U.S. Treasury Releases Details of Puerto Rico Plan, Official Testifies Puerto Rican Crisis is an American Crisis

On February 25, 2016, the U.S. House of Representatives Committee on Natural Resources held a full committee hearing on the fiscal problems that continue to plague the U.S. territory of Puerto Rico. The focus of the hearing was on the U.S. Department of the Treasury’s analysis of the situation in Puerto Rico, and the only witness was Mr. Antonio Weiss, who is the Counselor to the Secretary of the Treasury.

In his opening remarks, Mr. Weiss attempted to put the fiscal crisis into perspective by outlining what is at risk: “Puerto Rico is home to 3.5 million Americans whose economic well-being and safety are at stake. In the many months we have been traveling to Puerto Rico and meeting with Government officials, business leaders and workers, there is a growing sense of fear and a more urgent call to action. Puerto Rico is already in distress. What started as a recession has turned into a fiscal and liquidity crisis that shows signs of becoming a humanitarian one as well.”

Mr. Weiss further explained that significant cuts have already been made to health, education, and public safety services because the government of Puerto Rico simply cannot pay all of its bills. “The government remains open only because the Governor authorized more than $1 billion in onerous and unsustainable emergency liquidity actions. Tax refunds have been withheld from citizens. Pension assets, already severely depleted, are being sold to fund government operations.  Money dedicated to one group of creditors is being taken to pay other creditors.  The inevitable defaults and lawsuits have already begun.”

Last October, the Administration released a comprehensive legislative roadmap to stem the crisis and restore growth to the commonwealth of Puerto Rico. Mr. Weiss believes that “all elements of [the] plan are essential to Puerto Rico’s recovery and long-term growth, the most time-sensitive components are debt restructuring and fiscal oversight.  The Administration released further details today.

Pursuant to the territorial clause of the U.S. Constitution, the Administration is proposing a restructuring authority that would apply to all of the territory’s liabilities. This new authority would not apply to the states, which have their own defined relationship with the federal government under the 10^th amendment. The restructuring authority would be conditioned on acceptance of “strong, independent federal oversight.”

In the plan presented by Mr. Weiss, the framework for such restructuring would consist of a stay on litigation, during which time there would be an initial period of negotiations between all involved parties. If the negotiations prove to be unsuccessful and all creditors are not able to agree to the same terms, then the process would move to a court where a judge would have the authority to adjust any remaining claims.

Mr. Weiss warned the committee that “without a comprehensive restructuring framework, Puerto Rico will continue to default on its debt, and litigation will intensify.  It will be contentious and protracted – both among competing creditor classes and against the Commonwealth – while the economy worsens and Puerto Rico’s capacity to repay creditors collapses further.  As the cascading defaults and litigation unfold, there is real risk of another lost decade, this one more damaging than the last.”

The second part of the Administration’s proposal for immediate action is the implementation of a strong, independent federal oversight board to address the Commonwealth’s longstanding history of fiscal mismanagement and inadequate financial disclosure. Mr. Weiss cautioned that for any board to be effective, “oversight should be structured in a way that respects Puerto Rico’s self-governance while assuring implementation of required reforms.”

According to Mr. Weiss, “pairing restructuring and oversight is a tried and true combination to resolve debt crises, both domestically and abroad.  However, these two proposals must be enacted together.  One without the other will not work.”

Throughout the question and answer period, it became clear that the majority of the committee supports a type of oversight or control board for Puerto Rico, but that there is no consensus among the members of the committee on a debt restructuring mechanism for Puerto Rico. Rep. Jody Hice (R-GA) and Rep. Tom McClintock (R-CA) were particularly insistant in their questioning of Mr. Weiss, and both appeared to oppose any form of debt restructuring for Puerto Rico. When asked by Mr. Weiss how Puerto Rico should move forward without a mechanism for debt restructuring, Rep. McClintock was unable to provide a detailed response and suggested the territorial government simply make the payments.

Towards the close of the hearing, Rep. Jose Serrano (D-NY), who is not a member of the committee but was born in Puerto Rico, brought up the issue of Puerto Rico’s political status. Rep. Serrano insisted that the fiscal crisis has its roots in the status issue and there is no wrong time to discuss Puerto Rico’s ultimate political status. He argued that the fiscal crisis serves as the needed proof that it is time to settle the status issue: because of Puerto Rico’s colonial status, the territory cannot even restructure its own debts without Congressional approval. This type of treatment would never happen to a U.S. state. Rep. Serrano said that it is the job of the U.S. government to tell Puerto Rico what options are available for Puerto Rico’s status and would like to see language to that effect in the legislation that addresses the current fiscal crisis.

Puerto Rico’s Resident Commissioner, Pedro Pierluisi, also touched on the issue of Puerto Rico’s status, noting that “Federal policy towards Puerto Rico is a national disgrace, contradicting the claim that the United States desires democracy and dignity for all of its citizens.  Under this policy, my constituents are American enough to serve, fight and die for this country—a duty they have performed proudly since World War I.  But they are not American enough to vote for president, senators or voting members of the House.  They are American enough to win nine Medals of Honor, and to form the backbone of a U.S. Army unit that recently earned the Congressional Gold Medal.  But, as long as they remain in Puerto Rico, my constituents are not American enough to receive fair treatment under federal programs that improve quality of life and promote work.  And so they are moving to the states in huge numbers, because it is human nature to go where you have the best chance to survive and to thrive.”

“The excuse given by federal policymakers for such disparate treatment is always the same,” added Pierluisi.  “‘You don’t pay federal taxes,’ they proclaim.  Never mind that individuals and businesses in Puerto Rico pay about $3.6 billion in federal taxes to the IRS every year.  Never mind that it was Congress, not Puerto Rico, that chose to exempt island residents from certain federal income taxes.  And never mind that because the federal tax code combines tax obligations with tax credits, the average working family in Puerto Rico contributes more in federal payroll and income taxes than the average working family in the states.  As a statehood supporter, I aspire for American citizens in Puerto Rico to have the same rights and responsibilities as American citizens in every state.  I don’t appreciate being told—falsely—that the appalling treatment we receive as a territory is, in fact, preferential treatment.”

The issue of Puerto Rico’s status is not new to Mr. Weiss, and he has noted previously that the status of Puerto Rico is a root cause of the troubles Puerto Rico currently faces.

At the close of the hearing, Mr. Weiss thanked Chairman Rob Bishop (R-UT) for his continued attention to Puerto Rico’s crisis, and he said that he looks forward to working with Congress in a bipartisan manner to solve once and for all the ongoing fiscal crisis in Puerto Rico.