[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
THE STATUS OF PUERTO RICO OVERSIGHT, MANAGEMENT, AND ECONOMIC
STABILITY ACT (PROMESA): LESSONS LEARNED THREE YEARS LATER
=======================================================================
OVERSIGHT HEARING
BEFORE THE
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
Thursday, May 2, 2019
__________
Serial No. 116-14
__________
Printed for the use of the Committee on Natural Resources
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
or
Committee address: http://naturalresources.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
36-258 PDF WASHINGTON : 2019
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COMMITTEE ON NATURAL RESOURCES
RAUL M. GRIJALVA, AZ, Chair
DEBRA A. HAALAND, NM, Vice Chair
GREGORIO KILILI CAMACHO SABLAN, CNMI, Vice Chair, Insular Affairs
ROB BISHOP, UT, Ranking Republican Member
Grace F. Napolitano, CA Don Young, AK
Jim Costa, CA Louie Gohmert, TX
Gregorio Kilili Camacho Sablan, Doug Lamborn, CO
CNMI Robert J. Wittman, VA
Jared Huffman, CA Tom McClintock, CA
Alan S. Lowenthal, CA Paul A. Gosar, AZ
Ruben Gallego, AZ Paul Cook, CA
TJ Cox, CA Bruce Westerman, AR
Joe Neguse, CO Garret Graves, LA
Mike Levin, CA Jody B. Hice, GA
Debra A. Haaland, NM Aumua Amata Coleman Radewagen, AS
Jefferson Van Drew, NJ Daniel Webster, FL
Joe Cunningham, SC Liz Cheney, WY
Nydia M. Velazquez, NY Mike Johnson, LA
Diana DeGette, CO Jenniffer Gonzalez-Colon, PR
Wm. Lacy Clay, MO John R. Curtis, UT
Debbie Dingell, MI Kevin Hern, OK
Anthony G. Brown, MD Russ Fulcher, ID
A. Donald McEachin, VA
Darren Soto, FL
Ed Case, HI
Steven Horsford, NV
Michael F. Q. San Nicolas, GU
Matt Cartwright, PA
Paul Tonko, NY
Vacancy
David Watkins, Chief of Staff
Sarah Lim, Chief Counsel
Parish Braden, Republican Staff Director
http://naturalresources.house.gov
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CONTENTS
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Page
Hearing held on Thursday, May 2, 2019............................ 1
Statement of Members:
Bishop, Hon. Rob, a Representative in Congress from the State
of Utah.................................................... 4
Prepared statement of.................................... 5
Duffy, Hon. Sean P., a Representative in Congress from the
State of Wisconsin......................................... 4
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona........................................... 2
Prepared statement of.................................... 3
Statement of Witnesses:
Gomez-Perez, Ana Cristina, Associate Professor, University of
Puerto Rico................................................ 80
Prepared statement of.................................... 82
Questions submitted for the record....................... 89
Guzman, Martin, Non-Resident Senior Fellow for Fiscal Policy,
Espacios Abiertos.......................................... 72
Prepared statement of.................................... 73
Questions submitted for the record....................... 75
Jaresko, Natalie A., Executive Director, Financial Oversight
and Management Board for Puerto Rico....................... 50
Prepared statement of.................................... 52
Supplemental testimony submitted for the record.......... 58
Questions submitted for the record....................... 58
Pollock, Alex J., Distinguished Senior Fellow, R Street
Institute.................................................. 94
Prepared statement of.................................... 96
Questions submitted for the record....................... 100
Rivera, Amanda, Executive Director, The Institute for Youth
Development of Puerto Rico................................. 77
Prepared statement of.................................... 78
Questions submitted for the record....................... 80
Rossello, Hon. Ricardo A., Governor, Commonwealth of Puerto
Rico....................................................... 6
Prepared statement of.................................... 8
Questions submitted for the record....................... 17
Additional Materials Submitted for the Record:
List of documents submitted for the record retained in the
Committee's official files................................. 131
Submission for the Record by Rep. Gonzalez-Colon
Schatz, Hon. Thomas Rivera, President, Puerto Rico
Senate, Statement for the Record....................... 46
Submissions for the Record by Rep. Grijalva
de Mujeres, Junte, Statement for the Record.............. 126
Masses, Rodrigo, President, Puerto Rico Manufacturers
Association, Statement for the Record.................. 127
Rios Santiago, Hon. Carmelo, Senate Majority Leader,
Puerto Rico Senate, Statement for the Record........... 129
OVERSIGHT HEARING ON THE STATUS OF PUERTO RICO OVERSIGHT, MANAGEMENT,
AND ECONOMIC STABILITY ACT (PROMESA): LESSONS LEARNED THREE YEARS LATER
----------
Thursday, May 2, 2019
U.S. House of Representatives
Committee on Natural Resources
Washington, DC
----------
The Committee met, pursuant to notice, at 10 a.m., in room
1324, Longworth House Office Building, Hon. Raul M. Grijalva
[Chairman of the Committee] presiding.
Present: Representatives Grijalva, Costa, Sablan,
Lowenthal, Gallego, Cox, Levin, Haaland, Van Drew, Cunningham,
Velazquez, DeGette, Soto, San Nicolas; Bishop, Lamborn,
Wittman, McClintock, Westerman, Hice, Radewagen, and Gonzalez-
Colon.
Also Present: Representatives Garcia and Duffy.
The Chairman. Let me call the Natural Resources Committee
hearing to order. This hearing discussion will be on the status
of the Puerto Rico Oversight, Management, and Economic
Stability Act, PROMESA, and the lessons learned after 3 years.
Under the Committee Rules, oral opening statements at a
hearing are limited to the Chairman and the Ranking Minority
Member, or their designees. This will allow for us to hear from
our witnesses sooner, and help Members keep their schedules.
Therefore, I ask unanimous consent that all other Members'
opening statements be made part of the hearing record, if they
are submitted to the Committee Clerk by 5 p.m. today, or at the
close of the hearing, whichever comes first. Hearing no
objections, so ordered.
Another unanimous consent request is for Representatives
Garcia and Duffy to join us at the dais and ask questions to
the witnesses, if there's no objection. Thank you.
And before we get into the discussion, at this time, I
would like to request that the Committee take a moment of
silence to recognize the passing of former Puerto Rican
Governor, Rafael Hernandez Colon, who died this morning at the
age of 82. Hernandez Colon was one of the most prominent
figures in Puerto Rican politics, serving three terms as
governor, and one of the leaders of the Popular Democratic
Party. With your indulgence, a moment of silence.
[Pause.]
Thank you. And thanks to Ms. Velazquez for submitting the
request.
STATEMENT OF HON. RAUL M. GRIJALVA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
The Chairman. Let me begin with my opening statement, and
then the Ranking Member. The Committee meeting today is to
assess the implementation of PROMESA, the Puerto Rico
Oversight, Management and Economic Stability Act. I want to
begin by thanking our witnesses, particularly the Governor, for
making time, and those who traveled from Puerto Rico, for being
here today.
Contrary to the view that President Trump has, the people
of Puerto Rico are American citizens, and have been so for more
than 100 years. Their fathers, sons, daughters, and mothers
have all fought and died in every war and conflict that our
country has waged since World War I.
Democrats have been fighting to secure a fair and equitable
treatment of Puerto Ricans as they first faced a crippling dept
crisis and then a brutal hurricane which devastated the island
and caused the longest blackout in U.S. history.
In a few months, we will arrive at the 2-year anniversary
of Hurricane Maria, that hit Puerto Rico. And the residents
there have not received the assistance necessary from the
Federal Government to rebuild their community.
When we passed PROMESA, I stated that it was not a law that
I would have written. However, I voted for its passage. I've
urged my colleagues to do so, because I agreed with the Obama
administration that urgent action was needed to prevent an
economic catastrophe, due to never-ending lawsuits that would
result from creditors trying to collect uncollectable debt.
There was no question that without PROMESA, and the stay of
lawsuits it provided, the Government of Puerto Rico would not
be seeing a positive cash flow--not due to the Disaster
Assistance Funding--that they have today.
When the Obama administration's Treasury Department
proposed that we adopt PROMESA, they outlined two main goals.
The first, a process to restructure all of Puerto Rico's debt,
during a stay of litigation facing the island. Second, an
independent oversight body to work with the Government of
Puerto Rico to address the island's economic and fiscal
challenges.
The record of PROMESA's Oversight Board in achieving the
second objective has been mixed at best. Instead of focusing on
reducing the debt to the maximum extent possible, providing for
investments in the people of Puerto Rico that would bolster the
economic future of that island, the Board has embarked instead
on a program of crippling budget cuts, austerity measures, and
reforms that most economists say would only serve to worsen the
economic crisis.
Austerity alone does not work, and will only lead to
further economic constriction. There has to be a commitment to
protecting the island's most vulnerable populations, including
the elderly, young, disabled, and low income residents.
It is my hope that starting with today's hearing, we will
be able to encourage the Oversight Board to strike a more
agreeable and balanced deal with the people of Puerto Rico, so
that most of the severe budget cuts could be rolled back and
significant debt relief can occur.
Further, Congress has not done enough to assist Puerto Rico
by providing the tools the island needs. For example, we have
yet to provide assistance to protect the island's pension
system, full Medicaid funding, or the Earned Income Tax Credit.
While the Obama administration worked hand-in-hand with the
Puerto Rican Government to assist them in addressing the
crisis, this present administration has been out of sight and
out of mind. Except for saying that Puerto Rico cannot be
trusted to properly manage the funds they need to recover from
Hurricane Maria, this White House has paid little, if any,
attention to helping the island address its debt crisis or
fully recover from the hurricanes.
I look forward to our witnesses' ideas for improving the
implementation of PROMESA for the benefit of the people of
Puerto Rico. All of us, the Oversight Board, Congress and the
Administration, owe it to the Puerto Rican people to help find
solutions to the problems they are facing.
[The prepared statement of Mr. Grijalva follows:]
Prepared Statement of the Hon. Raul M. Grijalva, Chair, Committee on
Natural Resources
The Committee is meeting today to assess the implementation of
PROMESA, the Puerto Rico Oversight, Management and Economic Stability
Act. I want to begin by thanking our witnesses, especially those who
traveled from Puerto Rico, for being here today.
Contrary to the view of President Trump, the people of Puerto Rico
are American citizens and have been so for more than 100 years. Their
fathers, sons, daughters, and mothers, have all fought and died in
every war and conflict that our country has waged since World War I.
Democrats have been fighting to secure fair and equitable treatment
for Puerto Ricans as they first faced a crippling debt crisis and then
a catastrophic hurricane, which devastated the island and caused the
longest blackout in U.S. history.
In a few months, we will arrive at the 2-year anniversary of
Hurricane Maria hitting Puerto Rico and the residents there still have
not received the assistance necessary from the Federal Government to
rebuild their community.
When we passed PROMESA, I stated that it was not a law I would have
written. However, I voted for its passage and urged my colleagues to do
the same because I agreed with the Obama administration that urgent
action was needed to prevent an economic catastrophe due to never-
ending lawsuits that would result from creditors trying to collect on
uncollectable debts.
There is no question that without PROMESA and the stay of lawsuits
it provided, the government of Puerto Rico would not be seeing the
positive cash-flow--not due to disaster assistance funding--they are
today.
When the Obama administration's Treasury Department proposed that
we adopt PROMESA, they outlined two main goals. First, a process to
restructure all of Puerto Rico's debt during a stay of litigation
facing the island. Second, an independent oversight body to work with
the government of Puerto Rico to address the island's economic and
fiscal challenges.
The record of PROMESA's Oversight Board in achieving the second
objective has been mixed at best. Instead of focusing on reducing the
debt to the maximum extent possible and providing for investments in
the people of Puerto Rico that would bolster the economic future of the
island, the Board has embarked instead on a program of crippling budget
cuts, austerity measures, and reforms that most economists say will
only serve to worsen the economic crisis.
Austerity alone does not work and will only lead to further
economic contraction. There must be a commitment to protecting the
island's most vulnerable populations, including the elderly, young,
disabled, and low-income residents.
It is my hope that starting with today's hearing, we will be able
to encourage the Oversight Board to strike a more agreeable deal with
the people of Puerto Rico so that most of the severe budget cuts can be
rolled back and significant debt relief can occur.
Further, Congress has not done enough to assist Puerto Rico by
providing the tools the island needs. For example, we have yet to
provide assistance to protect the island's pension system, full
Medicaid funding, or the Earned Income Tax Credit.
While the Obama administration worked hand in hand with the Puerto
Rican government to assist them in addressing the crisis, the Trump
administration has been out of sight and out of mind. Except for saying
that Puerto Rico cannot be trusted to properly manage the funds they
need to recover from Hurricane Maria, this White House has paid little
if any attention to helping the island address its debt crisis or
recover from the hurricanes.
I look forward to our witnesses' ideas for improving the
implementation of PROMESA for the benefit of the people of Puerto Rico.
All of us--the Oversight Board, Congress and the Administration--
owe it to the Puerto Rican people to help them find solutions to the
problems they are facing.
______
The Chairman. With that, let me turn the time over to the
Ranking Member, Mr. Bishop.
Mr. Bishop. Thank you, Mr. Grijalva.
Allow me to give the first minute of my opening
introduction to Mr. Duffy.
STATEMENT OF HON. SEAN P. DUFFY, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF WISCONSIN
Mr. Duffy. Thank you, Ranking Member Bishop, Chairman
Grijalva, for the indulgence. And I want to thank you for
inviting me to say a few words in defense of PROMESA and the
debt restructuring of Puerto Rico. Governor, it's good to see
you as well. Thanks for being here.
Governor Rossello. Thank you.
Mr. Duffy. The over-riding goal and stated purpose of the
Act was for Puerto Rico to establish fiscal credibility with
and access to the capital markets, and to modernize the
island's economy. We have to acknowledge that PROMESA is not
perfect. But this was a bi-partisan bill. Republicans and
Democrats, the House and the Senate worked together to put the
long-term interests of the Puerto Rican people first.
One point I'll emphasize is that Congress wrote PROMESA and
created the FOMB through Article IV, plenary powers respecting
territories, not through Article I. The Territories Clause in
the Constitution is clear, and no judge should legislate from
the bench to ascribe intent where no intent was intended.
Attempts by a single judge to misdirect the law should be blown
aside.
The territory government must continue to reform if the
island is to thrive. The Government and the FOMB are required
by law to produce regular and transparent financial statements.
I'm a strong supporter of absolute and total equality for the
Puerto Rican people, but it must be achieved through statehood.
To prepare for statehood, we must also continue to make sure
these critical reforms continue. With that, I yield back.
STATEMENT OF HON. ROB BISHOP, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF UTAH
Mr. Bishop. Thank you. I'm reclaiming my time. I want to
thank those who are here today. Mr. Grijalva, thank you for
holding this hearing. I want to thank the Governor for being
here. We received your written testimony 15 minutes ago. I'm
glad that at some time we'll have the chance to actually be
able to read that. Thank you for the respect in sending it to
us.
Natalie, we are happy to have you here. You are the
Executive Director of the Board. I appreciate that. Mr.
Pollock, I appreciate your presence here. And all the other
witnesses who have traveled a great distance to be at this
hearing, thank you for your time and effort to do that.
Three years ago, this Committee was assigned to come up
with a process, in some particular way, to solve the looming
disaster that was facing financial disaster in Puerto Rico.
PROMESA was a bi-partisan compromise that came out of a
Republican Congress and the Obama administration. It hoped to
provide the tools, and it did play a big part in providing the
territory with needed tools to cope with what was an untenable
situation.
No one can forget the fact they were $72 billion in debt
and $50 billion in pension liabilities, and there was no way of
actually funding that.
This situation took decades to develop, and it will not be
solved in a matter of years or months. It's going to take a
long time to try to right it.
But as was stated by Mr. Duffy, and I want to re-emphasize:
if the goal--and I think the goal from at least the majority of
this side of the aisle is to see Puerto Rico eventually have
statehood sooner rather than later, the ability of working
together to solve these issues becomes critical.
And I say that merely because, as I mentioned when I was
last in your office, I come from a state that was ready and had
the qualifications for statehood in 1850, and it did not happen
until 1896 for political reasons. And there had to be political
things that took place in Utah, before that statehood was
granted.
I understand the situation. I understand the reality. And
sometimes those realities are not necessarily what I would
consider to be fair. But it has to be able to face those
realities and be in a situation to make that possible.
So, with that, Mr. Chairman, when Resident Commissioner
Gonzalez comes here, since this is dealing with one of the
territorial issues, we have decided, we've always said that she
would be the Chairman of these types of hearings. I would ask
your permission, unanimous consent, to allow her to replace me
as the Ranking Member.
With that, I thank you, and I appreciate the opportunity of
being here.
[The prepared statement of Mr. Bishop follows:]
Prepared Statement of the Hon. Rob Bishop, Ranking Member, Committee on
Natural Resources
Good morning, I thank the Republican Leader on Insular Affairs for
yielding and thank you Chairman Grijalva for holding this hearing. Let
me also thank our witnesses, especially the Governor. I also want to
thank Natalie Jaresko, Executive Director for the Board. Both of you
have busy schedules and work that needs to be accomplished yesterday.
We thank you for joining us. I also want to thank the rest of our
panel, including Mr. Pollock.
It's been 3 years since this Committee crafted and signed into law
the Puerto Rico Oversight, Management and Economic Stability Act.
PROMESA was enacted as a bi-partisan compromise between the Republican-
controlled Congress and the Obama White House to help bring control to
Puerto Rico's quickly unraveling debt crisis. This Committee played a
big part in providing the territory with needed tools to cope with an
untenable situation. By 2016, Puerto Rico had amassed roughly $72
billion in bonded debt and $50 or more billion in unfunded pension
liabilities. The Island had effectively lost access to the capital
markets. We can all debate how we go here and who or what is to blame,
but the fact of the matter is that Puerto Rico needed help. The Island
faced impending defaults that would result is mass litigation both
against the Commonwealth and amongst their different creditors, further
paralyzing its institutions and economy.
PROMESA created mechanisms the Island did not have: a framework for
managing the unavoidable restructuring of its debts, a structure for
financial oversight, and a path forward for these Americans that did
not exist at the time. The situation on the island was created over
decades and was--and is--unprecedented in scope and complexity. Nothing
Congress could do would fix it overnight, but we have made progress. We
need to see more of it. I look forward to hearing from our panel on how
we do so.
I thank the Resident Commissioner for yielding, I yield back the
remainder of my time.
______
The Chairman. Let me inform the Members, at 10:30, 10:40,
first votes will be called. We will go ahead and take a recess,
and hopefully we will get through the Governor's testimony and
initial questions. The follow-up will be after the recess.
Governor, with that, let me join the Ranking Member in
commenting on, we got your testimony 15 minutes or so before
the hearing. Staff hasn't had a real opportunity to go through
it to generate the questions that we'd like to generate from
your testimony. And that puts us in a situation where we are
not as prepared as we should be to follow up with any questions
based on your full testimony. So, with that, we welcome you.
Thank you for your time, and for being here.
Governor, the floor is yours.
STATEMENT OF HON. RICARDO A. ROSSELLO, GOVERNOR, COMMONWEALTH
OF PUERTO RICO
Governor Rossello. First of all, thank you for giving me
the minute of silence, commemorating Governor Rafael Hernandez
Colon. It's very important to me, and it's very important to
our people. Thank you for the opportunity to appear before you
to discuss the Puerto Rico Oversight Management and Economic
Stability Act, PROMESA, and to address the lessons learned in
the 2 years since its enactment.
Congress intended PROMESA to provide Puerto Rico tools that
could be used to restructure its debt, achieve financial,
fiscal stability and spur economic growth, under the public
policy direction of the elected Government of Puerto Rico.
Those tools were necessary because, due in large part to its
unequal treatment under Federal laws as a U.S. territory, as
well as years of mismanagement, both on and off the island.
Puerto Rico, and certain of its instrumentalities, accrued
over $70 billion worth of public debt and over $50 billion in
unfunded pension liabilities that could not be satisfied with
the available revenues. There is, however, a naive and
problematic narrative that the Government is not doing its job,
that we refuse to make structural reforms, and that the
Oversight Board is the solution to address said mismanagement.
Allow me to correct that notion here in front of all of you.
When I ran for governor, there was no Oversight Board. There
wasn't even the idea in the public discourse. Notwithstanding,
my team and I developed a platform, the Public Policy Roadmap,
that included structural reforms, expense reduction and
government downsizing measures, the re-negotiation of our debt,
and economic and social reforms.
With obstacles both natural and man-made, our Government
has followed our Policy Roadmap, achieving the following: (1)
The biggest operational budget cuts from one year to the other
in the history of Puerto Rico, and any state in the past couple
of decades. We reduced $1.4 billion, or 17 percent of the
operational budget for FY 2018. (2) We saved the payment for
the retiree pensions. Pension funds were essentially depleted.
Our government assumed the responsibility to pay for pensions,
implementing a new PayGo system. Simply put, if we had not made
the budgetary cuts above, we could not meet our obligations
with pensioners, something we would have not failed to do. (3)
We moved forward, implementing structural reforms with our
government platform. These include: education reform; local
Earned Income Tax Credit, because we don't have the Federal
kind; energy transformation at PREPA, with the new energy
public policy mandates and statutes; the creation of entities
external to the government to promote investment and to promote
tourism in Puerto Rico; labor reforms; we commenced a reform of
our public service systems; a tax reform; a new public
healthcare model for the medically indigent; promoting new
markets, such as medical cannabis, e-gaming, amongst others;
and we commenced government agency rightsizing to reduce the
amount of agencies and increase accountability. (4) Some of our
results, based on this, include: the reduction of over 20,000
employees, without having a single layoff; we reduced about 20
percent of our agencies; we reduced 20 percent in 2 years of
our operational budget costs; we arrived at a Title VI
agreement with creditors at GDB to restructure its liabilities
outside of court; and unemployment has been at an all-time low
in Puerto Rico. We created over 18,000 jobs within a year. The
PREPA transformation is well on its way, and we expect to have
a concession of the transmission and distribution system by
December 2019. We worked together with our Board to restructure
$21 billion of our debt and we did all of this without the
initially mandated furloughs, layoffs, decreased or impaired
access to health care, or further reducing pension benefits.
On the other hand, this is the FOMB scoreboard: Proposal of
austerity measures that hinder economic growth and would have
been devastating on a social level; complete failure on Title V
economic development projects; insistence in overstepping their
boundaries, such as attempting to overtake PREPA, and constant
intermission into our policy development process; constant
operational delays on budget reapportionments--it takes the
Oversight Board sometimes 1 to 3 months to approve the
budgetary reallocations that are really minor amounts; a
continuous reformulation of fiscal plans that delay proper
execution of measures--note that no fiscal plan certified by
the Board has lasted more than 6 months; zero results on their
objectives to identify economic development initiatives for
Puerto Rico, particularly on the Federal level; spending twice
as much on lobbying in Washington, DC than the Government of
Puerto Rico invests in its Washington, DC office to this day,
and no one knows what they're lobbying for; while the elected
Government must face scrutiny and is accountable to the public,
the Oversight Board conducts all of its business in secret
executive meetings where the public and the Government are
denied access.
Clearly, the Oversight Board has not achieved the
objectives for which it was created, and worst of all, has
overstepped its boundaries, making it an even more un-
democratic entity.
To add insult to injury, the Oversight Board has gone out
of its way to create uncertainty in Puerto Rico. It takes
actions and makes public pronouncements that are not supported
by PROMESA, and then refuses to recognize their mistakes. Just
2 days ago, alone, the Oversight Board sued hundreds of local
Puerto Rican suppliers. This includes health clinics and
centers for education for our most vulnerable children. How is
the Puerto Rican Government supposed to receive goods and
services if everyone must fear litigious harassment?
Therefore, with regards to PROMESA, I would recommend that
Congress consider the following. First, the Oversight Board
should not infringe on the day-to-day operations of government.
It is critical to the legitimacy of the process that the
Government of Puerto Rico always retain its democratically
derived powers for setting public policy, operating the
government and implementing solutions. Other reapportionments
should be handled by the Government of Puerto Rico----
The Chairman. With all due respect, Governor, if we could
just wrap it up, so that we can get to the questions?
Governor Rossello. Sure. I will just briefly mention a few,
some of the descriptions of these items are in my written
statement. We propose to eliminate the role of the Oversight
Board as the exclusive Title III representative. Revise this--
--
The Chairman. We can do that during the questioning
process, I think.
Governor Rossello. OK.
[The prepared statement of Governor Rossello follows:]
Prepared Statement of the Hon. Ricardo Rossello, Governor of Puerto
Rico
Chairman Grijalva, Ranking Member Bishop, and members of the
Committee, thank you for the opportunity to appear before you to
discuss the Puerto Rico Oversight, Management and Economic Stability
Act (PROMESA) and to address the lessons learned in the 2 years since
its enactment. Congress intended PROMESA to provide Puerto Rico tools
that could be used to restructure its debts, achieve fiscal stability,
and spur economic growth, under the public policy direction of the
elected government of Puerto Rico. Those tools were necessary because,
due in large part to its unequal treatment under Federal laws as a U.S.
territory as well as years of mismanagement both on and off the Island,
Puerto Rico and certain of its instrumentalities accrued over $70
billion in public debt and over $50 billion in unfunded pension
liability that could not be satisfied with available revenues.
There is however a naive and problematic narrative that the
Government is not doing its job, that we refuse to make structural
reforms, and that the oversight board is the solution to address said
mismanagement.
Allow me to clear and correct that notion.
When I ran for governor, there was no oversight board. It wasn't
even an idea in the public discourse. Notwithstanding, my team and I
developed a platform with a public policy road map that included,
structural reforms, expense reduction and government downsizing
measures, the renegotiation of our debt, and economic and social
reforms.
With obstacles, both natural and man-made, our government has
followed our policy roadmap, achieving the following:
1. The biggest operational budget cuts from one year to the other in
the history of Puerto Rico, and of any state in the past
couple of decades at least. We reduced 1.4 Bn or 17 percent
of the operational budget on FY 18.
2. Saved the payment of retiree pensions: Pension funds were
essentially depleted. Our government assumed the
responsibility to pay for pensions, implementing a new
PayGo system. Simply put, if we had not made the budgetary
cuts above, we could not meet our obligations with
pensioners--something we have not failed to do.
3. We moved forward and implemented structural reforms from our
government platform. Some of these include:
a. Education reform
b. Local earned income tax credit
c. Energy transformation at PREPA and new energy public
policy statutes
d. The creation of entities external to government to
promote investment and tourism known as Invest Puerto Rico and
Discover Puerto Rico
e. Labor Reforms
f. Commenced a reform of our public service system
g. Tax Reform
h. A new public healthcare model for the medically indigent
i. Promoting new markets, such as medical cannabis, e-
gaming, amongst others
j. We commenced government agency rightsizing to reduce
amount of agencies and increase accountability.
4. Some of our results include:
a. Reduced over 20,000 employees without layoffs
b. Reduced 20 percent of our agencies
c. Reduced 17 percent of our operational budget expenditures
d. We arrived at a Title VI agreement with creditors of GDB
to restructure its liabilities outside of court
e. Unemployment has been at an all-time low in Puerto Rico
f. Created over 18,000 jobs within a year
g. The PREPA transformation is on its way, and we expect to
have a concession of the transmission and distribution system
by December 2019
h. Worked together with the board to restructure $21 billion
of our debt
i. All of this without furloughs, decreased or impaired
access to health care, without layoffs, or further reducing
pension benefits
On the other hand, the FOMB's scoreboard:
1. Proposal of austerity measures that hindered economic growth and
would have devastating social impact.
2. Complete failure on Title V economic development projects.
3. Insistence on overstepping their boundaries such as:
a. Attempting to take over PREPA
b. Constant intromission into our policy development process
4. Constant operational delays on budget reapportionments; it take
the oversight board sometimes 1-3 months to approve budget
reallocations that are minor amounts.
5. A continuous reformulation of fiscal plans that delays proper
execution of measures. Note that no fiscal plan certified
by the board has lasted more than 6 months.
6. Zero results on their objectives to identify economic development
initiatives for Puerto Rico, particularly Federal
initiatives.
7. Spending twice as much on lobbying in DC than the Government of
Puerto Rico invests in its Washington, DC office and to
this day, no one knows what they are lobbying for.
8. While the elected government must face scrutiny and is
accountable to the public, the oversight board conducts all
of its business in secret executive meetings where the
public and the government are denied access.
Clearly, the Oversight Board has not achieved the objectives for
which it was created, and--worse of all--has overstepped its
boundaries, making it an even more undemocratic entity.
To add insult to injury, the Oversight Board has gone out of its
way to create uncertainty in Puerto Rico. It take actions and makes
public pronouncements that are not supported by PROMESA and then refuse
to recognize their mistakes. Two days ago alone, the Oversight Board
sued hundreds of local Puerto Rican suppliers. This included health
clinics and centers for education for our most vulnerable children. How
is the Puerto Rican government supposed to receive goods and services
if everyone must fear litigious harassment?
Therefore, with regard to PROMESA, below you will find a thorough
review, events that have occurred and our recommendations and petitions
to Congress.
The Operational Reality of Two Years Under PROMESA
The Oversight Board was not appointed until August 31, 2016 and did
not select an Executive Director until March 20, 2017, almost 3 months
after I took office on January 2, 2017. Hurricanes Irma and Maria
delayed the PROMESA process even further when they hit the Island in
September 2017, causing widespread devastation and requiring drastic
alterations to the fiscal plans and budgets and a virtually complete
reset in the pending Title III proceedings.
Since that slow beginning, the Government of Puerto Rico has
cooperated with the Oversight Board to craft and adjust the fiscal
plans and certified budgets to meet the evolving needs of Puerto Rico
in a way that not only addresses the fiscal imbalances of the past, but
also prioritizes pro-growth structural reforms in our economy and
reforms our government structures to better reflect and respond to the
needs and carrying capacity of our society. Our undeniable commitment
to collaboration with the Oversight Board is evidenced by our near
constant dialogue with the Oversight Board and its advisors including
in weekly meetings.
The relationship with the Oversight Board has been tremendously
challenging at times--and I believe requires significant reform--but I
am proud of the progress we have been able to make for the people of
Puerto Rico despite the tension and inefficiencies of the process.
Fiscal Plans and Budgets
The process of developing, drafting and certifying fiscal plans and
budgets has been time consuming and fraught with challenges. We have
worked diligently to meet the Oversight Board's requirements for
submission of fiscal plans and budgets despite unreasonably short
deadlines and burdensome information requests.
When my administration took office, we immediately turned our
attention to amending the first fiscal plan submitted by our
predecessor--a process that was truncated by the Oversight Board
requiring submission on a short time frame. Despite the short deadline,
we submitted our first fiscal plan for the Commonwealth of Puerto Rico
on February 28, 2017. The Oversight Board considered it for
certification on March 13, 2017 and certified it with corrections on
April 18, 2017. My administration then submitted its first Commonwealth
budget to the Oversight Board on May 31, 2017.
On April 28, 2017, my administration submitted fiscal plans for
each of the Puerto Rico Aqueduct and Sewer Authority (PRASA), the
Puerto Rico Electric Power Authority (PREPA), the Puerto Rico Highway
and Transportation Authority (PRHTA), and the Government Development
Bank for Puerto Rico (GDB). The PRHTA and PRASA fiscal plans were
certified on April 28, 2017 and the GDB and PREPA fiscal plans were
certified on May 3, 2017. The Oversight Board certified budgets for
each of those entities on June 30, 2017.
After the certification of the initial fiscal plans and budgets, we
have worked with the Oversight Board on the following:
1. Fiscal plans for the Commonwealth of Puerto Rico certified on
April 19, 2018, May 30, 2018, June 29, 2018, and October
23, 2018, and a budget certified on June 30, 2018.
2. Fiscal plans for the University of Puerto Rico certified on April
20, 2018, June 29, 2018, and October 23, 2018, and a budget
certified on June 30, 2018.
3. Fiscal plans for PRHTA certified on April 20, 2018 and June 29,
2018, and a budget certified on June 30, 2018.
4. Fiscal plans for PREPA certified on April 19, 2018 and August 1,
2018, and a budget certified on June 30, 2018.
5. Fiscal plans for PRASA on certified on April 19, 2018 and June
29, 2018, and a budget certified on June 30, 2018.
6. A standalone fiscal plan for COFINA certified on October 18,
2018, and a budget for Fiscal Year 2019 certified on
February 11, 2019.
Since our initial fiscal plan, we have submitted at least 10 drafts
of Commonwealth fiscal plans and numerous drafts of other fiscal plans
in response to deadlines from the Oversight Board. Each of those drafts
has been accompanied by information requests and diligence from the
myriad advisors to the Oversight Board. The Oversight Board's approach
to fiscal planning and budgeting has become a full-time job with
continual information requests and sometimes obsessive revising,
reworking and amending of fiscal plans and budgets. That approach has
taken what could have been a powerful tool and turned it into a
bureaucratic nightmare that strains Puerto Rico's resources and takes
the focus away from moving Puerto Rico forward. The constant amendments
and modifications to the fiscal plans have also had the effect of
eroding the confidence of stakeholders in the information presented in
the plans.
Worse, the Oversight Board has used the fiscal plan and budgeting
process to attempt to supplant government policy and force austerity
measures on our most vulnerable. For example, as part of the fiscal
planning process, the Oversight Board insisted on specific private-
sector, human capital and labor reforms, specific plans for
governmental agency consolidations and compensation and benefit
reductions for public employees. The Oversight Board has also engaged
in a crusade to cut public pensions.
The Oversight Board rightly and appropriately should assist Puerto
Rico in setting fiscal targets, but decisions on how to achieve those
targets should belong to the duly elected Government of Puerto Rico.
The Oversight Board should not be permitted to use the fiscal planning
and budgeting process to dictate public policy choices for Puerto Rico.
Title III Filings
PROMESA provided for a litigation stay so that the Commonwealth
could reach consensual arrangements with creditors. That stay was
unrealistically short and the Oversight Board did not focus on
negotiating forbearance agreements with creditors prior to expiration.
When the stay expired on May 1, 2017 without forbearance agreements in
place, creditors immediately began commencing lawsuits against the
Commonwealth. I was left with little choice but to request that the
Oversight Board commence a Title III proceeding for Puerto Rico, which
I did on May 2, 2017. Title III filings followed for the Puerto Rico
Sales Tax Financing Corporation (COFINA) on May 5, 2017, PRHTA and
Employees Retirement System of the Government of the Commonwealth of
Puerto Rico (ERS) on May 21, 2017, and PREPA on July 2, 2017.
The Title III filings sparked intense litigation initiated by
various bondholder constituencies, the creditors committee and the
Oversight Board. To date, that litigation has included proceedings
addressing complex issues such as the application of retained revenues
to non-GO debt expenses, whether certain GO bond issuances are invalid,
the status and scope of the liens purportedly supporting the PRHTA
bonds, the claims of Bonistas del Patio, Inc. in COFINA, various issues
related to the validity of the ERS bonds and pension reform, attempts
to lift the stay to seek a receiver in PREPA, and whether the Puerto
Rico Public Building Authority leases are true leases or disguised
financing transactions.
The litigation has been a significant burden for Puerto Rico and
has delayed the restructuring process. In addition, professional costs
have been astronomical. In addition to its own professionals, Puerto
Rico pays for the fees and expenses of the professionals retained by
each of the Oversight Board, the creditors committee appointed by the
Title III Court, the Commonwealth and COFINA agents appointed by the
Oversight Board to address the restructuring of COFINA, and the
mediation team appointed by the Title III Court. Each of the bondholder
groups has its own professionals and, in connection with any consensual
restructuring, expects those fees to be paid by Puerto Rico. The high
price tag is exacerbated by the fact that certain of the bondholders
and the creditors committee pursue extensive litigations that do not
have the opportunity to create value for Puerto Rico.
Role of Government and Oversight Board
From the beginning of the Title III proceedings, the Government of
Puerto Rico and the Oversight Board differed on the proper role of the
Oversight Board under PROMESA. The Oversight Board's continued
insistence on dictating public policy choices by the Government has
been a source of tension and, at times, blunted the effectiveness of
PROMESA.
Disputes between my administration and the Oversight Board over
expenditure controls began shortly after the certification of the March
13, 2017 Commonwealth fiscal plan. As part of the fiscal planning
process, the Oversight Board tried to force us to institute a furlough
program and reduce Christmas bonuses. We rejected those recommendations
by the Oversight Board. The Oversight Board continued to insist on
cutting Christmas bonuses in its fiscal plans despite our explanation
that paying the bonus was critical to recognize the dedication and
service of public employees who went above and beyond in aiding
recovery efforts across the Island after the hurricanes.\1\
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\1\ At times, the Oversight Board has more directly attempted to
take over functions of the government. In a filing on October 26, 2017,
the Oversight Board attempted to take control of PREPA through a motion
to appoint a Chief Transformation Officer. The Title III Court ruled
against the Oversight Board but its attempted power grab cost us
valuable time and money and created an environment of distrust.
Notwithstanding that, the relationship with the Oversight Board has not
been wholly broken as we have cooperated with respect to ERS, where the
Board and Government have seen eye to eye on strengthening the
retirement system through fiscal plan, budget and legislative measures,
as well as a coordinated legal approach in the Title III case.
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We have also struggled to reach common ground with the Oversight
Board on the terms of a consensual fiscal plan for the Commonwealth.
Most recently, a tentative agreement was reached on May 20, 2018 but
that agreement collapsed over the Oversight Board's requirement that
the Puerto Rico legislature repeal Puerto Rico's Wrongful Termination
Act, Law No. 80 by June 27, 2018. I worked with the Oversight Board in
an attempt to pass the repeal of Law 80 but the Puerto Rico legislature
determined, in an appropriate exercise of its legislative powers, not
to do so.
The Oversight Board responded to the failure to repeal Law 80 by
certifying a draconian and ill-conceived Commonwealth fiscal plan. That
plan, among other things: (i) eliminated the annual appropriation for
the Christmas bonus for public sector employees; (ii) eliminated the
annual appropriation of $25 million for student scholarships at the
University of Puerto Rico; (iii) eliminated the annual appropriation of
$50 million for economic development initiatives for municipalities;
(iv) eliminated the multi-year fund of $345 million for various
economic development and reform implementation initiatives as requested
by the Government; (v) maintained the previous elimination of the
Christmas bonus for both public sector and private sector employees, as
well as the reduction in sick days and paid leave for private sector
employees; and (vi) maintained the previous cuts to the budget of the
legislature and judiciary.
Since that action by the Oversight Board, we have been engaged in
litigation over the appropriate powers of the Oversight Board. The
Oversight Board has fought for expansive powers and has failed to
recognize the importance and role of the duly elected Government of
Puerto Rico. As part of this over-reaching attempt by the Oversight
Board, they have also engaged in active lobbying in Congress by hiring
numerous lobbying firms with Puerto Rico taxpayer money and then, at
times, using those lobbyists to advance the Oversight Board's concerns
rather than focusing on the interests of the Puerto Ricans who are
paying for this lobbying effort. This anti-democratic approach has
hindered the restructuring process under PROMESA.
Successes under PROMESA
Notwithstanding tensions and disagreements with the Oversight Board
and aggressive litigation from certain of our creditors, I am proud
that we have made real progress toward fiscal responsibility and
renewed access to the capital markets. Some highlights are below.
Debt Restructurings
In recent months, we have restructured more than $21 billion in
funded debt obligations. And we have done it largely consensually,
balancing the needs and legal rights of Puerto Rico with the rights of
the creditors. My administration has been at the forefront in
negotiating with creditors and executing on complex new bond issuances.
In November 2018, we consummated a deal that restructured more than
$4 billion in bonds issued by the GDB. We reached consensus with on-
Island and mainland financial creditors in a highly innovative
transaction that represented the first-ever use of Title VI of PROMESA.
We also recently obtained court approval of a Title III plan
adjusting more than $17 billion of COFINA debt. We brought together
bondholders, insurers and other parties to provide recoveries for
creditors (many of whom are American citizens residing in Puerto Rico
who invested their retirement funds in COFINA) in a deal that reduced
debt and provided the central government with access to billions of
dollars in revenue over the next 40 years. This money can be used to
shore up our finances and take care of our most vulnerable residents.
In addition to our success in restructuring GDB and COFINA, we have
also been working with an ad hoc group of PREPA bondholders and Assured
Guaranty, a significant monoline insurer of PREPA bonds, toward
finalizing a definitive restructuring support agreement (including
complex and technical securitization, legislative, and demand
protection term sheets). We hope to file that restructuring agreement
with the Title III court soon.
After years of hesitancy from the capital markets, we are seeing
investors and investment begin to flow back to the Island, and we are
determined to ensure that the human capital will follow. This marks a
critical first step on our road to financial recovery.
Structural Reforms
Again and again, Puerto Rico has demonstrated a willingness to make
the sacrifices needed to achieve fiscal responsibility and meaningful
structural change. We have consolidated numerous agencies through
legislation and strengthened our underfunded pension system by moving
to a ``PayGo'' retirement system. I am also proud to report that we
have fulfilled my ``Pledge for Puerto Rico'' to reduce the size of the
territorial government without firing anyone and while making it more
efficient. We have reduced by 10.7 percent the number of government
employees and are working to support those employees' transition to the
private sector. We have implemented the largest budget reduction from
one year to the next in the last 40 years in all the United States.
Additionally, we have passed local tax reform to reduce rates, simplify
the tax code and broaden the tax base, as well as executing countless
other reforms that seek to increase the ease of doing business and spur
private sector investment.
Despite the challenges of PROMESA, and that much remains to be done
in terms of structural reforms, I am very proud of the economic
progress we have made in Puerto Rico during my tenure. For the first
time in the past 12 years, Puerto Rico's economic activity index has
grown--up 3 percent. Our unemployment rate is down to 8.8 percent from
12 percent when I took office. Other indicators are also positive: (i)
March jobs were up 18,100 over the same period 1 year ago; (ii)
bankruptcies are down 4 percent over the past 12 months; (iii) retail
sales in October 2018 increased 18.4 percent over the same period in
2017; (iv) housing sales in February 2019 were up 19 percent over the
same period last year; (v) mortgage foreclosures have decreased to
their lowest rate in 9 years; and (vi) March automotive sales were up
16 percent over the same period last year. All of these indicators
suggest that there is great confidence in Puerto Rico's recovery.
Transforming the Energy System
We are also extremely proud of the progress we have made toward
transforming our electric system. From the early days of my
administration, I set a goal of assuring that all of our citizens had
access to safe, reliable and affordable energy. Last June, I signed
into law the Puerto Rico Electric System Transformation Act to begin
the process of privatizing PREPA and, as discussed below, we are making
steady progress in that direction. We also recently passed the Puerto
Rico Energy Public Policy Act, which requires the island to obtain 100
percent of its electric energy from renewable sources by 2050, with an
interim target of 40 percent by 2025, and to eliminate the use of coal
in the generation of electricity by 2028. Both of those laws were
critical steps to insuring the energy future of Puerto Rico.
The process to transfer the transmission and distribution (T&D)
system to the private sector is well underway. In late October 2018,
the Puerto Rico Public-Private Partnerships Authority (P3 Authority)
issued a Request for Qualifications (RFQ) seeking statements of
qualification from companies and consortia interested in managing and
operating Puerto Rico's electric power T&D. The RFQ defined the project
goals as: (i) delivery of low-cost electricity to ratepayers of Puerto
Rico; (ii) increasing system resiliency and reliability; (iii)
deployment of new technologies; and (iv) implementing industry best
practices and operational excellence. Four qualified RFQ respondents--
Duke Energy Corporation, Exelon Corporation, PSEG Services Corporation,
and a consortium formed by ATCO, Ltd, IRM and Quanta Services--were
invited to submit responses to a Request for Proposal (RFP) issued in
late January 2019. The process of developing RFP responses is ongoing.
We are also addressing the generation assets as part of remaking
our energy sector. Our objectives with regard to generation include:
1. Transferring existing generation assets to private ownership and/
or operations and establishing a framework wherein future
generation assets are privately owned/operated;
2. Reducing reliance on fuel oil and overall fuel cost;
3. Modernizing the generation fleet, retiring inefficient units and
increasing the development of renewable energy and natural
gas-fired facilities;
4. Investing in facility repairs and enhancements to improve system
resiliency;
5. Leveraging proven energy storage, distributed energy, and ``mini-
grid'' technologies to provide greater flexibility,
reliability, and resiliency of energy supply;
6. Improving dispatch capabilities by implementing modern
technologies; and
7. Improving overall system operational flexibility.
Consistent with these objectives, we expect all new generation
assets will be owned and/or operated by private entities and existing
generation to be sold or otherwise privately managed. Although the
ultimate plan for the privatization of the existing generation assets
has not yet been finalized, we have taken several concrete steps toward
this process.
First, PREPA recently executed a San Juan natural gas conversion
contract, which should provide a framework for future fuel supply
conversion. The fuel conversion project involves upgrading Units 5 and
6 of the San Juan Combined Cycle Power Plant so that those units can
operate on liquefied natural gas (LNG). The transaction, announced in
December 2018, is one of the most flexible LNG/gas agreements in the
world and undeniably the most flexible fuel supply agreement in PREPA's
portfolio. This transaction should produce material savings for PREPA
customers.
In addition, on February 13, 2019, PREPA filed a new Integrated
Resource Plan (``IRP'') with the Puerto Rico Energy Bureau for review
and approval. The IRP envisions the establishment of a series of mini-
grids, which are a design for energy transmission and distribution
networks that systematically improves resiliency by separating the
existing grid into pockets of critical loads served by distributed
resources that can operate in both grid-connected and islanded modes.
These mini-grids are distinguished from microgrids in that they utilize
existing distribution infrastructure and can be sized much larger than
typical microgrids; for example, one mini-grid will encompass the San
Juan region. The proposed mini-grids will cover most of the island and
will be able to withstand or recover very quickly from a catastrophic
weather event.
Also, through the P3 Authority, PREPA has issued a request for
proposals to install the first wave of energy storage projects, which
would consist of lithium-ion battery storage facilities and has
developed a request for qualifications to solicit third-party
investment and operation/maintenance experience to restore
hydroelectric generating capacity to the existing system. In addition,
PREPA has initiated discussions with a number of renewable energy
project developers that have existing power purchase agreements in
various stages of pre-development. Many of these proponents have
engaged in contract re-negotiations in the context of the Title III
process, to reduce the contracted prices and expedite project
development. PREPA is currently engaged in negotiations with project
sponsors who could break ground on approximately 350 MW of solar PV
projects before the end of 2019, with commercial operations achievable
in 2020, each of which would deliver significant cost savings versus
their current contracted pricing. PREPA, through the P3 Authority, has
also drafted a request for qualifications to solicit third-party
development of rooftop solar projects utilizing public building roofs.
This request for qualifications is currently being finalized and is
expected to be published in the next few weeks.
Putting in place the mini-grid concept, adding more distributed
generation resources, including more renewable resources, and adding
new, highly efficient natural gas-fired generating facilities, as the
IRP envisions, will significantly reduce Puerto Rico's vulnerability to
hurricanes and other weather events, and permit the island to respond
quickly and effectively when they occur. At the same time, the planned
changes to Puerto Rico's electric infrastructure will improve energy
efficiency, reduce fuel costs and dramatically reduce air emissions. We
are excited by the opportunity to lead the way into a future in which
electric systems are more efficient, more reliable, more resilient and
greener.
The Good and the Bad of PROMESA
What Is Working About PROMESA?
The tools provided in PROMESA have been helpful in facilitating
debt restructurings as evidenced by COFINA, PREPA and GDB. Both Title
VI and Title III of PROMESA have features that can be effectively used
to structure and implement debt restructuring transactions that might
not be possible without PROMESA. When a deal is good for Puerto Rico,
the Government of Puerto Rico is committed to executing and delivering
deals as evidenced by the support of both my administration and the
legislature for the GDB deal, COFINA deal, and the PREPA negotiations
and transformation process. The Oversight Board has also generally been
cooperative and helpful in the debt restructuring process.
What Is Not Working About PROMESA?
The Oversight Board has tried to use its powers to control the
decisions of the duly elected Government of Puerto Rico and to
implement its own view of public policy. These attempts by the
Oversight Board to usurp governmental powers have delayed the
restructuring process, created an environment of distrust and resulted
in unnecessary litigation.
The fiscal plan and budgeting process has been inefficient and has
eroded confidence and credibility in what could be a good planning
tool. The Oversight Board and Government worked closely together on
much of the fiscal planning process, but the process is burdensome.
Moreover, the Oversight Board has attempted to use the fiscal plan to
impose detailed policy recommendations and even legislation on Puerto
Rico rather than recognizing it as a financial planning tool. Through
the fiscal plan process, the Oversight Board has also attempted to
impose its view of critical public policy issues--such as labor
reform--that result in projected speculative 30-year surpluses that
create unrealistic expectations for creditors. So far, the Oversight
Board has also failed to deliver any meaningful progress in terms of
infrastructure revitalization under Title V of PROMESA.
Recommendations
With regard to PROMESA, I recommend that Congress consider the
following changes:
The Oversight Board should not infringe on the day to day
operations of government: It is critical to the legitimacy
of this process that the Government of Puerto Rico always
retain its democratically derived powers for setting public
policy, operating the government and implementing
solutions. Budget reapportionments should be handled by the
Government of Puerto Rico, complying with a commitment NOT
to increase the set overall budget expenditure goals.
