Mano a Mano: Sánchez Betances vs. Pierluisi
Oversight Board Places Puerto Rico Government in Trusteeship
On March 29, 2016, the chair of the Committee on Natural Resources of the U.S. House of Representatives unveiled its draft of a bill to establish an oversight board “to assist the government of Puerto Rico in managing its public finances;” enacted pursuant to the Territorial Clause of the Constitution. It “provides Congress the power to dispose of and make all needful rules and regulations for territories.”
Its 115 pages are principally dedicated not to revitalizing our economy, but to place the constitutional government of Puerto Rico in trusteeship. The powers allotted to the board are of such magnitude that it virtually supersedes the powers of our elected officials to manage the operation of the government. The power would reside in five people appointed by President Obama. Nominees and nominator were not elected by the people of Puerto Rico, and without consultation and approval, much less control or supervision by duly elected Puerto Rico officials.
Among the powers the board would have are: approve the fiscal plan and budget for the commonwealth; if the government fails to administer the budget as per the fiscal plan, the board will be empowered to make the necessary reductions to be in compliance. It will also review each law approved during an oversight year. If it certifies that the law is consistent with the fiscal plan and the budget, it shall become law. If not, it shall be null and void.
Furthermore, the board will have the power to review and approve all contracts and leases to be entered by the government. No contract may be entered into without its approval. The commonwealth may not borrow money and/or issue bonds unless the board certifies that it would be consistent with the plan. The board would be the only one authorized to borrow or issue bonds in the name of the commonwealth. The obtained funds shall be deposited in an escrow account held by the board, to be allocated to the governor at such intervals, terms and conditions the board considers appropriate. Also, the board may pledge or grant security interest in commonwealth revenues to guarantee the bonds.
Instead of amending the definition of “state” to allow Puerto Rico to designate the municipalities that may file under Chapter 9 [bankruptcy], the draft creates a sui generis bankruptcy proceeding, combining specific sections of the Bankruptcy Code to be applicable. The proceedings apply to all the territories of the United States. The territory itself may be a debtor thereunder, i.e. the commonwealth, in addition to its municipalities and public corporations. The board has to approve the filing and would be the trustee in bankruptcy.
Last but not least, the draft provides no revitalization mechanism for the Puerto Rico economy; indispensable to create the capacity to pay its debts. It does refer to revitalization, but limited to cause the creation of expedited processes to approve critical energy projects.
The virtual elimination of the powers and authority of the constitutional government of the commonwealth, voted by the people of Puerto Rico, is a gross antidemocratic act and contrary to the representations the United States has given to the world regarding the creation of a unique constitutional status for Puerto Rico under Law 600, culminating thereby the previous colonial status. Such a bill should never be submitted or approved.
Time for Congress to Act
For months, I have been working with my colleagues in Congress to craft legislation that provides Puerto Rico with a fair and orderly debt-restructuring mechanism. The will to act is there, but as they say: the devil is in the details.
It is clear that to achieve bipartisan support, a bill that includes debt restructuring will have to be accompanied by an independent fiscal oversight board. Leaders from both sides of the aisle have been working tirelessly to reach a principled compromise on the scope of the board and the restructuring mechanism. If we cannot get a bill to President Obama’s desk, the consequences for Puerto Rico and the island’s creditors are likely to be grave.
The past few weeks have involved intense negotiations on the specifics of the various discussion drafts produced by the U.S. House Committee on Natural Resources. The bill, HR 4900, was formally introduced on April 11 with dramatic improvements over the previous draft, and was the subject of another Natural Resources Committee hearing on Puerto Rico last Wednesday, April 13.
There are provisions in this bill that I dislike, and there are items not in the bill—like full funding under Medicaid and refundable tax credits—that I believe should have been included. It is easy to object to a bad provision in the bill or to the exclusion of a good provision from the bill, and therefore decline to support it. But the stakes are too high to take the easy road. The broad question is whether the bill will achieve its intended purpose, which is to help Puerto Rico address its current crisis, and create the foundation for a brighter future.
