November 30,2015

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Hatch: Details on Puerto Rico’s Financial Health Needed Before Congress Can Act

Utah Senator Says, “Right now, too many people are willing to throw out demands and vague proposals - with a price tag as high as thirty to forty billion dollars - accompanied by a lot of political rhetoric. That’s precisely what we do not need.”

WASHINGTON - In a speech on the Senate floor today, Senate Finance Committee Chairman Orrin Hatch (R-Utah) outlined concerns regarding several proposals aimed at addressing the growing debt crisis in Puerto Rico and said Congress must first have access to clear and thorough information regarding the territory’s financial health before charting a course forward.

“We need everyone involved to be upfront and willing to work together,” said Hatch. “That goes for members of Congress, the administration, and the government of Puerto Rico.  Everyone needs to come clean about the current state of affairs, the specific needs and amounts requested, and the actual costs of any legislative or administrative proposal, and whether they want to offset costs or simply incur more federal debt.”

The complete speech, as prepared for delivery, is below:

     Mr. President, I rise today to speak on Puerto Rico’s financial and economic challenges. 

     The government of Puerto Rico tells us that the territory has more than $73 billion in debt that is, to use their words, “not payable.”  On top of that, Puerto Rico has tens of billions of dollars in unfunded pension liabilities and very few real assets to back its pension promises.

     The economy in Puerto Rico has persistently registered double-digit unemployment rates, staggeringly low labor force participation rates, and a bloated public sector.  And there are growing strains on Puerto Rico’s health care system, some of which reflect the way the so-called Affordable Care Act was written to treat Puerto Rico and other territories. And some of which reflects differing treatment between Puerto Rico, where residents do not pay federal personal income taxes, and states, where residents are included in the federal personal income tax system.

     In short, Mr. President, there is very little good economic news coming from Puerto Rico these days.

     As a result, we’re seeing an ongoing debate about what the federal government can or should do in order to help the American citizens residing in Puerto Rico.  And, to me, this debate boils down to four relatively simple questions.        

     Question Number One: Should the federal government allow Puerto Rico access to Chapter 9 of the Bankruptcy Code or to even broader debt-resolution tools?

     Question Number Two:  Will providing fresh tax incentives to Puerto Rico help boost the island’s economy by creating jobs and stimulating growth?

     Question Number Three: Should Congress increase federal resources to help ease Puerto Rico’s strained healthcare system?

     And, Question Number Four:  Should we take steps to exempt Puerto Rico from burdensome federal regulations – including labor, transportation, and energy regulations – that may be contributing to the territory’s ongoing economic struggles? 

     To date, we’ve seen a number of proposals that attempt to address these and other questions, though, in my opinion, many of them do so in some pretty awkward ways.  I want to take time today to address each of these four major questions in turn, and, hopefully, shed some light on what we have to consider as we try to address the growing crisis in Puerto Rico.

     So far, the majority of the discussion among policymakers with regard to Puerto Rico has focused on Question Number One, allowing access to Chapter 9 bankruptcy relief.  As we all know, Chapter 9 applies specifically to financially distressed municipalities who are seeking protection from creditors as they develop and negotiate plans to adjust their debts.  Puerto Rico is NOT currently eligible for Chapter 9 bankruptcy, meaning that granting them access to this type of relief will require a legislative change to the Bankruptcy Code, which may come with its own set problems. 

     Some proponents of a bankruptcy solution for Puerto Rico have argued that the clear language preventing the island from accessing Chapter 9 reflects some sort of drafting error.  They argue further that, once Puerto Rico is eligible for Chapter 9 protections, it should apply to debts already incurred.

     Now, whether or not the exclusion for Puerto Rico from Chapter 9 was intentional or not, we should keep in mind that there are potential rule-of-law issues at stake when we talk about legislative action to retroactively alter the terms of debt contracts.

     Puerto Rico’s creditors entered into their contracts with the various existing risks priced into the agreements in the form of interest rates and other terms.  If the island been eligible for Chapter 9 bankruptcy prior to entering into those agreements, creditors would have formed different expectations, likely leading to different terms, including differing interest rates that could have reshaped the demand for Puerto Rican bonds. 

            This isn’t rocket science, Mr. President, this is Finance 101. 

     We should be cautious about any legislative action that would alter the terms of existing contracts.  At the very least, we should consider what impact extending Chapter 9 to existing Puerto Rico obligations could have on credit transactions moving forward, given that parties set credit agreements based on the laws they expect to apply.