Eliminate the Role of the Oversight Board as Title III
Representative: The insertion of the Oversight Board as the
Title III representative creates confusion and results in
litigation within the Title III process. The Title III
debtor is already subject to the scrutiny of the court
process. While the Oversight Board has a critical role to
play, it is not necessary to create conflicting roles by
giving the Board both the debtor role and the oversight
function in the Title III process.
Revise Fiscal Planning Process: The fiscal plan and
budgeting process should be revamped to provide a focus on
1-year budgets to make sure that Puerto Rico is not
spending more than it is taking in and that an objective
and reliable assessment is made each year to determine how
much the Government needs to pay for essential services.
The fiscal plan and budgeting process should not be used as
a public policy tool or turned into an endless modeling
exercise.
Address Professional Costs: The costs and expenses of the
Oversight Board and its professionals should be carefully
scrutinized to assure that money is being spent
appropriately and in the best interests of Puerto Rico.
Require Oversight Board Transparency: The Oversight Board
must be held accountable for its use of public funds.
Reports of a lack of transparency and potential conflicts
of interests of the Oversight Board's consultants are
deeply concerning and not surprising given the way the
Oversight Board has conducted itself throughout the
process. Our Government also supports efforts to apply
basic transparency principles to the Oversight Board
through Federal legislation.
Improve Title V Process: The Title V process is one that
could be of substantial benefit to Puerto Rico. The
challenge with Title V is that, as drafted and implemented,
it is disconnected from the rest of PROMESA, creates
further bureaucracy, and is not tied to either the fiscal
reforms set forth in the fiscal plan or the public policy
of Puerto Rico. Title V effectively created yet another
path for someone to try to restructure Puerto Rico without
checks and balances. Title V should be restructured not to
create a parallel path but rather to be a tool that can be
used effectively by the Government of Puerto Rico and the
Oversight Board to implement the determined fiscal reforms
and public policies.
As I did at the outset of my testimony, I also note that the
success or failure of PROMESA is also dependent on much more than the
words of the statute or even the efforts of my administration of the
Oversight Board. The unfortunate reality is that Federal policy toward
Puerto Rico is oftentimes executed as an afterthought and without a
proper understanding of the circumstances of the island and its
residents. There are countless examples of Federal policies and
practices that harm or limit Puerto Rico's economic development
potential. These issues must be addressed if the process set forth in
PROMESA is to be successful.
To that end, I call upon Congress and the Federal Government to
address the following: \2\
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\2\ For a more detailed exposition of recommendations to Congress
see: Written Statement Hon. Ricardo Rossello, Governor of Puerto Rico,
U.S. Senate Committee on Energy & Natural Resources Hearing, ``Examine
the State of U.S. Territories,'' February 26, 2019. Available at:
https://www.energy.senate.gov/public/index.cfm/2019/2/full-committee-
hearing.
Cure the Inequity in Disaster Recovery Funding: Congress
must work with us to end the inequity in the disaster
recovery funding provided to Puerto Rico relative to other
jurisdictions stateside. The discrimination against Puerto
Rico is evident in the approach FEMA has taken to Puerto
Rico and in the Administration's application of the
existing statutes. The discrepancy in the way Puerto Rico
is treated is startling and represents discrimination by
parts of the Federal Government against the 3 million
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Americans living in Puerto Rico.
Assure the Nutritional Assistance Program (NAP): The
disaster NAP relief provided by Congress in 2017 ran out at
the end of February of this year, and beginning in March,
NAP recipients experienced a reduction in benefits,
averaging 25 percent. Still the island's most vulnerable
populations continue experiencing food insecurity at high
levels. I urge Congress to approve an additional $600
million in disaster NAP relief funding so that the
Government can provide the same basic nutritional
assistance as the states through the end of FY 19. In the
longer-term, I urge Congress to transition Puerto Rico from
NAP to Supplemental Nutrition Assistance Program (SNAP) so
that the island's nutritional assistance needs are
adequately met for the more than 1.3 million U.S. citizens
who participate in the program.
Create Equality in Federal Programs & Tools for Economic
Growth: Congress must end the unequal treatment of Puerto
Rico under multiple Federal laws, programs (such as Federal
Highways, Child Tax Credit, Earned Income Tax Credit), and
many other policies. New tools to support economic growth,
such as are also needed for Puerto Rico to succeed. Failure
to do so, creates an uneven playing field for economic
performance, leads to an overall quality of life in Puerto
Rico that is below the standard in the states, and
encourages outmigration.
Saving the Healthcare System: The Federal Government's
inconsistent and incoherent healthcare funding and policy
decisions toward Puerto Rico has put the stability of the
Island's entire healthcare system at risk and has
contributed to a mass exodus of medical and health
professionals which cannot be easily replaced. Urgent
action is needed. Congress must provide funding stability
to our Medicaid system for at least 5 years as it works on
a longer-term solution and should also work to address our
inequality in Medicare.
Federal Tax Law Revisions to Help Spur Economic Growth:
Congress should adopt tax policies that support economic
growth in Puerto Rico rather than treating Puerto Rico as a
domestic entity for some tax issues and a foreign entity
for others.\3\
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\3\ Although some argue that this has worked to our benefit because
of the lack of Federal income tax for island residents on their Puerto
Rico derived income, this seeming advantage is nullified for the vast
majority of island residents because of their unequal treatment or
outright exclusion in Federal programs and tax benefits like the Child
Tax Credit (CTC) and the Earned Income Tax Credit (EITC).The passage of
P.L. 115-97, the Tax Cuts and Jobs Act of 2017, added yet another
challenge to Puerto Rico with the imposition of the Global Intangible
Low-Taxed Income Tax (GILTI) as if we were a foreign jurisdiction.
While we do not yet know the full impact GILTI will have on Puerto
Rico's manufacturing sector and the local tax revenues they generate,
it's clear that the way this new tax was applied will do nothing to
help Puerto Rico attract new investment and economic activity.
Resolve Undemocratic & Unequal Territorial Status: The
question of Puerto Rico's ultimate political status and
relationship with the Federal Government is intimately
linked to the island's prospects for economic growth,
fiscal stability, and successful disaster recovery.
Congress must resolve Puerto Rico's status to unleash its
full potential and should implement the democratically
expressed will of voters who have expressed twice in the
last 6 years a clear desire to end the current territory
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status and to achieve statehood for Puerto Rico.
Conclusion
Despite our many challenges, the state of the U.S. territory of
Puerto Rico is optimistic, determined and full of potential. In the 19
months since the Hurricanes of 2017 and in the 2 years since PROMESA
was enacted, Puerto Rico has been challenged by the most damaging
storms in U.S. history, significant outmigration, and an island-wide
recession. Despite these long odds, Puerto Rico continues to endure and
recover. Our goal is to re-imagine, revitalize and rebuild Puerto Rico
so that it can develop to its full capacity for the benefit of not only
island residents, but for America as a whole. To do this we must
recognize and acknowledge our past mistakes and work together
diligently to correct them. If America's most challenged jurisdiction,
Puerto Rico, can turn itself around and be transformed into a place of
thriving prosperity, it can serve as a beacon of hope for all
Americans, and a sign to the world that the best is yet to come.
Statehood for Puerto Rico is not only about realizing Puerto Rico's
full potential. It is about America living up to its most noble values
by creating a more perfect Union.
______
Questions Submitted for the Record to the Hon. Ricardo A. Rossello,
Governor of Puerto Rico
Questions Submitted by Chairman Grijalva
Question 1. Section 2141(b)(1)(B) of PROMESA requires that Fiscal
Plans approved by the Fiscal Oversight and Management Board (FOMB) for
Puerto Rico ``ensure the funding of essential public services.'' In
your testimony, you mentioned that you and your administration have not
formally defined the term. How do you define ``essential public
services''?
Answer. From the Government's perspective, ``essential public
services'' consist of the government services that the Government
believes are necessary to operate the government of Puerto Rico and
preserve our economy and the well-being of our citizens. When the
Government submits fiscal plans and budgets, those proposals reflect
what we believe are essential public services. We refer the Committee
to the contents of the Commonwealth fiscal plan, as certified on May 9,
2019, for the details of those services.
Question 2. What framework and targets has your administration
implemented to ensure that ``essential public services'' are available
to the residents of Puerto Rico? Also, do you consider PROMESA should
be amended to include a more specific definition of ``essential public
services''?
Answer. Every year, each government agency works closely with our
Office of Management and Budget to determine how best to protect our
people and our economy through appropriate budgeting for essential
services. PROMESA should not be amended to include a more specific
definition of ``essential public services'' as essential services will
vary and will be a function of available resources and the policy
initiatives of the duly elected territory government.
Question 3. How are the PROMESA Fiscal Plans developed? Does the
FOMB write them and send them to you for your approval or is it a
collaborative effort?
Answer. PROMESA section 201 sets forth the process by which fiscal
plans must be developed and certified by the Financial Oversight and
Management Board (``FOMB'' or ``Oversight Board''). Under PROMESA, the
fiscal plan process begins when the Oversight Board ``deliver[s] a
notice to the Governor providing a schedule for the process of
development, submission, approval, and certification of Fiscal Plans.''
\1\ The Oversight Board may consult with the Governor in establishing
the fiscal plan schedule but retains sole discretion to change the
schedule dates as it deems ``appropriate and reasonably feasible.'' \2\
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\1\ PROMESA Sec. 201(a).
\2\ Id.
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After receiving the schedule notice, the Commonwealth or the
appropriate governmental entity or public corporation (as applicable)
must develop its fiscal plan proposal, which the Governor must submit
to the Oversight Board by the deadlines established under the
schedule.\3\ The Oversight Board then reviews the Governor's fiscal
plan proposal to determine whether it satisfies the 14 requirements set
forth under PROMESA section 201(b)(1) (the ``Certification
Requirements'').\4\ If the requirements are satisfied, the Oversight
Board can certify the proposed fiscal plan.\5\ If the requirements are
not satisfied, the Oversight Board must provide the Governor with a
``notice of violation'' and ``an opportunity to correct'' the fiscal
plan proposal.\6\ The Governor may submit as many revised fiscal plans
to the Oversight Board as permitted under the fiscal plan schedule.\7\
However, if the Governor fails to submit a fiscal plan proposal that
the Oversight Board determines in its sole discretion satisfies the
Certification Requirements, then the Oversight Board may develop and
certify its own fiscal plan.\8\ Alternatively, PROMESA section 201(f)
provides that the Governor and Oversight Board may jointly develop a
fiscal plan that meets the Certification Requirements.
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\3\ See id. Sec. 201(c)(2).
\4\ See id. Sec. 201(c)(3).
\5\ See id. Sec. 201(c)(3)(B).
\6\ Id. Sec. 201(c)(3)(B).
\7\ See id. Sec. 201(d)(1).
\8\ See id. Sec. 201(d)(2).
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The Government takes the fiscal plan process very seriously. It
submits thoughtful, fulsome fiscal plans that include detailed data and
projections as well as many substantive policy proposals for how to
continue Puerto Rico's rebuilding and revitalization.
Importantly, my administration has complied with all aspects of the
fiscal plan process since taking office in January 2017 and has met all
deadlines established by the Oversight Board for the submission of
fiscal plan proposals.
Question 4. Other than opposing the various labor reforms that the
FOMB proposed, has your administration been supportive or opposed to
the cuts to education, the University of Puerto Rico and healthcare?
Have you proposed budgets to restore those cuts that were rejected by
the FOMB?
Answer. My administration is committed to ensuring that Puerto Rico
residents have access to affordable healthcare and education. In fact,
these are among our highest priorities. The elected Government agrees
with the Oversight Board that the University of Puerto Rico (``UPR'')
must increase its revenues through modest increases in tuition and
other charges while also transitioning to a leaner operational
structure. However, we disagree on the means to achieve these ends.
Although the elected Government has proposed to gradually increase UPR
tuition by fiscal year 2023, the Oversight Board has sought a more
aggressive 65 percent tuition increase, while also reducing
scholarships for low-income students. To reduce UPR's overhead, the
Government has proposed a voluntary transition program, which allows
eligible workers to transition to non-profit and non-governmental
organizations or the private sector in exchange for a tax-free economic
incentive. The Oversight Board would take this program a step further
by eliminating any vacated positions while also imposing involuntary
terminations and reductions in federally funded personnel.
My administration vehemently objects to short-sighted, draconian
measures that would save some money now while forfeiting our
investments in the future. In light of the Commonwealth's current
financial crisis, modest cuts to these programs may be inevitable. But
the entire burden should not fall on the island's young people, who are
the foundation of the prosperous future that we are all striving to
build for Puerto Rico.
Questions 5 and 6. The Middle States Commission on Higher Education
has placed the University of Puerto Rico (UPR) in show-cause status due
to its fiscal situation and financial projections. The UPR is at risk
of losing its accreditation and access to Federal funds. Has your
administration engaged and collaborated with other stakeholders, such
as the University Board, to develop the UPR's budget and Fiscal Plan?
Please share information about the stakeholders that have participated
in the process and the extent of their participation.
Answer. UPR has maintained accreditation for each of its 11
campuses for an additional year, as it was able to deliver fiscal year
2016-2017 single audit, audited financial statements and show
substantial compliance with the Middle States Commission on Higher
Education (``MSCHE'') Standards. After the UPR was placed into a ``Show
Cause'' status by MSCHE, it provided sufficient evidence to maintain
its accreditation for an additional year, while it continues to take
concrete steps in the accreditation process.
After duly complying with MSCHE's request, on March 18, 2019, UPR
maintained accreditation for all campuses during the ``Show Cause''
process, which will last an additional year.
In its letter, MSCHE stated that UPR ``provided compelling
evidence'' that:
the quality of the learning experience for the student has
not been at risk at any time;
the Institution has the potential to remedy the non-
compliance issues identified by the MSCHE within the
extension period;
the Institution has developed reasonable plans to meet the
reaffirmation expectations of the MSCHE within the period
of extension;
the UPR has the support of the Central Administration of
the UPR, the Fiscal Oversight Board and other entities for
the institutional compliance in progress; and
the Institution has been affected by other circumstances
beyond its control.
On or before May 1, 2019, the UPR was required to submit a report
regarding the status of completion of the single audit and the audited
financial statements for the 2017-2018 fiscal year to MSCHE and the
U.S. Department of Education to meet the aforementioned Standards and
Requirements. On April 30, 2019 the UPR submitted its single audit and
audited financial statements for the 2017-2018 fiscal year to the
MSCHE. The Puerto Rico Fiscal Agency and Financial Advisory Authority
(``AAFAF'' by its Spanish acronym), as the Government's fiscal agent
and financial advisor, has provided support to the UPR Board and its
central administration on the development of all its fiscal plan and
budget submissions, including the latest April 5, 2019 fiscal plan.
Questions 7 and 8. The agreement reached between PREPA and a good
part of its creditors will cause an increase of up to 4.6 cents per
kilowatt hour, which when added to other scheduled adjustments for the
rate, would imply an increase of up to 30 percent in the cost of energy
in Puerto Rico in several years. Has the Government considered how this
will hurt workers in Puerto Rico who on average make less than $20,000
per year, or slow down the creation of jobs by local businesses? Can
local businesses and the people of Puerto Rico afford a 30 percent
increase in energy cost? Wouldn't a rate increase hurt the ability of
Puerto Rico's economy to recuperate?
Answer. The agreement reached between PREPA and a significant
percentage of its creditors paves the way for the transformation of the
electric system and results in a fair outcome for all stakeholders. Key
benefits of the transaction are:
1. The transition charge is fixed and capped (i.e., no floating
charge or uncapped charge to consumers). It is low in the
early years to provide time for the expected efficiencies
and upgrades to the electric system to be realized.
2. The transaction will achieve $2.1 billion in debt service savings
for the period from 2020 through 2039 as compared to the
contractual terms of the debt. These savings represent $3.3
billion in additional savings versus the terms of the
restructuring support agreement that was not certified
before the PREPA Title III filing.
3. Creditors are taking meaningful haircuts to claims.
Includes haircuts to Assured's claims (and not
just those of the uninsured bondholders).
The Government eliminates the possibility of risk
of a loss in litigation that could result in materially higher
recoveries to creditors (and locks in the agreed to haircuts
regardless of the outcome of any litigation).
10 percent of the bondholder recovery is
contingent and based on performance.
Questions 9 and 10. The Trump administration has expressed concerns
regarding financial controls in Puerto Rico to justify reluctance to
provide further funding for disaster relief and recovery for the
island. In terms of financial controls, what is the division of
fiduciary responsibilities among the Governor's office, the Puerto Rico
Fiscal Agency and Financial Advisory Authority, the Puerto Rico
Comptroller, and the FOMB?
Answer. The financial controls of the Government of Puerto Rico and
its instrumentalities are carried out by multiple entities. The Office
of the Governor exercises a general oversight role over the Executive
Branch of the Government of Puerto Rico and ensures that its public
policies are duly implemented by the agencies. AAFAF serves as fiscal
agent, financial advisor and disclosure agent of the Government of
Puerto Rico, its instrumentalities and municipalities. AAFAF also
serves as liaison between the Governor and the Oversight Board,
oversees the implementation of the Fiscal Plan and the Certified Budget
and represents all government entities in the renegotiation of the
public debt. On the other hand, the Office of the Comptroller of Puerto
Rico was created by Article III, Section 22 of the Constitution of
Puerto Rico and is attached to the Legislative Branch. The main duties
of the Office of the Comptroller are to examine all revenues, accounts
and disbursements of the Government of Puerto Rico, its public
corporations and municipalities to determine if they have been made in
accordance with the law. The Office of the Comptroller also administers
the centralized registry of contracts of the Government of Puerto Rico.
Finally, the Oversight Board's powers are established in PROMESA and
are mainly related to the certification of Fiscal Plans and Budgets and
to the restructuring of public debt.
Questions 11 and 12. Section 208(b) of PROMESA requires a report on
discretionary tax abatement agreements. Your administration has avoided
publicly disclosing the contents of the report. However, without this
information it is difficult to track how much revenue Puerto Rico is
losing from individually tailored corporate tax breaks. Why has that
information not been disclosed? Please provide an analysis of how much
Puerto Rico benefits from these tax breaks versus how much controlled
foreign corporations (CFCs) bring to the island's economy.
Answer. The Government of Puerto Rico has prepared a tax
expenditure report that is compliant with PROMESA Section 208(b). This
report has been shared in draft form with the FOMB. The FOMB has
indicated it has comments and may require additional information. Once
the FOMB and Government finalize the report, the intent is to make key
information, analysis, and conclusions public.
Puerto Rico provides approximately $180 million in annual tax
credits to certain corporations through incentives aimed at attracting
foreign direct investment, promoting economic development, and social
betterment.
Separately, Puerto Rico provides customized tax incentive packages
to certain CFCs. In aggregate, these CFCs provide well over $2.0
billion per year in Act 154, non-resident withholding, and other tax
revenues. This is in addition to investing in a work force with
thousands of high-paying job opportunities. Without a competitive tax
incentive structure, many of these corporations would not remain in
Puerto Rico, thereby depriving the Commonwealth of much needed
industry, jobs, and tax revenue.
Individual taxpayer information has not been published because it
is confidential under Puerto Rico law. However, aggregated data on tax
abatement agreements has been published. Furthermore, the Government is
in the process of enacting the Incentives Code of Puerto Rico, which
will completely reform the process of granting tax credits and other
tax abatements to incorporate ROI analysis. The Incentives Code will
also provide for the periodical publication of aggregated data
regarding tax abatements.
Questions Submitted by Rep. Rob Bishop
Questions 1 and 2. Please provide a list of all the supposed laws
and reforms your Administration has enacted since taking office. Please
provide a list of all supposed laws and reforms that your
administration has actually been able to implement since taking office.
Answer. I am proud to report that my administration has enacted and
implemented more laws and reforms than any other administration in
Puerto Rico's history. My administration's record speaks for itself,
including achieving a series-low unemployment rate, the highest private
sector nonfarm payroll numbers in 4 years and 8 consecutive months of
positive year-over-year job creation. Please see listing below of all
laws enacted and implemented since we took office:
Act 1-2017--The Participative Public Private Alliances
Act. This act strengthens the P3 legal framework to
facilitate critical infrastructure investments and improve
public services.
Act 2-2017--The Puerto Rico Fiscal Agency and Financial
Advisory Act. Creates the necessary legal framework to
implement and comply with PROMESA and with the Fiscal Plan.
Act 3-2017--The Act to Attend Puerto Rico's Fiscal, Budget
and Economic Crisis and to Guarantee the Operation of
Government of the Government, which allows for taking
immediate emergency and cost cutting measures to reduce the
Government's operating expenses.
Act 4-2017--The Labor Transformation and Flexibility Act,
which amended several labor legislations with the intention
of improving labor market competitiveness, improving the
labor participation rate, and halting the migration of
citizens to external labor markets.
Act 5-2017--The Puerto Rico Financial Emergency and Fiscal
Responsibility Act, which amended the prior Act 21-2016 to
prioritize essential services over debt payments and
extended the emergency period for revenue claw-backs to
August 1, 2017 pursuant to Executive Order 2017-31.
Act 8-2017--The Act for the Administration and
Transformation of Human Resources in Government, which
allows for the transfer of workers across the Government to
achieve savings through mobility and attrition.
Act 13-2017--Enterprise Puerto Rico Act, which creates a
not for profit corporation to promote the economic
development of Puerto Rico, attract foreign direct
investment and incentivize investments in technology in
collaboration with the private sector.
Act 15-2017--Created the Office of the Inspector General
of Puerto Rico.
Act 17-2017--Act to Promote Puerto Rico as a Destination;
enables the creation of a destination marketing
organization (DMO).
Act 18-2018--Reforms, simplifies and expedites the
permitting process.
Act 20-2017--Department of Public Safety Act, which
consolidates law enforcement and other public safety
agencies under a Public Safety Department.
Act 24-2017--Increases transit violation penalties and
fines to increase the Government's revenues.
Act 25-2017--Provides measures for enforcing collection of
sales taxes on internet transactions to generate $35
million to $55 million in new revenue.
Act 26-2017--The Fiscal Plan Compliance Act, which levels
out marginal benefits across the Government and its
instrumentalities to generate $130 million in savings,
increases revenues, and expedites the process of asset
disposition.
Act 37-2017--Reorganizes PREPA's Board of Directors to
comply with the Fiscal Plan for said public corporation.
Act 43-2017--Includes medical tourism services and
telemedicine facilities as eligible services under this Act
20-2012 and eliminates bureaucratic requirements that
restricted conferring tax incentives to applicants.
Act 45-2017--Amends Act 22-2012 to require investor to
make an annual contribution of at least $5,000 to non-
profit entities that operate in Puerto Rico; places a 5
percent tax on Individual Resident Investor's long-term net
capital gains recognized 10 years after becoming a Puerto
Rican resident, but before January 1, 2036, on stocks and
bonds that he or she possessed before becoming a Puerto
Rican resident; and eliminates bureaucratic requirements
that restricted conferring tax incentives to applicants.
Act 46-2017--Extends the emergency period established by
Act 5-2017 and authorizes the Governor to further extend
such period by executive order.
Act 81-2017--Establishes the Office of Municipal
Management attached to the Office of Management and Budget
and eliminated the Office of the Commissioner of Municipal
Affairs.
Act 106-2017--Establishes a pay-as-you go (``PayGo'')
system and creates a new Defined Contribution Plan similar
to a 401K Retirement Plan for public employees.
Act 109-2017--Establishes the legal framework to
restructure the Government Development Bank (GDB) debt
pursuant to the Restructuring Support Agreement (``RSA'')
authorized by the Fiscal Oversight and Management Board
under Title VI of PROMESA.
Amended by Act 147-2018.
Act 122-2017--Establishes a procedure for the
reorganization of agencies and corporations of the
Government of Puerto Rico, in order to create agile and
more efficient governmental entities. Authorizes the
Governor to submit Plans of Reorganization to the
Legislative Assembly, for its review, approval or
rejection, to create, outsource, conglomerate, coordinate
and consolidate agencies, functions, services, programs and
powers of the agencies.
Act 120-2018--Creates the Puerto Rico Electric Power
System Transformation Act to establish the legal framework
for the sale, disposition or transfer of assets,
operations, functions and services of PREPA.
Act 131-2018--Implements the Model Forest Reorganization
Plan.
Act 141-2018--Implements the Department of Economic
Development and Commerce Reorganization Plan.
Act 171-2018--Implements the Department of Natural and
Environmental Resources Reorganization Plan.
Act 211-2018--Implements the Public Service Regulatory
Board Reorganization Plan.
Act 212-2018--Implements the Education Council
Reorganization Plan.
Act 241-2018--COFINA Reorganization/POA implementation.
Act 257-2018--Tax Reform (multiple amendments to the
Internal Revenue Code).
Act 17-2019--Establishes the Puerto Rico Energy Public
Policy Act, which adopts the regulatory framework
applicable to the P3 transaction of PREPA.
Question 3. We've often heard you say the Oversight Board is
interfering with public policy and that's not their mandate yet the
law, PROMESA, requires the Board to certify your Government's budget.
How is the Board able to do their job without having a say in policies
that have to be funded by the budget?
Answer. In contrast to the powerful control board mode I used to
restructure the District of Columbia's debts in 1995, PROMESA embodies
a dual scheme of shared powers for Puerto Rico. Under PROMESA section
303, Congress clearly intended to preserve the self-determination of
the people of Puerto Rico by reserving all ``political and governmental
powers of the territory'' to the elected Government of Puerto Rico.\9\
This dual scheme was acknowledged in PROMESA's legislative history \10\
and has also been recognized by the U.S. District Court for the
District of Puerto Rico overseeing the Commonwealth's Title III
cases.\11\
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\9\ See In re Fin. Oversight & Mgmt. Bd. for P.R., 583 B.R. 626,635
(D.P.R. 2017) (``PROMESA section 303 reserves the territory's political
and governmental powers to the territory.'').
\10\ See H.R. Rep. 114-602(1), 2016 WL 3124840 at *110 (PROMESA
``pairs a comprehensive debt restructuring mechanism . . . with an
independent and temporary oversight board (which is not a Federal
entity)--not a heavy-handed control board--to help ensure that the
Puerto Rico government conducts itself in a responsible, transparent,
and disciplined manner'').
\11\ See In re Fin. Oversight & Mgmt. Bd. for P.R., 583 B.R.
626,633 (D.P.R. 2017) (``The degree of unilateral power that Congress
has granted to the Board stands in contrast to the powers Congress
granted to the [D.C. Board].'').
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With PROMESA's enactment, Congress sought to strike a careful
balance between preserving the representative Government's flexibility
to make policy decisions to achieve fiscal responsibility and
entrusting the Board with a meaningful oversight role.\12\ Congress
granted the Board oversight authority to prevent past abuses, such as
funding deficits through borrowing. In that regard, ensuring financial
transparency and accountability to the Government's stakeholders is an
essential element of the fiscal plan process.\13\
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\12\ While the Board's fiscal planning powers ``give it a strong
and substantially determinative voice in overall strategy regarding the
Commonwealth's revenues, expenses, and general direction for
responsible financial management,'' the Board does not have the power
to impose specific policies on the Government.'' In re Fin. Oversight &
Mgmt. Bd. for P.R., 583 B.R. 626, 633 (D.P.R. 2017). Rather, ``Congress
did not grant the [Board] the power to supplant, bypass, or replace the
Commonwealth's elected leaders and their appointees in the exercise of
their managerial duties whenever the Oversight Board might deem such a
change expedient.'' Id.
\13\ PROMESA Sec. 201(b)(1)(F) (fiscal plan must ``improve fiscal
governance, accountability, and internal controls'').
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Under PROMESA's framework, the Board can make recommendations to
the Government as to the policy choices needed to meet fiscal targets
established in the certified fiscal plan. But the Board cannot, through
a series of anti-democratic measures,\14\ control or usurp the elected
Government's exclusive authority to determine the policies within the
fiscal plan's parameters that are appropriate to protect the interests
of the electorate to whom the Government is accountable. Congress
intended for the ``Governor and the board to work together for the
benefit of the people of Puerto Rico, not to have parallel governing
structures.'' \15\
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\14\ H.R. Rep. 114-602(1) (2016) (``Under H.R. 5287, the anti-
democratic provisions empowering the oversight board to impose its
recommendations over the objection of the Puerto Rico government has
been removed. The board is still authorized to make policy
recommendations and to obtain a written response from the Puerto Rico
government regarding whether it will, or will not, implement those
recommendations. Section 201 does require the fiscal plan put forward
by the Puerto Rico Governor to `adopt appropriate recommendations'
submitted by the oversight board under Section 205, but the term
`appropriate' provides the Governor with significant flexibility to
adopt sound recommendations and to decline to adopt unsound
recommendations.'').
\15\ H.R. Rep. 114-602(1), at *114.
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If the Oversight Board were to adopt a policy over the Government's
objection, the District Court has correctly noted that the Oversight
Board would ``face[] the challenge of managing implementation of the
policy in a way that garners the genuine cooperation of Puerto Rico's
elected government and the citizens of the island who voted for them,
as well as the confidence of stakeholders and potential new investors
whose interest in doing business with the Commonwealth will be crucial
to the Oversight Board's ability to fulfill its charge in providing a
method to achieve access to the capital markets.'' \16\ As a practical
matter, the Oversight Board's ability to impose its own policies on the
Government is highly constrained. The Governor and the Legislature were
elected to serve the people of Puerto Rico. The people look to the
leadership of its elected officials to guide and implement the policies
for which they voted for. Ultimately, the Governor and Legislature--not
the Oversight Board--are accountable to the electorate and can be
replaced in future elections if the people of Puerto Rico so choose.
Accordingly, the Oversight Board and the Government must work together
to find common ground on policies that will put the Commonwealth on
stronger financial footing, while also preserving the goals and
ambitions of the people. It is through this dialogue that the Oversight
Board has influence over Government policy, but its implementation has
always rested solely with the Government. As the U.S. District Court
recognized:
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\16\ Rossello Nevares v. The Fin. Oversight & Mgmt. Bd. for P.R.,
330 F.Supp.3d 685, 701 (D.P.R. 2018).
[T]he Oversight Board has not been given power to affirmatively
legislate. Thus, with respect to policy measures that would
require the adoption of new legislation or the repeal or
modification of existing Commonwealth law, the Oversight Board
only has budgetary tools and negotiations to use to elicit any
necessary buy-in from the elected officials and legislators.
Elected officials and legislators, on the other hand, have the
ability to obstruct implementation altogether, or complicate it
in such a way as to cripple Puerto Rico's ability to use it to
promote the needed return to fiscal responsibility and access
to capital markets.\17\
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\17\ Id.
The statutory structure of PROMESA, therefore, ensures that neither
the Government nor the Oversight Board holds all of the cards, which
should ``motivate the parties to work together, quickly, for positive
change'' rather than engaging in ``mutual sabotage.'' \18\
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\18\ In re. Fin. Oversight Bd. for P.R., 583 B.R. 626,637 (D.P.R.
2017).
Questions 4 and 5. There have been instances where the Oversight
Board has advised your administration not to take a particular action
because they judged such action would violate either the certified
fiscal plan, budget, or cause harm to the local economy. For example,
you chose to ignore the Board and continue issuing Christmas Bonuses to
Public sector employees against their recommendation. Another example,
your Executive Order 2018-33 which raised the minimum wage to $15 for
public infrastructure projects that utilize Federal disaster relief
funding, against the recommendation of the Oversight Board and local
business sector. What led to these decisions you made to ignore the
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recommendations of the Board?
Answer. As previously discussed, the Oversight Board is not a
control board and PROMESA always intended to preserve the self-
determination of the people of Puerto Rico. Hence, the Board can issue
``recommendations'' on public policy, not ``commands.'' And, as such,
may use its fiscal plan and budget certification powers to establish
broad parameters within which the Government must operate, but cannot
use those powers to micromanage policy. In other words, the Board can
define the size of the room, but only the Government can decide where
to place the furniture. In the various iterations of its certified
Commonwealth fiscal plans, the Board recommended measures affecting
government-employee compensation, including: (i) maintaining a payroll
freeze; (ii) limiting paid holidays to 15 days annually across all
public employees; (iii) prohibiting carryover of sick and vacation days
between fiscal years; (iv) prohibiting any future liquidation of sick
and vacation days; (v) eliminating Christmas bonuses for all public
employees; and (vi) standardizing employee healthcare benefits so that
all employees receive $125 worth of benefits per month. Notably, the
Government was in favor of several compensation-related reforms. For
example, in 2017, the Government enacted Act 26, which implemented
public-sector labor reforms, including: (i) implementing a maximum 15
holidays each year for Government agencies and public corporations and
(ii) limiting Christmas bonuses to a maximum of $600. While these
reforms overlapped with the Board's recommendations, the Board sought
to make these measures permanent and, in the case of the Christmas
bonuses, sought to expand Act 26 by eliminating Christmas bonuses
entirely. Because the Government viewed the Oversight Board's
aggressive recommendations as too draconian, the Government rejected
those recommendations. In addition, the Government opposed those
measures because they would reduce government employee compensation and
increase outmigration when Puerto Rico could least afford it by
stripping important protections from working families. Furthermore,
many of those measures required legislation to implement, which the
Oversight Board cannot compel. Importantly, the limited areas of
disagreement between the Government and Oversight Board on labor reform
issues are insignificant as compared to Commonwealth's overall budget.
For example, the cost of implementing the annual Christmas bonus is
only approximately $70 million per year, representing a miniscule
percentage of the Commonwealth's $8.7 billion annual General Fund
budget. This is only slightly more than approximately $65 million
annual budget for the operation of the Oversight Board during fiscal
year 2019. In addition,
Commonwealth employees make far less than Federal employees, even
after receiving the Christmas bonus.\19\
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\19\ Source: OMB Budget (unaudited), Office of Personal Management,
compensation for PR government employees includes salary and benefits
excluding PayGo. PR Government data is for FY19. Data for US States and
Federal employees is for 2017.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
.epsEliminating the Christmas bonus would amount to an immediate
reduction in the already low average worker's compensation. As such,
the Government declined to adopt these measures because they would
effectively reduce compensation for all employees when Puerto Rico's
residents are still suffering the dramatic economic effects of
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Hurricanes Irma and Maria.
Question 6. A key component of establishing PROMESA and the
Oversight Board was to promote financial transparency on the island.
The Commonwealth has only produced [1] set of audited financial
statements (for the fiscal year 2014-2015), which was not a clean
audit, which meant external auditors were unable to verify that the
information provided by the Commonwealth was reliable. Has the
Government completed Financial audits for fiscal years 2016, 2017, or
2018? What's the delay with completing these audits? Shouldn't a timely
completion of these audits be a priority? It would seem to me that
completing these audits would go a long way toward helping restore
Puerto Rico's credibility and commitment to responsible fiscal
management.
Answer. Reliability of Financial Statements:
While we recognize the importance of the audited financial
statements, I must stress that my administration is providing to the
FOMB and others more current financial information than ever before on
government tax receipts and disbursements, including monthly tax
revenue reports, weekly cash balance reports, among others.
The Commonwealth recently released the fiscal year 2016 financial
statements on May 3, 2019. We must highlight that the audit opinions
for fiscal year 2016 showed a marked improvement from 2015. The fiscal
year 2015 audit report included a disclaimer of opinion in 3 of 13
opinion units and an adverse opinion in another opinion unit. There are
no disclaimers and no adverse opinions in the fiscal year 2016 audit
report.
There are only two specific matters causing the disclaimers,
adverse opinions and modified opinions in fiscal year 2015 and the
modified opinions in 2016. These matters are the following:
1. Implementation of Governmental Accounting Standard No. 68,
Accounting and Financial Reporting/or Pensions (``GASB
68'')--This Pronouncement was effective for financial
statements ending on June 30, 2015. The actuarial report
required by this accounting pronouncement was issued by the
Retirement Systems in 2018. As a result, a majority of the
public corporations issued their 2015 financial statements
before the actuarial information was available was
available to determine their proportional share of the net
pension obligation. Those financial statements did not
include either the proportional share of the net pension
obligations or amounts based on preliminary unaudited
analyses resulting in the modifications to the audit
opinions.
As discussed further below, lack of planning by the prior
administration was a factor in the delay of the actuarial
report and a contributing factor to the delay in the
completion of the 2015 audit.
2. Government Development Bank Liquidity Issues--A substantial
portion of cash held by agencies and public corporations
was deposited in the Commonwealth's Government Development
Bank. The Bank had liquidity and solvency issues that
eventually resulted in a loss of those deposits to the
depositing agencies, corporations and municipalities. The
prior administration did not issue instructions requiring
the assessment of a potential custodial credit loss until
October 2016, after many of those entities had already
issued their 2015 financial statements. As a result, their
financial statements did not take into consideration the
custodial credit risk loss on deposits in GDB and
consequently led to modifications to the audit opinions.
The Commonwealth determined that the custodial credit loss
should be recognized in the financial statements for fiscal
year 2015 that were issued on June 2018. This determination
needed extensive investigation and analysis to determine
the facts and the evaluation of accounting guidance
applicable required consultations directly with the
Governmental Accounting Standard Board as well with the
auditors to determine when to recognize and how to measure
the custodial credit risk loss. This process was also a
factor in the delay in the completion of the 2015 audit.
We must note that these matters could have been corrected in the
2015 financial statements and the opinion modifications by requiring
the restatement and reissuance of the component unit financial
statements. This, however, would have caused further delays in the
issuances of financial statements. We expected that these issues should
not affect the 2017 financial statements and anticipate further
improvements in the audit opinions.
Timeliness of Financial Statements:
Several situations have contributed to the lengthy delay in
completion of the audited financial statements. The prior
administration issued the fiscal year 2014 financial statements in June
2016, a delay of over 1 year from the deadline for Consolidated Annual
Financial Report.
1. When my administration took office in January 2017, we found the
following:
a. The accounting books of the central government for the
fiscal years ending on June 30, 2015 and 2016 were not closed;
b. As discussed earlier, there was no planning for the
implementation of the GASB 68, which required extensive work,
including actuarial evaluations;
c. Late instructions to all Commonwealth entities of Puerto
Rico for the assessment of the custodial credit loss caused by
the liquidity problems at the GDB, as discussed earlier;
d. Outdated accounting systems, including multiple systems
that do not interface with each other; and
e. Lack of personnel and resources due to budgetary
constraints.
2. Hurricane Irma and Maria further complicated the process causing:
a. Temporary delays in the accounting and auditing
processes to deploy resources to address emergency situations;
b. Further delays at various agencies and corporations due
to lack of reliable power;
c. Damage to some of government buildings and contamination
of the accounting and employee records; and
d. Migration of public employees.
3. Informational requirements from the FOMB and others: In addition
to the daily accounting processes, the limited personnel at
central accounting and at the agencies and public
corporations must deal with multiple requests for financial
information and assistance from internal units, the FOMB,
Commonwealth and Federal Inspector Generals, among others,
including:
a. Information for the preparation of the multiple
iterations of fiscal plan and budgets;
b. Support for the financial statement audits;
c. Periodic reports to FOMB reports;
d. Bank account investigation made by the FOMB;
e. Information for the Title III claims handling process;
f. Participation in the implementation of new operational
and accounting systems critical to providing timely and
accurate financial information in the future; and
g. Changes to budgetary practices by the FOMB that have, in
turn, require changes in reporting practices and recasting of
prior year information.
4. New accounting pronouncements: The Governmental Accounting
Standards Board periodically issues or updates accounting
guidance. In some instances, the implementation of that
guidance is time-consuming and complex, as was the case for
GASB 68, as discussed above. For fiscal year 2017, a new
rule requiring disclosure of Tax Abatements will be
implemented.
5. Disclosure requirements: The Commonwealth's fiscal situation and
the legal and other matters being dealt with by the FOMB
and the Title III court require extensive up-to-date
disclosures in the financial statements. Updates for recent
events will often cause last minute delays in issuance of
the reports.
6. New Developments: My administration is taking bold steps to
address the territory's fiscal challenges. Some of these
actions will have financial reporting implications that
will require time and efforts to address and resolve. An
example of that was the impact of the GDB liquidity issues
in 2015. For fiscal year 2018, the transition to a PayGo
system for employee pensions will pose new financial
reporting challenges. Similarly, the restructuring of debt
by the GDB and COFINA will impact fiscal year 2019.
The completion of the 2017 and 2018 audits and returning to
timely financial reporting in the fiscal year 2019 audit
cycle is a priority for my administration. We continue to
work diligently with our auditors and advisors with that
objective. The audit for 2017 is in process and we expect
completion by October 2019. We are concurrently working on
the closing of the books at central accounting for fiscal
year 2018. Audits at many agencies and corporations has
already been completed for 2017 and work on their 2018
audits is already in process.
The systems and resource limitations, incremental requirements
from the FOMB and the Title III processes, and
implementation of new accounting rules will continue to
present challenges in the near term. We are committed to
working through those challenges with the ultimate goal of
producing timely, reliable financial information as soon as
possible.
Questions 7 and 8. The Oversight Board recently notified your Chief
Financial Officer that 28 public corporations and 66 municipalities
have accrued $340 million in debt since implementation of the PayGo
system in 2017. What is your administration doing to rectify this and
ensure that government pensions are paid at all times as is required by
law?
Answer. First of all, it must be clarified that the information
included by the Oversight Board in its April 30, 2019 letter regarding
the outstanding PayGo debt of municipalities and public corporations is
not up-to-date and does not reflect payments made by municipalities and
public corporations in recent weeks. However, the Government recognizes
that these entities have certain outstanding PayGo debts. The
Retirement Board of the Government of Puerto Rico is working closely
with the Office of the Chief Financial Officer (``CFO'') so that these
debts are paid as soon as possible. Said process includes the
implementation of various collection mechanisms and procedures provided
in Act 106-2017. Finally, it should be emphasized that the disbursement
of the pensions is guaranteed by the General Fund, so notwithstanding
the outstanding debts, the payments to retirees has not been
interrupted.
Question 9. Your administration and the Oversight Board were
working together to enact substantial labor reforms that would have
made it easier for people to find jobs and reduce the administrative
burden of formal employment in the market. How did this effort fail?
Will your administration continue to pursue these necessary reforms?
Answer. First of all, I would like to establish for the record that
my administration has enacted and implemented substantial labor reform
to help improve the prospects for Puerto Rico's job market. On January
26, 2017, the Government enacted Act No. 4 of 2017 (``Act 4'') to
improve Puerto Rico's competitiveness and foster economic development,
while relaxing certain legal requirements for hiring and retention of
employees. Specifically, Act 4: (i) established lower accrual rates for
both vacation days and sick leave; (ii) approximately doubled the work
hours required for accrual of Christmas bonuses; (iii) placed a $600
cap on such bonuses; and (iv) reduced severance pay for unjust
termination, among other reforms. These reforms were sufficient to
increase labor market efficiency and revive economic growth, but their
effects were forestalled as a result of the hurricanes in September
2017. Allowing the Act 4 reforms to take hold will afford the
Commonwealth and its people more time to recover from the hurricanes
before introducing dramatic, and potentially disruptive, changes to
Puerto Rico's labor market.
In addition, the Government has instituted an ``Earned Income Tax
Credit'' (``EITC'') initiative and a work requirement for the
Commonwealth's Nutritional Assistance Program (``NAP'') as further
enhancements to its already instituted comprehensive private-sector
labor reform package of 2017. It is simply inaccurate to say that labor
reform efforts have failed in Puerto Rico. The Government has worked
substantially with the Oversight Board to implement many of its
recommendations regarding private-sector human-capital and labor
reforms to drive economic grown and competitiveness in Puerto Rico. For
example, in connection with the May 2018 Commonwealth fiscal plan, we
made substantial efforts to facilitate a comprehensive labor reform
deal. As a result of those negotiations, the Oversight Board agreed to
drop its demands for the elimination of the Christmas bonus and the
reduction of minimum vacation and sick days for private sector
employees in exchange for the repeal of Puerto Rico's Wrongful
Dismissal Act (``Law 80''). The repeal of Law 80 would have made Puerto
Rico an at-will employment jurisdiction, which the Oversight Board
believed was a necessary change to provide more flexibility in reducing
the Government's labor costs. However, the Puerto Rico Legislature
lawfully exercised its powers and rejected the repeal of Law 80 in June
2018. Since then, the leadership of the Puerto Rico Legislature has not
changed its view on this issue and, as a result, there are no plans to
continue raising the repeal of Law 80 as a potential avenue of
compromise regarding labor reforms.
Questions Submitted by Rep. Hice
Question 1. My understanding is that sections of the electrical
grid either have been transitioned or are in the process of
transitioning to natural gas. One of the problems being forecast is
that there is a transport shortage due to the Jones Act and that a
temporary waiver would allow for greater access to U.S. stores. What
action have you taken to pursue a waiver?
Answer. Puerto Rico's energy sector is undergoing a historic
transformation following my administration's new policy announcements
in January of 2018. As a result of our revised policy announcements,
Puerto Rico and PREPA are transitioning to cleaner, more modern,
efficient and compliant electric generation, including natural gas-
fired generation supplied by liquified natural gas (``LNG'') and
renewable sources that include solar and wind. We are advancing in the
transition to more LNG based generation to reduce our dependency on
fuel oil and are sponsoring multiple generation projects to meet those
objectives for the benefit of our citizens. We are seeking a waiver of
the Jones Act that would permit these generating facilities to be
supplied with LNG produced in the United States, rather than LNG
obtained from other, less secure, more costly sources.
These projects that will used natural gas derived from LNG as their
primary fuel include:
1. The conversion of San Juan power generation units 5 & 6 to LNG:
a. PREPA executed a contract in March 2019 with New
Fortress Energy (NFE) for the conversion and supply of LNG,
which is expected to generate $500M of savings over 5 years.
b. This project is located adjacent to PREPA's San Juan
Power Plant, near the main load centers in the North; the NFE
facility will provide 25 TBtu of natural gas to San Juan Power
Units 5 & 6.
c. The dual-fuel conversion cost of the power units is
provided by NFE resulting in no capital outlay on the part of
PREPA--and the conversion is expected to be completed by Q4-19.
2. New Palo Seco Power Plant Initiative:
a. Natural gas is planned for generation capacity at this
existing site also in the North, close to the island's main
load centers. LNG is an affordable primary fuel, cleaner than
fuel oil, and anticipated to yield $135M in annual savings
(based on Integrated Resource Plan (IRP) assumptions and
modelling conducted in 2019).
b. Repowering Palo Seco is a core component to PREPA's IRP
Action Plan. PREPA has begun the development of a Request for
Proposals for new generation at Palo Seco.
3. Additional projects contemplated in the 2019 IRP include:
a. Developing LNG terminals at Mayaguiez & Yabucoa. PREPA
has already begun conversion of four power generation units in
Mayaguez, located in the western section of the Island to LNG
use.
b. Possible development of a land-based LNG terminal in San
Juan to supply a new combined cycle gas turbine (CCGT) and the
San Juan 5&6 Combined Cycle.
With respect to the Jones Act, in December 2018, the Government of
Puerto Rico requested a waiver from certain provisions of the Jones
Act. It took this action because the Jones Act precludes deliveries of
natural gas produced in the United States to Puerto Rico. This waiver
would apply until a sufficient number of qualifying LNG carriers can be
made available to transport LNG from the U.S. mainland to Puerto Rico.
Without such a waiver, the advantages of cost-effective, favorably
located LNG supply sources will be denied Puerto Rico as it modernizes
its electric generation fleet, and the opportunity for mainland U.S.
LNG suppliers to penetrate the Puerto Rico market will be lost for many
years to come. Key attributes of the request are:
1. The petition addresses barriers to long-term supply contracts
with domestic producers of natural gas based on national
security interests.
2. It is limited to 10 years or until Jones Act compliant vessels
become available (which is currently not the case).
3. Jones Act exemption benefits to Puerto Rico and the mainland
United States include:
a. Ability to contract long-term fuel supplies from
geopolitically stable resources (domestic suppliers).
b. Cost reductions from a Jones Act limited waiver helps
support U.S. critical industries like pharmaceuticals and
biopharmaceutical operations located in Puerto Rico which serve
the mainland and international pharmaceutical markets.
c. Providing stable, cost-effective sources of electricity
to U.S. military installations in Puerto Rico.
d. Economic benefits:
i. Fuel savings to customers that reside in Puerto
Rico;
ii. Spur economic development due to more cost-
effective fuel; and
iii. Improve public health and environmental
standards given the availability of clean burning
alternative fuel supplies.
Since filing this waiver request, the applicants have supplemented
the request once and have had a meeting on the request with
representatives of the U.S. Department of Homeland Security (``DHS''),
Customs and Border Protection, to discuss the request. The waiver
request remains pending.
PREPA is hopeful that DHS and the Defense Department will grant its
request to permit LNG to be transported in bulk from U.S. sources to
Puerto Rico on vessels that are not Jones Act qualified pending
availability of enough suitable LNG carriers that can qualify under the
Jones Act. If they do, Puerto Rico energy consumers stand to save
hundreds of millions of dollars in fuel costs, and U.S. LNG producers
will have a secure domestic market for their projects.
