[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
PUERTO RICO'S DEBT CRISIS
AND ITS IMPACT ON
THE BOND MARKETS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 25, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-75
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Oversight and Investigations
SEAN P. DUFFY, Wisconsin, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina KEITH ELLISON, Minnesota
ROBERT HURT, Virginia JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
----------
Page
Hearing held on:
February 25, 2016............................................ 1
Appendix:
February 25, 2016............................................ 39
WITNESSES
Thursday, February 25, 2016
Batlle, Juan Carlos, Senior Managing Director, CPG Island
Servicing, LLC................................................. 7
Isaac, William M., Senior Managing Director and Global Head of
Financial Institutions, FTI Consulting......................... 8
Krueger, Anne O., Senior Research Professor of International
Economics, Johns Hopkins University School for Advanced
International Studies.......................................... 5
Zandi, Mark, Chief Economist, Moody's Analytics.................. 10
APPENDIX
Prepared statements:
Batlle, Juan Carlos.......................................... 40
Isaac, William M............................................. 75
Krueger, Anne O.............................................. 82
Zandi, Mark.................................................. 92
Additional Material Submitted for the Record
Mulvaney, Hon. Mick:
Written statement of Thomas Moers Mayer...................... 102
Batlle, Juan Carlos:
Clarification Regarding Remarks by Congresswoman Nydia
Velazquez.................................................. 129
PUERTO RICO'S DEBT CRISIS
AND ITS IMPACT ON
THE BOND MARKETS
----------
Thursday, February 25, 2016
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:11 a.m., in
room 2128, Rayburn House Office Building, Hon. Sean Duffy
[chairman of the subcommittee] presiding.
Members present: Representatives Duffy, Mulvaney, Tipton,
Poliquin, Hill; Green, Cleaver, Ellison, Delaney, Heck, Sinema,
and Vargas.
Ex officio present: Representative Waters.
Also present: Representatives Velazquez and Maloney.
Chairman Duffy. The Subcommittee on Oversight and
Investigations will come to order. Today's hearing is entitled,
``Puerto Rico's Debt Crisis and Its Impact on the Bond
Markets.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of this subcommittee may
participate in today's hearing for the purposes of asking
questions and giving an opening statement.
Before we begin, I want to take a brief moment as we start
today's hearing to recognize the Speaker of the Puerto Rican
Legislative Assembly, Jaime Perello, who is here with us today.
We are grateful for his participation and all the insight he
has given both sides of the aisle, as we try to navigate the
issues on Puerto Rico. So thank you for being here, Jaime.
The Chair now recognizes himself for 5 minutes for an
opening statement. According to the Government Accountability
Office (GAO), individual investors account for 75 percent of
America's nearly $3.7 trillion in the municipal bond market.
Bonds are an important source of financing for State and
local governments to pay for a variety of public projects, such
as infrastructure and schools. They are also considered a
relatively safe security for retail investors, many of whom
depend on the income that bonds yield in their retirement.
Despite Puerto Rico's relatively small size, it is one of
the Nation's largest issuers of municipal bonds, in part
because the bonds are triple tax exempt, at the Federal, state,
and local level.
For this reason, Forbes estimates that about 20 percent of
U.S. bond funds hold Puerto Rican debt. However, Puerto Rico is
now struggling with $73 billion in bonded debt, spread across
18 different issuers, eclipsing the size of the GNP.
In the words of one of our witnesses here today, ``Puerto
Rico faces hard times. Structural problems, economic shocks,
and weak public finances have yielded a decade of stagnation,
out-migration, and debt. Financial markets once looked past
these realities, but have since cut off the Commonwealth from
normal market access of crisis loans.''
But the crisis may already be here. At over 12 percent of
the island's unemployment rate, it is nearly double the next
State. Labor force participation is 20 points lower than on the
mainland, and nearly half of the island's population now lives
below the poverty line, which is absolutely unacceptable.
It is no wonder that 7 percent of the island has left in
the last 2 years, many of whom have come to the mainland in
search of opportunity, after the island's economy has shrunk by
13 percent since 2006.
This is further compounding the island's crisis, as its
workforce flees, as its tax base erodes, and it becomes harder
to service the island's massive debt, which now accounts for
one out of every three dollars the Commonwealth now spends.
The 3.5 million Americans living in the U.S. territory
deserve the attention and support of Congress, which is why we
are here today. After decades of mismanagement, Puerto Rico's
investors also deserve better. And borrowers all over the
country, from Wisconsin to Texas to Puerto Rico should be given
our careful consideration.
Speaker Ryan, a great Wisconsinite, has committed this
House to developing a responsible solution to Puerto Rico's
debt crisis by the end of next month. We owe it to all parties
to ensure that our response does not have negative implications
for the rest of the bond market.
