HFS Subcommittee Hearing on Puerto Rico
House Financial Services Subcommittee on
Oversight and Investigations
“Puerto Rico’s Debt Crisis and Its Impact on the Bond Markets”
Thursday, February 25, 2016
Key Topics & Takeaways
- “Super Chapter 9”: Isaac raised concern over the Treasury Department’s proposal for “Super Chapter 9” bankruptcy, as it will raise the cost of borrowing for the mainland, and that long-term financial stability for the territory’s government requires continued access to the financial markets, which will be more difficult and expensive should the Treasury’s plan be enacted.
- Restructuring: When asked by Rep. Maloney (D-N.Y.) if Puerto Rico needs stronger tools than Chapter 9, Zandi said yes, that a framework allowing for restructuring of all the island’s problems is needed, adding that it is the only way to put Puerto Rico on a sustainable path without fallout on the bond market and financial system.
- Oversight Board: Subcommittee Chairman Duffy (R-Wis.) asked what the people of Puerto Rico think of an oversight board, to which Batlle explained that there will be “strong support” for such a board.
- Treasury’s Plan: Rep. Mick Mulvaney (R-S.C.) noted his discontent over Treasury’s Puerto Rico plan and asked how it is fair for mainland pensioners and retirees. Krueger called the situation “dire,” adding that it will be a “messy, long, drawn-out process” as Puerto Rico will not be able to make its payments.
Witnesses
- Dr. Anne Krueger, Senior Research Professor of International Economics, John Hopkins University School of Advanced International Studies
- Mr. Juan Carlos Batlle, Senior Managing Director, CPG Island Servicing, LLC
- Mr. William M. Isaac, Senior Managing Director, Global Head of Financial Institutions, FTI Consulting
- Dr. Mark Zandi, Chief Economist, Moody’s Analytics
Opening Statements
In his opening statement, Subcommittee Chairman Sean Duffy (R-Wis.) stated that Puerto Rico is one of the largest issuers of municipal bonds due to their triple tax exemption, adding that such bonds help fund public projects such as infrastructure and schools. He stressed that while some say a Puerto Rican debt crisis is looming, the crisis “may already be here” and is why Speaker Paul Ryan (R-Wis.) committed that the House will deliver an answer to the Puerto Rican debt crisis by the end of March.
Subcommittee Ranking Member Al Green (D-Texas) noted that Chapter 9 bankruptcy used to apply to Puerto Rico but then “mysteriously was denied.” However, he continued, Chapter 9 will not be enough and the fiscal necessities of the territory must be addressed, to include restructuring that includes autonomy and independence.
Rep. Lydia Velazquez (D-N.Y.) expressed her desire for legislation to be created to help Puerto Rico, to include tools for restructuring the territory’s unsustainable debt, as Chapter 9 will only address a “small sliver” of the debt. She added that any sort of oversight board will have to be structured so it does not undermine Puerto Rico’s autonomy.
Testimony
Dr. Anne Krueger, Senior Research Professor of International Economics, John Hopkins University, School of Advanced International Studies
In her testimony, Krueger stated that in order to fix the debt problem in Puerto Rico, the following has to happen: 1) Puerto Rico has to resume economic growth; 2) Fiscal policies must be amended to become sustainable; and 3) Debt restructuring is needed. She continued that there is “no way” the territory will be able to cut its expenditures or taxes fast enough to sustain the debt and that restructuring the debt “has to happen.” Krueger added that Puerto Rico’s impeded growth can be solved by creating a “level playing field” for business and making the territory’s government more efficient. The earned income tax credit (EITC) would make a difference, she explained, but that it will be a “long, drawn out process” without assistance.
Juan Carlos Batlle, Senior Managing Director, CPG Island Servicing, LLC
In his testimony, Batlle stated that the banking sector is the “root of the problem” and that a resolution can only happen with assistance from Congress. He explained some of the causes of the Puerto Rican crisis, which include a: 1) failure to execute and follow through on economic development plans; 2) lack of adequate, independent regulation over the Government Development Bank (GDB) and the Economic Development Bank (EDB) for Puerto Rico; and 3) completely dysfunctional internal revenue service that has an ill-trained workforce with inefficient systems. Batlle continued that a fiscal oversight and control board for the territory could provide relief and fuel economic activity, but that a disorderly debt restructuring will further delay Puerto Rico’s credibility, market access, and have a negative impact on the entire municipal bond market.