Question 2. Puerto Rico experienced 710 homicides in 2017, and 641
in 2018--more than any U.S. state and mostly gang related. Your police
force is not only underpaid ($40k/yr--24% below avg) and in many cases
owed money, but Colonel Michelle Fraley, who was the superintendent of
the Puerto Rico police in 2017 during Hurricane Maria, told CBS News
this past January that she wouldn't go outside past 6 p.m. unless it
was an absolute emergency requiring a hospital visit.
Twenty-one months after Hurricane Maria what is being done to
protect your civilian women and children?
Answer. Over the past year, the Government has consistently
expressed to the Oversight Board that the Puerto Rico Police Department
(``PRPD'') cannot sustain the level of expense reductions as set forth
in various iterations of Certified Fiscal Plans. The Government,
including Department of Public Safety officials, PRPD, AAFAF, OCFO,
have held numerous meetings with the FOMB to address concerns
surrounding both the magnitude of expense reductions and the lack of
reinvestment in PRPD. Additionally, PRPD has been experiencing high
levels of attrition in FY19 putting additional strain on an already
fragile system.
As a result of the aforementioned meetings, the Fiscal Plan
certified on May 9, 2019 has included a number of revisions to ensure
the police who protect Puerto Rico and its citizens are fairly
compensated and PRPD is adequately staffed. These new investments
include:
1. $11,500 increase in officer salaries relative to FY 2019 levels
phased in over 2 years.
2. FY2019 salaries already included a $1,500 raise per sworn officer
instituted at the beginning of FY2019.
3. Increase life and disability insurance to $250 per year per sworn
officer starting in FY2020.
4. Social Security contributions for all police will begin in
FY2020.
5. Payments to sworn officers for past services of $122 million in
FY2019, FY2020, and FY2021.
6. 200 cadets will be hired each year to offset some of the 3
percent expected attrition.
7. $42 million in funding for capital expenditures to purchase
bullet proof vests, radios, and vehicles.
These reinvestments should help stabilize the Department and
provide PRPD with the necessary budget to provide the safety that
Puerto Rico and the 3.2 million U.S. citizens who live there deserve.
In addition to reinvestment, the Government continues to work
closely with the Federal Government in the fight against crime on the
island. I signed an agreement extending and expanding the collaborative
efforts between the Government of Puerto Rico and Federal law
enforcement agencies. The memorandum of understanding includes, but is
not limited to, the following:
1. Extending the drug enforcement task force created under a
previous agreement;
2. Coordination between the police and district attorney's for drug-
trafficking cases;
3. Government corruption;
4. White-collar crime;
5. Sexual exploitation of minors;
6. Human trafficking; and
7. Cruel treatment of animals.
Question Submitted by Rep. Gonzalez-Colon
Question 1. As you know, the Congressional Task Force on Economic
Growth in Puerto Rico--which was established by PROMESA--issued a
report in 2016 with various recommendations to help address Puerto
Rico's fiscal crisis. Among those recommendations was permanently
lifting the cap on the rum tax cover over. While Congress did pass
legislation lifting the cap through 2022, we have yet to permanently
lift the cap. Can you please discuss how Puerto Rico would benefit from
such legislative action?
Answer. Under the current construct, permanently lifting the cap on
the cover-over to $13.25 per barrel would result in an incremental $25
million-$30 million in revenues to Puerto Rico's general fund while
Puerto Rico rum producers would receive an additional $60 million-$65
million annually. Increased incentive payments to local rum producers
help keep Puerto Rico competitive and retain a valuable industry for
the island as well as providing additional funds to continue providing
services such as public safety, education and healthcare to our
citizens.
______
The Chairman. Thank you very much.
Dr. Hice. Mr. Chairman----
The Chairman. Go ahead.
Dr. Hice. Could I ask, in light of the fact that we are
just getting this written statement, we have not had the
opportunity to read it and develop, do the homework that we
should do, that we postpone this hearing until we have time to
go over the written statement ourselves and do adequate
homework?
The Chairman. I think at this point, with all due
deference, my friend, that we're going to proceed with the
hearing. We've had people that have made the arrangements to be
here. I understand the dilemma. I mentioned it. The Ranking
Member mentioned it. But I think for the sake of the Committee
and the sake of the witnesses that it's probably best, with all
due respect, that we continue this hearing.
Dr. Hice. OK. Thank you, sir.
Mr. Bishop. Mr. Grijalva, if I could just quickly jump in
on this?
The Chairman. Yes, please.
Mr. Bishop. I realize the dilemma, the legitimacy of the
request. I also realize the dilemma the Chairman is in, in this
particular situation. And obviously, because of the lateness,
and actually during the testimony especially, the specifics
you've started to go into, it would be wise, once again, to
replicate this hearing and do it again. But I think the
Chairman is right. For all those who have traveled great
distances to be here, it would be a shame for them to not be
able to at least express themselves. And then, to add to it,
obviously we're not going to have the final conclusion here.
This should be the first of some of those discussions. But I
think your point is well-taken.
Dr. Hice. I agree, sir. It's just tremendously
disrespectful to this Committee to----
The Chairman. Thank you very much. With that, let me begin
the questioning, if I may. Governor, I think you've repeatedly
said that you respect the authority of the Board to set
financial limits for the territorial government. But the Board
should not, as you were stating, make territorial policy or
micromanage governmental organizations. Policy should be made
by Puerto Rico's elected officials. We shouldn't make
administrative management decisions as well. Can you define the
word ``policy,'' in that? Because a wide range of policies also
affect financing. Just for clarification.
Governor Rossello. Well, here's the other--and let me just
state for the record, that I've made myself available
previously. I've made myself available afterwards as well to
answer these and any other questions concerning Puerto Rico, so
should you need more time, I would of course oblige to that.
Over the policy argument, what I'm stating is that there is a
fiscal and financial consideration in Puerto Rico, and we've
recognized that. Originally, and this was said by several of
the board members, that the role of the Oversight Board was to
set the size of the room, which means the amount, the broad
amount that would be spent, but that the Government of Puerto
Rico would be able to fix it and establish where the furniture
and where the structure was.
So, based on that, the interpretation is, we recognize that
there is a top-level spending limit. But when it becomes
problematic is when it goes on a granular level to itemized
actions within the budget that inhibit the proper execution of
government, and inhibit the proper flexibility of government.
If there is any event that exemplifies the need to quickly
adjust, it was Hurricane Maria in Puerto Rico. Priorities
changed quickly then, and we need to make sure that we have
flexibility to adjust to that. But even in the aftermath of
Maria, waiting for budget reapportionments for months, items
that should be determined quickly should not be a problem,
number one. Number two, there should be no strong-arming
efforts by the Oversight Board in limiting some of those
pockets, in order for us to agree to other policy measures that
quite frankly are, in our understanding, not in the best
interest of the people of Puerto Rico.
So, designing the platform in terms of socially and the
future of Puerto Rico, those policy decisions lying within the
grasp of the Government of Puerto Rico. And I'm very sure,
because I saw the legislative attempt was that the people of
Puerto Rico and the Government of Puerto Rico held that power.
The Chairman. Let me see if I, I'll try to get one more
question in, and then turn it over to the Ranking Member.
History is littered with examples of poorly designed debt
restructuring exercises that soon unraveled at a great economic
and human cost. Is the COFINA agreement one such poorly
designed restructuring exercise, because it saddles Puerto Rico
with escalating debt payments over the next 20 years? Does the
COFINA deal also set a dangerous precedent, because the General
Obligation bondholders will not accept anything less at this
point than the same terms?
Governor Rossello. Well, the objective of setting a fiscal
plan and establishing a debt sustainability model was that we
could start renegotiation of the debt, and within Title III,
start getting to some agreements. We sat down. In this effort,
we've worked with the Oversight Board to identify what are
decisions that would be in the best interest of Puerto Rico. We
have dealt with over $21 billion of the outstanding debt. We
have restructured that debt in the benefit, in my view, of the
people of Puerto Rico, reducing significantly the amount of
that debt. Within the instrument that we have, and within the
fiscal plan that's being established with having the surplus,
we feel that it is a decision that is in the best interests of
the people of Puerto Rico, a reduction in the debt payments
moving forward. And again, the remaining credits, we're going
to have to continue on dealing with that, and eventually have a
decision on Title III court.
The Chairman. Ms. Colon, go ahead.
Ms. Gonzalez-Colon. Good morning, Mr. Chairman. And good
morning and thank you, Ranking Member Bishop. Welcome,
Governor. Obviously for your statement, I think the first
question in a hearing like this is, is the very existence of
PROMESA not an example of the effects of the inequality that
Puerto Rico has been treated for more than 100 years?
Governor Rossello. Yes. I think this is, this is part of
the statement that I wanted to address. There are certain
things and certain petitions, aside from changes making to
PROMESA. There is an inherent inequality with the treatment of
the people of Puerto Rico. So, while I hear some of you mention
that we need to wait, I don't think that that is appropriate.
Civil rights don't wait. The democratic rights don't wait. And
inequality does not wait. We need to find a path forward, and
the people of Puerto Rico have voted twice for that. There are
outstanding petitions, many of which you have submitted as
well, Madam Congresswoman, in order for us to have equal
treatment on certain areas. Earned Income Tax Credit, for
example. We have to implement our own. We don't have the
Federal kind. Child Tax Credit. Fair treatment in Medicaid so
that we don't have to be on the cusp of a cliff every other
year.
NAP relief. So, an equal treatment on the NAP program,
which by all accounts, essentially every other jurisdiction
within the United States is treated under this NAP program, and
that puts us in a less competitive area, receiving about $1.2
billion for those vulnerable populations that would receive
under the NAP program.
But, of course, on top of all of that is the underlying
inequality of being a territory of the United States, a
colonial territory of the United States. And until we address
that problem, we will always be finding what the differences
are in Puerto Rico and why these differences are therein. So, I
ask this Committee and I ask Congress to move along with this
agenda as well. Help us prosper with economic initiatives that
you are proposed in a bi-partisan, bicameral report, and that
we get some results for the people of Puerto Rico, and true
equality.
Ms. Gonzalez-Colon. You just talked about the report of
PROMESA in 2016. And that was a bi-partisan report and a
bicameral report as well. That report mentioned more than 40
Federal laws that treat Puerto Rico differently than a state.
Governor Rossello. Yes.
Ms. Gonzalez-Colon. And a lot of the issues that Puerto
Rico is facing today regarding healthcare, infrastructure,
security, among others, are included in that report. A lot of
those measures are being introduced in last quarter and this
one in a bi-partisan way, but still some of those issues are
not being managed. Do you think that projections for growth in
revenues under the approved fiscal plan, Puerto Rico can
recover and we can begin a final legislation agreement, as they
are expected?
Governor Rossello. There's a lot of variability. Just take
the Medicaid bill. If you extrapolate it toward the future,
we're talking about dozens of billions of dollars difference,
one way or the other. If you tack onto that other of the items
that are being established, it's the difference between Puerto
Rico having a sustainable path forward or relapsing into a
problematic past. Listen, if there are bills, as you mentioned,
Congresswoman, that have been submitted in a bi-partisan way,
in a bicameral way, why are they not moving forward? Would this
happen elsewhere? Let's see how we can address the growing
problems that Puerto Rico has structurally. As I mentioned in
my statement, we're doing our part. We're making budget cuts.
We're changing different items, so it's time for the Federal
Government to step up.
Ms. Gonzalez-Colon. Governor, what is for you the main
challenge Puerto Rico got under PROMESA in order to reform
government?
Governor Rossello. The main challenge is the continuous
day-to-day operations problems that we entail by having the
Oversight Board overstep its boundaries. The Oversight Board
should make sure that the expenditure at the high level doesn't
go beyond that. It should also be potentiating economic growth
initiatives. That's what the statute says. It's not doing that.
And it should also be working with the Title III and debt
restructuring efforts. Unfortunately, most of its effort has
been on a very granular level, trying to micromanage certain
aspects of government. That is having more government. That is
having a lot of areas of lack of accountability and that is
delaying some of the execution of things that we want to
implement, so that, I would say is the single biggest problem.
It's the day-to-day pragmatic operations, the insistence in
overstepping those boundaries that I would hope that after this
Committee ends, we could consider attacking and tackling that
problem.
Ms. Gonzalez-Colon. Thank you, Governor. I yield back.
The Chairman. Mr. Michael San Nicholas.
Mr. San Nicholas. Thank you, Mr. Chairman. Governor, going
through your written testimony, I was particularly drawn to
page 11, where you list what is working about PROMESA and what
is not working about PROMESA. And I wanted to go ahead and
maybe use a minute or two of time to elaborate on what is
working and also more particularly what is not working, and
perhaps what your recommended solutions would be to address
what is not working about PROMESA.
Governor Rossello. Yep. So, I think that we did need a
restructuring-type of platform, and that, as we have shown with
COFINA, with the efforts in GDB, and the discussions that are
being had with PREPA, things are moving along, and we are being
able to restructure that. So, folks might have an opinion on
how that restructuring is working, but the truth of the matter
is that it is moving forward. It is working. We are reducing
the debt load on Puerto Rico.
The problems, again, and I will enumerate them. I think I
stand by the main objective being the insistence of infringing
in the operational day-to-day efforts of government, and on the
overstepping the boundaries to impose public policy that should
be directed by the elected government of the people of Puerto
Rico. So, I would say that those are essentially the most
glaring problems.
Of course, I reiterate my position prior to the PROMESA
bill and so forth. An Oversight Board, by its nature, it is all
democratic. It allows for a lot of the problems that we are
seeing, the delayed processes, the more expended government,
lack of accountability on their part to inhibit the process of
rebuilding Puerto Rico. So, those would be my higher-level
comments on PROMESA.
Mr. San Nicolas. Could you give us maybe two of the
biggest, most glaring examples of the overstepping into public
policy and the operations of government?
Governor Rossello. Yes. So, the first one, it was treated
in court, was trying to take over PREPA. Trying to take over
PREPA, mind you, with the same person that was running a failed
effort on Title V. So, that is clearly one of the problems. The
second one is we have established public policy measures that
we want for our folks in order to have resources and they have
just been stricken out on the budget. Completely stricken out.
I will give you a few examples. After the hurricane,
particularly, there is a lot of investment on roads to be built
back up, and there should be because there has been, in the
past, monies allocated to cleaning those roads. There were no
monies allocated to cleaning those roads when we asked for
them. We asked for a reapportionment of that, and it was
denied. So, something that might seem very simple, but that it
is a clear indication of how things are going in Puerto Rico
when you have cleaner roads structured and so forth, and we can
have the money to invest.
That was denied because even in our first budget that we
submitted, they struck it out, they put zeroes on it, and the
reapportionment did not flow through.
Mr. San Nicolas. So, your position is that the decisions
like that by the Board is actually an impediment to Puerto Rico
being able to achieve its goals of being able to restructure
its debt and meet its obligations on its own terms?
Governor Rossello. Listen, all of us have to take public
policy decisions, right? And if we want to invest on education,
we have to establish--let's say we want to implement the STEM
program. That has a cost. We have to establish that cost, and I
recognize that we have to reduce the costs in Puerto Rico. As I
mentioned earlier, we ran on a platform of reduction, and we
are doing it, but you have to let the Government of Puerto Rico
decide where it invests and where it doesn't.
It is not up to the Board to decide that and this is a
singular, but very important point. If the Board sets the limit
on the expenditures, we, as policy makers, have to decide where
we are going to invest that money, where we are going to invest
more, as I proposed in this occasion, investing more on
education, and where we are going to invest less, as I proposed
reducing 50 percent of the operational cost in other areas of
government.
So, those are the decisions that should be left to the
Government of Puerto Rico, but that we have been having endless
and litigious battles at some times to achieve.
Mr. San Nicolas. Thank you, Mr. Bishop. I yield back.
Mr. Bishop. Thank you, Governor. Once again, thank you for
being here. I appreciate that in your opening statement you did
say that when you were running for governor, the idea of an
Oversight Board was not even contemplated. That is just
factually wrong, but I appreciate your willingness to be here,
and I am going to look forward to reading the testimony that we
got from you 15 minutes ago.
I do have a couple of questions, though, if we can get
through this in the time that is allotted. Your administration
and the Oversight Board were working together to enact
substantial labor reforms that would have made it easier for
people to find jobs and reduce the administrative burden of
formal employment in the market. When that failed the
legislature, I believe the Board, and we will ask Natalie to
verify this later, removed the structure reform from their
certified fiscal plan and with that, also removed the
corresponding economic growth projections that were there.
Without this kind of incremental structure reform, the
island's economy probably will grow at an anemic pace and the
level unable to sustain long-term budgetary needs of the
people. So, can you tell me why this or how this effort failed,
and then how is your administration going to continue to try,
or will your administration continue to try to pursue these
types of reforms?
Governor Rossello. Sure. I will do so, but I would also
like for the record to correct the initial statement that you
made, Ranking Member. I started the policy-making process in
2011. By that point, there was no talk of the Oversight Board,
and that----
Mr. Bishop. You said it was when you were running for
governor.
Governor Rossello. No. That is part of the effort of
running for governor, establishing a policy----
Mr. Bishop. OK. And how you are going to actually get the
reforms in there?
Governor Rossello. The what?
Mr. Bishop. Why did it fail? Are you going to try to keep
those reforms going?
Governor Rossello. So, you are just talking about one
reform. You are talking about one of the labor reforms that was
established. I would like to remind you that we did pass labor
reform in Puerto Rico in our first month in office, and that--
--
Mr. Bishop. Then tell me why that reform failed. How did
that reform fail?
Governor Rossello. We submitted. We achieved an agreement
on the executive level with the Oversight Board.
Mr. Bishop. OK.
Governor Rossello. There were certain elements that were
agreed upon. It went to the legislature, and it did not pass on
one of the chambers of the legislature.
Mr. Bishop. So, are you going to re-enact that? Are you
going to still work forward to try to pursue that reform?
Governor Rossello. Listen, getting stuck on that one reform
is missing the big picture. There are other reforms that are
going----
Mr. Bishop. I don't care about the big picture. I am asking
you about that reform. Is your administration going to be
working to try to implement that reform?
Governor Rossello. No.
Mr. Bishop. All right. Then, when the Board actually comes
up for their testimony, I think that one of the questions I
will have for you is, ``How does that make your projection?
What is the impact of that kind of reform on your
projections?'' In fact, one of the things, if you are willing
to do it, because we will obviously run out of time with
everything that is going on here and I want to give some other
Members a chance to ask some questions, there are a list of
potential reforms that are structural, from labor, to welfare
to work, to ease of doing business, physical planning. If I
were to send that list to you, could you give us in a written
statement a response to how those should or could be
implemented going forward in the future?
Governor Rossello. Yes, of course, and many of those are
already being implemented.
Mr. Bishop. All right. Thank you----
Governor Rossello. I will give you an update on how they
are being----
Mr. Bishop. Wait a minute. I'm sorry, but there is a red
light in there. I have to watch that one. I want to yield back
so that other Democrats have a chance to ask questions before
we have to go vote. I have another minute and a half? Give it
to somebody.
The Chairman. Next on our list in terms of arrival, Ms.
DeGette. Any questions, comments?
Ms. DeGette. I believe Mrs. Velazquez was here before I
was.
The Chairman. Mrs. Velazquez?
Mrs. Velazquez. Welcome, Governor.
Governor Rossello. Good morning.
Mrs. Velazquez. Do you think any of the debt issued by the
Commonwealth or its instrumentality is illegal?
Governor Rossello. What I think, there is a process that
should evaluate that and if it is illegal, then the proper
proceeding should occur.
Mrs. Velazquez. So, if the debt issued is illegal, what
should be the consequences?
Governor Rossello. Well, those are the elements. There are
several things that our lawyers have told us about if the
issuance is illegal. There is a school of thought that the
payment shouldn't happen. There is another school of thought
that the full payment incurred by the creditor should be
accredited to that group. So, there is a wide range of results
on that basis.
Mrs. Velazquez. Do you support the Board actions to
invalidate the $6 billion once issued during Governor Fortuno
and Garcia Padilla's administration?
Governor Rossello. I support the examination of all of the
credits, and a proper examination, and seeing that everything
was done under----
Mrs. Velazquez. The Board concluded that it is going to
invalidate.
Governor Rossello. Right. That is going to take it and
there is going to be a process and, of course, it will be
determined in the court.
Mrs. Velazquez. And do you support the Board taking action
against government officials or advisors that recommended those
from issuance?
Governor Rossello. I don't have the elements with regarding
to that. If there is evidence that there was wrongdoing in
anything within the government, of course it should be
pursued----
Mrs. Velazquez. OK, and if it is proven that individuals or
firms that participated in the issuance of illegal debt, if it
is proven, at minimum, do you think that they are morally
responsible?
Governor Rossello. Well, again, it has to go through a--we
are a jurisdiction of law and order. We respect the courts and
that process and whatever the determination, we will follow it.
Mrs. Velazquez. And if the Board could demonstrate that the
debt issuance was illegal, would you or the government fire any
of such individuals if they are currently working for the
government?
Governor Rossello. Of course, if there is any wrongdoing,
our position has been very clear.
Mrs. Velazquez. So, has your administration ever persuaded
the Oversight Board to reverse a decision to reduce a budget
that, if implemented, will harm essential services.
Governor Rossello. We have had a lot of discussions with
the Board. A lot of the things that come outside are a lot of
the controversies that we have, but there are certain things
that we have been able to work throughout. The recent
rightsizing of government, and there have been measures in
order to implement that.
We have identified several areas, and now the best evidence
will be in this budget where we are making a change from a
traditional budget to a policy-based budget, and there are
going to be clear indications of where we are investing, and
where we are reducing. After that budget process has passed, we
will see that answer more clearly.
Mrs. Velazquez. And Governor, I heard you loud and clear
regarding the interference of the Board micro-management. That
is your characterization of it. Do you support Senate
confirmation of the current seven members that have been
nominated by the Trump administration?
Governor Rossello. Well, I support the process to be
evaluated. It eliminates uncertainty. There was a lot of
uncertainty in this process. Now, it is going to be up to the
wisdom of the Senate to determine if these seven members are
qualified. They have evidence. They can ask questions. They
should evaluate. There should be accountability, and on the
basis of that, then they should make their recommendations.
Mrs. Velazquez. And have you ever proposed debt cuts to the
University of Puerto Rico's budget in your fiscal plan?
Governor Rossello. Based on the initial petitions, higher
level petition of the Oversight Board, we had been working
through those. Of course, the University has autonomy and the
president of the University and the governance board of the
University are working to try to meet those goals. Of course,
it is a significant challenge, and one of the things that we
are trying to identify is outside resources to come to the
University so that they can yield services and get more
resources for their efforts.
Mrs. Velazquez. I am sorry, I didn't follow you when I
asked you if you have ever proposed cuts to the budget. A cut
in this fiscal plan----
Governor Rossello. There has been a fiscal plan. The fiscal
plan is not determined by the governor. It has been worked with
the efforts of the governance board and the president of the
University.
Mrs. Velazquez. I yield back. Thank you, Mr. Chairman.
The Chairman. We leave thereafter. I appreciate your
indulgence, Governor. We will be back immediately if other
Members have questions. Thank you very much.
Governor Rossello. I will stay here.
[Recess.]
The Chairman. Let me call the hearing back to order. And,
turning to Mr. Lamborn for your comments, questions.
Mr. Lamborn. All right. Thank you, Mr. Chairman.
Governor Rossello, there have been instances where the
Oversight Board has advised your administration not to take a
particular action because they judged such action would violate
either the certified fiscal plan, the budget, or cause harm to
the local economy. Specifically, you chose to ignore the Board
in continuing issuing Christmas bonuses to public sector
employees against its recommendation, and you also, under
Executive Order 2018-33, raised the minimum wage to $15 an hour
for public infrastructure projects that utilize Federal
disaster relief funding. This was against the recommendation of
the Oversight Board and the local business sector.
Why did you ignore the recommendations of the Board?
Governor Rossello. Thank you for your question, sir, and in
terms of the Christmas bonus, it is important to compare what
public servants in Puerto Rico earn, their cost of living, and
how we compare them to those public servants that are in the
states. We can facilitate that for the Committee for their
evaluation, but in general, we are talking about anywhere from
1\1/2\ times to 2\1/2\ times higher earnings in the states for
similar jobs than what they're receiving in Puerto Rico.
The Christmas bonus--yes, it has that name, but essentially
it makes an attempt to mitigate for what is clearly inequality
in terms of the earnings of these public servants, and have
them have that additional access. And even with that access,
still the differential is enormous.
So, while the Oversight Board recommends that it is law,
and we are committed to providing that service. We heard their
arguments, but our view is that this is something that's
important for Puerto Rico in terms of the minimum wage--or do
you want me to answer something regarding that part?
Mr. Lamborn. Yes. Yes, please finish and then I'll ask
another question.
Governor Rossello. OK. In terms of the minimum wage, we
have to look at this in the context of everything that is
happening in Puerto Rico. We have a labor force in the
construction industry that numbers only 45,000. The estimates
are that we're going to need 150,000 folks to join the
construction industry for these efforts. We're going to have to
drive either people, folks, that are out of the labor force in
the informal economy to the formal economy. That is why we have
supported welfare-to-work efforts, Earned Income Tax Credit.
But we really wanted to drive them to the construction sector.
One of the incentives that we wanted to give as a driver
and as a measure to tackle the gross inequality that exists in
Puerto Rico, which in terms of the Gini index, it is the
highest in the United States and it is one of the highest 10
jurisdictions in the world.
Mr. Lamborn. Let me interject at this point. Thank you. I
have one last question. I just want to comment and say I
understand your intentions, but in light of the massive
deficits, I think you made the wrong decision.
OK. However, having said that, another question. A key
component of establishing PROMESA and the Oversight Board was
to promote financial transparency. However, the Commonwealth
has only produced one set of audited financial statements, and
that was for Fiscal Year 2014 and 2015, which was not a clean
audit, and this meant that external audits are unable to verify
that information provided by the Commonwealth was reliable.
Has the Government completed financial audits for Fiscal
Years 2016, 2017 or 2018?
Governor Rossello. Yes, we are in that process, sir, and if
I may, I'd like to explain why this has taken so long.
Particularly, 2015 was a critical year. The way that government
used to operate, there was a lack of visibility as to how
government itself would borrow from other, say, public
entities, if they were accountable within the budget or not,
and it turns out in many cases they weren't.
So, there had to be a robust effort to get those 2015
audited financial statements out, and I think that the CFO just
made some comments about this about a week ago, and our
commitment is that, within the next weeks, we're going to have
the 2016s and then, hopefully, the rest of them can follow
soon. We want to make sure we're on time with that. We
recognize that this is a tool for accountability and we are
working hard in order to get those audited financial
statements.
Mr. Lamborn. I'm glad you're working hard on those. Those
are way overdue. It will help establish credibility for
responsible fiscal management when you can finish that, so
thank you for doing that.
Mr. Chairman, I yield back to you.
The Chairman. Thank you.
Mr. Soto.
Mr. Soto. Thank you, Mr. Chairman, and thank you, Governor,
for your strong leadership to help Puerto Rico recover from the
brink of collapse--the brink of collapse from Hurricane Maria
and Hurricane Irma--dealing with the crisis of the debt and of
PROMESA, and literally doing it with one hand tied behind your
back based upon the colonial status and based upon having to
lead within the confines of the PROMESA Board. So, thank you
for that and thank you for being here today.
I just wanted to make sure we're clarifying right, so the
PROMESA Board should be helping to determine the big budget
number, but the day-to-day operations, the individual line
items, those should be the sovereignty of the Puerto Rico
legislature along with the governor.
Governor Rossello. That's right. That's our petition. It
just makes sense, not only on the democratic level, but also
just pragmatically.
Mr. Soto. And then, would you support having some priority
status for worker pensions and potentially the University of
Puerto Rico? We heard a lot on our recent trip down there about
trying to help those two areas.
Governor Rossello. Yes. I mean, we've been working, we've
been sitting down with both areas. Of course, again, within the
confines of the University there is high-level ceiling. One of
the alternatives that we are trying to provide is higher
outside funding, own funding from the University. They can get
that through services, for example, that could be given to our
community.
As a matter of fact, I would like to point out one
executive order that I signed, which was directed toward that.
It was signed before the storm. We started doing some effort so
that the University of Puerto Rico could give some of the
services that our central government was asking for in the
private sector and elsewhere. We are retaking that effort again
and, hopefully, giving it the resources it needs.
Mr. Soto. And then with regard to the audit of the debt, I
know the PROMESA Board has undergone an audit that audits
public, but the underwriting documents aren't public, to allow
for other independent audits. Is that something that you think
would be helpful to allow for--to have those underwriting
documents be public so that there can be independent audits?
Governor Rossello. With me--over here is a former president
of the bank and current member of the Oversight Board,
representative of the Oversight Board. When this discussion was
had in Puerto Rico, he opened up his office so that anyone that
would want to do an audit could get the papers, and I think
that invitation--all of the documents--and that invitation is
still open.
So, yes, anybody that wants to run an audit, anybody that
wants to utilize the public information that we have
accessible, can certainly come and get it and we would, of
course, support that effort.
Mr. Soto. You know, it's important to remember where we
used to be and where we are now. In 1984, for reasons unknown,
Puerto Rico was actually removed from Chapter 9 bankruptcy, and
that's what set off this issue of it not being able to declare
bankruptcy and having to come to the Congress and, obviously,
that was something that was done under great stress.
Walk me through, because we're talking about different
changes that you're suggesting from the Child Tax Credit to
Earned Income Tax Credit to Medicaid parity. How much of the
debt that was accumulated before you ever got to office was
because of those shortfalls, like Medicaid parity, and having
to make up for those Federal inequities?
Governor Rossello. Well, let's take Medicaid, for example.
The initial step is you visualize it as, of course, resources
for health care, but at the same time if those resources are
necessary and you still want to provide health care as a
priority, you're going to have to get that money from somewhere
else.
So, what it provokes to us, as opposed to other
jurisdictions within the United States, is that we're going to
have to get more from our general fund to pay for those
resources. Aggregate that across a whole host of programs, some
that we get that we don't get the fair share, and yes, that is
one of the reasons. I mean, I'm not saying that there hasn't
been mismanagement. As a matter of fact, we are tackling that
effort. We recognize that there needs to be transparency, and
one of the reasons with the audited financial statement was
precisely because of that lack of accountability and lack of
mismanagement.
But make no mistake about it. The biggest driver over here
is the inequality that we have in Puerto Rico. Yes.
Mr. Soto. And I'm glad you mentioned that because it
appears that when you look at the debt or you look at the
recovery crisis, a lot of those are symptoms of the ultimate
issue of status. If there was sovereign immunity, we wouldn't
need a PROMESA Board. If there was a full delegation fighting
for disaster relief, I wonder whether Puerto Rico would have
the same treatment it's getting now. Obviously, those are
issues I'm working on with Congresswoman Gonzalez-Colon and
issues that we look forward to tackling here in the Natural
Resources Committee, and I yield back.
Governor Rossello. Yes. And I thank you both for your
leadership on this matter because it is the single most
important issue on the table right now: how do you get equality
so that all of these chronic problems that we have in the past,
with structural reforms, and we can solve them, but that we can
solve them in a sustainable fashion, and second, just being
fair, just and equal as U.S. citizens.
The Chairman. Thank you.
Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman. First I need to
distance myself from some of the praise of PROMESA we've heard
from several of our Members. I think PROMESA has been a
disaster. Certainly, it has not accomplished what we were
promised it would accomplish or you wouldn't be here today and
we wouldn't be here today rehashing it over and over. And I
think one of the damages that PROMESA caused was to shatter the
trust that investors have when a state or territory pledges its
full faith and credit to the repayment of debt. Some of the
fiscal problems that are facing Puerto Rico right now, I think,
arise from that breach of trust. I warned at the time that we
considered PROMESA that this would happen, and I'm saddened to
see that that warning proved accurate.
What particularly concerns me is that underwriters and
investors are looking at PROMESA's repudiation of debt, and now
they have to recognize that whenever a state or territory
pledges its full faith and credit, there's a risk that didn't
exist before that they're now going to have to price into the
rates that they're willing to loan at. And in short, Puerto
Rico's fiscal irresponsibility--that was enabled by this
Congress through the PROMESA--is now increasing borrowing costs
throughout the municipal bond markets, which means higher costs
for infrastructure in our communities.
Governor, you said that the Financial Oversight and
Management Board is undemocratic. I couldn't agree with you
more. I think that one of the very damaging parts of PROMESA
was that it diffused the responsibility over the fiscal affairs
of Puerto Rico; it confused accountability over who was
responsible; it made Congress a party to the mess that was
created in Puerto Rico and should have stayed in Puerto Rico.
And again, I think that's the greatest tragedy of all of
PROMESA.
My state, particularly a few years ago under Governor
Schwarzenegger, was very badly managed to the point where he
came to Congress asking for a bailout. As a Californian, I said
no--a mess that is made in Sacramento needs to stay in
Sacramento, and I think the same principle applies to San Juan.
All of that said, we look at the recommendations of the
Financial Management Board and find how few of them are
mentioned. For example, the Oversight Board recently notified
your chief financial officer that 28 public corporations and 66
municipalities have accrued $340 million in debt since
implementing the PayGo system in 2017.
So, my first question would be, what's your administration
doing to rectify this and ensure that government pensions are
paid at all times, as required by law?
Governor Rossello. Right. Certainly, by changing to a PayGo
system, the central government needs to make sure that it has
the proper systems in place so that the revenues can get to
where they need to achieve. We have been having problems that
have dated back previously. Even when it was a fund, there were
also limitations on what the municipalities could share.
But it is our job to continue on examining this first
iteration of the PayGo system to make sure that we make the
appropriate cuts where we need to, and that we invest on the
PayGo system, and that's why----
Mr. McClintock. But again, according to the Board, though,
you're not doing that. The president of the Board was in print
recently suggesting a whole range of reforms--labor reforms,
welfare to work--that the Board has recommended that the
Government has simply refused to implement. My colleague
mentioned the Christmas bonuses. I could mention the enormous
fees being charged for consoling, the failure to adopt a
uniform health care benefits savings measure that was proposed.
I could go on and on through a long list of things--audits that
have never been prepared that are owed. All of these things
recommended by the Management Board and the Puerto Rican
Government drops the ball.
Governor Rossello. No, let me correct you on that, sir. We
have been implementing measures. We have been reducing cuts.
We've made the biggest, budget-wise, in the modern history of
the United States: 17 percent from one fiscal year to the
other. We've consolidated agencies. We're about at 20 percent
consolidation. We've reduced over 2,000 employees with certain
transition programs that we've implemented. And we've started
executing a lot of the transformational reforms.
You talk about labor reform. We actually did a labor reform
on my first month in office that had always been talked about
but never executed. Now, welfare to work--we welcome that. We
are establishing that as part of a policy. It's a matter of how
do we implement that and where do we implement it.
But a lot of these things--sometimes we fixate on one issue
of labor or one other issue. When we see the whole stratosphere
of and platform of efforts that we are making and the
transformational impact that's going on in Puerto Rico, it is
significant and it is different to any other point in time.
The Chairman. Mr. Gallego.
Mr. Gallego. Thank you, Mr. Chairman.
Governor, thank you so much for being here today to
testify. According to the Puerto Rico Fiscal Agency and the
Financial Advisory Authority's latest public statement,
Hacienda has a total cash balance of $5.75 billion. Currently,
while there's a stay on debt-service payments and with money
slowly trickling in, some creditors are suggesting that because
Puerto Rico's financial position is stronger, they should be
getting ``better deals.''
How would you respond to this suggestion? Additionally,
what would the consequences be if Puerto Rico did not have
access to a comprehensive authority, like PROMESA, to allow it
to restructure its debt?
Governor Rossello. Yes. I think, as I mentioned in my
written statement, there are some good things and some bad
things. Having a restructuring platform is important for us to
move over because, before, we didn't have anything.
Regarding the cash balance that Hacienda has, really, if
you look at it, it's because we're in Title III, and that
includes monies from COFINA, that includes excess Federal
funds, say, from Medicaid and other sources that will be used
appropriately as they need to. So, it is not an indication of
just all of these things all of a sudden getting this enormous
cash balance that will be sustained. No, it is in large part an
artifact of Title III, and obviously, once you get to the
renegotiation or restructuring of the debt, then a lot of that
money is going to be used for that.
Mr. Gallego. Just to follow up, could you tell us what
public asset bondholders would have legal rights and claims to
if Puerto Rico didn't have this debt structuring authority?
Governor Rossello. So, we didn't have any outlet, so this
was necessary. The only thing that we had in our hands was I
would say the space to renegotiate, sit down in goodwill terms,
but not a legal framework to do so.
Mr. Gallego. Great. Moving on. Section 21(b)(1)(B) of
PROMESA requires that fiscal plans certified by the Oversight
Board ensure the funding of ``essential public services.''
However, PROMESA does not provide a definition of those
services and neither the Oversight Board nor the Government of
Puerto Rico have so far provided a definition of that concept.
That's very worrisome for me given that the Board has
already certified fiscal plans for the Commonwealth of Puerto
Rico and many of its public corporations and it has approved
two debt-adjustment plans so far.
Governor, how would you define essential public services,
and do you think PROMESA needs to be amended to include a more
specific definition of the term?
Governor Rossello. Here is one of the challenging parts
about all of this, is how we decide that and how does that
definition interfere with priority setting from a government,
and what are more tactical processes that are going about.
Here's the way I see it. The way I see it is we have to
take a good look into our government and see what processes are
ineffective and which ones we need to eliminate. We've been
doing that. We have to see which other services or processes
can be externalized either to the private sector, not-for-
profits or otherwise.
But, of course, there are certain larger-scale components
that I think should be essential services, such as education,
such as health care, and so forth. But also within that is the
process for an administration to determine what its priorities
are within a limited budget, and sometimes it's kind of the
battle of not having accountability. If you ask somebody where
there is a platform without accountability what's your priority
or this A, B and C are priorities, they'll say yes to all of
them.
But really, once you have a limited budget, you're really
going to have to be very clear if you want to invest in certain
areas. We've been very clear, for example, that we want to
invest in this coming budget $400 million on education. It is
important for us. We see Puerto Rico has opportunity to
flourish as one, where we develop our human resource and given
the opportunity to learn. And whether we have to cut back on
other areas, that one should be one of the ones that are
priority-based, and they should be flexible for the
administrations to determine.
Mr. Gallego. Great, thank you. I yield back.
The Chairman. Ms. Radewagen.
Ms. Radewagen. Thank you, Mr. Chairman. I'd like to yield
back my time to Ms. Gonzalez-Colon. And welcome, Governor. Good
to see you.
Governor Rossello. Thank you, Madam Congresswoman.
Ms. Gonzalez-Colon. Thank you, Ms. Radewagen, for your
time.
And, Governor, a few minutes earlier we were talking about
labor reform, and I think one of the issues that was included
in that petition from the Board was including a law requiring
severance pay for employees fired without a cause.
Governor Rossello. Yes, of course. Yes.
Ms. Gonzalez-Colon. And the Board said that it was needed
to stimulate investment to create many new jobs on the island.
So, many of that revenue from the economic growth will be about
a billion dollars per year, not just in 5 years, but in the
first fiscal plan. The Senate passed that repeal requested, but
for all new hires, not for the existing ones.
Firing current employees without a cause will contribute
nothing to the Board's stated purpose of creating new jobs.
That's one of the issues that was included in the law--in the
labor reform.
Governor Rossello. Right.
Ms. Gonzalez-Colon. Can you please provide in the next days
all the items that were included in the labor reform that were
approved, and at the same time, all the measures and reforms
that have been implemented since you've been sworn in as a
governor in terms of reducing cost and making the reforms that
the Board has asked for?
Governor Rossello. Yes, of course.
Ms. Gonzalez-Colon. My second question will be there is an
issue about the PROMESA and the Financial Board, saying that
the Board is part of the territorial government. This was done
in PROMESA to try to actually insulate it from the government,
from cost to Puerto Rican bankruptcy, especially in light of
the 2017 Supreme Court decision concerning Guam bonds,
recognizing that insolvency for a territory government created
and ultimately controlled by the Federal Government will cost
the Federal Government more money.
Having said that, the U.S. Court of Appeals for the First
Circuit and the Congressional Budget Office have judged that
the Board should be a Federal agency, and the U.S. Court of
Claims has rejected this argument, saying it's not. The Board
does not answer to the legislative assembly of Puerto Rico or
to you, as governor, and people on the island even refer to the
Board as a Federal entity.
Do you consider the Federal Board as territorial
government?
Governor Rossello. Well, I certainly see that there is a
space where there is lack of accountability for this entity
that we need to push forward. That is why I am recommending
that for us, as stakeholders, U.S. Congressmen and
Congresswomen, myself in the executive, we have to be held
accountable and we have to showcase a lot of things in a novel
manner that hadn't been done previously in Puerto Rico.
What we're asking is that the same bar of accountability be
applied to the Oversight Board so that we can see what they're
spending the Commonwealth of Puerto Rico's money on, and see
how it is impacting one of the three items that they are
designed to comply with, which are either allowing us to have
fiscal sustainability, economic growth toward the future, or
attending to the debt restructuring effort.
Ms. Gonzalez-Colon. One of the issues--and I think this
should be clear in terms of the PROMESA law--it's supposed to
be about long-term debt restructuring and returning to sound
fiscal management, as it states, and about economic stability.
Too much has been focused on fiscal accounting instead of the
proposals for economic growth that were part of the PROMESA
Task Force report that I just mentioned, in 2016.
Without the economy growing, there's no fiscal measure that
can be itself providing stability, and that should be the focus
of what other issues can we manage here in Congress.
So, my question will be in terms of what specific measures
do you recommend this Committee to be looking for and taking
place in order to help to accomplish both the mission of the
Board but, at the same time, the growth and stability of the
island? And I know you have just 30 seconds, so whatever is
left, you can send it in writing.
Governor Rossello. OK, I'll be quick. For all Congress, NAP
funding is critical--equality in that treatment; Medicaid
parity and Medicaid sustainability as measures that we need to
move forward; Earned Income Tax Credit so that we can
potentiate a growth of the labor market; Child Tax Credit so
that we can start reducing the enormous poverty rates in Puerto
Rico; and, of course, working with our tax system so that it's
one that works for everybody.
But the final one and the most important one is getting
equality for Puerto Rico. If we continue as a colonial
territory, we will always be treated unequally, there will
always be a debate for one reason or another. Until we have
equal treatment and the will of the people of Puerto Rico is
followed, as has been executed twice in the past 7 years, then
we will always be treated unequally.
Ms. Gonzalez-Colon. Thank you, Governor, and I will want to
file the rest of my statement for the record, and I want to
introduce unanimous consent to include the statement for the
record from the Senate president of Puerto Rico.
The Chairman. Without objection.
[The information follows:]
STATEMENT FOR THE RECORD
Hon. Thomas Rivera Schatz
President of the Senate of Puerto Rico
Chairman Grijalva, Ranking Member Bishop, Members of the Committee,
thank you for the opportunity to share with you the Impact that the
Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)
has had on the 3.1 million United States Citizens residing in Puerto
Rico. We have been consistent in our opposition to PROMESA and the
actions taken so far by the Financial Oversight and Management Board
(FOMB). PROMESA and the FOMB have been instrumental in perpetuating
Puerto Rico's undignified and unequal political status. Instead of
helping Puerto Rico establish a path toward fiscal responsibility that
would lead to access to the capital markets, the FOMB has exceeded its
powers over the affairs of the Government of Puerto Rico with no
tangible results. Furthermore, the FOMB has spent excessive amounts of
funds in its operations, which could have been used to reduce the debt,
improve our fiscal credibility and, in turn, facilitate access to the
capital markets.
We should point out that PROMESA was enacted by Congress under the
broad powers granted to it by the Territorial Clause. Art. IV Sec. 3,
Cl. 2 of the United States Constitution gives Congress the ``Power to
dispose of and make all needful Rules and Regulations respecting the
Territory [. . .] belonging to the United States.'' See: U.S. Const.
Art. IV Sec. 3, Cl. 2; 48 U.S.C. Sec. 2121(b)(2). Congress has no
constitutional authority to impose oversight boards on the states of
the Union, as they rely on ``authority originally belonging to them
before admission to the Union and preserved to them by the Tenth
Amendment.'' See: Puerto Rico v. Sanchez Valle, 136 S.Ct. 1863, 1871,
195 L.Ed. 2d 179 (2016) (citing Heath v. Alabama, 474 U.S. 82, 88, 106
S.Ct. 433, 88 L.Ed. 2d 387 (1985)). Therefore, the only reason why
PROMESA is feasible today is because Puerto Rico is an unincorporated
territory of the United States and not a state of the Union.
However, in 2012 and 2017 the absolute majority of Puerto Ricans
rejected the current Commonwealth status and voted in favor of
statehood. Had Congress acted on the results of those plebiscites,
Puerto Rico would today be in the process of completing the transition
to become a full-fledged member of the Union. Had that happened PROMESA
would not have been necessary. Becoming a state would have given Puerto
Rico political and economic stability that no law could provide. Today,
seven years after their first vote in support of statehood, Puerto
Ricans would have had the right to vote for the President, have full
representation in Congress, and access to resources in the same
proportion as other states. There is no doubt that statehood would have
strengthened Puerto Rico's economy in the same way it has done for all
fifty states. A more stable and stronger economy would have attracted
the investment necessary to generate the much-needed income for debt
re-payment.
Instead, in 2016, Congress imposed on Puerto Rico an oversight
board with such broad powers that it has effectively overridden the
powers vested by the Puerto Rico's Constitution in its elected
officials. PROMESA, as well as the oversight board it created, was
imposed by Congress in detriment to the democratic principles that
support a republican and democratic form of government. As recently
stated by the United States Court of Appeals for the First Circuit:
[. . .] PROMESA authorizes the Board to adopt Fiscal Plans and
Budgets incentivizing the Legislative Assembly to enact the
Board's recommended policies and accounting for the Legislative
Assembly's responses to those recommended policies. See id.
Sec. Sec. 2141-2151. Indeed, it is difficult to see how,
without such powers, the Board could be effective in achieving
Congress's ``purpose'' of ``provid[ing] a method for [Puerto
Rico] to achieve fiscal responsibility and access to the
capital markets.'' Id. Sec. 2121(a) (stating Board's purpose).
[. . .] Under PROMESA's preemption provision, the grants of
authority to the Board at Sec. Sec. 201 and 202 to approve
Fiscal Plans and Budgets ``prevail over any general or specific
provisions of territory law,'' including provisions of Puerto
Rico's Constitution that are ``inconsistent with [PROMESA].''
Id. Sec. 2103; see also Maldonado-Burgos, 844 F.3d at 346.
PROMESA does generally reserve ``the power of [Puerto Rico] to
control, by legislation or otherwise, the territory.'' 48
U.S.C. Sec. 2163. But this reservation of power is expressly
``[s]ubject to the limitations set forth in [Titles] I and II
of [PROMESA],'' where Sec. Sec. 201 and 202 appear. Id. When
the Board certified the 2019 Fiscal Plan and Budget, then, it
exercised authority granted to it under PROMESA In re Fin.
Oversight & Mgmt. Bd. for Puerto Rico, 916 F.3d 98 (1st Cir.
2019) (Emphasis)
Section 108 of PROMESA states that the elected Governor and
Legislature cannot ``exercise any control, supervision, oversight, or
review over the [FOMB] or its activities.'' As a result , the FOMB acts
without review, in terms of its expenditures. While the FOMB imposes
cuts in pension obligations, salaries, and fringe benefits, and
promulgates the elimination of governmental services and entities; it
spends more than $64 million annually in its operation, including
salaries for some of its officers, many of which exceed those of the
Vice-President of the United States and the Speaker of the House of
Representatives. In fact, the annual salary of the FOMB's Executive
Director is $625,000.00, in contrast with the $400,000.00 annual salary
of the President of the United States. Moreover, while the Government
of Puerto Rico is under a stay of debt payment to bondholders and other
creditors, the process to restructure the debt under Title III of
PROMESA is costing over $256 million a year in legal fees.
Three years after the enactment of PROMESA and the appointment of
the seven members of FOMB, Puerto Rico continues in bankruptcy, buried
under billions of dollars in debt and in an enduring state of fiscal
and economic uncertainty. In fact, not a single initiative has been
developed by the FOMB to strengthen Puerto Rico's economic development,
to allow the Government access to capital markets, or to afford much
needed resources for the United States citizens residing in Puerto
Rico. Three years after the enactment of PROMESA, the benefits it has
brought to the island do not justify the extraordinary curtailment of
the self-governing rights encompassed in Puerto Rico's Constitution.
According to the FOMB's own admissions, during the process to
approve a Fiscal Plan and Budget for Fiscal Year 2018-2019, one of its
initiatives was to ``improve'' Puerto Rico's economic development
through the repeal of local Act No. 80; a statute that provides
protections for over 800,000 employees and employers in the private
sector. On April 26, 2018, the FOMB sent a proposed bill to the Puerto
Rico Legislature that, if approved, would have repealed Act No. 80.
Nonetheless, the FOMB was never able to prove to the majority of the
members of the Senate of Puerto Rico how Act No. 80 was having a
negative impact on the economy, nor was it able to show how repealing
it would result in any economic benefit. The Senate of Puerto Rico
reached a compromise, and instead of fully repealing Act No. 80,
approved a prospective repeal that only affected newly appointed
employees while preserving the rights of existing employees. Following
the Senate rejection of the FOMB proposal to repeal Act No. 80, the
FOMB approved a new Fiscal Plan in which it rejected the budget already
approved by the Legislature as non-compliant. The budget approved by
the Legislature, and signed by the Governor, was a balanced budget that
complied with the Fiscal Plan that was in place during the budget
discussions. In reprisal for the Senate's voting against the Act No. 80
repeal, the FOMB threw away the budget drafted by the Legislature and
substituted it with its own budget. The FOMB budget reduced the
operating funds of the Legislature in over $19 million dollars, among
other budget cuts.
