto
Rico now represent double the AUM of high yield municipal funds with
more than 5% exposure to Puerto Rico. At the start of 2014 that figure
was only 28% more in AUM.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
High yield returns without Puerto Rico have also outperformed
each year since 2013 and the difference has increased each year. Based
on the S&P High Yield Municipal Index, high yield returns without
Puerto Rico were 1.47% and 4.29% higher in 2014 and 2015, respectively,
than the index when Puerto Rico is included.
A Threat to Tax-Exemption Is Possible
We don't see Puerto Rico creating contagion for the municipal
market via investor reticence over purchasing securities from mainland
states, other municipal issuers scrambling to seek debt relief or a
general increase in municipal borrowing costs.
However, market contagion is possible in the form of threats to the
municipal bond tax exemption. The longer Puerto Rico remains
unaddressed by Congress and unable to appropriately restructure its
debts and unfunded pension liabilities, the longer Puerto Rico will
remain in the headlines. As this plays out, the potential only grows
for some members of Congress to view Puerto Rico's profligate spending
and use of debt to fund government services as representative of the
entire municipal market.
Of course, any curtailment of the municipal tax exemption on the
basis of Puerto Rico's debt abuse would be wholly unfair to the rest of
the market. Puerto Rico spent much of the last 10 years issuing
billions in debt to pay maturing debt and fund government services,
while overall municipal debt outstanding remained more or less
constant. Exhibit 3 shows the total municipal debt outstanding from
2005 through 2014.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
From 2005 through 2010, municipal debt outstanding grew from $3
trillion to $3.77 trillion as the housing market boom created abundant
property taxes, permit fees and other revenues related to robust
residential growth. This growth also created the need for new schools,
roads, bridges and expanded water and sewer treatment capacity. Since
the onset of the recession, however, municipal debt outstanding
actually declined to $3.65 trillion. Issuers slowed the pace of capital
investment, and refunding transactions--rather than new money issuance
for projects--represented the majority of municipal debt issuance. From
2005 through 2014, total municipal market debt outstanding grew at a
2.1% compound annual growth rate (CAGR). This period included several
years of healthy capital investment to accommodate residential growth.
We think this manageable trend in municipal debt issuance speaks to
municipal market issuers' long-standing history of using municipal
bonds--and the benefit of municipal tax exemption--to responsibly
invest in the country's critical infrastructure. Puerto Rico and a
limited number of other municipal issuers that rely on municipal bonds
to maintain government spending do not represent the broader market,
nor do they indicate the general health of states and municipalities.
While Puerto Rico's approximately $70 billion of debt makes the
Commonwealth one of the largest issuers of municipal bonds, it
represents just 1.9% of municipal debt outstanding. Reducing or
eliminating the municipal tax exemption based on the actions of Puerto
Rico is like treating a sprained toe by removing the patient's leg.
Could Puerto Rico Set a Negative Precedent?
We do not believe a broad debt restructuring in Puerto Rico would
lead states struggling with budgetary challenges (such as Illinois, New
Jersey and Pennsylvania) to clamor to restructure their own debt.
Puerto Rico attempting to restructure its obligations won't encourage
other states to do the same. The magnitude of Puerto Rico's debt and
the lack of an economic base to service long-term liabilities makes it
a significant outlier in comparison to other states. The ``Illinois is
next'' argument misleadingly suggests that Illinois--admittedly the
least creditworthy U.S. state--is comparable to Puerto Rico in terms of
financial stress and capacity to meet its obligations.
Comparing key credit metrics for Puerto Rico and Illinois, as shown
in Exhibit 4, reveals this argument to be quite lacking.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Illinois is certainly not a model of state governance and
fiscal responsibility. But the size of the state's economy and tax
base, and its comparatively low sales and income tax rates, demonstrate
the state has far more flexibility to address its long-term obligations
than Puerto Rico. The state's diverse economy ranks fifth overall in
the U.S. in terms of gross domestic product (GDP), and fourth in per
capita income among the 10 most populous states. Though the state's
recovery has lagged the U.S., it is still growing modestly, unlike
Puerto Rico.
The scope of Puerto Rico's challenges far outstrips those of
Illinois once debt and unfunded liabilities are indexed to the
respective government's economies and resident incomes. Debt and
unfunded pension liabilities represent just 19.5% and 39.8% of Illinois
GDP and total household income, respectively. Puerto Rico carries debt
and unfunded pension liabilities representing 96.1% and 259.6% of GDP
and total household income, respectively. Simply put, Puerto Rico is
much more leveraged than even Illinois, the lowest-rated U.S. state. It
is inappropriate to compare them interchangeably in the context of the
need for federally sanctioned debt relief.
A political impasse has left Illinois operating without an adopted
budget almost nine months into the fiscal year. The budget standoff has
resulted in a growing accounts payable balance and reduced liquidity,
and distracted state leaders from addressing pension underfunding,
which remains a serious threat to the state's long-term financial
stability and structural budget balance. Failing to pass a budget and
address pensions has undoubtedly weakened the state's ability to
withstand the next economic downturn. Illinois deserves its lowest-
rated state designation.
But Illinois' budget stalemate, while detrimental to the state's
economy, is a political battle rather than a crisis caused by economic
contraction or a fundamental inability to afford long-term obligations.
The state's budget gap for fiscal 2017 is now projected to increase to
$5.6 billion, or 17% of estimated revenues. While not insignificant,
this budget gap is far from insurmountable. Increasing the individual
income tax rate by 1.25% to 5.0% (from 3.75%) would generate more than
$4.1 billion in new revenue, and go a long way to close the annual
revenue gap. The mathematical gap in Illinois is not nearly as wide as
the political chasm. While restructuring debt seems both appropriate
and unavoidable for Puerto Rico, it is not the appropriate tool for
Illinois and would provide the state with little budget relief.
Some argue that Puerto Rico's indebtedness is overstated in
comparison to mainland U.S. states, as Puerto Ricans pay no federal
income tax and therefore don't feel the burden of the U.S. government's
debt. Once again, we believe this argument is designed to mislead
rather than inform. It inappropriately equates two very different types
of debt: municipal debt issued by state and local governments and
sovereign debt of the United States.
Unlike state and local government debt, sovereign debt of the
United States is not truly amortized with regular principal payments.
Rather, sovereign debt is very often rolled into new debt offerings
with only the interest cost borne in the budget. Sovereigns tend to
attempt to maintain their debt outstanding within a specific range of
economic output (such as GDP), allowing the nominal amount of debt to
grow over time but remaining within a measure of affordability as
determined by economic activity. Thus any attempt to lump total federal
government debt outstanding into state debt profiles is an attempt to
inflate state indebtedness to give Puerto Rico's debt the veneer of
affordability.
A more appropriate way to consider the impact of the federal
government's debt is to consider annual interest cost, which in fiscal
year 2015 amounted to $402.4 billion. On a per capita basis, the annual
interest cost on federal debt was $1,252 in fiscal year 2015--or just
4.2% of Illinois' per capita income. The federal government's debt is
not an oppressive fiscal constraint on the U.S. states and taxpayers.
Nor does it make Puerto Rico's debt load magically affordable.
It is similarly inappropriate to contend Puerto Rico's debt burden
is artificially inflated in comparison to the states because it
includes all debt issued for underlying municipalities and schools,
whereas Illinois' total debt does not. This is also a spurious argument
because debt issued and guaranteed by Puerto Rico's general government
and the GDB is their responsibility and supported by their revenues. In
contrast, all Illinois taxpayers are not responsible for debt issued by
every underlying school district or county.
When the affordability of Puerto Rico's debt burden is debated,
some claim that the Commonwealth doesn't fully capture all economic
activity and their debt, and pensions would be affordable if only they
boosted tax compliance. While we agree that Puerto Rico does a poor job
of tax compliance and collection, we're not convinced that improvements
in this area alone will suffice.
To illustrate this, in Exhibit 5 we compare Puerto Rico to three of
the U.S. mainland's lowest-rated states: Pennsylvania, New Jersey and
Illinois.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
As Exhibit 5 shows, Puerto Rico's debt and pension leverage is
much greater than any of the lowest-rated mainland states, particularly
in the context of each government's economic output and resident
income. Simply increasing tax compliance will not reduce this over-
leverage. Puerto Rico's real problem is indebtedness, not tax
compliance.
This certainly does not mean that governmental reforms, expenditure
cuts, improved tax compliance and collections, employee layoffs and
government downsizing are not needed. Puerto Rico's budget projections
will improve with greater austerity and fiscal discipline, but we still
believe the magnitude of fixed costs outweighs the savings that can be
achieved through cuts and efficiency improvements.
Moreover, with an outsized portion of Puerto Rico's employment
derived from Commonwealth and local government employment (23.9% in
Puerto Rico versus 13.5% for the mainland U.S.), extensive austerity
will likely exacerbate the Commonwealth's economic contraction. We
expect most creditors will continue to object to Governor Garcia
Padilla's plans to restructure Puerto Rico's debts, but our analysis
continues to show that the territory's debts are unsustainable and
require adjustment.
Finally, it is unclear whether a framework for the adjustment of
state obligations through the federal court system would pass
constitutional muster. Unlike Puerto Rico--a U.S. territory subject to
the direct oversight of, and potential intervention by, Congress--
states are sovereign entities with certain protections from federal
interference specifically spelled out in the U.S. Constitution.
While legal opinions are mixed on this subject, many argue a
federal bankruptcy regime for states wouldn't pass legal and
constitutional muster because:
Such a federal regime would violate principles of both
state sovereignty and federalism.
States opting to enter into any such hypothetical
framework would necessarily be acting in direct violation
of their own constitutions and/or contract laws.
Moreover, the sole instance of which we are aware of the U.S.
government discharging state debt (according to a Fall 2011 American
Bankruptcy Law Journal article) followed the civil war when the federal
government nullified the debt issued by the former confederate states.
This nullification occurred via a constitutional amendment specifically
targeted to debt raised for the purposes of insurrection or rebellion
against the United States. This implies there was no path to
discharging the debt of U.S. states available through the balance of
the U.S. Constitution.
In short, Puerto Rico accessing a Congressionally-approved
restructuring regime is not a precursor to U.S. states following suit
because:
U.S. states, as sovereign entities, are likely
constitutionally ineligible for federally supervised
restructuring.
U.S. states are significantly financially healthier than
Puerto Rico and have far greater revenue flexibility, both
in terms of rate headroom and the wealth and scope of their
economies.
Aside from not needing a federal restructuring regime,
U.S. states have shown no inclination to ask for any such
legislation and would likely oppose it.
Swift Action Will Help Build Confidence
We believe the best outcome is for the Puerto Rico situation to be
resolved as quickly as possible. The faster the Puerto Rican government
is forced to implement much needed structural reform and fiscal
discipline, the earlier traditional institutional investors will view
Puerto Rico as a defensible investment. Puerto Rico must show it can
achieve and maintain financial discipline and an affordable debt
structure to regain access to affordable and sustainable lending for
infrastructure investment.
As a U.S. territory, Puerto Rico is not a true sovereign. It may be
state-like, and there are good arguments for the Commonwealth to
receive federal funding on parity with other states. However, as a
territory it does not enjoy the same responsibilities and advantages as
states. Puerto Rico is a sub-sovereign entity over which the U.S.
Congress has oversight. When warranted, Congress should act to resolve
various financial, economic and/or humanitarian crises within the
territories.
Years of litigation and inter-creditor disputes will only stifle
economic growth and accelerate out-migration, further diminishing the
tax base available to pay off creditors. At present, too many unknowns
prevent investors from reaching a reasonable degree of confidence in
the territory or any particular security pledge. This lack of certainty
will keep Puerto Rico locked out of the market until a path to
sustainability and economic growth emerges. We believe this will not
happen until Congress enters the void and brings with them a sense of
order and path forward for Puerto Rico.
______
The Chairman. Thank you. You are supposed to end with,
``It's a good bill.'' I got it. OK.
Mr. Kent.
STATEMENT OF ANDREW KENT, PROFESSOR OF LAW, FORDHAM UNIVERSITY
SCHOOL OF LAW, NEW YORK, NEW YORK
Mr. Kent. Thank you, Chairman Bishop, Ranking Member
Grijalva, and distinguished members of the committee. I
appreciate the invitation to testify today.
As you noted, I am a Professor of Law at Fordham University
School of Law, and I teach constitutional law and other topics.
I will comment briefly on the constitutional power of Congress
to enact the proposed legislation.
As might be expected, almost all legislation coming from
the Congress that deals with insolvency, restructuring,
bankruptcy, and like topics is enacted under the bankruptcy
clause of Article I. That clause provides that Congress shall
have the power to establish uniform laws on the subject of
bankruptcies throughout the United States.
The uniformity that this requires has been called by the
Supreme Court ``geographic uniformity,'' but, nevertheless, the
Supreme Court has also indicated that the uniformity
requirement is not a straitjacket, and it has in many different
cases found that differences in the law and the way it applies
to different classes of debtors and creditors are not
violations of the uniformity requirement.
Congress may address geographically isolated problems under
the bankruptcy clause without violating the uniformity
requirement. And, as I said, Congress may treat different
classes of debtors and creditors differently without violating
the uniformity requirement.
Because this is a territory-specific law that deals with an
entire class of debtors and is dealing with a geographically
isolated problem, I think there are strong arguments that
Congress could, if it wanted to, enact this under the
bankruptcy clause without violating uniformity requirements.
But there would be some risks if that were the only basis
under which Congress could act. Thankfully, it is not. There is
another basis on which Congress can enact this legislation, and
that is the so-called territorial clause of Article IV of the
Constitution, the clause that is referenced in the new draft
legislation in section 101. That clause empowers the Congress
to make, ``all needful rules and regulations respecting the
territory or other property belonging to the United States.''
Congress' power to use this clause to legislate for the
territories has been called an absolute and undisputed power by
Chief Justice John Marshall. Congress has well established and
very long exercised power under this clause to treat
territories differently from each other and to treat
territories differently than it treats the states of the Union.
And, in my judgment, this clause serves as an independent and
sufficient basis with which Congress could enact the
contemplated legislation.
The power of Congress under the territorial clause is
vastly different than the power it has when it is legislating
for states of the Union. Congress' power is limited when
legislating for the states to certain enumerated or implied
topics of national concern, but when legislating for the
territories, Congress is given additional power by this
clause--broad, general legislative powers that the Supreme
Court has repeatedly analogized to those powers held by a state
legislature.
So Congress, in fact, possesses two types of powers under
this territorial clause. As the Supreme Court has said, the
Nation possesses the sovereign powers of the general
government, and it added to that when it is legislating in the
territories, it also has the powers of a local or state
government.
The Supreme Court has called this power ``broad,''
``plenary,'' and even ``practically unlimited.'' And the
Supreme Court has numerous times emphasized that the
interpretation of Congress' power to legislate for the
territories must be flexible to allow Congress the flexibility
that is needed to legislate in a practical and workable manner
for the different situations of the different territories.
And, in fact, the history of congressional regulation of
the territories has been one of tailoring legislation to the
specific historical, geographic, economic, legal, and political
conditions of the different territories. The history has also
shown that Congress repeatedly uses the territorial clause to
enact a wide array of legislation that it could not have
enacted if it were legislating for the states under its Article
I powers. My written testimony gives many examples of this.
There are actually three identically worded uniformity
clauses in the Constitution. In addition to the bankruptcy
uniformity clause, there is a requirement that imposts and
excise taxes be uniform. The Supreme Court held as long ago as
1901 that that uniformity requirement--again, identically
worded to the one in the bankruptcy clause--does not apply to
Puerto Rico.
There is also a requirement of naturalization uniformity,
again, with the exact same language as in the bankruptcy
clause. The Supreme Court has not ruled on that, but the Courts
of Appeals have held that naturalization uniformity does not
apply in the unincorporated territories, such as Puerto Rico,
and there is a very long history of congressional
naturalization legislation that is disuniform, that treats the
residents of territories very differently, without
constitutional infirmity in that being found.
So, in a general matter, Congress only needs one
constitutional basis upon which to enact legislation, and since
I believe the territorial clause is sufficient for that,
uniformity issues under the bankruptcy clause need not be
raised.
Thank you very much.
[The prepared statement of Mr. Kent follows:]
Prepared Statement of Andrew Kent, Professor of Law, Fordham University
School of Law, New York, New York
Chairman Bishop, Ranking Member Grijalva, and distinguished members
of the committee, thank you for inviting me to testify today. I am a
professor of law at Fordham University School of Law, where I teach
constitutional law and other topics.
As I understand the new draft legislation just released publicly,
Title I creates a Financial Oversight and Management Board for Puerto
Rico, and gives the legislatures of other U.S. territories the option
to choose to have such an oversight board created for them. Title II
sets out the responsibilities of any oversight board created under
Title I. Title III, section 302, allows a U.S. territory or territorial
instrumentality to be a debtor and follow specified debt adjustment
procedures if it is subject to an oversight board created under Title
I, that board has allowed the territory or territorial instrumentality
to enter into a debt adjustment process, and the territory ``desires to
effect a plan to adjust its debts.''
i. the uniformity requirement of the constitution's bankruptcy clause
The Constitution's Bankruptcy Clause provides that ``The Congress
shall have power to . . . establish . . . uniform laws on the subject
of bankruptcies throughout the United States.'' U.S. Const., art. I,
Sec. 8, cl. 4. Case law about this uniformity requirement establishes
that, although it requires what the Supreme Court calls geographic
uniformity, the clause nevertheless grants Congress great leeway. ``The
uniformity requirement is not a straitjacket . . . .'' Railway Labor
Executives' Ass'n v. Gibbons, 455 U.S. 457, 469 (1982). Congress may
treat different classes of debtors differently; may incorporate state
law in ways that will lead to different results in different states;
and may address geographically isolated problems as long as the law
operates uniformly on a given class of debtors and creditors. See id.
at 465-69; Blanchette v. Connecticut General Ins. Corp., 419 U.S. 102,
156-61 (1974); Schultz v. United States, 529 F.3d 343, 350-52 (6th Cir.
2008). The Supreme Court has struck down a law as non-uniform, however,
where it applied to only a single debtor, one named railroad company.
See Railway Labor Executives' Ass'n, 455 U.S. at 465-69.
In light of this case law, a question might be raised about whether
the draft legislation could be subject to challenge for non-uniformity.
The fact that legislation concerns debt adjustment for certain classes
of debtors only--territories and territorial instrumentalities--is
unlikely to be deemed objectionable under the Bankruptcy Clause
uniformity provision. The Supreme Court has held that Congress may
treat different classes of debtors differently. But to the extent that
the legislation singles out Puerto Rico (and its instrumentalities),
because only Puerto Rico has an oversight board created for it by the
bill, uniformity questions might be raised.
Nevertheless, my view is that these constitutional concerns can be
avoided in this case, because Congress may enact debt adjustment
legislation for Puerto Rico under a different clause of the
Constitution, a clause that does not require uniformity. That clause is
the Territories or Territorial Clause of Article IV, as referenced in
Sec. 101(b)(3) of the new draft of the bill (setting out the
``Constitutional Basis'').
ii. the territories clause allows non-uniform legislation
The Constitution empowers Congress to ``make all needful rules and
regulations respecting the territory or other property belonging to the
United States.'' U.S. Const., art. IV, Sec. 3. Congress' power to use
this clause to make rules for the territories has been called an
``absolute and undisputed power,'' by Chief Justice John Marshall. Sere
v. Pitot, 10 U.S. 332, 336-37 (1810).
Congress has well-established and long-exercised power under this
clause to treat territories differently from each other, and to treat
territories differently than it treats U.S. states. In my judgment,
this clause serves as an independent and sufficient basis on which
Congress may enact the contemplated legislation. The remainder of my
testimony will concern the Territorial Clause and the non-uniformity
that it allows.
The power of Congress over the territories is vastly different than
its power over the States of the Union. Congress' power is limited in
legislating for the states to certain enumerated or implied topics of
national concern. But when legislating for the territories, Congress is
given additional power by the Territorial Clause--broad, general
legislative power that the Supreme Court analogizes to that of a state
legislature. See, e.g., First Nat. Bank v. Yankton Cty., 101 U.S. 129,
133 (1879); Benner v. Porter, 50 U.S. 235, 242 (1850). Over a territory
or dependency ``the nation possesses the sovereign powers of the
general government plus the powers of a local or a state government in
all cases where legislation is possible.'' Cincinnati Soap Co. v.
United States, 301 U.S. 308, 317 (1937). Thus, ``[t]he powers vested in
Congress by'' the Territorial Clause ``to govern Territories are
broad,'' Examining Bd. of Engineers, Architects, & Surveyors v. Flores
de Otero, 426 U.S. 572, 586 n.16 (1976), ``plenary,'' Binns v. United
States, 194 U.S. 486, 491 (1904), and even ``practically unlimited,''
Cincinnati Soap Co., 301 U.S. at 317.
The Supreme Court has many times emphasized that interpretation of
Congress' ability to legislate for the territories under the
Constitution must be marked by ``flexibility,'' Cincinnati Soap Co.,
301 U.S. at 318, and concern for Congress's practical ability to
govern, see Torres v. Commonwealth of Puerto Rico, 442 U.S. 465, 470
(1979).
Puerto Rico, though it is now formally a commonwealth, is still a
territory of the United States within the meaning of the Territorial
Clause. See Torres, 442 U.S. at 468-70; Davila-Perez v. Lockheed Martin
Corp., 202 F.3d 464, 468-69 (1st Cir. 2000); Americana of Puerto Rico,
Inc. v. Kaplus, 368 F.2d 431, 435 (3d Cir. 1966). In other words,
Congress may still today legislate for Puerto Rico pursuant to it
plenary power over territorial legislation.\1\
---------------------------------------------------------------------------
\1\ See also Cincinnati Soap Co., 301 U.S. at 319 (holding that
Congress' legislative power over the Philippines under the Territorial
Clause had not changed as a result of ``the adoption and approval of a
constitution for the Commonwealth of the Philippine Islands'').
---------------------------------------------------------------------------
The history of congressional regulation of the territories has been
one of tailoring legislation to the specific historical, geographic,
economic, legal, and political conditions of each particular territory.
The history has also shown Congress using the Territorial Clause to
enact a wide array of legislation that it could not enact for the
states under its Article I powers.
Congress' first territorial legislation--enacted in 1787 by the
Confederation Congress, and re-enacted in 1789 by the first Congress
organized under the new Constitution--shows this pattern. See Act of
Aug. 7, 1789, ch. 8, 1 Stat. 50. This law, the famous Northwest
Ordinance, announced many rules that would apply only in the Northwest
Territory. For example, it announced rules concerning intestate
succession and conveyance of real estate, but then also provided that
``the French and Canadian inhabitants'' of the territory could continue
to be governed by their own ``laws and customs now in force among
them.'' An Ordinance for the Government of the Territory of the United
States Northwest of the River Ohio Sec. 2 (July 13, 1787).
Many other examples could be given of congressional legislation
that (1) could not have been enacted under Article I to apply in the
states and (2) applied to one territory only and provided specifically
tailored rules for that territory. After the Louisiana Purchase,
Congress' legislation under the Territorial Clause provided special
rules for that territory concerning the port of New Orleans. See Act of
Feb. 24, 1804, ch. 13, Sec. Sec. 6 & 8, 2 Stat. 251, 253. After the
United States acquired Florida from Spain, Congress enacted specific
rules regarding revenue collection for Spanish vessels trading with
Florida. See Act of March 3, 1821, ch. 39, Sec. 2, 3 Stat. 637, 639.
When Congress organized the Territory of Oklahoma, it provided that
certain specified chapters of the laws of the state of Nebraska would
apply there, concerning mortgages, corporations, railroads, real
estate, and other topics. See Act of May 2, 1890, ch. 182, Sec. 11, 26
Stat. 81, 87. After the United States annexed Hawaii, Congress imposed
caps on the amount of real estate that corporations could purchase in
that territory only. See Act of April 30, 1900, ch. 339, Sec. 55, 31
Stat. 141, 150. After the Philippines became a U.S. territory through
the 1898 Treaty of Paris, Congress enacted a detailed set of provisions
to govern mining and mining claims in that territory only. See Act of
July 1, 1902, ch. 1369, Sec. Sec. 20-50, 31 Stat. 691, 697-704.
Early on Congress recognized the utility of extending many general
laws of the United States over the territories, but also recognized
that not all laws applicable in the states would work well in some or
all territories. As a result, Congress developed a practice of
providing in the organic acts for territories that ``all laws of the
United States which are not locally inapplicable'' shall apply in the
territory. Act of Sept. 9, 1850, ch. 49, Sec. 17, 9 Stat. 446, 452
(Territory of New Mexico). See also Act of March 3, 1863, ch. 117,
Sec. 13, 12 Stat. 808, 813 (Territory of Idaho); Act of May 26, 1864,
ch. 95, Sec. 13, 13 Stat. 85, 91 (Territory of Montana). This statutory
provision was, in effect, a delegation from Congress to the courts to
tailor the legislation of the United States to the specific local
requirements of each organized territory. The ubiquity of these
provisions, and the lack of successful constitutional challenges to
them, evidences Congress' plenary authority to tailor legislation to
the needs and circumstances of an individual territory.
The Supreme Court took up Congress' direction to determine which
general laws were locally applicable or inapplicable in specific
territories. When Congress specified in a statute that it would apply
to ``territories'' as well as states, the Supreme Court examined ``the
character and aim of the act'' to determine if a particular territory
was covered. People of Puerto Rico v. Shell Co., 302 U.S. 253, 258
(1937).
The Foraker Act, the organic act for Puerto Rico passed in 1900,
contained this same ``not locally inapplicable'' tailoring provision,
and specified also that Congress' internal revenue laws would not
apply. See Act of April 12, 1900, ch. 191, Sec. 14, 31 Stat. 77, 80.\2\
Congress further tailored legislation specifically for Puerto Rico by
also specifying in the Foraker Act that preexisting laws from the
period of Spanish rule would continue in force unless they were
repealed by the United States, in conflict with U.S. statutes, or
determined to be ``locally inapplicable.'' Id. Sec. 8.