William M. Isaac, Senior Managing Director, Global Head of Financial Institutions, FTI Consulting
In his testimony, Isaac stated that there are ways to assist restructuring Puerto Rico within the existing framework, but that it has to be done in the “right way.” He raised concern over the Treasury Department’s proposal for “Super Chapter 9″ bankruptcy, as it will raise the cost of borrowing for the mainland, and that long-term financial stability for the territory’s government requires continued access to the financial markets, which will be more difficult and expensive should the Treasury’s plan be enacted. Batlle suggested two parts to approaching Puerto Rico’s challenge: 1) Congress treats the territory like any U.S. state and allow municipalities to access Chapter 9 bankruptcy; and 2) Congress creates a Federal control board that oversees Puerto Rico’s finances, which is consistent with Duffy’s H.R. 4199, the “Puerto Rico Financial Stability and Debt Restructuring Choice Act.”
Dr. Mark Zandi, Chief Economist, Moody’s Analytics
In his testimony, Zandi stated that the Puerto Rico crisis is “very severe,” with a job rate decline of 10 percent over the last decade, more than the U.S. saw with the financial crisis. He commented that H.R. 4199 is “important,” as it is a “step in the right direction,” but that it is not enough and Congress “should do more.” Zandi recommended a shift from Chapter 9 bankruptcy to a broader restructuring framework that would keep the oversight board, but have more authority spanning across all liabilities. He continued that the board would be able to implement a temporary stay of all the territory’s debt payments, allowing time for Puerto Rico to create sustainable restructuring.
Question and Answer
Restructuring
Duffy noted some of the concern over restructuring and asked if it would set a “dangerous precedence,” raising costs in other parts of the country. Batlle replied that broad restructuring will have an impact on the overall municipal markets, and that new mechanisms “unfamiliar and unknown” to the stable municipal markets “would set a dangerous precedent” and create volatility and uncertainty.
Rep. Emanuel Cleaver (D-Mo.) said that the municipal bond markets would “tremble” at the thought of Chapter 9 bankruptcy due to the damage it would cause and asked the witnesses for other ideas. Zandi commented that the only point of contention among the witnesses is how broad the restructuring framework should be, whether solely Chapter 9 or something broader. Isaac stressed that the most important thing is to prevent the debt from spreading more broadly than it already is, and that if the bankruptcy rules are changed, “nothing good is going to happen from that.”
Velazquez asked if Chapter 9 was enacted, would it allow for restructuring debt. Zandi replied that it would be a “step in the right direction” but that it would not put the territory on a sustainable path.
When asked by Rep. Carolyn Maloney (D-N.Y.) if Puerto Rico needs stronger tools than Chapter 9, Zandi said yes, that a framework allowing for restructuring of all the island’s problems is needed, adding that it is the only way to put Puerto Rico on a sustainable path without fallout on the bond market and financial system.
Oversight Board
Duffy asked what the people of Puerto Rico think of an oversight board, to which Batlle explained that there will be “strong support” for such a board.
Rep. Scott Tipton (R-Colo.) asked if a financial stability board is important for Puerto Rico, and Isaac replied that it is “critical.”
Earned Income Tax Credit
When asked about ideas for stimulating Puerto Rican growth, Krueger noted the territory’s ineligibility of the EITC and how it would help by increasing the participation rate. Zandi agreed and stressed that the EITC is “critical” to Puerto Rico as it would bring people out of the “shadow” economy.
Rep. Maxine Waters (D-N.Y.) asked how introducing the EITC will impact the territory. Zandi and Krueger agreed that there will be less tax revenue without the EITC and that it would get Puerto Rico moving in a positive direction, to which Krueger agreed.
Treasury’s Plan
Rep. Mick Mulvaney (R-S.C.) noted his discontent over Treasury’s Puerto Rico plan and asked how it is fair for mainland pensioners and retirees. Krueger called the situation “dire,” adding that it will be a “messy, long, drawn-out process” as Puerto Rico will not be able to make its payments.
Tipton asked why the Super Committee proposed by Treasury would be a mistake. Isaac stressed that it is “serious mistake” to restructure general obligation bonds, and that if Congress allows this, “I don’t know where it stops,” as each state will be tempted to follow suit.
Impacts on the Bond Market
Velazquez noted that Puerto Rico has already defaulted on some issues, and asked if the U.S. bond market has been impacted, or if providing the territory with debt restructuring authority would compromise the U.S. bond market. Zandi replied that there is no evidence to both questions.
Tax Avoidance
Rep. Bruce Poliquin (R-Maine) asked why taxes are not being collected in the territory, to which Krueger replied that it is a “large, informal sector.” Batlle added that the taxing authority is a “dysfunctional entity” and that there must be consequences to those who do not pay taxes.
Economic Growth
Rep. Keith Ellison (D-Minn.) asked what sectors of the Puerto Rican economy have the most potential to grow. Krueger opined that tourism has not thrived in the territory other than the high end, and that the territory should be a corporate headquarters sector due to the location. Zandi agreed and added that the financial services industry has “significant potential,” as there is capital flowing from South and Central America into the U.S. that could go through Puerto Rico rather than Miami.