PROMESA doesn't need to be amended--it needs to be repealed. In its
place, a new law to implement the mandate admitting Puerto Rico as a
state of the Union should be enacted, with all the benefits and
responsibilities granted to citizens of the other fifty states of the
Union. Such a law should provide a transition period during which
Puerto Rico could transform from a debt-ridden territory to a self-
sustaining state of the Union. This will help sustain a true sovereign
and democratic government for the people of Puerto Rico.
The time has come for the United States Congress to grant equal
treatment to the people of Puerto Rico through statehood and end the
condition of indignity, inequality, and abuse to which its 3.1 million
citizens are subjected to under an outdated colonial regime. This is
the only viable path to achieve political stability and economic
development that would allow Puerto Rico to recover from the financial
crisis that the status has led it into.
Cordially,
Thomas Rivera Schatz
______
The Chairman. Mr. Sablan.
Mr. Sablan. Thank you, Mr. Chairman, for holding today's
hearing. Governor, welcome.
Governor Rossello. Thank you, sir.
Mr. Sablan. And just a little heads-up because you
mentioned Medicaid. We're in the same situation as you are, all
the insular areas, and with the concurrence of the Committee's
Chair, Mr. Grijalva, we are looking at planning a sort of a
hearing. Although the issue is also the jurisdiction of another
committee, we need to continue to highlight and bring attention
to the impending Medicaid leave that all of us are facing.
Governor Rossello. Yes.
Mr. Sablan. And I, just as you, would like to see a
Medicaid program that's no different from any of the other
states and the District of Columbia. And if that materializes,
we'll send an invitation to probably one of your staff.
But, Governor, yesterday Puerto Ricans, including teachers,
gathered to protest the austerity measures being imposed on
them as a result of the fiscal plans, and the Oversight Board
is responsible for approving and certifying the fiscal plans
and budgets for Puerto Rico. However, these plans are developed
and submitted by your administration also.
We all realize that sacrifices--sometimes painful--have to
be made. The Marianas Commonwealth Government is also going
through a difficult place. And your administration sets budget
priorities for the island.
So, do you think austerity measures are being evenly spread
around and not disproportionately hurting certain groups of
Puerto Ricans? And how will you ensure essential services are
received by those most in need?
Governor Rossello. Well, I'll give you one example that's
clear. It is the pensions, right? The pension recipients in
Puerto Rico have already suffered cuts, and there is an
insistence from the Oversight Board to cut pensions even
further. Now, let me--you know, we're talking about 10-some
percent on the pensions cut. We have assumed that as a PayGo
responsibility.
What we are saying is let us define what those priorities
are, and one of the priorities would be paying those pensions.
And look, I recognize, again, that there are many issues.
Here's what I want to provide the people of Puerto Rico with. I
want to provide them with a new budget that's policy-based so
that people can see where we're investing. When you have that
sort of visibility, people know what your priorities are. If
you increase on education but you decrease on marketing or
operational costs of a certain kind in government, people can
see what your priorities are.
So, that is what we are proposing. I know that there will
be differences, but if we have a limited budget, at least let
us have a discussion on the policy basis of it. At least let us
say the priority for us is making sure that one of the most
vulnerable populations, which are the pension recipients, don't
get another cut. This is important and it shouldn't be an
ideological argument. It should be the decision of the elected
Government of Puerto Rico, and my commitment is to fight for
that.
And these stem again from what are these problems that
we're having with the Oversight Board. They want to interject
into some of these decisions that are, in my view, more
ideologically inclined than from a pragmatic basis. Listen, if
we have to shrink down government more in order to pay for the
pensions, you know what? I'll make that call. I'll make that
call. But you need to allow me, as a decision maker, to do it.
You can't be putting obstacles all the way through, and if we
can get there, then I will be accountable for whatever cuts we
make, but I will also be able to protect those sectors that are
important for our policy to thrive.
Mr. Sablan. Fair enough. Thank you very much, Governor. I
yield back.
The Chairman. Governor, thank you very much.
Governor Rossello. Thank you, Mr. Chairman.
The Chairman. We thank you for your time, and other
questions, as they arise, will be forwarded to you so that the
Committee can have those responses. I have some. All the
Members have here some. But in the interest of both your time
and the Members' time and the next series of witnesses, thank
you so much for your time and your responses to their
questions.
Thank you a lot.
Governor Rossello. Thank you, Mr. Chairman.
Thank you, Committee.
The Chairman. Let me invite the next set of witnesses,
please.
Thank you very much for your patience, but the interruption
for the votes was unavoidable, and I very much appreciate your
patience. Let me begin with Ms. Jaresko, the Executive Director
of the Financial Oversight and Management Board of Puerto Rico.
Good to see you again, and the floor is yours for your initial
statement, and then we will follow up with each one with
questions as we go along.
Thank you.
STATEMENT OF NATALIE A. JARESKO, EXECUTIVE DIRECTOR, FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO
Ms. Jaresko. Thank you, Chairman and members of the
Committee. I am Natalie Jaresko, the Executive Director of the
Oversight Board. And thank you for this opportunity to update
the Committee on the work of the Board on behalf of the people
of Puerto Rico. I've submitted written testimony for the record
and I look forward to your questions.
When the Board began its work, Puerto Rico faced an
unsustainable burden of more than $70 billion in debt and $60
billion in unfunded pension liabilities, exacerbated by decades
of little economic growth and significant out-migration.
Congress and PROMESA provided a way forward for Puerto Rico.
The Board began exercising its authority to change the
fiscal culture of the government, and as we were underway,
Hurricanes Irma and Maria inflicted the most horrific
devastation to strike the United States in 100 years, and the
people of Puerto Rico deserve better. The efficiency and
quality of government services on the island remain a
challenge. Residents do not receive the same speed of police
and emergency response as their U.S. mainland counterparts, and
the Government has struggled to provide the level of education
necessary for its residents to achieve job security on the
island.
As the Governor just said, fiscal policy is about choices.
Years of spending have not created a safe and prosperous Puerto
Rico with opportunities for residents on the island. The
Oversight Board's mission is to help lay that foundation for
the prosperity through debt restructuring, fiscal discipline,
and structural reforms.
One of the most important components of our work is the
certified fiscal plan and the series of structural reforms that
enhance Puerto Rico's ability to create quality jobs, to
improve educational outcomes, to enhance the business climate
and transform the energy sector.
Unfortunately, 3 years later, there are many areas where
the Government has not yet implemented many of the planned
reforms. The fiscal plans are not a menu from which options can
be selected, rejected, or ignored. It is a rigorous, multi-
year, ambitious transformation plan that must be proactively
managed and implemented over time.
To ensure fiscal responsibility, we have moved to a pay-as-
you-go pension system that allows retirees to receive their
pensions without interruption. The Board has prioritized
critical spending, allocating funds to pay 10 years of back pay
that was owed to the police in Puerto Rico, funding safe kits
for the Forensic Science Bureau, ensuring funding for pay
increases for teachers and police, and spending up to $200
million annually, as the Governor described, for a locally
funded Earned Income Tax Credit.
The Board has led efforts to improve transparency and
visibility into Puerto Rico's financing, notwithstanding the
lack of timely audited financial statements. And within the
certified fiscal plan for PREPA, the Board required and
supported the transformation of PREPA.
The Board secured a completion of the restructuring of
approximately 30 percent of Puerto Rico's total debt. At the
Government Development Bank, legacy creditors took a 45 percent
reduction in the face amount of the claim. At COFINA, with
COFINA's $18 billion of debt, we reduced the par amounts by $6
billion and we reduced total debt service by 32 percent, saving
for the Commonwealth approximately $17.5 billion.
On an annual basis, that settlement meant that we could
reduce the maximum annual debt service for COFINA from $1.85
billion to just under $1 billion, and allow the Government to
spend that difference on its own general expenses.
And finally, we've reached an agreement in principle with a
variety of PREPA bondholders to reduce PREPA's debt by over 30
percent.
Yes, the University of Puerto Rico is the island's crown
jewel, and in many ways the future of Puerto Rico depends on a
vibrant and sustainable UPR. No student will be priced out of a
university education at UPR. The targeted measures to increase
revenues and reduce expenditures will allow UPR to operate
sustainably and ensure that UPR remains at the center of Puerto
Rico's successful economic development.
In many areas, the Government and the Oversight Board are
aligned in the transformation that is needed. The PREPA
transformation is an example. In other areas, however, we have
found it more complicated to work together. The legislature,
for example, refusing to approve a package of labor reforms
which would have made it easier for people to find jobs in the
private sector.
It is unrealistic to believe that the elected government
and the Oversight Board would be 100 percent aligned in every
aspect. We do, however, make every effort to consult, to
advise, and to work toward full implementation together. It is
important to note that the Board supports the important efforts
of the Members of this U.S. Congress advocating for fairness
for Puerto Rico in the distribution of Federal funding and
programs.
When PROMESA was passed, there were different expectations
from all sides as to the role of the Oversight Board, and the
reality is that this has been a balancing act with a balanced
board thanks to the law's bi-partisan appointment system.
I understand that many in Congress expect the island's
economy to be turned around immediately, but 40 years of fiscal
mismanagement cannot be fixed in 3 years. While the Board has
the power to certify the budget and restructure the debt, much
of Puerto Rico's economic future and sustainability is in the
hands of the elected government. Puerto Rico's future depends
on a strong commitment to implement structural reforms that
change the island's underlying economic model.
What I have the greatest faith in is the people of Puerto
Rico. Their level of loyalty and their love for this island is
remarkable. Thus, I remain confident and optimistic that Puerto
Rico's problems can and will be solved.
Thank you.
[The prepared statement of Ms. Jaresko follows:]
Prepared Statement of Natalie Jaresko, Executive Director, Financial
Oversight and Management Board for Puerto Rico
Chairman Grijalva, Ranking Member Bishop, and members of the
Committee, I am Natalie Jaresko, Executive Director of the Puerto Rico
Financial Oversight and Management Board (the ``Board'' or ``Oversight
Board''). Thank you for this opportunity to update the Committee on the
work the Board has done for the benefit of the people of Puerto Rico
and its substantial progress toward achieving the Board's mandate under
PROMESA. We have been working diligently to put in place the critical
fiscal building blocks for Puerto Rico's economic success: ensuring the
Government's fiscal responsibility, securing a fair and sustainable
exit from bankruptcy, and restoring access to the capital markets.
Introduction
When the Board began its work, Puerto Rico faced an unsustainable
burden of more than $70 billion in debt and $60 billion in unfunded
pension liabilities, exacerbated by a decade of economic decline and
significant outmigration. To put it in context, when Congress mandated
the establishment of the Oversight Board, Puerto Rico's largest pension
system was about 1 percent funded, whereas states like New Jersey and
Illinois, two of the states with the lowest funded ratios, are in the
30 percent range. By then, the sitting Governor had already declared
the debt was unsustainable and could not be paid, and more than 300,000
people, 10 percent of the population, had already left the Island.
Despite that reality, Government spending remained bloated, government
services were inefficient, liquidity shortfalls impaired strategic
decision making, and no multi-year, coordinated strategy existed to
restore growth and opportunity to the U.S. citizens living and working
on the Island. Congress and PROMESA provided a way forward for Puerto
Rico.
Mindful of the severe challenges faced by many of the Island's
residents, the Oversight Board began exercising its authority under
PROMESA to change the fiscal culture of the Government of Puerto Rico,
instituting long-term fiscal planning and balanced budgeting. As those
efforts were underway, Hurricanes Irma and Maria inflicted the most
horrific natural disaster devastation to strike the United States in
100 years. The tragic, unimaginable damage to the Island and its people
compounded this financial distress.
My testimony before this Committee on November 7, 2017, detailed
the extensive joint post-hurricane efforts of the Board and the
Government, including the singular importance of restoring electricity
and transforming the power sector to be more reliable, resilient, and
cost effective.
Today, the Board is responsible for administering the largest
public entity restructuring in U.S. history and is party to hundreds of
lawsuits, many in opposition to the Board-formulated debt
restructuring, others by parties opposed to PROMESA, and inevitably
actions by the Board implementing PROMESA. Moreover, the Board is
monitoring more than 120 reform implementation plans across the
Government, which requires a significant amount of resources and
expertise. These plans translate into thousands of individual reform
milestones that need to be monitored and tracked. Since the inception
of the Board, we have held hundreds of working meetings with the
Government and Legislature, organized many diligence sessions with
creditors, and held numerous public hearings on issues of keen interest
to stakeholders.
The Oversight Board has also improved financial transparency of the
Commonwealth so that residents have full access to the way their
taxpayer dollars are spent, as well as accountability from their
Government. This includes public records, available online, of budgeted
versus actual spending, cash and bank balances, submission of reform
implementation plans for all agencies, and mandated oversight over all
outside contracting and new debt issuance. All of the Board-approved
budgets of the Commonwealth and its instrumentalities are also
accessible online, as are the financial records of the Board itself.
Board meetings are open to the public, webcast, and posted to the
Board's website. Many of these documents are available in English and
Spanish to ensure as many people as possible have access to complete
information regarding the Board's efforts.
The Board is also committed to responsible stewardship and
transparency in its operations but there is always room for
improvement. Representatives Velazquez and Bishop have filed a bill to
strengthen the legislated disclosure requirements of third parties
hired by the Board, and the Board supports steps toward greater
transparency.
I will now walk you through the Oversight Board's main
accomplishments in the areas of fiscal plan implementation, fiscal
responsibility and debt restructuring.
Fiscal Plan Implementation
As you know, the Board's authorities under PROMESA center around
the development and certification of multi-year fiscal plans. These
fiscal plans must balance competing priorities enumerated in the law.
Prior to and since the hurricanes, the Board certified fiscal plans
successfully balancing those interests and delineating a path forward
for the Island.
To date, the Oversight Board has successfully certified more than a
dozen transformative fiscal plans with multi-year forecasts for the
Commonwealth and several of its instrumentalities. These fiscal plans
are specifically designed to guide long-term planning and promote the
Island's transformation and fiscal recovery. They are based on
collaborative efforts with the Government and extensive stakeholder
input, including listening sessions with major sectors of Puerto Rico's
economy.
One of the most important components of the certified fiscal plans
are the series of structural reforms that enhance Puerto Rico's ability
to compete and create quality jobs, including reforms to increase
Puerto Rico's labor force participation rate of 40 percent. They also
seek to improve educational outcomes, enhance the business climate, and
transform the energy sector. In addition, the fiscal plans must
transform the Government to reflect changed demographics and the fact
that Puerto Rico is in financial distress. Embracing the reforms in the
fiscal plan will undoubtedly lead Puerto Rico out of its financial and
economic crisis.
The fiscal plans include overdue right-sizing by the Government
while improving the delivery of services to residents. The Government's
proposal and implementation of around 250 school closures is a direct
response to these changing demographics and the desire to provide a
better education to all students by focusing limited resources in the
remaining schools. Spending over the past several decades without
limits has not produced better healthcare or educational outcomes or a
safer Island for its people. Thus, the focus of the right-sizing in the
fiscal plans is on improving these outcomes, while reducing spending.
The efficiency and quality of government services on the Island
remain a challenge:
Residents of Puerto Rico do not receive the same speed of
police and emergency response as their U.S. mainland
counterparts;
The Government has not properly maintained transportation
and infrastructure on the island, resulting in extreme
congestion and a higher vehicle death rate;
The Government lags behind the mainland when it comes to
simplifying the process of starting and running a business;
The Government has struggled to provide the level of
education necessary for its residents to compete with peers
on the mainland and achieve job security on the Island; and
Puerto Rico struggles to provide high quality government
services despite having higher spending and personnel in
many parts of the government.
Unfortunately, 3 years later, the Government has not yet
implemented many of the fiscal plan's most critical reforms. As an
example, just this week, the Governor announced he no longer intends to
enact the healthcare reforms he proposed in the fiscal plan. This is,
however, just the latest example of the Government's failure to act.
The fiscal plans are not a selective menu from which options can be
selected, rejected, or ignored. It is a rigorous, multi-year, ambitious
transformation plan that must be proactively managed and enacted over
time.
Accomplishments to Date: Fiscal Responsibility
The Oversight Board has successfully implemented fiscal discipline
and controls over the past 3 years. These are some of the main
accomplishments to date:
Moved to a Pay as you Go pension system: This allowed retirees to
receive their pensions without interruption, despite the fact that
Puerto Rico's pension funds did not have enough assets to sustain
paying pensions for more than a few more months. Now the Board ensured
over $2 billion per year is budgeted out of the Government's general
operating fund to meet current pension payments, while pressing for the
establishment of independently managed and transparent Defined
Contribution plans. In handling the claims of the retirees in the Title
III process, the Board developed a pension policy that ensures adequate
funding for pensions and guarantees that those with the lowest pensions
are protected from any cut, while ensuring a 10 percent savings of
total pension costs. Teachers and police officers will also be enrolled
in Social Security to increase their security and retirement benefits.
Created more transparency and visibility into Puerto Rico's complex
financial situation: The Oversight Board's efforts led to improved
transparency and visibility into Puerto Rico's liquidity, budgets,
special revenue funds, public corporations, and other sources of
intergovernmental spending, notwithstanding the Government's continued
delays in completing its overdue audited financial statements. The
Board also reviews major contracts before they can be ratified to
foster accountability and discourage unnecessary and/or unavailable
spending.
Prioritized critical spending: The Board-certified budgets
carefully balance the need to maintain funding for critical services
commensurate with the size of the population and prioritize critical
services such as education, public safety, and health care. Specific
reinvestments in the current budget include:
Allocated funds over a 3-year period to pay 10 years'
worth of debts owed to police officers for back pay;
Enabled reapportionments to ensure badly needed funding to
improve the operations of the Island's Forensic Science
Bureau, including funds for safe kits, many decades old, to
insure proper forensic analysis and long-awaited justice
for both the victims and the accused;
Allocated appropriations for expenses important to the
people of Puerto Rico not previously funded, such as pay
increases for teachers and police, which begins the process
of restoring competitive compensation packages with the
mainland;
Approved new spending of more than $200 million for an
Earned Income Tax Credit to support labor participation on
the Island;
Ensured the creation of a reserve account to ensure
liquidity on an ongoing basis in case of an emergency in
the future;
Ensured funds are budgeted to cover any cost-share for
Federal disaster funding, such that the Island would be
able to access the FEMA public assistance funds; and
Budgeted $400 million a year in capital expenditures at
the Commonwealth level to improve systems and assure
appropriate maintenance of infrastructure, necessary to
avoid the significantly underinvested situation in which
Puerto Rico found itself at the time of the hurricanes.
Implemented much tighter budgetary controls: The Board imposed
significant constraints on governmental spending. Reapportionments
within the budget must now be approved by the Board. Multi-year
appropriations from previous fiscal years are suspended in light of the
absence of audited financial statements and uncertainty of past
practices, and, with only a few exceptions, no new multi-year
appropriations are permitted. The Board also initiated the first
comprehensive review and certification of Puerto Rico's overall total
spending; historically, this detailed reviewed was only conducted on
General Fund spending, which represents less than 40 percent of total
spending.
Imposed fiscal discipline: The Board is employing strict discipline
to oversee government fiscal reform efforts. All tax initiatives must
now be at least budget neutral and projected in a fiscally conservative
manner to not overestimate revenues during a very uncertain time.
Revenues from new initiatives cannot be counted until realized, and
expense reductions must be documented, justified, and proven before
being certified.
Required the transformation of the Island's power sector: Within
the Puerto Rico Electric Power Authority (PREPA) Certified Fiscal Plan
and budget, the Board required and supported the transformation of
PREPA to ensure reliable energy for the residents, more effective and
efficient management, as well as lower fuel costs. The Government has
aligned with the Board in concluding that private generation and
private management of the transmission and distribution system are key
to these improvements. The goal is to achieve affordable, resilient,
and reliable power that is environmentally compliant and that serves as
a driver of economic growth, fully leveraging private market
enterprise, and investment; and establishing an independent, well-
funded energy regulator.
Supported clean and safe water for the residents of Puerto Rico:
Within the Puerto Rico Aqueduct and Sewer Authority (PRASA) Certified
Fiscal Plan and budget, the Board supported funds for the Puerto Rico
Clean Water and Drinking Water State Revolving Fund for personnel and
capital expenditures that will enable critical work on the water
system. The fiscal plan for the water utility requires a $2 billion
capital program of local and Federal funds over the next 6 years with
roughly $1 billion focused on investment in projects to improve water
quality and reliability through upgraded filtration plants, new
transmission and distribution pipelines, upgraded wastewater treatment
plants, and more sanitary truck sewers and collection systems.
Accomplishments to Date: Debt Restructuring
On the debt side, the Oversight Board began restructuring Puerto
Rico's crushing debt burden. The Board completed the restructuring of
approximately 30 percent of Puerto Rico's debt, primarily based on
consensual deals using both Title III (for COFINA) and Title VI (for
GDB). The main accomplishments to date are:
Stay on debt service: The automatic stay imposed upon enactment of
PROMESA together with the stays provided by the Board's various Title
III filings, provided Puerto Rico much-needed breathing room to allow
it to work toward a plan to get its fiscal house in order. Without the
actions of the Oversight Board, Puerto Rico would have been required to
impose draconian cuts to essential services in order to pay the
otherwise due debt service.
Approved the first PROMESA Title VI consensual agreement: The Board
approved a restructuring to resolve the Government Development Bank's
(GDB) over $4 billion in legacy bond debt and approximately $8 billion
in liabilities. GDB's legacy creditors agreed to a 45 percent reduction
in the face amount of their claim, and municipalities were allowed to
offset their GDB loans by the full amount of their deposits.
Confirmed the first PROMESA Title III plan of adjustment, saving
billions of dollars for the residents of Puerto Rico: The Board
restructured COFINA's $18 billion debt. The plan of adjustment,
approved by the Title III court in February 2019, reduces the par
amount of COFINA bonds by $6 billion. The agreement reduced total debt
service by 32 percent, saving approximately $17.5 billion over 40
years. On an annual basis, the settlement will reduce the maximum
annual debt service from $1.85 billion to $992 million and allow the
Government to spend the difference on general expenses.
Reached an agreement with groups of PREPA bondholders to reduce the
burden on customers: The Board negotiated a preliminary agreement with
PREPA Ad Hoc creditors and a bond insurer, which reduces PREPA's debt
by over 30 percent and protects consumers from uncapped debt-related
charges. This agreement is an essential step toward executing the
previously described transformation and modernization of Puerto Rico's
energy system. Relative to the prior Restructuring Support Agreement
that the Board rejected in 2017, the current agreement would save PREPA
and the Puerto Rican residents who depend on its electricity supply
about $3 billion in debt service payments over the next 10 years alone.
The agreement includes a fixed transition charge as a measure for
protecting PREPA's customers from potentially larger rate increases in
the future based on a lower demand forecast.
Undertook an independent investigation of the debt and is analyzing
potential claims: The Board conducted an independent investigation of
Puerto Rico's debt, which led the Oversight Board's Special Claims
Committee to file an objection in court contesting the validity of more
than $6 billion in General Obligation bonds. The Oversight Board,
through its Special Claims Committee, does plan to commence adversary
proceedings covering claims against dozens of parties, including
underwriters, law firms, tax counsel, swap counterparties, and
remarketing agents.
Ensured protection for other entities with unsustainable debts: The
Board provided Title III protection for the Highways and Transportation
Authority (HTA), and the Employees Retirement System (ERS).
Sought forbearance agreements for certain public entities: The
Board supported forbearance agreements with regard to outstanding debt
of the University of Puerto Rico and the PRASA, in order to allow more
opportunity to negotiate sustainable debt restructurings within Title
VI.
Continue to engage in good-faith negotiations with all parties: The
Board continues to negotiate with other creditors to reach a plan of
adjustment for the Commonwealth debt. The Board hopes to be able to
reach a court approved deal by the end of this calendar year.
Fiscal Plan for the University of Puerto Rico
The University of Puerto Rico (UPR) is an excellent university;
Puerto Rico's crown jewel. It is key to a safe and peaceful society. In
many ways, the future of Puerto Rico depends on a vibrant and
sustainable UPR. Targeted measures to increase revenues and reduce
expenditures will allow UPR to operate sustainably and ensure this
jewel remains at the center of Puerto Rico's successful economic
development.
The reforms are focused on maintaining the ability of all students
to access and benefit from an improved university system. The
Government has been subsidizing UPR at a rate far exceeding mainland
U.S. states--roughly 70 percent instead of 20-30 percent--and at a time
when it can no longer afford these subsidies in light of its own
financial pressures.
The UPR Certified Fiscal Plan focused on creating savings by
consolidating back-office functions across UPR's 11 campuses and
improving procurement processes. Eleven campuses do not require 11
duplicative administrations. No cuts to faculty or student services
are, or have ever been, planned, or are they necessary, if certain
administrative savings and a new focus on improving revenues are
implemented.
Revenues are depressed and insufficient at UPR due to extremely low
tuition levels for all regardless of ability to pay, few ``out of
state'' students, little success in attracting Federal grants, and no
active development of its superb alumni. The fiscal plan does require
increased tuition, but has ensured several safeguards to protect the
most vulnerable. The maximum annual tuition ($5,090 in FY 23) will
remain below current Federal Pell Grant award levels ($6,095), meaning
all Pell Grant eligible students will be able to cover both tuition and
some living expenses. The fiscal plan not only protects, but expands to
$44 million this year, UPR's needs-based scholarship programs such that
everyone should be able to attend regardless of income level.
Relationship with the Elected Government of Puerto Rico
Governor Ricardo Rossello did not create the fiscal and economic
crisis. We trust that he and his team are working in the best interest
of the people of Puerto Rico to turn the Island around. With one of the
largest natural disasters and the largest insolvency proceeding in the
United States, we recognize it is not easy. In many areas, the
Government and the Oversight Board are aligned in the transformation
that is needed--the PREPA transformation, the move to Defined
Contribution pensions, and the implementation of a local EITC, are just
a few examples.
In other areas, however, we have found it more complicated to work
together. The Legislature, for example, refused to approve a package of
labor reforms that would have made it easier for people to find jobs
and reduce the administrative burden of formal employment in the
market. Converting Puerto Rico into an employment-at-will
jurisdiction--like 49 of the 50 states--was a battle we lost. We
removed this structural reform from the Certified Fiscal Plan in light
of the Legislature's refusal, and the corresponding economic growth we
projected. As a result, without further incremental structural reforms,
the Island's economy will return to an anemic pace of growth, a level
unable to sustain the long-term budgetary needs of the people of Puerto
Rico.
The creation of a budget inherently includes difficult decisions.
Spending a dollar on police salaries instead of professional services
contracts or particular industry tax credits is a critical decision. I
think that we can all agree that the people of Puerto Rico want their
public funds to be better allocated to the services that are most
critical to their lives on the Island.
It is unrealistic to believe that the elected Government and the
Oversight Board would be 100 percent aligned in every aspect. Some
tension between the elected Government and the Oversight Board must be
expected in a situation like this. We do, however, make every effort to
consult, to advise, to offer perspective throughout the process, and
work toward full implementation together.
First Circuit Decision on the Unconstitutionality of the Board
On February 15, the First Circuit concluded that the Appointments
Clause applies to laws enacted under the Territories Clause, that the
members of the Oversight Board are Federal officials not territorial
officials, and that the members of the Oversight Board are principal
officers. It is our belief that the members of the Oversight Board are
territorial officers, not Federal officers, and that the Appointments
Clause does not apply to laws enacted pursuant to Congress' power under
the Territories Clause.
The implications of the First Circuit decision are immense. With
respect to the Oversight Board, if a stay is not granted by May 16,
then the Oversight Board would cease to function and the Title III
cases could be dismissed, leading to chaos in the courts and on the
Island.
Late in April, the Oversight Board filed a petition with the U.S.
Supreme Court to review the decision by the U.S. Court of Appeals for
the First Circuit that declared the appointment of the Members of the
Oversight Board unconstitutional and requested that the First Circuit
extend the stay of its February 15 ruling pending the Supreme Court's
final disposition of the case.
On April 29, 2019, President Donald J. Trump announced his intent
to nominate the current Board Members to undergo U.S. Senate
confirmation to serve out the remainder of their terms. We encourage
the U.S. Senate to review the nominations as quickly as possible.
Potential Federal Actions to Continue Supporting Puerto Rico
The Board supports the important efforts of Chairman Grijalva,
Ranking Member Bishop, Puerto Rico Resident Commissioner Gonzalez-
Colon, Representative Velazquez, Representative Soto, and many members
of this Committee and throughout Congress advocating for fairness for
Puerto Rico in the distribution of Federal funding and other Federal
programs essential to the prosperity of Puerto Rico and the well-being
of its people.
Critically, the Oversight Board supports the Government's request
to receive equitable treatment in Medicaid and Medicare. Without a
permanent solution to the Medicaid cliff, Puerto Rico would need to
spend around 25 percent of its General Fund, and more over time, to
fund health care for the people of Puerto Rico. In addition, in the key
area of health care, the Board supports fair treatment in Medicare
programs, where residents of Puerto Rico pay the same level of Medicare
taxes as mainland residents, but the Island receives substantially
lower payments in Medicare programs. These are critical policies that
will affect the entire Island's health care and economic development.
Finally, PROMESA required the establishment of a Congressional Task
Force to provide recommendations to help Puerto Rico's economic and
fiscal turnaround. While the Federal Government has supported Puerto
Rico in light of the hurricanes, many of the recommendations outlined
in the Task Force report have yet to be addressed.
Conclusion
PROMESA is a set of compromises. When PROMESA was passed, there
were different expectations from all sides as to the role of the
Oversight Board. The reality is that this has been a balancing act,
with a balanced Board thanks to the law's bipartisan appointment
system.
Some creditors expected to be repaid in full, while others expected
the debt to be wiped out. The reality is that Puerto Rico's debt is
unsustainable and cannot be repaid in full. But the reality also is
that Puerto Rico's restructuring, as decided by Congress, is being done
under an orderly bankruptcy process, which requires equitable treatment
of creditors.
I understand that many in Congress expected Puerto Rico's
mismanagement to be fixed and the Island to be turned around
immediately, but 40 years of fiscal mismanagement cannot be fixed in 3
years. In Washington DC, New York City, and Detroit, it took years
before the jurisdictions began to see progress.
The Oversight Board continues to implement its mandate to bring
Puerto Rico back to fiscal responsibility, ensure adequate funding for
pensions, and restore access to the capital markets. The law is clear
as to the work that we need to do--and for how long.
While the Board has the power to certify the budget and restructure
the debt, much of Puerto Rico's economic future and sustainability is
in the hands of the elected Government. Puerto Rico's future depends on
a strong commitment to implement structural reforms that change the
Island's underlying economic model. Restructuring and reform go hand in
hand. The Government needs to use the economic boost and cushion of
time provided by the stay, by the completed debt restructuring, and by
Federal disaster funds to make fundamental changes now, in order to
sustain economic growth, attract investments, create jobs, and avoid
repeating the mistakes of the past.
Difficulties aside, I am optimistic and confident that we can all
work together to ensure Puerto Rico's economic future is brighter than
ever and that Congress finds confidence that Puerto Rico's problems can
and will be solved.
______
SUPPLEMENTAL TESTIMONY FROM MS. JARESKO
Financial Oversight and Management Board for Puerto
Rico,
San Juan, PR
May 17, 2019
BY ELECTRONIC MAIL
Hon. Raul M. Grijalva, Chairman,
House Committee on Natural Resources,
1324 Longworth House Office Building,
Washington, DC 20515.
Dear Mr. Chairman:
I am writing to supplement my oral testimony before the Committee
on May 2, 2019, as to the following question asked of me by Rep.
Velazquez and my reply. Thank you for the opportunity to do so.
REPRESENTATIVE VELAZQUEZ: Do you have any individuals or firms
that were involved in the issuance of unconstitutional debt
working for the Board as employees or consultants?
NATALIE JARESKO: No, we do not.
I would like to clarify that Citi is currently providing financial
advisory services to the Board and the O'Neill & Borges law firm in
Puerto Rico is providing legal services to the Board. Both firms were
involved in the issuance of some of the General Obligation bonds that
have been contested by the Special Claims Committee of the Board.
Sincerely,
Natalie A. Jaresko,
Executive Director.
______
Questions Submitted for the Record to Natalie Jaresko, Executive
Director, Financial Oversight and Management Board for Puerto Rico
Questions Submitted by Chairman Grijalva
Question 1. Section 2141(b)(1)(B) of PROMESA requires that Fiscal
Plans approved by the FOMB ``ensure the funding of essential public
services.'' In your testimony, you mentioned that the FOMB has not
defined the term. That is particularly worrisome, given that the FOMB
has certified fiscal without defining any sort of funding baseline
necessary to ensure essential public services.
Answer. Please see the answer to #2.
Question 2. What is the FOMB's definition of the essential public
services that any government should guarantee to provide for the care
and well-being of its citizens? Why is the FOMB promoting the approval
of debt adjustment plans without defining those essential public
services? How do the fiscal plans certified by the FOMB reflect a
commitment to guaranteeing human rights and basic needs of residents of
Puerto Rico? Also, do you oppose PROMESA being amended to include a
more specific definition of ``essential public services''?
Answer. The FOMB is deeply committed to ensuring the funding of
essential public services as PROMESA requires. The FOMB has determined
that every fiscal plan that it has certified has satisfied all of the
requirements of a fiscal plan as provided in Section 201(b)(1) of
PROMESA, including that the fiscal plan ensures the funding of
essential public services. At a minimum, essential public services
include public health, education, and safety. For example, the fiscal
plan for the Commonwealth that the FOMB certified last week provides
salary increases for police, teachers, and firefighters, increased
funding for Medicaid and hospitals, and scholarship funds for UPR
students. The FOMB does not support any amendments to PROMESA,
including any modification to the provisions in Section 201(b)(1). See
page Appendix [A] for a complete list of investments.
Question 3. Upon the departure of Mr. Noel Zamot, you assumed the
role of Revitalization Coordinator for the Financial Oversight and
Management Board (FOMB). What critical infrastructure projects is the
FOMB considering?
Answer. There are two projects in the pipeline at the moment, but
neither comply with Title V's requirements. Generally speaking most
projects are disaster related and are being channeled through the
Government rather than the Revitalization Coordinator.
Question 4. Please provide a list of the FOMB's registered lobbying
firms. Include the total authorized annual cost, the duration of the
contract, and what each firm is lobbying for or against.
Answer.
Firm 1: Holland & Knight
Fee: $40,000 per month
Estimated spend for FY19: $240,000
Scope: See Appendix [B] for the contract with the firm
Firm 2: Offhill Strategies
Fee: $35,000 per month
Estimated spend for FY19: $420,000
Scope: See Appendix [C] for the contract with the firm
Our spending on registered lobbying firms (one was replaced mid-
year) has not changed as a result of the Aurelius opinion from the
First Circuit or the Board-member nomination process, nor have the
scopes of work changed for the firms engaged.
We would like to clarify that the claim brought by the Government
that FOMB spends more than the Government itself in lobbying is false
and misleading. The Government has several of government relations
contracts across different agencies.
Question 5. In your testimony, you mentioned that proposed budget
cuts to the University of Puerto Rico would only result in a
consolidation of ``back-office functions.'' In addition, you mentioned
that if certain administrative savings and a new focus on improving
revenues are implemented, then no cuts to faculty or student services
are necessary.
Answer. The Government and FOMB jointly determined in 2017 to
reduce the appropriation for UPR. The plan was to determine reasonable,
sustainable measures to bring UPR closer to U.S. mainland public
university tuition and administrative cost benchmarks without
compromising the quality of the instruction or experience. Our
recommendations of cost efficiencies at UPR include consolidation of
administrative services or back offices among the 11 campuses on the
Island. For example, rather than maintain 11 accounting, budget,
finance, human resources, and procurement offices, it would be more
efficient to provide these administrative services via four campuses on
the Island.
UPR's Fiscal Plan makes every effort to minimize the increase of
tuition and fees that could jeopardize affordability and access to
quality higher education on the Island. Some examples of additional
revenue measures discussed are Federal grants and awards, IP and patent
monetization, ancillary service fees for providing training to external
institutions including government services, as well as encouraging
raising funds from alumni and ``out-of-state'' student tuition.
The UPR and Commonwealth Fiscal Plans provide that no student would
be denied a UPR education because the following funds are made
available for means-tested scholarships:
FY 2019: $9 million in UPR Fiscal Plan and budget, in
addition to $35 million in the Commonwealth Fiscal Plan and
budget.
FY 2020: $11 million in UPR Fiscal Plan and budget, in
addition to $39 million in the Commonwealth Fiscal Plan and
budget.
The needs-based scholarship fund at the Commonwealth level
amount to up to $214 million over the period of the Fiscal
Plan.
Question 6. Has the FOMB or its consultants performed a study to
assess the feasibility of consolidating back-office functions and
reaching target administrative savings? Please share the results of the
assessment.
Answer. Target administrative savings were based on case studies
from other public and private sector examples, benchmarks from other
jurisdictions, and analysis of government organization and operations.
In some cases (e.g., education, health, public safety), the target
savings were developed through a joint effort with the Government.
Question 7. The FOMB has challenged the legality of more than $6
billion in General Obligation (GO) debt issued after 2012. Almost
simultaneously, the FOMB declined to challenge the legal basis for the
COFINA deal. What process and rationale did the Board follow to decide
which debt issuances to challenge?
Answer. Shortly after PROMESA was enacted, certain bondholders
challenged the legality of the COFINA bonds. In the summer of 2017, the
FOMB supported the establishment of a court-supervised process to
resolve the legal challenges asserted against the COFINA bonds. As part
of this process, the Title III court heard numerous arguments regarding
whether the COFINA bonds were valid. Eventually, the court-supervised
process produced a settlement of the litigation that had been filed in
connection with the COFINA bonds. The FOMB developed and proposed a
plan of adjustment for COFINA based on that settlement. Accordingly,
the plan of adjustment for COFINA was a product of challenges of the
COFINA bonds that had been asserted, litigated, and negotiated. By
contrast, no such litigation or court-supervised process existed for
the $6 billion in GO bonds issued after 2012.
Question 8. What specific measures, if any, has the FOMB
implemented to identify and redress conflicts of interest in its
decision making, advising, and investigative processes?
Answer. Please see Appendix [D] below for a statement from the
FOMB's Ethics Advisor.
Appendix D
Statement from Andrea Bonime-Blanc, Ethics Advisor to the FOMB
The Financial Oversight and Management Board for Puerto Rico (FOMB) was
established under the PROMESA (Puerto Rico Oversight, Management, and
Economic Stability) Act on June 13, 2016. Under PROMESA Section 109,
there are two provisions that impose ethics requirements on the Board
and in some cases ``staff designated by the Oversight Board'' (which as
of May 16, 2019, includes the Executive Director and General Counsel of
the FOMB)--PROMESA Section 109(b) regarding financial reports and
PROMESA Section 109(a) regarding conflicts of interest. Below is a
description of applicable financial disclosure and conflicts of
interest provisions of PROMESA and related Federal laws as applicable
to the FOMB.
1. PROMESA SECTION 109(b) ON FINANCIAL DISCLOSURES STATES THE
FOLLOWING:
``[n]otwithstanding any ethics provision governing
employees of the covered territory, all members of the Oversight Board
and staff designated by the Oversight Board shall be subject to
disclosure of their financial interests, the contents of which shall
conform to the same requirements set forth in section 102 of the Ethics
in Government Act of 1978 (5 U.S.C. App.)''
ETHICS IN GOVERNMENT ACT OF 1978 SECTION 102 (``EGA
Section 102'') states the following:
+ Section 102 of the Ethics in Government Act of 1978
(``EGA Section 102'') is titled ``Contents of Reports.'' 5
U.S.C. App. Sec. 102. It provides that ``[e]ach report filed
pursuant to section 101(d) and (e) shall include a full and
complete statement'' with respect to enumerated items,
including (but not limited to) the following:
-- ``source, type, and amount or value of income . .
. from any source'' other than income referred to in
subparagraph B (dividends, rents, interest and capital
gains) (5 U.S.C. App. Sec. 102(a)(1)(A)
FOMB ETHICS ADVISOR COMMENTS ON FINANCIAL DISCLOSURE
PRACTICES AT FOMB: In addition to the Initial Financial Disclosure form
filed by each Board member upon initial vetting and appointment to the
FOMB in August 2016 and by ``staff designated by the Oversight Board,''
the FOMB has established quarterly, annual and termination Financial
Disclosure forms and protocols which require each Board member (and
designated executive staff) to file a Quarterly Periodic Transactions
Report at the end of each calendar quarter and an Annual Financial
Disclosure Report at the end of each calendar year, each of which, when
finalized and reviewed by the FOMB Ethics Advisor is signed and posted
on the FOMB public website. In addition, when each Board member's (or
designated executive staff member) term ends, we will require them to
file a Termination Financial Disclosure Report up to such termination
date.
2. PROMESA SECTION 109(a) ON CONFLICTS OF INTEREST STATES THE
FOLLOWING:
``[n]otwithstanding any ethics provision governing
employees of the covered territory, all members and staff of the
Oversight Board shall be subject to the Federal conflict of interest
requirements described in section 208 of title 18, United States
Code.''
US CODE SECTION 208 OF THE U.S. CODE (``CODE SECTION
208'') PROVIDES THAT COVERED INDIVIDUALS ARE PROHIBITED FROM
PARTICIPATING:
a. ``through decision, approval, disapproval,
recommendation, the rendering of advice, investigation, or
otherwise, in a judicial or other proceeding, application,
request for ruling or other determination, contract, claim,
controversy, charge, accusation, arrest or other particular
matter'' in which, ``to his knowledge,'' the individual or
``his spouse, minor child, general partner, organization in
which he is serving as officer, director, trustee, general
partner or employee, or any person or organization with whom he
is negotiating or has any arrangement, concerning prospective
employment, has a financial interest.'' 18 U.S.C. Sec. 208(a).
Violations of Code Section 208(a) are ``subject to the
[criminal] penalties set forth in section 216'' of title 18.
Id.
FOMB ETHICS ADVISOR COMMENTS ON CONFLICTS OF INTEREST
PROTOCOLS AT FOMB: The FOMB has developed and implemented the following
measures, policies and protocols regarding the proactive management of
possible or actual conflicts of interest not only for the Board but for
the entire FOMB staff including the creation of the Ethics Advisor role
under the Bylaws, direct Code of Conduct provisions, practices and
protocols as follows:
a. FOMB BYLAWS SECTION 11.4 COMPLIANCE WITH SECTION 109 OF
THE ACT STATES THE FOLLOWING:
``(a) For purposes of advising the Board regarding compliance with
Section 109 of the Act, and consistent with section 7.1 of these
Bylaws, the General Counsel shall retain an ethics expert (the ``Ethics
Advisor''), who shall undertake the duties and responsibilities set out
in this Section 11.4 and such other duties and responsibilities as the
Board shall from time to time determine to be appropriate.
(b) In accordance with section 109(a) of the Act, all members and the
ex officio member of the Board, the Executive Director and all other
staff shall be subject to the Federal conflict-of-interest requirements
described in section 208 of title 18, United States Code. It shall be
the responsibility of the Ethics Advisor to
(i) review all situations that raise potential conflicts of interest
issues,
(ii) determine if any Board or staff member should be disqualified from
involvement in any activities of the Board based upon a conflict of
interest and (iii) grant any exemptions that he or she deems
appropriate.''
(c) In accordance with section 109(b) of the Act, all members and the
ex officio member of the Board, the Executive Director and staff
designated by the Board (collectively, ``Disclosure Persons'') shall be
subject to disclosure of their financial interests as follows:
(1) Documentation of Financial Interests: Disclosure
Persons shall document financial interests using the form
attached to these Bylaws as Attachment A (including as it may
from time to time be amended) or in such alternative format as
approved by the Ethics Advisor.
(2) Submission of Financial Interest Information:
Disclosure Persons shall submit their financial interest
disclosure forms to the Ethics Advisor.
(3) Initial Disclosures. Each Disclosure Person shall
provide an initial disclosure of his or her financial interests
the later of (i) within thirty (30) days following the
Disclosure Person's appointment and (ii) February 28, 2017.
(4) Updates. Each Disclosure Person shall update his or her
financial disclosure whenever a purchase, sale or exchange of
stocks, bonds, commodity futures or other securities has
occurred and the amount of the transaction exceeds $1,000 as
set forth on the transaction disclosure form (and subject to
the exceptions noted in that form) attached to these Bylaws as
Attachment B (including as it may from time to time be
amended). Such disclosures shall be made as necessary on a
quarterly basis fourteen (14) calendar days after the close of
each calendar quarter beginning with the first calendar quarter
in 2017.
(5) Annual Disclosures. Each Disclosure Person shall
annually provide a subsequent disclosure of his or her
financial interests by no later than April 30 of each year,
beginning on April 30, 2018.
(6) Publication. After review by the Ethics Advisor, the
financial interest information provided by each Disclosure
Person shall be published on the Board's website.''
b. SECTION 2 OF THE FOMB CODE OF CONDUCT, FIRST ADOPTED ON
JANUARY 28, 2017 (AS AMENDED THEREAFTER), CONTAINS THE
FOLLOWING CONFLICTS OF INTEREST PROVISIONS APPLICABLE NOT ONLY
TO BOARD MEMBERS BUT ALL FOMB STAFF (``COVERED PERSONS''):
``2. Conflicts of Interest: All Covered Persons shall comply with Bylaw
11.4(b), which states in part:
``In accordance with section 109(a) of the Act, all members and the ex
officio member of the Board, the Executive Director and all other staff
shall be subject to the Federal conflict-of-interest requirements
described in section 208 of title 18, United States Code.''
a. It shall be the responsibility of each Covered Person to
proactively bring to the Ethics Advisor's attention any
concerns regarding actual or potential conflicts of interest as
soon as practical (and in advance of taking any official action
that could be perceived as raising ethical concerns),
including, without limitation, the following:
i. Matters that are subject to the annual and
quarterly Financial Disclosure obligations specified in
Section 4 below and Bylaw 11.4(c);
ii. Matters concerning any contract proposed to be
entered into by the Commonwealth of Puerto Rico or any
covered instrumentality as further defined and
described in the ``FOMB Policy: Review of Contracts,''
as amended from time to time (the ``Contract Policy''),
in which a Covered Person, his/her spouse, minor child,
general partner, organization in which he/she is
serving as an officer, director, trustee, general
partner or employee, or any person or organization with
whom he/she is negotiating or has any arrangement
concerning prospective employment, may have a financial
interest.
A Covered Person shall refrain from participating in any action that
falls under the Board's mandate implicating a potential conflict of
interest unless and until the Ethics Advisor specifically authorizes
such involvement (including the scope of such involvement) in writing
after an opportunity for a thorough review and vetting of such
potential conflict.''
c. OTHER FOMB CONFLICT OF INTEREST POLICIES, PRACTICES AND
PROTOCOLS. In addition to the above Bylaws, Code of Conduct, financial
disclosure and conflicts of interest practices the FOMB Board members
and all FOMB staff are subject to, the FOMB General Counsel and Ethics
Advisor have developed and implemented a variety of additional conflict
of interest policies, protocols and practices as follows (and continue
to do so as new issues and challenges arise):
+ FOMB CONTRACT REVIEW POLICY pursuant to which the FOMB staff
review certain material Commonwealth of Puerto Rico and its
instrumentalities' third-party contracts and under which certain
conflict of interest protocols are observed to ensure that any Board
member who may have an actual or an appearance of a conflict of
interest with any such third parties recuses him or herself prior to
any decisions being made by the FOMB.
+ FOMB BOARD AND STAFF ANNUAL ETHICS EDUCATION & TRAINING. FOMB
Ethics Advisor provides the Board and the entire staff of the FOMB with
periodic/annual ethics and code of conduct training and education
including a focus on conflicts of interest issues.
+ LUSKIN MCKINSEY INVESTIGATION RECOMMENDATIONS IMPLEMENTATION.
FOMB General Counsel and Ethics Advisor have developed a plan to
implement the eight recommendations from the Luskin McKinsey
Investigation completed in February 2019 pursuant to which a variety of
additional FOMB third party contractor conflicts of interest management
protocols and requirements will be imposed beyond those already in
place.
+ PUERTO RICO BOND, DEBT RESTRUCTURING AND OTHER RELATED
LITIGATION RECUSALS. The FOMB General Counsel and Ethics Advisor, with
the assistance of outside counsel from time to time, maintain a
proactive, preventative and disciplined approach to the recusal of FOMB
Board members when and if it appears that they may have a present or
past appearance or actual conflict of interest with any such litigation
or related proceedings.
***
Question 9. Were FOMB members checked for personal and professional
conflicts of interest at the time of their appointment and have these
background checks been made public?
Answer. Yes, the White House and Treasury Department conducted
background checks for personal and professional conflicts of interest
prior to the appointments being made. To the best of our knowledge,
those background checks have not been made public.