---------------------------------------------------------------------------
\2\ Today 48 U.S.C. Sec. 734 provides: ``The statutory laws of the
United States not locally inapplicable, except as hereinbefore or
hereinafter otherwise provided, shall have the same force and effect in
Puerto Rico as in the United States, except the internal revenue laws
other than those contained in the Philippine Trade Act of 1946 [22
U.S.C.A. Sec. 1251 et seq.] or the Philippine Trade Agreement Revision
Act of 1955 [22 U.S.C.A. Sec. 1371 et seq.]: Provided, however, That
after May 1, 1946, all taxes collected under the internal revenue laws
of the United States on articles produced in Puerto Rico and
transported to the United States, or consumed in the island shall be
covered into the Treasury of Puerto Rico.''
---------------------------------------------------------------------------
Congress enacted the ``not locally inapplicable'' provision only
for so-called organized territories, see Revised Statutes Sec. 1891
(1878),\3\ in which Congress had created a local territorial
government. Thus, Congress allowed even greater dis-uniformity in
unorganized territories, where general rules of the United States were
not extended by any such provision. Even within organized territories,
Congress drew distinctions. When Congress organized a government for
the Philippines, it provided that Sec. 1891 did not apply, see Act of
July 1, 1902, ch. 1369, Sec. 1, 31 Stat. 691, 692, indicating an intent
that generally applicable U.S. laws would not automatically extend to
the Philippines.
---------------------------------------------------------------------------
\3\ This statute provides: ``The Constitution and all laws of the
United States which are not locally inapplicable shall have the same
force and effect within all the organized Territories, and in every
Territory hereafter organized as elsewhere within the United States.''
---------------------------------------------------------------------------
In the Insular Cases, the Supreme Court held that the Constitution
does not apply in full in so-called unincorporated territories, among
which the Court included Puerto Rico and the Philippines. There are
``inherent practical difficulties'' with ``enforcing all constitutional
provisions `always and everywhere.' '' Boumediene v. Bush, 553 U.S.
723, 759 (2008). Thus under the Insular Cases, not all structural
limitations on congressional power apply to territorial legislation,
see Torres, 442 U.S. at 468-69, and ``[o]nly `fundamental'
constitutional rights are guaranteed to inhabitants of those
[unincorporated] territories,'' United States v. Verdugo-Urquidez, 494
U.S. 259, 268 (1990). Congressional legislation for an ``unincorporated
territory'' like Puerto Rico is ``not subject to all the provisions of
the Constitution.'' Torres, 442 U.S. at 469. ``In exercising this power
[under the Territories Clause], Congress is not subject to the same
constitutional limitations as when it is legislating for the United
States.'' Hooven & Allison Co. v. Evatt, 324 U.S. 652, 674 (1945).\4\
---------------------------------------------------------------------------
\4\ Hooven & Allison was overruled in part on other grounds in
Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984).
---------------------------------------------------------------------------
In contrast to its allowance of flexibility and heterogeneity with
territorial legislation, the Constitution prescribes a certain amount
of uniformity when Congress is legislating for the States of the Union.
Territorial legislation has sometimes been challenged on the grounds
that it is dis-uniform and hence unconstitutional, but these challenges
have not succeeded.
The Constitution specifies that three kinds of legislation should
be ``uniform'' ``throughout the United States'': naturalization
legislation, bankruptcy legislation, and certain taxes (``duties,
imposts and excises'').\5\ Notwithstanding these clauses, it is well-
established that naturalization and tax legislation for the territories
need not be uniform--either with respect to legislation for States of
the Union or with respect to legislation for other territories. It
stands to reason that the Bankruptcy Clause, employing identical
language about uniformity, also does not bind Congress when it
legislates for the territories.
---------------------------------------------------------------------------
\5\ See U.S. Const., art. I, Sec. 8, cl. 1 (``The Congress shall
have power to lay and collect taxes, duties, imposts and excises, to
pay the debts and provide for the common defense and general welfare of
the United States; but all duties, imposts and excises shall be uniform
throughout the United States.''); id. Sec. 8, cl. 4 (``The Congress
shall have power to . . . establish a uniform rule of naturalization,
and uniform laws on the subject of bankruptcies throughout the United
States.'').
Tax uniformity not required for the territories: The Supreme Court
held, in the Insular Cases, that Congress was not bound by the
uniformity provision with regard to taxation when it enacted special
revenue laws applying only to Puerto Rico. As the Court later
---------------------------------------------------------------------------
summarized the rule:
``In Downes v. Bidwell, 182 U.S. 244 (1901), we held that
Congress could establish a special tariff on goods imported
from Puerto Rico to the United States, and that the requirement
that all taxes and duties imposed by Congress be uniform
throughout the United States, Art. I, Sec. 8, cl. 1, was not
applicable to the island.'' Torres, 442 U.S. at 468-69.
As Torres indicates, Downes is still good law on this point.
The tax uniformity requirement has also been held inapplicable with
regard to incorporated territories. In organizing and incorporating the
Alaska Territory, Congress ``created no legislative body'' for the
territory and so ``established a revenue system of its own, applicable
alone to that territory.'' Binns, 194 U.S. at 492. The Supreme Court
rejected a claim that these Alaska-specific license and excise taxes
enacted by Congress were required to be ``uniform'' with those
``throughout the United States.'' Id. at 487, 494-96. As the Court
noted:
``It must be remembered that Congress, in the government of the
territories . . . has plenary power, save as controlled by the
provisions of the Constitution; that the form of government it
shall establish is not prescribed, and may not necessarily be
the same in all the territories.'' Id. at 491.
Naturalization uniformity not required for the territories: The
Supreme Court has held that under the Territorial Clause or the clause
allowing Congress to admit new states into the union Congress can
accomplish the naturalization of aliens located in certain territories
and adjust their status to that of U.S. citizens. See Boyd v. Nebraska
ex rel. Thayer, 143 U.S. 135, 164-66, 168-70 (1892). The Court quoted
with approval a lower court decision that ``denied that the only
constitutional mode of becoming a citizen of the United States is
naturalization by compliance with the uniform rules established by
Congress.'' Id. at 165-66. The ``plenary power of Congress over the
territories'' can be used to collectively naturalize specific groups of
people on the terms that Congress determines. Id. at 169.
Congress has long exercised plenary authority to determine whether
residents of insular territories should be made citizens or not, and
has made distinctions between different territories. Hawaii, Puerto
Rico, Guam, and the Philippines were all acquired by the United States
in 1898, but Congress treated residents of the territories very
differently for citizenship purposes. In 1900, citizenship was granted
to essentially all Hawaiians. See Act of April 30, 1900, ch. 339,
Sec. 4, 31 Stat. 141, 141. Not until 1917 did Congress confer U.S.
citizenship on many residents of Puerto Rico. See Act of March 2, 1917,
ch. 145, Sec. 5, 39 Stat. 951, 953. Congress waited until 1940 to
comprehensively grant citizenship to residents of Puerto Rico. See
Nationality Act of 1940, ch. 876, Sec. 202, 54 Stat. 1137, 1139. Not
until 1950 did Congress extend citizenship to Guamanians. See Act of
Aug. 1, 1950, ch. 512, Sec. 4(a), 64 Stat. 384, 384. And Congress never
granted citizenship to residents of the Philippines en masse, see
Valmonte v. INS, 136 F.3d 914, 916-17 (2d Cir. 1998), though they were
eligible for naturalization if they came within the terms of generally
applicable statutes, see, e.g., Balzac v. Porto Rico, 258 U.S. 298, 308
(1922). Samoa, which was acquired by the United States in 1900, has
also seen its residents excluded from automatic U.S. citizenship. See
Tuaua v. United States, 788 F.3d 300, 302 (D.C. Cir. 2015).
Recently the Ninth Circuit confirmed that the uniformity provision
of the Naturalization Clause cannot be invoked by residents of
unincorporated territories to challenge non-uniform congressional
rules. See Eche v. Holder, 694 F.3d 1026, 1031 (9th Cir. 2012).
Other uniformity cases: When litigants from the territories have
used individual rights provisions of the Constitution to challenge
congressional legislation under the Territorial Clause for lack of
uniformity, the Supreme Court has rejected these claims. For instance,
when individual rights challenges have been raised to social benefits
legislation that treated residents of Puerto Rico differently than
residents of the states, the Supreme Court has held that Congress ``may
treat Puerto Rico differently from states so long as there is a
rational basis for its actions.'' Harris v. Rosario, 446 U.S. 651, 651-
52 (1980) (AFDC program, Fifth Amendment Due Process Clause challenge);
see also Califano v. Torres, 435 U.S. 1, (1978) (per curiam) (SSI
program) (holding that Congress could treat Puerto Rico differently
without violating the constitutional right to travel ``[s]o long as its
judgments are rational, and not invidious''). This kind of rational
basis review is exceedingly deferential to the government. See, e.g.,
FCC v. Beach Commc'ns, Inc., 508 U.S. 307, 314-15 (1993).
iii. conclusions
As a general matter, Congress needs only one constitutional grant
of power upon which to enact legislation. And if the legislation meets
the requirements of one grant, it does not matter if other possibly
applicable grants do not support the legislation. See, e.g., United
States v. Morrison, 529 U.S. 598, 607, 619 (2000).
It is true that the Supreme Court has held that, although general
principles governing the reach of the Commerce Clause would allow
Congress to enact bankruptcy legislation on that basis, Congress should
not be allowed to use the Commerce Clause ``to enact nonuniform
bankruptcy laws,'' because that ``would eradicate from the Constitution
a limitation on the power of Congress to enact bankruptcy laws.''
Railway Labor Executives' Ass'n, 455 U.S. at 468-69.
The Supreme Court was not addressing and did not consider
legislation governing the territories when it made that statement, and
the case law and legal principles discussed above suggest that the
Court's concerns about an end run around limitations on congressional
power should not apply to the situation at hand, where Congress could
act under the Territorial Clause.
The Territorial Clause is not an end run around anything. It is a
specially crafted constitutional power designed to allow Congress to
flexibly address the myriad practical problems of governing the
territories, and to tailor its legislation to the unique circumstances
of each territory. In many ways, the entire point of the Territorial
Clause is to allow Congress to do things that it cannot otherwise do
under Article I. That is how the clause has been consistently used by
Congress and interpreted by the Supreme Court over the centuries.
In my judgment, the newly released draft legislation is within
Congress's power under the Territorial Clause, which is not limited by
the uniformity requirement of the Bankruptcy Clause.
That conclusion is supported by the recent decision in Franklin
California Tax-Free Trust v. Puerto Rico, 805 F.3d 322 (1st Cir. 2015),
in which two judges of the First Circuit opined that Congress could
enact debt adjustment legislation specifically for Puerto Rico under
its plenary power under the Territorial Clause. See id. at 337. One
judge disagreed with this conclusion, however. See id. at 346-48
(Torruella, J., concurring in judgment). The Supreme Court has granted
cert in this case, see Acosta-Febo v. Franklin California Tax-Free
Trust, 136 S. Ct. 582 (2015), but it is not generally thought that the
Court's decision is likely to address Bankruptcy Clause uniformity
issues.
Thank you again for the opportunity to testify about this bill.
*****
Supplementary Testimony from Mr. Kent
Fordham University School of Law
New York, New York
April 20, 2016
Hon. Rob Bishop, Chairman,
House Committee on Natural Resources,
1324 Longworth House Office Building,
Washington, DC 20515.
Re: H.R. 4900, the Puerto Rico Oversight, Management, and Economic
Stability Act (PROMESA)
Dear Chairman Bishop and members of the committee:
Thank you for inviting me to testify on April 13, 2016 on the
constitutionality of the new draft of the Puerto Rico Oversight,
Management, and Economic Stability Act (PROMESA). As you know, current
federal bankruptcy law does not provide either a voluntary or
involuntary debt adjustment process for U.S. states or territories.
PROMESA would create such a process for territories. At the hearing,
questions were asked about whether a debt adjustment bill similar to
PROMESA could be enacted for U.S. state governments. I was asked to
submit a letter amplifying my testimony about that topic, in particular
focusing on the Contracts Clause of the U.S. Constitution.
As I understood the thrust of several questions, there might be
concern about whether a debt adjustment law for territories, such as
the current draft of PROMESA, could create a precedent for a bankruptcy
bill for states. The constitutional considerations regarding
congressionally-authorized debt adjustment for territories, like Puerto
Rico, and debt adjustment for U.S. states are starkly different. So
different that, in my view, PROMESA would not create constitutional
precedent for a debt adjustment statute for states.
Territories and states are fundamentally distinct in our
constitutional system. ``[U]nder our federal system, the States possess
sovereignty concurrent with that of the Federal Government, subject
only to limitations imposed by the Supremacy Clause.'' Gregory v.
Ashcroft, 501 U.S. 452, 457 (1991) (quotation marks omitted). ``[T]he
preservation of the States, and the maintenance of their governments,
are as much within the design and care of the Constitution as the
preservation of the Union and the maintenance of the National
government. The Constitution, in all its provisions, looks to an
indestructible Union, composed of indestructible States.'' Id. (quoting
Texas v. White, 7 Wall. 700, 725 (1869)).
State sovereignty limits Federal power in a variety of important
ways. See, e.g., U.S. Const., art. X (``The powers not delegated to the
United States by the Constitution, nor prohibited by it to the states,
are reserved to the states respectively, or to the people.''); id. art.
XI (``The judicial power of the United States shall not be construed to
extend to any suit in law or equity, commenced or prosecuted against
one of the United States by citizens of another state, or by citizens
or subjects of any foreign state.''). Congressional power, when
legislating for the states of the union, is limited to certain
enumerated and implied topics of national concern.
By contrast, the Constitution empowers Congress to ``make all
needful rules and regulations respecting the territory or other
property belonging to the United States.'' U.S. Const., art. IV,
Sec. 3. Unlike U.S. states, territories are not constitutional
sovereigns whose existence, structure, and powers are protected from
Federal infringement by the Constitution. Over a territory or
dependency ``the Nation possesses the sovereign powers of the general
government plus the powers of a local or a state government in all
cases where legislation is possible.'' Cincinnati Soap Co. v. United
States, 301 U.S. 308, 317 (1937). Thus, ``[t]he powers vested in
Congress by'' the Territorial Clause ``to govern Territories are
broad,'' Examining Bd. of Engineers, Architects, & Surveyors v. Flores
de Otero, 426 U.S. 572, 586 n.16 (1976), ``plenary,'' Binns v. United
States, 194 U.S. 486, 491 (1904), and even ``practically unlimited,''
Cincinnati Soap Co., 301 U.S. at 317.
As my written testimony for the April 13, 2016 hearing indicates, I
believe that Congress has authority under Territorial Clause of Article
IV to enact the PROMESA bill. But if Congress acting under Article I
powers were to amend the bankruptcy code to allow either voluntary or
involuntary debt adjustment for U.S. states, very serious questions
would be raised about constitutionality. I cannot say definitively that
such a statutory scheme would be found unconstitutional--extant Supreme
Court case law does not allow that kind of precision, and the
membership of the Court will likely be changing in the next year or
so--but there is certainly a great risk of unconstitutionality.
The first question would be whether Congress has enumerated or
implied power to enact bankruptcy legislation for state governments.
The Constitution's Bankruptcy Clause provides that ``The Congress shall
have power to . . . establish . . . uniform laws on the subject of
bankruptcies throughout the United States.'' U.S. Const., art. I,
Sec. 8, cl. 4. The Supreme Court has never been squarely confronted
with the question whether this power allows bankruptcy legislation for
state governments. Certainly we can say, though, that the members of
the Founding generation who drafted and voted to adopt this language
did not contemplate that Congress would be legislating with regard to
state governments. See Emily D. Johnson & Ernest A. Young, The
Constitutional Law of State Debt, 7 Duke J. Const. L. & Pub. Pol'y 117,
155-56 (2012); Thomas Moers Mayer, State Sovereignty, State Bankruptcy,
and a Reconsideration of Chapter 9, 85 Am. Bankr. L.J. 363, 367 (2011).
But even if the Bankruptcy Clause could not support such legislation,
Congress arguably would find sufficient power under the Interstate
Commerce and Necessary and Proper Clauses of Article I of the
Constitution. But cf. Railway Labor Executives' Ass'n v. Gibbons, 455
U.S. 457 (1982) (holding that Congress cannot do an end run around the
uniformity requirement of the Bankruptcy Clause by legislating under
the Commerce Clause).
A second question is whether state bankruptcy legislation would
violate the Tenth Amendment and related principles protecting state
sovereignty. In the 1930s, the Supreme Court held that a 1934 Federal
bankruptcy law for municipalities that allowed bankruptcy courts to
impair the control of state governments over the fiscal affairs of
their municipal subdivisions was not constitutional, see Ashton v.
Cameron County Water Improvement Dist. No. 1, 298 U.S. 513, 528-29
(1936); id. at 539 (Cardozo, J., dissenting), while the 1937 amendment
that both required state consent and sufficiently protected state
sovereignty was constitutional, see United States v. Bekins, 304 U.S.
27, 49-51 (1938).
These two decisions are widely understood to have suggested that,
to pass constitutional muster, any Federal bankruptcy regime that would
apply to states would need to meet two requirements: states would need
to consent (the process would need to be entirely voluntary), and the
statute would need to prevent Federal bankruptcy courts from
undermining state autonomy and sovereignty over taxing, spending, and
other core sovereign matters. See, e.g., Michael E. McConnell,
Extending Bankruptcy Law to States, in When States Go Broke: The
Origins, Context, and Solutions for the American States in Fiscal
Crisis 229, 230 (Peter Conti-Brown & David A. Skeel, Jr., eds.,
Cambridge Univ. Press 2012); Mayer, supra, at 374-75.\1\
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\1\ Federal bankruptcy for states without state consent might also
be unconstitutional under the Eleventh Amendment and principles of
state sovereign immunity. The Supreme Court has not directly answered
this question, and its case law has given inconsistent signals. Compare
Seminole Tribe v. Florida, 517 U.S. 44 (1996) (holding that Congress
may not abrogate state sovereign immunity under Article I powers) and
Central Virginia Community College v. Katz, 546 U.S. 356 (2006)
(holding that state sovereign immunity did not bar a bankruptcy court
from voiding a preferential transfer from a private debtor to a state
instrumentality). See generally Johnson & Young, supra, at 159-60;
Mayer, supra, at 368.
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Ashton and Bekins thus suggest that a mandatory oversight authority
for states--akin to that found in PROMESA--could be subject to fatal
constitutional objections. See David A. Skeel, Jr., States of
Bankruptcy, 79 U. Chi. L. Rev. 677, 731 (2012). But even a purely
voluntary bankruptcy process that attempted to respect state
sovereignty could run into constitutional problems under the Tenth
Amendment and principles of state sovereignty articulated in Ashton and
Bekins. First, ``viewed realistically, state bankruptcy would cut
deeply into the inherently sovereign powers of the statute over
taxation and expenditure,'' transferring at least some control over
those matters to a bankruptcy court. See McConnell, supra, at 233-34.
In other words, it would be hard to design a process that in fact
avoided all interference with a state's core fiscal functions.
Second, more recent Supreme Court case law raises questions about
whether state consent could cure Tenth Amendment concerns about Federal
impairments of state sovereignty via a bankruptcy regime. The ``anti-
commandeering'' case law bars Congress from ``require[ing] the states
to govern according to Congress' instructions,'' New York v. United
States, 505 U.S. 144, 162 (1992), even if the state consents, see id.
at 180-82. Federal legislation that commands state legislatures to
regulate according to Federal instructions disrupts the accountability
of local officials to their local electorates and hence undermines the
constitutional plan. See id. at 168-69. The Supreme Court has also
reiterated that constitutional limits on Federal action arising from
federalism concerns and the Tenth Amendment protect structural
interests and individual liberty, not just state sovereignty, see,
e.g., id. at 181-82; Bond v. United States, 131 S. Ct. 2355, 2364
(2011), casting further doubt on whether state consent could cure an
otherwise unwarranted invasion of state sovereignty. See McConnell,
supra, at 234-35. If state consent is not effective, it is possible
that even purely voluntary state bankruptcy would be unconstitutional,
to the extent that it impaired the sovereignty and autonomy of state
governments.
A third and final question is whether the Constitution would
prohibit the impairment of state government contracts--for example,
with bondholders--through a Federal debt adjustment process overseen by
a bankruptcy court. The Contracts Clause provides that ``No State shall
. . . pass any . . . law impairing the obligation of contracts.'' U.S.
Const., art. I, Sec. 10, cl. 1. It might be said that no Contracts
Clause problem would be posed by a congressional statute authorizing
state bankruptcy, see Steven L. Schwarcz, A Minimalist Approach to
State ``Bankruptcy,'' 59 U.C.L.A. L. Rev. 322, 337 (2011), because the
Federal Government is not covered by the Contracts Clause, which
expressly applies to ``State[s]'' only, see Hanover Nat'l Bank v.
Moyses, 186 U.S. 181, 188 (1902). But if Tenth Amendment concerns,
discussed above, require that the state consent to the Federal
bankruptcy process and to any court orders stemming from it, then it
would not only be Congress but arguably the state also that would be
choosing and authorizing actions that impaired state contracts. Thus
the Contracts Clause could come into play.
The Supreme Court's 1930s cases about municipal bankruptcy and
state sovereignty do not answer all questions about the Contracts
Clause as applied to a hypothetical statute authorizing state
bankruptcy. The Ashton decision, about the 1934 law, suggested that
states would violate the Contracts Clause by consenting to a
congressional bankruptcy scheme that impaired state contractual
obligations. See 298 U.S. at 531. But Bekins, the subsequent decision
about a very similar statute, the 1937 amendment, did not discuss any
Contracts Clause issues, perhaps suggesting that the Supreme Court had
sub silentio reversed itself on the issue.
Under modern Contracts Clause jurisprudence, ``impairment of a
state's own contracts would face more stringent examination . . . than
would laws regulating contractual relationships between private
parties.'' Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244
n.15 (1978). State laws regulating existing contractual relations must
have ``a legitimate public purpose. A state could not adopt as its
policy the repudiation of debts. . . .'' United States Trust Co. of New
York v. New Jersey, 431 U.S. 1, 22 (1977) (quotation marks omitted).
The courts must guard against ``the state's self-interest'' leading it
to abuse contracting partners. Id. at 26. Impairments of contract
rights must be ``reasonable and necessary to serve an important public
purpose.'' Id. at 25. The greater and more permanent the impairment to
contract rights, the less likely it is to be constitutional. See, e.g.,
Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 425, 430, 433,
441 (1934). Similarly, if contract rights were more theoretical than
real to begin with, a subsequent impairment by the state is less likely
to be proscribed by the Constitution. See Faitoute Iron & Steel Co. v.
city of Asbury Park, 316 U.S. 502, 510-13 (1942) (holding that
bondholders' ability to sue defaulting municipalities under preexisting
law was an empty ``right to pursue a sterile litigation'' and the
challenged state law allowing municipal debt restructuring did not
violate the Contracts Clause).
It cannot be predicted with certainty how voluntary state
bankruptcy allowed by a congressional statute would be treated under
the Contracts Clause by the Supreme Court applying the doctrines
described above. A lot could depend on details--for instance, did the
bankruptcy process impose significant ``haircuts'' on the principal
owed to bondholders, or did it merely extend the payment period by a
reasonably short amount of time. The former would be more likely
unconstitutional than the latter.
The Supreme Court's case law under the Fifth Amendment also
protects against impairment of contract rights. ``The Supreme Court has
made clear that retroactive legislation that affects valid property
interests raises problems under both'' the Takings Clause and the Due
Process Clause of the Fifth Amendment. Johnson & Young, supra, at 144
(discussing Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)). As with
the Contracts Clause, it is uncertain how a hypothetical congressional
statute for state bankruptcy would fare under the Fifth Amendment, and
the outcome of judicial review would depend significantly on the
particular details of the legislation and any challenged court orders
issued pursuant to it.
In sum, a congressional statute allowing state government
bankruptcy would raise a number of serious constitutional issues,
implicating unsettled areas of Supreme Court doctrine. In my judgment,
there is a real risk that either the legislation itself or particular
applications of it by bankruptcy courts would be found
unconstitutional. By contrast, as my April 13 testimony indicated, I
believe that PROMESA rests on a firm constitutional foundation.
Sincerely,
Andrew Kent, Professor of Law
Fordham University School of Law.
______
The Chairman. Thank you.
Next, Mr. Kirpalani.
STATEMENT OF SUSHEEL KIRPALANI, PARTNER, QUINN EMANUEL
URQUAHART & SULLIVAN, NEW YORK, NEW YORK
Mr. Kirpalani. Thank you, Chairman Bishop, Ranking Member
Grijalva, and members of the committee, as well as your
dedicated staff, who have worked many nights and weekends to
get us to this place. Thank you for having me participate in
this important issue for our country. It is truly an honor to
be here.
My name is Susheel Kirpalani. I am a partner at Quinn
Emanuel in New York, and I am a creditors' rights lawyer. I am
here to testify about fair restructuring laws and principles
and whether the bill for Puerto Rico has the hallmarks of
fairness and upholding the rule of law consistent with U.S.
precedent.
I have been practicing creditors' advocacy for over 20
years. I represented creditors in the two largest municipal
bankruptcy cases in the United States--Jefferson County,
Alabama, and Detroit, Michigan. I have also represented the
largest statutory creditors committees in Chapter 11 cases in
the Lehman and Enron bankruptcies. I also served as a court-
appointed mediator trying to solve myriad disputes among
stakeholders in a multi-billion-dollar case.
Here, I represent COFINA creditors. COFINA is the largest
bond issuer in Puerto Rico. When you think about Puerto Rico
and you hear numbers like $70 billion of borrowed-money debt
and $40 billion of pension debt, out of the $70 billion, COFINA
is $17 billion. If you take out the utilities, you are left
with $40 billion of borrowed-money debt apart from the
utilities, the electric power, and the water system. So, $17
billion out of $40 billion is COFINA. It is the largest issuer
of bonds in Puerto Rico, and they are secured creditors
protected by property rights under both the U.S. Constitution
and the Puerto Rico Constitution.