The governors of Arizona and Iowa have both sent letters to
leadership in the House and the Senate cautioning against
unprecedented steps being pushed by the Obama Administration to
address Puerto Rico's debt, which the governors warn could have
a significant impact on the cost of borrowing for states,
municipalities, and investors, not just in Puerto Rico, but
across the country as a whole.
I appreciate our witnesses being here today, including
those whom I know have traveled some distance to be part of
today's hearing. I look forward to learning more from all of
you about the causes of Puerto Rico's crisis, the health of the
island's financial services sector, and the impact on
investors.
Mostly, I hope to hear how Puerto Rico can return to growth
and to the capital markets, how we can have a positive impact
on the people and the citizens on the island. And that is what
this is about. This is about people. This is about prosperity.
This is about opportunity. This is about growth. This is about
doing the right thing by the Puerto Rican people, whom, as we
all know, are Americans.
I am sure all of my colleagues on this committee agree with
that assessment. And I know we are going to have a great
bipartisan movement and effort to come up with a solution that
works for the island.
So with that, I yield to the ranking member of the
subcommittee, Mr. Green from Texas, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman, and I will claim the 47
seconds that you did not utilize, by unanimous consent. My
consent. Thank you, again, and I thank the witnesses for being
present today.
And I do concur with you, Mr. Chairman. We all agree that
we should do the right thing with reference to Puerto Rico and
the Americans who are in Puerto Rico. The question that we will
confront today is very simply put: Will we, in the Congress,
allow the Americans in Puerto Rico to do the very same things
that we allow the Americans in the 50 States to do?
Will we allow them access to bankruptcy, as we currently do
for the Americans in the 50 States? I am talking about under
Chapter 9 of the Bankruptcy Code. And it is interesting to note
that Chapter 9 applied to Puerto Rico from 1933 to 1984. And
then mysteriously, for some reason, Puerto Rico was exempt from
Chapter 9.
But what the Congress giveth, the Congress can taketh away.
And the Congress can return it, if I may coin a phrase. And I
think that we may be at a point where we need to do so. I would
also add this, that Chapter 9 would not be enough.
There needs to be an opportunity to have something that
allows us to look into the future and deal with the fiscal
necessities of Puerto Rico. This restructuring process might be
called some sort of independent counsel or board, if you will.
But it has to have autonomy and independence.
I would also add that the Administration has made a comment
that I find favor with, the EITC, as well as helping with
Medicaid, because a good many of the persons there have only
Medicaid as a means of healthcare.
This is an important issue for us. I believe that we can
find a consensus. The mandate has been given by the Speaker.
But it is up to us to have the will to follow through. Now, let
me ask you this question quickly, because it will come up, the
notion that it is unfair to change the rules in the middle of
the game.
I concur. It is. But the truth is, you have look at all of
the rules. The Supreme Court has promulgated a rule that we
have to adhere to, as well. And the Supreme Court has said
that, because Congress has this enormous power to exercise,
with reference to bankruptcy, that when you make these
investments, you have to consider the fact that Congress can
change the rules. And Congress can do so retroactively.
So the argument that we shouldn't change the rules in the
middle of the game is a good one. That is why we are going to
consider all of the rules, which allows rules to be changed. I
will say more about that, as we progress, I am sure.
With that said, I am honored now to yield time to the
gentlelady from New York, New York's 7th Congressional
District, who has been a preeminent leader in this area, the
Honorable Nydia Velazquez. My time, remainder in residue, plus
the 47 seconds.
Mr. Velezquez. Thank you, Mr. Chairman, and Ranking Member
Green. After today's hearing in this committee and the
Committee on Natural Resources, I am hopeful that we will move
from convening hearings to drafting legislation.
And I believe that two principles must be met. First and
foremost, Puerto Rico needs tools to restructure its
unsustainable debt. What is critical is that the island be
given the authority to promptly address all of its various debt
obligations. This means not just the $20 billion in public
corporation debt, but, also, the remaining $50 billion in
general obligation, Government Development Bank, and
territorial tax revenue, or COFINA.
By itself, Chapter 9 will address only a small sliver of
this debt and do little to remove the black cloud hovering over
the island. That is why we need a broader, territorial-level
restructuring mechanism.
Second, an oversight board must be structured in a manner
that does not undermine Puerto Rico's autonomy. If a control
board takes the people's power away, it would just be viewed as
another imperialistic power grab by the U.S. Government.
It will be the height of hypocrisy for the Federal
Government to take away decision-making authority, due, in
part, to the policies enacted by this very same body. Don't
forget that Congress created and then eliminated the
preferential tax policies that have played a massive role in
this crisis. And I am referring to 936.