Question 10. Section 104(0) of PROMESA establishes that ``the
Oversight Board may investigate the disclosure and selling practices in
connection with the purchase of bounds issued by a covered territory
for or on behalf of any retail investors including any under-
representation of risk for such investors and any relationships or
conflicts of interest maintained by such broker, dealer, or investment
adviser as provided in applicable laws and regulations.'' In addition,
Section 104(p) establishes that the ``Oversight Board shall make public
the findings of any investigation references in subsection (o).''
Answer. Please see Appendix [E] for a copy of the Kobre & Kim
independent debt investigative report. This report has been publicly
available on our website in both English and Spanish since it was
released in August 2018.
Question 11. Why did the FOMB request to hide the identity of
individuals, corporations, and institutions potentially responsible for
issuing illegal debt as part of a list of possible defendants submitted
to the U.S. District Court for Puerto Rico in April 2019?
Answer. Only those individuals, corporations, and institutions that
signed a tolling agreement to extend the deadline by which certain
claims must be filed have had their identities kept confidential. The
reason is the FOMB has not determined whether to pursue litigation
against such entities and, given that they have signed a tolling
agreement, it would be prejudicial to accuse them publicly of
wrongdoing without first making that determination. The names of those
who have not entered into tolling agreements are public.
Question 12. The Government of Puerto Rico--at least the elected
part vs. the federally imposed part--appears to be matching the FOMB's
spending on outside lawyers and financial consultants dollar for
dollar, even though PROMESA provides for the FOMB to represent the
territory on debt matters. Have you tried to work out joint hiring of
lawyers, financial consultants, and others to save Puerto Rican
taxpayers hundreds of millions a year?
Answer. The FOMB and Government of Puerto Rico have worked closely
and cooperatively to reduce the exorbitant cost associated with the
debt restructuring. We continue to explore ways to eliminate
duplication and minimize professional fees. Unfortunately, the Title
III court has at times required separate counsel for each government
entity, which necessarily leads to excessive costs.
Question 13. Can you explain why the 2017 Fiscal Plan that was
released before the hurricane called for large reductions in debt
repayment--between 75 and 85 cents on the dollar--while the current
plan appears not to be as aggressive?
Answer. The fiscal stimulus from the Federal disaster recovery
funds and the insurance proceeds has the impact of increased economic
growth that translates into more tax revenues for the Commonwealth.
While no Federal monies are being used to pay debt, the Commonwealth's
new reality is that the Government will collect more revenue during the
period of the Fiscal Plan.
Question 14. One of the FOMB's biggest and most consistent
complaints about the Government of Puerto Rico is the Government not
adopting what the Board terms ``labor reforms.'' Chief among these is
the Government not repealing the long-standing law that requires
severance pay for employees fired without cause. The Chairman of the
Board wrote an op-ed in the New York Post reiterating this complaint
just this week.
Answer. The FOMB has laid out a series of structural reforms that
would improve the competitive nature of Puerto Rico's economy so that
the Island's economy can grow again and produce plentiful, good jobs.
Labor reform is just one structural reform, and the repeal of Law 80 is
just one aspect of a comprehensive labor reform package. Eliminating
the onerous severance requirement for firing employees without cause is
not a panacea for Puerto Rico's economy, though it is something that is
part of the labor market in 49 of the 50 states.
Question 15. Why did the FOMB repeatedly refer to an agreement with
the Governor as an agreement with the Government? Doesn't it understand
the separation of powers in a republican form of government?
Answer. The Governor represented that he was leading negotiations
on behalf of himself and the Legislature. The FOMB held many meetings
with the Legislature on this topic as well.
Question 16. Why didn't the FOMB negotiate a proposed change in law
with the Legislative Assembly, which writes the laws?
Answer. The FOMB held meetings with both the Governor and leaders
of the Legislature on this topic.
Question 17. How do the income and economic growth projections
included in the certified Fiscal Plans compare with the actual reports
on income generated by the Government of Puerto Rico? If the income and
economic growth projections included in the certified Fiscal Plans are
not met, does the FOMB have a Plan B to ensure funding for essential
public services and compliance with debt adjustment plans?
Answer. The revenue and economic growth projections in the Fiscal
Plan have been updated to reflect the Government revenue collections
and the Government's delayed implementation on fiscal and structural
reforms. The growth projections are based on latest economic data
available, disaster relief funding amounts, and roll out per FEMA. To
date, the FOMB's projections have been more conservative than actual
collections, i.e. revenues have been stronger than projected. However,
if at any time the established targets are not met the Government would
need to reduce spending in some less critical areas to properly fund
spending on priority areas such as health, education, and safety.
Question 18. The FOMB's certified Fiscal Plan for the territory as
a whole would require the Government of Puerto Rico to spend $1.162
billion of Puerto Rican tax dollars on Medicaid during the Fiscal Year
that begins July 1 and $2.294 billion in Fiscal Year 2021. Those would
be increases from zero this territorial fiscal year and $123 million in
FY 2018. To spend the amount dictated by the FOMB, the Government of
Puerto Rico will have to cut spending in other areas to generate these
amounts for Medicaid.
Answer. The Fiscal Plan projections are based on current law. In
FY2019 and FY2018 supplemental funding from ACA and BBA nearly
eliminated the need for the Government of Puerto Rico to pay for
Medicaid. The ACA and BBA supplemental funding are due to phase out in
FY2020. Therefore, the Fiscal Plan projects a funding cliff that begins
in FY2020 and gets worse in FY2021. To avoid the fiscal impact of the
projected cliff the FOMB has established a series of value-based
reforms the Government needs to implement to reduce the per member per
month cost. Assuming the Government implements these reforms, the
Government is projected to spend $865 million in FY2020 and $1.800
billion in FY2021. We are not sure where the $1.162 billion and $2.294
billion figures in the question come from.
Question 19. Do you recognize that you have constructed a Fiscal
Plan that insists its spending limits across the board are enough, so
that increasing Federal funding for Medicaid in Puerto Rico would
increase the budget surplus from which bond creditors could claim they
should be?
Answer. If additional revenues of any type, including Federal
funds, occur in any year, they would be characterized as excess primary
surplus. However, the FOMB is basing its assessment of what a
sustainable debt burden is for the Commonwealth on projected revenues,
and the Fiscal Plan projects revenues on current not potential law.
Question 20. The Puerto Rico Sales Tax Financing Corporation--
``COFINA''--is an instrumentality of the Government of Puerto Rico. It
was created a dozen years ago in response to a budget crisis solely to
enable the territory to borrow more than permitted by its constitution.
COFINA bonds of close to $18 billion totaled a quarter of the
territory's bonded debt and a third of the debt that the FOMB wants to
adjust.
Answer. Please see the answers to #24-27.
Question 21. Another quarter and third of the debt are ``General
Obligation'' or ``GO'' bonds issued or guaranteed by the Government of
Puerto Rico itself. According to the territory's constitution, payment
on these bonds must be made before any other expenditure of the
Government.
Answer. Please see the answers to #24-27.
Question 22. Section 201(a) of PROMESA requires the FOMB to
``respect the relative lawful priorities or lawful liens . . . in the
constitution, other laws, or agreements'' of Puerto Rico. The FOMB has
asked the PROMESA bankruptcy court to void more than $6 billion of the
nearly $18 billion in GO bonds because it exceeds the constitutional
limit on borrowing.
Answer. Please see the answers to #24-27.
Question 23. The FOMB's settlement with COFINA creditors is paying
senior COFINA bond holders 94 cents of face value and junior COFINA
holders 56 cents--with a 3.5 percent bonus for the big owners, with
which it primarily worked out the deal. Among these are hedge funds
that bought the bonds for far less than the amount that they will be
paid under the deal. Many Puerto Rican credit unions, other
institutions, and individuals, especially retirees own junior COFINAs.
Some hedge fund speculators with which the FOMB worked out the COFINA
deal are making profits of more than $1 billion.
Answer. Please see the answers to #24-27.
Question 24. Why doesn't the FOMB limit recoveries to what bond
creditors paid for the debt?
Answer. PROMESA establishes that the adjustment of debts follows a
legal process that is similar to what the U.S. bankruptcy code
provides. This legal process does not grant the FOMB the power to
``limit recoveries to what bond creditors [are] paid.'' Rather, the
bond creditors have legal rights that must be respected and considered
as part of the debt adjustment process. However, the FOMB conducts and
maintains a debt sustainability analysis for the Commonwealth to ensure
that the total amount of debt that the Commonwealth supports is
sustainable and allows for the Commonwealth to provide for and invest
in its residents and businesses and to fulfill the mandates of PROMESA.
Question 25. Why did the FOMB work out a deal with COFINA creditors
that allows windfall profits before working out a deal with GO
bondholders?
Answer. As stated in response to #7, in the summer of 2017, the
FOMB supported the establishment of a court-supervised process to
resolve the legal challenges asserted against the COFINA bonds. As part
of this process, the Title III court heard numerous arguments,
including from GO bondholders, regarding whether the COFINA bonds were
valid. Eventually, the court-supervised process produced a settlement
of the litigation that had been filed in connection with the COFINA
bonds. The FOMB developed and proposed a plan of adjustment for COFINA
based on that settlement. The COFINA plan of adjustment resolved issues
relating to the ownership of certain proceeds of the sales and use tax
revenue stream, which was a necessary predicate to determining what
resources the Commonwealth has to meet its various obligations,
including those to GO bondholders.
Question 26. Are you confident that the Puerto Rican economy will
be able to sustain both the new COFINA bond payments and the payments
that will need to be made on other bonds?
Answer. The FOMB is confident that by the end of the various debt
restructurings, the Commonwealth will have a sustainable debt burden
that allows for the Commonwealth to provide for and invest in its
residents and businesses and to fulfill the mandates of PROMESA.
Question 27. How does so much COFINA revenue going to bondholders
affect the ability of the Government of Puerto Rico to make payments on
the priority bonds issued or guaranteed by the territory?
Answer. As a result of the COFINA debt restructuring, the
Commonwealth achieved a 32 percent reduction in COFINA debt, over $17
billion in debt service savings, and access to $425 million annually,
on average, for the next 40 years that was otherwise going to be used
to pay COFINA debt. These savings and additional resources will help
the Commonwealth to restructure the GO bonds in a sustainable way and
allows for the Commonwealth to provide for and invest in its residents
and businesses and to fulfill the mandates of PROMESA.
Question 28. Current piecemeal debt negotiations have neglected to
look at Puerto Rico's ability to sustainably repay all its debt. A Debt
Sustainability Analysis authored by economist Martin Guzman indicates:
``the generosity with the COFINA bondholders can only be sustained if
the reduction on the rest of the public debt lies between roughly 85
percent and 95 percent--a conclusion that rests on the assumption that
the entire public debt restructuring is designed with the goal of
restoring debt sustainability.''
Notwithstanding, in the hearing you expressed your goal of using
approximately 10 percent of Puerto Rico's own resources to debt
service.
How do you suppose Puerto Rico could be left with a debt load
comparable only with the richest states, such as that of Florida, which
has a with a population of little over 21 million and own revenues of
almost $41 billion versus that of Puerto Rico, which has a population
of roughly 3.2 million and general revenues of roughly $10 billion? If
you look at the whole picture, how much of the debt stock will be
reduced? How do you prevent the island from falling prey to a future
default on its debt?
Answer. As outlined in the certified fiscal plan for the
Commonwealth, the FOMB considers a variety of metrics commonly used by
ratings agencies to ascertain what a sustainable debt burden is for the
Commonwealth. One such metric is the ratio of net tax-supported debt to
own-source revenues. Because this metric is a ratio based on a
jurisdiction's own-source revenues, it takes into consideration the
fact that some jurisdictions are more prosperous or more populous than
others. If the FOMB were to restructure the Commonwealth's debt such
that it is equivalent to 10 percent of Puerto Rico's own-source
revenues, and Florida had a debt burden equivalent to 10 percent of its
own-source revenues, the total amount of debt sustained by Puerto Rico
would be a fraction of that for Florida, which recognizes that Florida
has a larger economy and larger population.
Question Submitted by Rep. Horsford
Question 1. In helping Puerto Rico out of its debt crisis, it is
essential that Puerto Rico be better prepared for natural disasters
like Hurricane Maria, which caused an estimated $94 billion in damages
to a country already more than $70 billion in debt. If Puerto Rico's
infrastructure is not improved with resiliency to hurricanes and other
disasters, Puerto Rico could be destroyed again and sent back into a
whirlwind of debt. How can Congress help to mitigate and prepare Puerto
Rico for impending hurricanes and other natural disasters?
Answer. Congress can help to mitigate and prepare Puerto Rico for
impending hurricanes and other natural disasters by providing timely
and well-invested disaster reconstruction funds per the Stafford Act
and the Bipartisan Budget Act and by ensuring the flow of funds is as
streamlined as possible.
Questions Submitted by Rep. Bishop
Question 1. The Oversight Board notified the Governor that his
agencies had not achieved the required amount of savings in their
budget to issue Christmas bonuses for government workers, yet the
Governor issued the bonuses anyway. Did that action have any effect on
government operation and public services in Puerto Rico? How about the
effect on the economy?
Answer. The certified budget for this year did not budget funds for
the payment of a Christmas bonus. The Government implemented a
voluntary transition program (``VTP'') that reduced headcount by 5,000
employees which produced significant savings. While the Government was
able to afford the Christmas bonus as a result of these savings, many
of the employees that left through this VTP were teachers and sworn
officers affecting core Governmental services. The FOMB has been clear
that VTP for core services is not an efficient way of reducing the
Government's personnel costs.
Question 2. What could be done to create more of an ease in doing
business in Puerto Rico?
Answer. The competitive environment in Puerto Rico requires
improvement if it is to compete with other investment destinations,
specifically by reducing a variety of inefficiencies related to
building, expanding and attracting businesses. Easier-to-navigate
regulations, less complex and faster investment and permitting
mechanisms, and streamlined tax administration systems can encourage
new businesses to hire employees and invest in growth. These outcomes
can be achieved by making necessary administrative and legislative
changes and by investing in digitization. Please see Chapter 8 of the
Fiscal Plan for more information.
Question 3. What factors in Puerto Rico contribute to the low labor
force participation rate of only forty percent?
Answer. Puerto Rico's historically low levels of formal labor force
participation cannot be attributed to any single factor but rather a
range of public policies that have served to reduce employment on the
Island. Perhaps the biggest barrier to hiring in Puerto Rico is its
lack of ``at-will employment,'' which would lower the cost of any new
hire, encourage additional hiring, and make it easier for employers to
dismiss unsatisfactory employees improving employee morale and
productivity. While there are variations in labor laws among the 50
mainland states, 49 of them have adopted some form of at-will
employment.
In addition to the Island's labor laws, Puerto Rico residents may
also face disincentives to participate in the formal labor market due
to rules attached to various welfare benefits, including the
Nutritional Assistance Program (NAP), Medicaid, Section 8 public
housing, TANF, WIC, and other programs. These benefits are sometimes
stereotyped with a claim that ``welfare pays more than work.'' While
this may be true in isolated cases, the broader problem occurs when
welfare beneficiaries work in the formal sector and receive earnings
that trigger a reduction in their benefits. The phase-out of government
transfer benefits as earned income increases acts as a tax to
disincentivize formal employment, as effective hourly wage (income
received by working minus the loss of benefits) can be substantially
lower than the formal hourly wages received. For many residents,
working in the informal sector and collecting transfer benefits can
often result in higher effective income than working in the formal
sector. On this basis, the FOMB included a welfare to work program in
the structural reforms of the Certified Fiscal Plan.
Question 4. What sort of structural reforms could the local
government take to improve economic health and stability?
Answer. In addition to those that are part of the Fiscal Plan, the
Government could do the following:
Labor reform, generating an additional 0.50 percent GNP
growth over 2 years, by repealing Law 80, reducing paid
leave, and eliminating the Christmas Bonus. Key reforms
could require incentives, such as wage subsidies for low-
income workers and training programs to address
identifiable skills gaps. The reform is projected to
increase the 30-year surplus by $13 billion if implemented
after 10 years (FY2029) and by $4 billion if implemented
within 20 years (FY2039).
Ease of Doing Business reform, generating an additional
0.15 percent GNP growth, based on instituting Trading
Across Borders reform to improve customs processes and
congestion and repealing restrictive laws (e.g., Laws 21
and 75 dictating terms for terminating commercial supplier
relationships). The 30-year surplus is projected to
increase by $4 billion if implemented after 10 years
(FY2029) and by $1 billion if implementation lags by 20
years (FY2039).
Overhaul of the tax system of Puerto Rico to stimulate
growth, requiring short-term investment (lower revenues in
short-term) for long-term growth benefits up to 0.5 percent
spread over 5 years. The reform is projected to increase
the 30-year surplus by $10 billion if implemented after 10
years (FY2029) and by $2 billion if implementation lags by
20 years (FY2039).
Question 5. What happens if structural reforms are delayed or not
implemented at all?
Answer. Implementation of structural reforms is key to restoring
the economy and promoting growth on the Island. The latest Fiscal Plan
accounts for the already delayed implementation of the structural
reforms. Structural reforms contribute more than $300 million in
increase government revenues between FY2019-2024, and over $34 billion
in the Fiscal Plan's 30-year forecast. However, even after fiscal
measures and structural reforms and before contractual debt service,
the Fiscal Plan projects an annual deficit starting in FY2038, in large
part due to insufficient structural reforms.
Question 6. Has the government been successful in implementing
reforms?
Answer. The Government has implemented reforms in some areas but is
delayed implementing the structural reforms required by the Fiscal
Plan, as measured by progress against implementation milestones
included in the plan.
The impact of human capital and welfare reforms have been delayed
from FY2021 to FY2025 to reflect the 4-year implementation ramp the
Government is planning for NAP work requirement implementation. Ease of
doing business reforms were projected to add 0.5 percent to economic
growth in the 2019 Fiscal Plan (downgraded already from 1.0 percent in
prior Fiscal Plans), and delayed from having an impact in FY2020 to
FY2022. The impact of power sector reform has also been delayed and
spread out, from 0.30 percent in FY2020 to 0.10 percent in each year
FY2021-FY2023, though the Government is making progress toward
meaningful reform of the power utility.
To date, implementation progress and engagement has varied across
Government agencies. The lack of consolidation legislation is hampering
agencies from achieving savings, despite efforts to reduce personnel
and non-personnel spend through diverse initiatives. Some agencies are
developing meaningful tools and creative solutions to achieve savings
(e.g., the Department of Agriculture planning digital solutions to
reduce personnel or the Department of Environment's green tourism
initiative which could create job opportunities and tax revenues) but
many have done little to no planning at all.
Agencies have reduced personnel through the VTP program, but have
not provided evidence to suggest that this has driven efficiencies in
operations and in some cases has caused vacancies in key roles (e.g.,
sworn officers).
Question 7. How many total agencies are in Puerto Rico's current
government structure? Are any of these agencies redundant in their
mission and function to the government?
Answer. There is a total of 114 agencies in the Commonwealth of
Puerto Rico, excluding some public corporations. As part of the fiscal
plan process, the Government presented to the FOMB a proposal to
consolidate these agencies into 42 departments or groupings to avoid
redundancies and provide a more efficient service. Unfortunately, there
is uneven implementation of these proposed consolidations to date.
Unequivocally, there is redundancy in the mission and function of many
of these agencies, which is the reason why the Government and the FOMB
aligned in reducing the back-office costs of government agencies.
In some cases, the consolidations are designed to better focus the
competing efforts of multiple agencies, such as the Economic
Development grouping, which will consolidate 10 agencies into 1. In
other cases, the consolidations should serve to move services closer to
residents, such as the Healthcare grouping, which will consolidate
access points to important services like Medicaid.
Question 8. Should some of these agencies be consolidated? Does
Puerto Rico have any issues with `rightsizing' their government?
Answer. Yes. As part of the Fiscal Plan process the Government
presented to the Oversight Board a proposal to consolidate many of the
agencies to avoid redundancies and provide more efficient services to
the people of Puerto Rico. Unfortunately, the implementation of these
plans has been delayed, and some have been canceled altogether.
Question 9. How challenging has it been for the Board to encourage
the government to undertake this important initiative?
Answer. The Government and the FOMB are aligned in many areas of
the Fiscal Plan. However, in other areas we have asked the Government
to be more aggressive in implementing plans that will ultimately
benefit the people of Puerto Rico. The FOMB is constantly monitoring
the implementation of the Fiscal Plan, and as such, is monitoring over
120 individual implementation plans. In some areas, like the
implementation of an EITC, there is progress. In others, however, like
welfare-to-work, the implementation is much delayed.
Question 10. How is the Board proposing to reduce spending in the
University of Puerto Rico system?
Answer. Please see answer to question #5 from Chairman Grijalva.
Question 11. Has the Board ever interfered in any way with funding
for public safety like police, fire emergency management or coroner
services?
Answer. No. In fact, we have worked collaboratively with the
Government to identify unspent resources within the budget that can be
reapportioned to fund critical services from the Institute of Forensic
Sciences, Firefighters, and other public safety providers.
Question 12. Has the Board ever prevented the government from
spending money to help repair any homes or help people?
Answer. No. The Board has never been asked for any reapportionment
of funds for these purposes.
Question 13. Why have so many funds have been expended on law
enforcement and public education in Puerto Rico while law enforcement
officers and teachers are still disproportionately underpaid in Puerto
Rico?
Answer. It is a matter of allocation of resources and how money is
spent, rather than how much money is spent. For years, the Government
was spending billions of dollars in services, but educational and
safety outcomes do not seem to reflect the amount of money spent, nor
were law enforcement officers and teachers adequately compensated. The
FOMB has been working with the Government to prioritize funding to key
areas such as salaries, textbooks, equipment, among others.
For example, in terms of the police: based on recent reports, over
2,000 of the 13,000 sworn officers in the police are still fulfilling
administrative roles. This situation, accompanied by the heavy
attrition of sworn officers, led to a 2013 consent decree agreement
with the U.S. Department of Justice on reform measures, which compelled
the police bureau to conduct a staffing allocation and resources study
to assess the proper size of the police force. Based on these findings,
the police bureau needs to rebalance the work force and move sworn
officers to non-administrative roles to improve personnel resource
allocation and maximize public safety.
The Fiscal Plan provides funds to make compensation more
competitive for both police and teachers. Police received a $1,500 per
officer increase in FFY2019 and will receive an $11,500 salary and
required benefits increase over the next 2 years. In addition, they
will receive an additional $250 contribution per year per sworn officer
for improved life and disability insurance starting in FY2020. For
teachers and directors, there was initially a $46M provided for salary
increases. The Fiscal Plan provides an additional $500 salary increase
plus required benefits totaling $14M annually.
Question 14. COFINA was the largest bond issuer and the Board
successfully restructured those debts and the market reaction has been
positive. How important is restructuring the GO bonds, and is it true
that the rating agencies won't rate Puerto Rico until the GO credit is
re-established?
Answer. The FOMB is working diligently on an approach to
restructuring the GO bonds and expects to a file a plan of adjustment
for the Commonwealth as soon as reasonably possible. To the best of our
knowledge, the ratings agencies do not have a blanket policy against
rating Puerto Rico credits before the GO credit is re-established.
Question 15. Do you think the lack of compensation is an issue for
current board members? Do you believe it is an obstacle to attracting
new board members? If so, what do you believe would be appropriate
compensation?
Answer. The FOMB does not support any changes to PROMESA at this
time.
Question 16. Some creditors have claimed that the decisions and
actions the Oversight Board has taken over the last 3 years to
restructure some of Puerto Rico's debt in Title III will have
detrimental impacts on how other municipalities across the United
States will be able to borrow considering the reactions of rating
agencies and credit analyst paying attention to the outcomes with
Puerto Rico's circumstances. Does the Oversight Board take into account
or conduct any analysis of how potential actions and decisions that are
made with regards to the debt restructuring strategy implemented will
affect the broader U.S. municipal bond market? Why or why not?
Answer. The FOMB is committed to restructuring Puerto Rico's debt
in a manner that is in Puerto Rico's best interests and is consistent
with PROMESA. That is what the FOMB is focused on in developing its
approach to restructuring Puerto Rico's debt.
Questions Submitted by Rep. Hice
Question 1. When we last met in this Committee I asked you about
PREPA's decision to refuse an offer from creditors for a 5-year debt
holiday and to instead pursue a bankruptcy strategy. You told me that
after the hurricane you felt that was the best course of action due to
what would have resulted in unbearable electricity costs. You also
mentioned that you had engaged in a new dialogue with those creditors
and were working on a plan. Can you please update me on the outcome of
those conversations here roughly a year-and-a-half later?
Answer. Shortly after the hearing, the FOMB and Government of
Puerto Rico announced that we had entered into a restructuring support
agreement (``RSA'') with the Ad Hoc Group of PREPA bondholders and
Assured Guaranty to restructure PREPA's bonds. This RSA puts PREPA on a
path to exiting Title III with a substantially reduced and more
predictable debt burden and is a necessary step toward transforming
PREPA into a cleaner, cheaper, more reliable energy utility. The RSA
reduces PREPA's debt by over 30 percent and protects consumers from
uncapped debt-related charges. Relative to the prior RSA that the FOMB
rejected in 2017, the current agreement would save PREPA and the Puerto
Rican residents who depend on its electricity supply about $3 billion
in debt service payments over the next 10 years alone.
Question 2. We will be entering hurricane season in a few short
months, and a second disaster could spell doom for both rebuilding the
island and for solving this debt crisis. Can you tell me what the Board
has done to mitigate that threat? And furthermore, do you feel that the
Puerto Rican government and or PREPA has executed its responsibilities
to ensure hurricane preparedness for 2019 and beyond?
Answer. Through the Fiscal Plan and Budget development process, as
well as through the follow-up implementation tracking efforts, the FOMB
has attempted to ensure that PREPA undertakes the required operational
reforms to be better prepared to respond to a future emergency event.
Some of these reforms include the development and implementation of
vegetation management and system maintenance programs and the
development of a labor capacity assessment to determine optimal
staffing levels, so that PREPA has the personnel necessary to respond
to weather events promptly and effectively. Through our budgetary
oversight, the FOMB has also sought to ensure that funding is made
available for maintenance projects and underutilized funds are
reallocated to priority areas, such as the acquisition of mobile
generators, which will help PREPA increase generation capacity near
large load centers during emergencies or peaking hours, which increases
emergency responsiveness and overall system resiliency and reliability.
There is still much work to be done, as some, but not all, of the
reforms necessary for a resilient and stormproof energy system have
been fully implemented and executed. Within its authority, the FOMB has
and will continue to ensure that all necessary reforms are accounted
for and appropriately funded through the certified Fiscal Plan and
Budget. However, ultimate implementation of these reforms falls
squarely with PREPA.
The successful conclusion of ongoing efforts to contract with a
private party to manage and operate the T&D System is also an important
step in the medium- and long-term efforts toward hurricane preparedness
and resiliency. An appropriately incentivized operator will look toward
incorporating those upgrades necessary to increase the T&D System's
ability to withstand hurricanes, as well as dedicate the resources
necessary to maintain those upgrades on par with applicable quality
standards. Recently enacted Act 17-2019 provides a clear mandate to
both PREPA and the private operator to take the necessary measures to
strengthen the system and develop and maintain and appropriate
emergency response plan, subject to the periodical oversight of an
independent regulator.
Finally, providing visibility and reaching a final resolution on
the allocation of Federal disaster funding will enable Puerto Rico to
accelerate the pace at which it makes the necessary upgrades to reduce
the impact of future hurricanes.
Questions Submitted by Rep. Johnson
Question 1. Ms. Jaresko, in your testimony, you note that Puerto
Rico law enforcement officers have slower response times than that of
their U.S. mainland counterparts. As you know, Puerto Rico saw a spike
in crime in the aftermath of Hurricane Maria as police officers called
in sick to protest a lack of payment for overtime service. In your
view, why were officers not paid what they were owed in Puerto Rico?
Was this due to a lack of funds or a misuse of funds?
Answer. I cannot tell you why police officers argue they were not
paid for their overtime service. That is a question only the Department
of Public Safety can answer. It was not due to a lack of appropriated
funds in the budget at the time.
Moreover, the FOMB firmly believes that in order to promote
economic growth on the island, public safety needs to be a priority. As
part of this commitment, the FOMB included $122 million in the FY2019
budget to cover the back pay owed to sworn cops as part of a 3-year
payment plan (amounting to $366 million) to completely repay this
obligation.
Question 2. According to the World Bank, the labor force
participation rate in the United States is 62 percent. Puerto Rico's
labor force participation rate measures 41 percent, and the island's
labor force participation rate was low even before the 2017 hurricane
season--it measured 45 percent in 1990. What factors do you believe
contribute to this discrepancy between Puerto Rico and the United
States as a whole?
Answer. Please see the answer to question #3 from Rep. Bishop.
Question 3. The FOMB has now been in place for 3 years. What are
the top structural reforms that must be enacted to bring long-term
economic stability to Puerto Rico?
Answer. Please see the answer to question #4 from Rep. Bishop.
*****
The following were submitted as attachments to Ms. Jaresko's responses.
These documents are part of the hearing record and are being retained
in the Committee's official files:
-- Appendix A--2019 Fiscal Plan for Puerto Rico, Restoring Growth
and Prosperity, certified by the Financial Oversight and
Management Board of Puerto Rico, dated May 9, 2019.
-- Appendix B--FOMB--Contracts, Legal Services Agreement from
Holland & Knight, LLC, dated Feb. 1, 2019.
-- Appendix C--FOMB--Contracts, Independent Contractor Services
Agreement from Off Hill Strategies, LLC Consulting
Services, dated July 1, 2018.
-- Appendix E--Kobre & Kim LLP, Independent Investigator, Final
Investigative Report, dated August 20, 2018.
______
A Protester. The debt is illegal and immoral. The junta is
illegal and immoral. Not only did you rip off your country, now
you're ripping off mine. You and your board are corrupt and
rife with conflicts of interest. The woman should----
The Chairman. Sir, you need to leave.
A Protester. Shame on all of you for this sham creating
this junta. Shame on all of you for continuing to steal from
the people of Puerto Rico. Stop attacking my people. Stop
attacking the UPR. Stop attacking the children of Puerto Rico.
Stop attacking our families. Cancel the debt now.
[Pause.]
The Chairman. Ms. Jaresko, you may continue.
Ms. Jaresko. I had finished. Thank you very much.
The Chairman. That was a rather dramatic finish.
[Laughter.]
The Chairman. Mr. Martin Guzman, Non-Resident Senior Fellow
for Fiscal Policy, Espacios Abiertos. Sir, the floor is yours.
STATEMENT OF MARTIN GUZMAN, NON-RESIDENT SENIOR FELLOW FOR
FISCAL POLICY, ESPACIOS ABIERTOS
Mr. Guzman. Thank you, Chairman Grijalva. Members of the
House of Representatives Committee on Natural Resources, good
morning, or good afternoon actually. Thank you for the
opportunity to appear today before this Committee to discuss
lessons learned since enactment of PROMESA.
A basic tenet of modern capitalism is that insolvent
debtors need a fresh start. This is clearly the case for Puerto
Rico. There will be no economic recovery if there isn't a fresh
start for Puerto Rico. And it is well known that these
decentralized bargaining processes for debt restructuring often
lead to costly delays and the relief obtained being
insufficient to restore debt sustainability, making recessions
longer and deeper. Aware of these premises, Congress took
action and enacted PROMESA to facilitate debt restructuring and
economic recovery for Puerto Rico. So, in this sense, PROMESA
makes sense to me.
The Board was given the difficult task of designing a plan
for restoring the sustainability of the public debt that would
lead to Puerto Rico's recovery of access to capital markets.
And the critical question that I would like to address today is
whether the policies that the Board has promoted have been
aligned with the mission that it received, and I'm going to
focus on the macroeconomic aspects, on the macro debt aspect,
and I will argue that the answer to that critical question is
that the policies have not been aligned with the mission the
Board received so far.
In March 2017, the Board certified a fiscal plan. The
consensus among the economists that had been analyzing Puerto
Rico's case was that the plan did not provide for economic
recovery, that it included a number of unrealistic assumptions,
and that the new fiscal plan had to be fundamentally different
than the previous one if Puerto Rico was to have a chance for
recovery.
That plan, of course, became obsolete after Hurricanes
Maria and Irma, and the Puerto Rico struggles were aggravated.
The plan was replaced by a new fiscal plan in October 2018, and
in this testimony I intend to shed light on the consequences to
the future of Puerto Rico's economy implied by the latest
fiscal plan and the restructuring deal with the COFINA
bondholders.
Let's start with a basic issue, which is that the
sustainability of Puerto Rico's debt needs to be assessed and
addressed comprehensively, and there is a critical question
which is how much debt reduction Puerto Rico needs. This is
always the most critical question in debt restructuring
processes. It is a theme that I've been doing research on for
more than a decade, first at Brown University and then at
Columbia University, and I had the chance to look closely at
Puerto Rico's case over the last years, so I will share five
conclusions from my analysis on what has happened recently.
First conclusion, in my view, the Board's debt policies are
not yet aligned with what is needed to restore debt
sustainability. I see the Board still supporting too much debt
service.
Second, the COFINA deal poses a serious risk of a failed
debt restructuring. This deal would make sense if the other
groups of Puerto Rico's bondholders would get a very large
haircut. So, according to the calculations that my colleagues
and I have performed, as well as calculations from others, the
COFINA deal can only be sustained if the reduction on the rest
of the public debt lies between roughly 85 percent and 95
percent.
Third, the attempts of the COFINA deal imply that COFINA
bondholders will be getting far more than what they could have
expected a year ago or a year and a half ago, as it was
reflected in market prices. The outcome of the political game
over disaster relief funds has been contrary to the interests
of Puerto Rican citizens, and those who bought COFINA bonds in
the months that followed Hurricane Maria have actually made
massive profits at the expense of the future of Puerto Rico's
economy.
Fourth, I see the Board addressing the debt restructuring
one piece at a time in a way that I'm concerned could prove
unsustainable. In fact, if similar terms to the COFINA deal
were agreed with the General Obligation bondholders, Puerto
Rico's crisis wouldn't be resolved.
Fifth, the Board and the Government of Puerto Rico have
overstated the savings that the COFINA deal will deliver for
Puerto Rican taxpayers. I'll be happy to discuss the numbers
and the meanings of the $17 million that have been quoted. And
they have also understated the distributional consequences as
well as the risk that the outcomes of these debt negotiations
entail.
So, to conclude, I still don't see a well-oriented
restructuring process. My concern with what we are observing is
that the recovery induced by the Federal relief assistance will
be short-lived. We will see Puerto Rico grow in the short term,
but if the problem of unsustainable debt is not resolved, we
will see an economy once again in deep trouble by the time the
Federal relief starts to cease, and that probably will finish
in another costly restructuring.
Thank you again for the opportunity to share my views.
[The prepared statement of Mr. Guzman follows:]
Prepared Statement of Martin Guzman, Non-Resident Senior Fellow for
Fiscal Policy, Espacios Abiertos
Chairman Grijalva, Members of the U.S. House of Representatives
Committee on Natural Resources, good morning. Thank you for the
opportunity to appear today before this Committee to discuss the
lessons learned since the enactment of Puerto Rico Oversight,
Management, and Economic Stability Act 3 years ago.
The enactment of PROMESA and establishment of Puerto Rico's
Financial and Oversight Management Board, to which I will henceforth
refer as ``the Board,'' occurred in the context of a deep debt crisis.
A basic tenet of modern capitalism is that insolvent debtors need a
fresh start. And it is well known that decentralized bargaining
processes for debt restructuring often lead to poor outcomes, with
costly delays and the relief obtained being insufficient to restore
debt sustainability. Delays in concluding debt restructurings make
economic recessions deeper and longer. Aware of these premises,
Congress took action and enacted PROMESA, a law ostensibly designed to
facilitate debt restructuring and economic recovery for Puerto Rico.
The Board was in charge of designing and implementing a plan for
restoring the sustainability of the public debt that would allow for
the Commonwealth's recovery of access to capital markets and create the
necessary foundation for economic growth and to restore opportunity to
the people of Puerto Rico.
The Board certainly faced a difficult task, one that was of essence
for the future of Puerto Rico. The critical question that I would like
to address today is whether the policies that the Board has promoted
have been aligned with the mission that it received. I will argue that,
unfortunately for Puerto Ricans, but more fortunately for a group of
bondholders, they have not.
In March 2017, the Board certified a fiscal plan that was going to
be the basis of Puerto Rico's fiscal and debt policies over the
following decade. The consensus among the economists that had been
analyzing Puerto Rico's case was that the plan was severely flawed. In
a letter published on January 24, 2018, twenty-six internationally
renowned economists argued that ``the pre-hurricane fiscal plan did not
provide for economic recovery,'' that it included ``a number of
unrealistic assumptions,'' and that the new fiscal plan had to be
``fundamentally different than the previous one if Puerto Rico is to
have a chance for recovery.'' \1\
---------------------------------------------------------------------------
\1\ A Fiscal Plan for Puerto Rico Recovery (2018). Available at
http://recovery4pr.org/.
---------------------------------------------------------------------------
In September 2017, Hurricane Maria aggravated Puerto Rico's
troubles. Though Maria was a tragedy, it also created an opportunity to
rewrite the fiscal plan and to come up with a sensible debt
restructuring plan.
The island now has a new fiscal plan and an approved restructuring
deal with the COFINA bondholders. In this testimony, I intend to shed
light on the implications of both.
Let's start with the basics. The sustainability of Puerto Rico's
debt restructuring needs to be assessed and addressed comprehensively.
The critical question is how much debt reduction the island needs in
order to take its debt position to a sustainable level. A sensible
approach would be to calculate a range of how much debt could have been
paid in total before the hurricane and use that range as the basis of
how much debt can be sustained after the hurricane. Otherwise, part of
the expansionary effects that the Federal relief will have on Puerto
Rico's economy will constitute an implicit bailout to the bondholders.
In a study published in 2018 by the institution that I represent on
this occasion, Espacios Abiertos, as well as later by the National
Bureau of Economic Research and by the peer-reviewed journal CENTRO,\2\
professors Pablo Gluzmann, Joseph Stiglitz, and myself analyzed the
fiscal plan of March 2107 and computed the debt relief that Puerto Rico
needed in order to restore debt sustainability. In a study published
this morning by Espacios Abiertos,\3\ conducted under my direction, the
analysis has been updated. Our research, as well as related analyses
from reputed colleagues, suggests a number of conclusions that I would
like to share.
---------------------------------------------------------------------------
\2\ Gluzmann, Pablo A., Martin M. Guzman, and Joseph E. Stiglitz
(2018). ``An Analysis of Puerto Rico's Debt Relief Needs to Restore
Debt Sustainability.'' National Bureau of Economic Research Working
Paper No. 25256. Also available as Espacios Abiertos Paper: http://
espaciosabiertos.org/wp-content/uploads/DSA-English.pdf.
\3\ Espacios Abiertos (2019), ``Puerto Rico's Debt Struggle.''
---------------------------------------------------------------------------
First, while there is a strong consensus among economists on the
macroeconomic debt policies that Puerto Rico needs to adopt in order to
escape from the current debt trap, the Board's debt policies are not
being aligned with the conclusions reached by that consensus. Instead,
they are leaving a legacy of debt and risk that may undermine the
future of Puerto Rico's economy.
Second, the COFINA deal poses a serious risk of a failed debt
restructuring. The deal makes sense only if the other groups of Puerto
Rico's bondholders get a very large haircut. The arithmetic is simple.
According to our calculations, as well as calculations by others who
arrived at similar results with different methodologies, the generosity
with the COFINA bondholders can only be sustained if the reduction on
the rest of the public debt lies between roughly 85 percent and 95
percent--a conclusion that rests on the assumption that the entire
public debt restructuring is designed with the goal of restoring debt
sustainability.
Third, the terms of the COFINA deal imply that COFINA bondholders
will be getting far more than they could have expected a year ago, as
reflected in market prices. Overall, the outcome of the political game
among the Board, the government of Puerto Rico, the U.S. Congress, and
the bondholders over disaster relief funds is contrary to the interests
of Puerto Rican citizens. Those who bought COFINA bonds in the months
that followed Hurricane Maria have made massive profits at the expense
of the future of Puerto Rico's economy. In fact, with this deal, COFINA
bondholders will be among the main beneficiaries of the effects that
the Federal relief will have on the island's economy.
Fourth, the Board is still supporting too much debt service and is
addressing one piece of the debt restructuring at a time in a way that
will likely prove inconsistent. If terms similar to the COFINA deal are
agreed to with creditors who hold General Obligation bonds, Puerto Rico
will be forced to default again or else suffer even more fiscal
austerity, which will lead the economy once again into a destabilizing
spiral of recession and outmigration by the time the Federal relief
assistance decreases.
Fifth, the Board and the government of Puerto Rico have overstated
the savings that the COFINA deal will deliver for Puerto Rican
taxpayers and understated the distributional consequences as well as
the risks that the outcomes of those debt negotiations entail. In my
view, the people of Puerto Rico have been misled and not accurately
informed of the actual meanings of this deal by those who are supposed
to represent them.
While I am sure the last 2 years have brought difficult challenges
to the Board, I still do not see a well-oriented restructuring process.
My concern with the evolution of events that we are witnessing is that
the recovery induced by the Federal relief assistance will be short-
lived. While in the short term we will observe that Puerto Rico grows,
if the problem of unsustainable debt is not resolved, we will see again
a declining economy with further outmigration and a prolonged
humanitarian crisis by the time the Federal relief starts to cease.
That path will inevitably end in the need for another costly
restructuring.
Thank you again for the opportunity to share my views. I hope my
testimony contributes to a better informed policy debate.
______
Questions Submitted for the Record to Prof. Martin Guzman, Columbia
University Business School and Espacios Abiertos
Questions Submitted by Chairman Grijalva
Question 1. In your testimony, you mentioned that ``delays in
concluding debt restructurings make economic recessions longer and
deeper.'' What specific changes should the FOMB, the Government of
Puerto Rico, and Congress implement in the short-term to ensure that
Puerto Rico's debt restructuring process is successful and does not
result in a longer recession?
Answer. First, there should be a debt restructuring plan that
assesses the restructuring needs comprehensively and seeks a deal with
bondholders that is consistent with the computed restructuring needs.
This is not happening. Puerto Rico's FOMB is still supporting too much
debt service and is addressing one piece of the debt puzzle at a time
in a way that will likely prove inconsistent.
Second, the fiscal plan must be based on more realistic assumptions
about the effects of fiscal austerity policies and structural reforms,
in order to be able to serve as a reasonable basis for the computation
of the debt restructuring needs.
Question 2. According to your testimony, the FOMB and the
Government of Puerto Rico have overstated the savings of the COFINA
deal and understated the risks of those negotiations. Can you further
explain how your assessment of the COFINA deal differs from the
assessment performed by the FOMB?
Answer. The Puerto Rican government's announcement that the deal
entails savings of $17 billion is wrong. That figure assumes, first,
that the future payments scheduled for the old and the new COFINA bonds
should be discounted at the same rate; and second, it assumes a
discount rate of zero. None of those assumptions make sense.
One measure that is often invoked in restructuring episodes is the
haircut, defined as the ratio between (i) the difference between the
present discounted value (PDV) of the old defaulted bond and the PDV of
the new bond that creditors receive in the debt exchange, and (ii) the
PDV of the old defaulted bond. To compute the present value of future
flows, a discount factor has to be selected. If the restructuring is
effective in reducing the probability of a future default, the value at
which the flows on the defaulted bond are discounted should be higher
than the yield at the exit of the restructuring process. A computation
of the haircut for different combinations of discount factors sheds
light on the actual meanings of the COFINA deal. If both the PDV of the
old and the new COFINA were computed using the same discount factor of
zero, the haircut would be $16.8 billion--a number that approximates
what the government of Puerto Rico has advertised as the actual
savings, equivalent to a haircut of 34 percent. The haircut becomes
smaller when, as is reasonable in this case, we use a higher discount
factor for the old than for the new bonds. For instance, for a discount
factor of 6 percent for the new bond and 9 percent for the old bond,
the haircut is just 16 percent. For a discount factor of 5 percent for
the new bond and 9 percent for the old bond, the haircut is 2 percent.
These are more reasonable choices of parameters.
It must also be noted that the COFINA deal is not a simple exchange
of old bonds for new bonds with lower value. While the old bonds were a
mix of senior and junior bonds, the new bonds are all senior. The old
junior bonds get the largest reduction but they gain seniority. In
effect, the deal has improved rather than decreased the bondholders'
expected recovery, as reflected by the increase in the prices of those
bonds over the last year due to increasing optimism over the expected
recovery--an optimism that was confirmed by the exchange.
Question 3. According to your calculations, the COFINA agreement
can be sustained if the debt reduction on the rest of the public debt
is between 85 percent and 95 percent. Have other jurisdictions reached
this type of debt restructuring and is it practical to achieve it?
Answer. According to the calculations that my co-authors and I
performed,\1\ a conservative estimate of the sustainable stock of
public debt under the assumption that the primary fiscal surplus could
stabilize at the values forecasted by the FOMB was between $14.9
billion and $19.9 billion. Thus, with a COFINA debt legacy of $12
billion implied by the deal, the necessary reduction on the remaining
stock of public debt would have to be between 85.4 percent and 95.3
percent.
---------------------------------------------------------------------------
\1\ Gluzmann, Pablo A., Martin M. Guzman, and Joseph E. Stiglitz
(2018). ``An Analysis of Puerto Rico's Debt Relief Needs to Restore
Debt Sustainability.'' National Bureau of Economic Research Working
Paper No. 25256.
I am not aware of a haircut of that size on an entire stock of
municipal debt in the United States but there are antecedents of groups
of creditors receiving a haircut in that interval. A haircut of that
size on Puerto Rico's other bondholders would certainly entail large
---------------------------------------------------------------------------
inter-creditor inequities.
Question 4. The 2018 Fiscal Plan certified by the FOMB required a
Human Capital and Labor Reform that implements employment at-will and a
reduction of mandated paid leave. Does research support the
implementation of labor-market reforms to achieve economic development
during a recession?
Answer. No. Puerto Rico's economy is in a demand-constrained
regime. Thus, the assumption that those structural reforms will be a
driver of economic recovery in the short-term is not well-founded.
Besides, its political status and the possibility of its citizens to
migrate to the U.S. mainland means that the appropriate models for
assessing the effects of labor-market reforms that affect wages are not
the same as those that apply to most sovereign countries.
Question 5. Are you aware of any other case of massive primary
surpluses projected in the first 10 years of a debt restructuring deal,
that is then followed by declining negative ones? If Puerto Rico's
economy continue to wither, what are the implications of the current
debt restructuring deals down the line, say in about 15-20 years?
Answer. The IMF \2\ recognizes that sustained large surpluses are
not common and it incorporates this constraint in its debt
sustainability analyses.
---------------------------------------------------------------------------
\2\ IMF (2011). ``Modernizing the Framework for Fiscal Policy and
Public Debt Sustainability Analysis.'' Prepared by the Fiscal Affairs
Department and the Strategy, Policy, and Review Department. Approved by
Carlo Cottarelli and Reza Moghadam.
Besides, there is no evidence that supports the premise that
targeting sustained high primary fiscal surpluses has been associated
---------------------------------------------------------------------------
with recoveries in situations of debt distress.
When it comes to Puerto Rico, if the debt reduction provided by the
restructuring proves insufficient to restore the sustainability of the
public debt position, the citizens of Puerto Rico will end up suffering
the consequences of a new state of debt distress, in the form of a
higher tax burden, more austerity, depressed economic activity and
fewer opportunities in the island, with the consequent outmigration
that reduces the tax base even more, implying an even larger burden for
those who stay. Such a situation would eventually end up in another
costly restructuring.
______
The Chairman. Thank you very much.
Let me now turn to Ms. Amanda Rivera, Executive Director of
The Institute for Youth Development of Puerto Rico. Please.
STATEMENT OF AMANDA RIVERA, EXECUTIVE DIRECTOR, THE INSTITUTE
FOR YOUTH DEVELOPMENT OF PUERTO RICO
Ms. Rivera. Buenas tardes. I want to thank Chairman
Grijalva and the rest of the Committee for providing us a seat
at the table to discuss one of Puerto Rico's most pressing
issues: child poverty.
The extremely high rates of child poverty combined with the
declining child population presented a state of emergency for
Puerto Rico even before Hurricane Maria ravished our island. It
presents not only a human rights issue but a severe threat to
Puerto Rico's long-term economic development and
sustainability.
Yet, we have failed to act with urgency on this matter. The
Youth Development Institute of Puerto Rico is the only non-
partisan NGO strictly dedicated to improving the lives of
children in Puerto Rico through research, policy, and advocacy.
So, being that we are an entity that uses data to advocate for
policy changes, let me paint a picture using numbers.
If you are a child in Puerto Rico, you are likely to be
living in poverty, and there is a good chance that that poverty
is extreme. The day before Maria, 58 percent of Puerto Rico's
children lived in poverty and 39 percent lived in extreme
poverty. As a comparison, Louisiana has the highest child
poverty rate of all 50 states, at 28 percent.
It is also important to understand that this high level of
poverty has remained consistent for the last 20 years. In 1999,
when Puerto Rico's economy was doing well by some indicators,
the child poverty rate was also 58 percent. This tells us that
child poverty is not just a result of economic activity in the
island but rather, a systemic problem.