My clients include individuals who are retired or semi-
retired as well as asset managers that invested in these
safest, most secure bonds. This is how we are different from
other bondholders: we are backed by the sales taxes of Puerto
Rico. So, although creditors like the ones I represent
certainly want to see their debts repaid, our interests are
aligned with the people of Puerto Rico, because if they cannot
afford to go out every day and buy things they need for their
families, we can never get repaid. And if they leave home and
move to the mainland states, we can never get repaid. So, our
interests are truly aligned.
There are universal principles of any fair restructuring
law: stay litigation, uphold creditor expectations, uphold the
rule of law, and protect property rights as determined by the
local law. If we want to stabilize Puerto Rico under U.S.
principles, you need to respect U.S. traditions. This is not
Greece. We have our own rules based on 100 years of Supreme
Court jurisprudence.
My wife loves a show called ``MythBusters.'' I don't know
if anybody has seen that, but there are two myths that I would
like to dispel today. The first, which I have seen on
television--I am sure some of you have seen that or your
families have seen that--that this is a bailout. This is not a
bailout. This involves no U.S. taxpayer money, this bill. The
second one is that this is ``Super Chapter 9.'' I have a lot of
experience with Chapter 9. This is no Chapter 9.
The problem with Chapter 9 is the law allows the local
government to retain absolute control over its finances, its
revenues, and its decisionmaking on which debts to pay and
which debts not to pay. So, if you think about it, a local
government is usually going to try to respect its electorate
and the local interests, which is harmful to the municipal bond
market. The difference here, of course, is the control board,
and that difference is quite significant and makes it
absolutely immune from being confused with Chapter 9.
This bill is the right framework for debt-restructuring
laws under U.S. traditions and, critically, it will actually
encourage voluntary agreements by creditors. We have gone on
record publicly supporting Chairman Bishop's efforts, as well
as the efforts of House leadership. Other creditors have not.
We actually have no problems with other creditors, whether
they are general obligations creditors or the lowest tier of
unsecured bondholders of the Commonwealth, but some of those
creditors have regrettably engaged in negative advertising just
to obstruct you from trying to do this very difficult job.
We think this is the right bill, and we appreciate the
opportunity to answer any questions that you might have.
Thank you.
[The prepared statement of Susheel Kirpalani follows:]
Prepared Statement of Susheel Kirpalani, Partner, Quinn Emanuel
Urquahart & Sullivan, New York, New York
Thank you for inviting me to testify on the bill proposed by
Chairman Bishop for bespoke legislation needed to address Puerto Rico's
financial crisis. I am honored to be here.
background
My name is Susheel Kirpalani. I am the Chairperson of the
Bankruptcy and Restructuring Group at the law firm Quinn Emanuel
Urquhart & Sullivan, LLP. For more than 20 years, I have practiced
exclusively in the area of creditors' rights. Beginning in the late
1990s, I have primarily represented creditors in debt restructurings
driven by unanticipated financial collapse, typically as a result of
questionable accounting practices, lack of transparency in financial
reporting, and over-leveraged balance sheets. These restructurings
include: Enron Corporation; Refco Inc.; and Lehman Brothers. In each
matter, I represented the statutory committee of unsecured creditors--a
fiduciary body appointed by the bankruptcy division of the U.S.
Department of Justice to protect creditor rights and priorities. In
2012, I was appointed to serve as the examiner and mediator for
stakeholders of Dynegy Holdings, the Houston-based energy company that
once tried to save Enron, and which filed for Chapter 11 with a ``pre-
arranged plan'' that subverted creditor priorities.
I also have relevant experience from the two largest Chapter 9
bankruptcy cases in history--Jefferson County, Alabama and Detroit,
Michigan. In Jefferson County, I spent over 3 years working with the
largest insurer of sewer system bonds to successfully restructure and
reduce the system's overblown debt load to match the ability of the
citizens of Jefferson County to repay ballooning debts incurred by
corrupt public officials.
With respect to Puerto Rico's financial crisis, for the past 10
months, I have been representing a coalition of creditors made up of
retirees and individual investors as well as asset managers GoldenTree
Asset Management LP, Merced Capital LP, Tilden Park Capital Management,
Whitebox Advisors LLC, and others. These creditors invested primarily,
if not exclusively, in the safest and most secure senior bond
investment Puerto Rico offered known as COFINA.\1\ COFINA is a Spanish-
language acronym for the Puerto Rico Sales Tax Financing Corporation
created at the outset of Puerto Rico's fiscal crisis in 2006, in the
wake of the Commonwealth government's shutdown for 2 weeks, which left
500,000 school children without a place to study and over 100,000
public employees without pay.\2\ COFINA was created to insulate
creditors from the lack of transparency and political and credit risk
relating to the Commonwealth's general fund.\3\ Similar to other public
and private bonds, COFINA is a form of securitization, in which a
specific revenue stream is transferred or pledged to support bond
issues by a separate legal entity. Securitizations significantly reduce
costs of borrowing money by separating a revenue stream from an
entity's credit profile. Today, COFINA is the largest debt issuer in
Puerto Rico, with approximately $17 billion of secured bonds
outstanding, including more than $7 billion of senior bonds and more
than $9 billion of subordinated bonds.
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\1\ See, e.g., Janney Fixed Income Strategy, June 29, 2010,
available at http://www.janney.com/file%20library/
muni%20sector%20scorecard/cofina%206-29-10.pdf (``COFINA is the
strongest Puerto Rico issuer from a credit standpoint. The sales tax
revenue bonds have a secure foundation, based on a broad based sales
tax and a strong legal framework'').
\2\ Puerto Rico Closes Government Offices, Schools Amid Fiscal
Crisis, USA Today, May 1, 2006, available at http://
usatoday30.usatoday.com/news/nation/2006-05-01-puertorico_x.htm.
\3\ Standard & Poor's, Puerto Rico Sales Tax Fin. Corp.; Sales Tax,
May 18, 2009, at 2-3.
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COFINA bonds--held by many U.S. retail investors and pension
recipients--are supported by a dedicated sales and use tax protected
under both the U.S. and Puerto Rico constitutions. Given that the
revenues for COFINA are dependent on sales activity on island, COFINA
bondholders want to help craft a solution to Puerto Rico's fiscal
crisis that helps drive on-island commerce, empowers Puerto Rico's
economy, and stops the population flight to the states.
the need for federal legislation
Puerto Rico simply cannot pay all of its debts. The crippling debt
service Puerto Rico heaped upon itself is suffocating the economy now a
decade into recession. Young Puerto Ricans have figured out how to
escape the debt burden, and are now migrating to the mainland United
States in large numbers, accelerating the shrinkage of Puerto Rico's
economy, and further concentrating the debt burden on the citizens and
businesses that remain on the island. This is now forcing Puerto Rico
to take ad hoc and extraordinary actions that abuse creditors' rights.
Puerto Rico recently enacted a debt moratorium law that grants its
governor absolute power to choose to pay or not pay any public debts.
One of the three challenges made to the constitutionality of Puerto
Rico's ability to enact restructuring legislation is currently before
the U.S. Supreme Court. It can be anticipated that there will also be
constitutional challenges to the debt moratorium law. I previously
believed that the need for Congress to intervene was already evident,
but it has become urgent if there is to be any hope of an orderly
process that respects property rights and the rule of law, stems out-
migration, restores Puerto Rico to health, and avoids the risk of a
taxpayer-funded bailout down the road.
fair debt adjustment laws
Title III of PROMESA is entitled ``Adjustment of Debts.'' This
title designs a set of rules that would apply to any impairment of
rights of a creditor of Puerto Rico or any of its instrumentalities.
Although not a part of Title 11 of the United States Code (the
``Bankruptcy Code''), Title III of PROMESA borrows some battle-tested
rules contained in the Bankruptcy Code, which were shaped by over 100
years of U.S. jurisprudence on the constitutional limits of Federal
power over private rights. As such, these rules form the core of
American creditor expectations in the event a borrower becomes unable
to repay its debts.
The first step of understanding any restructuring regime is to ask
which creditor claims will potentially be subject to adjustment. In
recognition of the reality that most of the near-term strain on Puerto
Rico is at the general fund level, Puerto Rico's own recently passed
debt moratorium law applies to all issuers of public debt, including
the Commonwealth itself. Moreover, Puerto Rico's general obligations or
``GO'' bondholders assert a superior right to be paid from resources
available to the treasurer of Puerto Rico and maintained in the general
fund of Puerto Rico before other public debts of the Commonwealth can
be paid.\4\ The extent of this priority has never been examined by the
Supreme Court of Puerto Rico and resolution of that issue by agreement
or adjudication will figure prominently in any adjustment of debts of
the Commonwealth. Due to the competing claims of creditors from the
same ultimate source of repayment--Puerto Rican taxpayers--any
restructuring of Puerto Rico is a zero-sum game because the
population's resources are limited and will be further limited if out-
migration continues or economic growth does not resume.\5\ In my
experience representing creditors' committees in the largest Chapter 11
cases in history, and having served as a court-appointed mediator, I
believe the only way to build a global consensual compromise free from
challenge is for every stakeholder group to roll up their sleeves and
participate in good-faith negotiations and, failing a voluntary
agreement among all groups, to resolve the priority of competing
creditor rights in a judicial proceeding. Artificially excluding
significant creditor groups from a restructuring regime will lead to
protracted litigation, constitutional challenges, and delays to finding
a solution, which would only serve to destroy economic value on the
whole, and exacerbate creditor losses.
---------------------------------------------------------------------------
\4\ Puerto Rico Const., Art. VI, Sec. 8.
\5\ For a quick thumbnail on the reasons for Puerto Rico's fiscal
crisis, see Michelle Kaske and Martin Z. Braun, Puerto Rico's Slide,
April 6, 2016, available at http://www.bloombergview.com/quicktake/
puerto-ricos-slide.
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Fundamental to U.S. creditors' rights law is the provision of a
``breathing spell'' for the debtor that cannot pay--in the form of an
automatic stay of creditor enforcement actions--followed by a
``discharge'' or ``fresh start'' while respecting creditor priorities
and ensuring property rights are not taken for the greater good without
just compensation. In reality, this stay of creditor rights actually
may enhance creditor recoveries by (1) removing the ability to race to
the courthouse and obtain preferential treatment, which would otherwise
favor well-heeled sophisticated institutions to the detriment of
individuals and other creditors at large, and (2) allowing the
beleaguered borrower to stabilize and rehabilitate its financial
condition and future prospects without the resource drain and
distraction of a rash of lawsuits. And if the debtor abuses the stay
by, for example, failing to negotiate in good faith, creditors can seek
to have the stay lifted.
The goals of any fair and effective restructuring regime should be
to protect creditor expectations to the greatest extent practicable and
to ensure any necessary taking of private property for public purposes
is in exchange for just compensation. The means of achieving these
goals are as follows: (1) restructure balance sheets and set budgets on
a debtor-by-debtor basis; (2) establish classes of creditors in a fair
and common-sense manner--in other words, insist that only
``substantially similar'' claims with similar legal and contractual
rights against the same borrower are grouped together, fully
recognizing the secured and priority status of some creditors; (3)
solicit the votes of creditors in a fair way, consistent with due
process of law including by providing adequate information to make a
decision about any proposed adjustment; (4) treat each class of
creditors according to its members' legal and contractual priorities,
as determined by the local law governing the borrower and its
relationship with creditors; and (5) ensure that a restructuring is in
the ``best interests of creditors'' by mandating that creditors receive
at least as much as they would have received in the absence of Federal
intervention. Although the Bankruptcy Code has not always accomplished
these strict goals, particularly in the context of municipal bankruptcy
where the locality retains plenary and exclusive control over its
finances and proposing a debt adjustment plan, the provisions of the
Bankruptcy Code contain state-of-the-art rules that are the envy of
much of the world's less-developed financial markets and legal
systems.\6\
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\6\ In the aftermath of Dubai's real estate crisis, in 2009, I was
retained by the quasi-sovereign entity, Dubai World, to participate in
the drafting of Dubai's first-ever restructuring law. Hopeful to
restore confidence and credibility, it was the consensus among all
involved that United States laws in this area achieved the best
outcomes for creditors and, as a result, re-establishment of creditor
confidence and market re-entry. Several features of U.S. law were
borrowed in the enactment of Decree 57 of Dubai, which paved the way to
achieve billions of dollars of relief through voluntary agreements with
the backstop of a judicial system, only if needed.
---------------------------------------------------------------------------
collective action and the ability to bind holdouts
It is a given that if unanimous consent by all stakeholders were
required to confirm a debt adjustment plan, it would be impossible to
ever achieve a voluntary compromise. For example, different people have
different risk tolerance, a greater or lesser penchant for litigation,
and some may prefer an expedient solution that minimizes cost but
delivers recovery in the shortest amount of time. Accordingly, even the
most ``voluntary'' of collective action rules recognize the need to
bind holdouts who may otherwise seek to extract additional value for
themselves even if it means risking value for all. So, it has been a
constant feature of restructuring laws in the United States to permit
the restructuring of an entire class of debt as long as a majority in
number and two-thirds in dollar amount support the deal. This is not
``cramdown,'' and is simply the American style of ``collective action''
within each specific class. PROMESA has this feature.
But the question occasionally arises when an entire class of
creditors seeks to hold out for more than its members are legally
entitled, and those creditors' unwillingness to accept their fair share
prevents all other classes of creditors from moving forward. This rare
scenario is when the ``cramdown'' rule found in section 1129(b) of the
Bankruptcy Code must be invoked. I believe the ability to bind holdouts
is a reasonable and necessary component of any effective restructuring
authority. In my view, having the ability to bind holdouts if they
engage in brinkmanship is the only way to get everyone to the table and
have any hope of a voluntary agreement. It also promotes predictable
outcomes, which is of paramount importance to creditors. Omitting this
critical feature, which protects all other classes of creditors who do
wish to voluntarily restructure their debts, would lead to
unpredictable behavior and discourage consensual arrangements. It is
tantamount, in other words, to handing a gun to junior creditors with
which they can hold up senior creditors for value in excess of their
legal rights or that which they could hope to achieve under current
law. Cramdown is a term of art for ensuring that creditor treatment
complies with the ``absolute priority'' rule, a legal concept that has
been a critical part of U.S. restructuring jurisprudence since at least
the 1898 Bankruptcy Act. When used properly and in accordance with
strict Congressional mandates, cramdown ensures the fairness of the
restructuring process.
The National Bankruptcy Conference, a non-partisan organization of
60 of the Nation's leading bankruptcy scholars, recently had this to
say about the ``Discussion Draft'' of PROMESA:
The Conference believes that granting a Title III debtor the
power to confirm a plan of adjustment over the rejection of the
plan by an impaired class of creditors-including one comprising
holders of bond debt-is critical to the success of a Title III
case. Without cramdown, Title III would provide a dissenting
class with absolute veto power over a plan of adjustment. The
various protections afforded nonconsenting classes such as the
prohibition against unfair discrimination as well as the
incorporation of the absolute priority rule in sections
1129(b)(2)(A) and 1129(b)(2)(B), level the negotiation playing
field, and should serve to encourage both sides to reach
agreement, which is a stated goal of the House Committee on
Natural Resources.\7\
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\7\ Comments on the Discussion Draft of an Act Entitled ``Puerto
Rico Oversight, Management, and Economic Stability Act,'' available at
http://newnbc.wpengine.com/wp-content/uploads/2015/07/2016-April-8-NBC-
Statement-on-PROMESA.pdf (emphasis added).
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the perils of chapter 9 and the myth of ``super chapter 9''
Select bond investors have lobbied hard against PROMESA, including
through the placement of targeted advertisements in members' districts,
suggesting it is some form of ``Super Chapter 9'' because it
incorporates provisions of the Bankruptcy Code. This is misleading and
misguided. PROMESA is not an amendment to the Bankruptcy Code, and in
fact implements significant changes from Chapter 9 that are
specifically designed to ensure Federal oversight and the fair
treatment of creditors. Nor could PROMESA's territory-specific
provisions ever be ``contagious'' to the states. The reason is the
Tenth Amendment of the U.S. Constitution. The Tenth Amendment is a
recognition of our dual sovereign form of government--that it is the
various states that created the Federal Government. By contrast, under
the Territories Clause of the U.S. Constitution, the Federal Government
has plenary authority to enact needful rules and regulations respecting
the unincorporated territories.
Chapter 9 has led to failed creditor expectations because local,
elected officials remain in control and can lawfully use the stay to
prevent creditor enforcement while retaining discretion as to which
debts to honor during the bankruptcy case. Moreover, the elected
officials have exclusive authority to formulate a plan and could use
that authority to favor local interests.\8\ By the time the plan is
presented to creditors, bondholders may have no choice but to cry uncle
because they have no ability to force repayment and no recourse to an
impartial decisionmaking body. All they can do at that late stage is
object to the plan, vote against it, and hope the bankruptcy judge
forces the debtor to go back to the drawing board. The inherent
unfairness in that process is the necessary byproduct of balancing
state sovereignty with the desire for Federal legislation to
restructure a municipality's debts. The initial version of bankruptcy
law designed by Congress for state municipalities in 1934 was held
unconstitutional 2 years later as violating the Tenth Amendment.\9\ The
``sweeping character of the holding of the Supreme Court'' called for a
far lighter touch--one that offers debt adjustment tools to a
municipality upon election by the state but on the condition that the
state retained full control over all its municipality's political or
governmental powers, and the Federal court was unable to interfere with
a municipality's property and revenues. The revised statute was upheld
by the Supreme Court \10\ and is the predecessor to modern-day Chapter
9.
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\8\ See Recent Municipal Bankruptcies Provide Greater Clarity on
Outcomes for Investors, Moody's Investor Services, Sector-In-Depth,
Feb. 25, 2016 (``Given the choice between cutting retiree liabilities
(pensions and OPEBs) and [bond] debt, local governments may choose to
impair debt more severely than pensions and OPEBs.'').
\9\ See Ashton v. Cameron County, 298 U.S. 513, 536 (1936) (``If
obligations of states or their political subdivisions may be subjected
to the interference here attempted, they are no longer free to manage
their own affairs; the will of Congress prevails over them . . . And
really the sovereignty of the state, so often declared necessary to the
Federal system, does not exist.) (citing McCulloch v. Maryland, 4
Wheat. 316, 430).
\10\ See United States v. Bekins, 304 U.S. 27, 51 (1938) (``The
[revised] statute is carefully drawn so as not to impinge upon the
sovereignty of the state. The state retains control of its fiscal
affairs.'').
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In stark contrast, PROMESA does not leave unfettered control over
fiscal matters to the Governor and Legislative Assembly in Puerto Rico.
Unconstrained by the Tenth Amendment because Puerto Rico is not a
state, pursuant to the Territories Clause, PROMESA would install a non-
political oversight board--which Congress will play a significant role
in selecting--to ensure that local interests are not favored over long-
distance creditors, and that decisions on issues of greatest concern to
creditors are overseen and approved by a dispassionate, disinterested
board. Significantly, only the oversight board would be able to propose
a plan of adjustment for creditor vote and judicial approval. This is a
profound difference with Chapter 9, in which it is the debtor that
determines when to file.
Moreover, while Chapter 9 led to failed creditor expectations in
the case of Detroit, commentators have correctly observed that the
fault was not with the rules of the Bankruptcy Code as much as with the
bankruptcy judge who generously interpreted its flexibility.\11\ If
applied correctly, the Bankruptcy Code ``removes the risk that a debtor
will pick and choose which obligations to pay, and it ensures that
creditors' priorities will be honored.'' \12\ The practicalities of
Chapter 9--including the sovereignty point just discussed--make it
inappropriate for Puerto Rico, particularly given the heavy interest of
distant, state-side investors in Puerto Rican debt.
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\11\ David Skeel, Fixing Puerto Rico's Debt Mess, The Wall St.
Journal, Jan. 5, 2016 (``[T]he rule of law took a beating in the
Detroit bankruptcy . . . Steven Rhodes, the Federal bankruptcy judge in
the Detroit case, instead concluded that the requirement was met as
long as the plan satisfied his conscience'').
\12\ Id.
It is unclear whether PROMESA utilizes the Federal Bankruptcy Court
system. There is a reference in section 306 of the bill to 28 U.S.C.
Sec. 157, which permits the District Courts to refer matters to
bankruptcy judges, and in section 309 to 28 U.S.C. Sec. 158(a), which
governs appeals from Bankruptcy Courts. Bankruptcy judges serve for 14-
year terms and derive their power from Article I of the Constitution.
As such, they do not have life tenure and cannot without consent of the
parties exercise the judicial power of the United States, except for
certain ``core bankruptcy'' areas. Congress may want to consider
whether an event as significant as a territorial restructuring,
pursuant to the Territories Clause, should be heard by the Federal
District Courts which exercise the judicial power of the United States
pursuant to Article III of the Constitution. There may be issues that
arise in a territorial restructuring that some creditors may challenge
the Bankruptcy Court's power to hear and determine. Requiring that
cases under Title III of PROMESA be heard in the District Court would
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further distinguish the regime from Chapter 9.
Unlike Chapter 9, the oversight board has authority to move the
venue to a district outside the affected region if necessary.
provisions to further protect creditor expectations and respect
territorial law
The rules for classifying only ``substantially similar'' claims
together and ensuring a plan treats creditors ``fairly and equitably''
and does not ``discriminate unfairly'' are bedrock principles of
American law. Given the potential for creative interpretation of those
phrases, however, Congress should consider giving stricter definitional
certainty to protect creditor expectations that the laws and agreements
governing their claims will be respected and not tossed aside based on
one judge's views of what is fair at the time. Imposing stricter
definitional certainty would, with respect to Puerto Rico, make it
impossible to classify GO bonds with inferior unsecured claims, such as
pension claims or bonds that are subject to clawback, or to lump COFINA
senior bonds together with contractually subordinate bonds. By setting
the classification rules properly, only creditors with the same rights
against the same issuer can be counted together and receive the same
treatment. Further, especially given the lesson of Detroit, judicial
restraint can be imposed by further defining the concepts of ``fair and
equitable'' and whether discrimination is ``unfair'' based on creditor
priorities found in the law or by agreement, not in the personal views
of the jurist.
Another ``must have'' feature of any Federal law that prevents or
otherwise impairs creditor rights is to ensure that--when all is said
and done--every creditor fares no worse than they would have under
current law, had the Federal case never been commenced or were it to be
dismissed. This is known as the ``best interests of creditors'' test
and is one of the requirements to confirm a plan of adjustment under
PROMESA. The ``best interests'' test also comes out of bankruptcy case
law, and specifically ensures that the Federal Government will not be
liable in eminent domain for ``taking'' property without just
compensation because the creditor's recovery must be, by definition, at
least as much as the creditor would have received had Federal
legislation never intervened.\13\ Greater definitional certainty could
be included in PROMESA, again to make it more protective of individual
creditors and to prevent courts from merely rubber stamping a proposed
plan just because it is supported by the requisite majorities.
---------------------------------------------------------------------------
\13\ See Faitoute Iron & Steel Co. v. city of Asbury Park, 316 U.S.
502, 515-16 (1942).
Finally, Federal courts overseeing bankruptcy cases are routinely
called upon to address issues of state or territorial law, because it
is those laws, not Federal, that defines property interests.\14\ The
uncertain determination of key issues affecting creditor recoveries is
often a cause for concern among participants in a bankruptcy case. Any
doubt over whether the Federal judge retains discretion to attempt to
divine issues of first impression of Puerto Rican law bearing on
constitutional or property interests of creditors should be removed
under PROMESA. The law should require direct certification of such
issues to the territorial high court, namely, the Supreme Court of
Puerto Rico. This feature would not only promote and protect creditor
expectations, which were set by local law, but would reduce the risk of
undue Federal interference with insular territorial law and is
consistent with U.S. Supreme Court jurisprudence.\15\ The bill in its
current form does not have any type of Federal court abstention, not
even the type contained in 28 U.S.C. Sec. 1334, which applies to
bankruptcy cases. The original ``discussion draft'' contained an
appropriate provision to require expedited determination by the
territorial high court of issues of first impression under the
territory's laws.
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\14\ Butner v. United States, 440 U.S. 48 (1979) (``Uniform
treatment of property interests by both state and Federal courts within
a state serves to reduce uncertainty, to discourage forum shopping, and
to prevent a party from receiving `a windfall merely by reason of the
happenstance of bankruptcy.' '') (citation omitted).
\15\ Manuel Del Valle, Puerto Rico Before The United States Supreme
Court, 19 Rev. Juridica U. Inter. P.R. 13 (1984) (``In the case of
Puerto Rico, its economic, social and cultural development has been
intimately associated with its legal development and ability to
exercise insular sovereignty over matters of local concern.'')
(collecting SCOTUS cases that reversed the First Circuit Court of
Appeals in deference to the Supreme Court of Puerto Rico on issues of
Puerto Rican law).
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collective action clauses
I have been analyzing whether ``Collective Action Clauses'' or
``CACs'' could work for Puerto Rico. To be clear, CACs would
retroactively change individual creditor rights, without judicial
supervision and accepted notions of due process of law, so this raises
many of the same constitutional concerns as bankruptcy without any
precedent on which to rely. Special care must be taken to ensure any
proposed modification is consistent with contractual and property
rights among the competing creditors. While these types of provisions
have been introduced in the Euro-Zone, they have never been a part of
the fabric of American creditors' rights and they were not developed
from the ``takings'' jurisprudence of the United States.\16\ Title VI
of the bill contains a mechanism for retroactively changing contract
rights of bondholders through votes by two-thirds in amount of bonds in
a given ``pool.'' The bill thoughtfully includes careful classification
rules and also ensures any modification meets the ``best interests of
creditors'' test, both of which are critical. To be clear, these
features are the minimum floor of creditors' rights, and additional
features to protect against unfair results or improper motivations of
creditors in overlapping pools may be appropriate. The CAC concept in
Title VI, moreover, is only applicable to bond debt, which raises
questions about overall fairness if only bonds will be subjected to
compromise, and not other liabilities of Puerto Rico.
