Tuesday, September 27, 2022

Maybe It’s Time to Forget About a Solution from Washington

By on April 28, 2016

Editor’s note: The following opinion piece was written by former Judge Gerardo A. Carlo-Altieri. He was the chief judge of the U.S. Bankruptcy Court for the District of Puerto Rico (1994-2009) and a member of the Bankruptcy Appellate Panel in First Circuit Court of Appeals in Boston, Mass., from 1996 – 2009.

Congressional leaders have not agreed on a suitable formula for Puerto Rico’s financial oversight board and debt restructuring. This lack of consensus requires island officials to start thinking “outside the box”. There’s no doubt that the silence coming from the congressional front regarding H.R. 4900 (“PROMESA”), or any form of legislative assistance for the island, is deafening.  However, local officials have begged Congress to treat the island’s situation as a “humanitarian” crisis, but on the local front, they haven’t considered the structural changes and radical reforms that such an emergency requires.

Congressman Rob Bishop, a key player in marshalling the congressional response to Puerto Rico’s financial ailments, explained the abrupt ending of the House Committee’s mark-up session on H.R. 4900 by saying that it was all part of an ongoing “educational” exercise. But few doubt that the project, as drafted, is being questioned, needs major reworking and won’t move at least until late May.  

WASHINGTON, DC - MARCH 19: The U.S. Capitol dome is seen before work begins on a two-year, $60 million rnovation of March 19, 2014 in Washington, DC. Curved rows of scaffolds will encircle the dome starting this spring, enabling contractors to strip multiple layers of paint and repair more than 1,000 cracks and broken pieces. (Photo by Chip Somodevilla/Getty Images)

U.S. Capitol dome in Washington, DC. (Photo by Chip Somodevilla/Getty Images)

The big issues dividing the committee are the priorities of pension versus general obligation (“GO’s”) and AFICA’s or fixed revenue bonds, and the judicial debt restructuring mechanism found in the bill. Also, the H.R. 4900 is being labeled as a “bail-out” for the territory and therefore disliked by many members. The proposed oversight board is also unacceptable to local politicians who want, above all, to retain their budget-spending powers, consider it “undemocratic” and an affront to the Commonwealth’s “sovereignty.”

It’s hard to predict how the May 1 Puerto Rico government’s default or negotiated credit extension scenarios will play out.  The domino effect of this event on the markets and its impact on the borrowing costs for the fifty states and municipalities is complicated by the fact that no congressional (or federal executive) action is expected soon. Any declaration of default would lead to litigation and a possible Government Development Bank (GDB) melt-down. At the same time, if the governor triggers the local moratorium law and defaults on the other $2 billion due by July, the question becomes “ripe” and changes from a virtual reality show to “real time”.

The idea expressed in Congress, that the Puerto Rico financial mess is not their responsibility, may change if the markets respond negatively to a default and the governor declares the first legal moratorium sometime this summer.  

It’s pretty clear at this time that Congress is not ready to play ball and accepts very little if any responsibility. The consensus for effective assistance is missing, except maybe for the appointment of a strict control board taking away most powers from the local government in spending and budget, tweaking reforms to federal laws, minor transfer fund increases and proposed future studies on pension obligations.

The local administration has been resourceful and bold in enacting a bankruptcy readjustment law and litigating its validity all the way to the Supreme Court, imposing unpopular austerity measures, and passing a series of new but regressive taxes.  Unfortunately, these actions have not resolved the budget deficits and liquidity insolvency. Other initiatives, like enacting a local moratorium law and the use of executive claw-back orders, may have helped short term, but have resulted in a further erosion of market confidence.  Negotiations and administrative actions at the Puerto Rico Electric Power Authority, steep rate increases at various agencies and pension reform, have not plugged all the leaks.

This may be the time for the government of the island and the Obama administration to radically “shift gears” and rethink their strategy, which has been geared to resolving the financial crisis primarily through congressional action. There are too many local government and federal executive actions available that have been ignored or discarded, and should be placed back “on the table” immediately.

