[Senate Hearing 114-462]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-462

          PUERTO RICO: ECONOMY, DEBT, AND OPTIONS FOR CONGRESS

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

                                 HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 22, 2015

                               __________


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                    LISA MURKOWSKI, Alaska, Chairman
JOHN BARRASSO, Wyoming               MARIA CANTWELL, Washington
JAMES E. RISCH, Idaho                RON WYDEN, Oregon
MIKE LEE, Utah                       BERNARD SANDERS, Vermont
JEFF FLAKE, Arizona                  DEBBIE STABENOW, Michigan
STEVE DAINES, Montana                AL FRANKEN, Minnesota
BILL CASSIDY, Louisiana              JOE MANCHIN III, West Virginia
CORY GARDNER, Colorado               MARTIN HEINRICH, New Mexico
ROB PORTMAN, Ohio                    MAZIE K. HIRONO, Hawaii
JOHN HOEVEN, North Dakota            ANGUS S. KING, Jr., Maine
LAMAR ALEXANDER, Tennessee           ELIZABETH WARREN, Massachusetts
SHELLEY MOORE CAPITO, West Virginia

                    Karen K. Billups, Staff Director
                Patrick J. McCormick III, Chief Counsel
                     Isaac Edwards, Senior Counsel
           Angela Becker-Dippmann, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
       Allen Stayman, Democratic Senior Professional Staff Member
                            
                            
                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Murkowski, Hon. Lisa, Chairman and a U.S. Senator from Alaska....     1
Cantwell, Hon. Maria. Ranking Member and a U.S. Senator from 
  Washington.....................................................     2

                               WITNESSES

Weiss, Antonio, Counselor to the Secretary, U.S. Department of 
  the Treasury...................................................     5
Padilla, Hon. Alejandro J. Garcia, Governor of the Commonwealth 
  of Puerto Rico.................................................    16
Pierluisi, Hon. Pedro, Resident Commissioner for Puerto Rico, 
  U.S. House of Representatives..................................    26
Marxuach, Sergio, Policy Director, Center for a New Economy......    35
Fetter, Steven, President, Regulation UnFettered.................    43

          ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Alliance for Free Association:
    Letter for the Record........................................   389
Baco, Luis:
    Statement for the Record.....................................   394
Cantwell, Hon. Maria:
    Opening Statement............................................     2
Competitiveness & Sustainable Economy Institute of Puerto Rico 
  and the Puerto Rico Manufacturers Association:
    Letter for the Record........................................   399
Diaz, Jose Julio:
    Letter for the Record........................................   403
Fetter, Steven:
    Opening Statement............................................    43
    Written Testimony............................................    45
    Response to Question for the Record..........................   388
Hispanic Federation:
    Statement for the Record.....................................   411
Lopez, Franklin:
    Statement for the Record.....................................   416
Marxuach, Sergio:
    Opening Statement............................................    35
    Written Testimony............................................    38
    Responses to Questions for the Record........................   379
Murkowski, Hon. Lisa:
    Opening Statement............................................     1
Padilla, Hon. Alejandro J. Garcia:
    Opening Statement............................................    16
    Written Testimony............................................    18
    Responses to Questions for the Record........................    71
Pierluisi, Hon. Pedro:
    Opening Statement............................................    26
    Written Testimony............................................    28
Puerto Rico Hospital Association:
    Statement for the Record.....................................   420
Rosselo, Ricardo:
    Forbes Op-Ed entitled ``A New Path Forward for Puerto Rico''.   425
Santos (Ret.), Lt. Col. Armando:
    Statement for the Record.....................................   428
Weiss, Antonio:
    Opening Statement............................................     5
    Written Testimony............................................     7
    Responses to Questions for the Record........................    68

 
          PUERTO RICO: ECONOMY, DEBT, AND OPTIONS FOR CONGRESS

                              ----------                              


                       THURSDAY, OCTOBER 22, 2015

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:07 a.m. in 
Room SD-366, Dirksen Senate Office Building, Hon. Lisa 
Murkowski, Chairman of the Committee, presiding.

  OPENING STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM 
                             ALASKA

    The Chairman. Good morning. The committee will come to 
order.
    Today we are here to look at the current state of Puerto 
Rico's economy, its short-term liquidity issues, and options 
for Congress to address what has become a financial crisis for 
the island.
    In looking over the fiscal data that is available on Puerto 
Rico, I would like to reiterate Chairman Hatch's remarks at his 
Finance Committee hearing on Puerto Rico last month. We do want 
to be helpful, but in order to be helpful, we need verifiable 
data.
    As an example, the FY 2016 budget approved by the Puerto 
Rico Legislature sets aside $1.5 billion for debt service 
costs, yet the Krueger Report states that the official FY 2015 
$850 million surplus is ``a far cry from interest and 
amortization costs of $2.8 billion.'' The report further states 
that there is spending by entities other than the General Fund 
that is draining cash balances.
    That is a fairly significant gap of over $1 billion. With 
no independent audited financial report of Puerto Rico's 
Government Development Bank--the island's fiscal agent and 
financial adviser--since 2013 it leads to uncertainty over the 
true level of Puerto Rico's financial situation. I would ask 
our witnesses this morning to share their views on the accuracy 
of the data that is available to us.
    What we do know is that a number of reports suggest that 
even with the emergency actions taken by the government of 
Puerto Rico, the government will run out of cash in November, 
just a few short weeks away. If the current course of action is 
continued, an even bigger cash crunch will take place in June 
2016, with a negative cash balance of over $500 million.
    Barclays reports that the government may need to invade 
COFINA's tax revenue in order to pay its general obligation 
debt over the next five years and even that might not be 
enough. In short, Puerto Rico's short-term liquidity crunch is 
real, and action is needed.
    A number of ideas have been floated to help address Puerto 
Rico's fiscal challenges, both short-term and long-term. We are 
going to use today's hearing to take a much closer look at what 
the reality on the ground is, what actions--both locally and at 
the Federal level--could have the most positive impact, and 
what structural reforms can be made to make for a more 
effective and efficient government.
    I also intend for this hearing to take a closer look at 
Puerto Rico's Electric Power Authority (PREPA) and what is 
happening in Puerto Rico's energy sector. In my opinion, energy 
and the economy cannot be separated. They are too intrinsically 
interlinked, and Puerto Rico's economic health cannot be solved 
without also addressing its energy issues.
    I had a meeting just yesterday with some small-business 
owners in Puerto Rico. They tell me that some 30 percent of 
their business expenses go to energy costs. This is 
extraordinary. If one of the pillars for solving Puerto Rico's 
long-term financial situation is private sector economic 
growth, that level of energy expense is simply not sustainable. 
As the various options are considered, we must keep that pillar 
in mind to ensure that any means implemented do not drive 
business away from the island or make it too difficult for them 
to remain in operation.
    With that, we have a very distinguished panel before us 
this morning. After Senator Cantwell's remarks, I will 
introduce each of you, but we are very pleased to have the 
panel that we have.
    With that, I will turn to Senator Cantwell for her remarks 
this morning.

 STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Madam Chair, and thank you for 
holding this important hearing. I, too, look forward to the 
witnesses' testimony this morning and working with you and 
other Members of the Senate on this issue.
    At the outset, I would note that many observers may be 
wondering why, exactly, the Senate Committee on Energy and 
Natural Resources is having a hearing on the Puerto Rico debt 
crisis. It is important to remember that, until the Senate 
reorganized its committee structure in 1977, this committee was 
actually known as the Committee on Interior and Insular 
Affairs. We have jurisdiction over measures relating generally 
to the insular provisions of the United States except those 
affecting their revenues and appropriations.
    So today, we retain jurisdiction over territorial 
possessions of the United States, including the former 
Trusteeship and matters related to the territory of Puerto 
Rico.
    It is because of our general responsibilities in oversight 
that the Energy Committee has a key role to play in convening a 
responsible discussion about economic solutions that Puerto 
Rico now faces. However, it is also clear that fashioning these 
solutions will require partnerships with other Senate 
committees--the Chair mentioned the Finance Committee hearing, 
which I attended, and the Judiciary Committee, along with many 
others in the Puerto Rican Government and the Administration.
    The Finance Committee has convened a hearing on this topic 
to date. Today we will hear for the first time what the 
Administration would do to try to address the crisis more 
specifically, and I certainly look forward to that testimony.
    I would also like to make a few key points to put the 
current situation in context. First, it is very important to 
remember that 3.5 million residents of Puerto Rico today are 
U.S. citizens and have been citizens since 1917.
    As we look at the ways that our U.S. economy has recovered, 
it is very important to understand that Puerto Rico has not 
rebounded. The continuing decline in productivity is felt there 
every day. Incomes are falling. Puerto Rico is already well 
below the poorest state, about $18,000 per person in Puerto 
Rico, about half the $37,000 in Mississippi. Tuition is up. 
Hospitals are closing. Everywhere, families are facing these 
challenges.
    Puerto Rico is currently experiencing one of the largest 
migrations in U.S. history, having lost about eight percent of 
their population, over 300,000 people, in the past ten years. 
These individuals are many of Puerto Rico's most-skilled and 
highest-paid workers. This migration to the U.S. will continue, 
and I think it is one of the challenges we face.
    Debt has accumulated to an estimated $72 billion. In fact, 
the government and the electric utility have failed to make 
their required debt payments. I know, Madam Chair, you know a 
lot about high-cost utility costs, but the fact that these 
energy rates are at 29 cents a kilowatt obviously presents an 
incredible challenge to any manufacturing in the future. Also, 
credit is either unavailable or prohibitively expensive, and 
cash reserves are expected to be exhausted in the coming weeks.
    It is clear that the current situation is not acceptable. 
It is clear that we do not want to see the situation unfold in 
which the government of Puerto Rico faces a binary choice of 
either paying teachers or reimbursing healthcare costs versus 
paying the debt, much of which has been bought up by Wall 
Street for pennies on the dollar, under the assumption that 
Congress would not act.
    I think it is very important that we meet our 
responsibilities here, that congressional authority over Puerto 
Rico and the territories that stems from the Territorial Clause 
of the Constitution--which, just to remind people, say Congress 
shall have the power to dispose and to make all necessary rules 
and regulations respecting territories--I think is very 
important.
    We have done this in the past. Congress has acted. The 
constitution of Puerto Rico was authorized and approved by 
Congress. The Organic Acts of Guam and the U.S. Virgin Islands 
are Federal statutes. All of these have been reported by the 
Senate committee, and so I think it is very important that we 
realize that we do have the power and authority to act here.
    It was first President Bush in 1992 who said that Federal 
agencies should ``treat Puerto Rico administratively as if it 
were a state,'' unless doing so otherwise would ``increase or 
decrease Federal receipts or expenditures or seriously 
disrupt'' Federal programs.
    I know there are a lot of ancillary debates here about how 
we help Puerto Rico, but we do have the ability to give them 
the key tools to financial restructuring without doing another 
thing, without costing us anything. We have the ability to give 
them that power.
    If we are, in fact, to enact new laws in this area, we do 
need to have a partnership. Obviously, as I said, there are 
other committees that would have to be consulted in how we move 
forward on this issue. So I look forward to hearing from all 
the witnesses and the discussion about how we best move forward 
for Puerto Rico's future.
    I should just note, getting through this financial crisis 
is one step of the process. Clearly I have a lot of questions 
in my own mind about a flat world and how an island economy can 
best proceed in the future, but we will save that discussion 
for another day and instead focus on how we give Puerto Rico 
the best tools possible to get through this financial crisis.
    I thank the Chair, and I look forward to the witnesses' 
statements.
    The Chairman. Thank you, Senator Cantwell, I appreciate 
your comments this morning.
    With that, let us turn to our panel that has been assembled 
here this morning. We will lead off the panel this morning with 
Mr. Antonio Weiss. Mr. Weiss serves as the Counselor to the 
Secretary of the Treasury. He has been leading the Obama 
Administration's efforts to provide technical assistance to 
Puerto Rico on financial matters. We appreciate you being here 
this morning and assume that you will fill us in on the details 
of the proposal by the Administration.
    Next we have the Honorable Governor Padilla. Governor 
Padilla has been Governor of Puerto Rico since 2013, and he has 
been head of the Popular Democratic Party since 2012. Governor 
Padilla, it is nice to have you back before the committee. 
Welcome.
    Next to the Governor we have Mr. Pedro Pierluisi. Mr. 
Pierluisi has been Puerto Rico's Resident Commissioner in the 
U.S. House of Representatives since 2009. He is a member of the 
House Judiciary and Natural Resources Committee. Mr. Pierluisi 
has also been before the committee on several occasions, so we 
are pleased to have you back as well. Good morning.
    Next to Mr. Pierluisi we have Mr. Sergio Marxuach. I hope I 
am pronouncing that correctly. He is the Public Policy Director 
at the Center for a New Economy in Puerto Rico. He has 
previously served as Deputy Secretary of Commerce and Economic 
Development for the Government of Puerto Rico and as a Special 
Assistant in the Commonwealth's Office of Management and 
Budget. Good morning.
    Finally we have Mr. Steven Fetter. Mr. Fetter is President 
of the advisory firm Regulation UnFettered. He served as Chair 
of the Michigan Public Service Commission. He has also been 
Group Head and Managing Director at Fitch Ratings with a focus 
on global energy issues. So we also welcome you before the 
committee.
    I will ask that each of you try to keep your comments this 
morning to about five minutes or less. Your full statements 
will be included as part of the record.
    I will alert you to the fact that we are scheduled to have 
one, if not two, votes commencing at 11 o'clock this morning, 
so my hope would be that we would be able to get the testimony 
from each of you, and if we need to take a short break to run 
and do votes, we will do so. But hopefully we will be able to 
get all the comments in under that 11 o'clock time, and we will 
be able to proceed. There is a lot that is before the committee 
this morning, and we want to give you every opportunity.
    Mr. Weiss, if you would like to lead off. Welcome.

