Written by Luis Gallardo for Latino Rebels
Puerto Rico’s increasingly sensitive fiscal situation is nothing new. For the previous few months, international media has covered the matter closely. Nevertheless, outside of financial news sources little has been said about the recently proposed federal control board for Puerto Rico. Below is a guide for readers interested in catching up on the matter.
What’s going on?
A number of Republican lawmakers last December formally proposed the creation of a federal control board which would oversee Puerto Rico’s finances. Last month, House Republicans released a revised draft of the proposal. The board’s members would be nominated by the President. It would be composed of five non-elected individuals. Only two members would be Puerto Ricans.
This proposed board would have sweeping powers over Puerto Rico’s fiscal policies. The body would have the power to veto laws, revise the island’s budget, lower the minimum wage, review all government contracts, impose taxes, make cuts as it pleases and fine or arrest Puerto Rican government officials that do not comply with its directives.
Is this legal?
Yes, it is. As a U.S. territory, Puerto Rico is subject to the planetary powers of Congress. The District of Columbia, another U.S. territory, was also given a federal control board in 1995.
How did we get here?
During the previous months, Puerto Rico’s debt had peaked at $73 billion. Recently, government officials announced that said balance had dropped down to $69 billion due to payments made by the current administration. Nevertheless, when factoring in unfunded pensions and other debts, those levels can total up to $146 billion.
The local economy has been contracting since 2006 and citizens are moving to the U.S. at record numbers. In 2009, Puerto Rico 30,000 more people left the island than moved there. In 2012, it was 54,000. Between June 2014 and June 2015, Puerto Rico’s population dropped by 74,000.
This makes for a tough situation for public administrators, finding it harder and harder to meet revenue collection estimates. The results are budget shortfalls, deficits and cash flow deficiencies. To confront the situation, the government has held back on owed bonuses for public employees, delayed income tax returns to citizens and contracted out services such as special education therapy. Last September, Governor Alejandro García Padilla signed an executive order redirecting tax revenue meant for sales tax-backed bonds to pay for general obligation bonds. Despite all this, Puerto Rico defaulted on its January debt payments.
Are there any other alternatives?
A number of alternatives have been proposed. Governor García Padilla and Resident Commissioner Pedro Pierluisi (Puerto Rico’s non-voting Resident Commissioner to Congress) have pushed the later’s H.R. 870 to include Puerto Rico in the U.S. Bankruptcy Code Chapter 9, much like each of the 50 states. This would allow Puerto Rico’s public corporations to restructure their share of the debt, in total holding 73% of the island’s total debt. Puerto Rico was once included, but mysteriously disappeared from the Code after a series of 1984 amendments, with no debate or discussion.
Despite this, govtrack.us gives the bill a 0% chance of passage. Investors and hedge funds have pumped hundreds of thousands of dollars in lobbying, and some have even propped up organizations such as the 60 Plus Association and Mainstreet Bond Holders to carry out an aggressive media campaign in the hopes of swaying public opinion in their favor. The campaign has been successful enough to sway some, including Jenniffer González, Puerto Rico’s House minority leader, to oppose the bill, even though González is an advocate for statehood.
Legislators from the ruling Popular Democratic Party as well as the New Progressive Party’s Pierluisi have also proposed the exemption of Puerto Rico from colony-era shipping laws that require products shipped to and from the U.S. to be done so under U.S.-flagged, manned and built ships. Considering the Puerto Rico is an island and must import almost the totality of the goods that it consumes, it is estimated that said requirements drain up to a $1.3 billion from the pockets of local consumers. Nevertheless, shipping interests and lobbies have also pumped in money to prevent this from happening.
Other proposals have arrived, such as Nancy Pelosi’s (D-CA) H.R. 4290, a bill that would put a short-term freeze on certain debt-related lawsuits while Puerto Rico and Congress figure things out. Senator Bob Menéndez (D-NJ) also filed S.R. 2675 and 2676, which propose health-care funding, tax incentives, territory-wide restructuring and its own version of the federal control board. Being that said proposals are presented by Democrats with little to no bipartisan support, there is very little chance for approval. Senate President pro tempore Orrin Hatch (R-UT) rejected the proposal, responded by stating this: “Senate Democrats appear to want to move the goal posts on broad debt restructuring to favor public pensions and pair it with tens of billions of federal funds for Puerto Rico without any sense of where the funds come from.”
Finally, realizing that Puerto Rico is excluded from Chapter 9, in 2014 the island’s legislature approved a local bankruptcy law with the hopes of providing an ordered mechanism to restructure debt. However, federal courts recently ruled in favor of hedge funds such as Franklin Advisers and Oppenheimer and said the measure was invalid, citing a Chapter 9 prohibition on state laws of this type. The Puerto Rican government argues that if Chapter 9 does not apply to Puerto Rico, then the states should also fall into the same category as the island. This case is currently being reviewed by the United States Supreme Court.