For example, recent and very effective strict tax collection programs initiated by the Puerto Rico Treasury Department prove that simple local administrative solutions are the most effective remedies. Nonetheless, the success of the program was shadowed by Treasury’s withholding of tax refunds when due, which many understood to be highly abusive if not illegal.

Moreover, the aggressive sales tax collections confirm that an independent and apolitical tax administration for the island should be immediately created. The tax agency should be separate from the executive branch, with long term tenure and powers similar to the office of the Controller. The tax administration of the island has been terribly ineffective and highly politicized for many years. The act itself of creating this independent entity, including the Municipal Tax Revenue Center (CRIM by its Spanish acronym) administration, would restore trust in the markets and give Puerto Rico a new image.

Other tax changes that could be implemented include a total review of the outdated property tax assessment rolls and a gradual elimination or caps on deductions for high valued homes and real estate, which are not justified. Too many sacred-cow tax benefits exist, including doubtful exemptions for nonprofits, foundations and other tax-free entities.

The local government needs to look at all these options. The traditional government and accounting “schemes” used to balance the books—TARPS, short term loans, bond refinancing, extra-constitutional bond emissions, as well as utility rate and tax increases—are now exhausted. Instead, income and expense changes and structural cost reductions need to be implemented. Along these lines, the restructuring of agencies, consolidation of municipalities and placing the CRIM tax administration in a non-political entity are tools that need to be put back on the table.

In the recent past, local administrators  have sold or leased government assets and entered into public-private ventures. The sales of shipping lines, hospitals, telephone companies, and leases on airports, roads and bridges have worked reasonably well. They eliminated huge obligations, accumulated operating losses and created private employment in short time. The public will probably accept these transfers as before, but employee rights should be carefully protected throughout the transition.

The idea that privatization of goods and services also “privatizes corruption” should not be a reason to ignore these options, since such a possibility can be controlled.   Government corruption, experts agree, mostly stems from political funding and the creative “pay-to-play” methods used by parties to maintain control. This economic and moral cancer could be attacked with strict limits on contributions and even limitations on the expense of campaigns. Control in this area requires careful drafting to avoid federal constitutional decisions favoring uncontrolled financing. The commonwealth was resourceful in defending local bankruptcy and moratorium laws and argued that the island is “sovereign.” Then why not repair political corruption also with strict “sovereign” political reform?

Along the same lines, not only the executive, but all branches of government need to be slimmed down. Why not consider the consolidation of the Legislature into one chamber in order to send a powerful and genuine austerity message and at same time, consider eliminating the “professional” legislator concept? The judicial branch should not be exempted from this exercise of moderation and cost efficiency, rather ordered to provide alternate non-judicial dispute resolution (“ADR”) and mediation to the maximum extent, especially in civil private matters.  

In conclusion, it may have been a mistake by the commonwealth and the Obama administration to try and solve Puerto Rico’s economic and social crisis primarily by congressional grace. Washington has its own agenda and priorities, which don’t necessarily coincide with local needs and timing. Instead, we should concentrate on internal and simple solutions, like the tax collection efforts that the local Treasury Department is doing, educate our people, create a technical and efficient economic base, become agriculturally self-sufficient and, above all, prioritize the conservation of our island’s precious resources and delicate environment to the fullest.

Our emphasis should be on the continuous re-education of all ages by offering, if needed, free tuition at first class public and private universities. Also, a health care system for the needy that responds to the best preventive medical approaches. If we accomplish administrative and true tax reform (not just tax and rate increases), implement health and education programs for all, and establish clear local priorities, we will send the correct message to the world and pull out of the crisis in a positive way.

Waiting for Congress to pass a debt readjustment and oversight act or to somehow cure the island’s liquidity shortfall at this late stage, will not resolve our problems and is demeaning and demoralizing.

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