The Problem - City University of New York



Options Memorandum on thePuerto Rican Debt CrisisTO: Alejandro Jacier García Padilla, Governor Commonwealth of Puerto RicoBarack Obama, President of the United States of AmericaEduardo Bhatia Gautier, President of the Senate, Puerto Rican SenateJoseph Biden, Vice President of the United States, President of the U.S. SenateOrrin Hatch, President Pro Tempore, United States SenateMitch McConnell, Majority Leader, United States SenateHarry Reid, Minority Leader, United States SenateJaime Perelló, Speaker of the House, Puerto Rican House of RepresentativesCarlos Méndez Nú?ez, Majority Leader, Puerto Rican House of RepresentativesJennifer Gonzàlez, Minority Leader, Puerto Rican House of RepresentativesJohn Boehner, Speaker of the House, United States House of RepresentativesKevin McCarthy, Majority Leader, United States House of RepresentativesNancy Pelosi, Minority Leader, United States House of RepresentativesFROM: Jonathan Lee GibsonTara GitterSUBJECT: Options Regarding the Puerto Rican Debt Debt CrisisDATE: September 13, 2015CC: Melba Acosta Febo, Secretary of Treasury of Puerto RicoJack Law, Secretary of the Treasury of the United States of AmericaJanet Yellen, Chair of the Board of Governors of the Federal ReserveThe ProblemAs previously outlined, the issues facing the Commonwealth of Puerto Rico, and the reasons, while irrelevant as to how to ameliorate and attenuate the fallout, are diverse and deeply held in the colonial period of American history. Today, the Commonwealth is faced with a debt crisis that could, at a minimum, send the island into fiscal crisis and cause deep and lasting negative effects to the United States Municipal Bond Market with concurrent negative implications for the stock market, savings, investment, and other areas of the general economy. Additionally, the loss in value to personal pensions, mutual funds and individual investment accounts could be catastrophic.While it would be ideal to prevent a Puerto Rican municipal debt default, and there are interventions that would allow for this, a robust action should deal with both the immediate situation and help to sure up the Puerto Rican economy so that it can become sustainable and self-sufficient in the future while keeping in mind the history of American colonialism and how that effects the perception of Federal intervention.Options are Available to Different Governmental ActorsIn general, given the political status of the Commonwealth of Puerto Rico, options to attenuate this fiscal crisis fall into three general areas: Bi-lateral action by both the United States Federal Government and the Government of the Commonwealth of Puerto Rico and unilateral action on the part of either the Commonwealth or the United States. Given the political structure of the Commonwealth, and the legal supremacy of the United States over the island’s government,, looking at the attenuating options within these categories is important with respects to analyzing whether unilateral action by the United States could be viewed as a return to colonial era supremacy of the islands population. In an effort to explore options regarding a Puerto Rican Debt default we will begin with options that are unilateral to the Commonwealth to explore potential fixes that would leave Puerto Rico with the greatest amount of autonomy while staving off the fiscal crisis. Second we will look at bilateral action between the Federal and Puerto Rican Governments. Finally, we will look at actions that the United States could make unilaterally.Unilateral Action by Puerto RicoIndependenceThe question of Puerto Rican independence has been one of concern for the islands people since that appropriation of the island by the United States during the Spanish-American War. Since this is a question that the people have to answer we will spend little time discussing this here except to warn that independence, though it may offer a short term salve to the debt burden, would also mean that the Commonwealth would be without access to international bond markets to build its economy as an independent state for some time following a default and transition to an independent nation. Further, while there is little case law on the matter, there is a question as to whether or not the United States may be legally responsible for any debt discharged in this manner. The debt was incurred by a territory of the United States, and though acting independently, there is a question of whether or not the United States may ultimately be the legal debtor should Puerto Rico decide to terminate its relationship with the United States. For lack of a better metaphor, and without meaning any disrespect but rather commenting on the legal relationship between the United States and the Commonwealth of Puerto Rico, the relationship is much like a child and parent, and legally, a parent can be held responsible for the actions of their ward. If the United States is ultimately responsible for the territories under is purview, then it is in the best interests of the United States to work with the Commonwealth to find a better, more equitable, solution to the current debt crisis.Default and Leave the Federal Government to Fix or Attempt to NegotiateThe Puerto Rican Government could, in theory, default and claim that they have no choice. In this case they would certainly be sued by their creditors in