As a teenager in Puerto Rico, you will be more likely than
your counterparts in the states to not be in school or working.
The day before Maria, 13 percent of youth ages 16 to 19 were
considered to be disconnected youth. In the United States, that
percentage is 7 percent.
And as you begin to grow and think of a family of your own,
odds are that you will choose to leave Puerto Rico to pursue
better opportunities for yourself and your children, or that
you will choose to have few, if any, children. Between 2007 and
2017, Puerto Rico lost 35 percent of its child population.
The bottom line is that each day we have less children and
the majority are living in conditions that will limit their
potential as adults.
The study that we commissioned on the impact of Hurricane
Maria on children tells us that these trends have likely
worsened since. Around a fourth of families with children
reported losing wages because of the hurricane, and around a
third of the lowest income families a year after the hurricane
reported being in a worse economic situation than they were
before. It should not be a surprise then that around 15 percent
of families with children said that they were still considering
moving to the mainland.
Three years after PROMESA, what we have learned is that
children, despite carrying on their shoulders Puerto Rico's
future, are not a priority. Puerto Rico's children's budget and
analysis that we conduct on the budget allocated to programs
that serve children and their families found that these
programs have been cut by 15 percent between Fiscal Years 2014
and 2019. These cuts, although not exclusive to recent years,
have been consistent since austerity measures have been
implemented.
While some might argue that these cuts are reflective of
the declining child population, we argue that the investment
was never enough to begin with and that we have an opportunity
at hand to concentrate resources in an effective manner to
significantly reduce child poverty and improve youth outcomes.
Three years after PROMESA, congressional actions have
fallen short of what is needed to seriously address the
problem. While PROMESA required the Task Force on Economic
Growth for Puerto Rico to create a report that, among other
things, suggested policies to reduce child poverty, these two
policies that were included have not been carried out.
One was the extension of the Child Tax Credit for families
of one and two children, and this has garnered bi-partisan and
bicameral momentum, so we must ensure that this Congress does
not end without passing it. It's the very, very least that can
be done.
The report also listed the creation of an interagency task
force on child poverty. However, when Congress ordered the
creation of a roadmap to reduce child poverty by half in the
United States, which was published recently, this analysis did
not include Puerto Rico. Three years after PROMESA, which
ironically means ``promise'' in Spanish, it is with a heavy
heart that I say that we cannot promise our children that their
future will be better.
Our ask is for Congress to act on the recommendations
related to child poverty in the Task Force report and to not
end there because that would not be enough. To consider the
reduction of child poverty as an essential component of Puerto
Rico's economic development strategy, to commit to making the
investments necessary for this, and to keep the issue at center
when reviewing the impact of PROMESA.
Puerto Rico's children not only deserve better but they
also hold the key to Puerto Rico's prosperity.
Thank you.
[The prepared statement of Ms. Rivera follows:]
Prepared Statement of Amanda Rivera, Executive Director, The Institute
for Youth Development of Puerto Rico
Good Morning. I want to thank Chairman Grijalva for providing us a
seat at the table to discuss what we believe is one of Puerto Rico's
most pressing moral and economic issues--child poverty. The extremely
high rates of child poverty, combined with declining child population
were an emergency, even before Hurricane Maria ravaged our island. It
presents not only a human rights issue, but a severe threat to Puerto
Rico's long-term economic development. Three years after PROMESA what
we have learned is that children, despite carrying on their shoulders
Puerto Rico's future, are not a priority. We are past due on correcting
this wrong.
My name is Amanda Rivera and I am the Executive Director of the
Youth Development Institute of Puerto Rico. We are the only non-
partisan and non-governmental entity strictly dedicated to improving
the lives and opportunities of children in Puerto Rico through
research, policy and advocacy. We are also Puerto Rico's Kids Count
partner.
So, being that we are an entity that is known for its ability to
compile and disseminate data to advocate for policy changes, let me
paint a picture using numbers.
If you are a child in Puerto Rico, you are likely to be living in
poverty, and there is a good chance that the poverty is extreme. The
day before Maria, not only did 58 percent of children in Puerto Rico
live in poverty, but 39 percent lived in extreme poverty. As context,
Louisiana has the highest child poverty rate of all fifty states, at 28
percent.
It is also important for context to understand that this high level
of poverty has remained consistent for the last 20 years. In 1999, when
Puerto Rico's economy was doing well by some indicators, the child
poverty rate was also 58 percent. So that number has remained stagnant,
which tells us that the child poverty rate is not just a result of
economic activity in the island, but rather systemic problem.
As a teenager in Puerto Rico, you will be more likely than your
counterparts in the states to not be in school or working. The day
before Maria 13 percent of youth ages 16-19 were considered to be
disconnected youth. In the United States that percentage is 7 percent.
And as you begin to grow, and think of a family of your own, odds
are that you will choose to leave Puerto Rico to pursue better
opportunities, or that you will choose to have few, if any children.
Between 2007 and 2017, Puerto Rico lost 35 percent of its child
population.
The study that we commissioned on the impact of the hurricane on
children and youth tells us that these trends of poverty and migration
have likely worsened since. Around a fourth of families with children
reported losing wages because of the hurricane, and around a third of
the lowest income families, a year after the hurricane reported being
in a worse economic situation than before the hurricane. It should not
be a surprise then that around 15 percent of families with children
said they were still considering moving to the United States.
Austerity measures also compromise the opportunities that children
will have to escape poverty. The Children's Budget, an analysis that we
conduct on the budget allocated to programs that serve children and
their families in Puerto Rico, found that these programs have been cut
by 15 percent between fiscal years 2014 and 2019. These cuts, although
not exclusive to recent years, have been consistent since new fiscal
measures have been implemented. Also, the Fiscal Plan adopted by the
Oversight Board recommends cuts over the next 5 years of $576 million
to the Department of Education, $886 million to the health insurance
plan for low and middle income families and $163 million to the
Department of Health, which includes services for mental illnesses.
While some might argue that the cuts are reflective of the
declining child population, we argue that the investment was never
enough to begin with, and that we have an opportunity at hand to
concentrate resources in an effective manner to significantly reduce
child poverty, and in this way change Puerto Rico's economic and social
trajectory.
Yet, PROMESA and other congressional actions have fallen short of
what is needed to seriously address this problem. While PROMESA
required the Task Force on Economic Growth for Puerto Rico to create a
report that among other things, suggested policies to reduce child
poverty, the two policies that were included there have not been
carried out.
One was the extension of the Child Tax Credit for Families of 1 and
2 children. This has garnered bipartisan and bicameral momentum, and we
must ensure this Congress does not end without passing this. It's the
very least that can be done.
The Report also listed the creation of an interagency task force on
child poverty. However, when Congress ordered the creation of roadmap
to reduce child poverty by half in the United States through the
National Academies of Sciences, this analysis did not include Puerto
Rico.
Meanwhile, Puerto Rico's children continue to languish in
conditions that limit their ability to reach their full potential.
Child poverty continues to be a side note, and not an essential
component of Congress' agenda of economic growth for Puerto Rico.
Our ask is for Congress to act on the recommendations related to
child poverty in the Task Force's report, and to not end there, because
that would not be enough. To include Puerto Rico in the plans to reduce
child poverty, to commit to making the changes and investments
necessary for this and to keep the issue at center when reviewing the
impact both PROMESA's and the Recovery's outcomes. Puerto Rico's
children not only deserve better, but also hold the key to Puerto
Rico's prosperity. Thank you.
______
Questions Submitted for the Record to Amanda Rivera, Executive
Director, The Institute for Youth Development of Puerto Rico
Question Submitted by Chairman Grijalva
Question 1. Section 2141(b)(1)(B) of PROMESA requires that Fiscal
Plans approved by the Fiscal Oversight and Management Board for Puerto
Rico ``ensure the funding of essential public services.''
Would defining essential public services help improve the quality
of life of children in Puerto Rico? Please explain why or why not.
Answer. The extent to which defining essential public services
would help improve the quality of life of children in Puerto Rico is
complex, and will greatly depend on the way in which these essential
public services are defined.
On one hand, including public education as an essential service,
could help ward off further cuts from the public school system--K-12
and the university. Several studies have found a link between per pupil
spending and positive student outcomes, especially for students from
low-income backgrounds. These investments are deemed to be more
effective if they are directed toward specific elements--such as
reducing class size--and are focused on supporting instruction and
other direct services for students.
However, it should be noted that while education is an important
variable in children's well-being, their opportunities to thrive and
leave poverty are a product of other variables beyond the education
system. Children's development is affected by a host of different
systems interactions, which include the family, the school, the broader
community, and even the broader economic and cultural context
(Bronfenbrenner, 1979).
Moreover, as research has proven, broader economic factors such as
poverty, as defined by household income--which in the case of Puerto
Rico is pervasive to the majority of the child population--can have a
negative impact on educational outcomes, cognitive development health,
emotional well-being, and child welfare.
The definition would then need to include services that impact
parents, grandparents taking care of children, child care and early
childhood programs, work force development programming, mental health,
social work and safety nets. If these other services and programs,
which are not usually considered essential, are not included, they then
run the risk of deeper cuts.
Other ways to look after children's well-being, especially the
issue of child poverty, is to better define economic growth so that it
includes social development and the reduction of child poverty. In this
way, the fiscal plan would be obliged to provide for investments to
reduce child poverty. This would include a broader range of programs
and services, that could be inclusive of education.
References:
Bronfenbrenner, Urie. (1979). The ecology of human development.
Cambridge, MA: Harvard University Press.
Center on the Developing Child (2010). The Foundations of Lifelong
Health Are Built in Early Childhood. Retrieved from
www.developingchild.harvard.edu.
Jackson, C. Kirabo, Rucker C. Johnson, and Claudia Persico (2015).
``Money Does Matter After All.'' Education Next, July 17, 2015. http://
educationnext.org/money-matter/.
Ratcliffe, Caroline & McKernan, Signe-Mary. (2012). ``Child Poverty and
its Lasting Consequence.'' Washington, DC: Urban Institute. Retrieved
from: https://www.urban.org/research/publication/child-poverty-and-its-
lasting-consequence/view/full_report.
______
The Chairman. Dr. Ana Cristina Gomez-Perez, Associate
Professor, University of Puerto Rico.
STATEMENT OF ANA CRISTINA GOMEZ-PEREZ, ASSOCIATE PROFESSOR,
UNIVERSITY OF PUERTO RICO
Dr. Gomez-Perez. Buenas tardes. Honorable Chairman and
members of the Committee, I am Professor Gomez and the
Coordinator of the Budget Committee of the University Board,
the highest non-political body in the University. I have
experienced firsthand the dire economic impact that PROMESA has
inflicted on the financial stability of the University system,
and have been a witness to the shortcomings of the University's
fiscal plan.
The purpose of PROMESA is to create a mechanism to ensure
the fiscal responsibility of Puerto Rico and its access to
capital markets. My main argument is that investing in the
University is one of the major mechanisms to achieve PROMESA's
goals, and the University fiscal plan goes in the opposite
direction.
In my written testimony, you will find all the studies and
analyses that support this argument. For this reason, the
University Board respectfully requests the members of this
distinguished commission to amend Section 201(b)(1)(B) of
PROMESA to ensure proper funding of essential public services
that include public funds allocated to the University of Puerto
Rico in order to comply with its obligations and accreditation
requirements.
In 1908, Congress extended the Morrill-Nelson law to Puerto
Rico, granting our institution the status of a Land Grant
College. Today, the University is one of the major economic
engines of the island, and the most important factor in
promoting social mobility among the population. According to
the mainstream economic studies, the University generates $1.5
for each dollar of government investment. That is an impressive
150 percent return.
The University is the primary academic and scientific
research institution in Puerto Rico, receiving $284 million in
grants and research funds annually. It seems obvious that
Puerto Rico's economic recovery depends on providing essential
service and investing our limited financial resources where
they generate better returns for the economy.
Investing in higher education by adequately funding the
University complies with both of these goals, but our
Government and the Board remain oblivious to those realities
and continues to impose draconian cuts in funding for our
University with a 53 percent budget cut in 4 years.
If such projected cuts are implemented, by the year 2021
the University will operate on deficits and will be in default
of its creditors, thus setting the stage for a total closure.
The primary problem is that the University Plan stands on a
false premise, that the University is a conventional government
agency and that it can choose to default on its obligations and
seek protection through bankruptcy. However, the Federal Higher
Education Act will permanently ban the University from
receiving Title IV funding if it chooses this path since the
institution will be in non-compliance with the financial
responsibility requirements of the law.
That is to say, if we are forced to run into deficit, as
foreseen by the fiscal plan, we will be excluded from all
Federal scholarships, grants, and research funding. With 55
percent of the population living below poverty level, this
means that about 73 percent of our students will lose the
possibility of higher education because they will not have
access to Title IV funds.
This process has already begun. Last January, the Middle
States Commission placed the University on their ``Show Cause''
status and required us to demonstrate compliance with the
affiliation requirement related to the institution's financial
resources.
We can all agree that the University must adopt measures
that respond to the economic reality of the island, and in
fact, it has been doing so for a number of years. But as a sui
generis government corporation, the University must dutifully
observe a wide range of Federal and state regulations and
requirements for the accreditation of all its campuses and
programs.
It is obvious that PROMESA and the Government's fiscal plan
will lead to the eventual closing of the University of Puerto
Rico, which will have a terrible economic effect on the island.
That is why we respectfully request the Congress to amend
PROMESA law, Section 201(b)(1)(B), so that it is not up to the
local politicians and the Board to arbitrarily decide what the
adequate investment should be for the University system.
Gracias.
[The prepared statement of Ms. Gomez-Perez follows:]
Prepared Statement of Dr. Ana Cristina Gomez-Perez,\1\ Professor of
University of Puerto Rico-Rio Piedras Law School; Coordinator of the
Budget Committee, University Board
---------------------------------------------------------------------------
\1\ I have a PhD from the Universidad Complutense de Madrid and I
am a Law Professor. For the past 18 months, I have served at the
University Board, representing the UPR, Rio Piedras Campus, that is the
biggest and more comprehensive campus of the system. At the University
Board, I served as the Coordinator of the Budget Committee, which has
the legislative mandate to evaluate the budget of the units of all the
UPR system and make recommendations to the UPR President, and the
Governing Board before approval. In this committee we have examined the
budget projections for all the units and the critical situation brought
about by the current Fiscal Plan.
---------------------------------------------------------------------------
Honorable Chairman and members of the Committee, I am a professor
at the University of Puerto Rico School of Law and serve as Coordinator
of the Budget Committee of the University Board. The University Board
is the highest non-political body in the University. I have experienced
first-hand the dire economic impact that PROMESA has inflicted on the
financial stability of the University system and have been a witness to
the shortcomings of the University Fiscal Plan.
The purpose of PROMESA is to create a mechanism to ensure the
fiscal responsibility of Puerto Rico and its access to capital markets.
My main argument is that investing in the University is one of the
major mechanisms to achieve PROMESA's goals and that the University
Fiscal Plan moves us in the opposite direction. In my written testimony
you will find all the studies and analyses that support this argument.
For the reasons stated above, the University Board respectfully
requests the members of this distinguished commission to amend section
201(b)(1)(B) of PROMESA to ensure proper funding of essential public
services which include public funds allocated to the University of
Puerto Rico, so that it is able to comply with its obligations and
accreditation requirements.
In 1908 Congress extended the Morrill-Nelson law to Puerto Rico,
transforming our institution into a Land Grant College. Today the
University is one of the major economic engines of the Island. Not only
is it the single most important factor in promoting upward social
mobility among the general population, but according to mainstream
economic studies the University generates 1.5 dollars for each dollar
of government investment. That is an impressive 150 percent return on
government expenditures.
The University is the primary academic and scientific research
institution in Puerto Rico, receiving $284 million in grants,
scholarships and research funds yearly, and generating positive
economic wealth and social benefits for the population at large. It
would seem obvious that Puerto Rico's economic recovery depends on
providing essential services and investing our limited financial
resources where they generate better returns for the economy. Investing
in higher education by adequately funding the university complies with
both of these goals, yet, our Government remains oblivious to such
reality and continues to impose draconian cuts in funding for our
university with a 53 percent budget cut in 4 years for the University.
It is inconceivable that this is done while the statewide elections
commission is allocated an increase of 87 percent of the budget.
If such projected cut is implemented, by the year 2021 the
University will operate on deficit and be in default of its creditors,
thus setting the stage for its total closure. The Government fiscal
plan stands on a false premise: that the University is a conventional
agency, and that it can choose to default on its obligations or seek
protection through bankruptcy. However, the Federal Higher Education
Act would permanently ban the university from receiving Title IV
funding if it chooses this path; since the institution would
effectively be in non-compliance with the financial responsibility
requirements of the law. That is to say, if we are forced to run into
deficit, as foreseen by the fiscal plan, we will be excluded from all
Federal scholarships, grants and research funding. In Puerto Rico, with
55 percent of the population living below poverty levels, this means
that about 73 percent of the students would lose the possibility of
higher education because they would not have access to Title IV funds.
Ironically, these sources of income are the same that the fiscal plan
identifies as new, alternate funding mechanisms for the University to
survive.
This process is already underway. Last January, the Middle States
Commission of Higher Education (MSCHE) placed the University in ``Show
Cause'' Status and required it to demonstrate compliance with
affiliation requirement related to the institution's financial
resources.
We can all agree that the University must adopt measures that
respond to the economic reality of the Island, and in fact it has been
doing so for a number of years, before PROMESA we suffered a cut of
more than $500 million. But as a sui generis government dependency, the
university must dutifully observe a wide range of federal and state
regulations and requirements for the accreditation of all its campuses
and for a large number of specific programs.
It is obvious that PROMESA and the government's fiscal plan will
lead to the eventual disappearance of the University of Puerto Rico
and, as an aftermath, a terrible economic effect to the Island. That is
why we expressly request Congress to amend the PROMESA Law and include
the recommended language, so that it is not up to the board or local
politicians to arbitrarily decide what the adequate investment should
be for the University system.
The University of Puerto Rico's Board approved unanimously, in its
regular meeting of April 3, 2019, request to the members of this
Committee to amend the PROMESA law at section 201(b)(1)(B) to read as
follows:
``ensure the funding of essential public services; this
includes public funds allocated to the University of Puerto
Rico by means of the formula established in Law 1 of 1966 or a
minimum of $800 million annually until termination of the
Oversight Board pursuant to section 209 of this Act, so that
with the aforesaid funds the institution is able to fulfill its
major role as an essential public service and is also able to
comply effectively with its obligations and accreditation
requirements.''
Fiscal Plan for the University of Puerto Rico
Act 2 of January 20,1966, amended in 1993, established the funding
formula used by the state for allocation of resources to the UPR with
the objective of promoting fiscal autonomy, as well as for the
expansion of the Institution. This, with the purpose of ensuring the
construction of regional campuses that would enable all citizens the
opportunity to receive the best higher education at the lowest cost
possible.\4\ On December 1, 1995 Puerto Rico's legislature amended Law
2 of 1966 to increase the formula to 9.60 percent of the annual rental
annuities. Subsequently, the funding formula that had been established
for UPR operations suffered drastic changes due to the freezing of
government funds, since fiscal year 2014-2015 to fiscal year 2017-2018
which resulted in a cumulative budget cut of more than 550 million
USD.\5\
---------------------------------------------------------------------------
\4\ Velez Cardona. W. (2002) El financiamiento de la educacion
superior en Puerto Rico. San Juan: Puerto Rico, Grafica Metropolitana.
p. 79.
\5\ http://www.vcertifica.upr.edu/PDF/CERTIFICACION/2017-2018/
21%202017-2018.pdf (Revised on April 24, 2019).
---------------------------------------------------------------------------
With the enacting of the Puerto Rico Oversight, Management, and
Economic Stability Act (PROMESA),\6\ the approved fiscal plan for
Puerto Rico's Central Government establishes a series of fund
reductions for the University as detailed below:
---------------------------------------------------------------------------
\6\ 48 U.S.C. Sec. 2121.
------------------------------------------------------------------------
Fiscal Year Adjusted Annual-Recurrent Adjusted Accumulate
------------------------------------------------------------------------
2017-2018 $202,718,000 $202,718,000
2018-2019 $44,074,000 $246,792,000
2019-2020 $84,236,000 $331,028,000
2020-2021 $71,000,000 $402,028,000
2021-2022 $23,000,000 $425,028,000
2022-2023 $24,000,000 $449,028,000
------------------------------------------------------------------------
After the incorporation of the reductions, the University's Fiscal
Plan was approved by the FOMB in October 2018,\7\ with economic
measures:
---------------------------------------------------------------------------
\7\ http://www.upr.edu/wp-content/uploads/2018/10/Fiscal-Plan-21-
oct-2018-.pdf (Revised on April 24, 2019).
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
On April 2, 2019, the University Governing Board presented a
revised fiscal plan \8\ with more drastic and harmful economic measures
than those previously established in the plan approved for 2018.
---------------------------------------------------------------------------
\8\ http://www.aafaf.pr.gov/assets/upr-revised-fiscal-plan-april-
2019.pdf. p. 23. (Revised on April 24, 2019).
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The economic future for the UPR, under the approved or revised
plan, assures that the UPR's budget will be in negative cash-flows and
will show a deficit as soon as the upcoming fiscal year. There is an
expected deficit increase to between $30 to $50 million for the year
2023. In a note to the financial statements for fiscal year 2016-17,
the UPR external and independent auditors expressed the ongoing concern
---------------------------------------------------------------------------
that:
``With these fiscal plan measures . . . the University would
have operational deficits starting in fiscal year 2021 and
increasing through fiscal year 2023.'' \9\
---------------------------------------------------------------------------
\9\ http://www.upr.edu/wp-content/uploads/2019/01/
Estados_auditados_UPR.pdf (Revised on April 24, 2019).
---------------------------------------------------------------------------
Eligibility Requirements for Title IV Funds at the University of Puerto
Rico
One of the main sources for the UPR finances are grants and Federal
aid for students and researchers. Title IV of the Higher Education Act
of 1965 [HEA] of 1965, 20 U.S.C. Sec. 1070(a), establishes various
Federal student financial aid such as the: Pell Grant Program,
Supplemental Educational Opportunity Grant Program, Stafford Loan
Program, PLUS Program, Consolidation Loan Program, Work-Study Program,
the Teacher Education Assistance for College and Higher Education Grant
Program, the William D. Ford Federal Direct Loan Program, and the
Federal Perkins Loan Program.\10\ The amount of funds that the UPR
receives from these grants and Federal aid amounts to $287 million
annually according to UPR's Fiscal Plan \11\ and more than 70 percent
of students depend on this type of Federal aid to study.\12\ The income
received by Title IV is the second source of income of the University
and according to the Fiscal Plan it must increase gradually to complete
the planned cuts of the appropriations of the Government. As discussed
here, the University depends on Title IV funds for its survival and yet
the Fiscal Plan violates the eligibility requirements of Title IV.
---------------------------------------------------------------------------
\10\ 20 U.S.C. Sec. 1070 et seq.
\11\ http://www.aafaf.pr.gov/assets/upr-revised-fiscal-plan-april-
2019.pdf, p. 36.
\12\ According to University Student Vice-president data.
---------------------------------------------------------------------------
Furthermore, Title IV of the Higher Education Act [HEA] of 1965, 20
U.S.C. Sec. 1070(a), establishes various Federal student financial aid
(grant and loan) programs whereby the government contributions funds to
eligible higher education institutions the funds necessary to provide
aid to qualifying students and pursue an academic program.\13\ Eligible
institutions are those that meet the HEA definition of ``institution of
higher education.'' The definition imposes three primary requirements
for eligibility: (1) state licensure, (2) accreditation by a Department
of Education (DOE) recognized accrediting agency, and (3) certification
by the DOE that the institution is administratively capable and
financially responsible. Up to 1992, higher education institutions were
legally able to file for restructuring of their debts through
bankruptcy proceedings. In 1990, however, Congress amended the
Bankruptcy Code to exclude a debtor's eligibility to participate in
title IV financial aid programs and a debtor's accreditation status and
state licensure as part of the property of the estate, as well as to
exclude from the automatic stay on actions by the DOE to terminate
eligibility or any action by an accrediting agency or state licensing
board regarding the institution's status. Notwithstanding, in 1992
Congress closed the bankruptcy door by amending the definition of
``institution of higher education'' to exclude an ``institution . . .
that has filed for bankruptcy.'' 20 U.S.C. Sec. 1002(a)(4)(A).
---------------------------------------------------------------------------
\13\ Title IV of the Higher Education Act of 1965 establishes
various Federal student financial aid such as: Pell Grant Program,
Supplemental Educational Opportunity Grant Program, Stafford Loan
Program, PLUS Program, Consolidation Loan Program, Work-Study Program,
the Teacher Education Assistance for College and Higher Education Grant
Program, the William D. Ford Federal Direct Loan Program, and the
Federal Perkins Loan Program. 20 U.S.C. Sec. 1070 et seq.
---------------------------------------------------------------------------
The Senate Report that accompanied the HEA amendments \14\ focused
on the shortcomings of the accrediting agencies in assuring the quality
of education required for Guaranteed Student Loan Programs' (GSLP)
participation, in the ``cost-effectiveness and ongoing viability'' of
the GSLP, and in the danger of allowing a school to admit new students
despite its financial instability, ultimately producing a financial
burden for students left without degrees but with unpayable debts.
---------------------------------------------------------------------------
\14\ See Higher Education Amendments of 1992, Pub. L. No. 102-325,
106 Stat. 448. Section 1002(a)(4) of the HEA was originally numbered 20
U.S.C. Sec. 1088(a)(4). It was renumbered 20 U.S.C. Sec. 1002(a)(4) as
part of Pub. L. No. 105-244 in 1998.
---------------------------------------------------------------------------
Congress' concerns regarding the use--or misuse--of Title IV funds
by certain institutions and their failure to fulfill their educational
commitment to their students, is at the core of Congress' decisions
regarding the possible venues of institutions of higher education to
address their dire financial situation. Because of these amendments,
now accrediting agencies carefully overview the financial situation of
the institution and its impact on the quality of education.
When Congress' enacted the Puerto Rico Oversight, Management and
Economic Stability Act (PROMESA) in 2016, extending the island access
to a debt restructuring mechanism, it also created an Oversight and
Management Board to serve as the debtor in debt-restructuring
processes. In May 2017 the Board filed ``the largest bankruptcy case in
the history of the American public bond market'' \15\ As a result, the
UPR, one of the government's corporations, was forced into a blanket
bankruptcy process, where it lacks control over its restructuring.
Moreover, without further provisions in PROMESA, the Act has, de facto,
produced a worse scenario than that evaluated by Congress in 1992.
Competing interests in a process where that UPR is not considered an
essential service, and where there are no guarantees of a minimum
amount of annual funding to fulfill its primary role. This has brought
the UPR to a financial situation that threatens its accreditation and
thus its fundamental education duty, and its role in the development of
society as whole.
---------------------------------------------------------------------------
\15\ https://theintercept.com/2017/05/09/puerto-ricos-123-billion-
bankruptcy-is-the-cost-of-u-s-colonialism/ (Revised on April 24, 2019).
---------------------------------------------------------------------------
The negative effect of the fiscal plan measures for the UPR will be
twofold. The immediate effect is evident in the line items impacted by
the severe budget cuts, and the resulting operational deficit under the
fiscal plan, a deepening deficit beginning in fiscal year 2019.
The deepening operational deficit will be met with the second, and
even more devastating effect, which is the impending loss of the
institution's ability to receive Federal student financial aid funding
from the DOE, resulting in the end of the UPR's feasibility \16\ as
Puerto Rico's premiere and most prestigious institution for higher
education. That is, the deepening operational deficit created by the
fiscal plan's measures will lead the UPR into insolvency and,
consequently, cause this institution to default on its financial
obligations. However, since the UPR is an institution for higher
education, it may not be able to reorganize or restructure its debts
under bankruptcy protection, since ``an institution's eligibility to
participate in Title IV programs terminates immediately upon filing for
bankruptcy, and termination will instantly destroy the institution's
financial viability.'' \17\
---------------------------------------------------------------------------
\16\ See, Scott F. Norberg, Bankruptcy and Higher Education
Institutions, St. Johns University School of Law Symposium, 23 Am.
Bankr. Inst. L. Rev. 385 (2015).
\17\ Id. See, also, 20 U.S.C. Sec. 1002(a)(4)(A), (6).
---------------------------------------------------------------------------
Even defaulting in its obligations to creditors may cause an
institution to lose eligibility to participate in Federal funding.
Under Title IV of the HEA, one of the main requirements for eligibility
is certification by the DOE that the institution is administratively
capable and financially responsible.\18\ This means that an insolvent
higher education institution that defaults in its obligations to
creditors may face losing Title IV eligibility, as it may fail to
qualify, and obtain the necessary certification from the DOE as being
administratively capable and financially responsible. Therefore, the
UPR may be rendered ineligible to participate in Title IV programs
because of the deepening deficit created by fiscal plan measures,
resulting in the institution's insolvency and inevitable default. In
turn, loss of access to Federal financial aid funding most likely will
force the UPR to shut down.
---------------------------------------------------------------------------
\18\ 20 U.S.C. Sec. 1001(a).
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In 2018, 8 of the 11 campuses were placed on probation by the
regional accrediting agency for our area, Middle States Commission on
Higher Education (MSCHE). Their main concern being the lack of evidence
that these campuses had the resources to carry out their mission and
comply with financial obligations.
On January 11, 2019, MSCHE placed the University in ``Show Cause''
status and required each campus a report to ``show good cause'' as to
why accreditation should not be removed and demonstrate compliance with
Standard VI (Planning, Resources, and Institutional Improvement).\19\
Affiliation requirement 11 specifically provides that:
---------------------------------------------------------------------------
\19\ https://www.msche.org/2019/01/1O/middle-states-commission-on-
higher-education-puts-11-institutions-of-the-university-of-puerto-rico-
on-show-cause/ (Revised on April 24, 2019).
``The institution has documented financial resources, funding
base, and plans for financial development, including those from
any related entities (including without limitation systems,
religious sponsorship, and corporate ownership) adequate to
support its educational purposes and programs and to ensure
financial stability. The institution demonstrates a record of
responsible fiscal management, has a prepared budget for the
current year, and undergoes an external financial audit on an
---------------------------------------------------------------------------
annual basis.''
The 11 campuses of the UPR had to submit a report to the MSCHE,
which included a teach out plan, explaining the closing measures of
each one in the event that they had to cease operations. The problems
with MSCHE is only the initial effect of a downward spiraling process.
Implemented Measures by the University of Puerto Rico to Address the
Economic Crisis
Since the enactment of PROMESA, the University has been
implementing drastic adjustments due to the continuing fund reductions
suffered in its budget. Some of the adopted measures and some soon to
be adopted by the fiscal plan are:
The temporary cessation of positions throughout the entire
university system. Currently, there are 746 professor
positions frozen awaiting to be cut from the budget.\20\
This measure has contributed to the recruitment of
lecturers or part time Instructors who in most cases do not
receive any fringe benefits. A lecturer's salary is as low
as $2,043,\21\ per semester for a 3 credits class; this
compensation is for a professor with a doctoral degree. The
practice of freezing and cutting tenure track positions and
recruiting part-time adjunct lecturers is contradictory
with some of the accreditation regulations that require
full-time tenured-faculty per a ratio of students.\22\
---------------------------------------------------------------------------
\20\ As of December 31, 2018, according to University Human
Resources.
\21\ Certification Num. 152 of FY 2010-2011. http://
www.vcertifica.upr.edu/PDF/CERTIFICACION/2010-2011/152%202010-2011.pdf.
\22\ As an example American Bar Association standard 404 for Law
Schools.
A 100% reduction in other payroll payments for FY 2019-
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2020 through FY 2022-2023.
A 9% reduction in procurement for FY 2019-2020 and FY
2020-2021 (Materials and Services).
A 150% increase to undergraduate tuition cost per credit
for the academic year 2017-2018 through 2022-2023.\23\
---------------------------------------------------------------------------
\23\ UPR Revised Fiscal Plan with Measures, April 5, 2019. http://
www.aafaf.pr.gov/assets/upr-revised-fiscal-plan-april-2019.pdf, p. 23.
A 150% increase to the graduate tuition cost credit for
the academic year 2017-2018 through 2022-2023.\24\
---------------------------------------------------------------------------
\24\ UPR Revised Fiscal Plan with Measures, April 5, 2019. http://
www.aafaf.pr.gov/assets/upr-revised-fiscal-plan-april-2019.pdf, p. 23.
Since academic year 2018-2019, the University has
increased most of the dues and fees.\25\
---------------------------------------------------------------------------
\25\ UPR Revised Fiscal Plan with measures, April 5, 2019. http://
www.aafaf.pr.gov/assets/upr-revised-fiscal-plan-april-2019.pdf, p. 23.
Retirement Pension Plan. According to the audited
Statements of 2017, the PR's Pension System has an Unfunded
Liability of $2.0 billion. The anticipated contributions
in the fiscal plan only foresee an approximation of $82
million for 2020 increasing up to $87 million for 2023.
This is less than the schedule of amortization approved by
the Governing Board in a closed amortization of the
Unfunded Liability over 40 years.\26\ Nonetheless, the
allocations in the UPR Fiscal Plan are far from the
recommendations suggested by the actuarial experts to
prevent that it become insolvent (Move to Pay-As-You-
Go).\27\
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\26\ Certification Num. 140 of FY 2010-2011 http://
www.vcertifica.upr.edu/PDF/CERTIFICACION/2014-2015/140%202014-2015.pdf.
\27\ Cavanaugh Macdonald Consulting, UPR retirement System
Analysis, August 9, 2018, http:// juntaretiro.upr.edu/mod/glossary/
view.php?id=172 (Revised on April 24, 2019).
These efforts are part of the hard work that has been done. The
University is not idle or unconscious of the need for fiscal restraint
and has been working since 2014 with economic cuts from the Government,
adopting multiple measures to continue providing quality higher
education to almost 55,000 active students. However, some of the
measures that need to be adopted in the future require strict
compliance with processes regulated by Federal, state and accreditation
legislation. The Fiscal Plan, however, does not offer the University
the economic space or time to comply with those regulations.
The University of Puerto Rico's duty for the Economic Development of
Puerto Rico
The University has made many contributions that have been
recognized worldwide, thus not only benefiting Puerto Rico with its
existence. It is important to realize its essential role in promoting
economic growth for island and that its closure would lead to Puerto
Rico not overcoming the economic crisis.
Just to mention a few of these contributions, Dr. Jose Oliver
Gonzalez from the UPR Medical School invented the schistosomiasis tests
and method of environmental control of the parasite and its host that
has saved and continues to save millions of lives across the world. In
the 1960s the surgical teams lead by Dr. Frank Rafucci invented some of
the first extracorporeal perfusion pumps for cardiovascular surgery at
the Advance Surgery Laboratory at the UPR Medical School. The UPR
Mayaguez was a world leader in Nuclear Reactor Physics as part of the
Atoms for the Peace Program of the Atomic Energy Commission in 1950s
and in the 1960s. Dr. Juan Lopez Garriga from the UPR Mayaguez was
recognized with several Presidential Awards for his work in the field
of science/scientific education. Dr. Ram Lamba, a Professor of
Chemistry and former Chancellor at UPR Cayey was recognized with the
American Chemical Society Presidential award for his contributions to
the education of Chemistry.
The UPR Rio Piedras Campus houses one of the most important
anthropology and art museums in the United States of America. During
the 1950s and 1960s it had, as a member of its faculty, the renowned
Latin American writer Gabriela Mistral and the Spanish prolific writer
Juan Ramon Jimenez. Both Nobel Laureates in Literature worked with
several of our distinguished Puerto Rican's scholars such as Dr. Margot
Arce, who established one of the best Hispanic Studies Academic
Programs in the Americas. More recently, under the leadership of Dr.
Jose Lasalde and NIH sponsorship, the Biomolecular Sciences Institute,
developed one of the most important programs for the production of an
HIV/AIDS vaccine. The UPR, Rio Piedras Campus Chorus and the UPR Tuna
Estudiantina have continuously and consistently earned awards for their
excellence around the world. These are just glimpses of some of the
contributions in the fields of arts, science, literature, education,
engineering, and medicine of the UPR to the United States of America,
the World and Humanity.
These achievements should be considered important by those working
with the fiscal plans and debt restructure of Puerto Rico. Perhaps the
most important purpose of the PROMESA, at section 101(a), is to promote
a method to achieve fiscal responsibility in the Territory of Puerto
Rico. This purpose must certainly guide also all decisions made by the
FOMB and the Government of Puerto Rico. Nevertheless, since the
creation of the FOMB, the method used to attain fiscal responsibility
has been spending reductions, a massive dose of austerity for
government spending, while providing a large impulse to privatization
and granting tax exemptions without a reliable analysis of what will be
the outcome on investment of the actions taken. Austerity measures
contribute to high levels of inequality, a massive migration of Puerto
Ricans to the United States, poverty, violence, and to the present dire
crisis our island is living.
It should be noted that the International Monetary Fund established
that austerity was an incorrect methodology for addressing government
debt. When the question on the austerity methods arise, the
International Monetary Fund tells us the following:
``Moreover, since both openness and austerity are associated
with increasing income inequality, this distributional effect
sets up an adverse feedback loop. The increase in inequality
engendered by financial openness and austerity might itself
undercut growth . . .'' \28\
---------------------------------------------------------------------------
\28\ J. Ostry, P. Loungani & D. Furceri. 2016. (Revised on April
24, 2019). https://www.imf.org/external/pubs/ft/fandd/2016/06/
ostry.htm.
Likewise, Mark Blyth (2015) states that the austerity measures are
---------------------------------------------------------------------------
sustained by the ``fallacy of the composition.'' Blyth mentions (2015):
``Austerity policies suffer from the same statistical and
distributional delusion because the effects of austerity are
felt differently across the income distribution. Those at the
bottom of the income distribution lose more than those at the
top . . .'' (p. 8-9)
Puerto Rico has high levels of inequality,\29\ with a GINI \30\
index of 55.12, and an average family income below $20,000.\31\ After
experiencing two hurricanes (Irma and Maria), it is imperative to re-
evaluate the fiscal plan if the intention is to foster Puerto Rico's
recovery. The economic growth and the development of wealth for a
generation in our island should strive to promote social development
and not prompt the detriment of it. The wealth distribution is the
great gap interconnecting economic growth with the capacity for social
development. By not addressing this problem, or by making it worse, the
possibilities of social economic development of our island are becoming
impossible. It should be noted that the students in Puerto Rico have
the largest expense of family income into higher education in the USA.
It reaches 64 percent of net family income going to pay for higher
education. That was before the state university tuition increase put
forward under PROMESA and the Fiscal Plans, so we can safely assume
that today is even higher.\32\
---------------------------------------------------------------------------
\29\ https://revista.drclas.harvard.edu/book/inequality-puerto-rico
(Revised on April 24, 2019).
\30\ GINI ratio or index is a measure of statistical dispersion to
represent the wealth or income distribution of a nation's residents.
\31\ https://wid.world/country/puerto-rico/ (Revised on April 24,
2019).
\32\ https://www.pulsoestudiantil.com/puerto-rico-tienen-los-
costos-mas-altos-de-estudios-en-ee-uu/ (Revised on April 24, 2019).
---------------------------------------------------------------------------
A study completed by Dr. Alameda and Dr. Gonzalez,\33\ the
University of Puerto Rico generates $1.56 dollars for the local economy
for each $1 dollar that the government contributes to the institution.
Furthermore, for each 100 jobs generated as part of the institution's
activities, 164 additional jobs are created in other areas of our
economy. That is, it has a 1.64 multiplicative factor in the job
market. It is well established, that the University of Puerto Rico
produces 73 percent of the scientific knowledge in our Island.\34\
---------------------------------------------------------------------------
\33\ http://www.uprm.edu/artesyciencias/wp-content/uploads/sites/
95/2017/06/Pres-UPR-Alameda-Revisada31-oct-Presentacion-Impacto-
socioeconomico-del-SUPR-II-1.pdf.
\34\ https://www.upr.edu/red-ici/?page_id=31O (Revised on April 24,
2019).
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Within the context of this crisis and the aftermath of the
hurricanes, the University of Puerto Rico is the only institution that
can provide the island with the platform for recovery and
restructuring. Currently, the University of Puerto Rico has a diverse
array of research and projects aimed to recovery in the areas of
health, education, safety and renewable energy, among others. It is
also the first and only public institution of higher education in the
island and custodian of its cultural heritage. Moreover, it has the
best graduation rates compared to other higher education institutions
of the island.
We believe that the FOMB is misguided in its conception and
designing of the fiscal austerity measures of the University of Puerto
Rico. The approved fiscal plan imposes a reduction of $512 million
without justifying this with any scientific data/criteria. It also
ignores the impact of the University 11 campuses, distributed
throughout all our regions, ignoring that UPR Higher Education System
is one of Puerto Rico's assets for its recovery and development.
The University of Puerto Rico's Board, including the 11
Chancellors, the President of the UPR, the Vice President of the UPR,
one faculty and one student representative from each of the 11 Academic
Senates, approved unanimously, in its regular meeting of April 3, 2019,
request to the members of this Committee to amend the PROMESA law at
section 201(b)(1)(B) to read as follows:
``ensure the funding of essential public services; this
includes public funds allocated to the University of Puerto
Rico by means of the formula established in Law 1 of 1966 or a
minimum of $800 million annually until termination of the
Oversight Board pursuant to section 209 of this Act, so that
with the aforesaid funds the institution is able to fulfill its
major role as an essential public service and is also able to
comply effectively with its obligations and accreditation
requirements.''
Puerto Rico is developed and sustained by the University of Puerto
Rico. Those interested in helping us should understand that the
University is our present, and that the future of Puerto Rico depends
on its survival and sustainability.
______
Questions Submitted for the Record to Dr. Ana Cristina Gomez-Perez,
Associate Professor, University of Puerto Rico
Questions Submitted by Chairman Grijalva
Question 1. In your testimony, you stress that the University of
Puerto Rico (UPR) has made important contributions to the economic
development of the island. Has the UPR or independent entity quantified
the financial impact of these contributions? Please provide supporting
documentation.
Answer. Throughout history, the University of Puerto Rico has
played an essential role in the economic development of the island
according to the study on the economic impact of the University
published by Dr. Jose Alameda-Lozada and Dr. Alfredo Gonzalez in April
2017 (see Attachment 1 for the full report). The UPR is responsible for
73 percent of the scientific knowledge of the Island (see graphic
below). It is ranked 502 in the worldwide university rankings, and
ranks in the 15th position in Latin America and the Caribbean.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The same study shows that the services provided by the UPR
through its academic health center--The Medical Science Campus, located
within the Puerto Rico Medical Center and The UPR Hospital in Carolina,
for the year 2014-2015 represents 74 percent of the total number of
hospitalizations in Puerto Rico.
On the economic impact, Dr. Alameda-Lozada and Dr. Gonzalez
published a scientific study in February 2017 through macroeconomic
analyses shows for every $1,000,000 invested in the University there is
a return of $1,563,000. That represents an economic multiplicative
factor of 1.563. In addition, for each job generated in the University,
an additional 60 indirect jobs are generated in the surrounding
economic areas.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The economic study of Dr. Alameda y Gonzalez also clearly
establishes the value to the human capital of investing in higher
education in Puerto Rico as it represents a social yield of 434.26
percent.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Another study carried out by the Census Information Center (see
Attachment 4) shows that municipalities with a university campus in its
jurisdiction have higher proportion of the Gross National Product than
those without a campus. It is noteworthy that this trend is mostly
observed in those municipalities with a UPR campus in it.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Attachments:
1. Doctor Alameda-Lozada and Doctor Gonzalez-Martinez economic
analysis: ``El Impacto Socioeconomico del Sistema de la
Universidad de Puerto Rico.'' Occasional Papers, OP no. 7,
April 2017.
2. Presentation Impacto socioeconomico del SUPR II (1).
3. Impacto recintos de la UPR 27 de marzo d 2017.pptx. Centro de
informacion Censal.
4. Los Planes Fiscales y la UPR FINAL (3).pptx Dr. Alameda.
5. CEEF Boletin, March 2017.
Question 2. Has the UPR assessed the possibility of a reformed
system of income- or means-based tuition? Please explain why and the
status of the assessment.
Answer. The fiscal plan contemplates granting subsidies to students
according to their economic resources. One of the elements that must be
considered is that in Puerto Rico more than 55 of the population live
in poverty levels \1\ and an average family income below $20,000.\2\
This family income is 50 percent lower than the poorest state in the
United States.\3\ Furthermore, in the Bulletin of the Puerto Rico
Council on Higher Education, Vol. 11, No. 2, of March 2017 it is
clearly demonstrated that based on the percent of family income
consumed by higher education costs, Puerto Rico is the jurisdiction
with the most expensive jurisdiction in the USA. (see Attachment 5)
---------------------------------------------------------------------------
\1\ https://revista.drclas.harvard.edu/book/inequality-puerto-rico
(Revised on April 24, 2019).
\2\ http://factfinder.census.gov/bkmk/table/1.0/en/ACS/17_1YR/
R1901.US01PRF.
\3\ According to the census, the income of average family in West
Virginia is $43,469.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The University needs to go beyond means-testing for tuition, to
a means-based testing for the total cost of studies at the UPR. Even if
full tuition is covered, the undergraduate student will need an
additional $10,000 to $11,000 to cover the full costs of attending the
UPR. The table below shows a comparison published by Dr. Ricardo
Gonzalez Mendez in early 2017 that demonstrates this fact. (https://
medium.com/@UnivDeTodos/el-costo-de-estudiar-en-la-upr-mitos-y-
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realidades-918e09 7a5da).
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Note that the tuition costs here are those for 2015-2016,
before the tuition increases of 2017 and 2018.
Question 3. The UPR annually graduates thousands of students--
highly educated engineers, lawyers, bankers, and teachers. In your
opinion, how can Puerto Rico best leverage the research and human
capital of the UPR as an economic multiplier? What role can the UPR
play to offset the amount being spent on outside consultants?
Answer. According to the studies indicated in Question 1,
investment in the University has the best multiplier effect for the
Island because:
1. The investment is translated into scientific knowledge and
employment generation.
2. Expenditures on other essential services such as health can be
provided through the University.
3. The University generates a significant economic impact on the
populations near its campuses.
4. The University generates a report on the development of human
capital through offering quality higher education at
affordable prices, promoting upward social mobility among
the general population and access to better salaries.
The University of Puerto Rico can offer the best resources of the
Island to the Government and the Fiscal Control Board for a fraction of
what consultants' firms are charging. It is the government's
responsibility to use those services.
Question Submitted by Rep. Bishop
Question 1. During the hearing, you informed the Committee that
your University receives upwards of $280 million in Federal grant
funding. Please list a simple breakdown of these grants from Federal
agencies the University qualifies and receives annually.
Answer. Please See Attachment 6.
______
The Chairman. Thank you very much.
Next we have Mr. Alex Pollock, Distinguished Senior Fellow
from the R Street Institute.
STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR FELLOW, R
STREET INSTITUTE
Mr. Pollock. Thank you, Mr. Chairman and members of the
Committee. We have been asked to consider the lessons after 3
years of PROMESA, and in my view there are six of these key
lessons to consider.
One, the fundamental bargain of PROMESA was sound, in my
view. Such situations are certain to include a lot of conflict
and controversy.
In my opinion, the Oversight Board should have more power
than it does with respect to financial reform. In particular,
it should have a chief financial officer with provisions
similar to those so successfully used in the Washington, DC
reforms in similar problems.
The Oversight Board will last a good deal longer than 3
years. Large unfunded pensions are a central element in these
situations and set up inescapable conflict between the claims
of bondholders and pensioners.
And last, progress must operate on three levels of
increasing difficulty, which I'll define in a moment.
As it considered PROMESA, the Congress was faced with an
insolvency of unprecedented size, dealing with a total debt
more than six times that of the city of Detroit, the previous
record municipal bankruptcy.
It was about $19 billion total debt and unfunded pensions
for Detroit versus $120 billion, we thought, at the time. It
turns out it's $130 billion for Puerto Rico.
The fundamental bargain was you can have debt relief, but
it comes with reform of the fiscal operations of the
government.
This is a classic bargain and, I think, a very sound one.
The Oversight Board created by the Act was and is, in my
judgment, absolutely necessary to achieve these twin goals of
debt settlement and fiscal reform. So far, significant progress
has been made. Of course, much remains to do.
Nothing is less surprising than that the actions and
decisions of the Oversight Board have created controversy and
criticism.
For the settlement of defaults, reorganization of debt,
creation of fiscal discipline, is, of necessity, passing out
losses and pain to various parties.
It is utterly natural for the insolvent debtors and the
creditors who are not being paid to have differing views of
what is equitable, and we should certainly expect that.
If the Oversight Board is operating as it should, both
sides will complain, as they do.
Looking to the lessons of history, the Financial Control
Boards of New York City and Washington, DC, are now rightly
considered, as a matter of that history, to have been very
successful and to have made essential contributions to the
recovery of their cities, but both generated plenty of
complaints, controversy, protests, and criticism in their time,
with many speeches very similar to that we heard the Governor
give earlier today.