     If parties believe there’s a real possibility that Congress might retroactively change those laws in the future, they’re likely to seek different terms or to reevaluate a contract’s potential worth.

      Even so, it’s not at all clear that amending Chapter 9 to allow access for Puerto Rico will solve Puerto Rico’s debt problems.  Officials from the Obama Administration have argued that Chapter 9 would only cover around 30 percent of Puerto Rico’s outstanding obligations and, as a result, even broader debt-restructuring authority is necessary.  Therefore, those in Congress with proposed solutions that center only on Chapter 9 bankruptcy are apparently not aware of the administration’s position.

      However, the other non-bankruptcy proposals we’ve seen, which would allow Puerto Rico to handle its debt on its own, are also lacking. 

     For example, we have seen proposals to allow the Federal Reserve to purchase debt issued by Puerto Rico, and to authorize the Treasury to guarantee bonds issued by the government of Puerto Rico or any of its instrumentalities.  Of course, this approach would run the risk of setting very bad precedents for future insolvent entities and is fraught with moral hazard.

     Ultimately, those pushing to restructure Puerto Rico’s debt as the sole solution tend to want to simply blame the problems on the creditors, using loose terms like “hedge funds” or “vulture funds.”  For these people, punishing the creditors is their desired focus, not because it is a viable solution, but because, at the end of the day, an opportunity for populist rhetoric is itself a valuable commodity heading into a contentious election cycle. 

     While that approach may help some around here appeal to their political base, it does precious little to help the people of Puerto Rico and ignores the fact that a number of the creditors are middle-class investors and retirees from virtually every U.S. state and territory from Utah to New York to Puerto Rico itself. 

     Ultimately, whatever case can be made for restructuring authority for Puerto Rico’s debt, there may not  be an urgent need for that authority to be granted right away.  This is evidenced by the fact that, despite several months of debate surrounding these issues, Puerto Rico has only recently begun negotiating with some of its creditors. 

     I would hope that, if the need for relief is in fact dire, the government of Puerto Rico will waste no time negotiating and working toward private solutions.  If there is no urgency on that front, it will be hard to argue that there is urgent need in Congress to consider proposals relating to Chapter 9 bankruptcy or broader restructuring authority. 

     So, that’s Question Number One, Mr. President.  Let’s talk about Question Number Two, which deals with tax incentives to boost Puerto Rico’s economy. 

     On the tax front, we’ve seen proposals in Congress to allow residents of Puerto Rico to claim the Earned Income Tax Credit and the refundable portion of the Child Tax Credit on the same basis as other U.S. taxpayers.  Likewise, the Obama Administration has indicated support for a similar approach, though they have not provided any real details as to what their proposal would look like.   

     Proposals like these are problematic for a number of reasons. 

     As I mentioned, the residents of Puerto Rico are exempt from the federal personal income tax system, meaning they do not pay any personal federal income tax.  Therefore, offering these refundable tax credits wouldn’t reduce their tax burden because you can’t reduce a tax burden that is already zero. In other words, these tax credits would ultimately be cash payments offered directly to lower-income residents of Puerto Rico.

     On top of that, the Earned Income Tax Credit and the Child Tax Credit are already rife with fraud and overpayments when they are offered to taxpayers who are required to file a return and can, at least theoretically, incur a tax burden at some future date if their income goes up.  Extending these same credits to Puerto Rico could very well introduce a number of threats to the integrity and administration of our tax system. 

     Those who issue these types of proposals rarely have a solution to these inherent concerns.  Moreover, we haven’t seen any public information from congressional scorekeepers as to how much these proposals would cost.  I also haven’t heard any proponents of this approach offer so much as a hint about how they would plan to offset the costs, or if they intend to offer any offset at all. 

     Long story short, Mr. President, most of the tax-related proposals to the Puerto Rico situation leave much to be desired.  That’s not to say we shouldn’t do anything in this area.  There are, quite likely, tax incentives we could offer to better incentivize growth and labor force participation, and perhaps investment, in the Puerto Rican economy.  I think it would be safe to say that Republicans would be open to such a discussion.  But, to date, I haven’t seen anything that resembles a serious solution that focuses on the tax code.

     This brings us to Question Number Three, dealing with healthcare policy, which has been the primary focus of a number of our colleagues when it comes to these issues. 