---------------------------------------------------------------------------
\16\ See Collective Action Clauses No Panacea for Sovereign Debt
Restructurings, available at https: // www.pimco.com/ insights /
viewpoints/ viewpoints/ collective-action-clauses-no-panacea-for-
sovereign-debt-restructurings (``German Chancellor Angela Merkel and
French President Nicolas Sarkozy, meeting in the French seaside resort
of Deauville amid the escalating eurozone debt crisis in 2010, agreed
to make them de rigeuer for sovereign bonds European countries issue
under U.K. law from 2013.'').
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______
The Chairman. Thank you.
Mr. Johnson.
STATEMENT OF SIMON JOHNSON, PROFESSOR OF GLOBAL ECONOMICS AND
MANAGEMENT, MIT SLOAN SCHOOL OF MANAGEMENT, CAMBRIDGE,
MASSACHUSETTS
Dr. Johnson. Thank you, Mr. Chairman.
I would like to make three points. The first is on the
nature of the debt crisis and the potentially severe
consequences of not dealing with it.
I was previously Chief Economist at the International
Monetary Fund. I have worked on crises around the world for 30
years. There are, sadly, many similarities between the
situation in Puerto Rico and some of the difficult situations
we have experienced elsewhere in the world. But one feature
that is absolutely unique is that this is 3.5 million American
citizens and they can leave Puerto Rico and move to the 50
states, and they will leave Puerto Rico and move to the 50
states in increasing numbers unless and until the situation is
dealt with.
So your tax base, as was just mentioned, is going to walk
out the door. And if there is an excessive imposition of
austerity, well, there is a much better deal waiting for these
American citizens in Florida, or Texas, or Pennsylvania,
including access to the minimum-wage laws, including access to
the earned-income tax credit, including access to fully funded
or better-funded Medicare and Medicaid.
The second point I would like to make is with regard to the
oversight board. I think that part of the bill is very good,
Mr. Bishop. I think, to Mr. Pierluisi's question, which is
directly at the point, you have worked very hard and, I think,
found a balance between effective oversight and maintaining
sufficient sovereignty for the elected officials, the Governor,
and the legislature of Puerto Rico.
I do have one reservation or concern, if I may express it.
I know that there are a lot of compromises already that have
been made, but you did make reference, Mr. Chairman, to U.S.
precedents for this kind of situation. I thought that in the
case of the District of Columbia, the control board members had
been selected by the President of the United States in
consultation with the leadership of the relevant committees.
The structure that you have is a different one, and I worry
about the potential for difficulties in appointment, for
deadlock in decisionmaking, and, of course, for some difficult
moments with regard to the venue of jurisdiction and, as Mr.
Weiss said, some key moments in the restructuring process.
My third point is about the restructuring authority. And
here, I am afraid--well, I am not afraid--I completely agree
with Mr. Weiss and the Treasury Department, I think that this
is not yet a sufficiently streamlined process. I think, as I
think most of the panel would agree, that you want a process
which encourages voluntary renegotiation. It also prevents
holdouts, a significant number of creditors refusing to
negotiate in good faith.
And those safeguards for the majority of the creditors as
well as for the people of Puerto Rico, those safeguards have to
be present in the process it leads up to, a court-run
adjudication, when the matter is before the courts themselves,
and when the restructuring has ended, when you exit from what
we are not calling bankruptcy, but what is obviously inspired
by some of the better parts of U.S. bankruptcy process.
I understand very well that the House is also considering
and thinking about financial distress and potential bankruptcy
for systemically important financial institutions, a completely
different matter. But the parallel, Mr. Chairman, is this: that
I think the Republican caucus has rightly considered the
importance of making sure that everyone, every individual,
every company, and every legal entity in the United States can
go bankrupt or can go through the equivalent of a bankruptcy
process with appropriate safeguards, with protections for
creditors, and recognizing the traditions of the United States,
but also not allowing deadlock, impasse, and debt restructuring
to get stuck.
So, I really encourage you to work further on Title III and
the subsequent titles to move that restructuring authority in
that direction. I am confident, Mr. Bishop, that you can and
will ultimately get to a good bill.
Thank you.
[The prepared statement of Dr. Johnson follows:]
Prepared Statement of Simon Johnson, Ronald Kurtz Professor of
Entrepreneurship, MIT Sloan School of Management; Senior Fellow,
Peterson Institute for International Economics; and co-founder of
http://BaselineScenario.com \1\
---------------------------------------------------------------------------
\1\ Also a member of the Federal Deposit Insurance Corporation's
Systemic Resolution Advisory Committee, the Office of Financial
Research's Financial Research Advisory Committee, and the independent
Systemic Risk Council (created by Sheila Bair). All the views expressed
here are mine alone. An electronic version of this document can be
found at http://BaselineScenario.com. For important disclosures, see
http://baselinescenario.com/about/.
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a. overview
1. Puerto Rico is in the midst of a serious crisis. The economy is
in decline, public health is threatened, and residents are
moving to the 50 states. Unless there is a significant
improvement in living conditions and job prospects, out-
migration will likely pick up speed in the months and years
ahead.
2. Making promised debt payments has--as a result of much broader
stress on public finances--become difficult and, by some
measures, Puerto Rico is already in default.
3. As a territory of the United States, Puerto Rico does not have
access to the standard debt restructuring mechanisms
available to the 50 states.
4. Compared with the situation for states and municipal borrowers
within states, the U.S. Congress has much broader ultimate
authority over all aspects of public finance in Puerto
Rico. Some powers can be, have been, and should be
delegated to Puerto Rico. But Congress must now decide on
what broad strategy is adopted for dealing with the crisis
in Puerto Rico.
5. Insisting on full repayment of all debts would be
counterproductive. Most residents of Puerto Rico are also
U.S. citizens. By moving to the 50 states, these people
automatically can participate fully in more vibrant
economies, while also changing their relationship to public
finances--specifically, becoming eligible for the earned
income tax credit.
6. It is no surprise that current net out-migration is around
60,000 per year and the population has declined by nearly
500,000 over 15 years.
7. Attempting to repay all of Puerto Rico's debts would involve
either large further tax increases or significant cuts in
public services or both. Either way, the incentive to leave
the island will be stronger--and the tax base (people who
earn income) will literally fly away. The odds of full
repayment in that scenario are almost zero. And the social
costs--in terms of lower living standards for those who
remain--would be dramatic.
8. The best way forward includes agreeing on a mechanism for
restructuring Puerto Rico's debts, with the goal of making
a voluntary negotiation easier and more effective. The
restructured debt should include some standard debt
commitments, but with lower principal as well as reduced
cash-flow commitment in the near term. At the same time, it
would be very helpful if creditors could be persuaded to
accept bonds with a contingent payoff--so that lenders get
paid more if the economy does better.
9. At the same time, it is necessary to change the organization of
public finance in Puerto Rico. The ability of the governor
and the legislature to do this by themselves has proven to
be limited. Establishing an oversight board would help
build credibility.
10. At the same time, long experience--including with International
Monetary Fund program lending--suggests that imposing
institutional arrangements or even specific polices on
countries does not usually lead to good outcomes.
11. The proposed legislation has some strong points in terms of
creating an oversight board that would bring meaningful
changes to governance, without being overly intrusive.
However, I am concerned that the way in which board members
are picked may slow the debt restructuring process. More on
this is in Section B below.
12. In terms of the debt restructuring mechanism, the current draft
of the bill is a great improvement over previous versions.
However, there are a number of significant dimensions that
require further clarification--including the extent to
which debt principal can be reduced, whether all debt
issued by Puerto Rico government entities can be readily
included in any restructuring, and the mechanism through
which a debt restructuring agreement is concluded. I expand
on these points in Section C.
13. In addition, I am concerned about opening the door to reducing
the minimum wage in Puerto Rico. Again, it is not in the
interest of creditors to encourage taxpayers to leave the
island.
b. oversight board
The proposed legislation does a good job of balancing the need for
greater oversight for public finance in Puerto Rico along with the
important priority of maintaining sovereignty.
We should keep in mind one very important lesson from economic and
political history--an oversight board that is too strong would be
counterproductive. Unless there is sufficient local ownership of any
reform program, that program fails to deliver sustained growth (and
better outcomes for creditors).
There are seven main elements in the proposed structure under
discussion today:
The proposed law specifies what must be in the 5-year
fiscal plan.
This plan is approved by the oversight board (or not).
The governor draws up this plan and can adjust it in the
process of discussion with the board.
The governor is also responsible for the annual budget.
This budget can be revised by the legislature, as long as
it remains consistent with the 5-year fiscal plan.
The board watches out for variances from the fiscal plan
and makes recommendations for course corrections.
If the government fails to correct these variances, after
repeated opportunities have been missed, then the board can
do more.
It is important to note that in the current draft, the board cannot
issue regulations or other rules over the objection of the government
of Puerto Rico.
The board will terminate after 4 years of balanced budgets. This
seems entirely appropriate--and consistent with what was required for
the District of Columbia.
There are also strong ethics and conflict of interest rules for the
oversight board. These are important both in terms of perceived
legitimacy and to ensure the board remains effective throughout its
duration.
However, I am concerned with how members of the oversight board
would be selected. In the case of DC, board members were picked by the
President, in consultation with the leadership of the relevant
congressional committees. In the current draft for Puerto Rico, the
structure is more cumbersome and perhaps would lead to unintended
outcomes.
For example, if the Speaker of the House proposed a list with only
two names on it, would the President have to accept those names--or
could he (or she) request a new list? How long would this process take?
c. debt restructuring
With regard to the ability of the government of Puerto Rico to
restructure its debts, I understand these provisions were controversial
and the subject of much discussion. I also recognize that key details
in this draft may shift as the legislation moves through Congress, so
let me emphasize that the points made here apply to this particular
wording--and even minor shifts in language could be sufficient reason
to change my opinion.
Title III represents a great improvement over previous attempts to
address the restructuring issue. However, the current language (also in
Title VI) suggests that the process could be streamlined further in
ways that would be helpful.
In particular, I would flag four issues which, at the very least,
would benefit from greater clarity.
First, any and all forms of Puerto Rico official sector debt should
be eligible for a reduction in principal as a result of the debt
restructuring process. The bill's language could usefully be clarified
in this regard.
Second, it should not be possible for creditors to prevent or delay
a particular class of debt from being restructured. The current draft
seems to create the possibility of a very slow process, for example for
COFINA bonds.
Third, there needs to be a clear and workable mechanism through
which a debt restructuring is concluded. At present there may be
potential for relatively few creditors to delay or even prevent a final
agreement. It is important not to allow any kind of hold out in this
situation.
Fourth, while the goal is a voluntary comprehensive renegotiation
of Puerto Rico's debt, the legislation could also recognize more
explicitly that--under some circumstances--it may be necessary for a
judge to impose a deal.
______
The Chairman. Thank you. We appreciate that.
We will now turn to our committee. Under Rule 3(d),
questions are limited to 5 minutes for members of the
committee. We will now recognize members for the questions they
wish to ask.
Mr. Lamborn, are you ready to go first?
Mr. Lamborn. Certainly, Mr. Chairman. And I want to thank
the staff and you, Mr. Chairman. No one has worked harder on
this than you have.
And I am still gathering information about this very
complicated issue. I am looking with an open mind at the bill.
I have questions and concerns though, and I hope that my
questions will clarify, at least for me, some of what these
are.
Thank you all for being here today.
We are all concerned about the future of Puerto Rico. We
want it to be a successful, thriving economy. We want this
crisis to end, and end in such a way where it will not happen
again. And we want everyone to be treated fairly--creditors,
pensioners, everyday citizens, and so on.
I am going to ask a question about the oversight board. I
will use that phrase because that is what the bill calls it.
The oversight board--I am a little unclear as to whether or not
it has the final say in what a plan is that it thinks is
necessary to get out of the crisis for the future. And I see
some conflicting things in the bill.
So if someone could sort of distill for me the essence of
what the power of the oversight board is. Is it really
something that is going to make a difference, or will it be
over-ridden if the Governor or legislature do not like its
recommendations? To me, this is a critical issue.
Who would like to take a crack at that?
Mr. Weiss. I can start. Thank you, Congressman.
The oversight board does respect, in fact, the principles
that the Administration laid out at the beginning of this
process, which is that it preserves the Commonwealth's self-
governance, while putting in place safeguards that ensure that
the plans that are agreed and that the budgets that are agreed
will be carried out.
And I think as other witnesses have testified, it is also
the case uniquely in this bill that access to restructuring
authorities or, indeed, access to a collective-action clause
under the voluntary path can only be obtained through a process
which is certified and put forward by the oversight board.
So, the oversight board respects the self-governance but is
a gateway to further the voluntary negotiations that have a
chance of success or restructuring authorities.
Mr. Lamborn. What if the board and the Governor and/or
legislature are at loggerheads on what the way forward is on an
important part of the economy of Puerto Rico?
Mr. Weiss. The Governor and the legislature are to put
forward a long-term fiscal plan and an annual budget. These are
to be approved by the legislature, as is the case presently. In
the event that subsequent budgets deviate from the initial
fiscal plan, which is revised annually as well, or performance
falls short, there is an iterative process back and forth with
the oversight board to correct those shortfalls, and,
ultimately, there is assurance that the plans will be carried
out as initially forecast.
Mr. Lamborn. OK. Thank you very much. That, to me, is
critical.
Another critical item--there are so many here, but in my
remaining short time--is the rights of creditors who feel like
they are not getting a good deal, the holdout creditors, let's
say.
And, sir, you have been intimately involved with this in
the past. What about holdout creditors, even if they are in the
minority, how will they be treated?
Mr. Kirpalani. Sure. Thank you, Congressman Lamborn.
There are two types of holdouts. And the first type to
think about is the dissenting minority when the majority of a
pool or a class wants to go along with the deal and get a
voluntary restructuring. You may have people who just do not
want to participate. They don't want to even open their mail.
They don't want to be involved in any kind of restructuring
discussion or they are not sophisticated or they don't want to
hire professionals to focus on their rights. So they may vote
against or they may not vote at all.
The bill allows in the debt-restructuring section that the
majority--it is majority in number, so more than 50 percent in
number of people voting--and more than two-thirds in dollar
amount of the particular class voting should be able to bind
everyone in that class of similarly situated creditors.
So, the most important thing to take away, you have to make
sure the bill protects similarly situated creditors to work
together and not lump people with different contract rights,
different property rights together.
The one issue I have with collective-action clauses is----
The Chairman. You have 3 seconds to say your issue.
Mr. Kirpalani [continuing]. It is a eurozone concept. It
has no classification rules. Just be careful.
The Chairman. OK. Thank you.
Mr. Lamborn. Thank you.
The Chairman. Mr. Grijalva.
Mr. Grijalva. Thank you, Mr. Chairman.
Mr. Weiss, we know who loses if something pragmatic and
humanitarian is not done in terms of legislation from this
Congress. We know who loses. But if something is not done, who
wins?
Mr. Weiss. Congressman, my answer is simple: no one wins,
everyone loses. The people of Puerto Rico lose. The creditors
ultimately lose. As has been noted, the moratorium, which has
been enacted in Puerto Rico to preserve essential services, has
led credit prices to deteriorate. And the mainland loses, in
the sense that the alternative to this legislation, which is
not a bailout, will, in fact, become a bailout over time.
And, as has been stated by many Members of Congress in both
parties, this legislation costs taxpayers nothing. In fact,
what it does is it precludes the likelihood that over time
taxpayers would have to step in, as they always do when the
safety and economic prosperity of Americans are at stake.
Mr. Grijalva. Thank you.
Professor Johnson, categorize for me the level of austerity
that has been imposed on the people of Puerto Rico,
specifically how much money has been cut from annual spending
since, let's say, 2006, 2008.
Dr. Johnson. I do not have that precise number, but it is a
significant amount of austerity. This is not of the levels that
we have seen in Greece, but it is certainly the level that we
have seen, for example, in Portugal in the eurozone. So a 10-
to 20-percent cut in effective social services.
And, of course, you see a lot of this in the availability
of doctors who have left. You see it in the hospital services.
You see it in the hospitals laying off. The length of lines
have increased for these essential services. So, it is not all
in the monetary numbers, Congressman, it is also in the quality
of services and the availability of those services.
Mr. Grijalva. In rough-number estimations, if that is the
range, 20 percent--I think Governor Padilla said that, as well,
about $500 billion--if that is the range, how much of Puerto
Rico debt do hedge funds own at this point?
Dr. Johnson. I think you should ask the creditors'
representatives for more precise numbers on their existing
holdings. I think Mr. Kirpalani said that the mutual funds are
holding 50 percent now, or no more than 50 percent of the debt.
Presumably some is held by individuals, but the hedge funds are
a significant portion of the remainder.
Mr. Grijalva. Mr. Weiss, do you have an estimate on how
much of that debt is hedge fund?
Mr. Weiss. I think estimates vary from a third on up.
I should mention that this debt continues to trade hands
every day and is trading today, as well, and so this number, by
most estimates, is accumulating.
Mr. Grijalva. Just to review, the point that I think is
important to note is that if hedge funds bought risky Puerto
Rican bonds as an investment strategy, they structure the
investments to absorb a hit in the event some of those
investments do not go well. They have spent heavily to prevent
the debt from being restructured in the courts. They have spent
heavily to try to prevent restructuring here in Congress. I
think this is the kind of strategy that makes people really
angry in Washington. And it is an investment strategy by the
hedge funders in this particular instance.
Unfortunately, as I asked in the earlier question, nobody
wins. It is at the expense of the quality of life for the
people of Puerto Rico.
I think that somebody holding that significant number and
being not only the holdouts but also effectively attempting to
campaign against any movement on this issue legislatively, I
think, speaks for itself in terms of what greed has caused in
terms of us being able to find a solution to this.
With that, Mr. Chairman, I yield back.
The Chairman. Thank you.
Mr. Wittman.
Mr. Wittman. Thank you, Mr. Chairman.
I would like to thank the witnesses for joining us today.
Professor Kent, I want to start with you. You laid out the
constitutional authorities--Article I, where Congress can act
on the issues of bankruptcy; Article IV that empowers it to act
on issues involving territories.
My question is this. As you look at other provisions there
under Article III for the courts to adjudicate bankruptcies, do
you believe that there is a priority that is set in the
Constitution that says the Congress must act, and counter to
the courts, where the courts could act to adjudicate a
bankruptcy such as this?
Mr. Kent. Well, the power to adjudicate bankruptcy has to
be given by the Congress, and the courts cannot act unless that
authority is given. So a bill, such as the one being
contemplated now by the committee, would be the first thing
that would need to happen before we would have any questions
about power of courts.
Mr. Wittman. But the courts could act, in this case, to
adjudicate this?
Mr. Kent. Were they granted authority by the Congress, yes.
Mr. Wittman. But in absence of a congressional action, the
courts can act to adjudicate this. The creditors can file and
say, ``we wish that our claims be made before the court,'' and
they can argue their claims before the court.
Mr. Kent. I am not a bankruptcy law expert. I am a
constitutional person, but my understanding is that, currently,
Puerto Rico and its instrumentalities are not--that bankruptcy
is not available to them through the current statute.
Mr. Wittman. Mr. Weiss, a question to you. When we talk
about how this should be laid out and Congress acting versus
what I believe can take place through the courts, why wouldn't
it be a desire for voluntary agreements to be worked out
between Puerto Rico, the bondholders, through a mechanism in
the courts versus one that is set by Congress? And does
Congress' action actually itself set priorities for creditors'
claims versus where it could be worked out in the courts with
voluntary agreements and back and forth between the judiciary
and the government of Puerto Rico?
Mr. Weiss. Congressman, the litigation has already begun in
courts. At the time that the Governor was forced to claw back
certain revenues in order to pay other debts in December, there
was immediate litigation filed.
Mr. Wittman. So there is current litigation? They are
trying to adjudicate their claims?
Mr. Weiss. There is current litigation, and none of this is
reaching resolution. It is not resulting in a constructive
environment for negotiations to take place. To the contrary, as
these claims are individually pursued, both against the
Commonwealth and amongst the different creditors, there are 24
creditor classes and counting. What we fear is that if we are
left without any framework, as has been established by the
committee under leadership of the Chairman, that Puerto Rico
faces a lost decade as these various claims are contested.
Mr. Wittman. Why would the contestment take place any
differently with back and forth between the bondholders and the
courts versus the government of Puerto Rico bondholders and the
United States Congress?
Mr. Weiss. Two reasons. First, this legislation puts in
place a strict and independent oversight board in order to look
across all of the different claims and the fiscal plan and
budgeting process and to try to bring all of that into
alignment through the course of a restructuring.
And second, in the tools that have been outlined by the
draft, there is an opportunity to pursue a voluntary pathway
and to achieve agreement across a particular class of creditors
as there is an opportunity to pursue an orderly restructuring
mechanism in the event that the voluntary process fails.
Mr. Wittman. Does this potential legislation, though,
reprioritize what would otherwise be the claims of the
bondholders here? In other words, does Congress supersede or
put its imprint over who it believes should take precedence in
that versus an adjudicatory hearing where the courts would
determine priority of the bondholders?
Mr. Weiss. There is language in the bill, which I will not
cite exactly because it is relatively fresh, which does talk
about the pre-existing priorities of claims, but what is to be
pointed out is that without the centralized review of an
oversight board and without the restructuring authorities and
voluntary mechanism, there will be endless litigation as to
claims.
We have heard from secured creditors on this panel. There
are other creditors who are actually of a different point of
view as to who is most senior, and so, in order to bring this
to an orderly resolution, it requires this kind of mechanism.
Without it, we fear economic chaos.
Mr. Wittman. Thank you, Mr. Chairman.
I yield back.
The Chairman. Thank you.
Ms. Bordallo.
Ms. Bordallo. Thank you, Mr. Chairman. I truly appreciate
your leadership and being true to your word to craft a bill to
assist Puerto Rico, and I, as a representative from a
territory, am also very concerned.
I appreciate the language that clarifies the other
territories covered by this provision must opt in to the
control through a vote of the legislature and with concurrence
of our governors. While I can empathize with the policy
decision to try to keep the bill clean, unfortunately, the
problems of this fiscal crisis are cross-jurisdictional. The
debt crisis will not be resolved through debt restructuring
alone but, rather, will need additional fixes.
Guam and the other territories, while we are nowhere near
the crisis that Puerto Rico is in, could very well be headed
down that road should these fixes not be addressed. So, thus, I
remain disappointed that the bill does not address issues such
as Medicaid, the EITC, and government pensions. I, and the
other delegates from the territory, sent a letter to the
committee last week reiterating our support for these fixes.
The Administration's proposal includes the other
territories in removing the caps on the Medicaid program,
readjusting our FMAPs, as well as providing a cover over to the
nearer Tax Code jurisdiction on providing EITC.
I simply do not believe that the proposals that we are
looking at now will resolve Puerto Rico's problems. So we are
doing all that we can to be proactive in ensuring that what is
happening to Puerto Rico does not happen to the rest of us.
So, Mr. Weiss, I have a question for you. This bill
authorizes an oversight board and debt restructuring for Puerto
Rico which will address their debt crisis. However, will this
legislation fix their cash-flow issue or help with the other
issues I have mentioned, such as Medicaid or EITC? Wouldn't it
be helpful for this to be included and for the territories to
be considered in this fix as well?
And, if you could make your answer brief, because I have
very little time.
Mr. Weiss. Yes, our initial proposal did include those two
components, as you are well aware. However, it does alleviate
the financial stress on the Commonwealth through the stay and
through the process, which would allow the Commonwealth to have
a sustainable level of debt, which is our ultimate goal.
Ms. Bordallo. Thank you very much.
Professor Johnson, you are an advocate for an investment-
led recovery for Puerto Rico, and I understand that you have
also cautioned that reducing the minimum wage would induce more
Puerto Ricans to leave. So I ask: Does keeping the minimum wage
at $4.25 an hour increase the likelihood of (1) more Puerto
Ricans having to rely on government assistance and/or (2) more
Puerto Ricans having to leave the island for better economic
opportunity?
How would this minimum wage provision impact the long-term
economic outlook for Puerto Rico?
Dr. Johnson. I believe the Governor would have to choose to
opt in to this minimum wage provision, as I read the bill. If
that were the case, then I would be very worried about the
consequences, Congresswoman, for exactly the reasons that you
just articulated.
Ms. Bordallo. Thank you.
And, Mr. Weiss, I have my third question and last question.
The bill clearly prohibits elected officials from Puerto Rico
from serving on the control board. Now, I understand that,
while not explicit, there is a conflict-of-interest provision
that would also prevent representatives with ties to
bondholders from serving. Is this provision sufficient to
prevent any potential conflicts of interest?
Mr. Weiss. We continue to work with the committee to refine
this provision. We agree with the principle that this committee
should be fully independent of the political process and free
of any conflict of interest, whether financial or otherwise.
Ms. Bordallo. Thank you very much.
Mr. Chairman, I yield back.
The Chairman. Thank you.
Mr. Gohmert.
Mr. Gohmert. Thank you, Mr. Chair.
I appreciate your testimony today.
I understood that, previously, there had been mention of a
10 to 20 percent cut in social programs being proposed in
Puerto Rico, and I am curious: Does anybody know if there are
proposals of cutting the government workers by 10 to 20
percent, or is it just social benefits? Anyone know?
Dr. Johnson. Well, we were discussing, Congressman, a
moment ago the cuts that have already been made since 2006, so
that was a retrospective assessment. And, of course, the
government payroll has also been cut over that same period as
part of that.
Mr. Gohmert. This same cut, 10 to 20 percent?
Dr. Johnson. Again, I do not have those exact numbers with
me, but we can look them up very easily.
Mr. Gohmert. Yes.
Dr. Johnson. It is certainly above 10 percent. One of the
concerns is the way in which those layoffs have impacted
services, who has been laid off, and so on. But, again, that is
a retrospective statement.
Mr. Gohmert. I have seen one projection that 20 percent of
all income in Puerto Rico came from Federal welfare benefits
from those paying Federal taxes in the 50 states and,
unfortunately, for the District of Columbia, for DC, too, so I
am curious, of the reforms that you refer to as retrospective,
that were 10 to 20 percent of social benefit cuts, were those
cuts that Puerto Rico is making to Puerto Ricans, because my
understanding is that it certainly was not cuts to social
benefits from the Federal Treasury?