The ranking member mentioned the fact that Puerto Rico was
covered under bankruptcy law protection from 1933 to 1984. So
when people talk about changing the rules of the game, let's
look at what the United States Federal Government, U.S.
Congress policies have produced and the implication that it has
had in Puerto Rico.
What they need is not only bankruptcy protection, but,
also, economic growth. And the only way to do that and to
accomplish that is by enacting the types of tax incentives that
will enable investors to come and invest in Puerto Rico.
Thank you, and I yield back.
Chairman Duffy. The gentlelady yields back. I now want to
welcome our witnesses. Dr. Anne Krueger is a senior research
professor of institutional economics at the School for Advanced
International Studies at John Hopkins University, and she is a
graduate of the University of Wisconsin, I believe.
Mr. Juan Carlos Batlle is a senior managing director and
co-head of CPG Island Servicing.
Mr. William Isaac is senior managing director and global
head of financial institutions at FTI Consulting. He is a
former Chair of the FDIC. I believe you were the youngest Chair
of the FDIC, if I recall.
And finally, we have Dr. Mark Zandi. He is the chief
economist at Moody's Analytics and is a frequent witness on the
Hill.
So I thank you all for being here today. The witnesses will
now be recognized for 5 minutes to give an oral presentation of
your testimony. And without objection, the witnesses' written
statements will be made a part of the record.
Once witnesses have finished presenting their testimony,
each member of the subcommittee will have 5 minutes within
which to ask questions of each of the witnesses.
As a reminder, please note you have three lights on your
table. The green light, obviously, means go. The yellow light
means that you have 1 minute left. And the red light means that
your time is up.
So if you get asked a question in yellow and you are
finishing it, a brief time span into red, that is okay. But if
you are going over, we will try to move on to the next witness.
The microphones are sensitive. Please make sure you are
speaking directly into them.
With that, Dr. Krueger, you are now recognized for an oral
presentation of your testimony for 5 minutes.
STATEMENT OF ANNE O. KRUEGER, SENIOR RESEARCH PROFESSOR OF
INTERNATIONAL ECONOMICS, JOHNS HOPKINS UNIVERSITY SCHOOL FOR
ADVANCED INTERNATIONAL STUDIES
Ms. Krueger. Thank you, Mr. Chairman, and members of the
subcommittee. I am very pleased to be here. I have submitted
written testimony, and I will try to keep my opening statement
very short.
Puerto Rico is a beautiful island, and it should be the
jewel of the Caribbean. It has all kinds of advantages,
including, of course, English and Spanish, including, of
course, the U.S. dollar, U.S. law and order.
It also has some disadvantages coming from the United
States Federal Government, as well. Unfortunately, over the
past 10 or 15 years, the disadvantages that it has done to
itself, plus those done by the Federal Government, plus those
inflicted by the world economy have led Puerto Rico into a very
long period of stagnation.
As the chairman already mentioned, Puerto Rican income per
capita is down, population is down, labor force participation
is less than 40 percent, contrasted with 62 percent on the
mainland, and we are worried that is too low. And there are
other problems.
Many of these problems have causes that can be, at least
partially corrected. And there are three things that have to
happen in order to get things sorted out. Puerto Rico has to
resume growth. Without growth, there is no hope over the longer
term for any solution.
To resume growth, however, its fiscal policies have to be
amended in such a way as to become sustainable, which they are
not currently. That is the second thing. And the third thing is
that there has to be some kind of debt restructuring.
Debt, in the short run, is not sustainable, consistent with
Puerto Rican growth. I will take my time, briefly, on each of
these. No matter what happens, there is no way that today
Puerto Rico could cut expenditures enough and raise taxes
enough, quickly, to make a difference, in terms of the
sustainability of its debt over the next several years.
Tax receipts don't come in sharply after you change taxes.
And, indeed, in Puerto Rico's case, the likelihood is that, if
taxes rose very much (except for reforms in the tax structure)
what would happen is that, first, Puerto Ricans would leave the
island. More would go on welfare and there would be a lower
participation rate and more in the informal sector.
Restructuring debt has to happen, because the government
just can't pay everything, especially going forward, where
there are pension liabilities and other things. But the thing I
will focus a minute on is growth.
Growth has to resume. Without it, nobody can borrow,
because future receipts will not be enough to cover it. And
they are not going to be able to borrow, given the current
state. Puerto Rico has lost market access. So that is critical.
What else is needed for growth? The fiscal situation must
be addressed, but, also, there are a number of things, both
Federal and Commonwealth, that have impeded growth measures and
need to be changed. Some of these are things where something
can be done and should be done, by the Commonwealth.
They include things to make a more level playing field for
business. Right now Puerto Rico, by the World Bank, is ranked
49th in ease of doing business, in the world economy. The
United States mainland is ranked seventh, which gives you some
idea.