 STATEMENT OF ANTONIO WEISS, COUNSELOR TO THE SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Weiss. Chairman Murkowski, Ranking Member Cantwell, and 
members of the committee, thank you for inviting Treasury to 
participate in today's hearing. We welcome the opportunity to 
have a constructive dialog with you and with your colleagues on 
this important and very urgent matter. The economic security 
and well-being of 3.5 million Americans living in the 
Commonwealth is at stake. I would also like to acknowledge our 
ongoing collaboration with Governor Garcia Padilla and Resident 
Commissioner Pierluisi, both of whom are here today.
    Through our daily contact with local leadership and 
frequent meetings with stakeholders in San Juan and Washington, 
I can tell you with total confidence that Puerto Rico's fiscal 
crisis is escalating and it is very real, and that without 
Federal action, it could easily become a humanitarian crisis as 
well.
    Let me be clear: there is no substitute for legislative 
action. Administrative authorities are simply insufficient to 
put an end to the crisis. Without Federal action, this crisis 
will escalate and result in further economic contraction, 
outmigration, and suffering of American citizens in Puerto 
Rico.
    In the very near future, Puerto Rico will face impossible 
choices among providing essential public services, delivering 
promised pension benefits, and making payments on its debt. Now 
my written testimony describes the gravity of Puerto Rico's 
fiscal challenges, but I would like to highlight a few of the 
more salient facts.
    First, Puerto Rico's decline started before the U.S. 
financial crisis, but unlike the U.S. as a whole, the 
Commonwealth never recovered and remains in recession today.
    Second, these economic challenges have sparked the largest 
wave of outmigration from Puerto Rico since the 1950s, and that 
pace continues to accelerate. Eighty-four thousand Puerto 
Ricans left the island last year.
    Third, the Commonwealth has already run out of operating 
cash. Government services and debt payments have only continued 
because Puerto Rico is deploying unsustainable emergency 
liquidity actions, such as delaying tax refunds to its citizens 
and borrowing from workers' compensation funds. But even with 
these steps, the Commonwealth projects it still will completely 
exhaust its liquidity before year end.
    Now the strain created from these actions is already 
evident. The pensions are underfunded severely, hospitals have 
reduced services--one has even closed--and invoices to small 
businesses are going unpaid. Against this backdrop, additional 
fiscal adjustment, while absolutely necessary, must be measured 
against its negative impact on Puerto Rico's economy and 
people.
    In our judgment, austerity alone is not a solution. Most 
fundamentally, the debt is unsustainable, and the market knows 
this, which is why Puerto Rico's debt has traded for some time 
between 30 and 70 cents on the dollar.
    Now there is plenty of blame to go around for the mistakes 
of the past, but we must now focus on the path forward. The 
Administration believes that Federal actions, executed 
alongside measures taken in the Commonwealth, are now required 
to allow Puerto Rico to address its fiscal crisis and for the 
economy to return to growth. We are presenting these policies 
as principles to the committee and stand ready to work with you 
on specific legislation. There are four interrelated elements 
to our plan.
    First, Puerto Rico needs tools to comprehensively 
restructure its financial liabilities. Congress should pass 
legislation already introduced that provides Chapter 9 
protection to Puerto Rico's municipalities and public 
corporations, but Congress should also authorize a broader 
legal framework that allows for a comprehensive restructuring 
of all of Puerto Rico's outstanding debt.
    Second, Congress should require that Puerto Rico implement 
strong fiscal governance and oversight as part of any 
comprehensive legislative package. The oversight should provide 
sufficient safeguards to ensure Puerto Rico adheres to its 
recovery plan and fully implements proposed reforms, but care 
must also be taken to structure fiscal oversight in a way that 
respects Puerto Rico's autonomy and unique heritage.
    Third, Congress must provide a long-term solution to Puerto 
Rico's inadequate Medicaid treatment to raise the standard of 
care. We should also remove the Medicaid cap and increase 
support through the Federal Medicaid match.
    And finally, Congress must help Puerto Rico boost economic 
growth. The decade-long recession has taken its toll on Puerto 
Rico's finances, its economy, and its people. To break this 
vicious cycle and help those hardest hit, Congress should 
extend the earned income tax credit (EITC) to citizens in 
Puerto Rico. The EITC is one of the strongest, most powerful 
policies for rewarding work and supporting economic growth.
    We look forward to a constructive, bipartisan dialog that 
identifies ways to execute the Administration's proposals and 
provide Puerto Rico with the tools it needs to manage through 
this crisis and restore growth.
    You have kindly invited us today to discuss Puerto Rico's 
economy, debt, and options for Congress. We believe this 
discussion is timely and the issue must be addressed.
    Thank you.
    [The prepared statement of Mr. Weiss follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. Weiss.
    Governor Padilla, your comments, please? Thank you.

STATEMENT OF HON. ALEJANDRO J. GARCIA PADILLA, GOVERNOR OF THE 
                  COMMONWEALTH OF PUERTO RICO

    Governor Padilla. Thank you, Chairwoman Murkowski, for your 
leadership and for holding this hearing. I appreciate our 
collaboration and look forward to a bipartisan solution to this 
crisis, working with Ranking Member Cantwell, members of the 
committee, Congress, the Treasury, and the Resident 
Commissioner of Puerto Rico.
    We are facing a crisis in Puerto Rico, a crisis decades in 
the making. We did not create it, but we need to solve it. To 
address it, my administration has reduced expenses by 20 
percent and increased revenues by another 20 percent in the 
last three years.
    Despite these efforts, by the end of this year, Puerto Rico 
may have to choose between paying its creditors and providing 
essential services to the island's 3.5 million American 
citizens. Police and fire protection, healthcare, and social 
services are all in jeopardy.
    Puerto Rico is running out of cash and will soon exhaust 
the emergency measures we are using to keep the government 
operating. When faced with the prospect of either making 
payments on debt obligation or paying for essential services, 
Puerto Rico will have no choice but to default. With no 
bankruptcy options, creditors will sue, dragging us into 
complex and costly legal battles that will only aggravate the 
crisis.
    I urge you to read Dr. Anne Krueger's report, which 
reinforces this reality. Her debt sustainability study, the 
first ever done by any administration in Puerto Rico, describes 
a vicious cycle of economic recession, public borrowing, and 
fiscal adjustment that began to accelerate in 2005 following 
congressional repeal of Section 936 of the Internal Revenue 
Code and the resulting downturn into our manufacturing base.
    From 2005 to 2012, Puerto Ricans shouldered the burden of a 
new sales tax, employee layoffs--thousands, a surtax on real 
property, and other expenditures and revenue measures while our 
debt burden nearly doubled from $39 billion to more than $70 
billion.
    Upon taking office in 2013, I began to implement additional 
fiscal adjustment measures: reduce expenditures and froze 
collective bargaining agreements, reform our largest pension 
fund from defined benefits to defined contribution, and 
increased revenues. Most notably, throughout attrition, we now 
have 66 public employees per 1,000 persons, lower than the U.S. 
average of 68, and have begun to reduce our debt, a historic 
first.
    Other actions my administration has taken are detailed in 
my written testimony. However, independent experts tell us, and 
we agree, that even if we implement all of the measures in my 
working group's Fiscal and Economic Growth Plan, large 
financing gaps and unfunded pension obligations will persist.
    We have never asked Congress for a bailout, and we are not 
seeking one today. We ask for access to a legal framework to 
restructure our liabilities. We ask for fair treatment in 
Medicare and Medicaid funding, for reforms that stimulate labor 
force participation and job creation such as the earned income 
tax credit. We ask for exemption of the Jones Act like that of 
the United States Virgin Islands, our closest neighbors. 
Treasury's recommendations address many of my administration's 
requests and are an essential step forward.
    Chairwoman and members of this committee, inaction is not 
an option. By moving forward on these measures now, you can 
help prevent the situation from getting worse. Your action will 
have a dramatic impact on the people of Puerto Rico and will 
have little or no effect on the serious national budget issues 
confronting Congress.
    Working--I am sorry--waiting will only allow the situation 
to grow worse, more expensive, and difficult for you to address 
down the road. Give us the tools, and we will finish the job.
    Thank you for your time and attention.
    [The prepared statement of Governor Padilla follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Governor.
    Mr. Pierluisi, welcome.