Dr. Johnson. No. I think what we were discussing, because
of the nature of fiscal autonomy in Puerto Rico, is they have a
different basis for their revenue. There are people who receive
Medicare benefits and the people who pay into and receive
Social Security.
Mr. Gohmert. Right.
Dr. Johnson. But they are not paying favorable income tax,
as you know, and it is the collapse in local revenue, including
the sales tax, that has had a significant impact on revenue.
Mr. Gohmert. One of the remarkable things, Puerto Rico
ought to be the model for how free markets could work. It could
be the United States' Hong Kong, because there is no Federal
income tax. All it would need is to streamline and not have
such a bloated government where, I have seen the numbers--one
community of 1,800 or so, 45-plus percent work for the
government, and then the list goes on down. A community of
35,000, 40 percent of those work for the government. Another
community, 27,000, 39 percent work for the government.
If it were not for all the government workers in Puerto
Rico, there would be no need to have a 4-percent higher
corporate tax than the United States itself has. We have the
highest corporate tax of any advanced nation in the world, 35
percent. Yet, Puerto Rico has more than that at 39 percent. I
would think that with no Federal income tax, if you get it down
to around 12 percent, business would be flocking, but nobody
wants to come to a place where 45 percent of the community
works for the government. That does not wreak of free markets,
growing businesses.
And then it seems one of the real tragedies--on the one
hand, we are told if we will allow an exception for Puerto Rico
to lower the minimum wage, then that will create more jobs and
that will get more Puerto Ricans working, because we did
provide an exception when the Democrats had the majority for
one of our territories, but that was not Puerto Rico.
But then when I see a projection that a family of three,
the take-home pay for doing a minimum wage job at the current
level would be less than $1,200, but with the U.S. Federal
welfare, AFDC welfare, food stamps, the take-home is more like
$1,800. Then if we lower the minimum wage, then there is even
less take-home for those who might be tempted to work for about
two-thirds of what they get if they do not work.
My time is expiring, but I would welcome anything in
writing from any of our witnesses that would tell us how to
balance that problem. Thank you.
I yield back.
The Chairman. OK. You have your assignment.
Ms. Tsongas.
Mr. Tsongas. Thank you, Mr. Chairman.
And I appreciate all of you being here with us today. As we
are talking about Puerto Rico, I just want to reiterate the way
in which it makes it back to our districts.
The economic viability and success of Puerto Rico is an
issue that is really important to many of my constituents in my
district in Massachusetts. 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. They have seen firsthand the devastating effects
that the 10-year recession and debt crisis have had on the
island, and they are watching carefully as we work to address
it. They are well aware of what the 3.5 million American
citizens are struggling with.
Puerto Rico's electricity prices are higher than any state
in the country. The unemployment rate is 12.2 percent, more
than double that across the United States, and its poverty rate
is a staggering 45 percent. And we are hearing today about the
alarming decline in some essential services.
We, in Congress, have a responsibility to address the
crisis facing Puerto Rico, and I think the discussion draft and
the bipartisan effort behind it is a step toward that goal. All
stakeholders stand to lose in the face of the continued
deterioration on the island is its economic and financial
condition.
I appreciate the debate we are having about the different
elements of the legislation, but as the Ranking Member of the
Federal Lands Subcommittee, a committee that is tasked with the
protection of our shared historical, cultural, and national
heritage, I just want to express my deep concern about the
bill's provision to transfer public land at the Vieques
National Wildlife Refuge. This refuge is one of the crown
jewels of our National Wildlife Refuge System, and the transfer
language is an unnecessary addition that will do absolutely
nothing to address the fiscal crisis in Puerto Rico.
With that, I would like to yield the balance of my time to
Mr. Pierluisi.
Mr. Pierluisi. Thank you, Ms. Tsongas.
Actually, I will use this time to clarify a couple of
points, and the witnesses can correct me if I am wrong.
Mr. Lamborn, the way the bill currently reads, the Federal
oversight board does have the power to approve the fiscal plan
of the government of Puerto Rico. It also has the power to
approve the budgets, approved in turn by the legislature and
signed by the Governor, so the board does have ultimate
authority.
The bill defers to the government of Puerto Rico in the
right way because it allows the Governor to elaborate the plan
and submit it to the board, and the board can bring it back and
send it back with its comments and recommendations. So, it will
be a back and forth until the board is satisfied that the
fiscal plan makes sense. OK.
On the budgets, the process is similar. The Governor will
submit the budget to the board for review. The board will
comment. Once the board blesses the budget at that level, then
it goes to the legislature of Puerto Rico. The legislature will
do its job. But before it is finally approved by the
legislature, the board will take a look at it, and the board
can say that the board is not satisfied with the budget as
approved by the legislature. So, the board will have the final
say in a way.
What I expect to happen here is--just assume that the
Governor and the legislature of Puerto Rico will do the right
thing. They will just have this board overseeing them in this
process. The same applies on variances. Let's assume that there
is overspending, meaning that the spending is excessive, given
the budget that is applied. What the legislation does, it
requires quarterly reports to the board, and the board can say,
when they see overspending: Explain to us the variance. And if
the explanation is reasonable, nothing happens. If, after
multiple tries, the government of Puerto Rico cannot satisfy
the board's concerns, then the board can step in.
So that is why this is a reasonable model, given that you
do have elected officials in Puerto Rico, a Governor and
legislators, so it does give the board the final say.
On the minimum wage, let me say this. The way the bill is
drafted, the Governor of Puerto Rico is the one that can opt to
pay less than the minimum wage to employees 25 years or
younger. I personally do not like that bill provision, and I
will tell you why: it will promote migration out of Puerto
Rico, because these are U.S. citizens, and if not, they will
not work, and they will simply rely on welfare and the informal
economy.
The Chairman. Thank you.
Mr. Fleming.
Dr. Fleming. Thank you, Mr. Chairman.
Mr. Weiss, does this legislation contain mandatory debt
restructuring ability for the control board?
Mr. Weiss. At the end of the process, this ensures that the
debts will be restructured to a level that is sustainable
relative to the size of the economist----
Dr. Fleming. So the answer is yes.
Mr. Weiss. At the end of the process.
Dr. Fleming. OK. So what this does is create a control
board, which then goes to the creditors and asks them to come
up with or to go along with some sort of voluntary negotiated
prioritization of the creditors. If they disagree, then you go
to the next step, the step you are referring to, which some
call a cramdown, where then they will be forced to restructure.
Am I correct on that?
Mr. Weiss. It organizes both the voluntary discussion,
which you are describing, and the restructuring mechanism in
the event that the voluntary restructuring does not succeed. It
also incentivizes the voluntary restructuring with tools which
are not in place today.
Dr. Fleming. So the answer is yes, it does have the power
to force restructuring.
So does that mean that it is possible for holders of full
faith and credit debt to be put at a lower priority for
repayment than unions or pensions?
Mr. Weiss. We are not here to pick winners and losers among
creditors.
Dr. Fleming. But that can happen. Is that correct?
Mr. Weiss. The oversight board is invested with enormous
responsibility in putting forth, as the Congressman has
described.
Dr. Fleming. But don't dodge the question. Can that happen?
Mr. Weiss. It can only happen if all other measures have
been exhausted and it is the judgment of the oversight group--
--
Dr. Fleming. But it can happen, correct?
Mr. Weiss. These creditors today are holding 67 cents on
the dollar. They know it is being restructured, sir.
Dr. Fleming. Let me ask you this. They say that this is not
bankruptcy or reorganization bankruptcy, but it looks like
reorganization bankruptcy, so how is this, other than just the
technical features of it, overall, how is it different than a
bankruptcy?
Mr. Weiss. It is radically different from bankruptcy.
Dr. Fleming. Let me hear from you.
Mr. Kirpalani. Yes, I would just like to try to answer the
Congressman's very important question. The way this bill is
drafted, it protects priorities. It does not disturb local law.
We could tighten that. In fact, our view is it should be
tightened.
Dr. Fleming. But, in a sense, that bankruptcy could force,
cramdown, if you will, require a certain priority of creditors,
isn't that also true of this bill as well?
Mr. Kirpalani. Only if the dissenting class has no good
reason to hold up because they are getting the best interest,
the same that we get under law----
Dr. Fleming. In other words, if they do not agree, this
control board can force them to reprioritize, correct?
Mr. Kirpalani. No. They would have their ability to explain
to the court, to your colleagues on your left, that this is an
unfair plan; it discriminates unfairly to me. The laws can be
drafted even more tightly and clearly, and we would support
that, but if the intent of the bill is absolutely to protect
the----
Dr. Fleming. If the board did not agree with them, then
they would be forced.
Mr. Kirpalani. But that is no different than in the absence
of legislation.
Dr. Fleming. Again, that looks a lot like bankruptcy
restructuring, so I would just have to say--now, it is also
said that this is not a bailout.
But we understand, now, how did we get here to begin with?
It is the progressive socialist policies, economic policies
that got Puerto Rico at this point, the same kind of policies
that got Greece where it is today. Greece has gone through two
restructurings with bailouts, as I recall, and they are going
to have to go through another one.
From my perspective, I look at this, and I am told: this is
no bailout. Well, technically, that is true, but there are
still going to be cash-flow problems. How are we going to solve
the cash-flow problems?
Mr. Kirpalani. I think that there are a lot of things that
Congress can do under the territories clause to create better
growth, better initiatives. What this is doing, it is the first
step; it is a necessary step to stabilize the economy to keep
people in place.
Dr. Fleming. Exactly, that is my point. It is the first
step, and what is the next step? What is the other shoe to
drop?
Mr. Kirpalani. I don't know that there will be.
Dr. Fleming. There will have to be a cash bailout. That is
the only way that is going to be solved under this bill.
Mr. Kirpalani. Without this bill, there will be a cash
bailout.
Dr. Fleming. I would suggest to you that this is a
framework of a bankruptcy, whatever you want to call it, and it
will ultimately require a bailout.
I yield back.
Mr. Kirpalani. But it will respect priorities, though.
The Chairman. Mr. Pierluisi.
Mr. Pierluisi. Thank you, Chairman.
Mr. Weiss, I would like you to expand, elaborate on your
concerns with the collective action clause, the way it is
currently drafted. As I understand it, your concern is that it
is too cumbersome, or it is not streamlined enough. You want
this to work, but can you expand? What is wrong with the
collective action clause process that this bill provides for?
Mr. Weiss. Congressman, we believe that the intent is for
this to work, that there are important drafting items which we
need to review with the committee, and we will begin to do so
immediately following this hearing, but the intent is to
provide for a voluntary path with incentives to reach agreement
and, in the event that this fails, a restructuring mechanism to
allow the Commonwealth to emerge with a sustainable debt load.
If these principles are respected in the drafting, we
believe we can work with the committee to get there.
Mr. Pierluisi. OK. Now, Mr. Miller, as I understood your
testimony, you are saying that, in general terms, the markets
are welcoming this bill. The markets are looking forward to a
restructuring, and in your view, it is better to have an
orderly restructuring process as opposed to litigation all over
the place. That is how I read what you said.
As I see it, when we talk about collective action clause--
these terms get in the way, but let me explain them, and then
you correct me--and cramdown, what we are talking about is, any
time you want to restructure debt, you want to reach all the
creditors of the entity in question. If you don't reach them
all, then the deal will mean so much, and when you need to
restructure, again, you try to reach them all.
So collective action is another way of saying: If you have
two-thirds majority of the creditors supporting the deal, then
you can go to court to enforce the deal on all, and the same
pretty much applies on the cramdown concept.
What is happening in Puerto Rico is that we can negotiate
with the creditors of PREPA, the power company, and we can
negotiate with the creditors of the water and sewer company,
but we cannot reach them all. We do not have a structure.
Would you comment, Mr. Miller?
Mr. Miller. Sure. Thank you very much for the question,
Congressman. The reasons why I did allude to the fact that I
think the marketplace is prepared and more welcoming in this
bill is for the following reasons: The independence of the
board, getting fresh audits, getting transparency over what the
fiscal situation actually is; those are all positives to the
marketplace, as a whole. The determination of the level of debt
that the Commonwealth of Puerto Rico can actually handle longer
term and grow the economy and be a stable credit, that is
positive.
I think versus alternatives--the litigation is building,
the defaults are coming regardless, and I think the
marketplace, you can see in the pricing, the marketplace knows
that is going to happen anyway. The 67 percent figure that you
are alluding to, that is, in part, this is a large and very
diverse widely held set of bonds and set of indentures, and in
such a circumstance, you will never get to 100 percent. It is
impossible.
Mr. Pierluisi. Thank you. Let me quickly address you, Mr.
Kirpalani, and the audience. This is not Chapter 9. I have a
Chapter 9 bill. Mr. Duffy had a Chapter 9 bill. This is not
super Chapter 9. Why not? Because there is a Federal oversight
board acting as the gatekeeper here, making sure there is no
abuse of the Chapter 9 process, of the bankruptcy rules.
There is nothing wrong with the bankruptcy rules. Congress
enacted them, but we want them to be applied fairly, and that
is why you have this board being created to oversee this. Do
you agree, Mr. Kirpalani?
Mr. Kirpalani. Thank you, Congressman.
I 100 percent agree with that statement, and I would also
say that our laws, our bankruptcy laws and restructuring laws
from 100 years, they are the envy of the world. They are the
hallmark of an efficient financial system, and I was hired
several years ago by Dubai to pass legislation and help them
draft it. They never even had to use it because every creditor
organized itself and voluntarily agreed because they understood
the rules, and the same thing can happen for Puerto Rico.
Mr. Pierluisi. Thank you.
The Chairman. Thank you.
Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman.
First of all, let me ask the question. Does Congress have
the authority to change bankruptcy law or to take portions of
bankruptcy law and apply it in this case?
Mr. Kent. Yes, it does. Under the territories clause, I
believe it does.
Mr. McClintock. OK. And does it also have the authority to
alter bankruptcy law as it applies to states?
Mr. Kent. As it applies to state governments?
Mr. McClintock. Yes.
Mr. Kent. That raises some very hard issues. The Supreme
Court addressed this in the 1930s and had very serious
constitutional concerns about the impact on state sovereignty.
I would say pretty definitively that something like the
oversight board that is contemplated here as kind of the quid
pro quo for having access to restructuring would be----
Mr. McClintock. But the oversight board, though, I think is
irrelevant to the principal point that we are altering the laws
under which these loans were made to creditors. We are
rewriting these laws for Puerto Rico, and if it can rewrite
these laws for Puerto Rico, the concern arises, why wouldn't it
then also rewrite them for states?
My concern is that every lender to every state in this
country is no longer going to trust the terms of their own
loans, and if those terms are not stable and reliable, interest
rates will rise for every state in this country, and taxpayers
are going to end up shouldering that burden through paying much
higher interest costs. These are the concerns that are being
expressed by a number of state governors with respect to the
ramifications of this bill.
The argument I hear is: this is apples and oranges. Puerto
Rico is a territory subject to congressional oversight, and
states are not.
But the applicability of bankruptcy law can affect states,
and Congress can rewrite bankruptcy law, whether for
territories or for states, and this introduces a very, very
dangerous precedent into a public borrowing.
It seems to me that, under the status quo, both sides have
an incentive to negotiate mutually agreeable terms. If we were
to simply honor the rule of law and maintain the terms in which
these loans were originally made, first, I think it would be a
very powerful signal to bond markets that the United States
stands by its promises, even when it is inconvenient. Until the
prospect of this congressional action arose, my understanding
is Puerto Rico was negotiating terms of debt restructuring with
the mutual consent of their creditors, and under current law,
it is in the interest of both sides, the debtor and the
creditor, to work out the terms with which both can live to
restructure and repay this debt.
And I think it is also within the interests of the people
of Puerto Rico to hold accountable the elected officials that
got them into this mess, not an unelected and unaccountable
oversight board.
Mr. Weiss. Congressman, with respect to the
constitutionality, there is a clear pathway under Article IV of
the Constitution for this to be enacted for territories. The
10th Amendment provides no such assurance.
Current negotiations, in our judgment, cannot succeed
without the additional tools which have been effectively
offered by this committee to support both voluntary
negotiations and restructuring, if it is needed. The witness
from Nuveen could speak to the efficacy of this with respect to
state borrowing costs, but the pathway is between a disorderly
default and something structured.
Mr. McClintock. My time is very limited. I think the
structure on that oversight board, it seems to me that it
violates, indeed it renounces the most basic architecture of
American constitutional government where the Founders
meticulously divided and separated the powers of government.
This board recombines them. And where the American Founders
meticulously established a system where their government was
accountable and with the consent of the people, this
establishes an oversight board that is not accountable to the
people of Puerto Rico.
And I think the great tragedy is this: Puerto Rico is an
island paradise. It is a cruise ship destination. It is ideally
located for both North and South Atlantic shipping. It has an
ideal climate for agriculture. It is part of the United States.
It has all of the protections of property rights and the rule
of law and due process. The only thing that it lacks is wise
public policy.
It seems to me that the direction we should be taking is
relieving Puerto Rico of the burdens of the Jones Act, a
panoply of regulatory burdens that are crushing the economy and
providing the option for Puerto Rican companies to be taxed
territorially. These reforms could turn Puerto Rico into the
Hong Kong of the Caribbean, and that is the direction we ought
to be taking: maintain the rule of law and restore free markets
to Puerto Rico.
The Chairman. Mrs. Torres, you are next.
Mrs. Torres. Thank you, Mr. Chairman. Good morning. My
questions are around the board, and in the specific bill, I
think that we are pretty prescriptive as to who appoints the
seven-member board. However, it lacks the same type of
prescriptive way of who actually can be appointed.
While the bill states that individuals must have knowledge
and expertise in finance, municipal bond markets, management,
law, or organization, or operation of business or government,
seven board members could come from any one of those subgroups,
but not all, correct?
Mr. Weiss, I apologize if I put you on the spot there.
Mr. Weiss. Not at all, I think that this is an area we
continue to develop with the committee. I think that the
principles for the composition have been established that it
must be a deeply experienced board, an independent board, free
of all conflict of interest and broadly representative of the
stakeholders who are affected by the restructuring.
Mrs. Torres. I understand the conflict of interest.
However, my concern is still that all seven members could come
from any one of those specific backgrounds, and I think that
the board should be a diverse board that represents the
interests that are being proposed here or talked about here,
not just with financial interest but also that look like the
people of Puerto Rico.
Mr. Weiss. We agree with you.
Mrs. Torres. In the early 1980s, as a young 16-year-old, I
started my first job earning minimum wage. Back then, it was
$3.35. Fast forward 35 years, we are asking 25-year-olds and
under in Puerto Rico to live within about 90 cents higher than
the minimum wage of early 1980s. How is that not going to
negatively impact the workforce of Puerto Rico? And is this
going to create a two-class type of employee where the older
employees may be the first ones to be laid off or fired under
this restructuring of wages?
Mr. Weiss. Professor Johnson addressed this issue before
eloquently. The perhaps single biggest crisis in Puerto Rico is
out-migration. In the 12 months ending October 31, 2.5 percent
of Puerto Ricans left for the mainland. That is roughly double
the rate that were leaving 2 years ago, and this is why the
comparison between Puerto Rico and Greece breaks--we are
talking about Americans.
And it is true that Puerto Rico can be an island paradise.
It is not a paradise for the American citizens who live there
today. There is 58 percent childhood poverty; 45 percent of
homes live in poverty. Government payrolls have been shrunk by
more than 25 percent, and the policy of austerity, coupled with
the suffocating amount of debt, has left the economy at a dead
end. These are the tools which will allow Puerto Rico to
emerge--and I repeat--at no cost to the Federal taxpayer.
Mrs. Torres. These are the two issues that I am very
concerned about, and I don't believe that today I have heard an
answer that has satisfied my concern.
Thank you, and I yield back my time.
The Chairman. Mr. Benishek.
Dr. Benishek. Thank you, Mr. Chairman.
Thank you all for being here today. I am learning a lot. I
guess I have a couple of basic questions here, and that is,
what if we don't do anything, what is going to happen? Maybe,
Mr. Kirpalani, you have some experience.
Mr. Kirpalani. Thank you, Congressman Benishek. Yes, and we
have seen what happens. If Congress does not do anything, then
the local legislature does, in the cover of night, pass a debt
moratorium law that denies due process and contravenes U.S.
law. I think that is going to be met with constitutional
challenges.
I am not blaming local legislators from doing what they
need to do to protect the citizens living in their home
jurisdiction, but it certainly does not uphold the rule of law.
This Congress can do that, and so we hope that you do.
Dr. Benishek. Mr. Miller, what is going to happen to the
bond markets, not only for Puerto Rico but around the country
in general, if nothing happens here? What is the story with
that?
Mr. Miller. We think that Puerto Rican bonds generally have
been moving more into distressed territory and investors have
reallocated, generally. That does not mean there could not be
further downside. I think there is more collateral damage
potentially on Puerto Rican security specifically in the
absence of congressional action, and possibly some additional
damage on the municipal bond market. Although, again, I would
emphasize that this has moved heavily into distressed debt
territory and therefore has moved heavily into hedge fund
territory, and individual investors and mutual funds have
dramatically reduced their exposure, and the municipal bond
market is relatively healthy.
I would add that state borrowing costs actually continue to
fall, and the risk premium on state borrowing costs above a
pure AAA, those risk premiums have continued to narrow, meaning
people are comfortable that states do not want Chapter 9. I
know of no state that wants to go into Chapter 9, that needs to
go into Chapter 9, or that would want a control board.
So, I think that I would continue to highlight the
territorial specific nature, not just from a legal perspective,
which is true, but also from the perspective that no state is
in the same fiscal and economic situation that Puerto Rico is
in. So, there are some very significant differences.
Dr. Benishek. Thank you.
I don't know who can answer this question, but I have some
of the same concerns that Dr. Fleming had. If we do this, how
is this going to fix all these problems? How is this going to
fix the immediate cash-flow difficulties?
Mr. Weiss, can you comment on that?
Mr. Weiss. This, in our judgment, properly completed, will
stabilize the crisis. The stay, coupled with the tools to
incentivize voluntary negotiations and the restructuring
mechanism, backed by an independent and strong fiscal oversight
board, in our judgment, will create a period of stability, but
we do agree that there needs to be additional tools over the
long run to incentivize growth. Those do not need to come
necessarily in the form----
Dr. Benishek. Well, give me an example of that.
Mr. Weiss. Our initial plan pointed to two. We believe in
the earned income tax credit as a very effective way of--a
bipartisan way of incentivizing work, bringing more Americans
in Puerto Rico into the formal workforce, which has a tendency
to expand the taxable base, and it also puts money into the
pocket of those most likely to spend it.
Dr. Benishek. I appreciate that answer. I have heard in
previous hearings about the potential for privatizing much of
the industry that is currently owned by the government. But,
how is this board going to make that happen or facilitate
something happening that they change the way they do business
there?
Mr. Weiss. In our discussions with business, it is clear
that there is significant appetite to invest in Puerto Rico,
both to modernize the electricity grid, to provide alternative
forms of power generation, to invest in infrastructure. No one
will invest in the face of an economic crisis. The crisis needs
to be stabilized, and then the significant interest in
investing in Puerto Rico will materialize.
Dr. Benishek. What kind of a timeline are we talking about
for all this to happen? Say this bill passed tomorrow through
the House and all that, what is the timeline you are talking
about?
Mr. Weiss. For it to be done responsibly, for there to be
an ample opportunity for creditors to negotiate in the
voluntary process in order for the oversight board to implement
its work in a thoughtful way and to provide the transparency of
financials that we all seek, it will not happen overnight.
Dr. Benishek. You are wasting time here because my time is
up now. I did not get an answer to my question.
Thank you, Mr. Chairman.
The Chairman. Just tell him ``now.'' Just say ``now.''
Mr. Weiss. A year and a half, 2 years.
The Chairman. All right, Mr. Cartwright, you are
recognized.
Mr. Cartwright. Thank you, Mr. Chairman.
And thank you to our witnesses for coming today to discuss
a crisis that will shape Puerto Rico for decades to come and
could have ripple effects across our entire Nation.
We all know the situation in Puerto Rico is dire. Congress
has to act quickly to address this growing humanitarian crisis,
but I do have grave concerns that some of the proposals
concerning this crisis either have little to do with addressing
the actual issue at hand or potentially could exacerbate
problems for Puerto Rico in the long run.
Under current Federal law, if an employee is less than 20
years old and is in his or her first 90 days of working with a
particular employer, Federal minimum wage laws allow the
employer to pay them a sub-minimum wage of $4.25 an hour, and
the justification, of course, is that they are apprentices and
they are learning the trade of the job.
The draft of the bill we are considering tomorrow changes
that. It allows the Governor of Puerto Rico to lower the
minimum wage in Puerto Rico to $4.25 for anybody who is under
25 and is in their first 5 years on the job, not just 90 days.
Yet, there are professions that require 5 years of on-the-
job training, some medical professions, plumbers or
electricians, for example, but workers in these industries are
generally rewarded with much higher salaries than minimum wage
after their training is complete to help justify lower
salaries, which are generally well above $4.25 anyway, while
training.
Professor Johnson, I want to ask you, do you know of any
minimum wage jobs that require 5 years of on-the-job training?
Dr. Johnson. I cannot readily bring to mind any such jobs,
Congressman.
Mr. Cartwright. Me neither.
How about you, Mr. Weiss? Do you know of any such jobs,
minimum wage jobs that require 5 years of on-the-job training?
Mr. Weiss. No, sir.
Mr. Cartwright. OK. Another issue I have a concern about is
emigration. One of the drivers of the economic crisis in Puerto
Rico is the roughly 100,000 people per year who are moving to
the mainland for better economic opportunity. I am concerned
that drastic measures, such the proposal surrounding minimum
wage, could accelerate and exacerbate this emigration and
deepen Puerto Rico's crisis in the long run.
According to the CDC, the average age for a new mom on the
island is 24.1 years old, so a huge percentage of new moms in
Puerto Rico would have to raise their child on potentially
$4.25 an hour. I wouldn't stick around for that if I didn't
have to.
Professor Johnson and Mr. Weiss, what does it mean for the
economic recovery if young families leave the island?
Professor Johnson?