Some things take years in Puerto Rico. Registering property
is a good example. There has not been property revaluation
since 1954. There are a number of things that could be done.
The Puerto Rican government itself could become much more
efficient.
The number of school teachers has increased about 30
percent over the past several decades, while the number of
students has dropped about the same amount. Some things need
correcting within the public sector, but, also, in a way that
Puerto Rico treats business.
There are other things to be done that would help a great
deal. The Treasury's proposal for the Earned Income Tax Credit
would certainly make a difference. Finding a fairer formula for
Medicaid and block grants would be important in all of this.
There are a number of other things that can be done, at
both the Federal and the State level. But, above all, we can't
get very far without debt restructuring. And debt restructuring
would be a long, drawn out process without some kind of legal
framework for it, which now does not exist.
As you know, the Commonwealth tried to do it, itself. That
was thrown out. It is a Federal responsibility. But, at the
Federal level, right now, as someone mentioned, there are 18
different issuers of debt in Puerto Rico. And without somehow
cleaning that up, there is going to be enough uncertainty
hanging over markets and hanging over potential investors in
Puerto Rico, that it will forestall growth.
So simply addressing the debt is a first prerequisite,
along with, then, doing things to restore growth and getting
the fiscal situation, going forward, straightened out.
Thank you very much.
[The prepared statement of Dr. Krueger can be found on page
82 of the appendix.]
Chairman Duffy. Thank you.
Mr. Batlle, you are recognized for 5 minutes.
STATEMENT OF JUAN CARLOS BATLLE, SENIOR MANAGING DIRECTOR, CPG
ISLAND SERVICING, LLC
Mr. Batlle. Thank you, Chairman Duffy, and distinguished
members of the subcommittee. From 2011 to 2012, I served as
president of the Government Development Bank for Puerto Rico
and previously held senior positions with Banco Santander's
investment banking arm on the island, working primarily in
public finance matters of the municipal market for 15 years.
Focusing concurrently on the root causes of our problems,
our banking sector, and the impact of the crisis on the
municipal market makes it evident that we are faced with a
dynamic situation, whose eventual resolution will rest on the
actions or inaction of Congress and Puerto Rico.
In my view, the root causes for our problems are many. A
lack of execution and follow through, as our leaders have put
forth economic development plans that all shared similar
principles, but all failed, not because they were flawed, but
because we were unable to implement them.
An unwillingness to change and adapt, during and after the
State filed a Section 936. Petty political parties infighting
prevailed, and we failed to compromise and to execute. Decades
of fiscal mismanagement, insatiable public sector crowded out
the private sector. And the lack of adequate regulation over
the Government Development Bank.
A fragmented government-wide technological structure,
exemplified by the recent dismantling of the Office of the
Chief Information Officer, after significant progress that
included a pilot project to produce real-time financial data
and financial statements. Ironically, our best talent from this
office now works for the United States Digital Service here in
Washington.
A completely dysfunctional Internal Revenue Service that
facilitates tax evasion. Unfair and discriminatory funding of
Federal health programs that aggravate budget deficits. The
enactment of tax laws that encourage over-concentration of
local wealth in Puerto Rico-only assets, resulting in
unimaginable loss of wealth.
And lack of trustworthy and timely financial data and
budgetary forecasts that eventually led to a complete loss of
market confidence and market access. Our failure to execute on
politically unpopular matters, given excessive partisan
politics and a self-centered private sector are the main
reasons that a fiscal oversight and control board is necessary.
Since 2006, our banking sector has lost 43 percent and 31
percent of its assets and deposits, respectively, and gone
through four FDIC-assisted consolidations. Last year, over
4,000 homes were foreclosed, 27,000 since 2008, and over 20,000
are currently in the foreclosure process.
Today, this sector, the banking sector, has achieved
healthy capital ratios and stabled delinquency ratios, after a
costly transformation. But a banking sector can't really be
healthy when a government and economy are not. And it is the
subject of excessive regulatory examinations and stifling
reporting requirements.
Under a fiscal oversight and control board, regulators
could provide relief and additional technical assistance,
without abandoning their obligations, allowing banks to direct
resources towards more agile lending and fueling economic
activity.
Puerto Rico's bonded debt represents approximately 1.8
percent of the $3.7 trillion bond market. Roughly 80 percent of
this debt is held directly, or indirectly, by individuals in
their own accounts, or through pension and mutual funds.
A restructuring of public debt through any mechanism other
than good faith, consensual negotiations, or existing tools,
like Chapter 9, could further delay Puerto Rico's ability to
recover its credibility and market access, with additional and
collateral damage spreading to the banking sector, credit
unions on the island, retirees nationwide and locally, and
other individuals.
The overall municipal bond market also stands to lose. An
unfamiliar or disorderly debt restructuring process would have
negative effects on the entire municipal bond market, given its
reliance on the rule of law and certainty.