 STATEMENT OF HON. PEDRO PIERLUISI, RESIDENT COMMISSIONER FOR 
           PUERTO RICO, U.S. HOUSE OF REPRESENTATIVES

    Mr. Pierluisi. Chairman Murkowski, Ranking Member Cantwell, 
and members of the committee, for Puerto Rico to overcome its 
challenges, leaders in San Juan and Washington, D.C. must take 
swift and serious steps. The main economic problem in Puerto 
Rico is lack of growth. This is the result of low private 
investment, which is due to the lack of investor confidence in 
the economic and fiscal policies of the Puerto Rico government.
    The territory government has an outdated economic model 
that relies on government-owned enterprises, tax preferences, 
and subsidies. The government must streamline operations, 
expand public-private partnerships, and empower the private 
sector.
    There are no silver bullets or shortcuts. Progress requires 
smart, steadfast work. The Puerto Rico government must break 
its entrenched spending habits, which have not adjusted to 
changing economic and demographic realities. Our government 
must be a better steward of funds received from taxpayers and 
lenders, accounting for every dollar it spends.
    The local taxes require reform because it is complicated 
and unfair. Some taxpayers owe too little, while others owe too 
much, and the government does a poor job of collecting what it 
levies.
    With improved economic and fiscal policy, Puerto Rico can 
eliminate deficits and be in a better position to meet its 
obligations to creditors. In short, the Puerto Rico government 
must be transformed. We owe this to our constituents, no 
excuses.
    Let me turn to the Federal Government now. I am a proud 
American citizen, but I am also a Puerto Rican patriot. I have 
spoken forcefully about the need for the Puerto Rico government 
to chart a new path forward. The Federal Government should now 
speak with equal force about the need to correct its immoral 
and illogical policy toward Puerto Rico.
    Because Puerto Rico is a territory, it can be and is 
treated worse than the states under programs like Medicaid, 
Medicare, refundable tax credits, SSI, and Chapter 9 of the 
Bankruptcy Code. You cannot treat the people of Puerto Rico 
like second-class citizens and then profess to be surprised 
when we do not have a first-class economy, nor can you claim to 
be shocked that in the last decade over 300,000 island 
residents have relocated to the States in search of equal 
opportunity. This was easily foreseeable, but only if your eyes 
are open.
    I join the Treasury Department, the National Economic 
Council, and HHS in urging Congress to enact a legislative 
package for Puerto Rico that contains provisions that give 
Puerto Rico more equitable treatment under spending and tax 
credit programs, and to grant Puerto Rico access to a fair and 
orderly legal process to restructure a meaningful portion of 
its debt.
    The package could also contain language authorizing 
Treasury to guarantee repayment of principal and interest on 
future Puerto Rico bonds. Puerto Rico is currently locked out 
of the capital markets, and this provision would ensure that 
the government has the cash necessary to meet its immediate 
obligations.
    Finally, the package could provide for enhanced Federal 
oversight of the Puerto Rico government's financial management 
practices with the goal of helping the territory to budget, 
spend, and tax in a more responsible and transparent fashion. I 
believe such assistance would be welcomed by citizens and 
creditors alike.
    While I am open to Federal oversight, I oppose Federal 
control. If Puerto Rico is better governed at the local level 
and receives fair treatment at the Federal level, we can 
overcome our challenges. My constituents already endured the 
indignity of not being able to vote for their national leaders. 
Further eroding democracy in Puerto Rico is not the answer.
    Finally, let me address the fundamental problem from which 
nearly all of Puerto Rico's other problems emanate: our 
undemocratic and unequal political status. No Senator would 
accept territory status for their constituents, and I do not 
accept it for mine.
    Puerto Rico's status is not an abstract or theoretical 
problem. It is a moral, social, and political wrong with the 
crushing practical consequences for the American citizens I 
represent. One day soon my constituents, including hundreds of 
thousands of military veterans, will have the same rights and 
responsibilities as your constituents.
    In 2012, there was a local referendum in Puerto Rico, and 
voters rejected territory status and expressed the preference 
for statehood. In 2017, it is very likely that voters in the 
territory will confirm their desire for statehood in the first 
Federally-sponsored vote in our history. The government of 
Puerto Rico will then use all appropriate means to petition 
Congress to enact legislation making the territory a state.
    For Puerto Rico to prosper, it must be treated equally, and 
to be treated equally, it must become a state. Until then, 
there is much the Puerto Rico government and the Federal 
Government can do to help the territory.
    There has been enough discussion. It is time for action.
    Thank you.
    [The prepared statement of Mr. Pierluisi follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Commissioner.
    Mr. Marxuach, welcome.

STATEMENT OF SERGIO MARXUACH, POLICY DIRECTOR, CENTER FOR A NEW 
                            ECONOMY

    Mr. Marxuach. Good morning, Chairman Murkowski, Ranking 
Member Cantwell, and members of the U.S. Senate Committee on 
Energy and Natural Resources. I thank you for the opportunity 
to appear today before this committee to discuss Puerto Rico's 
financial and economic challenges.
    Puerto Rico currently faces two distinct yet related 
crises. The first and most urgent arises out of the 
government's weak financial situation. The second is the 
product of the chronic stagnation of its economy over the last 
ten years.
    Decades of fiscal and economic mismanagement have 
engendered an economy characterized by chronic primary 
deficits, high debt-to-GNP ratios, low employment levels in the 
formal economy, a large informal economy encompassing both 
legal and illegal activities, significant government corruption 
and predatory rent-seeking behavior in both the public and 
private sectors, substantial tax evasion, a hollow productive 
base, and high levels of private consumption and indebtedness 
enabled by having access to a stronger currency than its 
economic fundamentals will warrant. In our opinion, the 
parallels with Greece are quite evident for all to see and none 
to misunderstand.
    Notwithstanding this dismal economic situation, the island 
managed to triple its public debt from $24 billion in 2000 to 
$72 billion in 2015. Indeed, during this period, Puerto Rico's 
public indebtedness grew at a compound annual rate of 7.6 
percent while its income measured by GNP grew at a nominal rate 
of only 3.6 percent.
    To be fair, for decades the borrowed money was put to good 
use: to finance the construction of public schools, hospitals, 
highways, and other essential infrastructure. The problem is 
that during the last 20 years or so, a large portion of the 
money borrowed by issuing long-term debt was used to finance 
budget deficits, operating expenses, and classic pork barrel 
spending.
    Given the magnitude and multiplicity of challenges facing 
Puerto Rico, it should be obvious that there are no quick fixes 
to solve the island's fiscal and economic problems. Congress 
needs to implement a comprehensive program to remove some of 
the disadvantages imposed on Puerto Rico under the current 
political arrangement and eliminate some long-standing 
inequitable and discriminatory policies. The current situation 
simply does not allow for piecemeal action by Washington. A 
wide-ranging plan is needed.
    In the short-term, the most pressing issue is Puerto Rico's 
deteriorating liquidity situation. If the cash-flow projections 
made by Conway MacKenzie are accurate, Puerto Rico will not 
have enough cash on hand to meet all its obligations as soon as 
December of this year. In that event, and the absence of either 
(1) access to an emergency liquidity facility, or (2) 
forbearance from bondholders, the probability of a disorderly 
default is quite high because the current administration has 
already stated its firm intention to keep essential government 
operations running, and Puerto Rico cannot avail itself of 
relief under Chapter 9 of the U.S. Bankruptcy Code. Given the 
short time window, the policy options at the Federal level boil 
down to providing short-term financing to Puerto Rico to avoid 
a default or enacting legislation extending the application of 
Chapter 9 to the island.
    Another significant problem on the fiscal side is the cost 
of the government health plan, which is one of the principal 
drivers of Puerto Rico's non-interest expenditures. Providing 
Puerto Rico equal treatment under Federal healthcare programs 
such as Medicare, Medicaid, and the Affordable Care Act will 
provide the Commonwealth with some much-needed fiscal space and 
address a long-standing injustice inflicted on Puerto Ricans. 
For the truth of the matter is that Puerto Rican workers and 
employers pay the same payroll taxes as workers and employers 
in each of the 50 states of the mainland, yet benefits to 
Puerto Rico are unfairly rationed by Federal legislation.
    On the economic growth side of the equation, we recommend 
extending the Federal earned income tax credit to Puerto Rico. 
The Federal EITC is the most effective anti-poverty program in 
the United States. It has been shown to promote savings. It 
helps poor families smooth out the effect of unexpected 
financial shocks and builds a strong sense of future 
orientation among recipients. Extending this program to Puerto 
Rico, which would provide a significant wage supplement to low-
income Puerto Rican working families, could be expected to 
stimulate aggregate demand in the short run.
    Sustaining economic growth over the long-term, however, is 
a more complicated issue involving the interplay of many 
factors and variables, including the capability to accumulate 
and increase capital in all its forms: physical, financial, and 
human.
    The efficiency with which inputs are utilized in the 
production process, what economists refer to as total factor 
productivity, the degree of openness to the world, and the 
adaptable institutional structures that provide the right 
incentives to innovate and develop new technologies to 
reorganize production in order to exploit new opportunities.
    In this context, we recommend--we strongly recommend that 
any savings derived from a reduction in debt service be 
dedicated exclusively to develop and implement a new industrial 
policy for Puerto Rico based on a set of coherent horizontal 
policies such as reforming a complicated permitting and 
licensing system that stifles innovation; lowering energy and 
other costs of doing business in the island; substantially 
improving educational standards; discovering new sectorial 
opportunities through a process of dialog and consultation with 
key stakeholders in the private and civic spheres; and 
identifying spillovers, externalities, and other areas where 
Puerto Rican society could learn more.
    This new learning, in turn, would lead to new investment in 
research and development, increased productivity, identifying 
new areas of comparative advantage for Puerto Rican firms, 
higher economic growth, and the creation of high-quality jobs, 
which is what will in the end categorically terminate Puerto 
Rico's economic stagnation.
    We at the Center for a New Economy are currently working 
with experts from Columbia, Brown, MIT, and Brookings, among 
other institutions, to develop this medium- to long-term 
industrial policy.
    Finally, any new economic strategy for Puerto Rico, no 
matter how nuanced, sophisticated, or brilliantly conceived, is 
bound to fail if it ignores the fact that Puerto Rico has 
reached the limits of its development within the constraints 
imposed by its subordinate political status, which is both 
humiliating to Puerto Ricans and unworthy of a nation like the 
United States.
    In conclusion, Chairman Murkowski, I thank you and the 
committee for once again participating in this important public 
policy debate and look forward to answering any questions you 
may have.
    [The prepared statement of Mr. Marxuach follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. Marxuach.
    Mr. Fetter, welcome.