Dr. Johnson. That is your tax base walking out the door or
getting on the plane and flying to the mainland. And the more
people that leave, of course, Congressman, the more relatives
you already have, the more connections you have, the easier it
is to get a job, so it is a self-reinforcing process that is
already accelerating, as you said and as Mr. Weiss has said.
Mr. Cartwright. And young families are crucial to anchoring
the economic recovery, aren't they, Professor Johnson?
Dr. Johnson. Yes, of course. We need young people
throughout the U.S. economy, including in Puerto Rico.
Mr. Cartwright. Do you agree with that?
Mr. Weiss. Fully agree.
Mr. Cartwright. OK.
Now, Professor Johnson, do you think at the end of 5 years
of paying a worker a sub-minimum wage to the employee,
companies will be more likely to value the training their
employees will have accumulated and be happy then to pay the
$7.25 an hour, or will this minimum wage provide an incentive
to let these employees go and start a new clock with a new sub-
minimum wage 20-year-old worker?
Dr. Johnson. I think that point was already made by Mrs.
Torres. I think it is a very legitimate fear to consider, and I
absolutely share it.
Mr. Cartwright. All right. So if that is the case and young
workers put this together, they put two and two together, and
they realize that this is going to happen, what is that going
to do to the incentives to take this work and to stay on the
island? Professor?
Dr. Johnson. I think that any young person who has the
ability to leave will leave, and they will find a good job at a
higher wage and better opportunities in the 50 states.
Mr. Cartwright. So, it is an even bet that this is a
proposal that will exacerbate the crisis because of increasing
emigration from the island, isn't it?
Dr. Johnson. If the Governor opts into it. You do have the
safeguard that the Governor would have to own this. I don't
know why any governor of Puerto Rico would opt into it,
frankly.
Mr. Cartwright. All right.
Now, Professor Johnson and Mr. Weiss, aside from
encouraging young people to leave, what are the other effects
that such a low minimum wage on the island would have? What
impact might it have on the long-term recovery prospects on the
island and its economic stability? Mr. Weiss?
Mr. Weiss. The minimum wage aspect would have to be elected
by the Governor. I think the arguments have been clearly stated
both by you, Congressman, and by Professor Johnson. The bill in
its totality has enormous benefits, though, which in our
judgment should stem out-migration if properly implemented.
Mr. Cartwright. Professor Johnson?
Dr. Johnson. I agree with Mr. Weiss.
Mr. Cartwright. OK. Thank you.
I yield back.
Mr. Lamborn [presiding]. Thank you.
Representative Duncan.
Mr. Duncan. Thank you, Mr. Chairman.
We still have not seen audited financial statements for
Puerto Rico, and I think in order to make good decisions here
in Congress, we need to see that and understand the ability or
inability of Puerto Rico to actually pay.
The Ranking Member used a term earlier, ``greedy bond
markets,'' but nobody forced Puerto Rico to borrow this money.
Investors took a risk with their hard-earned dollars. It was
their money they invested in Puerto Rico. That is not greed, in
my opinion. They invested based on a bond that was priced for
the risk.
So, let's use terms that are adequate. The Governor of
Puerto Rico, I believe, has calculated access to bankruptcy
protections far before we started discussing this here in
Congress. Are you gentlemen familiar with the Argentina
situation?
Argentina has bonds. The Kirchner regime did not want to
pay those bonds. They were almost in default. Now we see the
Macri government actually come to Wall Street, come to the
bondholders, the hedge funds, and actually start renegotiating
that debt, and the optimism in Buenos Aires, Argentina, is so
strong, you can taste it. Optimism for solvency, access to
capital markets for future investment, infrastructure
investments, that is the proper way to do it--approach it in a
sound, fiscally-responsible manner and renegotiate the debt to
come up with a plan.
Mr. Weiss. Congressman.
Mr. Duncan. Now, Mr. Miller, Chicago's school system. Your
firm invested, last month, $725 million in bonds with an 8.5
percent yield. Does Chicago's school system have access to
Chapter 9 bankruptcy courts?
Mr. Miller. They do not at this time.
Mr. Duncan. They do not. And I think that actually
reflected on the yield that your investors were looking for. I
have trouble comparing the Chicago situation where they do not
have access to any bankruptcy protections or whatnot, and the
Puerto Rico situation where they do not have access to
bankruptcy, but this bill would actually give them some access
to some bankruptcy provisions, section 1129 cramdown provisions
concern me greatly.
I believe that we are going down a slippery slope here,
because states do not have access to bankruptcy protection to
this point and under Chapter 9, but I believe that there are
many in Congress that would love to see states do that.
I come--my accent may give it away--I come from a southern
state. We generally are fiscally responsible in southern
states. We do not saddle our citizens with unsustainable
entitlement obligations. We do not take on debt. In fact, South
Carolina has a balanced budget requirement in our Constitution.
We cannot borrow money like that. And if we do borrow money, we
have to be able to pay that back. We cannot incur debt after
debt.
But what you see in Illinois, California, and New York,
they all adopt absurd governing principles of spend, spend,
spend, and they pass the political responsibility to another
authority. So, I do not want to allow states to be able to
access bankruptcy.
Municipal government and other government entities, they
are different than private entities. They do not have to fork
over capital or hard assets to their creditors when they file
Chapter 9.
So, let me just end with this. It is time somebody takes
some fiscal responsibility here. I have trouble sitting in the
halls of the U.S. Congress when our Nation is $19 trillion in
debt on balance sheet, $100 trillion-$150 trillion in debt in
off-balance sheet liabilities that the American taxpayers are
going to be responsible for, and we are discussing how to tell
Puerto Rico how to manage their debt and their fiscal affairs.
I really have trouble with that.
Mr. Chairman, I don't really have any questions for the
witnesses, and I will yield back.
Mr. Lamborn. Mr. Weiss, did you have a comment?
Mr. Weiss. Congressman, just with respect to Argentina, two
comments. One, it has taken 15 years to resolve, and throughout
that period of time, Argentina has been sidelined from markets.
Two, Puerto Rico is not Argentina. It is part of the United
States.
We have a choice today between a disorderly process, which
will ultimately result in a direct transfer of taxpayer funds
in the form of a bailout and this is the----
Mr. Duncan. Reclaiming my time, I don't have an objection
to a control board or an oversight board that will hold Puerto
Rico accountable and can renegotiate the debt, not cramdown the
debt, not seek bankruptcy type protections.
I think we could do a lot better than what we have done
with this bill, but I yield back.
Mr. Lamborn. OK. Thank you.
Representative Polis.
Mr. Polis. Thank you, Mr. Chairman.
I appreciate the committee moving forward on legislation to
address the devastating debt crisis in one of our territories,
Puerto Rico, which serves to remind me how the territory status
is neither in the interest of our country nor Puerto Ricans. It
is my distinct hope that Puerto Ricans will decide to apply for
statehood soon and that we give that application favorable
consideration promptly, should that be what the Puerto Rican
people choose. Otherwise, we will be back here again in the
Natural Resources Committee, where we would never be if this
was a state, talking about something that we would never talk
about if it was a state, and I think that we should have the
same treatment that we would have for any other state in our
country for Puerto Rico.
Rather than talk about working out the debt, I want to talk
about economic growth and how we can get there. I think the
only real way out of this, regardless of what we do and whether
Congress tinkers or whether the courts tinker, is we need a
higher rate of economic growth in Puerto Rico.
There have been some ideas bandied about here. I think it
is no coincidence that with the expiration of section 936 tax
credit is when the recession began in Puerto Rico. It may very
well not be that instrument. I have a number of ideas, as many
other colleagues do, about what we need to do to get a higher
rate of economic growth in Puerto Rico. I don't think the
answer is lowering the minimum wage with labor and mobility. I
cannot imagine, you have a young person who is 20 years old,
and they can either earn $4.50 or we have places going the
other way on minimum wage, $12, $15. So, you cannot have that
kind of delta and expect it to contribute to increased
employment when you have labor mobility. The last thing we want
to do is lure the best and brightest off the island, especially
with the cost of the U.S. Treasury of picking up additional
health care, dual-eligible Medicare/Medicaid beneficiaries, all
of this cost.
We want a vibrant Puerto Rican economy, and I think we need
to look at the way we can do that with all the weapons in our
arsenal, including tax credits, including manufacturing,
looking at the manufacturing economy. My question for Mayor
Williams is, can you speak to the need for economic growth as a
component to help Puerto Rico work through the issues of debt
and financial responsibility, regardless of what comes out of
this Chamber?
Mr. Williams. I think the control board was a powerful
inducement for us to rationalize our balance sheet, establish
settled expectations, and, on that basis, begin an economic
growth program based on looking at our balance sheet. How do we
increase our sales tax by increasing retail, increase growth in
the downtown? How do we increase our income tax by bringing new
residents to the district? I think very powerfully here, as a
matter of compromise, I would prefer a stronger control board,
because we had a really strong control board in DC, but I
recognize that compromises have to be made. And I think, that
said, not letting perfect be the enemy of the good, the
oversight board here has powerful tools to influence the right
strategy toward growth.
I will say one final thing. One of the things that happened
in the District was once we had done some severe cost cutting,
rationalization of our balance sheet, established faith and
credit, particularly with the Congress, we were able to get,
similar to other states, a Medicaid match that worked better
for us. I would hope that in this instance, as I alluded to in
my oral testimony, that part of this rationalization process,
establishing expectations process, Puerto Rico will be able to
enjoy the same Medicaid relationship with the Federal
Government that other states have.
Mr. Polis. Thank you.
I yield to my colleague, Ms. Velazquez.
Ms. Velazquez. Thank you for yielding, and I just want to
say for the record that I want to thank Chairman Bishop,
Ranking Member Grijalva, and the Resident Commissioner for
their leadership, as well as Speaker Ryan and our leader, Nancy
Pelosi.
In some areas, we are in a much better place than we were 2
weeks ago when the initial draft was made public. The oversight
board has improved, but it still needs further improvement. So
the ultimate return for Puerto Rico's economy--it is one thing
to have the board approve peaceful plans on--but on a whole
different matter to have the board approve. It is not working.
But it is a whole different matter to have the board
approve laws, regulation, and contracts. This is a degree of
micro-management, and I will put this plainly. It is insulting
to the island, which has a long memory of the U.S. military
takeover in 1898. The same is true about the fact that today we
don't have among the witnesses any representatives from the
government of Puerto Rico, and here we are discussing important
legislation that will impact the lives of the people of Puerto
Rico.
What we are demonstrating today as a body, the House of
Representatives, is that we have absolute power over the people
of Puerto Rico.
So, plainly, we have a colony in the Caribbean. No longer
do we use the argument that we can showcase Puerto Rico as a
democracy that we use when we needed to get in the face of the
Cuban Government.
I yield back.
Mr. Lamborn. Thank you.
Representative Labrador.
Mr. Labrador. Thank you, Mr. Chairman.
Thank you, witnesses, for being here today.
As a person born in Puerto Rico, this has hit close to
home. I am now the Representative from Idaho, which is very far
away from Puerto Rico, but, obviously, I have many memories. I
left the island when I was 13. I have many friends and family
members, and I am concerned about the crisis that is happening
in Puerto Rico, unfortunately, a crisis that is self-imposed.
This is not a crisis of the Government of the United States
imposing bad policies on the people of Puerto Rico. This is a
crisis of the people of Puerto Rico making unfortunate
decisions that have led us to this point that we are dealing
with it in Natural Resources, and I wish we were not here to
deal with this issue.
I just have a few questions, and I am hopeful that this
oversight board will take seriously the opportunity to provide
Congress and the President with recommendations on what
additional steps we can take on economic policy, because the
board by itself and restructuring by itself is not sufficient.
There are many other things that we need to do to make sure
that the people of Puerto Rico can use the best tools.
And as a conservative Republican, I hope those tools are
pro-market tools, because we have seen some anti-market tools
being used in Puerto Rico for a long time that have led to this
crisis.
Mayor Williams, I thank you for being here again. I have
always enjoyed your testimony. How does this bill's oversight
board differ from the financial control board that was put in
place for DC, and how is it similar?
Mr. Williams. As I have read the bill and understand the
architecture and design of the bill, the board here is intended
to be much more principally a convener and a facilitator to use
its authority as a gateway to debt negotiation and
restructuring; to use its authority to approve a budget to
drive the right reorganization, the right rationalization of
the balance sheet, and the right performance measures in the
government. And I think it is a wise balance, given all of the
conflicting views.
All that said, the authority in the District was more
direct. The board had the authority in the first instance. It
would offer the District the opportunity to do a budget, but
after the first instance, we had a 1996 budget called ``the
1996 budget on second look,'' and it was really the 1996 budget
you don't want to look at, because it was pretty bad. So, the
board ended up doing it itself, so----
Mr. Labrador. You mentioned that you would actually prefer
a stronger control board. Do you think we could make this a
stronger control board?
Mr. Williams. I recognize that this is a process of
compromise and what I am saying is: I think that this bill
works to achieve its intended purpose. I mean, yes, in an ideal
world, I would prefer a stronger authority. For example, I
mentioned a CFO. I think it would be great for the island to
have a very strong CFO, going forward, who is autonomous and
can provide an autonomous revenue estimate for the country.
Mr. Labrador. OK. Thank you.
Mr. Miller, a lot has been said over the past few weeks
that this bill will have a disastrous impact on the municipal
bond market. Are those predictions accurate, and why or why
not?
Mr. Miller. I don't think those predictions are accurate.
These concepts have actually been floating around for several
months. In addition, the draft itself has been out for a couple
of weeks and the municipal bond market has really been
recovering ever since 2013. Excluding Puerto Rico, the risk
premiums across munis over and above AAA, they continue to
narrow ever since 2013, and in addition, the consistency of
investor inflows into muni bond mutual funds, particularly
those with less Puerto Rican exposure, the consistency of those
inflows has been striking since 2013, with over $60 billion put
in.
Mr. Labrador. If we pass this bill, will the municipalities
in my state, in Idaho, will they have a more difficult time
issuing bonds than they have in the past?
Mr. Miller. No, I don't think so.
Mr. Labrador. Will the state of Idaho or any other state
have a more difficult time issuing bonds?
Mr. Miller. No.
Mr. Labrador. No. Thank you.
Professor Kent, does this bill set a precedent that will
allow states to declare bankruptcy?
Mr. Kent. I don't think it does. There would be very, very
serious constitutional difficulties, probably insurmountable,
with something that looks like this bill here as applied to the
states. There would be problems with the 10th Amendment. There
would be problems with sovereign immunity. There would be
problems with the so-called contracts clause of the
Constitution. No is the short answer.
Mr. Labrador. Is this bill constitutional that we are
discussing today?
Mr. Kent. I do think it is, yes.
Mr. Labrador. OK.
And, Mr. Kirpalani, when we are talking about this debt,
there have been some groups that have been calling this Super
Chapter 9. Why is this not, or why is it Super Chapter 9? Why
isn't it Super Chapter 9?
Mr. Kirpalani. Right. Thank you, Congressman. The big
problem with Super Chapter 9 or Chapter 9 is who controls the
restructuring process. If the elected officials are controlling
the restructuring process, there is a potential for problem and
disappointed results. Here, it is the board that controls it,
the board that formulates the plan, and the board that
negotiates with the creditors. That is the critical difference.
Mr. Labrador. Thank you.
I yield back.
Mr. Lamborn. Representative Costa.
Mr. Costa. Thank you very much, Mr. Chairman, members of
the committee.
It seems to me that we are engaged in a process here in
which there is some precedent when we look at Detroit and we
look at New York and we look at other examples over the years
in which similar entities have found themselves in this
situation for whatever reasons. So I would like to ask
questions to Mr. Weiss and Mr. Miller as it relates to the
timeline.
But it seems to me, before we get there, in terms of this
process, this legislation we are trying to put together, there
are three areas that are still being worked on: one is the
jurisdiction of this oversight board; two, is the makeup of the
board; and, three, is a host of miscellaneous items that have
been mentioned, whether it be minimum wage, overtime, the
ultimate impacts on the Island of Vieques, which I have been to
there. And that is going to be, I believe, at some point in
time, the subject of a negotiation, as this legislation already
has become.
But let me go to the former mayor here, because you have
your own experience and multiple hats that you have worn. Under
the category of lessons learned, what would you suggest to us
as this legislation is being formed, realizing that, at the end
of the day, we are not going to all be satisfied with all of
the aspects, but do you think it finds the sort of necessary
compromise to get the job done on behalf of the people of
Puerto Rico?
Mr. Williams. Well, in Washington, DC, I think we had our
first access to the credit markets for short-term debt in 1996.
And I came in in the fall of 1995. There was downsizing that
had taken place. We had taken control, under the oversight
board, of the financial operations of the District, so I was
able to establish credit. It seemed harsh and it seemed severe,
but we established faith and credit. We were able to access the
markets.
One lesson I think is, in my humble opinion, I don't think
you are really helping anyone by trying to be, ``too nice.'' I
think it is better to provide the medicine, provide the
therapy, and get underway as quickly as possible to establish
the expectations, get the economic growth program underway, get
access to the markets underway. That is one lesson.
The second lesson that I think is very important and should
not be underestimated is, when people talk about budgets, they
often talk about conception of the budget, formulation of the
budget. But as we have seen in many different levels of
government from this level on down, budget execution is
crucially important. So, the execution of a budget and a
financial plan is just as important as its conception, and I
would pay attention to that in the program here.
Mr. Costa. All right. I want to get to my other questions.
But think more about that, and I think if you provided that in
the form of a letter to the committee, that would be helpful.
By your comments, I assume that the 14-year example in
Argentina is not an option in terms of how we go forward.
Mr. Weiss, the legislation has changed. There are
modifications that have been made. What additional changes
would you like to see in either the jurisdiction of the
oversight board or the makeup of the board, all these
miscellaneous issues, and please be quick?
Mr. Weiss. We are getting close to a point where there is a
potential for a bipartisan solution.
Mr. Costa. Well, there has to be. Without a bipartisan
agreement, there is no agreement.
Mr. Weiss. And without an agreement, there is a collapse in
Puerto Rico.
Mr. Costa. So, for the timelines for that purpose, how
quickly do you think we need to get there on this bipartisan
agreement?
Mr. Weiss. As soon as this hearing ends, we are going to
sit with the Chairman and his staff. We will work through all
of our technical edits on this draft, the substantive issues I
enumerated in my testimony, and we have to get this done.
Mr. Costa. We have passed one deadline on April 6. Isn't
that correct? Then we have another deadline approaching on May
1, on the $2 billion payment. Then is July 1. So we have
several deadlines that are looming.
Mr. Weiss. The time to act is now. We are past every
deadline.
Mr. Costa. OK.
And, Mr. Miller, do you care to confirm, aye or nay.
Mr. Miller. I agree. The May 1 payment is significant and
the July 1 payment is even more significant.
Mr. Costa. So are those the three buckets, roughly, that we
have to find this consensus here sooner rather than later?
Mr. Weiss. Technical items, restructuring workability, and
the other items you mentioned. We can get there if there is a
will.
Mr. Costa. Clearly. And without a bipartisan agreement, we
have no bill.
Mr. Weiss. Yes.
Mr. Costa. So it seems like we know where the challenges
are as it relates to the jurisdiction, as it relates to the
makeup. There are a host of miscellaneous issues that the
Representative from Puerto Rico has outlined, and I think we
have to come to an agreement sooner than later. We are not
going to get everything we want.
Thank you. My time has expired.
Mr. Graves [presiding]. The gentleman from California, Mr.
LaMalfa, is recognized for 5 minutes.
Mr. LaMalfa. Thank you, Chairman Graves.
Mr. Kirpalani, your clients, my understanding, are
GoldenTree Asset Management, Merced Capital, Tilden Park
Capital Management, and the Whitebox Advisors. Is that correct?
Mr. Kirpalani. That is correct, Congressman, in addition to
some individuals, yes, sir.
Mr. LaMalfa. When did your clients buy most of their COFINA
bonds? Was it before or after 2014?
Mr. Kirpalani. Congressman, unfortunately, I don't know
when they acquired debt. We have represented original owners of
COFINA debt, and we continue to do so. And we represent some
that have acquired them in the secondary market from people who
could not afford to hold onto them.
Mr. LaMalfa. So it is fair to say most of those bonds were
bought after it was well known that Puerto Rico was distressed
and bought them for less than original investors had paid for
them?
Mr. Kirpalani. I honestly cannot comment as to when exactly
they bought them. I would assume that it is a mix: it is
probably some who bought initially; some who bought when the
debt was at 90, 80, 70. I honestly don't know.
Mr. LaMalfa. So you think it is a mixture. Not all recent
purchases----
Mr. Kirpalani. That is correct. Absolutely right.
Mr. LaMalfa. OK. So these are hedge funds. They regularly
seek out situations where, especially post-2014, they are
looking to invest in a situation where there is trouble?
Mr. Kirpalani. These particular clients that I am
representing I have actually not seen very active in the hedge
fund space. I have never represented them before. There are
certain hedge funds, some who have bought up GO bonds in
particular, who are looking to try to have an event-driven
strategy to capitalize on returns.
Your colleague earlier talked about Argentina. Argentina
was held up for 15 years, and the hedge funds that bought
Argentine debt actually made 38 percent return for over an 8-
year period of time. And some of those funds are actively
campaigning now here so that Congress does not act, and they
are just hoping that there is no progress, and they will use
their litigation tools to try to achieve a result like that.
My clients actually are supportive of responsible
legislation. We think that the key point here is that there is
a good control board in place and that it respects the rule of
law. If we could change anything, we would actually give
greater deference to the judicial system in Puerto Rico. For
issues of property rights and constitutional rights, to Ms.
Velazquez' point earlier, we should defer to the autonomy and
sovereignty of Puerto Rico and uphold their laws too.
Mr. LaMalfa. OK. That sounds good.
Now, some of these bonds are not due for quite a few years,
a decade or maybe even two decades. But my understanding is
that you have been asking the Commonwealth of Puerto Rico to
start repaying sooner than they would have under the original
agreement. So, with Puerto Rico being in such a cash-stressed
situation, why would these particular investments, especially
the more late-arriving investments, go to the head of the line
for repayment with that much stress?
Mr. Kirpalani. That is a terrific question, Congressman.
Let me try to explain in a very short period of time here.
Investors who bought COFINA senior bonds, this was the original
safe bond that was introduced when the economy actually
collapsed in 2006 in Puerto Rico. There were long-term
investors, as you said, for 40 years, 30-something or 40 years,
and the protection they had was if there is a default, they
would get paid ahead of any bonds that came later. So there is
a big swath of subordinated bonds, contractually junior bonds,
somewhat called junkier bonds, that came later. So, the only
thing that we were saying is: We will reduce the overall
payment requirements. We will give back $19.5 billion over the
next 35 years to the people of Puerto Rico, and the only thing
we ask is respect our contract rights--that is all--and that we
get paid before the juniors. But some of them actually will get
paid later than maturity, absolutely.
Mr. LaMalfa. For those that would go ahead of their
contracted time, though, isn't that kind of stepping out of
line? Wouldn't that be kind of a windfall for those?
Mr. Kirpalani. No, sir, because contractually upon a
default, everything is accelerated and it is due immediately.
So what we would do is actually forbear, take no payments at
all for a year, and then have payments for the next 5 years and
slowly inch back up to what the government of Puerto Rico has
said they could actually afford. So the only issue, really,
between us and the Commonwealth of Puerto Rico are the holdup
creditors, who are the junior bondholders who will not go
along. That is the problem.
Mr. LaMalfa. OK. Thank you for your answers. I will yield
back, Mr. Chairman.
Mr. Graves. Mr. Clay is recognized for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
Professor Johnson, one of the areas of concern for me is:
How do we best protect pensioners and retirees who, no fault of
their own, stand to be hurt by severe reductions in pension
benefits? Have you given that much consideration?
Dr. Johnson. It is a very difficult issue, Congressman. So,
as you know, people who live in Puerto Rico pay payroll taxes,
and they do receive Social Security. So there is a Federal
dimension. But there are also government people who work for
the government who receive government pensions. And those
pensions are, without question, under pressure. And the pension
fund, I believe, is out of cash or very nearly out of cash.
I think that what you say in legislation is that there has
to be a sustainable fiscal plan. To Ms. Velazquez' point, I
believe that what you have here is a governor with the right to
design a plan making decisions, including about what happens to
pensions. That plan has to be consistent with what the board
regards to be sustainable, but that level of decision, I
believe, if you were to pass this legislation, would still
reside with the Governor and the legislature of Puerto Rico.
I don't have an easy answer. There are no easy answers. But
that is a decision that will be made by the elected officials
of Puerto Rico.
Mr. Clay. Thank you.
Mr. Weiss, the proposed legislation does a delicate dance
with the creditors of the island nation. In its current form,
will this provide the solution, or is there more work to do
there?
Mr. Weiss. Congressman, we believe that we can get there if
the good spirit of cooperation on technical items which need to
be remedied remains in place and we work quickly and
diligently, we believe that we can get to a workable solution.
I highlighted three elements in my oral testimony where I think
substantial work needs to be done first. There will be a host
of other technical issues. But as Congresswoman Velazquez
pointed out, we have made a lot of progress.
This is the mayor's term. This is a wise balance. It is
tough for the people of Puerto Rico. It is tough for their
creditors, some of them. But in the aggregate, it is going to
produce the best overall results in our judgment, properly
constructed for the people and for the investors.
Mr. Clay. Thank you.
Mr. Chairman, at this time, I will yield to my friend and
colleague from New York, Ms. Velazquez.
Ms. Velazquez. Thank you.
I thank the gentleman for yielding.
Mr. Johnson, members here are concerned and troubled by the
fact that, yes, in Puerto Rico, they have made bad decisions
fiscally. They have spent too much. But I would like to ask
you--workers in Puerto Rico pay the same payroll taxes as those
living in the mainland, yet they receive fewer benefits than
those who live in the United States. Do you think that is fair?
Dr. Johnson. No, Congresswoman, I don't think it is fair.
In a previous hearing, I testified that my recommendation would
be to move Puerto Rico toward the same fiscal relationship with
the Federal Government that the 50 states have. I think that
would be fair. That would be reasonable. You could separate it
from the issue of statehood, although, obviously, it comes up
in the context of statehood.