A fiscal oversight and control board, with a trusted and
familiar tool, like Chapter 9, preceded by mediated, consensual
negotiations, would mitigate the impact on investors and the
municipal bond market.
Mr. Chairman, upon reviewing testimony from prior
Congressional hearings, it dawned on me that we seem to forget
we all are, and have been, responsible parties to our problems.
Everyone blames politicians. Politicians blame each other. And
all the ones who do the blaming forget, we were part of the
problem, too, the 3.5 million citizens in Puerto Rico, this
U.S. Congress, the White House, bond holders, and all
stakeholders alike.
But crisis is the mother of opportunity. The situation we
face today gives us a unique chance to shape our future. Our
failure to execute, compromise, and live within our means, and
the lack of action by Congress in the past, have left no other
choice--an independent fiscal oversight and control board with
a debt-restructuring mechanism that incentivizes consensual
negotiations with access to Chapter 9, as a last resort,
complemented by meaningful economic stimulus, are necessary.
However, bear in mind that you don't fix someone's mistake
by fixing it for them, but rather by fixing it with them.
Thank you very much.
[The prepared statement of Mr. Batlle can be found on page
40 of the appendix.]
Chairman Duffy. Thank you.
Mr. Isaac, you are recognized for 5 minutes.
STATEMENT OF WILLIAM M. ISAAC, SENIOR MANAGING DIRECTOR AND
GLOBAL HEAD OF FINANCIAL INSTITUTIONS, FTI CONSULTING
Mr. Isaac. Thank you. It is a pleasure to be here today,
talking about Puerto Rico. Toward the end of my career, which
has now spanned some 50 years, nearly 50 years, and, believe
me, I hope it goes on another 50 years, or at least a lot
longer. I am not ready to retire.
The situation in Puerto Rico takes me back to the beginning
of my time at the FDIC, in March of 1978, when I was appointed
by President Carter and confirmed by the Senate to be one of
three Directors of the FDIC.
My then current employer, which, at the time, was the
largest bank in Kentucky, had a going away dinner for me one
evening, shortly before I left. The Executive Secretary of the
FDIC flew to Louisville that evening, on the evening of my
dinner. And the next morning, I met with him in the lobby of
the hotel where he was staying, and he swore me in.
We then drove straight to the airport to fly to Puerto Rico
to handle the failure of one of the island's largest banks,
Banco Credito. That was my first day in office. There was no
Chairman of the FDIC at that time. The position was vacant, as
was the Comptroller of the Currency position, the other Board
Member of the FDIC.
So the 34-year-old, newly minted Board Member of the FDIC
was about to be tested under fire. I remember saying that day
to the professional FDIC staff, ``I hope somebody in this room
knows what they are doing, because I don't.''
Banco Credito was a very large bank, by the standards of
those years, and there were few potential buyers in Puerto
Rico. So we broke the bank into two pieces, sold two-thirds of
the bank to Banco Popular, the largest bank in Puerto Rico. And
we sold the other one-third to the Spanish bank, Santander.
That was my first several days at the FDIC. My tenure as
the Director of the Board lasted 2 years. And then, when
President Reagan was elected, he appointed me as Chairman of
the FDIC in 1981.
It was an extremely tumultuous time. We dealt with some
3,000 bank and thrift failures, including Continental Illinois,
9 of the 10 largest banks in Texas, and many other large banks
throughout the country, and thrifts.
The problems we are addressing today are largely due to
some of the unique features of Puerto Rico's relationship with
the United States. While the challenges faced by the
Commonwealth are substantial, I believe there is a way to
assist the Commonwealth in organizing its finances and
restructuring a portion of its debt within existing legal
frameworks.
Successfully doing so will help position the Commonwealth
for much-needed economic growth and restore confidence. But we
need to go about it the right way. Specifically, I am very
concerned about proposals coming from the Treasury, which
propose so-called Super Chapter 9 bankruptcy, or a super
control board, that would provide for the restructuring of all
of Puerto Rico's debt, even its constitutional debt.
Granting this authority would be unprecedented and would
have far-reaching implications, including, most certainly,
raising the cost of borrowing for the 50 States. Moreover,
long-term financial stability for Puerto Rico's government will
require continued access to financial markets, which will be
difficult and more expensive, if the Treasury plan should be
enacted.
I believe the best approach to address Puerto Rico's
challenges would be comprised of two parts. First, Congress
should treat Puerto Rico like any U.S. State, by allowing the
Commonwealth's municipalities to access Chapter 9 for
bankruptcy.
This would allow Puerto Rico to legally restructure 75
percent of its debt, including debt incurred by COFINA, a
public corporation created by the Commonwealth to circumvent
its constitutional debt limit.