The two key components under discussion are the fiscal oversight board and the restructuring mechanism. It is important to ensure that their scope is properly calibrated. The board’s main function is to provide broad oversight of fiscal policymaking in Puerto Rico. It will be able to provide guardrails for the government of Puerto Rico, but in no way supplant the territory’s elected leaders.
The debt-restructuring mechanism would provide for a temporary stay of litigation, which—let me underscore—is intended to create an environment for consensual negotiations with creditors and not to encourage otherwise avoidable defaults. If agreements cannot be reached with the requisite number of creditors, the board could authorize the debt-issuing entity to go to court and adjust debt using the bankruptcy code provisions that apply in every state in the nation. We have been working without pause to ensure the process is workable and not unduly cumbersome. It needs to be fair to creditors, but cannot create unreasonable impediments to actual debt relief. It must allow the government finances to be stabilized, ensure essential services and allow our economy to grow, and put our government in a position to pay its debts.
We must work together to make this congressional bill possible. I am hopeful that the bill can be brought to a vote on the House floor before the end of the month. I will continue to fight for a bill that is good for Puerto Rico. Inaction will benefit no one.
Editor’s note: Resident Commissioner Pedro Pierluisi is also the president of the New Progressive Party and a gubernatorial candidate.
Luis Sánchez Betances View
Interview Conducted by Philipe Schoene & Ismael Torres
CB: You oppose U.S. Rep. Rob Bishop’s (R-Utah) measure for fiscal oversight of Puerto Rico as it is drafted. What are the fundamental objections you have with it?
LSB: Well, basically, the legislation, far from being a project or a bill to facilitate or revitalize the economic growth of Puerto Rico, what it really does is to place the government of Puerto Rico, the constitutional government elected by the people of Puerto Rico, in a trusteeship because the powers that are contemplated to be given to the [fiscal control] board are of such nature that they would legally and factually become the government of Puerto Rico, and this means that people who were not elected as I say in the column, [neither] the nominee [nor] the nominator were elected by the people of Puerto Rico. And, they are going to go over what the elected people of Puerto Rico, or the elected officials, of the commonwealth of Puerto Rico were trusted with by the vote of the Puerto Rican people.
CB: So in essence, it’s an affront to our exercising democracy of choosing our elected officials.
LSB: That’s my contention. One of the, obviously, the main general objection, in terms of being such an antidemocratic piece of legislation, from whatever specter of politics we may be, the truth is that in 1952, something happened in Puerto Rico.
CB: To provide consent of the governed.
LSB: Right. And that was, there’s an issue of sovereignty, as to who is really the sovereign, be it the federal government or the Puerto Rican people. That’s one of the issues in the Sánchez Valle case, where the issue of double jeopardy is related to the sovereignty of the state and the Puerto Rico Supreme Court ruled that there was no sovereignty in the commonwealth of Puerto Rico. But sovereignty is a flexible term, in the certain sense.
CB: So we have learned from different hearings that have been held, the term—capital S or lower case S.
LSB: Exactly, capital S or lower case S. But, as a matter of fact, if we want to give it, in the sense, the worst-case scenario—where Congress retained the sovereignty of the jurisdiction over the territory—the fact is the people voted for that constitution and they approved it and they voted for the elected officials—the governor, the legislators, the resident commissioner. So there is an exercise of the people of Puerto Rico, which I believe is acknowledged by international law. That was the representation made by the United States to the United Nations—the reason for which the United States no longer had to report on Puerto Rico as one of the nations belonging to its list of colonies.
However you interpret it—good or bad—the fact remains that the people of Puerto Rico did choose a constitution. And pursuant to that constitution, we have an elected government in Puerto Rico, which is the maximum authority in Puerto Rico.
Tied to that question—if the U.S. is the sovereign, does the debt belong to the United States?
