Monday, October 23, 2017

U.S. House holds Hearing on Fiscal Control Board for Puerto Rico

By on February 2, 2016

SAN JUAN – The U.S. House Indian, Insular & Alaska Native Affairs Subcommittee, chaired by Rep. Don Young (R., Alaska), held a hearing Tuesday on the potential establishment of a federal fiscal control board on Puerto Rico.

Rep. Don Young (R., Alaska), chairman of the U.S. House Indian, Insular & Alaska Native Affairs Subcommittee

Rep. Don Young (R., Alaska), chairman of the U.S. House Indian, Insular & Alaska Native Affairs Subcommittee

The latest hearing marked the seventh time since last year that a Congress committee publicly discussed issues related to the island’s fiscal and economic crisis.

First up among those who testified was former Washington, D.C., Mayor Anthony Williams, who was the city’s chief financial officer when Congress established a fiscal control board in D.C. during the late 1990s.

In his submitted testimony, Williams, who is a senior strategic adviser to Dentons US LLP, said Puerto Rico is not alone in its financial distress and that Washington, D.C., New York, Philadelphia and Cleveland benefitted from having a financial control board assist them.

Among Williams’ concerns is that “the assertion will be made that permitting another government to provide some assistance…denies the populace their voice in self- determination,” but said that will quickly erode “as positive developments…start taking hold.”

Regarding the need for a federal government authority to provide fiscal stability leadership, both the “current inability of the GDB [Government Development Bank] and the island’s administration to solve imminent defaults, as well as the sheer magnitude of the debt liabilities, alone justify Congressional action,” he said, adding, “Congress needs to be mindful of the consequences to the cost of municipal credit across our Nation if the Island’s debt obligations are not resolved.”

Economic growth for Puerto Rico is key to the island’s future, he stated, by “maximizing the extent to which budget shortfalls can be meaningfully narrowed over time through real growth in the island’s tax base,” not “relying on concessions from creditors as the only means to bring current and future budgets into balance.”

James Spiotto, managing director of Illinois-based Chapman Strategic Advisors, was unable to attend the hearing but nevertheless argued for the inclusion of a fiscal oversight board in his written testimony. “It does not constitute a bailout,” Spiotto said in the document. “Rather, as has been the experience in a number of states, the introduction of financial oversight is not only more appropriate than rushing into Chapter 9 but also more effective.”

He also called for the potential board to help draft a recovery plan that would take a holistic approach and foster financial credibility in the market by determining what is affordable and what is not; allow for development of accurate, transparent and mutually agreed-upon financial statements and projections; assure appropriate funds for needed governmental services and infrastructure improvements; authorize the restructuring of debt consistent with government financing law and provide for economic stimulus and business development.

Carlos García, former GDB president and current CEO, founder & managing partner of BayBoston

Carlos García, former GDB president and current CEO, founder & managing partner of BayBoston

Also testifying was Carlos García, former president of the Government Development Bank during the administration of former Gov. Luis Fortuño, and current CEO, founder & managing partner of BayBoston, a minority-owned private equity firm.

During his testimony, García went at length regarding his stint as chairman of the Puerto Rico Fiscal Restructuring and Stabilization Board, a local fiscal control board created by law on March 9, 2009. “The local control board had a two-year mandate, which I believe was too short,” García said. “It was also limited to Puerto Rico’s central government. It did not include the Puerto Rico public corporations, and it did not have powers to eliminate or consolidate government agencies or to implement structural economic, labor or tax measures.”

According to García, the local control board and its members were successful in coordinating efforts with the Puerto Rico Legislature to enact several reforms to promote economic growth and improve the fiscal situation, such as the Puerto Rico Public-Private Partnerships Authority, a permits reform, a tax reform, an excise tax on foreign corporations, and an energy reform. Efforts to enact a labor reform and an overhaul of the government agencies were not successful.

“After the local control board disbanded in 2011, the strength of its centralized budgeting, expense control, fiscal oversight and transparency reporting programs as well as its implementation arm disappeared,” García noted. “What happened after it disappeared is painfully known to all of us.”

García went on to say that Congress should provide the framework and tools while qualified members of the at-large Puerto Rico community would be responsible to manage affairs under a federally mandated “Puerto Rico Fiscal and Economic Authority,” under congressional oversight and progress reporting to the Puerto Rico Legislature.

Simon Johnson, an economics professor at the Massachusetts Institute of Technology (MIT), was up next, giving a point-by-point analysis of the issues Puerto Rico faces.