That said, because of Puerto Rico's track record in
managing its finances, and its failure to produce reliable
financial data, the idea of granting it Chapter 9 has been
controversial. That brings me to the second part of my
recommendation. Congress should create a Federal control board
to oversee Puerto Rico's finances.
The control board should not have the ability to negotiate
with creditors or to restructure debt. But it could be
empowered with the ability to recommend normal Chapter 9
bankruptcy for specific instrumentalities of the Commonwealth,
subject to appropriate financial tests.
I close by thanking you, Chairman Duffy, Ranking Member
Green, and the members of the subcommittee. I understand you
received a copy of my testimony, and I would be happy to
respond to any questions you might have.
[The statement of Mr. Isaac can be found on page 75 of the
appendix.]
Chairman Duffy. Thank you.
And Dr. Zandi, you are recognized for 5 minutes.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST, MOODY'S ANALYTICS
Mr. Zandi. Thank you, Chairman Duffy, and members of the
subcommittee, for the opportunity to be here today. The views
that I am going to express are my own, and not those of Moody's
Analytics or the Moody's Corporation.
I will make three points in my remarks. Point number one,
which is now the obvious, the Puerto Rican economic and
financial crisis is very severe. You provided a long list of
statistics to demonstrate that.
For me, the most telling is the fact that the job base of
the island has declined by 10 percent over the past 10 years.
Just for context, in the financial crisis that we went through
a few years ago, peak-to-trough employment nationally fell by 6
percent. And, of course, the island's recession continues on.
It is unabated.
The fiscal situation is very dark, $70 billion in debt,
another $45 billion or so in unfunded pension liabilities. You
add it up, divide by GNP, which is the Gross National Product
of the island, the resources that the island has to pay on the
debt, it is 160 percent.
Just for context, Illinois, which is the State under the
most significant financial stress, has a debt plus unfunded
pension liability to GDP ratio of closer to 20 percent; New
Jersey, 15 percent; and in my own home State of Pennsylvania,
which has had its own fiscal issues, it is 5 percent. So the
situation is very dark.
Point number two, the legislation you sponsored, H.R. 4199,
is a very positive step in the right direction. I think the two
key aspects of that are very good steps. The first, obviously,
is Chapter 9 bankruptcy for Puerto Rican municipalities and
public corporations.
Obviously, that is a necessary condition for putting the
fiscal situation on sounder ground. The quid pro quo for that
is the opting in by Puerto Rican lawmakers to a financial
stability council, a board that has--I think it has a nice
balance of authority to get what needs to get done, done, but,
also, respect the sovereignty of the island. I think you did a
nice job of accomplishing that balance.
Point number three, I think lawmakers should do more. I
don't think your legislation is enough. The Chapter 9
bankruptcy for municipalities and corporations covers, for
sure, about 30 percent of the island's debt. There is some
debate, reasonable debate, as to does it cover other
liabilities.
And that will have to be adjudicated, go through some court
process. And judging by what Detroit has gone through, that
could take a long time. And I don't think we have time.
So I would recommend that you shift from Chapter 9
bankruptcy to a broader restructuring framework that would
maintain the board, as you have described it, an opt-in for the
lawmakers of Puerto Rico, but they have broader authority
around all of the liabilities that the island is struggling
with, beyond just the debt of the corporations and the
municipalities, including the GO debt and the unfunded pension
liabilities.
This authority, this restructuring framework, should also
allow for a timeout to, against litigation, let everyone sort
this thing through and kind of nail things down. There needs to
be a voting mechanism to ensure that a handful of creditors
can't stop the way. And, as Mr. Isaac pointed out, I believe,
there are 20 different creditor groups. It clearly suggests a
very messy process.
Ultimately, if they can't come to an agreement, there is
some kind of court process to work through the problems. So I
would counsel that what you propose is great. I just don't
think it is going to put the island on a sustainable path.
Then the other thing I say that I would recommend that you
address is, and this goes to Dr. Krueger's comment. She is
absolutely right, nothing works unless the economy's growing.
And I, in my written testimony, talk and lay out a number of
different economic policy proposals that I would consider to
help the island.
But most importantly, most critically, you have to get
Medicaid on sound ground here. Under current law, Medicaid
funding is going to decline beginning mid-2017, 2018. And half
of the residents of Puerto Rico rely on Medicaid and hundreds
of thousands of people will be affected by this. And I think it
is very important to put that on sounder ground.
Thank you, again, for the opportunity, and I look forward
to your questions.
[The prepared statement of Dr. Zandi can be found on page
92 of the appendix.]
Chairman Duffy. I appreciate the panel's opening
statements. The Chair now recognizes himself for 5 minutes for
questions.