Federal Court. There is a potential legal claim that since the United States Government has supremacy over the Commonwealth, that the ultimate creditor is in fact the United States Federal Government, as stated previously. This action would likely leave the island and its government as a pariah within the United States and could lead to the Federal Government going back to Colonial era rule of the island. Short of just defaulting and leaving the Federal Government to figure out the default crisis, the Puerto Rican Government could attempt to negotiate with creditors if no other access to other remediating options is given to the island under Federal Law. So far creditors have been unwilling to negotiate with the islands Government. The creditors are savvy, they know the legal rules and the fact that Puerto Rico does not have access to bankruptcy protections, and that they can force the islands hand and the Federal Government’s hand as well to get their money back without negotiating. Given the general state of Wall Street it is the opinion of theses authors that general default is not realistic, that it is unlikely given the status of the island, and the remedies it can seek, that creditors will negotiate or accept anything less then what they want. The only way this reality changes, and gives the island’s government options to act unilaterally without default, is if the island has access to options under the law that it does not currently have. These options are discussed in the Unilateral Action by the United States States section bellow.Bilateral Action by the United States and Puerto RicoStatehoodEntrance into the Union as a state should be explored.? This option requires a vote by Congress and a referendum plebiscite vote in Puerto Rico in order to change its status. Statehood would allow Puerto Rico to declare bankruptcy, take action to assess and pay down debt.? Unfriendly economic conditions associated with the Jones Act would be lifted with entrance into the United States, likely subsequently improving market conditions and unemployment rates.? Overall ameliorating the economic crisis becomes possible with the status change to Puerto Rican statehood.? Restoration of a working and thriving economy would create revenue both for the Federal Government as well as the Commonwealth.???????????????? New fiscal policy is accompanied by representation in the Capitol.? Under current conditions, Puerto Rico would add 5 new seats to the House.? This has potential to affect the representation of a number of other states, many of which are already set to lose a representative in coming adjustments.? This would likely impede the process, as would the uncertain identity of the 7 total seats.? This would be the largest introduction of a Latina/o delegation in Congressional history.? The political leanings of Puerto Rican candidates are as of yet identified, and their election to the United States Legislature could upend the status quo. With structural changes to the Legislature and the electorate generally, it is likely that politics would be the greatest barrier to the statehood option for Puerto Rico.Unilateral Action by the United StatesExtend Chapter 9 Municipal BankruptcyChapter 9 Municipal Bankruptcy provides a mechanism for municipalities to restructure debt via a defined court process. This is a mechanism that is allowed to all municipalities of within the fifty-states but is not extended to the Commonwealth of Puerto Rico or other territorial possessions to restructure public debt that is no longer serviceable by the municipal organization. While this is not an option available to the State government, it is available to independent government agencies. This type of debt accounts for a large portion of the public debt that is burdening the Commonwealth of Puerto Rico and access to this options would allow the island and its independent agencies to get a handle on, at least, a large portion of the debt.Having said this, investors bought Puerto Rican sovereign debt for a number of reasons. First, the islands debt is quadruple exempt from taxes on the gains. Second, the island is legislatively bared from defaulting on its debt. The fact that the Commonwealth does not have the funds is a peripheral concern. Since investors bought the debt under these circumstances, it is likely that if the United States were to retroactively extend Chapter 9 bankruptcy protections that investors would sue the United States federal government for any losses sustained as a result. If this is found to be a reasonable disquiet, then this outcome of extending Chapter 9 municipal bankruptcy must be considered in putting together a final recommendation.Fiscal BailoutThe territory has asserted its inability to pay its approximately $72 billion in debts, and is attempting to restructure its debt independent of access to Chapter 9 protections. Many of Puerto Rico’s bond issuers are already under the leadership of restructuring officers.? Even with officers working to restructure the debt the Commonwealth is still on the brink of default.? As United States territory, a declaration of bankruptcy receives no legislative acknowledgement.?A bailout could help Puerto Rico to whittle away at its enormous composite debt.? Installation of a board to audit institutions would determine where there is still credit worthiness and allow insolvent institutions to