  STATEMENT OF STEVEN FETTER, PRESIDENT, REGULATION UNFETTERED

    Mr. Fetter. Thank you. Chairman Murkowski, Ranking Member 
Cantwell, and members of the committee, I appreciate the 
opportunity to testify on the fiscal issues affecting the 
Commonwealth of Puerto Rico.
    With my background as a utility regulator and utility bond 
rater, I have been asked to discuss Puerto Rico's electric 
utility known as PREPA.
    I should say with the comments from my colleagues on the 
panel, the fiscal issues are extremely serious, but I believe, 
at least on the energy side, with a few changes it potentially 
has a brighter outlook, including the possibility of a 
consensual settlement agreement with investors short of a 
filing for bankruptcy.
    Initially, I wish to emphasize that I come at the PREPA 
issues with the hope that the ultimate resolution will create 
an environment in which investors will be willing to continue 
providing funds to the Commonwealth for the wide range of 
public services they now support and that that goes on well 
into the future. I believe the best way of achieving that is if 
stakeholders can reach a consensual settlement agreement under 
which necessary sacrifices can be shared across the board.
    This is consistent with the approach I took at the Michigan 
Commission, where I continually urged our staff and adversarial 
parties to attempt to reach agreement on points of difference 
through settlement because no matter how thorough a litigated 
case record is developed, the parties are always in a better 
position to weigh their areas of dispute and strike a fair 
balance as to how they wish them to be resolved. Basically, 
then, each party chooses the end result for themselves.
    Toward this ultimate goal, I offer the following thoughts:
    The new Energy Commission should expedite PREPA's current 
base rate case as much as it possibly can, a point that I 
believe Congress could help emphasize. My understanding is that 
rate levels have long been inadequate to meet operating 
expenses and debt obligations, thus leading to PREPA's 
financial crisis.
    Adding to the problem, when oil-reliant PREPA received a 
major positive break with oil prices plummeting down during the 
past year, those saved funds were immediately flowed back to 
customers rather than keeping rate levels the same and using 
the additional revenues to support operations and required 
investor payments. My back-of-the-envelope calculation puts 
those lost revenues during the past year as approaching $1 
billion on a total base of $9 billion of debt at PREPA.
    I admit I am not sure if the Energy Commission had the 
authority to so direct these fuel savings, but my experience 
tells me that they could have done what I did at the Michigan 
Commission. I went to the Michigan legislature. Actually, your 
colleague, Senator Stabenow, was serving in the legislature at 
that time.
    I explained to policymakers why the law needed to be 
changed and why the public interest would be furthered if they 
did it immediately. Such a proactive step would have helped 
PREPA respect the interests of debt investors while mitigating 
the financial pain its customers will likely have to face as 
this crisis proceeds.
    Similarly, PREPA should immediately endeavor to operate 
with substantially increased efficiencies, especially with 
regard to rate-collection practices. I think if I were serving 
at the commission or at PREPA, I would seek the advice of 
individuals and institutions that have faced similar 
difficulties in the past.
    For example, almost every U.S. utility regulator serves at 
NARUC, their longstanding national association, and utility 
executives belong to a range of electric and natural gas 
associations. I expect that any of these organizations would be 
willing to assist PREPA or the Energy Commission.
    And of course, relevant experience exists in utility 
consulting firms across the U.S. Expertise is there to be 
tapped, and I believe Congress could play a role in 
facilitating a connection between PREPA, the commission, and 
these experts.
    In addition, I understand that outside investors are 
willing to assist PREPA in a range of ways, from new investment 
aimed at asset modernization, all the way up to privatization. 
At this point, no option should be off the table.
    Finally, let me briefly discuss the potential for Chapter 9 
bankruptcy filings being permitted for PREPA or other 
Commonwealth entities. At least with regard to the energy 
sector, the potential for a Chapter 9 filing was not a risk 
that investors considered at the time they decided they would 
lend money to PREPA.
    Undoubtedly, that means that if Chapter 9 were permitted 
for review of debt investors' return of funds, there would be 
legal challenges to such an authorization that would go on for 
years. I think a consensual settlement agreement is potentially 
there and would be a far superior path.
    Finally, let me tell you just my concern about the Chapter 
9. Debt investors lent money to the Commonwealth and its public 
agencies with the expectation that they would receive their 
funds back with interest. They are not equity holders or co-
owners of PREPA, subject to the ups and downs of utility 
performance. Thus, in my mind, for any resolution of this 
crisis to succeed going forward, it must keep faith with the 
debt investment community because those are the individuals and 
institutions, along with possible future equity investors, that 
will be needed to support Puerto Rico's continuing recovery 
well into the future.
    Thank you, Madam Chairman.
    [The prepared statement of Mr. Fetter follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. Fetter, I appreciate your 
comments, and you gave some specific proposals there that I 
think will be good for the committee to look at.
    Let me begin my questioning first directed to you, 
Governor. Again, thank you for being here.
    As we have come to this hearing today, we have heard a 
great deal of discussion about the numbers and where Puerto 
Rico is and their clear inability to pay, but there has been a 
lot of concern about the fact that we have not seen the 
financial reports that have been hoped for. There have been a 
number of financial reports. You mentioned one, and several of 
you also mentioned the Krueger report. There is also the Conway 
MacKenzie report to the working group report, which I think is 
helpful.
    But there is concern, clearly, about the verifiability of 
Puerto Rico's financial data, and this goes back to the fact 
that we have not seen a comprehensive independent audit since 
July 2013. I know that this was an issue that was raised before 
the Finance Committee as well.
    Can you tell the committee this morning whether or not 
there are plans to complete independent audits of the 
Government Development Bank for Fiscal Years 2014 and '15 and 
then, of course, going into the future? What is the status of 
that?
    Governor Padilla. Thank you, Chairwoman.
    It is a historical problem in Puerto Rico. We inherited 
such a mess there, too, and it was part of the different 
governments in the past to hide information to the market so 
they were able to have more access to the market. We have been 
dealing with that. Now we are just one audited financial 
statement behind. That should be released in the next weeks or 
months.
    The Chairman. Excuse me. Would that be '14 or '15 that 
would be----
    Governor Padilla. It will be '14 and then '15, but when I 
was sworn in, the delay was huge. We have been able to go 
forward and being now a little bit more accurate. The Conway 
MacKenzie and Krueger reports are part of that effort of the 
Commonwealth and my administration to bring you and to the 
world the right numbers about Puerto Rico through commission-
independent experts to evaluate Puerto Rico numbers.
    So on the audited financial statement, it is a historical 
problem that we are just now getting up to date. But to 
supplement that lack of information, that is why we 
commissioned the same company that did the research in Detroit, 
this Conway MacKenzie, and the best one in the world from the 
IMF is the Krueger report.
    The Chairman. But what you are telling the committee is we 
should anticipate the 2014 independent audit sometime within 
the next several weeks?
    Governor Padilla. Weeks or months, yes. I will tell you 
why. As you know, it is an independent contractor that is 
requesting every day information, so to put a burden on them to 
be faster, I need to ask them to address the issue in a more 
responsible way so you will have the better numbers. But, yes, 
we are putting a lot of pressure on them to accelerate that 
process.
    The Chairman. I think you understand the need and of 
course----
    Governor Padilla. Of course.
    The Chairman.--concern for very clear numbers.
    Let me ask you, Mr. Weiss, given your close interaction 
with the Puerto Rico government over the last year, are you 
comfortable with the financial data that is available and has 
the Treasury Department considered sending a team from Treasury 
to help them produce some of these auditable financial 
statements?
    Mr. Weiss. Thank you for posing the question, Chairman 
Murkowski.
    An essential part of the plan that we are proposing, not 
covered in my oral testimony but contained in the written 
proposal, is that it is absolutely the case that Puerto Rico 
needs to make an investment in its financial reporting systems 
and cannot be in a position where audited financials are not 
released on a timely and transparent basis to all stakeholders.
    It is equally the case that we have analyzed all available 
data, including the Conway MacKenzie report and other analyses, 
and there can be no doubt--there can be no doubt in our 
judgment that there is a fiscal crisis and that it is imminent. 
There is a liquidity crisis as well as a long-run fiscal 
crisis.
    And this is why we have proposed not just a broader 
restructuring authority but also enhanced fiscal oversight, and 
as part of that fiscal oversight, an investment in IT 
infrastructure and also the authorizations, as you suggest, to 
allow Treasury and the other agencies within the Federal 
administration to provide real on-the-ground technical 
assistance to make sure that that IT infrastructure is built 
out quickly and effectively.
    The Chairman. So that technical assistance that you are 
speaking to will be a team from Treasury that will go to Puerto 
Rico to try to get a better handle on what we are talking about 
with the numbers? The reason I ask, you mentioned assisting 
with the system. You and I both know that that is going to cost 
money. You and I both know that there is a lot of uncertainty 
right now in terms of what is going on with just the budget and 
appropriations as we move forward.
    As we look at the proposals you have outlined, one of the 
concerns that has been expressed is that there does not appear 
to be any kind of an estimate as to what the overall cost may 
be, whether it is for the proposals that have been discussed 
with the EITC, removing the Medicaid cap, or, as you have just 
mentioned, assistance with helping build out what is very 
necessary, I would agree. But do we have any kind of an 
estimate out there in terms of the costs of the 
Administration's proposals?
    Mr. Weiss. As to the cost of the build-out of the IT 
infrastructure, it is our judgment that the cost is low but 
that the benefits are great, and that, in fact, the technical 
assistance we could provide, not just out of Treasury but other 
agencies, would help to ensure that it is effective and quickly 
implemented.
    But I need to underline that there can be no doubt that 
there is a fiscal and liquidity crisis in Puerto Rico. The debt 
is consuming $3.5 billion to $4 billion annually out of a $10 
billion budget. That is 35 to 40 percent of government 
receipts. This compares to figures more in the area of five to 
ten percent in states and municipalities. The debt trades at 
prices between 30 cents and 70 cents and has traded there for 
the past two years since Puerto Rico lost access to traditional 
municipal bond investors. So the investment needs to be made, 
but it cannot be an excuse in our judgment for a failure to 
act.
    The Chairman. Okay. Mr. Weiss, I am well out of time but 
know that I am going to come back to you with this question in 