Dr. Zandi, I will probably come back to you, if I have
time, at the end. But you mentioned we deal with 30 percent of
our debt, but I know there is some debate. Mr. Isaac brought
this up, but depending on where COFINA falls, it looks like we
could actually deal with 75 percent of Puerto Rican debt,
excluding the GO bonds, which would probably be a lot closer to
where you would like to be. But that is a conversation, I
think, that we have to continue to have.
I will move on, though. Mr. Batlle, I mentioned in my
opening that Terry Branstad, the Governor of Iowa, recently
wrote Congressional leaders, in both the House and the Senate,
and expressed some concern about Treasury's plan, which is
probably consistent with Mr. Zandi's testimony, about a
restructuring that would violate the constitution of Puerto
Rico, offering broad restructuring, including general
obligation bonds.
And you kind of mentioned this, but could you go a little
further? Does that set a dangerous precedence? And would it,
likely, raise the borrowing cost, not just in Puerto Rico, but
would it raise the costs in other parts of the country, have an
impact on other states and municipalities?
Mr. Batlle. Yes. Thank you for that question, Mr. Chairman.
And I do think going down the path of a more broad
restructuring regime would definitely have an impact on the
overall municipal market.
I think the best way I would describe the municipal market,
not to be disrespectful to it, but it is a very boring market,
I would say. It likes predictability, stability, and it doesn't
like surprises. It is a market used by a lot of both
individuals, retirees, and this investment vehicle is looking
for a stable, fixed income into their accounts.
And, I think, introducing an alien or new mechanism, that
is completely unfamiliar and unknown, to an otherwise stable
and very large market, on which the 50 States and the
territories depend, or, say, subdivisions of the states and the
territories rely on to raise necessary capital for
infrastructure development and many other needs, would set a
very dangerous precedent.
I think it would be highly speculative to go into any
discussions as to what type of financial impact it would have,
but, at the least, it would definitely create volatility,
uncertainty, which would translate, naturally, into higher
costs or higher losses, depending on which side of the aisle
you sit.
Chairman Duffy. And you live on the island, right? You live
in Puerto Rico?
Mr. Batlle. Yes.
Chairman Duffy. And, so, going to the fiscal stability
board and opportunity growth board, some will say a control
board. I meet with a lot of the elected officials on the island
and I get some pushback. And, as Ms. Velazquez mentioned, there
is concern about sovereignty and perceptions.
And I am very sensitive to that. I think we want to have
complete buy-in to a plan that comes from Congress. I hear from
politicians, with maybe one perspective, but do you know where
the people in Puerto Rico fall on this issue? Do they support
some form of board that can help get the finances and the
budgeting in order? Can you speak for them, by chance?
Mr. Batlle. If I were to speak for them, and I will say
this is my personal opinion on what I hear from the people I
talk to, I do think, and I actually do strongly believe, that
there would be strong support for a fiscal oversight and
control board.
And on, if I expand just 1 minute, the proposal or the type
of structure that I propose in my written testimony, it is
actually something that I think would get in the buy-in
necessary from the politicians, also, on the island, from
leaders.
That is why I call it an oversight and control, where you
would have an initial phase, during which Puerto Rico would get
the chance to deliver on the compromises and promises that we
need to make to get things moving forward on the fiscal and
economic side, and also on the debt restructuring side.
But there has to be very specific metrics, very specific
milestones to be accomplished. And any non-compliance under
this would automatically convert this oversight board into a
control board that would have a lot more teeth into the
decision-making process in Puerto Rico.
But I do think there will be acceptance within the
population for that type of structure.
Chairman Duffy. And the 5 minutes is just not enough time,
but I want to go to you, Dr. Krueger. Quickly, you talk about
growth, and I think growth is so important. You just can't have
one component of some form of bankruptcy and oversight. We have
to have growth on the island.
If you are thinking outside the box, and I don't have a lot
of time left, can you give me some ideas on what we could do,
in Congress, that could stimulate or incentivize growth and
investment on the island?
Ms. Krueger. I think there are a number of things. There
are Federal laws that really impede Puerto Rico. For example,
the Jones Act on shipping, which I know is a political hot
potato, but Puerto Rico lies right next to some other Caribbean
islands. All of them are dependent on oil for their fuel, for
electricity generation.
Puerto Rico pays 40 percent more than the other islands and
there are other factors. Puerto Rico is not eligible for the
Earned Income Tax Credit. Getting that through, which Treasury
has proposed, would, indeed, very likely increase the formal
participation rate, which would help.
Puerto Rico is subject to the mainland minimum wage law,
and Puerto Rico per capita income is well below that of the
poorest U.S. mainland State. Doing something to amend that so
there could be, for example, a period of apprenticeship or a
period for young people, youth employment, to learn skills on
the island would make a difference.