As PROMESA came into effect, no one really knew what Puerto
Rico's revenues and expenditures were. This highlights the
central role in both creating and fixing the debt crisis of
financial management reporting and controls, and as we have
heard, there are still no audited financial statements for the
Government of Puerto Rico for 2016 or 2017, let alone 2018.
One of the most striking differences between the
Washington, DC board, which operated directly with Congress,
without a state in between it, the way Puerto Rico does, and
the Puerto Rico Oversight Board is the greater power of the
Washington board as designed in 1995.
When the Congress revised the structure in 1997
legislation, the Washington board was made even stronger than
it was before.
Most notably, the Washington design included the statutory
Office of the Chief Financial Officer which answered primarily
to the Financial Control Board and was independent of the
mayor, and if PROMESA is ever to be revised, for example, by
trading additional financial support for additional reform and
financial controls, as did, indeed, happen in the Washington
case in 1997, I believe the revision should include structuring
an office of the chief financial officer for Puerto Rico on the
Washington, DC, model.
Under PROMESA, the Oversight Board must continue until
Puerto Rico has four consecutive years of balanced budget
performance, so it has years to go. In New York, the Financial
Control Board worked for 11 years; in Washington, 6 years. We
have a way to go.
As we go, we have to confront pensions, an ever-growing
issue in municipal finance, and finally, progress in Puerto
Rico must operate on three levels of increasing difficulty.
First, equitable reorganization of the debt, including
pensions; second, reform for efficiency and reliability in the
fiscal and financial functioning of the government; and third,
reforms which allow a growing, enterprising, successful market
economy to emerge from the historic government-centric economy
of Puerto Rico.
Three years into the process, I will conclude by saying the
first of these requirements, debt restructuring, is difficult
and obviously controversial but well underway. The second is
harder. Reform would be advanced by the creation of an office
of the chief financial officer, as discussed. And the third
problem, the creation of an enterprising, vibrant economy is,
by far, the most difficult, but achieving the first two will
certainly help clear the way for achieving the third.
Thank you for allowing me to be here.
[The prepared statement of Mr. Pollock follows:]
Prepared Statement of Alex J. Pollock, Distinguished Senior Fellow, R
Street Institute, Washington, DC
SIX LESSONS
Mr. Chairman, Ranking Member Bishop, and members of the Committee,
thank you for the opportunity to be here today. I am Alex Pollock, a
senior fellow at the R Street Institute, and these are my personal
views. I have spent almost five decades working in and on the banking
and financial system, including studying the recurring insolvencies of
municipal and sovereign governments. I have personally experienced and
studied numerous financial crises and their political aftermaths, and
have authored many articles, presentations, testimony and two books on
related subjects. Prior to R Street, I was a resident fellow at the
American Enterprise Institute 2004-2016, and President and CEO of the
Federal Home Loan Bank of Chicago 1991-2004.
In my view, there are six key lessons about PROMESA, the massive
insolvency of the government of Puerto Rico, and the role of the
Oversight Board we should consider. These are:
1. The fundamental bargain of PROMESA was sound. But it could be
improved.
2. In such situations, a lot of conflict and controversy is
unavoidable and certain.
3. The Oversight Board should have more power: in particular, it
should have the same Chief Financial Officer provisions as
were so successfully used in the Washington, DC reforms.
4. Oversight boards are likely to last more than 3 years. In Puerto
Rico, all the problems were of course made more difficult
by the destructive hurricanes, and the flow of Federal
emergency funds into the Puerto Rican economy now makes the
financial problems more complex.
5. Large unfunded pensions are a central element in these situations
and set up an inescapable conflict between the claims of
bondholders and pensioners.
6. Progress must operate on three levels of increasing difficulty:
a. Equitable reorganization of the debt (including pension
debt)
b. Reform for efficiency and reliability in the fiscal and
financial functioning of the government
c. Reforms which allow a growing, enterprising successful
market economy to emerge from the historic government-centric
economy
1. The fundamental bargain of PROMESA was sound. But it could be
improved.
As it considered PROMESA, the Congress was faced with a municipal
insolvency of unprecedented size. As one analyst correctly wrote,
``There is no municipal borrower remotely as insolvent as Puerto
Rico.'' Indeed, adding together its $70 billion in bond debt and $50 or
$60 billion in unfunded pension debt, the government of Puerto Rico has
debt of more than six times that of the city of Detroit, the previous
all-time record holder, as it entered bankruptcy.
The fundamental bargain Congress constructed in PROMESA to cope
with Puerto Rico's financial crisis made and makes good sense. It may
be described as follows:
-- To the Puerto Rican government: We will provide reduction and
restructuring of your unpayable debts, but only if it is
accompanied by fundamental financial and government reform.
-- To the creditors: You will get an appointed board to oversee
and reform Puerto Rico's finances, but only if it also has
debt reduction powers.
This is a sound bargain. The resulting Oversight Board created by
the act was and is, in my judgment, absolutely necessary. But its
members, serving without pay, were as we all know, given an extremely
difficult responsibility. So far, significant progress has been made,
but much remains to do. Let us hope the Senate promptly confirms the
existing members of the Board, so that its work may continue
uninterrupted.
In the negotiations leading to PROMESA, it was decided to create an
Oversight Board, less powerful than a control board. I thought at the
time, and it seems clear in retrospect, that it would have been
better--and would still be better--for it to have more of the powers of
a financial control board, as discussed further under Lesson 3.
Two well-known cases of very large municipal insolvencies in which
financial control boards were successfully used were those of New York
City and Washington, DC. In 1975, New York City was unable to pay its
bills or keep its books straight, having relied on, as one history
says, ``deceptive accounting, borrowing excessively, and refusing to
plan.'' In 1995, Washington was similarly unable to pay its vendors or
provide basic services, being mired in deficits, debt and financial
incompetence.
Today, New York City has S&P/Moody's bonds ratings of AA/Aa1, and
Washington, DC of AA+/Aaa. We should hope for similar success with the
financial recovery of Puerto Rico.
2. In such situations, a lot of conflict and controversy is unavoidable
and certain.
Nothing is less surprising than that the actions and decisions of
the Oversight Board have created controversy and criticism, or that
``the board has spent years at odds with unhappy creditors in the
mainland and elected officials on the island.''
As one Oversight Board member, David Skeel, has written, the Board
``had been sharply criticized by nearly everyone. Many Puerto Ricans
and economists . . . argued that our economic projections were far too
optimistic . . .. Creditors . . . insisted that the economic
assumptions in the fiscal plan were unduly pessimistic and . . .
provided too little money for repayment.''
The settlement of defaults, reorganization of debt and creation of
fiscal discipline is of necessity passing out losses and pain,
accompanied by intense negotiations. Of course, everyone would like
someone else to bear more of the loss and themselves less. It is
utterly natural in the ``equitable reorganization of debt'' for
insolvent debtors and the creditors holding defaulted debt to have
differing views of what is ``equitable.''
If only one side were critical of the Oversight Board, it would not
be doing its job. If it is operating as it should, both sides will
complain, as will both ends of the political spectrum. In this, I
believe we must judge the Oversight Board successful.
The financial control boards of New York City and Washington, DC
are now rightly considered as a matter of history to have been very
successful and to have made essential contributions to the recovery of
their cities. But both generated plenty of complaints, controversy,
protests and criticism in their time.
In Washington, for example, ``city workers protested by blocking
the Control Board's office with garbage trucks during the morning rush
hour.'' In the board's first meeting, ``protesters shouted `Free DC'
throughout the meeting, which was brought to an end by a bomb threat.''
Later, ``in one of its most controversial actions, the Board fired the
public school superintendent, revoked most of the school board's
powers, and appointed its own superintendent to lead the system.''
In New York, the board ``made numerous painful, controversial
decisions that the administration of Mayor Abraham D. Beame was
unwilling or unable to make. It ordered hundreds of millions of dollars
in budget cuts above those proposed by the administration and demanded
the layoffs of thousands of additional city workers. It rejected a
contract negotiated by the city's Board of Education . . . it also
rejected a transit workers' contract.''
What did this look like at the time? ``In the eyes of many people
in the city, it was most distasteful,'' said Hugh Carey, then governor
of New York State. ``They saw the control board as the end of home
rule, as the end of self-government.'' Another view: ``The city of New
York was like an indentured servant.''
In restructurings of debt and fiscal operations, it has been well
observed that a ``key factor is making sure that the sacrifice is
distributed fairly.'' But what is fair is necessarily subject to
judgment and inevitably subject to dispute.
3. The Oversight Board should have more power: in particular it should
have the same Chief Financial Officer provisions as were so
successfully used in the Washington, DC financial reforms.
As PROMESA came into effect, as has been observed, ``The most
obvious obstacle . . . was that no one really knew what Puerto Rico's
revenues and expenditures were.'' This financial control mess, stressed
by expert consultants at the time, highlights the central role in both
creating and fixing the debt crisis, of financial management, reporting
and controls. Progress had been made here with efforts of both the
Oversight Board and Puerto Rico, as the certified fiscal plan has been
developed. But the government of Puerto Rico still has not completed
its audited financial statements for 2016 or 2017, let alone 2018.
Of the historical instances of financial control boards in
municipal insolvencies, there is a key parallel between Puerto Rico and
Washington, DC: in both cases, there is no intervening state. The key
role played by New York State, or by Michigan in the Detroit
bankruptcy, for example, is missing. The reform and restructuring
relationship is directly between the U.S. Congress and the local
government.
The most striking difference between the Washington, DC board and
the Oversight Board is the greater power of the former. This was true
in the initial design in 1995, but when Congress revised the structure
in 1997 legislation, the Washington board was made even stronger. Most
notably, the Washington design included the statutory Office of the
Chief Financial Officer, which answered primarily to the control board
and was independent of the mayor. Puerto Rico has created its own Chief
Financial Officer, as good idea as far as it goes, but it lacks the
reporting relationship to the Oversight Board and the independence
which were fundamental to the Washington reforms.
Today, long after Washington's financial recovery, the independence
remains. As explained by the current Office of the Chief Financial
Officer (OCFO) itself:
``In 1995, President Clinton signed the law creating a
presidentially appointed District of Columbia Financial Control Board .
. .. The same legislation . . . also created the position of Chief
Financial Officer, which had direct control over day-to-day financial
operations of each District agency and independence from the Mayor's
office. In this regard, the CFO is nominated by the Mayor and approved
by the DC Council, after which the nomination is transmitted to the
U.S. Congress for a 30-day review period.
``The 2005 District of Columbia Omnibus Authorization Act . . .
reasserted the independence and authority of the OCFO after the Control
Board had become a dormant administrative agency on September 30, 2001,
following four consecutive years of balanced budgets and clean
audits.''
If PROMESA were ever to be revised, for example trading additional
financial support for additional reform and financial controls, as
happened in the Washington, DC case in 1997, I believe the revision
should include structuring an Office of the Chief Financial Officer for
Puerto Rico on the Washington, DC model.
4. Oversight boards are likely to last more than 3 years. In Puerto
Rico, all the problems were of course made more difficult by
the hurricanes, and the flow of emergency funds into the Puerto
Rican economy now makes the financial problems more complex.
As we come up on the third anniversaries of PROMESA and the
Oversight Board, we can reflect on how long it may take to complete the
Oversight Board's responsibilities of debt reorganization and financial
and fiscal reform. More than 3 years.
The New York City control board functioned from 1975 to 1986, or 11
years. There was a milestone in 1982, which was the resumption of bank
purchases of its municipal bonds. That took 7 years.
The Washington, DC control board operated from 1995 to 2001, or 6
years. (Both boards still remain in the wings, capable of resuming
activity, should the respective cities backslide in their financial
disciplines.)
Everything in the Puerto Rico financial crisis was made more
uncertain and difficult by the destruction from the disastrous
hurricanes of 2017. Now, as in response, large amounts of Federal
disaster aid are flowing into the Puerto Rican economy.
How much this aid should be is of course a hotly debated political
issue. But whatever it turns out to be, this external flow makes the
formation of the long-term fiscal plan more complex. Whether the total
disaster relief is the $82 billion was estimated by the Oversight
Board, the $41 billion calculated as so far approved, or some other
number, it is economically a large intermediate-term stimulus relative
to the Puerto Rican economy, with its GDP of approximately $100
billion.
There are significant issues of how effectively and efficiently
such sums will be spent, what the economic boost will be as they
generate spending, employment and government revenues, whether they can
result in sustainable growth or only a temporary effect, and therefore
how they will affect the long-term solvency and debt-repayment capacity
of the government of Puerto Rico. Even if none of these funds go to
direct debt payment, their secondary effects on government revenues
may. How to think through all this is not clear (at least to me), but a
conservative approach to making long-term commitments based on short-
term emergency flows does seem advisable.
The Oversight Board will have to come up with some defined approach
to both long- and short-term outlooks, as it continues its double
project of debt reorganization and fiscal reform. That is yet another
difficult assignment for them, requiring time and generating
controversy.
5. Large unfunded pensions are a central element in these situations
and set up an inescapable conflict between the claims of
bondholders and pensioners.
Puerto Rican government pension plans are not only underfunded,
they are basically unfunded. At the time a PROMESA, a generally used
estimate of the pension debt was $50 billion, which added to the $70
billion in bond debt made $120 billion in all. It appears that there is
in addition $10 billion in unfunded liabilities of government
corporations and municipalities, making the pension debt $60 billion,
and thus the total debt, before reorganization haircuts, $130 billion.
As I learned from an old banker long ago, in bankruptcy, assets shrink
and liabilities expand.
How are the competing claims of bondholders and pensioners
equitably to be settled? This is an ever-growing issue in municipal and
state finances--very notably in Illinois and Chicago, for example, as
well as plainly in Puerto Rico. The bankruptcy settlement of the city
of Detroit did give haircuts to pensions--a very important precedent,
in which the state constitution of Michigan was trumped by Federal
bankruptcy law. But the pensions turned out in Detroit, as elsewhere,
to be de facto senior to all unsecured bond debt. This reflects the
political force of the pensioners' claims and needs.
On April 30, the Oversight Board demanded that the government of
Puerto Rico act to enforce required contributions to pension funds from
several public entities and municipalities. It is ``unacceptable to
withhold retirement contributions from an employee and not immediately
transfer that money into the individual retirement account where it
belongs,'' wrote our colleague on the panel, Natalie Jaresco. She is
right, of course. Except that it is worse than ``unacceptable''--it is
theft.
Pensions as a huge component of municipal insolvencies will
continue to be a tough issue for the Oversight Board, as well as for a
lot of other people.
6. Progress must operate on three levels of increasing difficulty:
a. Equitable reorganization of the debt (including pension debt)
b. Reform for efficiency and reliability in the fiscal and financial
functioning of the government
c. Reforms which allow a growing, enterprising successful market
economy to emerge from the historic government-centric economy.
Three years into the process, the first of these requirements is
difficult and controversial, but well underway.
The second is harder, because it is challenging government
structures, embedded practices, power, and local politics. Relative to
addressing insolvency, the most important areas for reform are of
course the financial and fiscal functions. Reform would be advanced by
the creation of an Office of the Chief Financial Officer on the
Washington, DC model.
The third problem is by far the most difficult. Solving the first
two will help make solving the third possible, but the question of how
to do this is not yet answered, subject to competing theories, and
major uncertainty. We all must hope for the people of Puerto Rico that
it will nonetheless happen.
Thank you again for the chance to share these views.
______
Questions Submitted for the Record to Alex Pollock, Distinguished
Senior Fellow, R Street Institute
Questions Submitted by Rep. Bishop
Question 1. How important to the financial recovery of the island
is fiscal transparency? How would you rate Puerto Rico's government
thus far in regard to achieving and demonstrating fiscal transparency?
Could an increase in the powers of the Oversight Board help achieve
more success in this regard?
Answer. I believe fiscal transparency is critical and necessary
(though not sufficient) for financial recovery. You cannot fix the
problems until you know what the financial situation really is, until
the problems can be accurately measured and reported, and progress
likewise accurately tracked.
In my view, significantly more progress is required than has been
made. I suggest the financial powers of the Oversight Board should be
increased, whenever that may be possible, by giving it authorities more
like those of the control boards which were so successful in
Washington, DC and New York City. In particular, the Office of the
Chief Financial Officer should be restructured on the Washington model.
Question 2. Compared to the control boards for Washington, DC, New
York City and other cities, how would you rate the Oversight Board's
success for Puerto Rico? When considering the success that the control
boards of DC and New York had, are there ways you think the Oversight
Board for Puerto Rico could be improved?
Answer. We have the advantage of looking back in time on the
Washington, DC and New York City insolvencies, so we know how they
turned around. History shows that the control boards of Washington and
New York were very successful. This is generally agreed upon. Of
course, they both entailed plenty of disputes, complaints and protests
along the way. I believe this is inevitable in such situations--in
Puerto Rico as in other financial failures of local governments.
The Oversight Board for Puerto Rico is still in in the midst of its
work with important uncertainties ahead. It has made progress, but it
is clear that the Washington and New York boards had more power as
financial control boards. As part of the PROMESA political compromise,
this was not the design of the Oversight Board. In my opinion, if the
occasion arises to amend the legislation, the Oversight Board should be
moved more in the direction of the successful Washington and New York
models. In particular, reporting to it should be an Office of the Chief
Financial Officer, which is independent of the Governor.
Question 3. How important is it for Puerto Rico to fix their
unfunded pension system? Do you think the Puerto Rican government will
be able to achieve success in fixing their broken pension system alone
or do you see this as an area where the local government could work
together with the Oversight Board to achieve success?
Answer. As this question suggests, the Puerto Rican government's
employee pension plans are not only ``underfunded,'' as so many other
plans are; they are basically unfunded. This is, in my view, a
political and moral default by the government of Puerto Rico. Puerto
Rico's government pension plans have an aggregate deficit of an
estimated $60 billion, making them a huge unsecured creditor of the
insolvent government, representing about 45 percent of the total pre-
reorganization claims. They inevitably compete for available funds with
bondholders in the debt reorganization.
Nothing is clearer, both in general and in this particular case,
than that pension fund deficits are a problem very difficult for local
governments to deal with. I believe it is essential for the Puerto
Rican government to work with the Oversight Board to address this huge
issue in its insolvency.
Question 4. How important would you say achieving fiscal reforms
within the Government of Puerto Rico are toward helping the island
recover? In your view, can the local government accomplish these
necessary reforms on their own or could the Oversight Board be
instrumental in helping the island achieve this goal?
Answer. All experience of insolvent local governments shows that
substantial reforms are very difficult for local politicians to achieve
on their own. Hence the roles of bankruptcy judges in Chapter 9, of
control boards in many municipalities, of the emergency manager in the
city of Detroit, and of the Oversight Board in Puerto Rico. The
Oversight Board, in this as in parallel other cases, can certainly be
instrumental in helping the government of Puerto Rico achieve the
needed reforms.
Question 5. How effective is debt restructuring IF the island's
government does not also achieve fiscal reforms?
Answer. I believe debt restructuring and fiscal reforms must go
together. That is the fundamental logic of PROMESA, which seems to me
entirely correct.
Question Submitted by Rep. Hice
Question 1. As you reference in your testimony, $41 billion in aid
has so far been approved for Puerto Rico. And the Oversight Board
estimates that this figure will reach $81 billion while the President
has estimated a top end of $91 billion. My understanding is that is due
to potential liabilities over the life of the disaster that would need
to be committed via the Disaster Relief and Emergency Assistance Act of
1988 (Stafford Act). For instance, over the life of the disaster
recovery, CRS reported in 2014 that, ``Congress provided roughly $120
billion for Hurricane Katrina.''
You remark that this acts as a short-term stimulus. Would you agree
that in the wake of this crisis that now more than ever it is vital the
Puerto Rican government gets its fiscal house in order? Do you have any
recommendations?
Answer. I fully agree that is essential to improve the
transparency, control and reliability of the Puerto Rican government's
fiscal affairs. As discussed in my written testimony, I believe the
financial powers of the Oversight Board should be strengthened if the
opportunity arises, in particular by structuring an Office of the Chief
Financial Officer which reports to the Board, on the Washington, DC
model.
Disaster aid of any of the amounts mentioned in the question will
be very large relative to the Puerto Rican economy, with its GNP of
about $70 billion. As the Oversight Board has discussed, this inflow of
funds will create a short-to-intermediate term stimulus directly to the
local economy and indirectly to government revenues, which may reduce
the government's motivation for fiscal reform. The challenge is to
separate the temporary effects of the stimulus from the weak underlying
economic and fiscal trends. Moreover, a high level of effective
financial control is required to effectively manage the magnitude of
the funds involved with the disaster aid.
______
The Chairman. Let me change the sequence and turn to my
colleague from New York, Ms. Velazquez, for opening questions
to the witnesses.
Ms. Velazquez. Thank you, Mr. Chairman, and I want to thank
all the members of the panel for being here today.
Ms. Jaresko, when we passed PROMESA, it was never intended
for the Board to implement harsh austerity measures on the
island residents.
We provided you tools to deal with the debt, which I feel
you have not used to its full potential to drive down the debt,
and simply put, austerity does not work. It did not work in
Greece, it did not work in the United Kingdom, and it will not
work here.
So, you must look elsewhere to address the fiscal crisis.
It cannot be on the back of the people of Puerto Rico.
So, let me help you maybe look elsewhere.
I want to discuss how heavily the Board is spending on its
operation, including fees paid to consultants and lawyers. In
fact, the Board estimates its operating budget will be
approximately $1.5 billion over the next 6 years, with nearly
two-thirds of that earmarked for consultancy fees.
So, to me, this feels like profiteering off of Puerto
Rico's fiscal crisis.
How do you justify the big cut that has been imposed to the
University of Puerto Rico when this much money of taxpayers--it
is the people of Puerto Rico paying for this. How do you
justify that?
Does the Board have any internal controls to reign in its
spending?
Is the Board taking any steps to reduce its cost and
reliance on external consultants?
Ms. Jaresko. Thank you.
First of all, I would like to clarify. The $1.5 billion is
not an estimated cost that related to the Board. That is the
estimated cost of all of the Title III and the Board, and that
includes all the costs of the----
Ms. Velazquez. How much money are you paying for
consultants?
Ms. Jaresko. Of the $1.5 billion, our budget is $400
million of that, of the $1.5 billion. That includes the
unsecured creditors committee, as well as the Government's cost
for the Title III over the period of time expected to get
through the Title III.
In terms of our budget, notwithstanding what the Governor
said, every single line item of our budget is public.
Ms. Velazquez. I am not discussing that. I am not asking
you if it's public or not.
Ms. Jaresko. I know, but----
Ms. Velazquez. I am asking you if the optics look right to
you, morally speaking, when so much is spent, and then you are
not looking at other mechanisms to promote economic growth in
Puerto Rico, and that is part of the legislation. That is part
of PROMESA.
So, let me ask you, what policies, if any, does the Board
have to avoid conflicts of interest?
Ms. Jaresko. So, the Board has a full set of ethics and
disclosure rules that it uses on a very regular and transparent
basis to avoid all conflicts of interest. We recently added to
that based on an independent report by Luskin & Stern that was
developed after accusations made with regard to one of our
consultants.
In addition to that, we have an independent ethics advisor
outside of the Board that reviews all of our operations.
Ms. Velazquez. I am aware of your recent conflicts report
and its recommendations, but the cat is out of the bag.
You have an optics issue here that needs to be addressed.
Will you support legislation to address the issue of
conflict of interest?
Ms. Jaresko. Yes, we support steps for even greater
financial and other----
Ms. Velazquez. Do you have any individuals or firms that
were involved in the issuance of unconstitutional debt working
for the Board as employees or consultants?
Ms. Jaresko. No, we do not.
Ms. Velazquez. As you know, I wrote a letter to the Board 2
weeks ago urging the Board to seek recoupment of millions in
fees associated with issuing unconstitutional bonds.
I was pleased to see that, yesterday, the Board filed
lawsuits against 20 banks and law firms who recovered said
fees.
Can you elaborate on those filings?
Ms. Jaresko. Yes. We filed three sets of lawsuits in the
past few days.
One is vendor avoidance actions. We filed 230 actions
related to payments made to anyone from the Government of
Puerto Rico for the 4 years prior to the insolvency that were
to anyone that was over $2.5 million, so nothing attacking any
small business or individual entrepreneurs that were involved
with the Government but reflecting any contracts that were not
registered, payments where contracts were not properly
registered under Puerto Rico law or contracts where payments
were made above and beyond the contracts that were registered.
That was the first set.
The second set is bondholder claw-back litigation where we
filed with regard to the payments on bonds that were made,
which we have objected in terms of them violating the
constitutional limit with regard to the NGOs in PBA, and that
is premised on fraudulent transfer, and that is based on,
again, Puerto Rico law prohibiting fraudulent transfer.
And third, we file a third-party claims which is trying to
recoup the fees, related fees collected by financial
institutions and professional advisors related to the debt that
has been claimed by the Board and the unsecured creditors
committee to be invalidly issued.
Ms. Velazquez. OK. So, can you help me understand--is my
time expired? OK.
Thank you, Mr. Chairman.
The Chairman. Mr. McClintock.
Mr. McClintock. Thank you.
Mr. Chairman, I think, really, to pick up on this point,
because I think it illustrates one of my principal concerns
with PROMESA, is that we have two riders on the same horse.
By setting up an independent management board, we have
confused the responsibilities and the accountability which
rightly belong to the people of Puerto Rico, who elected the
representatives who so badly mismanaged the state.
For the Congress to blunder into that mess rather than
expecting the Government of Puerto Rico to clean it up itself,
I think, has been a real serious problem.
Mr. Pollock, you have obviously studied this situation. My
first and principal concern with PROMESA is how, as I said
earlier, it shattered the trust of capital markets, not just in
the promise of repayment backed by the full faith and credit of
the Commonwealth, but I am concerned it has also given markets
a reason to look at the full faith and credit pledges made by
every state in the Union, knowing that if any of them becomes
as seriously mismanaged, Congress could blunder in again and
say, oh, don't worry about all those promises you made to bond
buyers.
Those bond buyers, of course, now have to look at that and
say, these are a lot more riskier than we thought, because at
any time, they can get a friend in Congress to get them to
abrogate that debt.
How do you view the impact of PROMESA on access to the
capital market, not just to the Commonwealth of Puerto Rico but
the effect on municipal bond markets generally?
Mr. Pollock. Congressman, these are good and serious
questions.
Any of us who have studied the history of government debt,
both municipal debt and sovereign debt, know that defaults by
governments on their debt are fairly common in history, and
capital markets have to take account of that in how they price
debt.
In this country, we have the advantage that widespread
defaults by states of the United States on their debt in the
1840s were met by a refusal of the Congress at the time to bail
them out, which is a great precedent at the state level.
On the municipal level, we do have, in law, Chapter 9
bankruptcy. Municipal failures are fairly common. Bondholders
have to take that into account, and we do have----
Mr. McClintock. That is not true of state promises of full
faith and credit to the General Obligation debts that they
issue, is it not?
Mr. Pollock. Correct. I am trying to distinguish,
Congressman, between states and municipalities.
Mr. McClintock. That's my point. OK.
Mr. Pollock. Yes. For municipalities, we have a very good
history of financial control boards helping municipalities. I
mentioned in my testimony both Washington, DC, and New York
City, which were both broke, both unable to pay their bills,
both unable to provide basic services.
Mr. McClintock. My time is fleeting, so I need to get to
the heart of the matter.
Mr. Pollock. I'm sorry.
Mr. McClintock. Has this helped or hurt the rates charged
for debt backed by the full faith and credit of the states?
Mr. Pollock. Well, it helped both, in those two cases, went
from broke to now double-A, very solid credits, and we can hope
for the same for Puerto Rico in my opinion.
Mr. McClintock. Are we seeing any indication of that? Has
Puerto Rico regained access to credit markets?
Mr. Pollock. No, not yet, and we would not expect it this
soon in the game.
Mr. McClintock. But if we had simply left well enough
alone, wouldn't the courts have come in, enforced the full
faith and credit requirements of the law, and required the
Commonwealth to sort out its own problems?
Mr. Pollock. Obviously, there was a possibility of just
allowing the creditors to pursue their own lawsuits, with the
vast amount of the debt, including the unfunded pensions, and
the very wide number of creditors, it was judged, I believe,
correctly at the time, that PROMESA was a better alternative.
Mr. McClintock. How is the debt trending now? Are we
cleaning up this mess or not?
Mr. Pollock. Little by little.
Mr. McClintock. Well, little by little. This was, what, 5
years ago now?
Mr. Pollock. It's 3 years ago, but as I mentioned, we will
expect a lot more than 3 years. Debt will be settled. Reforms
will be put in. It would be better if the fiscal reforms were
faster, and of course, the ultimate goal is a vibrant market
economy in Puerto Rico, once we get past these other things.
Mr. McClintock. Do we anticipate that?
Mr. Pollock. I anticipate settling the debt. I anticipate
some reform. I wish there were more, and I think the economic
outcome is possible and to be hoped for, Congressman.
The Chairman. Having passed on the first--on the Governor's
panel, Mr. Garcia, 5 minutes are yours.
Mr. Garcia. Thank you, Mr. Chairman.
I want to ask at least two of the panelists some questions.
Ms. Jaresko, thank you for stopping by my office yesterday
and for the introduction.
If I can begin with you, is it correct to say, in
simplified form, that the mandate of the Oversight Board is:
(1) to ensure four consecutive years of balanced budgets, and
(2) restoring access to credit markets for Puerto Rico?
Ms. Jaresko. Yes, sir.
Mr. Garcia. Thank you. Are those goals that PROMESA
established for the Board?
Ms. Jaresko. Yes, sir.
Mr. Garcia. And you agree with them?
Ms. Jaresko. Yes, sir.
Mr. Garcia. So, with respect to Section 201 of PROMESA, it
also requires the development of fiscal plans to ensure the
funding of essential public services. Is that correct?
Ms. Jaresko. Yes, sir.
Mr. Garcia. Would you define what essential public services
are?
Ms. Jaresko. We have not made a strict decision or
definition of public services, but what we have done is try to
ensure that the public services that are essential are, indeed,
funded, including, as a first priority, pensions.
Mr. Garcia. Would you generally say that they are
adequately protected, those services?
Ms. Jaresko. Yes.
Mr. Garcia. But you haven't defined them.
Ms. Jaresko. That's correct.
Mr. Garcia. Can you give me a list of what they might be?
Ms. Jaresko. Part of the reason for not defining them is
that there are many things that occur that you could argue are
not essential services, necessarily, but are needed, and some
of them, for example, are funding for NGOs, some of the folks
who are sitting at this table, which are incredibly valuable
but may not fit a traditional definition of essential services.
The traditional essential services definition would
include, at a minimum, public safety, public education, public
health, and pensions.
Mr. Garcia. Wouldn't you agree that, if you do not define
them, you are not following the law, unless those essential
services are clearly defined? How are you to know if you are
doing the right thing?
Ms. Jaresko. No, actually, our team and our advisors and we
have determined that the law does not require us to define
them. It requires us to ensure that they are actually being
fulfilled, and we believe they are.
Mr. Garcia. But you have not defined them?
Ms. Jaresko. That is correct.
Mr. Garcia. Ms. Jaresko, Mr. Guzman published a paper
estimating that Puerto Rico needs to cut its debt by no less
than 80 to 90 percent.
Do you accept Mr. Guzman's conclusions, or do you have your
own estimate for how much debt Puerto Rico needs to shed in
order to achieve the Oversight Board's mandate?
Ms. Jaresko. I don't have an estimate for the overall debt.
Each category of debt has a different character and it has a
different set of payment requirements under law, under the
bankruptcy court that we are using for this process. That said,
what we have provided is the debt sustainability which shows
what the average should be no greater than in any given year in
terms of the percentage of owned resources that should be
dedicated to debt.
Mr. Garcia. And what is that?
Ms. Jaresko. We are using the top 10 states, and it is
approximately 10 percent of owned resources.
Mr. Garcia. So, by far, nowhere near the 80 to 90 percent.
Ms. Jaresko. No, that is the percentage of owned resources
that would be dedicated to debt service.
Mr. Garcia. OK.
Ms. Jaresko. As I said, the cuts in the debt so far have
been 45 percent at GDB, 32 percent at COFINA, and right now, it
appears, 30 percent at PREPA.
Mr. Garcia. So, in your estimation, is Puerto Rico on a
pathway to reducing its debt by 80 to 90 percent?
Ms. Jaresko. No, not by 80 to 90 percent at this stage.
Mr. Garcia. OK.
Mr. Guzman, I have about a minute left. If Puerto Rico's
economy continues to wither, what are the implications of the
current debt restructuring deals down the line, say in 15 to 20
years?
Mr. Guzman. The problem with not pursuing debt
sustainability is that Puerto Rico will be forced to do further
austerity in order to pay its debts, and that will depress the
economy even further.
In the next few years, because of the effects of the fair
relief funds, there will be a positive impact on the economy,
but if the debt problem is not resolved when the relief funds
start to cease, we will observe again an economy in distress,
with less opportunities and a continuation of economic debt and
migration crisis.
Mr. Garcia. Is that the underpinning of your principal
argument at the beginning of your statement, that in order to
bring back viable markets in Puerto Rico, that has to be
changed dramatically?
Mr. Guzman. Yes. In order to do it sustainably, yes.
Otherwise, Puerto Rico would recover access to capital markets
but that will be ephemeral. Eventually, we have to do that
restructuring again, and that will impose enormous cost on the
country.
Mr. Garcia. Thank you, Mr. Guzman.
Thank you, Mr. Chairman. I yield back.
The Chairman. Mr. Soto.
Mr. Soto. Thank you, Chairman.
Ms. Jaresko, we already have a public audit by Kobre & Kim;
is that correct?
Ms. Jaresko. Yes, sir.
Mr. Soto. But the underlying documents to make an
independent audit are not made public currently if you wanted
to make an independent one; is that correct?
Mr. Jaresko. I believe that is correct, sir.
Mr. Soto. This is something that our Committee is looking
at, whether to do by the Federal Government or independently,
but that will be a long road. Would you commit here today to
allowing these underwriting documents minus people's personal
information be made public so that an independent audit could
be done?
Ms. Jaresko. I don't believe that is in our hands. I
believe it is in the government's because those were issued by
the Governor, but if the government disclosed them, I would
have nothing against it.
Mr. Soto. So, the PROMESA Board, in general, would be in
support of allowing these documents to be available for an
independent audit?
Ms. Jaresko. Again, it is not up to me, but if the
Government agreed to disclose them, we would not be against it.
Mr. Soto. OK. I just want to make sure our numbers are
right on the debt that has been reduced. It has been $6
billion, approximately 45 percent of the first tranche of
public debt--is that correct?--and then $5 billion representing
32 percent of COFINA. And then what is the 30 percent for
PREPA? What amount does that go in raw figures?
Ms. Jaresko. I am not sure what the first number you gave
is. For GDB, there was $4 billion of bonded debt, and it was a
45 percent haircut, so about half.
Mr. Soto. OK, $4 billion for the GDB.
Ms. Jaresko. Was the bonded debt.
Mr. Soto. And that was the 45 percent.
Ms. Jaresko. There were also other liabilities that were
involved here. But in terms of bonded debt, it was $4 billion
so about a 45 percent haircut. At COFINA, it is a 32 percent
haircut.
Mr. Soto. And that is $5 billion?
Ms. Jaresko. A little bit more.
Mr. Soto. Approximately.
Ms. Jaresko. Mm-hmm.
Mr. Soto. And then PREPA at 30 percent, how much is that?
Ms. Jaresko. Of the nine so that is another $3 billion.
Mr. Soto. Nine billion dollars. OK.
Ms. Jaresko. Yes, sir.
Mr. Soto. Mr. Guzman, I have had a lot of constituents ask
me whether Congress can just eliminate the debt. Mr. Guzman, do
you have an opinion about whether Congress has the power to
eliminate the debt for Puerto Rico?
Mr. Guzman. No, sir.
Mr. Soto. You don't have an opinion either way?
Mr. Guzman. I can only speak about economic matters, not
about legal matters.
Mr. Soto. OK. A yes or a no, Ms. Jaresko. Does Congress
have the power to eliminate the debt?
Ms. Jaresko. I don't know.
Mr. Soto. Mr. Pollock, does Congress have the power to
eliminate the debt?
Mr. Pollock. In my opinion, it doesn't. It had the power to
put Puerto Rico into what is effectively a bankruptcy
proceeding with equitable settlement of the debt, and I think
that is its power.
Mr. Soto. So, the only power under the Constitution is--
other than this would be to convert to Chapter 9 and send them
to the Bankruptcy Court, and then the judge would have to do
that?
Mr. Pollock. I think Puerto Rico effectively is in Chapter
9, just a different judge.
Mr. Soto. Effectively with, obviously, a lot of regulations
to it.
Ms. Rivera, obviously health care for our kids is so
important. What would having a permanent Medicaid fix mean for
our healthcare system? And if you want to discuss briefly any
CHIP disparities----
Ms. Rivera. Yes, definitely a Medicaid fix would help.
Right now, we do have pretty high coverage rates for children.
A lot of what we are seeing are issues of quality with the
system. But we would have to get back to you on a really
detailed analysis on the CHIP piece.
Mr. Soto. And with regard, and I know we spoke about this
briefly on our trip down to Puerto Rico--what is the private
insurance percentage coverage in Puerto Rico right now?
Ms. Rivera. I don't----
Mr. Soto. How many people are covered by private insurance?
Ms. Rivera. I don't have those numbers.
Mr. Soto. OK. I thought it was something around 30 percent,
something very low.
Ms. Rivera. Yes, so I can tell you how many children are
covered under the public one. We only have 4 percent of our
children that are not covered under health insurance. And out
of those, 63 percent of the children are receiving the public
health insurance.
Mr. Soto. Because whether through this Committee or through
Energy and Commerce, I am very interested in helping resolve
the long-term Medicaid parity issue, as well as apply the
Affordable Care Act to Puerto Rico, which I know a lot of my
colleagues here fought to try to do a long time ago. And now is
a good time to try it again.
Dr. Gomez, obviously we want to try to carve out some
priority to protect the University of Puerto Rico. Are there
any tuition increases on the horizon right now for the
University of Puerto Rico?
Dr. Gomez-Perez. Well, I would like to answer in Spanish. I
would like to use the translator.
Mr. Soto. [Speaking in Spanish.]
Dr. Gomez-Perez. [Speaking in Spanish.]
Mr. Soto. [Speaking in Spanish.]
Mr. Garza. She said the tuition is about to increase, she
projects, about 150 percent.
Mr. Soto. Is the college receiving any Federal grants right
now, the University.
Dr. Gomez-Perez. At the moment, they receive $284 million
in Federal funding, but if the University defaults, then they
will no longer receive any of the Title IV funding, and about
73 percent receive Federal Pell Grants, and they will not be
able to afford their tuition.
The Chairman. Ms. Radewagen.
Mrs. Radewagen. Thank you, Mr. Chairman. I would like to
yield my time to Ms. Gonzalez-Colon.
Ms. Gonzalez-Colon. Thank you, Ms. Radewagen. I really
appreciate that. And thank you for your visit to Puerto Rico
and for helping us to sponsor all the bills for the recovery
process on the island.
I would like to take maybe some time with Ms. Jaresko
regarding the December bi-partisan, bicameral task force
created under PROMESA. It presented some recommendations that
we discussed here before during our initial time. And some of
the duties of that PROMESA Board was about incentives provision
that needed to be extended to Puerto Rico in that report. Those
included things that have the Child Tax Credit, Earned Income
Tax Credit, SSI, data collection, Medicare, Medicaid, capital
access for businesses, among other measures.
Some of those bills are already being dropped, H.R. 302,
H.R. 754, H.R. 947, among others. And I am actually sponsoring
one of the bills that Ms. Velazquez filed regarding the
transparency for the oversight. I really believe it is
important. Some of the Members are here--actually all of them,
Mr. Soto, Mr. Gallego, Mr. Sablan, Ms. Velazquez, and I have
been filing all those measures to gain equality to the island
and a lot of those programs.
But the Board has been too quiet in pushing for economic
growth measures. And you are being seen as focused more on the
labor market, things that are cutting back on compensations and
benefits, austerity measures and not pushing for those economic
growth measures itself.
For me, I think fiscal accounting balance is not enough to
drive the economy of the island and neither is just making the
hiring and firing process easier on the island. And that is
something that needs to be changed. You actually--in the bill,
there was a provision that you should have a liaison here in
DC.
The law provided that you can even have offices here, but
you have been having private contractors in many ways that
actually goes in the other way in terms of how many of them are
receiving contracts of $720,000 a year for lobbying--half a
million dollars in Holland & Knight; Hill Strategies, $180,000
a year; $567,000 a year, different kind of contracts. And I can
go on and on and on.
And there is a perception of the island that we are taking
austerity measures by the Board to the public entities and
essential services but not for hiring lobbyists or private
contractors. It is not easier having a liaison or hiring
personnel for the Board to make those things happen instead of
having billions of dollars in those contracts?
Ms. Jaresko. Thank you. We only have two governmental
relation contracts. You named them. We don't have any more. We
have two. That is under $1 million a year. And, no, it was not
less expensive to establish an office in Washington and try to
hire the staff. It actually is less expensive to have the two
government relation firms. I specifically don't use the word
``lobbying'' because we are not lobbying. But we are taking our
responsibility for the stakeholders in Washington, DC very,
very seriously and trying to communicate with all of you about
all the things that we are doing to try to clarify and to try
to communicate clearly.
Ms. Gonzalez-Colon. But one of those issues that have just
arrived recently is that you are targeting local businesses to
recover payments made by the government to its suppliers before
it was declared bankruptcy. And there is a real concern that
this will also extend to include NGOs that are providers of
services that are mandated by Federal law, such as special
education.
The Government of Puerto Rico as well said that the Board
should seek that, in the later case, a callback will result,
and then the Federal agencies may require the Federal share of
the funds to be returned since they and the state match have to
be used both in full or for their appropriate purpose. What are
you going to be doing using that callback?
Ms. Jaresko. First of all, small businesses were
specifically kept out because every contract under $2.5 million
was excluded from the lawsuit. Second, we specifically took out
all non-profits and charitable organizations from the list as
well as governmental entities. To the extent that any mistake
has been made, we have offered and filed for public use the
contacts of the lawyers. If by accident, something we didn't
recognize was a not-for-profit, it should be off the list. We
will take it off the list immediately.
The only contracts that are on that list, once again, are
those that were either improperly registered under Puerto Rican
law, were paid more than their contracts reflected, which is,
again, under Puerto Rican law, not possible. Each and every
case can be worked through and discussed, but that is all that
is attempting to do, is to look at excessive payments under
Puerto Rico law.
In terms of what the callbacks would be used for, to the
extent that those callbacks are received, they go to the
general fund, to the Government of Puerto Rico, for using as is
seen fit, as necessary.
Ms. Gonzalez-Colon. My time is over, but I will take my
turn to continue the line of questions. Thank you, Mr.
Chairman.
The Chairman. Mr. Sablan.
Mr. Sablan. Well, thank you very much, Mr. Chairman, again.
And to everyone on the panel, welcome. Medicaid is a major
issue for all the insular areas. I remember that day
specifically. In fact, I have a photo highlighted in my
district office where the Congressional Hispanic Caucus--Ms.
Velazquez was there, Mr. Grijalva was there, then-Resident
Commissioner Pierluisi and I and joined by Senator Bob Menendez
went to the White House--because the territories were
completely taken out of the Affordable Care Act.
So, we went and argued under the Patient Protection, PPA,
that the territories needed more help. And we argued our case.
And, while the President did not immediately say yes, 2 days
later, Cecelia Munoz's office called and said, ``Get the staff.
Let's meet. Let's talk about''--and we were able to get the
supplemental on Medicaid, which everybody is going to lose on
September 30. Those who have money left and those in Puerto
Rico and the Northern Marianas are after you stole their money.
So, again, we are planning a hearing probably soon but, Ms.
Jaresko, in particular, there are 167,000 public pensioners in
Puerto Rico. And more than half are over the age of 70. So, on
average, they receive about $12,000 in pension benefits a year,
well below the Federal poverty line. As a resident of Puerto
Rico, would you consider it feasible to leave off the proposed
pension payments that caught already low benefits by an average
of 10 percent?
Ms. Jaresko. In fact, the Board's pension proposal does not
touch the pensions that are under the Federal poverty level.
And that means that 25 percent or so of the pensioners have
zero cut, and 43 percent of them have 5 percent or less. I
think it is important to note for the record that it is not the
Board's desire to cut pensions that drove this.
It is the fact that, in the Bankruptcy Court, under Title
III, retirees are unsecured creditors in the courtroom. And
they have to have a position and they have to be treated
equitably by law. It is not the choice of the Board. If we
could treat them as operating expenses above the line, that
would be fine, but the law requires them to be recognized as
unsecured creditors in the room at the bankruptcy.
Mr. Sablan. Yes, and I am asking these questions also
because what is happening in Puerto Rico could essentially
happen to the Northern Marianas or the rest of the insular--so
let me ask you. Ms. Jaresko, can you offer some examples where
the Board's fiscal plans directed funds to services to
residents that you considered lacking?
Ms. Jaresko. Yes, absolutely. The Board insured that back-
pay owed $366 million to police that had been owed for 10 years
and won in court was, in fact, budgeted over a 3-year period so
they could receive and they have received, this year, the first
installation of $122 million. The Board increased pay for
teachers and directors of school by $500 per year last year.
In addition, the Board has, through the reapportionment
process, identified, after Senator Zoe Laboy brought to our
attention, that, for 20-some years, rape safe kits have not
been developed, have not been analyzed, both the victims and
the accused having to wait. We found the $3 million and
reapportioned it so that those rape kits, those safe kits,
could be analyzed. Those are just a couple of the examples.
Mr. Sablan. OK. And I have another question for Dr. Perez,
please. Dr. Perez, has the University of Puerto Rico assessed
the possibility of a reform system of income or means-based
tuition for its student body?
Dr. Gomez-Perez. I will answer in Spanish. Sorry.
Mr. Sablan. Yes, yes.
Dr. Gomez-Perez. Yes, that they have considered it, that it
is essential to make sure that education is accessible to these
people because that will bring them out of poverty.
Mr. Sablan. Why has what the University has done not
succeeded, and what do you think is needed to successfully
ensure that the students at the University can afford to pay
for education?
Dr. Gomez-Perez. That the cuts cannot be so aggressive in
such a short period of time, that they still have to abide by
Title IV, and they have to abide by that process.
Mr. Sablan. Yes.
Dr. Gomez-Perez. We have to follow a process by Federal and
state regulation.
Mr. Sablan. Yes, my Chairman said I am----
Dr. Gomez-Perez. Oh, sorry.
Ms. Jaresko. Mr. Chairman? Mr. Chairman, if I may, could I,
just for the record, clarify some of the UPR issues?
The Chairman. Sure. Let me extend the courtesy. Go ahead.
Ms. Jaresko. Thank you. I just want to clarify that,
indeed, we set aside $44 million this year for needs-based
scholarships. Tuition was increased, but tuition was increased
such that Pell Grants would cover tuition and leave $1,000 in
the pocket of the student for living costs, housing costs or
other costs. Tuition is never to go above $1,000 less than the
Pell Grant.
In addition to that, there are no closures of any of the 11
campuses foreseen in the UPR fiscal plan. It is all about
savings in the back office, consolidation of the 11 campuses'
procurement offices, finance offices, accounting offices,
administration offices, zero effect on the student teacher
ratio, professor-student ratio. So, the idea was never to price
a single student out.
The Chairman. Thank you.
Dr. Gomez-Perez. I would like to answer.
The Chairman. [Speaking in Spanish.]
Dr. Gomez-Perez. OK. I would like to answer. Sorry.
The Chairman. Well, I started this.
Dr. Gomez-Perez. That the fiscal plan was made for somebody
apart from the University that doesn't understand the
University process so that, independently from the fiscal plan
and the plan proposed by the Board--that even with the current
budget cuts by 2021 that they are already going to be in a
deficit. And if they go into deficit, they will default, and
they will lose their Federal Pell Grants and all their Federal
funding because of Title IV.
Mr. Garza. She doesn't want to tell you that they haven't
taken measures to cut budgets but they really have.
Dr. Gomez-Perez. They need time and they are working on it.
The Chairman. Thank you very much. Let me turn to Ms.
Gonzalez-Colon for your 5 minutes.
Ms. Gonzalez-Colon. Thank you, Mr. Chairman. Ms. Jaresko,
why haven't we seen any announcement of the critical priorities
contemplated under Title V?
Ms. Jaresko. Title V was established to provide expedited
permitting for critical infrastructure projects, a very narrow
category. The projects that were registered under that narrow
category, almost entirely, 95 or more percent, had to do with
PREPA purchase power agreements. Once PREPA went into Title
III, none of those purchase power agreement projects could
develop until such time as PREPA either decides to confirm or
reject those purchase power agreements in the Title III court.
Therefore, we followed through with all of the non-PREPA
purchase power agreement projects, and that is why we have one
successful municipal housing project in San Juan. However, the
lack of interest in doing other critical infrastructure
projects and/or--I can't make a judgment, maybe the fact that
people didn't need the help of expedited permitting seems to
have reduced the amount of demand for this Title V treatment.
Ms. Gonzalez-Colon. What are you doing to expedite that
Title V process?
Ms. Jaresko. I go out. We speak. We encourage. I can tell
you that most of the private sector right now with regard to
critical infrastructure is looking at Federal disaster funding
as a source of income, and they won't need the expedited
permitting or the Title IV process to accomplish that.