the next round to try to understand what it is that we are 
dealing with because, as I would agree, we have to work with 
Puerto Rico here. We must address this.
    We also recognize that we have issues as they relate to 
just dealing with the costs, so I am trying to get some kind of 
an understanding as to what we are dealing with with the 
Administration's proposal and whether or not they have got a 
back-of-the-envelope number that we can be looking to. So know 
that I am going to be coming back to you.
    Mr. Weiss. Thank you.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Madam Chair, and thank you to 
the panelists.
    I think having seen some of the discussion in the Finance 
Committee--at the end, it got kind of heated--I think it is 
safe to say that you all do not hang out together. [Laughter.]
    So if I could just get an answer to this question, a yes or 
no. Which of you support this Chapter 9 authority, creating 
Chapter 9 authority for Puerto Rico?
    Governor Padilla. Yes.
    Senator Cantwell. Can we just go down the line?
    Governor Padilla. I am sorry.
    Senator Cantwell. Mr. Weiss?
    Mr. Weiss. Yes, Senator.
    Governor Padilla. Yes.
    Mr. Pierluisi. I support Chapter 9--giving access to Puerto 
Rico to Chapter 9. I introduced a bill for that purpose.
    Senator Cantwell. Okay.
    Mr. Marxuach. Yes, Senator, I support it.
    Mr. Fetter. No, I do not.
    Senator Cantwell. Okay. Mr. Fetter, your testimony suggests 
that you believe that there are assets within the utility, and 
that is why you do not support Chapter 9, and you want to make 
sure that those assets--but in a bankruptcy, that is what the 
bankruptcy discussion is about. It is about what assets are 
there.
    So, Mr. Weiss, how is Puerto Rico--or the Governor--going 
to be constrained, and all the other sectors trying to reform 
in bankruptcy going to be constrained by this utility 
objection?
    Mr. Weiss. We need to be clear about bankruptcy as a whole. 
There are two aspects. One is Chapter 9, which has been 
introduced by Congressman Pierluisi in the House, and there is 
a companion bill in the Senate, and that would cover PREPA and 
the other public corporations and municipalities. That totals 
approximately one third of the total bonded debt in Puerto 
Rico.
    The Administration is absolutely in favor of moving forward 
with that legislation immediately. It would help not only 
finalize the PREPA negotiations, which are ongoing, but also 
cover the other municipalities in Puerto Rico, which are over-
indebted.
    At the same time, we are advocating for a broader 
bankruptcy that would cover the entire bonded debt of Puerto 
Rico. And the benefits of that are, first, litigation has been 
made at--various have mentioned litigation that provides a stay 
on litigation and necessary breathing space for the economy 
while it is in effect. Second, it provides a mechanism for 
assuring an agreement with each class of bondholders that is 
enforceable across the entire debt stock. And third, to the 
extent needed, it allows for senior financing, which can be 
brought in from the private sector and come out on a priority 
basis.
    It is our judgment that the time has come to address the 
entire debt stock of Puerto Rico and not just the Chapter 9 
municipalities and public corporations.
    Senator Cantwell. Mr. Fetter, you are definitely holding 
the utility area sacrosanct under this larger problem. What 
about what Mr. Weiss just said is not a process and procedure 
for making sure that this is----
    Mr. Fetter. Senator, my----
    Senator Cantwell.--that your investors are going to have a 
fair day--in a horrible situation, no doubt--but they are going 
to have their fair day under this?
    Mr. Fetter. I guess I come at it a few different ways. It 
is a risk that they did not envision when they decided to make 
their investment. I believe with a commitment towards improved 
operations at PREPA and improved regulatory timeliness, a 
consensual settlement agreement can be reached.
    And so, to me, that is far superior than starting down a 
path of Chapter 9 restructuring, which, in the end, might be 
okay to investors or it might not be okay. So since it is that 
binary okay or not, my expectation is that they would raise 
legal objections at the outset, as opposed to working toward 
that settlement agreement that I think is possible.
    Senator Cantwell. Mr. Marxuach.
    Mr. Marxuach. I just want to make a quick remark. I 
disagree. I respectfully disagree with the remark that 
bondholders relied expressly on bankruptcy protection in order 
to make these investments. To my knowledge, looking at every 
prospectus that is out there, I do not think it was even 
highlighted, you know, when the debt was issued. The main 
driver for Puerto Rican bonds was the triple tax exemption they 
enjoyed under the U.S. Tax Code and in Puerto Rico, and that 
was really what drove people to invest in Puerto Rico.
    It will be very difficult, I think, for any investor to 
prove in a court that they relied expressly on a representation 
that bankruptcy was not an option.
    Senator Cantwell. Okay. I see my time is expired. Thank 
you.
    The Chairman. Thank you, Senator Cantwell.
    Senator Barrasso.
    Senator Barrasso. Thank you, Madam Chairman.
    Congressman Pierluisi, you mentioned in your written 
testimony that Puerto Rico is, I think you said, ``treated in 
discriminatory fashion or excluded entirely'' from various 
Federal programs, including Chapter 9 of the Federal Bankruptcy 
Code. As you know, there is a companion legislative proposal to 
your bill in the Senate introduced by Senator Blumenthal to 
grant Chapter 9 Bankruptcy Code protection.
    I have concerns about families and retirees in my state and 
other states who were incentivized by Congress through the Tax 
Code to invest in the Puerto Rican bonds, including the Puerto 
Rico Electric Power Authority. I have heard there are many 
individuals who are invested in these bonds across the State of 
Wyoming. Some have investments in their 401(k)s, people who may 
not even know that their 401(k)s are invested in these bonds. 
Congress explicitly prohibited Puerto Rico from being able to 
access Chapter 9. Puerto Rico took advantage of the lower cost 
of capital by doing that. If access to Chapter 9 was granted 
and the rules under which investments in these bonds were made 
are retroactively changed, then the value would, I think, be 
negatively impacted. So my concern is people bought the bonds 
because they are tax-free, low-interest, Government bonds. So 
what happens when a retiree in Wyoming goes to their mailbox 
and opens their financial statement only to find their 
investment has been negatively impacted because Congress 
changed the rules of the game after the fact? What do I tell 
them?
    Mr. Pierluisi. Okay. First of all, Congress has the power 
to change the bankruptcy laws at any time, and no lawyer worth 
his or her salt would advise a client that bankruptcy law 
cannot change. Puerto Rico for 45 years had access to Chapter 
9. It did not use it then and did not need it then. For reasons 
that are not even expressed in the Congressional Record, it was 
left out. That is the story, the life of a territory.
    But I would also add that any investor would be in worse 
shape if, for any reason, the entity in which the investor 
invests has no legal structure, no legal remedy to handle its 
debt obligations. That is the situation in Puerto Rico right 
now. It is going to end up being chaos. You need a legal 
framework in which a Bankruptcy Court, a Federal Bankruptcy 
Court, oversees the reorganization of an entity that becomes 
insolvent.
    By the way, this is not like automatic. The law is clear. 
You need to show that you are insolvent. You need to show that 
you are not able to pay your debts when they become due. In 
addition, creditors have a participation in the process. So, if 
anything, I say it is much better to have Chapter 9 than not. 
And all we are asking is the same access as the states have. 
That is my answer.
    Senator Barrasso. Thank you.
    Mr. Weiss, if this Chapter 9 status is granted, would that 
not cost Puerto Rico the confidence of investors in the future 
who are a key component of improving the economy of Puerto 
Rico?
    Mr. Weiss. Senator, thank you for the question. And it 
really leads to the point that Puerto Rico lost confidence of 
traditional investors two years ago when it lost its investment 
grade rating. And the only financing it has been able to 
complete since then has been one $3.5 billion financing at an 
8.5 percent rate, which was put together entirely by hedge 
funds.
    More recently, it has also lost its interim financing. It 
is in a completely shutout situation from financial markets 
today and----
    Senator Barrasso. So would granting Chapter 9 do anything 
to address the structural problems and practices that have led 
to the economic situation in Puerto Rico?
    Mr. Weiss. As we have said in our proposal, the Chapter 9, 
the broader version, which covers the entire debt stock of 
Puerto Rico, in our judgment, should be coupled with greater 
fiscal oversight provided by a body that appropriately 
represents the status and people of the Commonwealth, and 
investment in IT infrastructure around financial reporting. So 
we would do the two together.
    But we think the quickest way to restore confidence in 
Puerto Rico in financial markets is to go through a broader, 
comprehensive restructuring of the Commonwealth's debt such 
that it emerges in a position where investors have confidence 
in the oversight and IT systems and that the level of debt 
itself, which today is totally unsustainable, better matches 
the size of the economy.
    Senator Barrasso. Thank you, Madam Chairman.
    The Chairman. Thank you, Senator Barrasso.
    For the information of the committee members, a vote has 
just started. There will be two votes. So I think what we will 
do is go until 25 after, and then we will take a break. That 
way we can try to hit both votes at one time and then come 
back.
    At this time, we will go to Senator Heinrich.
    Senator Heinrich. Commissioner Pierluisi, Mr. Fetter seemed 
to suggest that PREPA rates are not adequate, and that may be 
true from at least the narrow view of some investors. But as 
you know, PREPA rates are already far higher than mainland 
electric rates.
    If electric rates were higher in Puerto Rico, how would 
that impact the broader ability to attract additional business 
investment that is needed to grow out of the current situation?
    Mr. Pierluisi. Excellent question. But of course that PREPA 
and our energy cost are crucial to Puerto Rico's future. We 
need to grow. We need to grow our economy, and we are paying 
over 20 cents per kilowatt hour for energy. PREPA needs to 
diversify its energy sources. To do so, it needs to attract 
private capital so we have new LNG plants in Puerto Rico.
    But in the current state of affairs in PREPA, it has become 
such a risk for the investment community that nobody would 
enter into a power purchase agreement with PREPA as matters 
are. That is why restructuring at PREPA, reorganizing PREPA 
under the protection of the Bankruptcy Code, should be an 
option.
    I am the first one, Senator, who supports consensual 
negotiations with creditors. PREPA has been doing that for more 
than a year. I have been saying that it has taken too long, but 
we should always have that option because it is good for the 
process. It encourages the parties to negotiate in good faith. 
It gives PREPA, yes, more leverage in the negotiation, but it 
is the right thing to do.
    And of course the solution cannot be raise rates. That 
cannot be the solution. That is going to harm our economy, and 
it is going to cause even more migration, and it is going to 
create more fiscal pressure. So you are absolutely right.
    Senator Heinrich. With regard to Chapter 9, you believe 
that the certainty that that creates in the long run is better 
for the investment community than the status quo obviously?
    Mr. Pierluisi. Yes. Definitely, it is a tool we should 
have. I should say that in Puerto Rico I believe--I, for one--I 
believe we have 18 different entities issuing bonds in Puerto 
Rico. Some of those entities are in reasonable financial 
condition. Some definitely need to be reorganized. PREPA is 