No, I don’t think so. It is a political argument, but legally speaking, I don’t think so. The municipalities of Puerto Rico are not sovereign; they are creatures of the Commonwealth of Puerto Rico. It is the same as saying that the commonwealth vis-à-vis the federal government is not sovereign—well, the municipalities are not sovereign. But that doesn’t mean the debts of a municipality are the debts of the Commonwealth of Puerto Rico—they are two separate entities created by different laws—the constitution and then the Legislature created the municipalities. So in that sense, they have independent judicial personalities.
CB: A fiscal control board helped return market access to Washington, D.C. What amendments to Promesa do you see as necessary to achieve market access?
LSB: Definitely, the problem that Puerto Rico has right now is the lack of access to the markets; but then at what price?
To access the markets, you would need to have an economy that would be able to service the debt. The first place to start would be to revitalize the economy, to provide the measure to create employment and tax incentives for the transfer of enterprises into Puerto Rico. There are so many other measures that may be taken that do not necessarily relate to occupying the field of the Commonwealth of Puerto Rico.
Part of the revitalization is the access to money markets. And this can be done in other ways that are not as onerous or heavy as this proposed bill.
This bill is intended to help gain access to the markets. And as I said in the column, the only one who can borrow money or issue bonds is the board.
It gives me the impression that the perspective of the people who drafted this legislation is to assure that bondholders get paid. It is kind of a trusteeship that they will rule the budget, they will rule the fiscal plan, they will rule the Legislature and they will try to assure that the government manages its finances in such a way that bondholders will not be impaired or harmed.
The board will act on their behalf in the name of the Commonwealth of Puerto Rico.
CB: That said, will it be necessary to enter into consensual agreements that include collective action clauses?
LSB: One of the things in dealing with bankruptcy proceedings is to deal with the nonimpairment of contracts clause. For example, in bankruptcy, you divide the creditors in classes. And if a majority of the creditors approve, then the rest of the creditors are obliged to come on board.
CB: What good will an oversight board do, if we don’t have measures for economic development?
LSB: Servicing the debt and the well-being of the people of Puerto Rico will depend on the development of the economy. So the first thing that needs to be done is create the proper measures so the economy will develop, be it with tax incentives or through lending by the U.S. Treasury. That would be one way to access the markets—if the Treasury guarantees debt….
CB: The President’s Task Force was amended by President Barrack Obama to include economic development; what are the implications of inaction on that front?
LSB: It appears that nothing has happened in spite of that. I haven’t seen any project or any proposal to revitalize Puerto Rico’s e economy. It may be on paper, but I have not seen anything toward that end. In the past administration, we received several billions in ARRA [American Recovery & Reinvestment Act] funds, which were an economic stimulus, but apparently it did not work.
We need much more than merely receiving funds. The consensus is that we need something like Section 936 of the Internal Revenue Code.
CB: Would the proposed Sect ion 933-A be a solution?
LSB: I think that is one of the proposals that the P.R. Manufacturers Association is pushing in Congress. That is a proposal that could return [investment] to the United States and not be a problem with a small tollgate tax left in Puerto Rico. At a recent forum, we came to the conclusion that whatever was done had to be politically neutral, meaning that whatever is done could not hurt the statehood movement or the commonwealth. For example, Section 936 was incompatible with statehood; you could not have Section 936 if you were a state.
Pedro Pierluisi View
Interview Conducted by Philipe Schoene & Ismael Torres
CB: What aspects of U.S. Rep. Rob Bishop’s (R-Utah) measure for fiscal oversight of Puerto Rico do you favor?
PP: Well, I’m convinced that Puerto Rico needs a debt-restructuring mechanism and the only way the government of Puerto Rico—I’m convinced the government of Puerto Rico needs a debt-restructuring mechanism and the political reality is that the only way we’re going to get it is by also having a fiscal oversight, a federal fiscal oversight board in charge of not only implementing it or overseeing it, but also approving the government’s fiscal plan and budgets.
CB: What amendments to Promesa (the acronym for Bishop’s bill) do you see as necessary to help Puerto Rico achieve access to the market? What amendments, if any?