dismantle without fallout.? With debt rated abysmally low, central banks would step in to help with liquidity and healthy banks would require recapitalization and the U.S. should take an ownership interest thereto.? Further economic stimulation, including interest rate cuts, should be explored.? A board of overseers would be installed to oversee implementation of programs and their conditions in their entirety.?The insinuations of such a weighty action have potential to generate pushback on the island.? Historically treatment of the territory has not been to its benefit, and in keeping with the conditions of a bailout, there might be dangers associated with a unilateral approach by the Federal Government.? A bilateral tactic could have merit, and be a political necessity to avert feelings of hostility toward the United States by the Puerto Rican people.Current reactions to commonwealth commissioner Pedro Pierluisi’s introduction in Congress of a bill to grant Puerto Rico Chapter 9 protections, and a corresponding Senate bill, are a great indication of the present attitude towards a civic bailout.? The opposition in the House and Senate rules out any immediate action and likely makes this option impractical.?Reenact and Restructure the 923 Tax CreditIn 2006 the 936 Puerto Rico and possession tax credit which gave incentives to corporations to invest in Puerto Rico expired. This program was enacted in 1986 and got severe criticism due to the program acting more as a tax shelter for corporations then actually providing economic growth for the island and this was detailed in a 1993 GAO report titled “Puerto Rico and the 936 Tax Credit.”While the intent of the program was to encourage companies to create jobs within the Commonwealth, it was common for corporations to open offices with one employee to take advantage of the tax credit. While economic growth on the island was anemic, and after the expiration of this credit it remains anemic with unemployment hovering around 12%, over double that of the mainland United States, the idea of a tax credit to encourage companies to invest in jobs on the island is not a bad idea, it was just poorly conceived in 1986.One option that the United States has would be to encourage economic growth in the Commonwealth with a renewed program like that of the 936 tax credit. The problem with the original 936 program was that it was tied to a company having a presence on the island. Like Microsoft did, by simply having an employee and a physical office presence, corporations could repatriate money to the island and not pay up to 80% of the Federal tax due on that income. Obviously, this was a flawed program allowing corporations to avoid paying corporate income tax and without actually creating jobs and boosting the islands economy.A revised version of this program might look like a worker tax credit. For example, every job created and given to an existing resident on the island would be a better approach. This would work by the company providing documentation that: 1.) the company is headquartered outside the island, 2.) that this is a newly created job, 3.) for each employee proof that the worker has lived on the island for at least two years, 4.) certification that the job is a permanent position. One this has been certified, for each year that the job and employment exists, a deduction against profits for up to 100% of the salary paid would be available to the company to offset tax liability on profits derived from its activities as a whole.By attaching the tax credit to actual jobs and requiring documentation for such we can incentivize creating jobs. However, in short this does not help ameliorate the dire situation right now. Admittedly, reauthorizing a new, revamped, version of the 936 tax credit is not going to solve the problems facing the island today, but by shoring up the economy over the coming years if a bailout, or restructure requires not writing off debt in the short and long term, but rather deferring those payments under new terms, then the current economy would likely not be able to sustain that in the long run. Encouraging a robust economy on the island where there are increased tax revenues would ensure the future stability of the Commonwealth of Puerto Rico, regardless of any short term fixes.Systemic Problems Related to all SolutionsThe sorted history of American colonialism affects every option presented here. Since the United States gave Puerto Rico self-governing autonomy in the 1950’s the primary barrier to the People of Puerto Rico voting for statehood has been a worry that assimilating as a State and not a territorial commonwealth would mean the end of the Puerto Rican/Latino culture that defines the islands people. Independence is likely an option that is not feasible for strict economic reasons which leaves either bilateral action between the Commonwealth and the United States or unilateral action by the United states as directly viable options. However, whatever action is to be taken and advocated it must be an option, or options, that can not be seen by the people of the Commonwealth of Puerto Rico as a return to American colonialism, removing or stripping the rights of the people of Puerto Rico, or infringing on what sovereignty that it currently has as a territorial commonwealth state.,References ................
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