For more information on this hearing, please click here.
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House Financial Services Subcommittee on
Oversight and Investigations
“Puerto Rico’s Debt Crisis and Its Impact on the Bond Markets”
Thursday, February 25, 2016
Key Topics & Takeaways
- “Super Chapter 9”: Isaac raised concern over the Treasury Department’s proposal for “Super Chapter 9” bankruptcy, as it will raise the cost of borrowing for the mainland, and that long-term financial stability for the territory’s government requires continued access to the financial markets, which will be more difficult and expensive should the Treasury’s plan be enacted.
- Restructuring: When asked by Rep. Maloney (D-N.Y.) if Puerto Rico needs stronger tools than Chapter 9, Zandi said yes, that a framework allowing for restructuring of all the island’s problems is needed, adding that it is the only way to put Puerto Rico on a sustainable path without fallout on the bond market and financial system.
- Oversight Board: Subcommittee Chairman Duffy (R-Wis.) asked what the people of Puerto Rico think of an oversight board, to which Batlle explained that there will be “strong support” for such a board.
- Treasury’s Plan: Rep. Mick Mulvaney (R-S.C.) noted his discontent over Treasury’s Puerto Rico plan and asked how it is fair for mainland pensioners and retirees. Krueger called the situation “dire,” adding that it will be a “messy, long, drawn-out process” as Puerto Rico will not be able to make its payments.
Witnesses
- Dr. Anne Krueger, Senior Research Professor of International Economics, John Hopkins University School of Advanced International Studies
- Mr. Juan Carlos Batlle, Senior Managing Director, CPG Island Servicing, LLC
- Mr. William M. Isaac, Senior Managing Director, Global Head of Financial Institutions, FTI Consulting
- Dr. Mark Zandi, Chief Economist, Moody’s Analytics
Opening Statements
In his opening statement, Subcommittee Chairman Sean Duffy (R-Wis.) stated that Puerto Rico is one of the largest issuers of municipal bonds due to their triple tax exemption, adding that such bonds help fund public projects such as infrastructure and schools. He stressed that while some say a Puerto Rican debt crisis is looming, the crisis “may already be here” and is why Speaker Paul Ryan (R-Wis.) committed that the House will deliver an answer to the Puerto Rican debt crisis by the end of March.
Subcommittee Ranking Member Al Green (D-Texas) noted that Chapter 9 bankruptcy used to apply to Puerto Rico but then “mysteriously was denied.” However, he continued, Chapter 9 will not be enough and the fiscal necessities of the territory must be addressed, to include restructuring that includes autonomy and independence.
Rep. Lydia Velazquez (D-N.Y.) expressed her desire for legislation to be created to help Puerto Rico, to include tools for restructuring the territory’s unsustainable debt, as Chapter 9 will only address a “small sliver” of the debt. She added that any sort of oversight board will have to be structured so it does not undermine Puerto Rico’s autonomy.
Testimony
Dr. Anne Krueger, Senior Research Professor of International Economics, John Hopkins University, School of Advanced International Studies
In her testimony, Krueger stated that in order to fix the debt problem in Puerto Rico, the following has to happen: 1) Puerto Rico has to resume economic growth; 2) Fiscal policies must be amended to become sustainable; and 3) Debt restructuring is needed. She continued that there is “no way” the territory will be able to cut its expenditures or taxes fast enough to sustain the debt and that restructuring the debt “has to happen.” Krueger added that Puerto Rico’s impeded growth can be solved by creating a “level playing field” for business and making the territory’s government more efficient. The earned income tax credit (EITC) would make a difference, she explained, but that it will be a “long, drawn out process” without assistance.
Juan Carlos Batlle, Senior Managing Director, CPG Island Servicing, LLC
In his testimony, Batlle stated that the banking sector is the “root of the problem” and that a resolution can only happen with assistance from Congress. He explained some of the causes of the Puerto Rican crisis, which include a: 1) failure to execute and follow through on economic development plans; 2) lack of adequate, independent regulation over the Government Development Bank (GDB) and the Economic Development Bank (EDB) for Puerto Rico; and 3) completely dysfunctional internal revenue service that has an ill-trained workforce with inefficient systems. Batlle continued that a fiscal oversight and control board for the territory could provide relief and fuel economic activity, but that a disorderly debt restructuring will further delay Puerto Rico’s credibility, market access, and have a negative impact on the entire municipal bond market.