PP: My pending request is that the U.S. Treasury and its experts should validate the debt-restructuring mechanism that would be provided to Puerto Rico. Essentially, Treasury should give me the necessary comfort in terms of the effectiveness of the mechanism. There’s no question that the government of Puerto Rico has lost all access to the financial markets and it has also been unable to reach effective debt-restructuring agreements with our creditors, the government’s creditors. That’s why we need a mechanism.
CB: One government source told Caribbean Business that there is still the possibility that you won’t see the measure passed. That said, will creditors have to ultimately face the need to enter into consensual restructuring through collective action clauses—is that a possibility?
PP: The problem with the consensual agreement is that they cannot reach all creditors; they can only reach those creditors engaged in [negotiation].
CB: It’s not binding; you can’t bring the holdouts in.
PP: Exactly and there’s no way, there is no collective action mechanism or clause in the bond documents issued by our public entities, and there’s no legal way of having it other than by having Congress legislate it. Even though I am the first who’s been encouraging the government and government officials to engage with creditors, to seek access to the financial markets; I have been doing that now for a very long time. I am telling them they shouldn’t be relying or putting all their eggs in one basket, they shouldn’t be relying on Congress’ pending intervention, but rather should be negotiating with all of our creditors. I mean [general obligations] GOs, major institutional creditors, who invested in GO bonds, as well as Cofina (Spanish acronym for Sales Tax Financing Corp.) bonds. The purpose of those negotiations would be to avert default, avoid default and ensure that in the coming fiscal year starting in July, the government would have a TRANs [tax revenue anticipation notes] facility so that we don’t have another fiscal year with a severe liquidity crisis like the one we have right now.
CB: What good will an oversight board be if we are unable to return sustainable economic development to the island?
PP: The first thing you have to do to have sustained economic development in Puerto Rico is to put our fiscal house in order, to stabilize the government’s public finances. Our government has become the main impediment or obstacle to growth in Puerto Rico. The first thing that any economic development plan should have is what I just said, it is to have a concrete and effective way of improving our government’s financial standing.
CB: But then you need to create jobs also because…
PP: And the way you create jobs…. We should stop simply looking at Congress as the promoter of our economic development. Puerto Rico has a lot of potential, untapped potential, that can be taken advantage of, that can be used and maximized by having a more effective government operation. The government should be promoting and incentivizing our private sector with our current tools; exceptions to that I would say, let me just say this: I am the first who believes that having access, for example, to several tax credit programs would definitely help Puerto Rico to stabilize our economy and grow our economy. But we should stop thinking, because politically it’s not realistic that Congress, this Congress will devote any significant amount of money or resources to rescue Puerto Rico or incentivize our economy. Sometimes leaders in Puerto Rico forget that when you talk about tax incentives in Congress, it is viewed as an expense. The joint taxation committee has to score the bill and they compute the impact that any kind of tax incentive given to Puerto Rico would have in the federal government’s Treasury.
CB: Something like Sect ion 933-A, that they would not go for something like that even though…
PP: They won’t go for any of that, there is no appetite in Congress for spending any substantial amount of additional federal funds in Puerto Rico as well as [reducing] the federal government’s revenues because of new incentives given to Puerto Rico. Any federal legislation needs to be scored and fiscal impact computed and the current Congress, the leaders of the current Congress, have said time and again that they do not believe the federal government should be bearing any significant fiscal impact because of the Puerto Rico crisis.
CB: The President’s Task Force on Puerto Rico was amended by President Barack Obama to include economic development. What are the implications of the inaction on that front for Puerto Rico at this critical juncture?
PP: [T]he main point made in the report was that you cannot separate the discussion of Puerto Rico’s economic development from its status problem, that one thing goes along with the other. I do believe the best way to ensure that Puerto Rico can grow on a consistent basis and improve significantly the quality of life of its residents is by getting equal treatment in all federal laws, by joining the Union the same way Hawaii and Alaska did. Just by looking at the growth experienced in both Hawaii and Alaska in the 10 years following their respective admissions to the United States, you can confirm that the best solution, the economic solution for Puerto Rico would be to join the Union on a permanent basis as the 51st state of America.