Simon Johnson, an economics professor at the Massachusetts Institute of Technology (MIT)

Simon Johnson, an economics professor at the Massachusetts Institute of Technology (MIT)

 

“Puerto Rico does not need a bailout,” Johnson said. “It needs to reduce the cost of doing business, encourage investment, and attract people to work (and pay tax). It also needs to move away from an unsustainable fiscal deal vis-à-vis the federal government–and towards the same kind of arrangement that is available to all 50 states.”

The scholar also stressed the important factor that population migration is having on the issue. “Puerto Rico could easily experience a lost decade of growth. And outcomes (in terms of economic aggregates in Puerto Rico) could even be dramatic because residents can move to the 50 states,” he said. “In modern times, we have never experienced this particular dimension of a debt crisis–the relatively easy exit of a population.” 

Johnson concluded his testimony by stating: “International experience teaches us that economic recoveries are possible, even from apparently dire circumstances. Puerto Rico does not have its own currency, so recovery through devaluation is not an option. And reducing wages in Puerto Rico would induce more people to leave – this should be regarded as an important constraint on policy.

But international experience also suggests there is a sensible way forward if Congress and the government of Puerto Rico are willing to support: significant debt restructuring in a court-run process; improvement in fiscal management, including with external oversight; a reduction in the cost of doing business; and an investment-led recovery.”

Thomas Moers Mayer, partner at New York-based Kramer Levin

Thomas Moers Mayer, partner at New York-based Kramer Levin

Thomas Moers Mayer, a partner at New York-based Kramer Levin, a law firm representing two bondholder groups in their so-far-successful challenge to Puerto Rico’s locally enacted bankruptcy law, noted that Franklin and Oppenheimer are collectively the largest holders of Puerto Rico bonds, with more than 600,000 investors owning these bonds in the two firms’ funds.

“These people live on Main Street, not Wall Street,” Moers Mayer stated, adding that they bought Puerto Rico’s tax-exempt bonds after Congress expressly excluded the island from Chapter 9.

He warned against the negative effects that forcing a restructuring on bondholders could have for the island, leaving Puerto Rico with “no recourse except to lenders who charge extraordinarily high rates to compensate for risk, or – in the end – the U.S. Treasury.”

He added Congress’ final say on the matter could directly impact millions of Americans, and the only way Puerto Rico will regain access to low-cost capital markets is with the establishment of “a strong, independent and federally appointed Authority”; Chapter 9 would hinder, and not help, this authority, Mayer added.

Eric LeCompte, executive director of Jubilee USA

Eric LeCompte, executive director of Jubilee USA

Eric LeCompte is the executive director of Jubilee USA, which represents U.S. religious bodies, congregations and institutions, and focuses “on how the most vulnerable are impacted by global issues such as trade, debt, corruption and taxes,” he explained.

“In Puerto Rico, we partner with religious leaders representing more than 95% of the island’s people,” he said in his written testimony, adding that Puerto Rico’s “is not simply a debt crisis – this is a humanitarian crisis.”

He believes in long-term solutions to address the island’s problems and “immediate measures to help Puerto Rico’s people who are suffering right now.”

“Puerto Rico…can’t tax its way out of this crisis. There is no path to economic growth for Puerto Rico that doesn’t include debt restructuring. Self-imposed austerity in Puerto Rico is already proving harmful and counter-productive,” he added.

Resident Commissioner Pedro Pierluisi

Resident Commissioner Pedro Pierluisi

Early in the hearing, Puerto Rico Resident Commissioner in Washington, Pedro Pierluisi, said any Congressional legislation on the matter would have to follow similar measures that applied to the District of Columbia in 1995 and 1997 as the main guidelines. Among his recommendations was an independent board that would approve fiscal plans on a long-term basis. On the other hand, Pierluisi said he would fight any measure that would further curtail the commonwealth’s democratic process.

As another recommendation, Pierluisi called for the restructuring of Puerto Rico’s debt. He also insisted that Puerto Rico’s territorial status lies at the heart of the matter.

hearing witnessesLater on, Williams and García agreed on the need of a federal board, although on slightly different terms; while Williams proposed a board made up of five to seven members, García recommended a five-member board with a strong local presence.

During the hearing’s question-and-answer phase, Rep. Raúl Grijalva (D-AZ) said the proposed fiscal board solution should not be compared to cases such as Washington D.C., and instead establishes a closer comparison with the recent situation going on in Flint, Michigan, in which austerity measures partly helped bring about its current pollution crisis. “The lack of attention by the U.S. government helps bring about such issues,” he said.