one. The Water and Sewer Authority is probably the next 
candidate, and we should have this, too. We should definitely 
have this, too.
    Now, part of our debt, and I should make this point, is it 
has been issued by the central government and it has been 
guaranteed by our constitution; and Congress approved our 
constitution. I believe that that part of the debt, which is 
about $18 billion worth, is manageable, and we should pay every 
penny of it because it is our word. It is our constitution, and 
we should be a jurisdiction of law and order.
    So I want to clarify the record there. Even though I agree 
with having Chapter 9 as--I do not agree with the concept of 
restructuring or failing to pay all of our debt. We should 
honor our obligations to the extent we can, and we should have 
Chapter 9 available.
    Senator Heinrich. Do you think there is a relationship 
between the uncertainty over Puerto Rico's political status to 
the current economic crisis? What is the nexus there, 
Commissioner?
    Mr. Pierluisi. A clear nexus. Let me give you just an 
example. And by the way, Chairman, you referred to the lack of 
estimates. Obviously, to the extent we start generating 
specific bills, we will score them. CBO will score them.
    But let me just give you one example. If you improve the 
treatment of Puerto Rico under the Medicaid program so that at 
least we can cover the people falling below the Federal poverty 
level--I am not even asking for Medicaid expansion--the Puerto 
Rico government would be receiving at the very least roughly 
about $1.5 billion from the Federal Government that it is not 
receiving right now.
    That accomplishes two things. On the one hand, it helps us 
fiscally. We would not have the deficits that we are having. We 
would not have the liquidity problems we are having. On the 
other hand, we could cover this population, American citizens 
under the poverty level, as we should. So that is just one 
example. That is why this is tied to status.
    Why are we treated like that? Because we are a territory, 
and you have license to treat us differently. But I complained 
because, as American citizens, we should be treated equally. It 
has an impact on our fiscal health, and it definitely has an 
impact on our economy.
    Senator Heinrich. Thank you, Madam Chair.
    Mr. Fetter. May I add some rebuttal?
    The Chairman. We are going to go to Senator Sanders just 
because we are running short of time here.
    Thank you, Senator.
    Senator Sanders. Thank you, Madam Chair.
    I want to raise a couple of issues. First of all, let us be 
clear about the extent of the human tragedy currently taking 
place in Puerto Rico. As I understand it, since 2006, Puerto 
Rico has lost 20 percent of its jobs. About 60 percent of 
Puerto Rico's adult population are either unemployed or have 
given up looking for work. Over the last five years alone, more 
than 150 public schools have been shut down, and the childhood 
poverty rate has shot up to 56 percent.
    That is a human tragedy, and in my view, Wall Street should 
not be believing that they can get blood from a stone. When 
people are suffering and hurting, you cannot continue to 
squeeze them.
    I want to get back to that, but I want to say a word now on 
the energy situation. I have not heard one word--or maybe I 
missed it--on a phrase called ``sustainable energy.'' As I 
understand it, Puerto Rico today is producing its electricity 
55 percent from oil, 28 percent from natural gas, 16 percent 
from coal, 1 percent from renewables.
    Now, unless Puerto Rico's advertising is incorrect, last I 
heard you were a sunny island. You are an island. There is 
wind. I do not understand why you are producing electricity 
from oil and why we are not investing significantly into 
sustainable energy. I know there are plans underway, but you 
have huge potential to lead this part of the world.
    All right. Let us get back to my friends on Wall Street 
here. Mr. Weiss, you indicated that the hedge funds, some of 
the vulture funds, are buying bonds at 30 to 70 percent. At a 
time when children in Puerto Rico are going hungry and schools 
are being shut down, why should the U.S. Government or why 
should these guys be getting back 100 percent on their 
investment when they are paying 30 to 70 percent on the dollar 
for these bonds?
    Mr. Weiss. Senator, as we have said, the debt is 
unsustainable, and the market knows this. The fact that the 
highest-rated, most senior debt trades at 70 cents is a clear 
indication that this is no surprise and you want----
    Senator Sanders. What are the interest rates? I do not have 
a lot of time. What are the interest rates now that these----
    Mr. Weiss. A yield on the most highly priced security, debt 
security in Puerto Rico, is in excess of 11 percent.
    Senator Sanders. Whoa. So they are getting 11 percent, or 
they want 11 percent?
    Mr. Weiss. They are receiving----
    Senator Sanders. They are receiving 11 percent----
    Mr. Weiss.--11 percent.
    Senator Sanders.--and children in Puerto Rico are going 
hungry. Somehow that equation does not make a lot of sense to 
me. I think this is an issue that has to be dealt with.
    So the first point that I would make, in any serious 
discussion about this issue, the goal cannot be simply to 
protect high interest rates going to vulture funds on Wall 
Street. They are going to have to sit down on the table and 
take a significant haircut. They made risky investments, and 
when you make a risky investment, you should not expect to get 
100 percent back on your dollar.
    Mr. Marxuach. Senator, may I make one point? That 11 
percent is tax exempt. I just wanted to make that point.
    Senator Sanders. All right. So I think let us put that on 
the table, and that has got to end.
    My own view is--and I indicated this to the Secretary of 
the Treasury, Mr. Weiss, I think the Secretary of the Treasury 
and you should call a meeting with all of the players, 
including the players in Puerto Rico who are now suffering. 
Representatives of labor unions, when I hear labor reform, 
usually what that means to me is lower wages and longer hours, 
all right? But I would like to see all of the players sit down 
with the vulture funds and work out an agreement that is 
satisfactory to both sides.
    Now, in terms of transparency, I have heard, and I do not 
claim to be an expert on this, but that it is possible that 
some of the debt was incurred in an unconstitutional way, in 
violation of Puerto Rico's constitution.
    Governor Padilla. Yes.
    Senator Sanders. Who wants to talk to that one? Yes, sir, 
Governor.
    Governor Padilla. Yes, we need to audit that.
    Senator Sanders. You think that that is a possibility that 
some of your debt was unconstitutional?
    Governor Padilla. In those words, if that is a possibility, 
the answer is yes.
    Mr. Pierluisi. And let me clarify that there is an Attorney 
General opinion in Puerto Rico providing some support for the 
interpretation that some of the debt could be issued outside 
the constitutional requirements. So it is a legal issue. But 
you might be right, and it is something that should be studied.
    Senator Sanders. Should debt be repaid if, in fact, that 
debt was incurred in an unconstitutional way?
    Mr. Marxuach. No.
    Senator Sanders. Who said no? You both say no? Sir?
    Mr. Marxuach. I said no, and in addition to the opinion 
from the Attorney General that Congressman Pierluisi mentioned, 
the constitution specifically says that to balance the budget, 
you are not allowed to issue debt. You are supposed to either--
basically increase taxes. That is what the Puerto Rico 
constitution----
    Senator Sanders. And we presume that the investors 
understood that and were familiar with the constitution----
    Mr. Marxuach. Well, it was certainly disclosed in the 
financial statement. Whether or not they read it is a different 
question, and that is perhaps an issue to be investigated by 
the Banking Committee here in the Senate.
    Senator Sanders. Okay. So what I am hearing, though, from 
several of you, that if these debts were incurred in a way that 
was unconstitutional, that perhaps this debt should not have to 
be repaid?
    Mr. Pierluisi. Yes. And since the Senator raises the issue, 
or it has been raised, the issue of audits, let me say that 
Congress has the authority, this committee has jurisdiction to 
require GAO to do annual audits of the Puerto Rico government 
and financial transactions and issue recommendations. This 
committee had legislation before the committee providing for 
GAO to oversee or give guidelines and recommendations as to 
estimates, tax revenue, revenue estimates, expense estimates 
done by the territories.
    I testified before this committee, and I asked the 
committee to include Puerto Rico in that legislation. And for 
some reason you left Puerto Rico out, and you allowed GAO to 
advise the other territories but not Puerto Rico. And now, you 
tell me that our records or financial records are not the types 
that you would like to see.
    So what I say is definitely Congress has authority to--it 
did with the District of Columbia, and you can do it in a way 
that respects Puerto Rico's autonomy, and I think it should be 
done. And GAO could also----
    Senator Sanders. Thank you.
    Mr. Pierluisi.--consider the issue----
    Senator Sanders. Okay.
    Mr. Pierluisi.--the issue that was raised----
    Senator Sanders. My time is expired.
    The Chairman. We are going to try to get one more Member 
in. Senator Warren?
    Senator Warren. Thank you, Madam Chair, and thank you all 
for being here.
    I want to see if I can try to pull this together. The 
people of Puerto Rico are in a really lousy position. They have 
been hit hard by ten years of recession, and now they are 
crushed by debt they cannot repay. Ordinarily a city in this 
kind of financial trouble would declare bankruptcy, a country 
would go to the IMF, and in either case they would work out a 
reasonable debt reduction and a repayment plan.
    Puerto Rico, by American law, cannot do either one of 
these, and that leaves the 3.5 million American citizens on the 
island at the mercy of the people who hold Puerto Rico's debt.
    So who owns Puerto Rico's debt? Many of these owners are 
so-called vulture funds that wait until a borrower is in 
trouble and then they buy the debt at a big discount so they 
can make a profit even if some of the debt does not get repaid. 
But the vulture funds do not want to negotiate. Instead, what 
do the vulture funds want? Well, they want Puerto Rico to raise 
taxes, cut healthcare, fire teachers, cut pensions, sell off $4 
billion worth of government buildings, privatize public ports, 
close neighborhood schools, and cut support for the University 
of Puerto Rico, all so that these vulture funds can squeeze out 
more profits.
    Now, Mr. Marxuach, what would happen to the people of 
Puerto Rico and the economy of Puerto Rico if they did what the 
vulture funds are asking for?
    Mr. Marxuach. Well, it is essentially another round of 
austerity that would be imposed on the people of Puerto Rico. 
We already have done pension reform. We have fired government 
employees. We have cut expenditures. We have raised taxes since 
2009. So obviously what it will do to the economy is, you know, 
make the actual recession or contraction even more acute.
    Senator Warren. Okay.
    Mr. Marxuach. So I do not think it is part of the solution.
    Senator Warren. So it will make things worse----
    Mr. Marxuach. Definitely.
    Senator Warren.--in Puerto Rico?
    Mr. Marxuach. In my opinion, it would.
    Senator Warren. Worse for the people, worse for the 
future----
    Mr. Marxuach. Yes.
    Senator Warren.--of this economy?
    Mr. Weiss, I understand that the Treasury Department's 
position is that Congress should pass legislation so that 
Puerto Rico can force creditors to the negotiating table, the 
same way any American city or any country can do. I believe 
that Congress should pass a law. I have cosponsored such a law, 
and I will fight for it.
    I also understand from your testimony that you have been 
working with other agencies to guarantee Puerto Rico has access 
to existing Federal programs. You have worked to encourage 
other agencies to pursue all administrative options. But I want 
to be clear on this point. Is it your position that Treasury 