William M. Isaac, Senior Managing Director, Global Head of Financial Institutions, FTI Consulting
In his testimony, Isaac stated that there are ways to assist restructuring Puerto Rico within the existing framework, but that it has to be done in the “right way.” He raised concern over the Treasury Department’s proposal for “Super Chapter 9″ bankruptcy, as it will raise the cost of borrowing for the mainland, and that long-term financial stability for the territory’s government requires continued access to the financial markets, which will be more difficult and expensive should the Treasury’s plan be enacted. Batlle suggested two parts to approaching Puerto Rico’s challenge: 1) Congress treats the territory like any U.S. state and allow municipalities to access Chapter 9 bankruptcy; and 2) Congress creates a Federal control board that oversees Puerto Rico’s finances, which is consistent with Duffy’s H.R. 4199, the “Puerto Rico Financial Stability and Debt Restructuring Choice Act.”
Dr. Mark Zandi, Chief Economist, Moody’s Analytics
In his testimony, Zandi stated that the Puerto Rico crisis is “very severe,” with a job rate decline of 10 percent over the last decade, more than the U.S. saw with the financial crisis. He commented that H.R. 4199 is “important,” as it is a “step in the right direction,” but that it is not enough and Congress “should do more.” Zandi recommended a shift from Chapter 9 bankruptcy to a broader restructuring framework that would keep the oversight board, but have more authority spanning across all liabilities. He continued that the board would be able to implement a temporary stay of all the territory’s debt payments, allowing time for Puerto Rico to create sustainable restructuring.
Question and Answer
Restructuring
Duffy noted some of the concern over restructuring and asked if it would set a “dangerous precedence,” raising costs in other parts of the country. Batlle replied that broad restructuring will have an impact on the overall municipal markets, and that new mechanisms “unfamiliar and unknown” to the stable municipal markets “would set a dangerous precedent” and create volatility and uncertainty.
Rep. Emanuel Cleaver (D-Mo.) said that the municipal bond markets would “tremble” at the thought of Chapter 9 bankruptcy due to the damage it would cause and asked the witnesses for other ideas. Zandi commented that the only point of contention among the witnesses is how broad the restructuring framework should be, whether solely Chapter 9 or something broader. Isaac stressed that the most important thing is to prevent the debt from spreading more broadly than it already is, and that if the bankruptcy rules are changed, “nothing good is going to happen from that.”
Velazquez asked if Chapter 9 was enacted, would it allow for restructuring debt. Zandi replied that it would be a “step in the right direction” but that it would not put the territory on a sustainable path.
When asked by Rep. Carolyn Maloney (D-N.Y.) if Puerto Rico needs stronger tools than Chapter 9, Zandi said yes, that a framework allowing for restructuring of all the island’s problems is needed, adding that it is the only way to put Puerto Rico on a sustainable path without fallout on the bond market and financial system.
Oversight Board
Duffy asked what the people of Puerto Rico think of an oversight board, to which Batlle explained that there will be “strong support” for such a board.
Rep. Scott Tipton (R-Colo.) asked if a financial stability board is important for Puerto Rico, and Isaac replied that it is “critical.”
Earned Income Tax Credit
When asked about ideas for stimulating Puerto Rican growth, Krueger noted the territory’s ineligibility of the EITC and how it would help by increasing the participation rate. Zandi agreed and stressed that the EITC is “critical” to Puerto Rico as it would bring people out of the “shadow” economy.
Rep. Maxine Waters (D-N.Y.) asked how introducing the EITC will impact the territory. Zandi and Krueger agreed that there will be less tax revenue without the EITC and that it would get Puerto Rico moving in a positive direction, to which Krueger agreed.
Treasury’s Plan
Rep. Mick Mulvaney (R-S.C.) noted his discontent over Treasury’s Puerto Rico plan and asked how it is fair for mainland pensioners and retirees. Krueger called the situation “dire,” adding that it will be a “messy, long, drawn-out process” as Puerto Rico will not be able to make its payments.
Tipton asked why the Super Committee proposed by Treasury would be a mistake. Isaac stressed that it is “serious mistake” to restructure general obligation bonds, and that if Congress allows this, “I don’t know where it stops,” as each state will be tempted to follow suit.
Impacts on the Bond Market
Velazquez noted that Puerto Rico has already defaulted on some issues, and asked if the U.S. bond market has been impacted, or if providing the territory with debt restructuring authority would compromise the U.S. bond market. Zandi replied that there is no evidence to both questions.
Tax Avoidance
Rep. Bruce Poliquin (R-Maine) asked why taxes are not being collected in the territory, to which Krueger replied that it is a “large, informal sector.” Batlle added that the taxing authority is a “dysfunctional entity” and that there must be consequences to those who do not pay taxes.
Economic Growth
Rep. Keith Ellison (D-Minn.) asked what sectors of the Puerto Rican economy have the most potential to grow. Krueger opined that tourism has not thrived in the territory other than the high end, and that the territory should be a corporate headquarters sector due to the location. Zandi agreed and added that the financial services industry has “significant potential,” as there is capital flowing from South and Central America into the U.S. that could go through Puerto Rico rather than Miami.
For more information on this hearing, please click here.