And, specifically, I wish that you were addressing the
earned income tax credit in this legislation because that is
one salient point that actually people on the right and the
left generally agree on is a sensible program, and Puerto Rico,
people who live and work in Puerto Rico do not have access to
that, as you know.
Ms. Velazquez. Well, the fact of the matter is that this
legislation that we have before us lacks any economic growth
policy. And yes, that will be one area that will benefit
greatly the people of Puerto Rico.
Mr. Weiss, in your testimony, you stated, and I quote,
``The process for entering restructuring should not require a
supermajority vote of the board. A minority of the board should
not have veto power at the critical juncture when all other
options have been exhausted.''
Given your comments, is it your view that requiring five
board members to vote affirmatively to approve Puerto Rico's
entrance to judicial restructuring is an insurmountable hurdle,
in fact, denying Puerto Rico restructuring authority?
Mr. Weiss. Congresswoman, it is one of the three elements I
highlighted in my oral testimony. I absolutely stand behind the
words that I used. But I also expect that it will be among the
issues where we can make progress with the committee and with
the Chairman and his staff.
Ms. Velazquez. OK.
Thank you, Mr. Chairman. I yield back.
Mr. Graves. Mr. Westerman is recognized for 5 minutes.
Mr. Westerman. Thank you, Mr. Chairman.
And thank you to the panel for being here today.
As unpleasant and as unfortunate as this debt issue is in
Puerto Rico, I am actually glad that we are here in Congress
talking about debt, and I hope that we will have more serious
discussions about debt. I say that based on the fact that if
you look at the debt per capita in Puerto Rico, $115 billion
over roughly 3.5 million people, that is just under $33,000 per
person. If you look at the debt here in United States, $19.2
trillion over 323 million people, that is over $59,000 per
person.
We have a debt per capita 81 percent higher than the
territory of Puerto Rico. This may be the classic example of
worrying more about the plank in our own eye than the speck in
our neighbor's eye. That said, I think we can learn from
history. Any of us who have made an investment have probably
read the small print that says: Past performance is not an
indicator of future performance.
My state of Arkansas has a statistic that I am not very
proud of. We were the last state to default on our debt. It
happened in 1933. It happened after the state had invested
heavily in bonds for infrastructure, a couple of natural
disasters, crash of the stock market, and the state found
itself in a very precarious situation. When we talk about
bankruptcy, I think to the common person, our state was
bankrupt, but we did not have Chapter 9 bankruptcy protection.
One historian wrote that we were flat broke. The State
Treasurer said at one point in time the balance in the state
budget was $4.92. Arkansas suffered through that. They took a
substantial hit to their bond rating. It was actually 1949
before the state ever issued another bond. But through that, we
also put better fiscal policies in place. We had a balanced
budget act that was passed. I was serving in my state
legislature in 2011 when many states were having fiscal issues.
Our state was actually cutting taxes and had a surplus budget
because of the pain that we had suffered many years ago and the
reforms that we had put in place.
Mr. Weiss, other than the fact that Puerto Rico has not
fixed their problem, what is the emphasis for the Federal
Government to interject itself into the Puerto Rican debt
issue? And I remind you that it is the Federal Government that
is 81 percent per capita more in debt than the government that
we are trying to help.
Mr. Weiss. The Federal Government borrows on a 10-year
basis at 1.75 percent. Puerto Rico is borrowing in excess of 12
percent. In fact, it is not borrowing at all right now because
it is shut out. We have three interests: Number one, we believe
that the safety and economic well-being of the 3.5 million
Americans in Puerto Rico is at stake. Essential services today
are being curtailed. Hospitals are being shut and out-migration
has accelerated to the extent that 2.5 percent of the Americans
in Puerto Rico are now coming into the mainland every year.
We are inextricably bound to Puerto Rico. How they got
there is not a topic of today's discussion. There is a long
history of mismanagement that extends back decades. But the
complexity and extent of this debt crisis is such that it falls
on Congress to act in order to set Puerto Rico back on the
right path.
Mr. Westerman. Mr. Kent, even if a future Congress tried to
use this legislation to establish precedent for a Chapter 9
protection for states and potentially violate the Constitution
in doing so, would that Congress still not have to pass
legislation? And is there not precedent that establishes no
Chapter 9 protection allowed for sovereign states? That
question has been asked many ways. It is another attempt.
Mr. Kent. Certainly, Congress would have to authorize it.
And as I said before, I think the constitutional difficulties
are so severe that it is hard for me to imagine how it could
possibly be constitutional with regard to the states. There is
contracts clause, there are sovereign immunity issues, and then
there are also issues with 10th Amendment and state sovereignty
being invaded. So, I just don't see how it could happen.
Mr. Westerman. Mr. Miller, I may have time to get this
question out there. Would this legislation cause a ripple
effect in the bond market?
Mr. Miller. No, I think the opposite. I think it would be a
calming effect on the bond market.
Mr. Westerman. And the opposite of that, if nothing is
done, would it cause a ripple in the bond market?
Mr. Miller. The risk is higher if nothing gets done.
Mr. Westerman. OK.
Thank you, Mr. Chairman.
Mr. Graves. Thank you.
I recognize myself for 5 minutes.
Mr. Kirpalani, I heard folks talking earlier about ads that
are being run in various districts. Could you give your opinion
on what you think the outcome of those who are funding those
ads is, what their objective is?
Mr. Kirpalani. Sure. Thank you, sir.
To be perfectly honest, just to start with, this is my
first experience with Washington and with this whole political
process. I didn't even know----
Mr. Graves. I would urge you to leave.
Mr. Kirpalani. I didn't even know that you could do that
kind of thing, place ads in the newspapers in Members' home
districts when they are at home on recess with their families.
I think it is really horrible.
I think that the real goal here is, if you really dissect,
which I have been doing over the last 10 months or so, what the
motivations are, the folks that are putting the ads, they
bought New York-governed GO bonds issued by Puerto Rico. So
just take a step back and think about that. The sovereign of
Puerto Rico, territorially sovereign of Puerto Rico, issues
bonds, but the creditors insisted--and these are creditors who
insisted that the minimum entry to participate in that offering
is $100,000 a pop. This is not your individual retail customer.
OK. These are sophisticated, well-heeled institutions. And they
said: We know how to make gambles. Our gamble is this Congress
in a bipartisan way will never act. So, therefore, let's put
New York law to govern the Puerto Rico general obligation bonds
so that when Puerto Rico collapses, which it has done, and
Puerto Rico issues a debt moratorium law, which it has done, we
will ride free. So the only way that that debt could also
participate in an overall restructuring process is if the U.S.
Congress acts. They are just hoping that does not happen.
Mr. Graves. Do you think that they would also prefer some
type of bailout from Congress or from the Federal taxpayers?
Mr. Kirpalani. They are just spinning absolute fiction.
That is what they are doing. There is no bailout concept here.
There is nothing in the bill that suggests a bailout. It is,
frankly, just the opposite. It is the only way to rationalize
the resources that are available to repay creditors in a timely
way. I am also representing a couple of individuals: Barry,
from Minnesota, who is a retiree from New York City, a former
public worker; as well as Pepin from San Juan, who is also
retired but, unfortunately, now has to restart working at a dry
cleaning business.
These folks want to hold on to their investments. They
cannot afford to sell them at the depressed prices. They just
need to get repaid, and they are worried very, very much about
their financial future. And this type of responsible
legislation gives them encouragement.
Mr. Graves. Thank you.
Mr. Weiss, thank you for returning. Your testimony in both
instances has been very educational. I know you have been asked
this question in some form previously, but could you explain
what you view as being the alternatives right now that Congress
has in order to address the crisis in Puerto Rico right now?
Mr. Weiss. Thank you, Congressman.
On the one hand, it is a cascading series of defaults,
mounting litigation. The constitutionally-protected debt that
is due in July cannot be paid. The moratorium which has been
enacted in Puerto Rico will apply in each subsequent repayment
instance. In our judgment, chaos will ensue, and the economy
will face another lost decade with accelerated out-migration.
Our alternative to that, which involves pain for all sides,
but, again, is this wise balance, is to put in place
independent fiscal oversight and a restructuring set of tools,
both incentives for voluntary negotiations and a fallback in
the event that those fail. This is, by far, the best outcome
for the people of Puerto Rico, for markets as a whole, as a
colleague has attested, and, ultimately, will provide the best
recovery for creditors taken as a whole.
Mr. Graves. Mr. Weiss, would you see no action by the
Congress as increasing the chances of liability for taxpayers
or decreasing?
Mr. Weiss. There is an element of inevitability around that
question. This is the alternative to a bailout.
Mr. Graves. Thank you.
One last point I want to make and I know time is about to
run out. Look, I don't want to get into a political or partisan
battle in this hearing. I appreciate the cooperation everyone
has had. There has been a bit of a focus on minimum wage, and I
just want to make note that, in 2013, there was unanimous
action by this Congress to ensure or to prevent the increase in
minimum wage in territories in the United States, again,
unanimously passed, signed by this President. I understand that
there are challenging conditions, but I have concerns with
imposing the minimum wage standard for the most developed
country in the world upon some territories that may not have
similar conditions. I just want to make note, and I am looking
forward to continuing to work with all of you on establishing
the best policy.
I will now recognize Mr. Hice for 5 minutes.
Mr. Hice. Thank you, Mr. Chairman.
Professor Kent, you made the comment earlier, and I just
want to clarify, that in your opinion this bill is
constitutional, correct?
Mr. Kent. Yes, I think Congress has power under the
territorial clause.
Mr. Hice. Is there any constitutional precedent where this
has, or something similar has, taken place in the past with
another territory?
Mr. Kent. I am not aware of one, but there are, as I said,
identical clauses. The problem here would be if the bankruptcy
clause is said to apply and require uniformity. But like I
said, there is precedent that the other uniformity clauses in
the Constitution do not apply to Puerto Rico and similarly
situated territories. So, I don't think there will be that
problem. Congress could act in a way that either territory,
across all the territories or specific to Puerto Rico, I think,
without a constitutional problem here.
Mr. Hice. OK. We are also being told, just to carry this
line of thought a little further, that what is happening and
what is being proposed here, constitutionally, with Puerto Rico
does not set a precedent for states or cities. Out of
curiosity, does anyone know, of the other U.S. territories, are
any of them in any financial problem?
Mr. Miller. The territory that probably has the best
reception and the narrowest risk premium in the marketplace is
Guam, and the balanced budget and most stable economy. Some
concerns about Virgin Islands, some delayed audits, but not
anywhere near this kind of magnitude.
Mr. Hice. OK. But there is potential that we could be
facing this with some other territories at some point?
Mr. Weiss. Puerto Rico is multiples more stressed than any
other territory.
Mr. Hice. I understand that. But my question is, are we
going to be running down this path? Once we set a precedent
here in Puerto Rico, are we going to be running down this at
some point elsewhere?
Mr. Weiss. The U.S. Virgin Islands ran a referendum as to
the viability of a CFO, not even a control board. And by
memory--and I ask to verify this with you afterwards--I believe
two-thirds or three-quarters of the citizens voted against in
that referendum.
Mr. Hice. OK. Let me go on a little bit further, and,
Professor Kent, I will stay with you, I think, for this
question. Municipal bondholders who have a particular interest
in Puerto Rico probably are in every district represented in
this committee and in Congress, for that matter, and probably
senior citizens are most affected by that. This bill clearly
has Congress changing the rules after they have purchased an
investment. Is it your belief, is it your testimony, that
Congress has the constitutional authority to change the rules
after the fact on municipal bondholders or anyone else?
Mr. Kent. Yes, the Constitution protects contracts against
states changing them, but it does not have a similar protection
for the Federal Government. That is because the Federal
Government has the power over bankruptcies. But as I said here,
with regard to territories, Congress has an alternate basis,
and it could enact bankruptcy legislation under the territorial
clause.
Mr. Hice. I understand that case here. But you are saying
constitutionally Congress has the authorization to come in
after the fact and change the rules of the game of investors?
Mr. Kent. Well, as I understand the process, that is what
happens with bankruptcy.
Mr. Hice. I understand the process. I am asking
constitutionally.
Mr. Kent. Yes.
Mr. Hice. I would like an answer from you in writing, if
you can, where in the Constitution that would be found.
Let he hit my final thought here. Yes or no, Mr. Weiss. Let
me just ask you this: Is it problematic at all that the
oversight board has no one representing the bond market on the
oversight?
Mr. Weiss. The composition of the oversight board has not
been determined.
And with respect to your other question, the 2014
prospectus that Mr. Kirpalani described expressly provided that
there could be a change in law----
Mr. Hice. OK. Last question. Thank you.
Mayor, you have had experience with this, both on the board
in DC and as mayor. The tax incentives, there have been changes
recently. All have resulted in declining jobs. What tax
incentives need to take place? And I would really like to hear
from Mr. Johnson as well on this, your suggestion as to what
tax incentives need to be in place.
Mr. Williams. Again, I think the board can help rationalize
the financial performance plan on which you can build economic
incentives. I don't know particularly which. But by assuring
the markets that there is execution in the government and
settled expectations on the performance of the government, you
can then begin to build economic investment.
Mr. Hice. Could I get your answer in writing here, Mr.
Johnson, if you would, please? If I could have that, I would
appreciate it.
Thank you. I yield back.
Mr. Graves. Mrs. Radewagen is recognized for 5 minutes.
Mrs. Radewagen. Thank you, Mr. Chairman.
While Congress and certainly this committee understand the
need for this legislation, I do believe that it might not go
far enough in providing the tools Puerto Rico needs to recover
from their current fiscal crisis.
There are many good measures in the bill that will do a
great deal to resolve the issue, but there are also other
things that can be done--and some may have mentioned this
already, but I wanted to go on record--such as putting the
territories on the same footing as the states when it comes to
the earned income tax credit, the child tax credit, and
removing the caps on Medicaid.
Just quickly, anybody on the panel, can any of you explain
to me why these proposals should not be part of this bill?
Dr. Johnson. Well, Congresswoman, I had previously
testified in a hearing of a subcommittee of this committee
exactly in favor of those changes. I can send you that
testimony if you don't have it readily available.
I do recognize that this is a political process here, and I
recognize that not everything that everybody wants can be in
this particular piece of legislation, but I think the Congress
will have to come back to these issues or the closer related
issues in the near future because encouraging and stimulating
growth in Puerto Rico is going to remain an important priority.
This bill is a first step, can become a first step, but I think
you are going to have to do more.
Mrs. Radewagen. Thank you.
Mr. Williams. I would agree with that, for the record.
Mrs. Radewagen. Thank you.
And, last, I notice that in the final draft, the name of
the board has been changed from the Puerto Rico Oversight Board
to the Territorial Oversight Board. That actually makes
Americans far more nervous. While this may seem trivial, I am
concerned with this renaming and its implications as well as
some of the language in sections 303 and 401, which essentially
gives Congress carte blanche power over the territories.
In your opinion, would the language contained in this bill
grant Congress unlimited powers with regard to the other
territories?
Mr. Weiss. With respect to the other territories, there is
an opt-in feature such that the other territories would have to
choose through their own democratic process to elect the powers
which were described in the article to which you refer.
Mrs. Radewagen. Thank you, Mr. Chairman. I yield back.
Mr. Graves. I am going to recognize Mr. Pierluisi for a
brief closure.
Mr. Pierluisi. Thank you, Chairman.
I would like to clarify a couple of things for the record.
Part of this overspending is definitely the result of
mismanagement. I admit it. And it is embarrassing. But part of
it is lack of adequate Federal funding in key areas such as the
health of the American citizens living in Puerto Rico.
Let me just give you an example. Under the Medicaid
program, Puerto Rico is entitled to get about $350 million a
year. With ObamaCare in place, the additional funding given by
the Affordable Care Act, Puerto Rico is getting about $1.2
billion a year from the Federal Government to take care of the
medically indigent in Puerto Rico, American citizens.
Oregon, which has a similar population to Puerto Rico, gets
$5 billion a year. You don't need to be an economist or a CPA
to know the huge difference between $1.2 billion a year and $5
billion a year. Wouldn't that help Puerto Rico's fiscal
condition? That is just an example.
My other comment has to do with growth. We are all about
growth. Puerto Rico is not going to grow when its government is
failing, when its government has become an impediment to
growth, when its government owes contractors from the private
sector over $2 billion.
We need to stabilize the government so that Puerto Rico
grows. And talking about growth, I have to remind everybody
here that the last two territories that became states, Hawaii
and Alaska, within 10 years each doubled their economy. So if
we want growth, let's change Puerto Rico's status.
Thank you, Mr. Chairman.
Mr. Graves. Ranking Member.
Mr. Grijalva. Thank you, Mr. Chairman.
I want to thank the witnesses. I appreciate very much the
testimony. We are getting down to the point that if a true
bipartisan legislation is to appear, it needs to appear
immediately.
I echo Mr. Weiss' points on areas I think need to be worked
on for the sake of a bipartisan agreement.
I also want to say that this is an alternative to a
bailout, and I really appreciated the question. People said,
``Oh, this is a bailout; this is unconstitutional; this skirts
bankruptcy laws,'' and all that, which through this testimony
has proven not to be the case.
Having said that, though, this is an alternative to a
bailout because, in the short term, if Congress truly
understands both its fiduciary and, indeed, its moral
responsibility to our fellow citizens in Puerto Rico, we have
to do something, because something will be done, and the
humanitarian crisis spurred by this economic and fiscal crisis
cannot be tolerated.
I hope, for all the stakeholders in this, that a very
important effort is done to satisfy a bipartisan piece of
legislation and that the narrow interests in this question are
ignored and the majority interest is taken care of, and that is
the people of Puerto Rico.
I want to thank you, Mr. Chairman, for the hearing, and I
look forward to a product that we can all comfortably support
on the Floor.
With that, I yield back, and thank you.
Mr. Graves. I thank the witnesses for their valued
testimony and the Members for their questions.
The members of the committee may have some additional
questions for the witnesses, and I will ask that you would
respond to those in writing. Under Committee Rule 4(h), the
hearing record will be open for 10 days for these responses.
If there is no further business, without objection, the
committee stands adjourned.
[Whereupon, at 12:51 p.m., the committee was adjourned.]
[ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD]
Prepared Statement of the Hon. Stacey E. Plaskett, a Delegate in
Congress from the U.S. Virgin Islands
Thank you Chairman Bishop and Ranking Member Grijalva for holding
this hearing to consider H.R. 4900, an act to establish an Oversight
Board to assist the Government of Puerto Rico, including
instrumentalities for managing its public finances, and for other
purposes.
The people of the United States Virgin Islands and the other
territories are aware of the fact that for over a year now, there have
been discussions in Washington around the concerns facing Puerto Rico
and their continuing debt crisis.
While I am generally supportive of Congress acting to resolve an
issue affecting one of the territories, I am concerned that a large
number of the discussions, thus far, have been focused solely around
the fear of the collapse of Puerto Rican bonds, instead of the
underlying issues that led to the debt crisis.
In October 2015, the White House issued a roadmap to recovery for
not only Puerto Rico, but for the other insular territories that were
also in need. In that proposed roadmap, the White House requested that
Congress address several areas other than bankruptcy, including:
Expanding and lifting the overall cap on Medicaid;
Increasing tax relief for residents through the Earned
Income Tax Credit and Child Tax Credit;
And increasing access to credit opportunities.
These were all areas of focus not just for Puerto Rico but for
Guam, American Samoa, Northern Mariana, and the Virgin Islands.
The Governor of the U.S. Virgin Islands, my fellow Democratic House
Members, leaders in Puerto Rico, and myself all agreed that these
options were an important start to helping us create real economic
growth for our territory.
After several months of pushing for a package to help all
territories create economic opportunity, it became evident that the
relief coming out of this Congress would be focused solely on
bankruptcy protection.
I believe this is a mistake. I believe this Congress and this
legislation should focus on putting in place the mechanisms needed to
ensure that our economies could actually grow.
H.R. 4900 mentions nothing about Medicaid, or any other tax relief,
nor does it provide any other recommended economic growth options. It
will review Puerto Rico's pension system and deals primarily with the
mechanism for Puerto Rico's restructuring of its debt.
This bill does so by creating an Oversight Board, a Board with very
broad powers over the Puerto Rican government. Rather, it allows a stay
on payments, while the Board reviews the Puerto Rican finances, and
that Board will ultimately determine if Puerto Rico can restructure.
However, what is more alarming, is the fact that PROMESA also
contains a provision, which states that the other territories may also
have oversight boards, if the local Legislature and Governor request it
from Congress.
I cannot support this bill creates a Territory Financial and
Oversight Management. Any language that implies Federal oversight, as
to how we govern ourselves, even if it implies that local support is
required, is not acceptable.
I am concerned not only about over-reach by the Federal Government,
but by the chilling message this may send to our own creditors and
investors countering the confidence that our Governor and legislature
have created over a number of years of hard work.
I believe the Territorial Financial Oversight and Management Board
provision in H.R. 4900 to be detrimental to the advancement of our
local government. It provides a tool for financial restructuring
instead of providing resources for the other territories to avoid a
debt crisis and economic growth for all territories. The territories
did not ask for an oversight board. Therefore, the passage of this bill
should not hinge on the inclusion of the other territories.
I will also continue to press for the development and creation of
true economic growth opportunities, like those I referenced earlier.
Thank You.
______
The Associated General Contractors of America,
Puerto Rico Chapter,
San Juan, Puerto Rico
April 11, 2016
Hon. Rob Bishop, Chairman,
House Committee on Natural Resources,
1324 Longworth House Office Building,
Washington, DC 20515.
Re: Puerto Rico Oversight, Management and Economic Stability Act
(``PROMESA'')
Dear Chairman Bishop:
The Puerto Rico Chapter of the Washington, D.C. based Association
of General Contractors of America (``AGC-PR'') wishes to thank you,
members of the Committee and staff for the work and effort related to
Puerto Rico, its current crisis and the potential solutions. In
connection therewith, we hereby formally express particular support for
a fiscal control board for Puerto Rico to address the current fiscal
and economic crisis. We also express our strong support for Title V of
PROMESA \1\ (as it relates to infrastructure investment and economic
development), which undeniably is at the center of the current crisis
and the key to any sustainable solution.
---------------------------------------------------------------------------
\1\ The discussion draft released by the House Committee on Natural
Resources on March 29, 2016.
---------------------------------------------------------------------------
Any federal structure that may be legislated to help Puerto Rico
address the current crisis must not only address the issue of debt
but--at the same time and possibly with greater emphasis and priority--
must ensure sustainable economic growth, development and certainty.
This includes contractual certainty (rule of law) to enable small,
medium and large investors and business concerns to invest, perform and
receive payments therefor. Without this, any debt or fiscal
restructuring will only postpone the inevitable, to the detriment of
all U.S. citizens still residing on the Island as well as those who
have invested in Puerto Rico instruments.
It is widely known that our infrastructure, whether energy,\2\
water and sewer,\3\ solid waste management,\4\ roads and bridges \5\
and low income housing,\6\ is in need of replacement, modernization or
new construction. The Committee is well aware that Puerto Rico's
permitting process poses significant challenges for the Island's
general competitiveness--resulting in long and inefficient practices
that generate uncertainty and discourage investment. Permitting reform
is needed and should also contemplate government restructuring in order
to achieve sustainable efficiencies and government transparency. Recent
studies commissioned by the current administration expressly recognize
the need to address permitting issues in order to improve and achieve
sustainable economic growth.\7\ Puerto Rico has the necessary statutory
and regulatory structure to reform permitting. Any final version of
PROMESA (Title V) should ensure that Puerto Rico immediately undertakes
(implements and maintains) the permitting reforms needed to ensure
economic growth, investment, jobs and infrastructure capable of
providing citizens quality services as well as protecting the
environment and human health.
---------------------------------------------------------------------------
\2\ The power generation fleet of the Puerto Rico Electric Power
Authority is very aged and inefficient (median generating plant age is
44 years vs. an industry average of 18 years).
\3\ Potable water reservoir capacity around most of the island is
severely impaired given a lack of maintenance; water and sewer
treatment and distribution facilities require significant capital
investments (for federal environmental compliance, efficiency and
related factors) for which the Puerto Rico Aqueduct and Sewer Authority
does not have the funds or even the current ability to access the
capital markets.
\4\ As recent as March 2016, EPA informed that 20 of the 27
landfills in operation on the Island are not in compliance with local
or federal regulations that protect human health and the environment--
and as such, pose a direct threat to surface and ground-waters
(potential or actual drinking water sources), soils and air, in and
around communities near these noncompliant facilities.
\5\ The Puerto Rico Highway & Transportation Authority lacks the
funds for the construction of 1new roads and/or bridges or their
adequate maintenance.
\6\ [_______]
\7\ The Kruger Report states: 26. A lot can be done to lighten the
burden of doing business, which is particularly important when reforms
are aiming to move the economy in new directions. To date, the term
business-friendly in Puerto Rico has referred to efforts to offset high
input costs with tax breaks and subsidies. As input costs are brought
down, the focus should shift to ensuring a level playing field and
greater ease of doing business, including permits for new businesses.
This is always an on-going task but a start could be made by addressing
the three weakest areas identified by the World Bank: the difficulty in
registering property, in paying taxes, and in obtaining construction
permits . . . (Emphasis ours). See Puerto Rico--A Way Forward, Anne O.
Krueger, Ranjit Teja, and Andrew Wolfe, June 29, 2015, http://
www.bgfpr.com/documents/puertoricoawayforward.pdf; See Page 27 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
Executive Order 2015-022, September 9, 2015; http://www.bgfpr.com/
documents/PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf.
---------------------------------------------------------------------------
The AGC-PR represents 80% of the overall economic activity in
construction and has 300 members with diverse professional backgrounds
and experience covering construction industry areas that include but
are not limited to energy, roads, water and sewer, housing, tourism,
and facilities for the manufacture of pharmaceutical and other products
as well as technology and research and development.
Our historic role and impact on the local economy was very
significant as compared with today.