itself has absolutely no power to help the people of Puerto 
Rico without congressional action?
    Mr. Weiss. Thank you for the question.
    The Administration has organized, led by the White House, 
an interagency effort, and we are part of that. There is a 
dedicated team at Treasury. There is also a dedicated team at 
HHS. We have been working closely with the Governor, with the 
legislative leadership.
    Senator Warren. I am sorry. Just help me out a little bit 
on what ``working with'' means. I just want to understand what 
Treasury is doing to try to help out in these circumstances.
    Mr. Weiss. We have analyzed the finances of Puerto Rico. We 
are here to say today with no ambiguity that there is a 
liquidity crisis and that there is a fiscal crisis, and it is 
our strong belief that the most powerful way forward involves 
broader bankruptcy protection, as you stated, which would allow 
us to bring creditors to the table who would otherwise have no 
intention to enter into negotiations.
    Senator Warren. Mr. Weiss, I will push on Congress to try 
to pass these bills, but frankly, I think Treasury needs to 
step up and show more leadership here. I agree with Treasury's 
recommendations to Congress, but let us face it, in Washington 
sometimes things like this that sound good amount to just 
passing the buck.
    During the financial crisis when the banks were in trouble, 
Treasury did a lot more than just bail them out. Treasury 
stretched the limits of its authority to make sure that the 
banks stayed afloat. It helped broker deals between banks. It 
applied pressure to get parties to accept deals they may not 
have liked very much. It has done that in multiple other crises 
as well.
    Now the people of Puerto Rico are calling. They understand 
there is no bailout on the table for them, and they are not 
asking for one. After all, they are not a giant bank. But they 
are asking the Administration to do what it can to help broker 
deals, to stand up to the vulture funds that are pushing for a 
vision that is far at odds with the people of Puerto Rico and 
with all American citizens.
    Puerto Rico is not trying to protect its profitability. 
They just want to make sure that the families of Puerto Rico 
have a chance to build a future for themselves and their kids. 
I urge Treasury to be just as creative in coming up with 
solutions for Puerto Rico as it was when the big banks called 
for help.
    Mr. Weiss. Senator----
    Senator Warren. Thank you.
    Mr. Weiss. We----
    The Chairman. I am sorry. We are going to have to adjourn. 
The vote is about to be closed, so we will stand adjourned for 
about ten minutes or until Members can get back.
    [Recess.]
    The Chairman. I call this meeting back to order before the 
committee. We have got a little bit of a reprieve. The second 
vote is going to begin in about 10 or 15 minutes, so we will 
continue with the questioning and probably have to wrap it up 
by about five minutes after 12 p.m., or continue it, depending 
where we are in the process.
    With that, we will turn to Senator Hirono from Hawaii.
    Senator Hirono. Thank you very much.
    Regarding Senator Warren's line of questioning as to the 
Treasury being able to do more, I would share those sentiments 
because I think we need to do everything we can besides waiting 
for the legislation that would help Puerto Rico pass. That may 
take a while. I would like to echo her suggestion and her 
strong urging to Treasury that you be aggressive in doing what 
you can.
    In fact, I would like to ask Governor Padilla, do you think 
that Treasury is doing all it can to help Puerto Rico in this 
crisis situation?
    Governor Padilla. Well, Senator, thank you for the 
question. And I want to be as comprehensive as you have been 
trying.
    Yesterday, Treasury and the White House put out a plan to 
make Puerto Rico, as you said, and it is a more comprehensive 
and ambitious one in my lifetime. I think that, since Kennedy, 
especially when Munoz was Governor, no one has addressed the 
issue as President Obama and Treasury yesterday.
    We can argue, for example, with HHS that they can fix 
Medicare right now, but what we cannot allow, Senator, is to 
let Puerto Rico struggle between the Hill and the White House 
with Congress arguing that the Administration should do more 
and the Administration arguing that we need to pass 
legislation. Maybe both are true, but Puerto Rico is in the 
middle.
    Senator Hirono. Yes. My point is that it may take a while 
for Congress to act, considering what the circumstances and the 
environment here is. So short of Congress acting--and, yes, I 
totally agree that Congress should act on the bills that we 
have before us, but in the meantime, we would want to be 
assured that the Administration is doing everything it can to 
assist Puerto Rico.
    I have a question for Mr. Marxuach.
    Mr. Marxuach. Yes.
    Senator Hirono. In your testimony, you recommend that the 
extension of the earned income tax credit to Puerto Rican 
workers would be a very effective antipoverty program. It is 
that pretty much in the U.S. and all of the benefits of the 
earned income tax credit in promoting work, et cetera.
    So if implemented today--by the way, forgive me for not 
knowing, but would we have to pass legislation in order for 
Puerto Rico to qualify? Yes----
    Mr. Marxuach. Yes.
    Senator Hirono.--that was yet another thing.
    Let us say that we did pass it, and if it passed, how long 
would it take? How soon would the benefits of the earned income 
tax credit accrue so that your economy and your debt situation 
could be improved?
    Mr. Marxuach. Well, first of all, it depends when it is 
implemented, but assuming it is for the next----
    Senator Hirono. Just say----
    Mr. Marxuach.--tax year, it would be pretty much immediate. 
I mean there are dozens of studies here in the United States 
that demonstrate that this type of refundable credit has a 
direct impact on consumption and on the welfare of the poorest 
families since they basically spend all their income. They have 
basically no money left over to save. So the impact in the 
short-term could be very significant, but as I mentioned in my 
testimony, it is only part of the solution. I mean it will 
help. You know, it is like a shot in the arm in the short-term, 
but we need to think also about the longer-term policies.
    Senator Hirono. Did you want to add something, Governor?
    Governor Padilla. Yes, Senator, just to make my point very 
clear on the previous question, there is no doubt that 
congressional action is needed, not to kick the can. If you 
want to kick the can a little bit, a few months, maybe a year, 
but to solve the problem, this is very simple. The ball is 
right now in Congress's court. What we are asking is to throw 
the ball to our court.
    I want to solve the issue we began. We need to finish that 
job. Right now, the ball is in your court. Please, pass it to 
ours. We need to do the job. It is our problem. We need the 
tools to do our job.
    Senator Hirono. I certainly get the sense of urgency that 
you have and that we all should share.
    Governor, in May 2014, you signed legislation that required 
the Puerto Rico Electric Power Authority (PREPA) to ensure that 
the electricity from fossil fuels be generated more 
efficiently. Have efficiency goals been met as a result of this 
legislation that you signed?
    Governor Padilla. Let me give you just a little of 
background. When I was sworn in, we produced like 67 percent of 
our energy from oil. Now it is 54 percent, as Senator Sanders 
pointed out. When I was sworn in, energy was 31 cents per 
kilowatt hour; now it is 19. It is cheaper than in Hawaii or in 
the U.S. Virgin Islands. Puerto Rico is the offshore 
jurisdiction with cheaper energy than the United States. It is 
still high, 19 cents.
    But let me tell you why we got there. Did you know that a 
previous Governor took a loan addressing our GDP liquidity just 
to reduce the energy for the election period? That was amazing. 
That was incredible, and that was part of the problem.
    Yes, we are trying to add more renewables. We already 
signed for the building of 600 megawatts up to the amount of 
3,200 megawatts on renewables, but we need to finish the 
restructuring of PREPA that we already began or we are about to 
end successfully to allow the trust of the financial world to 
invest. But those are the right facts. Puerto Rico three years 
ago was at 31 cents per kilowatt. It is now at 19, and that is 
the reality of Puerto Rico.
    Senator Hirono. Congratulations on that.
    Governor Padilla. Thank you.
    Senator Hirono. Hawaii, yes, we share certain common issues 
relating to reliance on fossil fuels. Thank you.
    Thank you, Madam Chair.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Madam Chair, and thank you, Madam 
Chair, for keeping this open as well.
    I want to see if for a moment I can take a bit of a longer 
view with respect to this challenge, and this really goes back 
to the days when I was the Chair of this committee and Senator 
Murkowski was Ranking Minority member.
    Let me direct this question if I might to you, Mr. 
Marxuach. To me, the central question if you are going to keep 
this from happening again, you have to resolve this issue of 
status. That, to me, is just basic. I see you are nodding your 
head yes, so let us kind of walk through a little bit of this.
    In November 2012, the Puerto Rican government held a local 
referendum on Puerto Rico's political future. We noted, back 
again when I was Chair in August 2013, on that vote there was 
no dispute that a majority of the voters in Puerto Rico, 54 
percent, clearly expressed their opposition to continuing the 
current territorial status.
    So at that hearing, I expressed my concern that the lack of 
resolution of Puerto Rico's status not only distracts from 
addressing these huge challenges, it contributes to them. The 
President's Task Force on Puerto Rico's Status found that 
``identifying the most effective means of assisting the Puerto 
Rican economy depends on resolving the ultimate question,'' 
which they called status.
    So it is still clear that, for Puerto Rico to get on top of 
these issues and really to achieve the full potential that all 
concerned are interested in, the issue has got to be resolved. 
Puerto Rico must either exercise full self-government as a 
sovereign nation or achieve equality among the States of the 
Union. Congress's response to the 2012 referendum, Congress 
responded to it by authorizing and allocating the funds for the 
first federally-sponsored status vote in Puerto Rico's history. 
I am not sure that that has been fully appreciated, but the 
enactment of this law is, again, one of the important steps to 
get this resolved. It is my hope that the government of Puerto 
Rico will use this funding to conduct a federally-sponsored 
vote.
    A rejection of the current territory status by the voters 
of Puerto Rico leaves the Puerto Rico challenge with only two 
options: statehood under U.S. sovereignty or some form of 
separate national sovereignty. Once Puerto Rico does hold the 
vote, the Congress ought to respond in an appropriate fashion 
to implement the democratic desire of the U.S. citizens of 
Puerto Rico. So if you might, Mr. Marxuach, tell the committee 
a bit about how you see this question of political status, in 
effect, in suspended animation has harmed the economy of Puerto 
Rico.
    Mr. Marxuach. Certainly, it has harmed the economy of a 
Puerto Rico. I am going to leave the political----
    Senator Wyden. I asked you about the economy.
    Mr. Marxuach.--issue--yes. But economies are trained 
basically to deal with situations where they have to analyze 
and try to optimize a given event within certain restrictions. 
In the case of Puerto Rico, the restrictions have become 
overwhelming because precisely of this ambiguous status that we 
have that it is called Commonwealth.
    You know, we are not a sovereign country. We are not a 
State of the Union. We have no authority to negotiate treaties, 
no access to emergency financing from multilateral 
institutions, no monetary policy instruments. We have limited 
fiscal policy tools, nominal representation in Congress, with 
all due deference to the commissioner here, and the U.S. 
Supreme Court has determined that it is constitutionally 