Johnson insisted on a comprehensive solution that would be able to revise and restructure all of the commonwealth’s public debt.  He also said that if Puerto Rico had mechanisms similar to the states’, “we wouldn’t be here.” Meanwhile, Moers Mayer disputed many of Johnson’s points, adding that Chapter 9 protection would make the commonwealth’s re-entry into the bond market more difficult than it already is under current circumstances.  

During his turn, Rep. Luis Gutierrez (D-IL) gave a fiery statement, throwing into light Puerto Rico’s colonial status, calling for a restructuring of the commonwealth’s debt, and placing part of the responsibility on the players who sold the bonds in the first place. Rep. José Serrano (D-NY) agreed with Gutierrez’s points and further highlighted Puerto Rico’s political status in the issue.

Rep. Luis Gutierrez (D-IL)

Rep. Luis Gutierrez (D-IL)

In his closing statements, Pierluisi said he was willing to go beyond political lines and try to find a solution under Puerto Rico’s current commonwealth status, even though he’s pro-statehood. Committee Chairman Young closed things off by stating that, although he also favors statehood, he also acknowledged that “there’s no chance in hell,” of Puerto Rico obtaining statehood under the current environment.

 

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  • Chris

    I agree with Congressman Young, our immediate focus should be on economic development and debt restructuring … which will make it much easier for Puerto Rico to become a state down the road. We need to stop viewing statehood as an immediate objective and more of a long term goal.

  • Jose Oyola

    Politicians and analysts have expressed outrage at the congressional proposal to establish a Fiscal Control Board. It is true that the Board will temporarily reduce Puerto Rico’s fiscal autonomy, but it is also a great opportunity to regain its government’s institutional capacity, lost beginning in the 1970s.

    According to Congressman Sean Duffy: “I do not care the name the Legislature wants to give to a park, I do not want the Council to get into that. I designed it to be limited to the collection of taxes, finance and budget. That’s where the problem lies.”

    Governors in Puerto Rico know what needs to be done to strengthen the capacity to collect taxes and have published timely financial statements in the past. Not so long ago the Legislature approved honest, balanced budgets. If we know how to do them, why we need a Fiscal Board to carry out these three essential components of good governance?

    The Board will provide two essential elements to overcome the crisis: credibility and capacity to act. Local politicians lost their credibility and ability to implement transparent and fair fiscal measures, adjusted to Puerto Rico’s new economic reality. The credibility of the Fiscal Board is necessary to regain the confidence of investors in the Government of Puerto Rico and convince them to provide the essential financing to overcome its current liquidity crisis.

    The ability to act will allow the Board to make budget adjustments quickly, fairly and transparently. Major changes the Board will be able to implement quickly include increasing revenues without raising taxes, reducing the enormous tax evasion. There is consensus that the local Treasury, known as Hacienda, needs a significant increase in its budget and a qualitative change in its organizational structure, but it can not complete its ongoing modernization without the support of a Federal Control Board, for at least five years.

    The Control Board will help restore fiscal and financial transparency by establishing standards and assigning resources to promptly publish the audited financial statements, no later than six months after the end of each fiscal year.

    The Board will restore access to capital markets, regaining the reputation painstakingly built under the Administrations of Rexford Tugwell and Luis Munoz Marin. Puerto Rico will be known again as an issuer who honors fully its existing and new obligations. This change in financial policy would be enough to open capital markets and allow a successful, consensual debt restructuring.

    The Board will radically change the unhealthy fiscal rules that have existed in Puerto Rico for decades, which allow inflated revenue estimates to “balance” budgets. The Board will establish budgetary rules that will help the Governor and the Legislature to develop realistic estimates of revenue and expenditure, which will by certified by external experts.

    The Board will eliminate the practice of overestimating income before the start of a fiscal year, as happened with the $9,800 million budget in fiscal 2015. The Board will not approve borrowings to finance structural operating deficits.

    The Board will establish rules to prevent future secretaries of Hacienda to “give away the house,” negotiating temporary tax breaks to large taxpayers in order to balance current deficits with future revenues.

    The Board can not do everything. Its main objective will not be to prepare a detailed economic development plan. But the Board will have an immediate impact on economic growth, removing the uncertainty on the financial and fiscal sustainability of the government, which is main cause of the high cost of interest on the public debt. There will be an immediate effect on fiscal health, reducing the cost of servicing the debt, freeing up resources for economic development.

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