Following are some telling data points:
----------------------------------------------------------------------------------------------------------------
Area Historic Current
----------------------------------------------------------------------------------------------------------------
Jobs........................................................ 90,000 20,000
Gross National Product...................................... 10% 3%
Investment.................................................. $6B $2B
----------------------------------------------------------------------------------------------------------------
The local construction industry's situation is evidently aggravated
by the current fiscal crisis, as by the Administration's delay in
paying government contractors for services rendered.\8\ Furthermore,
very recent government actions like the highly controversial enactment
of Act 21-2016 (Moratorium Act) last week and ongoing discussions by
local government officials about bankruptcy, defaults and the ability
to expropriate private property and services without proper procedures
has only added to the general uncertainty of citizens and the business
community--confirming the investing community's perception that Puerto
Rico, a U.S. Commonwealth, is a high risk investment jurisdiction.
---------------------------------------------------------------------------
\8\ It was unofficially stated (by the Secretary of Treasury) last
week that the total debt due to Government service providers has
reached the amount of over $2.2 Billion. With respect to PR-AGC
members, as of March 2016 the Puerto Rico Aqueduct and Sewer Authority
alone owes multiple members over $160 Million, with no near term
capacity to pay these amounts.
---------------------------------------------------------------------------
PROMESA will undoubtedly provide Puerto Rico with the necessary
structure, and immediate credibility, to quickly begin addressing the
most fundamental budgeting, cost-control, efficiency and transparency
requirements of a fair and equitable government. Similarly, Title V
will help implement and maintain the regulatory conditions necessary to
facilitate critical infrastructure projects, related investments and
economic and job growth. We trust and support that the final version of
PROMESA and Title V be designed to ensure that Puerto Rico can retake
the path of a supportive government while allowing the private sector
to jumpstart economic development, create jobs and provide opportunity
to thousands of citizen on the Island. We urgently need a climate of
credibility, transparency and certainty that maximizes Puerto Rico's
ability to overcome the current crisis.
Again, thank you and the Committee for its work and efforts related
to Puerto Rico. We stand ready and available to assist in any way the
Committee deems relevant and appropriate.
Sincerely,
Eng. Neyssa Varela,
President.
______
Hon. Rob Bishop, Chairman,
House Committee on Natural Resources,
Washington, DC 20515.
Dear Chairman Bishop:
Respectfully request a personal interview with you in your
Washington D.C. office, at some time between April 12-15, 2016.
I am Jose Olmos, Republican and leader within the Veteran and
Military community in Puerto Rico. After 27 yrs of service in the Army
Reserve and Army National Guard, as a Citizen Soldier I retired as
Lieutenant Colonel in 2011. For many years I have been active in Puerto
Rico educating the political leadership on the importance of the
contributions made by our citizens to national security. At present I
am running for office to become the 1st State Representative in Puerto
Rico political history that strongly and without limitation supports
the Veteran/Military Community and the Caribbean Security of the United
States.
Under your leadership as Chairman of the House Natural Resources
Committee you intend to present a bill whose objective is to ``To
establish an Oversight Board to assist the Government of Puerto Rico,
including instrumentalities, in managing its public finances, and for
other purposes.'' This proposed bill has been in preparation by your
committee for several months and has received input from many
political, commercial and industrial leaders of Puerto Rico.
But one community that has not been heard is the Military Community
of Puerto Rico, composed of 150,000 veterans and over 50,000 service
members in all the military components of the nation. I am sure that
you have not received any input or comments from the perspective of
national security or considered the 117 years of loyal military service
to the nation by the American Citizens of Puerto Rico. My intend is to
move you to consider that any Bill to ``assist the Government of Puerto
Rico, in managing its public finances'' is incomplete if you don't
consider the Blood, Sweat and Tears spilled by the American Citizens of
Puerto Rico in the defense of the nation.
The solution of Puerto Rico economic problems is not only a
question of financial loss; it is also a question of facing the real
challenge of giving equal political right to Puerto Rico. The Bill that
you propose will only place a temporary bandage to the festering wound
of a colonial relationship.
Next July 25, we commemorate 118 years since the U.S. Armed forces
INVADED Puerto Rico, following the orders of a REPUBLICAN President and
supported by a REPUBLICAN Congress. Our ancestors received those troops
as liberators and welcomed the American flag in 1898 because they
believed it, and we still believe today that it is a symbol of
democracy and justice. Since then we have struggled to be responsible,
loyal and patriotic citizens. But today, although we enjoy great
material wealth our political liberties are more restricted than when
we were under the colonial rule of Spain. Why you may ask? Then as
today our final destiny as Puerto Ricans is subject to the whims of a
Central Government who is unwilling to make up its mind. The main
difference is that the USA Congress created a facade to hide its
control of the island. I think that the Spaniards were more truthful in
their actions.
I want to meet with you and hear from you, how will you explain to
the thousands of Veterans and Military Personnel/Citizens from Puerto
Rico that they are equal on the battlefield but not in the Voting
Booth. How will you explain to the military widows and orphans that the
sacrifice of their parents is worthless and diminished by the economic
interest of Wall Street? How will you justify the continued inequality
to thousands of parents who lost their sons in distant battlefields for
the defense of an ungrateful nation?
The economic crisis of Puerto Rico needs urgent attention but the
Blood, Sweat and Tears of our soldiers has to be considered in the
solution. Any solution can't be at the expense of passing the final
solution of the island political status to another generation. The time
to act is now.
Thank you for the opportunity and look forward to a sincere face-
to-face conversation.
Sincerely,
Jose O. Olmos
P.S. Below are some facts related to the military contribution of
the American Citizens of Puerto Rico.
It is important for you to become aware that PUERTO RICO IS THE
CARIBBEAN BORDER OF THE USA. The Caribbean border is as important as
the Mexican Border and currently is wide open leaving 3.5 million
American Citizens in the Island at risk of terrorism, narcotics and the
enemies of our Great Nation that move their ships freely within the
area. It is time that the Caribbean Border receives the attention it
merits to be secured.
1. Puerto Rico National Guard plus Reserves contribute more Citizens
Soldiers to national Defense than 22 States.
2. There are approximately 150,000 veterans in the island plus their
family members.
3. There are more than 50,000 Puerto Rican soldiers in Active Duty in
all the branches of the armed forces.
4. Puerto Ricans have carried the burden of defending the nation in
equal terms with our continental brother in arms since 1899.
5. WE ARE EQUAL IN THE BATTLEFIELD BUT NOT IN THE VOTING BOOTH.
6. We don't want to continue a relation with the USA as a colonial
dependency.
7. WE HAVE FOUGHT IN EVERY WAR FOR 117 YRS. The liberty, security and
prosperity that the USA enjoys today were paid in part with the BLOOD,
SWEAT AND TEARS of disenfranchised citizen soldiers of Puerto Rico.
8. The Puerto Rico National Guard and Reserve Components are the best-
trained, lead and equipped force in the Caribbean. After 15 yrs
actively contributing and mobilizing for the GWOT their combat and
operational experience has no comparison within the military and
security units of other Caribbean nations. The National Guard and
Reserves should lead the efforts to secure the Caribbean Border by
becoming the trainers and on site force that works with partner nations
in the area.
______
Outdoor Alliance
April 12, 2016
Hon. Rob Bishop, Chairman,
Hon. Raul Grijalva, Ranking Member,
House Committee on Natural Resources,
Longworth House Office Building,
Washington, DC 20515.
Re: Puerto Rico Oversight, Management and Economic Stability Act
discussion draft
Dear Chairman Bishop and Ranking Member Grijalva:
We write to express our serious concerns with certain aspects of
the ``Puerto Rico Oversight, Management and Economic Stability Act''
discussion draft, which the House Natural Resources Committee will
consider this week. In particular, we are concerned by the proposed
transfer of thousands of acres from the Vieques National Wildlife
Refuge to the government of Puerto Rico, which we believe sets a
dangerous precedent by facilitating the potential privatization of
protected public lands.
Outdoor Alliance is a coalition of seven member-based organizations
representing the human powered outdoor recreation community. The
coalition includes Access Fund, American Canoe Association, American
Whitewater, International Mountain Bicycling Association, Winter
Wildlands Alliance, the Mountaineers, and the American Alpine Club and
represents the interests of the millions of Americans who climb,
paddle, mountain bike, and backcountry ski and snowshoe on our nation's
public lands, waters, and snowscapes. Our members are deeply committed
to the protection and responsible stewardship of our country's public
lands.
Outdoor Alliance recognizes that targeted and limited land
exchanges or small-scale transfers are an appropriate land management
tool under certain circumstances. However, a proposal directed toward
the privatization and development of protected public lands as part of
a potential solution to a governmental entity's financial problems is
wrongheaded. Public lands--particularly those given additional
protections for their ecological or recreational values--are a trust
that should be retained in public ownership and managed for benefits in
perpetuity, not in response to temporary financial exigencies.
We ask that the Committee carefully consider the dangerous
precedent set by this proposed transfer and demonstrate its commitment
to America's public lands by removing this problematic provision.
Best regards,
Adam Cramer,
Executive Director.
______
Puerto Rico Builder's Association
April 12, 2016
Hon. Rob Bishop, Chairman,
Hon. Raul Grijalva, Ranking Member,
House Committee on Natural Resources,
Longworth House Office Building,
Washington, DC 20515.
Dear Chairman Bishop and Ranking Member Grijalva:
At this time, we bring to your attention, the Discussion Draft,
submitted by the Committee you lead, to establish an ``Oversight Board
to assist the Government of Puerto Rico.''
As you well know, through the National Association of Home Builders
(NAHB), we represent the construction and housing industries across our
Nation, which includes our Puerto Rico Chapter. As such, we are
committed to give an informed input to your Committee on this subject,
having discussed and studied this serious matter with our colleagues
and fellow companies of our Puerto Rico Chapter.
In light of this preliminary analysis, we provide the following
conclusions or recommendations, on this matter:
a. A federally-appointed Fiscal Control Board is an important and
necessary step to tackle Puerto Rico deep fiscal crisis on
the short-term.
b. We believe a good-faith and upfront negotiation should be done
between the Government of Puerto Rico, its creditors and
any Fiscal Control Board established by Congress.
c. This Fiscal Control Board should be established, in conjunction
with a clearly defined mechanism for the restructuring of
Puerto Rico's non-guaranteed debt, that is to say, every
portion of the debt owed by public corporations, not
guaranteed as a general obligation under the local
Constitution or any other guaranteed agreement or
legislative act.
d. This Fiscal Control Board must be complemented with a strong
economic redevelopment plan, to stimulate the Puerto Rico
economy. No fiscal control effort will make sense without
an economic recovery. Included herein is a document
outlining suggestions on actions needed to secure economic
prosperity.
e. Every federal piece of legislation, adopted to attain the
aforementioned goals, should be approved with adequate
instruments to secure complete accountability and
transparency from the Government of Puerto Rico, including
but not limited to a thorough disclosure of Puerto Rico's
updated financial state, current debt and assets.
f. Legislation should include measures that improve the investment
and economic climate of the Commonwealth of Puerto Rico.
There will be no fiscal relief or assistance to the local
government without an economic recovery.
As you can conclude from the elements described above, the
Association and our Puerto Rico local Chapter, have a business-oriented
standpoint, geared toward a balanced and reasonable solution to Puerto
Rico's fiscal challenges, without any partisan consideration.
Also, this balance can only be accomplished by a combination of a
federally-appointed Board that gives stability and certainty to Puerto
Rico's fiscal scenario, a restructuring of the non-guaranteed debt and
a strategic, coherent and federally-sponsored economic redevelopment
plan.
Regarding this last component, we believe some short and medium-
term economic measures should be enacted to stimulate the Real-Estate
and Construction Sector of Puerto Rico's economy.
We will give the highest priority to the analysis of any other
recommendation we deem appropriate to submit to your Committee
concerning this matter. Finally, we thank you in advance for your
consideration and analysis you can give to our statements and
proposals.
Best regards,
Arch. Ricardo Alvarez-Diaz, AIA, NCARB,
President.
______
Jubilee USA Network,
Washington, DC
April 13, 2016
Hon. Rob Bishop, Chairman,
House Committee on Natural Resources,
1324 Longworth House Office Building,
Washington, DC 20515.
Dear Mr. Chairman:
On behalf of Jubilee USA we want to thank you for your leadership,
as well as that of Speaker Ryan and Representative Duffy to move
forward a solution for the financial crisis affecting 3.5 million
Americans.
Jubilee USA's founders and members include 550 Churches and
Synagogues, and groups like the U.S. Conference of Catholic Bishops,
The Episcopal Church, American Jewish World Service and Islamic Relief
USA. Our religious coalition works closely with a coalition in Puerto
Rico that represents 95% of the population and Catholic, Evangelical
and Pentecostal religious groups. San Juan's Catholic Archbishop,
Methodist Bishop, Lutheran Bishop and head of the island's Bible
Society are calling for solutions that protect their people from
further austerity policies.
Mr. Chairman, on behalf of Jubilee USA we need to affirm that there
can be no economic growth in Puerto Rico until the debt is brought back
to sustainable levels.
Congress must adopt a solution that promotes budget transparency,
reduces child poverty and ensures strong provisions to restructure the
debt in a manner that is timely, comprehensive and orderly.
As you know, we've organized religious communities across our great
nation and on the island of Puerto Rico to pray for you as you move
legislation forward. As you begin your deliberations, I wanted to share
the thoughts of the island's religious leaders.
Puerto Rico's Catholic Archbishop, Roberto Octavio Gonzalez Nieves,
O.F.M., encourages Congress to ``work together to find a solution to
the crisis that respects the rights and dignity of all sides. I invite
the people of Puerto Rico and all people of faith around the world to
join me and pray for the U.S. Congress as they consider action around
Puerto Rico. We also must pray for Puerto Rico's leaders and creditors
to work together to find a solution to the crisis that protects the
rights and dignity of all sides. We pray that any solution seeks to
reduce child poverty on the island and invest in our people. We pray
that solutions respect Puerto Rico's democracy. Finally we pray that
any solutions will ensure that the debt is brought to payable levels,
without further sacrifice to our social services.''
Reverend Heriberto Martinez, the head of Puerto Rico's Bible
Society said, ``It is urgent that leaders of our country and creditors
can sit together at the table of dialogue and fellowship to find a
responsible solution that does not sacrifice our people, already going
to a very difficult situation. Our creditors should recognize that
above any further consideration should be the well-being of human
beings. The well-being of my brother and sister is and should be our
main and highest priority.''
We look forward to continuing to work with you throughout this
legislative process.
Gratefully,
Eric LeCompte,
Executive Director
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
April 14, 2016
Hon. Paul Ryan,
Hon. Nancy Pelosi,
U.S. House of Representatives,
Washington, DC 20515.
Hon. Mitch McConnell,
Hon. Harry Reid,
U.S. Senate,
Washington, DC 20510.
Dear Speaker Ryan, Majority Leader McConnell, Democratic Leader
Pelosi and Minority Leader Reid:
State and local governments have a keen interest in federal
legislative efforts to bring fiscal reforms to Puerto Rico. For
example, an essential component of any federal fiscal reform package to
aid Puerto Rico must be that such a plan is specific to the territory
and does not contain provisions that could be construed as having
application to U.S. state and local governments. We will aggressively
work to oppose federal legislation that contains such extraneous
provisions, including the Public Employee Pension Transparency Act
(PEPTA). Such legislative provisions would needlessly expand the scope
beyond Puerto Rico, impose unnecessary and undue regulatory burdens on
U.S. state and local governments and threaten the federal tax exemption
on municipal bond interest.
State and local governments of all sizes access the tax-exempt bond
market to provide essential infrastructure. Through the tax-exemption,
the federalist system of reciprocal immunity continues to provide
critical support for the federal, state and local partnership to
develop and maintain essential infrastructure. State and local
governments provide three-quarters of the total investment in
infrastructure in the United States,\1\ and tax-exempt bonds are the
primary financing tool used by state and local governments and
authorities nationwide to satisfy these infrastructure needs. State and
local governments issue approximately 11,600 bonds a year totaling
roughly $300 billion on average. This has allowed state and local
governments to finance more than $3.5 trillion in infrastructure
investment over the last decade through the capital markets.
---------------------------------------------------------------------------
\1\ Public Spending on Transportation and Water Infrastructure,
1956 to 2014: Congressional Budget Office, 2015.
---------------------------------------------------------------------------
We support legislative efforts tailored specifically to Puerto Rico
that will establish an orderly process to immediately initiate steps to
restore fiscal order to the island and maintain critical services to
the citizens of Puerto Rico. Such a process is preferable to a less
orderly plan that pits Puerto Rico against its creditors in lengthy
negotiations while government services to the citizens of Puerto Rico
deteriorate and a humanitarian crisis ensues. The latter of which could
expose U.S. state and local governments to unyielding and inaccurate
speculation about the likelihood of their defaulting on their debt
obligations, and drive news media and federal policy makers to draw
false comparisons between Puerto Rico, which is a U.S. territory, and
mainland state and local governments.
This kind of conjecture ignores that fact that bankruptcy, while
headline-grabbing, is rare and is not an option for most localities.
State and local governments recognize that the general obligation
pledge is widely relied upon by municipal entities across the country
to access the capital markets, and place significant value on upholding
this pledge. Historically, municipal bonds have had a significantly
lower average cumulative default rates than global corporates overall
and by like rating category.
For example, between 1970 and 2013, the average 10-year default
rate for Moody's Aaa-rated municipal bonds was zero compared to a 0.49
percent default rate for Moody's Aaa-rate corporate bonds.\2\
Furthermore, over the last five years, during which state and local
governments struggled to recover from the Great Recession, rated state
and local GO defaults were remarkably low at 0.005 percent.\3\ In the
double-A rating category to which the majority of municipal ratings
were assigned, average cumulative default rates are much lower for
municipals than for corporates with the same double-A symbol.\4\ There
has been only one state that has defaulted on its debt in the past
century, and in that case bondholders ultimately were paid in full.
---------------------------------------------------------------------------
\2\ Moody's Investor Service--U.S. Municipal Bond Defaults and
Recoveries, 1970-2013, May 7, 2014.
\3\ Municipal Market Analytics (MMA).
\4\ Moody's Investor Service, https://www.moodys.com/research/
Moodys-Municipal-bond-defaults-remain-low-in-number-but-new_PR_298814.
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Thank you for your consideration of these comments.
Sincerely,
Matthew D. Chase, Exec.
Director, Clarence Anthony, Exec. Director,
National Association of
Counties National League of Cities
Tom Cochran, CEO/Exec.
Director, Jeffrey L. Esser, Exec. Director/
CEO,
U.S. Conference of Mayors Government Finance Officers
Association
Robert J. O'Neill,
Executive Director,
International City/County
Management Association
______
Council for Citizens Against Government Waste
(CCAGW),
Washington, DC
April 19, 2016
U.S. House of Representatives,
Washington, DC 20515.
Dear Representative:
On behalf of the more than one million members and supporters of
the Council for Citizens Against Government Waste (CCAGW), I strongly
urge you to support H.R. 4900, the Puerto Rico Oversight, Management,
and Economic Stability Act (PROMESA). This legislation creates an
essential mechanism to thwart a taxpayer bailout of Puerto Rico's
fiscal failures.
On April 12, 2016, Rep. Sean Duffy (R-Wis.) introduced PROMESA,
which would establish an oversight board to assist the government of
Puerto Rico, including instrumentalities, to manage public finances.
The legislation provides reforms that will allow the territory to
fulfill its debt obligations responsibly and efficiently. It will also
help the citizens of Puerto Rico prosper from a growing economy. The
bill is designed to address problems related solely to Puerto Rico and
will neither have any impact on existing bankruptcy provisions that
govern states or their municipalities.
The structure of the oversight board is based on the precedent
established in 1996, when Congress set up a financial control board to
oversee the fiscal affairs of the government of the District of
Columbia as well as the control board set up for New York City in 1975.
PROMESA is not a bailout, despite misleading advertisements to the
contrary. Indeed, without the enactment of H.R. 4900, taxpayers will
inevitably be forced to bailout Puerto Rico in the near future.
I urge you to vote in favor of PROMESA in order to create a fiscal
oversight board for Puerto Rico and ensure that taxpayers are not
liable for any defaults on the territory's debt obligations. All votes
pertaining to PROMESA will be among those considered in CCAGW's 2016
Congressional Ratings.
Sincerely,
Tom Schatz
______
SIFMA Asset Management Group
April 21, 2016
Hon. Rob Bishop, Chairman,
Hon. Raul Grijalva, Ranking Member,
House Committee on Natural Resources,
1324 Longworth House Office Building,
Washington, DC 20515.
Re: Congressional Action to Address the Puerto Rico Municipal Market
and Contagion
Dear Chairman Bishop and Ranking Member Grijalva:
On behalf of the Asset Management Group (``AMG'') of the Securities
Industry and Financial Markets Association (``SIFMA''), I am writing to
support Congress' efforts to create a limited and targeted framework to
address Puerto Rico's fiscal crisis through H.R. 4900, the Puerto Rico
Oversight, Management, and Economic Stability Act (``PROMESA'').
SIFMA AMG is the voice for the buy-side within the securities
industry and broader financial markets, which serves millions of
individual and institutional investors as they save for retirement,
education, emergencies, and other investment needs and goals. SIFMA
AMG's members represent U.S. asset management firms whose combined
assets under management exceed $30 trillion. The clients of AMG member
firms include, among others, registered investment companies, separate
accounts, ERISA plans, and state and local government pension funds.
Some SIFMA AMG members have more exposure to the debt of the
Commonwealth of Puerto Rico and its instrumentalities than others, but
all care deeply about ensuring that Puerto Rico's financial situation
is addressed appropriately, without negatively affecting the broader
municipal bond market.
Puerto Rico's financial crisis is unique and complex, and it
therefore requires a unique solution. We believe that the combination
of the establishment of a federal oversight board and a restructuring
framework that is based on the Territorial Clause of the U.S.
Constitution, will create a comprehensive solution to aid Puerto Rico's
economic recovery, improve the island's financial position, and prevent
Puerto Rico's situation from leading to higher permanent borrowing
costs for other municipal issuers.
In particular, SIFMA AMG supports the creation of a federal
oversight board with broad powers to enforce and monitor fiscal
discipline. We believe this is a practical way to address the current
crisis in Puerto Rico. We support Congressional efforts to ensure that
the oversight board will treat creditors fairly and protect valid and
legal liens during the restructuring process. SIFMA AMG also supports
the inclusion of a provision that allows creditors an opportunity to
vote on any debt restructuring plans.
While many details about this legislation remain in flux, we
believe the municipal market would and should welcome appropriate
Congressional action to address the financial crisis in Puerto Rico. We
urge Congress to act quickly before the situation worsens. Thank you
for your leadership on this issue. We look forward to partnering with
Congress as it works toward final passage of this legislation.
Sincerely,
Kenneth E. Bentsen,
President and CEO.
PIMCO Blog
Congress Needs to Act on Puerto Rico's Debt Crisis, and `PROMESA' Could
Work
Authors: David Hammer, Sean McCarthy, and Libby Cantrill
Published: April 26, 2016
Diverse interests have emerged seeking to derail a bill aimed at a
satisfactory resolution to Puerto Rico's debt crisis.
The U.S. House Natural Resources Committee (HNRC) is considering
H.R. 4900, entitled the Puerto Rico Oversight, Management, and Economic
Stability Act, or PROMESA, which means promise in Spanish. A critical
component of the bill is creation of a federal oversight board with
broad powers over Puerto Rico's fiscal and budgetary affairs. The seven
members of the oversight board would be appointed by the U.S.
president, but chosen from lists of qualified candidates offered by
various parties.
Some critics have protested the potential infringement on Puerto
Rico's sovereignty, while others want assurances the island territory
or investors will not get a ``bailout.'' (PIMCO currently manages more
than $40 billion of municipal investments issued by U.S. cities,
counties and states. PIMCO portfolios do not hold any exposure to bonds
from the Commonwealth of Puerto Rico or its various governmental
entities.)
In our view, PROMESA represents a responsible framework for
managing the unavoidable restructuring of Puerto Rico's debt and other
liabilities. We expect no contagion to the broader municipal market
from PROMESA. More specifically, PROMESA will not trigger higher
borrowing costs for states or municipalities.
Some are worried the federal government might take over a state's
finances in a similar manner; yet there are no convincing arguments
because the Constitution protects the sovereignty of the states. Again,
this bill wouldn't create such a precedent. PROMESA is possible because
the Constitution explicitly allows Congress to set all laws on U.S.
territories, which have fewer rights than states.
In addition, it would be incorrect to classify PROMESA as a
``bailout.'' No incremental federal tax dollars are allocated to the
Territory under the bill. In fact, if this legislation does not
advance, the probability of future federal tax dollars flowing to the
Territory or bondholders may actually increase.
The failure of U.S. Congress to address the complex fiscal and debt
crisis in Puerto Rico is a greater risk to the $3.5 trillion tax-exempt
municipal market. It is essential to enact a stay on litigation to
provide a fiscal control board with an appropriate amount of time to
reach a sensible solution. Without a stay, creditor litigation on
individual liens is likely to ensue. The outcomes of these decisions
have the potential to set confusing precedents for not just holders of
general obligation debt, but for other portions of the municipal
market, including holders of essential service revenue bonds that
constitute the majority of outstanding municipal debt.
Time matters. At this point, it appears that the 1 May deadline to
address the worsening situation in Puerto Rico will not be met, and
Puerto Rican issuers will likely miss some of the $470 million debt
service due on that date. Some hope that the missed payments will add
pressure on policymakers to act, but given the disagreement between the
parties (and within the Republican Party), it appears that the crisis
will have to get worse before it is tackled by Congress. An even larger
debt service payment looms on 1 July.
Accordingly, we urge Congress to continue moving PROMESA forward. A
successful resolution to the unique crisis in Puerto Rico can only be
achieved with a strong federal oversight board empowered to both
enforce fiscal discipline and adjust the Territory's public debt in a
fair and equitable manner designed to achieve debt sustainability. We
believe PROMESA will achieve these objectives.
______
[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE COMMITTEE'S
OFFICIAL FILES]
-- Numerous letters from the Puerto Rico Citizen Coalition in
favor of the Federal Fiscal Control Board.
[all]