permissible to discriminate against Puerto Rico in the 
application of Federal programs as long as there exists a 
rational basis for doing so. So if you are trying to deal with 
an emergency or a crisis like the one we have now with no 
monetary tools, limited fiscal policy tools, and all these 
other political restrictions, it is almost an unsolvable 
problem.
    So yes, there are certain things we can do in the short-
term to alleviate this situation, but eventually, if you are 
going to think alleviating to longer-term, you have to solve 
the underlying issue, which obviously is status.
    Senator Wyden. Okay. I appreciate that point because I 
understand I missed some of the earlier discussion, and there 
was, as is the case in this committee, some fairly spirited 
debate. But what Mr. Marxuach has said--and I know it is not 
flashy and sensationalistic and will not drive this evening's 
headlines, but the underlying question which I feel strongly 
about and Mr. Marxuach just confirmed, the underlying question 
is resolving the issue of status. If you do not resolve that 
issue, you are on a glide path for a threat that this could 
happen again, and no one wants to see that.
    I have to go back to the floor. I know one of the other 
witnesses wants to respond, I apologize for the discourtesy and 
perhaps----
    Governor Padilla. It is okay. I know you have a busy 
agenda.
    Senator Wyden. Why do you not just go ahead? Please, if you 
could----
    Governor Padilla. Very briefly.
    Senator Wyden. I apologize for----
    Governor Padilla. No, no, no, no. I appreciate your 
attention always to Puerto Rico, Senator. You are from Oregon, 
and we are glad that you are talking so much about us.
    First, this is a crisis that we need to solve now, and I 
want to highlight that. Second, we can address the issue of 
status. We need to address the issue of status, but we will not 
argue that the Illinois fiscal problems are due to an issue of 
status, or New York or Detroit or Orange County. We may say 
that statehood is a problem for Illinois, but we will not argue 
that.
    And I will urge the committee to take a look on the last 
report of Congress's request from the GAO, information on how 
statehood will potentially affect Puerto Rico.
    Senator Wyden. Let me do this if I might, because I will 
also be dealing with these issues, along with my colleague 
Senator Cantwell on the Finance Committee----
    Governor Padilla. I know.
    Senator Wyden.--and there are a whole host of measures that 
come up there as well. Clearly, action needs to be taken to 
deal with a number of the challenges right away. But what 
happens in American politics and in American government is 
people always say, oh, let us respond here in the next 36 hours 
and we will call it a day because we got it fixed. What Mr. 
Marxuach confirmed is essentially what I have been concerned 
about is that we could be back dealing with this again unless 
the issue of status is resolved. I look forward----
    Governor Padilla. Thank you.
    Senator Wyden.--to working with all of you.
    Governor Padilla. Thank you.
    The Chairman. Thank you, Senator Wyden. I think your point 
is certainly well taken.
    What we want to be able to do is not just address a short-
term crisis. I think it is fair to say, whether it is a 
humanitarian crisis, as Mr. Weiss has used the terms, or 
financial crisis, fiscal crisis, we have a crisis. Several of 
the proposals I think that the Administration is proposing and 
I think that you, Governor Padilla, have put out on the table 
may deal with this in the short-term.
    But I absolutely concur with what Senator Wyden has said. 
We do not want to be back here as a committee or as a Congress 
several years from now in the same situation. We need to be 
looking to a longer-term solution. As probably one of the few--
maybe I am the only one, I will have to check on it--Members of 
the Senate at least that was born in a territory, I pay keen 
attention to the situation in Puerto Rico and on the issue of 
status.
    Right now, what we are trying to do is figure out whether 
some of these short-term proposals are the fix that we need, 
and I think we have got a lot of work ahead of us.
    I also want to agree with what Senator Warren raised and 
what was reinforced by Senator Hirono, that what we are talking 
about here are proposals that the Administration has now put 
before Congress, and I think we all recognize that Congress 
sometimes, even in the midst of a crisis, takes a long while to 
work its magic, if you can describe it as magic. So everything 
that the Administration can be doing within its tool box needs 
to be pursued and considered.
    I do not know during the break, Mr. Weiss, if you had an 
opportunity to get a better handle on some of the numbers that 
I had asked you about in my questions, but I was able to get 
some information. Apparently, an energy analyst with the Height 
Securities report has provided a rough breakdown of the 
Administration's proposal. The EITC, is estimated to cost about 
$1.5 billion in annual payments; the child tax credit, about 
$850 million; the FMAP to the Federal average would be about 
$2.8 billion; and the ballpark that is estimated again--and I 
am just giving you what I picked up over a Blackberry in the 
past half an hour or so, is about $5 billion a year.
    If, in fact, we are in this ballpark, you need to 
understand that it is going to take Congress a while to work 
through some of these proposals. Attempting to identify an 
offset is something that we need to know that the 
Administration is going to be willing to work with us on 
because that will be a part of the hang-up here.
    That is a broad statement that leads to a response from 
you, Mr. Weiss, in terms of whether or not there are other 
administrative actions that you feel can be advanced at this 
point in time and if you feel that the proposal that you have 
laid out, that the Administration has laid out, is somewhere in 
the ballpark of what this Height Securities report has 
advanced.
    Mr. Weiss. Thank you, Chairman Murkowski. And I would like 
to address the very fair comments made by Senators Hirono and 
Warren as well.
    Let me assure this committee that Treasury and the broader 
Administration will apply all of its efforts and all of our 
creativity and all of our resources to the resolution of this 
financial crisis, just as we have in past crises, and we will 
leave no stone unturned. And so we recognize that the 
Administration has a role to play alongside Congress in 
crafting these proposals and in making sure that Puerto Rico 
sees through this crisis and gets back on the path to growth.
    As to the costs of our proposals, I would like to highlight 
that bankruptcy involves no Federal funds. It costs nothing to 
the Federal Government. It is merely a means of bringing 
creditors to the table in order to achieve an orderly 
restructuring of liabilities.
    As to healthcare and the EITC, let me emphasize that we 
have introduced these two as principles, not as detailed 
legislation, and we would look forward to working with you and 
your staff and other Members of Congress as to how to bring 
this to reality in a fiscally responsible way.
    The Chairman. Okay.
    Mr. Weiss. We understand that this is a fiscally 
constrained environment, but at the same time, I need to 
highlight 1.6 million American citizens in Puerto Rico out of 
the 3.5 million population depend on Medicaid, and it is the 
lack of Medicaid that is also prompting some of them to leave 
the island.
    The Chairman. Understood. I do not mean to cut you off, but 
I am going to have to run to this vote because it is wrapping 
up also. I am also very cognizant of what this committee's 
jurisdiction is, and as important as the Medicaid piece is, I 
know that other committees are going to be looking to address 
that.
    I wanted to ask a very quick question of Mr. Marxuach if I 
may because there has been a lot of discussion back and forth 
about the bondholders and gaining advantage and being paid 100 
percent. Do you happen to have any idea what percent of the 
bondholders are actually Puerto Ricans? I have to imagine that 
they are not all outsiders who have no interest in what happens 
to Puerto Rico.
    Mr. Marxuach. You are right about that. The number seems to 
change every week, I guess, but the latest figure we have here 
it is between 25 and 30 percent of all outstanding bonded debt 
is held by either Puerto Rico institutions or Puerto Rico 
investors. However, I have no way of verifying that. You know, 
this is a number that has been put out by some investment 
banks. But I personally do not have--I mean I cannot vouch for 
the validity of that, but that is the number that has been put 
out.
    Governor Padilla. It is the same number that we have, 
Chairwoman.
    The Chairman. Mr. Pierluisi?
    Mr. Pierluisi. And, Chairman, I would like to contribute. 
The best estimates that my office has obtained for the EITC, 
full application of EITC in Puerto Rico is roughly $500 
million, so it is half a billion dollars, not this number that 
you quoted from some other source.
    The Chairman. Well----
    Mr. Pierluisi. And child tax credit, full application of 
the child tax credit program, the number we have is roughly 
$150 million. And I agree with you, the challenge would be to 
identify an offset, but those are the best numbers I can 
provide you.
    The Chairman. I think part of what we are dealing with 
today, the Governor released his proposal, last week the 
Administration released their proposal. This is all new. It is 
out there on the table. There is a lot of assessment, a lot of 
analysis. There are going to be a lot of numbers going back and 
forth.
    This is why, at the end of the day, it really helps to 
understand what it is that we are dealing with, what are the 
true numbers, so whether it is what we have requested from the 
Governor and he has indicated we are going to see in the next 
couple weeks at least with the 2014 audited report, that is 
going to be important. It is going to be important that 
Treasury be able to rely on this. We need to have some keen 
understanding. I do not think that there is any disagreement 
that it is bad, but we also need to understand, again, if it is 
this bad, what are the costs that are associated----
    Mr. Marxuach. Madam Chairman----
    The Chairman. Mr. Marxuach?
    Mr. Marxuach.--if I may, in my extended written remarks 
that I submitted to the committee, I did take the time to look 
at the audits we do have from 2013 all the way back to 1998 and 
calculate what is called the primary balance for Puerto Rico. 
What that means in non-technical terms is how much money you 
have left before paying interest on your debt. And it is clear 
that at least, you know, during that period between 1998 and 
2013, Puerto Rico ran a primary deficit. That is, we had a 
deficit before even paying the interest on our debt.
    So that essentially means that we are in a classic debt 
trap, what economists call a debt trap. You have to keep 
borrowing just to pay off the interest on outstanding debt. And 
when that game of financial musical chairs stops, you really 
cannot continue. And I think we have reached that point.
    I do not have the numbers for 2014, but I did take the 
effort to, as I said, calculate this primary deficit for Puerto 
Rico and it is submitted in the longer statement that I 
presented to the committee.
    The Chairman. We will all be looking at this, and it will 
not just be this committee, of course. It will be the other 
committees of jurisdiction: Judiciary and Finance.
    Again, I apologize that we are not able to give more time 
to this. Obviously, as I was speaking with Senator Cantwell, we 
could have continued this hearing well into the afternoon to 
probe deeper into it.
    But I appreciate all of you coming this morning and 
presenting the positions. We have much work to do. I think 
there is agreement that we must be working together to address 
the situation in Puerto Rico not only for the short-term, which 
is very precarious, but for the longer-term as well. There is 
so much material before the committee.
    Thank you all, and we stand----
    Mr. Pierluisi. Thank you, Chairwoman.
    The Chairman.--adjourned.
    [Whereupon, at 12:06 p.m., the hearing was adjourned.]

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