Ms. Gonzalez-Colon. What projects are the Oversight Board
currently considering in that Title V, if any?
Ms. Jaresko. We don't have the authority to do any projects
on our own. But in terms of economic development, that is what
the structural reforms are about. And the Board is extremely
serious about economic development. Economic development
involves ensuring reliable, low-cost electricity, number one;
improving the ease of doing business on the island, number two;
improving the ease in the use of infrastructure to reduce
congestion, number three; as well as important enforcement of
human and welfare and labor reform.
Ms. Gonzalez-Colon. Question. What is the Board currently
doing to pursue the appointment for a new revitalization
coordinator?
Ms. Jaresko. We have hired a recruitment firm, and we are
taking applications right now.
Ms. Gonzalez-Colon. And you are actually coordinating these
efforts with the Governor?
Ms. Jaresko. First, we have to get the applications. We
have not received them yet so, yes, we will.
Ms. Gonzalez-Colon. I have a question for Mr. Pollock. It
is regarding one of the mandates of PROMESA. It is for the
Board to engage in consensual negotiations with creditors. And
the Oversight Board has recently decided to initiate
litigation, as we just mentioned a few minutes ago, in an
attempt to cancel, roughly, $6 billion worth of General
Obligation debt.
Furthermore--and this is something that really concerns me.
In the oversight, it is even attempting to pull back fees that
have already been paid to contractors in Puerto Rico and to
creditors as well. My questions to you will be in terms of what
effect, if any, these kind of actions from the Board that is
mandated to negotiate those debts and to re-establish the
credibility of the Government of Puerto Rico will be in the
market. Is this a wise action? What are your concerns with
that?
Mr. Pollock. Thank you, Congresswoman. I can't really speak
to the specific logic because I haven't been part of it. It is
certainly true that the Act mandates negotiations between
creditor and the Board representing Puerto Rico, the debtor.
And those have been going on. They are, of course, as I said in
my testimony, always controversial because, as I said, between
the insolvent debtor and the creditor who is not being paid,
there is a natural difference in point of view. And the whole
point of the negotiations is to find an equitable place in
between. And, as Natalie said, that applies to the pensions as
well as claimants in the insolvency proceedings.
I really would rather hear from the Board itself on this
particular issue of the lawsuit on the debt. I understand it is
an important issue, but I don't know the specifics of the
logic, Congresswoman.
Ms. Gonzalez-Colon. Yes, but the question I was making to
you was in terms of credibility of the Government of Puerto
Rico, not about the legality of the transaction itself. What is
the perception? Is it compliant with the original intent of the
law in your opinion or you prefer to be silent on that issue?
Mr. Pollock. Well, when bonds are issued, there are lots of
legal requirements about the opinions that have to be issued.
And after the fact, one can dispute them, as obviously is being
done here. In general, as I said to the Congressman a little
before, the history of government debt, both municipal debt and
sovereign debt, is a history of frequent defaults, historically
speaking. And anybody who is a lender to governments needs
rationally to take that into account in making investment
decisions, both as to price and as to commitment. Part of that
is taking into account what happens when you get into
insolvency proceedings and reorganization of the debt. That is
a natural part of the game. And you have to understand that
happens with government debtors, just as it does with private
debtors.
Ms. Gonzalez-Colon. Thank you, Mr. Chairman.
The Chairman. Thank you.
Some quick questions. And indications are that people want
to do a second round. So, we will quickly do a second round,
one more opportunity for each Member if they choose to.
Let me ask Dr. Gomez-Perez a question regarding the
University because the discussion inevitably as we move away
from these hearings and information is going to be, is it a
carve-out? Is it a firewall? How do you protect this essential
resource for the island? I think Members are going to need to
have that discussion because it is an important one, but also,
as Ms. Jaresko explained and I think the Governor did as well--
I think it was the Governor--that there is another body that is
independent that makes decisions for the University and for the
system and that much of the responsibility of the fiscal plan
fell on that body and the president, chancellor of that
university. Who appoints that body?
Dr. Gomez-Perez. Thank you for the question.
[Speaking in Spanish.] The governing board who appoint the
President of the University, the majority of the members are
appointed also by the Governor. They approved the fiscal plan
without any regular academic process, any University process,
like the budget.
The Chairman. OK. No. I thank you very much. In discussing
a firewall or a carve-out, my colleagues, I think we also have
to understand where the governance is and who is making the
call because one of the most frustrating things has been any
time there are bad consequences, nobody is responsible for
them.
Dr. Gomez-Perez. Yes.
The Chairman. Any time there is a decision made, the
Government of Puerto Rico says it is the Board. And we go back
and forth in that. For instance, if I may, Ms. Jaresko, the
Governor said here that the Board zeroed out any funding for
roads in the first budget. Why did you zero out all of the
funding for roads in the first budget?
Ms. Jaresko. We did not zero out any funding for roads in
the zero budget. I am not sure what the Governor was referring
to. In fact, the Highway Transportation Authority had over $800
million of capital expenditures budgeted between the general,
special, and Federal funds. Unfortunately, within the first 9
months of the year, they put only 25 percent of that $800
million to work while they are also sitting on over $330
million of cash in their bank accounts. There is plenty of
authority to fix roads in Puerto Rico.
The Chairman. Road maintenance. Let me ask about it.
Ms. Jaresko. I am sorry?
The Chairman. Road maintenance. Was that zeroed out as
well, I mean according to the Governor?
Ms. Jaresko. We did not zero it out. What he was referring
to was a reapportionment early in the year where they asked for
reapportionment without providing a source. And I can't
reapportion when I don't have a source. Then he provided a
source that can't be used, which was previous-year spending.
And we don't have access to any financial audits or any
knowledge of what previous-year spending remains available. And
then he withdrew that request after that and didn't ask a third
time.
The Chairman. Same question I asked the Governor if you
don't mind.
Ms. Jaresko. Of course.
The Chairman. Is a COFINA agreement an example of a poorly
redesigned restructuring exercise that will saddle Puerto Rico
with escalating debt payments for the next 20 years, the
question I asked him? And is this agreement sustainable?
Ms. Jaresko. Yes. I actually believe this is a good
agreement for the Commonwealth of Puerto Rico. And I think it
is an example of what one of the Members mentioned before in
terms of access to the markets.
So, what does COFINA do? COFINA takes a stream of income,
which is the sales and use tax, which under some decisions of
court potentially could have gone all to the COFINA bondholders
because they have a secured instrument, and divided it roughly
half and half, half going to the creditors, 53 percent and 46
percent going to the Commonwealth.
Those bonds are now trading. Those bonds are being
purchased. If you talk about renewed access by traditional
buyers, mutual fund buyers, Puerto Rico's bonds are once again
in those holdings.
The Chairman. Mr. Guzman, a reaction to the sustainability,
both expressed by the Governor and by the Executive Director?
Mr. Guzman. Yes. With all due respect, I disagree with the
positions of the Governor and the Board on the virtues of the
COFINA deal. First, it is important to look at the entire
restructuring comprehensively. If we do it piece by piece, it
is possible that at the end, the debt burden ends up being too
high and Puerto Rico is forced to default again or to
restructure the debt again.
Second, in the case of COFINA, there has been enormous
generosity. Market prices--if I can show a slide that I have
submitted, it is my number 3----
The Chairman. Let me go back because we have another round,
and my time is effectively over.
Mr. Guzman. Very briefly, I would address----
The Chairman. I have been shutting other people off, so I
need to shut myself off occasionally. Let me now turn to Mr.
Bishop. Questions?
Mr. Bishop. Do you have a second round first? All right.
Once again, thank you for being here. I have obviously been
absent for a while. And I have come back late, and you are
still here. So, thank you for being here. Why aren't you going
home?
For the Executive Director of the Board, let me start off
with just one of the things I asked the Governor about labor
forces, the bill that was actually not passed by legislature.
What factors in Puerto Rico contribute to the low labor force
participation? It is I think, what, only around 40 percent?
Ms. Jaresko. I think there are a variety of factors. I
think tradition and culture is one. There is a very large
informal market.
Number 2, I think that welfare policy has kept people for
generations, unfortunately, on welfare. And there hasn't been
enough incentive provided without risk to get off of welfare.
And, third, it is a simple fact of I think the amount of
investment on the island in the creation of jobs. After the tax
privileges started to wind down and many of the multi-national
corporations started to leave because of the lack of tax
preferences, the number of jobs on the island simply decreased
as well.
Mr. Bishop. All right. I am going to come back to you and
ask about some of the structural reforms and what happens if
the structural reforms are delayed, but I want to go to Mr.
Pollock first for just a question. How effective is debt
restructuring if the island's government does not also achieve
fiscal reform?
Mr. Pollock. I think the two go together, Congressman. And,
as I said in my testimony, the underlying bargain of PROMESA
was to link debt reorganization, which was necessary with
fiscal and financial reforms, which are equally necessary and
we need to do both and then lead on to movements toward a more
entrepreneurial, vibrant Puerto Rican economy.
Mr. Bishop. Thank you. All right.
To the Executive Director, let me come back to you and ask
you what kinds of structural reforms do you think the local
government could take that would improve our economic health,
the stability, and what happens if those structural reforms are
delayed or not implemented?
Ms. Jaresko. There are four sets of structural reforms that
are in the fiscal plan. They are not the only things that can
be done, but those are the things we have agreed on.
The first is human capital and welfare reform. That was
discussed earlier today in terms of an EITC locally funded. It
is a welfare-to-work plan, which is delayed in terms of its
implementation and as well as investment in training and
education and improving education.
The second area is ease of doing business. And that is
looking at where Puerto Rico ranks as compared to the other
competitive environments with regard to how easy it is to do
business. We specifically look at the ease of registering
property, the ease of getting permits, the tax administration
burden--not the tax rate but the burdensome nature of filing
taxes.
Third, and probably most important, is energy and power
sector reform. Achieving lower cost, more reliable electricity
is the key to life, death, as well as all business and economic
development. And, finally, infrastructure reform, again,
reducing congestion, improving the roads, everything that will
help economic development. If those are not implemented, either
on a timely basis or at all, you will not see the potential for
economic growth, especially post-Federal disaster funding,
where the fiscal stimulus ends.
Mr. Bishop. So, there will be growth, but it will be anemic
growth?
Ms. Jaresko. It would be anemic without structural reforms.
Actually, without any of these reforms, you won't even see
growth.
Mr. Bishop. In fact, those were the four areas I actually
wanted the Governor to respond to in writing that I mentioned a
lot earlier.
Let me ask you just one last question. Has the Government
been successful in implementing any reforms?
Ms. Jaresko. I think we have had the most success in
achieving movement on the transformation of PREPA; that is,
attracting a private sector operator to the transmission and
distribution grid and then having an independent regulator that
is well-funded and protected from political interference. I
think in the ease of doing business, there have been select
improvements. I think the implementation of the EITC as of
January 1 is a success. However, there is very little movement
on infrastructure reform. The welfare-to-work reform, again,
has been delayed and dragged out over 4 years. And the other
ease-of-doing-business reforms don't see a great deal of
progress yet.
Mr. Bishop. And especially on the ease of doing business,
if that progress is not there, once again, there may be growth,
but it is going to be anemic and it is going to be unsuccessful
and unsustainable?
Ms. Jaresko. That is correct, sir.
Mr. Bishop. I yield back. Thank you.
The Chairman. Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Ms. Jaresko, there has been some confusion in the press in
Puerto Rico that the Board may not be pursuing all legal
avenues to recoup fees. Can you address those concerns?
Ms. Jaresko. I am sorry. Could you repeat that? Which
concerns?
Ms. Velazquez. Regarding the illegal debt. It has been
reported in the press in Puerto Rico that the Board will not be
pursuing all legal avenues to recoup fees, commissions.
Ms. Jaresko. No. As I described earlier, we have filed
three sets of lawsuits, hundreds of lawsuits: one with regard
to the avoidance; second, with regard to clawing back the
bondholder principal interest paid of the debt.
Ms. Velazquez. So, do you intend to recoup the fees?
Ms. Jaresko. And the third is with the fees. Yes, ma'am.
Ms. Velazquez. OK. Thank you.
The haircut agreement with PREPA was 30 percent. Right? And
then COFINA, 33 percent. Is this setting a dangerous precedent
for the rest of the debt?
Ms. Jaresko. No, I don't believe these set a precedent
because each and every situation is unique. I disagree with Mr.
Guzman to look at the whole thing as a single debt ball because
each of these pieces of debt has different securities attached
to them. Each of them has a different set of revenues
potentially attached to them. And I think where you can avoid
the problem that Mr. Guzman fears, rightfully so, of promising
too much overall because you do it piecemeal is solved by the
fact that the Board is absolutely committed to an annual debt
service maximum, a max cap, that would limit how much debt
service would be paid in any given year.
Ms. Velazquez. Mr. Guzman, do you care to comment?
Mr. Guzman. What I claim is not that the haircut on every
instrument has to be the same. That is definitely not what I am
claiming. But, instead, what I am claiming is that we have to
look at the entire debt stock and compute what is the necessary
haircut on the entire debt stock independently on how we
distribute the haircut. And that is a basic principle for the
resolution of debt crisis.
Ms. Velazquez. Thank you.
Mr. Guzman. And in the case of COFINA, my computations
suggest that given the haircut that was imposed on COFINA, the
only way in which the restructuring can actually restore debt
sustainability is if there is a massive haircut on the public
debt that is left, as I said before, between 85 and 95 percent.
Ms. Velazquez. Thank you.
Ms. Jaresko, you have been quoted in the press as saying
that disaster relief spending by the Federal Government is a
stimulus. And based on this increase in Federal funding, many
critics say you artificially boosted the island's economic
projections and, therefore, its ability to repay the debt. That
confusion has led the President of the United States to falsely
claim the island is using disaster relief funds to pay down the
debt. Can you please tell this Committee whether one single
cent of Federal disaster funds has been used to pay back
bondholders?
Ms. Jaresko. Not one cent of disaster funding has been used
to pay back bondholders.
Ms. Velazquez. And when making these upward revisions to
the economic projections, do you take into account the
continued suffering of families that are losing their homes,
increasing healthcare costs, or demand for nutrition
assistance, especially for those 65 percent of the children of
Puerto Rico that live in poverty?
Ms. Jaresko. Medicaid funds do, in essence, run through the
budget because if you don't receive them, as the Governor
referenced, he pays out of his general fund what is not being
picked up by Federal reimbursement. NAP funding does not work
that way in the budget. And whether or not that, let's say,
additional or incremental $600 million, which we support, is
provided does not change the budget, the general fund, because
Puerto Rico does not alternatively support that payment itself.
It only does what is given.
Ms. Velazquez. Do you agree that the disaster relief money
and spending will boost the economy in the short-term?
Ms. Jaresko. It does boost it for approximately 10 years.
Ms. Velazquez. Yes, but it will not have a longer impact
because it is going to come to an end.
Ms. Jaresko. Over 10 years, yes.
Ms. Velazquez. I yield back.
Ms. Jaresko. It doesn't have a permanent effect.
Ms. Velazquez. Thank you. So, that means that 10 years from
now, we are going to be here dealing with the same economic
crisis?
Ms. Jaresko. No. The fiscal plan shows that the growth
slows. Of course, as I referred to Congressman Bishop, if you
do the structural reforms, you can keep growth post-fiscal
Federal monies at 1\1/2\ to 2 percent. You can do more
structural reforms and increase growth further than that, but
so far, there has been no agreement to do that.
The Chairman. We are doing the second round.
Ms. Velazquez. Yes.
The Chairman. Members? Mr. Soto? Miss Colon?
Ms. Gonzalez-Colon. OK. I will go, then. Don't fight for
the minutes. I will use it.
First of all, I want to say that I have, actually, many
questions. Some of them I will put in writing to the panel and
witnesses to answer, but I want to say thank you to Ms. Rivera
for working with our office and with Members in the House and
the Senate to get the child tax credit, which I think is
something of the utmost importance for families on the island.
Forty-seven percent of our families are living under the
poverty-level line. And that means worse than the lower state.
That should be Mississippi.
And you were talking a few minutes ago. Many people don't
know, don't even know, that Puerto Rico has the child tax
credit if you have three kids or more but not the first and the
second child. And nobody can answer why that policy is still in
place. I do believe that managing and getting the child tax
credit extension for the first and the second child in Puerto
Rico will help us out, not just to increase the quality of
living on the island but taking our children and families out
of the poverty-level line.
I know you endorsed H.R. 302. And I want to say thank you
to Members who are a co-sponsor of that bill as well. What else
do we need in order to make that happen? I mean, what other
recommendations should be included?
Ms. Rivera. As I was saying, the second thing that was
included in the task force report was a creation of this
interagency committee that will look at child poverty in the
United States, thinking that it would also include Puerto Rico
because Puerto Rico has such a high child poverty rate.
In 2016, the same year that PROMESA was crafted, in the
appropriations bill, they included a mandate basically to fund
a study that would create a blueprint to reduce child poverty
in half in the United States through the National Academies of
Sciences. This report was just published in February and it did
not include Puerto Rico. So, to start off, if there is already
a plan running to reduce child poverty in the United States,
Puerto Rico needs to be included in that analysis because that
is what is going to set all the policy for child poverty
reduction in the United States. So, that is one thing.
The other thing is that we really need to come into broader
investments. That is just not going to be enough for Puerto
Rico. Right now, for example, Puerto Rico has really low
availability of child care, of public child care. Other things
that we have looked at--and we have actually discussed with Ms.
Jaresko--the benefits cliff, the phenomenon that happens to
families when they start working and lose their benefits. That
is going to take a little extra investment, but we need to look
at that because that is actually holding back a lot of families
from going into----
Ms. Gonzalez-Colon. Are you sponsoring as well the Social
Security income, the SSI, as one of the measures that can help
and boost, of course, a quality of living of our seniors and
young people with disabilities on the island?
Ms. Rivera. Yes. SSI has also been recommended as standard
policy for----
Ms. Gonzalez-Colon. Ms. Jaresko, do you, I mean the Board,
support legislation to get equality in SSI for Puerto Rico as
well?
Ms. Jaresko. Yes, we have supported equitable treatment.
Ms. Gonzalez-Colon. And do you support the data collection
and earned-income tax credit and child tax credit as well as
the Medicaid provisions that are being included in Congress?
Ms. Jaresko. Yes, we have.
Ms. Gonzalez-Colon. And Ms. Rivera?
Ms. Rivera. Yes.
Ms. Gonzalez-Colon. Mr. Guzman, do you think those measures
and just gaining access to equal treatment in those Federal
programs will help out the economy of the island as well?
Mr. Guzman. If you could again repeat the question, ma'am?
Ms. Gonzalez-Colon. Do you think those programs--child tax
credit, earned-income tax credit, getting SSI, social
supplemental security for elderlies and people with
disabilities on the island, as well as the provisions for
Medicaid--will help the growth of the economy of the island?
Mr. Guzman. I believe so, but I haven't done any analysis
on that.
Ms. Gonzalez-Colon. I have one question for Mr. Pollock.
And that is the comparison between the comparable boards that
were approved for Washington, DC in your city and other cities
as well. How will you rate the success and the failures of the
Oversight Board in Puerto Rico comparing to those similar
oversights?
Mr. Pollock. Thanks, Congresswoman. Well, with the other
boards I mentioned, in particular, New York and Washington, we
have the advantage that we can look back and see that they were
very successful indeed and that both cities came into fiscal
health and financial discipline and economic growth and, as I
mentioned in my testimony, are now AA. And in Washington's
case, they have one AAA for their bond ratings. So, I think
that is clear.
Now, with the Oversight Board of Puerto Rico, we are only 3
years in, not 6 or 7 years in. So, we can't see----
Ms. Gonzalez-Colon. And there is another----
Mr. Pollock. I think, as I mentioned in my testimony, the
Board is making progress. It would make more progress if it had
greater financial authority, which I believe if the occasion
arises, it should be given.
Ms. Gonzalez-Colon. And there is also a big difference.
People from New York and people from Washington have the
opportunity to vote for their elected officials. We don't have
that right here. I am the only one representing the island,
without the right to vote on the Floor.
I want you to make a list of what failures or what
successful items are being the result of the Board and what
should be the next 3 years or 5 years. And Congress should be
looking into that path from the Oversight Board.
I yield back.
The Chairman. Thank you very much.
Mr. Soto, sir.
Mr. Soto. Thank you, Chairman.
Ms. Jaresko, after there are 4 years of balanced budgets,
walk me through how we bring in the PROMESA Board to a landing.
Ms. Jaresko. The two mandates: (1) to have 4 years of
balanced budgets, and (2) to have market access at reasonable
interest rates, are what we need in order to have, as you say,
PROMESA go away. The second, having market access at reasonable
rates, is not well-defined in the law. And I think you can have
various opinions. From my perspective, market access does not
mean that Puerto Rico would have to necessarily borrow again
but that it might be rated such that it could borrow and/or
that the bonds that have been restructured, like the COFINA
bonds, are trading well in the market, which shows that there
is market access.
I think the challenge to achieve that is that it is not
simply restructuring and it is not simply balancing a budget
that gets you there. You also have to have, for example, timely
audited financial statements in order to have market access.
There are other parts of this.
Mr. Soto. So, obviously, Congress can make the decision
through subsequent legislation, but is it also self-executing
otherwise should other legislation not come about?
Ms. Jaresko. I am sorry. Could you repeat that?
Mr. Soto. Is the termination of the fiscal board self-
executing should a bill from Congress terminating it at the end
of that not come about?
Ms. Jaresko. I don't know. I don't know how it would be
ended other than achieving those two mandates. I am sure
Congress could----
Mr. Soto. Well, that is important to know that there is a
gray area there.
I know there is a lot of confusion around the role of the
fiscal board and economic development. We talked about it in
the meeting we had with fellow Members of Congress when we went
down to the island. I recognize that there is some language in
Title V that has this broad idea of economic development, but
upon discussing it with you, you believe the fiscal board's
only real power in there is with permitting of critical
infrastructure. Is that correct?
Ms. Jaresko. That is correct, essentially a very narrow
chapter. It only applies to critical infrastructure as defined
in the law. And it only provides for expedited permitting. If
you don't need expedited permitting or you are a company that
does it on your own, you don't apply. If you are not a critical
infrastructure project in the definition, you also don't apply.
So, it is a very narrow category.
Mr. Soto. And this is where I think there are some ironies
and arguments, because we are trying to make sure that we
protect Puerto Rico's sovereignty. So, to say that the PROMESA
Board should do more economic development when we would rather
have the elected leaders of the island do it, I think that
latter group, the Governor and the legislature, are more
appropriate to do economic development.
And I did want to take a few minutes to talk a little bit
about the economic development aspect because we cannot cut our
way or spend our way out of the fiscal crisis in Puerto Rico.
And I think a lot of people have talked about the concerns of
austerity here.
One of the big opportunities we have with the disaster
relief is to convert to more renewable energy. We saw the
Governor and the state legislature pass landmark legislation,
everything from solar and micro grids to helping out areas be
more resilient after the storm. I think having an energy
revolution, getting off of oil and coal, which are two of the
most expensive parts of the economy, are absolutely critical
for Puerto Rico's economic future.
Agriculture, an area that my family and many others were
involved in back when our families lived in Puerto Rico, is a
key component. Right now, only 0.8 percent of the economy is
agriculture in an island that has a 24/7 growing season that is
only feeding itself at 20 percent after Hurricane Maria. I
think we could at least get that domestic production up to 40
or 50 percent of the island's food needs. And think of all the
billions of dollars that would during the entire lifecycle of
the economy remain in Puerto Rico.
And we not only want to help with USDA loans and working
with the University of Puerto Rico to encourage the expertise
we need, but also with the Commonwealth Government to make sure
that we can open up state lands that are not sensitive lands to
potential small family farm leases.
And then I know there is also a push to assist in tourism
outside of just the San Juan corridor. There is a tax credit
that is being requested by the Rossello administration that I
think we need to look into, so that other areas outside of San
Juan, which already does pretty well in tourism, and El Yunque,
the other big draw in that area, also have more uniform
prosperity among tourism while still making sure we have a
strong manufacturing base, which already makes up 50 percent of
the economy.
Those are the types of things I know I will be urging our
Committee to continue to look at to make sure we have an
economic development road to prosperity as well.
The Chairman. Thank you, Mr. Soto.
Mr. Bishop.
Mr. Bishop. Yes. I will make this surprisingly brief for
you.
First of all, Darren, you are going back to your farm
roots, aren't you? You always were a farmer. You are always
going to be a farmer. Yes. OK.
Ms. Jaresko, you said one thing that just clicked in my
mind as you said that. In an effort to come to an evaluation of
if we are ready to move on, the essential element has to be
some kind of audit to be a part of that.
When is the last time the Government of Puerto Rico
actually completed an audit?
Ms. Jaresko. I believe audits would be necessary to have
market access at reasonable rates, yes. And the last audit was
Fiscal Year 2015. The Governor said and the CFO said that they
expect within weeks the Fiscal Year 2016 audit to be complete.
That leaves 2017, 2018, and shortly we will be completing the
Fiscal Year 2019 fiscal year.
Mr. Bishop. And we will go on to the rationale of why that
is so tardy, but some other time. This is not the time to do
it.
Mr. Chairman, if you want me to quit, I do have a couple of
UC requests for you. One is two letters, one from the Puerto
Rico Chamber of Commerce to the Financial Oversight Board of
Puerto Rico, and the other from the Puerto Rico Builders
Association to President Trump. They are both expressing their
opposition to the Governor's Executive Order 2018-33.
Second is a report entitled, ``Economic Impact of the
Adoption of a $15.00 Minimum Wage for Construction in Public
Projects and of a PLA,'' which also highlights some of the
impacts of the Governor's Executive Order, which I just
recently mentioned.
And finally, a report by the World Bank comparing the
business regulations of 190 domestic economies, which ranks
Puerto Rico as Number 64.
The Chairman. Without objection.
Mr. Bishop. And without objection, I yield back.
The Chairman. And unanimous consent to enter into the
record communications for the Puerto Rico Bar Association, the
Union of Workers of the Electrical Industry and Irrigation, and
the third one is the Puerto Rico Manufacturers Association. If
there is no objection, so ordered.
Let me, if I may--Ms. Jaresko, just one quick question, and
then I can thank the witnesses and we can wrap up. And I
appreciate very much the fact that you sat through this and
responded to our questions. And your testimony is all fully
part of the record, and I appreciate that very much.
If I may, how are the various fiscal plans for the
Commonwealth and the various instrumentalities developed? I ask
this question because does the Board write them and send them
to the Governor for his approval, or is it the other way
around?
How would you categorize the nature of disputes that we
heard from the Governor that you have with the Governor with
the fiscal plans? Were they over the level in nature of what to
cut, or what was, or who was initiating? That is the question.
I am still confused as to how--well, like I said earlier, whose
responsibility at some point is to own up to, this was my plan?
Ms. Jaresko. The process begins by asking for a fiscal plan
from the Governor or from an instrumentality, whether it be UPR
or whether it be the Highway Transportation Authority or other.
So, they provide the first draft.
We then have a process outlined in the law of going back
and forth in providing comments, asking for more information
getting data, trying to understand what is in there. And it is
not just a written document, but it is a large Excel file which
gives you all the numbers.
And that process, with what is called Notices of Violation
under the Law, go back and forth until such time that we either
get very close to agreement through negotiation, collaboration,
understanding one another, cooperation; or if the Board, under
law, cannot come to agreement with what has been submitted in
the final instance, it has the right to certify its own fiscal
plan.
The Chairman. Yes, so the disputes have been over the level
of how big the cut is, or the cut itself, or the categorical
area in which a cut is occurring?
Ms. Jaresko. Both. The bulk of the fiscal plan actually
comes from--in the case of the Commonwealth, it comes from the
Governor's own proposals. So, rightsizing was an exercise that
we went through, and we worked with the Government to develop
principles and agreement on what actually could be cut, what
could not be cut.
And I would argue that most of that--I would say 80 or 90
percent of that--came from a collaborative process of agreeing
to next steps. Five, 10 percent of it is in disagreement.
The Chairman. Thank you very much. And as we continue to
pursue this, as I indicated earlier, written questions will be
submitted by Members. And we would appreciate a rapid response
so that this information can be part of the deliberations and
the discussions that will occur after this hearing, leading to
some actions.
And I said earlier, there are some issues relative to
services, essential services, that I think have been
highlighted over and over again. And the higher education and
public schools, public education, the very profound--and thank
you, Ms. Rivera, for that--the very profound issue of child
poverty and family poverty, and work force development and
training, and health care.
Different pieces of legislation to begin to deal with the
tip of the iceberg in some instances, but also having some deep
structural improvements on everything. And as I said earlier,
do we carve out something? Do we redirect the emphasis of the
laws that exist to create a firewall so that those essential
services are indeed protected for the long haul? And as we
begin to turn around the issue of poverty as an important
agenda, that we look at sustainability of the economy in the
long term and not just the austerity measures to meet a goal.
And that is what I have learned from the visit. That is what I
have learned from everything that I have read.
As we go forward, and the elephant in the room being the
discussion about status in the future, I think that
discussion--I have never disagreed--that discussion has to
occur.
Simultaneously, just like Hurricane Maria caused both the
fiscal stability efforts to be meshed with the recovery, and
that is part and parcel of what we are dealing with, the
efficiency and the effectiveness of the recovery being
expedited is, I think, a key issue to not only the recovery but
to the fiscal health of the island as will.
And as we go forward, running parallel with the discussion
about status in the future will be the sustainability
economically of the island itself. And given all the rationale
for that discussion and the historic need to have that
discussion as well. I think we should, on not only the present
moment but the future and looking at the history.
We're talking about colonization here. We are not talking
about anything else. So, I look forward to that conversation as
well, and we will be announcing some potential dates to have
that discussion.
But with that----
Ms. Velazquez. Can I add something?
The Chairman. No. I'm wrapping up. No. That's it.
I want to thank you, and I thank the witnesses for their
valuable testimony, the Members for their questions. The
members of the Committee may have additional questions, and
they will be forwarded to you. And they will be held open for
10 business days for those responses.
If there is no further business----
Ms. Velazquez. Yes, sir.
The Chairman. Without objection----
Ms. Velazquez. Just one thing.
The Chairman. You are objecting to closing the meeting?
Ms. Velazquez. Yes. Just for 1 minute. I just want to say
that, to the Puerto Rico, it is commemorating and remember the
members of the Puerto Rico Air National Guard that last year
lost their lives in an accident in Georgia. And their names are
Robert Espala, Carlos Perez, Jim Paravisini, David Albadoz,
Mario Brana, Jose Roman, Eric Circuns, Victor Colon, Jean
Audriffred, and Robert Espada. And that means that sometimes
people see danger just in the battle lines and not in all the
people that are serving.
Thank you, Chairman, for allowing me to read that.
The Chairman. No. That is an excellent point, and I am glad
you mentioned that, as we mentioned the passing of Governor
Hernandez Colon this morning.
And I think that we are not dealing with an issue of
culture. We are dealing with American citizens that have not
had access and equity in terms of how they are treated and how
they are respected. I think the recovery was a good lesson for
us. And PROMESA was an effort to stabilize and I supported it,
that economic stability and fiscal stability is essential.
And the people of Puerto Rico--what I heard in my visit
there, from anywhere from the people that served us to the
people that were working outside, is a level of distrust for
government as a whole, including the government that I am a
part of. And we have an obligation to try to turn that around.
And the best way to do it is to assure them that they will not
continue to be victimized as we go forward with looking at
PROMESA, re-establishing the importance of the essential
services, and highlighting those going forward.
With that, thank you very much.
[Whereupon, at 2:47 p.m., the Committee was adjourned.]
[ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD]
Submissions for the Record by Rep. Grijalva
STATEMENT FOR THE RECORD
Junte de Mujeres M-18
May 2, 2019--Washington, DC
Once again, we come before you to ask that you do away with the
PROMESA Act and the Puerto Rico Fiscal Oversight and Management Board.
With the passing of the Act and the resulting establishment of the
Board, a crime against humanity is being waged against Puerto Ricans.
The only acceptable remedy is for the PROMESA Act and the Fiscal
Oversight and Management Board to be repealed and done away with.
Congress must provide a mechanism for bankruptcy independent of the
PROMESA Act. Members of the Fiscal Oversight and Management Board are
federal officials; as such, Puerto Rico is not responsible for paying
their expenses. The U.S. must return to the people of Puerto Rico the
money paid illegally for the Board's expenses.
As we told this Committee during the public hearings in San Juan on
March 15, the imposition of the PROMESA Act and the Fiscal Oversight
and Management Board is an act of imperial power being exerted on a
country that was invaded, occupied, and colonized in 1898. Puerto Rico
is a colony dragged into bankruptcy which the administering power
intends to subjugate and exploit in perpetuity for the continued
benefit of its enterprises and financial interests.
The bankruptcy of the colony, for which Congress wants to lay sole
blame on Puerto Ricans, was provoked and induced. The corrupt insular
administrations to which you turn a blind eye are nothing more than the
Congress' taskmasters in the colony. Their criminal actions and the
ensuing consequences fall squarely on the shoulders of Congress, which
deals the final blow through austerity measures designed to impoverish
the colony and make it even more dependent. Its plan is and has always
been maintaining a permanent colony. The PROMESA Act and the Fiscal
Oversight and Management Board are just its latest tool for
perpetuating the colonial status.
The United States' colonial power over Puerto Rico has resulted in
five main outcomes:
You destroyed our diverse agriculture to impose one that
benefits you.
You destroyed local enterprises through unfair
competition, monopoly, and market control.
You polluted and depleted our natural resources through
destructive military and industrial activities.
You tried to strip us of our language, culture, and
history.
You criminalized all attempts at resistance and rebellion
against colonialism by torturing and assassinating our
leaders through incarceration and disproportionate
sentences.
PROMESA represents:
the dismantling of the public education system with the
closing and privatization of schools;
the ripping apart the University of Puerto Rico to
suppress the main source of academics and professionals at
the service of the country;
the stripping of acquired labor rights to impoverish and
repress the working class;
the reduction of the retirement pensions of workers to
make them more vulnerable;
the criminalization of protests by workers and students in
order to get rid of them;
the mortgaging of the country over the next forty years to
pay off the bondholders and COFINA's vulture funds; and
the imposition of a toxic labor environment characterized
by despair and massive emigration.
Such is the legacy of colonialism, the PROMESA Act, and the Fiscal
Oversight and Management Board.
PROMESA PROMISES NOTHING BUT POVERTY. If you think that you are
helping the people of Puerto Rico tackle the fiscal crisis, THINK
AGAIN. This is a humanitarian disaster. The PROMESA Act and the Fiscal
Oversight and Management Board must be eliminated.
Members of Congress, colonialism is a crime against humanity. With
every passing second that Puerto Rico is subjected to the indignity and
inhumanity of the colonial condition, the United States is committing a
crime against humanity. You, who have usurped our sovereignty, who deny
us our right to our nationality, are accomplices to this crime. You are
humanly, legally, morally, and ethically responsible for stopping this
crime waged against the people of Puerto Rico. Step up.
______
STATEMENT FOR THE RECORD
Rodrigo Masses
President of the Puerto Rico Manufacturers Association
Thank you for the opportunity to share our statement and especially
for your interest in the 3.4 million U.S. Citizens residing in Puerto
Rico, a U.S. jurisdiction larger in population than twenty states, as
it pertains to the status of our Territory; the Commonwealth of Puerto
Rico.
I serve as the elected Chairman of the Puerto Rico Manufacturers
Association (``PRMA''). PRMA is the primary voice of the private sector
and especially, Puerto Rico's manufacturing. Our Members are the
principal business sector driving the island's economy for the last 50
years. Our members generate approximately 250,000 American middle class
jobs on the Island, produce close to 50% of Puerto Rico's GDP, and has
been the island's primary wellspring of tax revenue for decades.
The focus of this hearing on PROMESA and the questions to be asked
are not only vital for restoring the quality of life for those living
in Puerto Rico but a priority task required to revitalize our economy
and reverse our island's rapid loss of population to other locations in
the United States. PRMA has been leading efforts focused on the need
for meaningful, long term economic growth, necessary to improve the
wellbeing of our people but also to stem the migration to the mainland.
Manufacturing and its economic ecosystem are the primary engine
creating middle class jobs on our island. Its health and growth is
critical for two critical long term challenges facing Puerto Rico:
creating employment opportunities and the need for tax revenue to
address the needs of the local government. Without growth, we will
continue to see a brain drain as our young people continue to leave,
the middle class shrinks and the government struggles to provides
services and maintain infrastructure.
Our message is simple and straightforward; only robust economic
growth will serve as a solution to Puerto Rico's challenges. Austerity
alone will fail to secure Puerto Rico's future.
As the Committee well knows, the economy of Puerto Rico had
suffered well over a decade of economic contraction by the time PROMESA
was enacted on June 30, 2016 and Congress created the Fiscal Oversight
and Management Board (FOMB). Despite what many had hoped from this
historic Congressional action, the serious condition of the economy has
continued to deteriorate hemorrhaging jobs and creating little new
economic opportunity.
Many in Puerto Rico have publicly expressed their concern with the
absence of a strong and proactive intervention by the FOMB in defense
of Puerto Rico's economy during the negotiations concerning the Tax
Cuts & Jobs Act in Congress resulting in dire consequences for the
Island's future. Although we understand the far reaching and complex
task the FOMB has at hand, PRMA feels that the FOMB being a creature of
Congress was in a particularly strong position to influence legislation
so crucial to Puerto Rico's future.
Let's remember that PROMESA requires the taxpayers of Puerto Rico
to fund the FOMB. Its estimated that the cost of the FOMB to the people
of Puerto Rico is an estimated $300 million so far; including millions
in consulting contracts. This amount could pay for the health services
under the local government's health program for 100,000 low income
residents. I doubt very much that the return to our People from
spending that amount in the FOMB has been positive. On the contrary,
and as I indicate below, the actions of the FOMB have resulted in
serious consequences both economic and socially.
We are concerned that after almost three years the FOMB has done
little to advance the collective interests of Puerto Rico. The FOMB,
through its actions or lack thereof has only increased the uncertainty
that has clouded the economic prospects for Puerto Rico. This
uncertainty raises questions concerning future local tax policy and how
it will impact the operations the productive sector in Puerto Rico. The
reform of PREPA and the need for attracting private capital investment
into the electricity sector is in doubt.
We believe that the FOMB must be restructured and refocused to
provide greater emphasis on economic development. Without a sustained
development agenda Puerto Rico runs the risk of a relapse in its fiscal
situation and unfortunately at this moment, there is no guarantee that
any such development is a concern or priority of the FOMB The lack of
attention to implementing reforms and policies that will foster
economic growth along with the FOMB's continued emphasis on austerity
measures only deepens the economic contraction, discourages investment
and works against the positive environment needed to jump start our
economy.
The lack of economic certainty is the largest impediment to
achieving PROMESA goals, including those that were part of the bi-
partisan Task Force on Economic Growth that was created to propose
development initiatives. At PRMA, we understand that the primary
mission assigned to the FOMB is returning Puerto Rico to a healthy
fiscal situation. It is also our belief, given the economy's condition
and outlook after both hurricanes, the new federal tax law's
consequential treatment of Puerto Rico and the slow recovery process
that the FOMB should place the highest priority on proposing and
pursuing measures that stimulate sustained economic growth. As a
creature of Congress, it is in a privileged position to argue for
revisions of PROMESA that will help facilitate this.
We urge the Committee to make changes in the PROMESA authorizing
statute that will shift the emphasis of the FOMB to economic growth and
development.
We also urge the FOMB to rethink its own role and objectives. As
mentioned, resolving the fiscal problems facing Puerto Rico will be
impossible unless the economy returns to sustained growth generating
new tax revenues and creating jobs. By continuing its current priority
of imposing fiscal austerity, the FOMB will only make things worse. The
FOMB current prescription will prevent economic recovery resulting in
serious economic and social costs for the Island's residents and future
generations.
We strongly urge the Committee to concentrate efforts in the
following specific areas:
1. Collaborate with the local government and the private sector to
aggressively pursue Congressional action to assure Puerto
Rico remains a viable option to retain and attract
manufacturing facilities and their productive capacity
essential to our future economic wellbeing. Let's remember
that manufacturing is \1/2\ of the local GDP and the
primary source of middle-class jobs.
2. Renewing our electrical grid together with a modernized
regulatory framework that promotes private investment with
the goal of achieving efficient and diverse distribution
and generation of electricity at competitive rates. The
recently approved Public Policy on energy is a major step
in this direction.
3. Development and implementation of government reforms and economic
policies that will attract new investment and lead to long
term sustainable economic growth.
4. Continue efforts to secure a consensual solution to the island's
debt load to eliminate uncertainty and thus stimulate
economic investment.
5. The PRMA has been insistent on introducing transparency into
PREPA transformation and other government actions. The same
process of transparency should also apply to the FOMB's
contracting practices. Sunlight is the best disinfectant.
I must also mention that it has recently been made public that the
FOMB will target local, small and medium size businesses to recover
payments made by the government to its suppliers before it declared
bankruptcy. This will place an enormous burden on these firms, many of
which have been suppliers of government services for years. This is a
major new source of uncertainty for business since it is now subject to
legal proceedings for simply providing goods and services to the
Government. How is an honest businessman to know if the Government is
about to declare itself bankrupt? At the very least the FOMB's actions
will undermine confidence in Government, increase the cost of its
acquisitions and will, additionally, generate legal proceedings that
will be very costly for the already battered local business sector. The
PRMA will keep its options open to exercise all means at its disposal
to oppose the intended legal proceedings against local businesses and
prevent the FOMB from bringing additional harm to our economic
wellbeing.
We appreciate your consideration and welcome the opportunity work
with you and your Committee to advance economic growth in Puerto Rico.
Thank you for the opportunity to share our statement with you and the
Committee.
______
STATEMENT FOR THE RECORD
Hon. Carmelo Rios Santiago
Senate Majority Leader of the Senate of Puerto Rico
Thank you for the opportunity to share with you the impact the
Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)
has had on Puerto Rico these past three years. Despite the
controversies that surrounded the legislative process that led to
PROMESA's enactment, once in place it was seen by many on the island as
a beacon of hope in the middle of the fiscal crisis. Even though many
in Puerto Rico opposed the imposition by Congress of a fiscal control
board that threatened the few self-governing rights of the territory,
it was accepted at the time as the only option to rebuild our economy,
restructure our debt, and get us back into the financial markets.
The people of Puerto Rico understood that they needed to make
sacrifices in order to put the economy in a path of financial stability
that will lead to a prosperous future for all. Although there was
distrust toward the Board, many welcomed the possibility of having a
non-partisan entity advocating and advancing the best interests of the
people of Puerto Rico.
Earning the trust of the people of Puerto Rico should have been the
number one priority of the members appointed to the Fiscal Oversight
and Management Board (``the Board''), if they wanted to be effective in
implementing the much needed austerity measures. Unfortunately, that
was not the case. In fact, recent polls show that the people of Puerto
Rico distrust the Board and find it to be ineffective. In the past 6
months the approval numbers of the Board have dropped significantly.
Amidst a fiscal crisis that has forced so many to make the heart
wrenching decision to leave their families behind to move to the states
in search of a brighter future, how can the Board justify the $625,000
annual salary of its Executive Director and their million dollars
consulting contracts? How can the Board justify the steep cuts to the
pension plans, which in most cases are the only source of income of our
aging population, while at the same time their president publicly
admits that he couldn't maintain his lifestyle on the low payments the
Board was proposing?
The members of the Board are the only ones responsible for their
poor public image. Their actions, the drastic measures that
significantly affected pensions, the work force, students, the
healthcare system, public safety, along with their blatant disregard of
the reality many Puerto Ricans face has undermined their credibility.
PROMESA was supposed to put in motion a set of compromises between
the Board and the democratically elected Government of Puerto Rico. The
reality is that this should have been a balancing act. The Legislature
understood it that way and demonstrated its willingness to work with
the Board since the beginning. In fact, starting January 2017, we
worked with the recommendations of the Board and adopted a significant
number of measures to comply with the certified fiscal plan while
protecting the best interest of our constituents. We reformed
government structures, we consolidated numerous agencies resulting in a
significant reduction in the government work force, we approved the
smallest budgets in the last few decades, we reduced tax rates, and
have done everything in our legislative power to attract private sector
investment.
However, in the past two years we have found ourselves constantly
battling the Board in court due to its insistence in dictating public
policy. For instance, in May 2018, the Board insisted that in order to
certify the fiscal plan submitted by Governor Ricardo Rossello, the
Legislature had to repeal Act 80 without showing any evidence of how
the repeal will positively impact the economy. This law provides
protection to over 800,000 employees and employers in the private
sector. After many demands from the press, the Legislature, and several
economists, the President of the Board finally explained that the
repeal of Act 80 along with other labor reforms would result in 0.8%
economic growth for Puerto Rico. However, it must be noted that this
0.8% translates into a 0.5% increase if NONE of the labor reforms
presented by the Board were implemented.
In spite of this, the Senate reached a comprise so that Act 80
would continue to apply retroactively so as to not divest employees of
the rights already acquired, but would no longer apply to new hires.
Nonetheless, this compromise was flatly rejected by the Board.
In reprisal for not voting in favor of the repeal, the Board
declined to approve the balanced budget submitted by the Legislature of
Puerto Rico and instead approved their own a budget. A budget that was
$40 million higher than the one approved by the Legislature, but that
reduced the operating funds of the Legislature in over $19 million. It
also eliminated the Christmas bonus, eliminated a $25 million
scholarship fund at the University of Puerto Rico, the annual
appropriation of $50 million for economic development initiatives for
municipalities, among other budget cuts. Yet, the Board's $64 million
operating budget suffered no cuts.
The Government of Puerto Rico and the Board have been able to work
together in many areas like for example debt restructuring agreements,
the PREPA transformation, the implementation of a local EITC, and
lobbying Congress for additional federal funds. However, the Board's
actions and disregard for the People of Puerto Rico and their elected
officials has created so much distrust on the island that it makes it
very difficult to work together.
As legislators we cannot be expected to give in to every whim of
the Board, especially when they offer no reliable data to justify their
requests. We paid the price for refusing to repeal Act 80. It is
evident that the Board is overstepping its mandate by attempting to
dictate public policy and blatantly disregarding the democratically
elected public officials.
Currently, the Oversight Board is not accountable to anyone--not
even Congress--yet it has the final say in the decisions affecting our
government. This is why it is necessary to amend PROMESA. For months I
have been promoting that Congress amends the federal law to replace the
Board with an Oversight Monitor who will have broad investigative
powers and will advise the Governor, the Legislature and the Court.
This Monitor would have federal authority, would have to send Congress
periodic reports on fiscal, budgetary and debt restructuring issues,
and would be appointed by the President with the consent of the Senate.
He will have to be involved in every step of the process to ensure
transparency and legitimacy. This Monitor will be independent and have
unlimited access to all government documents.
The Government of Puerto Rico and the Oversight Monitor will be
tasked with the drafting of the fiscal plans and budgets. However, in
the event they are unable to reach an agreement then it will be up to
the court to decide. Any agreement made and ratified by the court will
stand, but any other decision or agreement not ratified could be
revised by either the Government or the Oversight Monitor.
This is the right time to act. If PROMESA is amended, the new
Oversight Monitor could come in right after the end of the terms of the
current members, if they are confirmed by the U.S. Senate. Meanwhile
the Government of Puerto Rico would continue under the jurisdiction of
the U.S. District Court for the District of Puerto Rico, which would
also certify the fiscal plans.
To date the Board has not been able to accomplish any of the tasks
it was assigned by Congress. Furthermore, it creates more political
uncertainty in Puerto Rico, which is the worst that a government could
offer the markets. Thus, we should have a Board or a Monitor that does
not try to micromanage every aspect of public policy on the Island,
that does not strangle the working class and that protects the
essential services in the Island.
PROMESA is much more than the Board and as uncomfortable as we may
be with it, it is still necessary, but it needs to be amended. Puerto
Rico, now more than ever needs certainty and clarity, and the way to
start is by changing the current Board members.
______
[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE COMMITTEE'S
OFFICIAL FILES]
Submissions for the Record by Rep. Grijalva
-- Congressional Research Service Report on Status of
Funding Oversight Following the Response to and
Recovery from Hurricanes Irma and Maria in the
Commonwealth of Puerto Rico and the U.S. Virgin
Islands, dated April 29, 2019.
-- The Plan of Adjustment of Debt of COFINA: Sustainability
and Financial Capacity of Puerto Rico's Economy, by
Dr. Jose I. Alameda Lozada, dated December 31,
2018.
Submissions for the Record by Rep. Bishop
-- Letter from the Puerto Rico Builders Association to
Donald Trump, dated September 19, 2018.
-- Letter from the Puerto Rico Chamber of Commerce to Jose
Carrion III, President of the Fiscal Oversight &
Management Board for Puerto Rico, dated August 20,
2018.
-- Estudios Tecnicos, Inc. Report, ``Economic Impact of the
Adoption of a $15.00 Minimum Wage for Construction
in Public Projects and of a PLA,'' dated November
15, 2018.
Submission for the Record by Ms. Rivera
-- 2019 Chart on Child and Youth Well-Being Index in Puerto
Rico from the Instituto Desarrollo Juventud.
[all]