     Here in Congress, we have seen some poorly constructed proposals that, when boiled down to their essence, would allocate more than $30 billion from the general fund directly to Puerto Rico.  Of course, that’s not how the proponents describe their ideas.  Typically, these proposals are couched as changes to the way Puerto Rico’s share of federal health dollars is determined under existing programs.  However, while the issues are admittedly complex, the result is fairly simple: fiscal irresponsibility would be rewarded to the tune of tens of billions of dollars.

     Don’t get me wrong.  We will very likely have to consider ideas to alter the means by which we allocate federal health funds to Puerto Rico.  However, if we decide to go that route, it is essential that we move forward in a fiscally responsible manner.  To date, I have yet to hear any concrete thoughts from proponents in Congress or from our federal health agencies about how this can be done.   

     I have heard, however, that the so-called Affordable Care Act is the source of some of the healthcare-related problems faced by Puerto Rico.  I’ll leave it those who wrote that law and forced it through Congress on a partisan basis to explain why that is the case. 

     We now come to Question Number Four, the possibility of providing Puerto Rico with relief from various federal regulations.

     We’ve heard a number of ideas in this area, including reforms or exemptions from regulations governing labor markets, shipping, energy costs, and others.  While I am inherently sympathetic to proposals to scale back federal regulations, the issues here are very complex, and would become very political in a hurry. 

     For example, while I haven’t taken any straw polls, I think it is safe to assume that many of my friends on the other side of the aisle would reflexively oppose any attempt to mitigate the application of federal minimum wage regulations to Puerto Rico.  This would be puzzling, given that Congress has offered similar relief to other ailing U.S. territories in the relatively recent past.  On top of that, the Krueger Report, which was commissioned by the government of Puerto Rico, along with a host of economic analysts across the political spectrum have argued that allowing Puerto Rico the flexibility to set minimum wages that differ from the federal levels would have a positive economic impact and that the current minimum wage levels do not fit productivity conditions on the island. 

     Still, even in the face of all this evidence and precedent, my guess is that many of my colleagues would take issue with this idea.  I’d expect that they’d similarly reject out of hand to any proposals to scale back environmental regulations or rules governing transportation, even if it could be shown that their regulations were having a negative impact and contributing directly to Puerto Rico’s fiscal and economic predicament. 

     Unfortunately, Mr. President, for a number of our colleagues here in Congress, commitment to ideology too often does not allow room to admit when your policies aren’t working.  And, while the situation in Puerto Rico isn’t the first time we’ve seen that come up, I expect we’ll see that happening a lot if we get a chance to consider regulatory relief as a potential solution. 

     Those are the four main questions we face with regard to Puerto Rico, Mr./Mme. President.  While they each come with their own sets of difficulties, those are the basic categories of solutions we’ve seen come to light so far. 

     Of those four categories, two of them – the tax and the healthcare categories – are interrelated insomuch as members of Congress and administration officials have made them the focus of various ideas to help Puerto Rico improve its fiscal situation and perhaps its economy.  While those putting the tax and health proposals forward have largely been silent about what our official scorekeepers – the CBO and the Joint Committee on Taxation – will say about the costs of their ideas, I have done some of my colleagues’ homework for them. 

     Adding up the refundable tax credits – including the EITC and the CTC – and health-related resource flows – including changes to Medicaid allocations -- the overall cost looks to be well north of $30 billion, and likely around $40 billion over the next 10 years. 

     Those are hardly insignificant figures, Mr. President.  Questions of funding and resource allocation are always difficult, and they implicate a number of issues.  It isn’t as simple as just deciding to give more health funds to Puerto Rico or access to refundable tax credits, because doing so would necessarily mean reduced funding for other federal priorities or increased taxes or yet more federal debt. 

     True enough, Puerto Rico’s problems are multi-dimensional and complex.  And, I don’t know anyone in Congress who is indifferent to the plight of these American citizens.  Sadly, those facts don’t make our unpleasant budget arithmetic any easier.  If anything, they make it all the more complicated.

     In short, there are no easy answers. 

     That said, regardless of how we move forward, we need to have a clearer picture of what’s going on in Puerto Rico.  We need to have the fiscal facts regarding the island’s indebtedness, funding levels, and needs.

     Yet, to date, we have not seen any recent audited financial statements from Puerto Rico.  Instead, we are being asked to rely on statements and cash-flow analysis commissioned by the government of Puerto Rico.   As of right now, finances in Puerto Rico remain extremely opaque and difficult to monitor.  Congress should demand independent verification of the territory’s finances before moving forward on any kind of relief package. 

     Moreover, while we’re hearing horror stories of inadequate cash flow and a liquidity squeeze in Puerto Rico, it’s difficult to ascribe much urgency to the situation when we are still seeing and reading about relatively large outlays for questionable expenses.  Indeed, it is hard to believe an entity is in danger of running out of cash when it is paying for a broad public relations and lobbying campaign and when officials are talking about protecting hundreds of millions of dollars in year-end bonuses for government employees.

     This brings us to yet another difficult question.  I suppose you could call this Question Number Five:  What can we do to ensure that Puerto Rico changes its clearly unsustainable fiscal course? 

     No matter what we do with regard to debt restructuring, tax policy, healthcare policy, or regulatory relief, the solution will ultimately be meaningless if we don’t take steps to ensure that Puerto Rico doesn’t simply continue on the fiscally irresponsible path that brought them here in the first place.  Even if every creditor gets a massive haircut and all the requested resources are channeled directly to the island, steps need to be taken to avoid getting into this situation in the future. 

     Puerto Rico, for some time, has spent more than it takes in from revenues and receipts, and has covered the difference with debt.  The debt that has been issued has tapped out virtually every possible expected future receipt of the government, and basic budget arithmetic has caught up with this unsustainable fiscal recipe, and has effectively shut Puerto Rico out of funding markets. In short, Puerto Rico must move to policies that are fiscally sustainable. 

     Mr. President, that is not me trying to impose on Puerto Rico’s sovereignty. 

     That is not an agenda of “austerity” at work. 

     It is just the simple budget arithmetic of the situation.  And, before we undertake any effort to provide relief or assistance to Puerto Rico, we need to give this simple math its proper consideration and demand a workable plan for the future. 

     For its part, the Obama Administration has chosen to remain relatively vague on this issue. 

     In October, we a saw a joint statement from Treasury, the Department of Health and Human Services, and the National Economic Council outlining a general plan, which they called a “Roadmap for Congressional Action.”  This roadmap contained many of the same general proposals I’ve discussed today with regard to bankruptcy relief, tax credits, and health spending.  Conspicuously absent were any proposals for regulatory relief for Puerto Rico.  Also absent were any real cost estimates or proposed offsets, just some lip service to the need to undertake these changes in a “fiscally responsible” way.

     I’ve made inquiries to various agencies, including Treasury and HHS, with little in the way of detailed response to many of the issues at stake here.  It remains puzzling to me that, in the midst of what some in the administration are calling a “humanitarian crisis,” we’re seeing very little engagement from the our health agencies, particularly when so many have been arguing that the crisis stems, in large part, from a lack of healthcare funding in Puerto Rico. 

     It also seems that provisions of taxpayer-funded technical assistance, which I would think would be considered in any package aimed at Puerto Rico, may be rendered moot given that, as I understand it, Treasury officials are working to wedge such assistance on the sidelines into appropriations vehicles. 

     Needless to say, before Congress can even begin to consider a significant legislative package to address the situation in Puerto Rico, we need more information from the administration about what it is now doing and what it plans to do in the near future.  Put simply, it would not be productive for Congress to move forward on a legislative vehicle costing billions – if not tens of billions – of dollars without knowing beforehand if that legislation contradicts or conforms to the plans of federal agencies. 

     Long story short, Mr. President, this will likely be a significant undertaking.  There are a lot of ideas floating around. Some may work, others clearly won’t. 

     As the Chairman of the Senate committee with jurisdiction over our tax code and most of the relevant health programs, I am more than willing to work with my colleagues on both sides of the aisle to find a bipartisan path forward. 

     To accomplish that goal, we need everyone involved to be upfront and willing to work together.  That goes for members of Congress, the administration, and the government of Puerto Rico. 

     Everyone needs to come clean about the current state of affairs, the specific needs and amounts requested, and the actual costs of any legislative or administrative proposal, and whether they want to offset costs or simply incur more federal debt. 

     Right now, too many people are willing to throw out demands and vague proposals – with a price tag as high as thirty to forty billion dollars – accompanied by a lot of political rhetoric. 

     That’s precisely what we do not need. 

     It will be very easy to play politics with this issue, Mr. President.  My hope is that enough of us will be willing to set that aside to allow Congress to do right by our fellow citizens in Puerto Rico.