It would not do it all overnight, however. All of these
things would take some period of time. I know I have to stop
here.
Chairman Duffy. Thank you. And I would have asked you--
going into the red zone. But thank you. My time has expired.
The Chair now recognizes Mr. Delaney for 5 minutes.
Mr. Delaney. Thank you, Mr. Chairman. I just have a quick
question, and it is related, but not directly on point to the
bankruptcy.
Maybe for Dr. Zandi, Puerto Rico is unique in terms of
their ability to offer tax incentives to U.S. citizens who
domicile in Puerto Rico for 183 days. And they maintain their
status as citizens of the United States.
And I have no issue with people who have done that, because
it is perfectly permissible and perfectly legal under the laws,
as they are now. But have you thought about the potential drain
that has on the U.S. income tax base? And should we be thinking
about that, as part of other aid we provide Puerto Rico? You
mentioned Medicaid, which I do agree with you. I think should
be funded, so that we can stabilize that situation.
And, I guess, set the most efficient way to get Federal
dollars into the Puerto Rican economy and would we be better
off doing things more directly and not allowing them to put in
place a scheme that would continue to drain or reduce the U.S.
tax base?
Mr. Zandi. Yes, I am sympathetic to what you are saying. I
think that there are many other more effective ways of helping
the island's economy. And the most obvious to me is the Earned
Income Tax Credit, the EITC, which has a lot of bipartisan
support.
We have a lot of evidence of it working, and it is
particularly critical to Puerto Rico, because it will bring
people out of the underground economy, the shadow economy.
Someone made the point that labor force participation in Puerto
Rico is 40, 45 percent, the lowest anywhere in the country.
Bring them back into the taxable base and establish a
broader culture of paying your taxes. So if I were king for the
day, I would take the tax benefit you described and use that to
pay for, or help pay for, the EITC. I think that would be the
best step to help the island, long run.
Mr. Delaney. I yield back my time. Thank you.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the gentleman from South Carolina, Mr. Mulvaney, for
5 minutes.
Mr. Mulvaney. I thank the chairman. I want to talk about
what both the chairman and the ranking member mentioned in
their opening statements, which is their concern, and my
concern, our concern, that this is about people, because it is
about people, but not about maybe the people they were
mentioning.
There is a New York Times article out this morning, and I
will quote from it. It says that, ``Most Puerto Rican debt is
held by individuals. They are mostly over 65. They mostly have
incomes of less than $100,000 a year. They are not vulture
funds, they are your friends and neighbors.''
I understand that the Treasury's plan would change the
prioritization of payments in Puerto Rico to prioritize
payments to Puerto Rican pensioners, before bond holders get
paid. So the Treasury plan would pay pensioners in Puerto Rico,
before we pay the pensioners who lent Puerto Rico money in the
first place.
And I want to know how that is fair, because it strikes me
as not being fair. In fact, it reminds me, Mr. Chairman, of
something that many of us in the Class of 2010 ran against
when, during the Chrysler bankruptcy, we changed the laws in
this body to give priority to unions over the pensioners from
the Indiana Teachers and Firemen's Fund. It wasn't fair then,
and it wouldn't be fair now.
I also understand, in doing some research, that some of the
debt revolves around the state or the government-owned electric
company, which has not raised its rates on its people since
1989.
So, again, I ask, is it fair for us to ask pensioners and
retirees, some of whom may live in South Carolina, to incur
greater debts on their own debt, in the future, or to lose
prioritization here, so that the Puerto Rican government can
continue to provide below-market, subsidized electricity to
their residents? That doesn't strike me as fair.
And I know I don't have many questions, because, honestly,
I don't know who to ask the question of, but this--
Mr. Delaney. If the gentleman would yield, I would--
Mr. Mulvaney. I would be happy to. Yes, sir.
Mr. Delaney. Thank you. With reference to the power plant,
when you are in Chapter 9 bankruptcy, you have to demonstrate
that you have made a good faith effort. That would be part of
the evidence that would be presented to the court. And if the
concludes that the good faith effort has been made--
Mr. Mulvaney. Reclaiming my time. And I appreciate that,
and that is fine. But, I guess, doesn't solve my original
question, which is we would be asking pensioners in this
country to help make up for the fact that, for the last 25
years, there have been no raises. And I will come back to you
at the end, I promise, but let me finish my thought on this.
Look, I am sympathetic to what the island is going through.
It strikes me that most of the ills are self-inflicted. Dr.
Krueger made, perhaps, what I thought were the most positive
comments so far, which is ways that we have actually made
things worse.
We could fix the Jones Act. We could provide exemptions
from the minimum wage laws, and those are positive things that
don't really cost my folks any money. And maybe that is where I
think we should be focusing our attention.
But everything else that we have talked about today smacks,
to me, of a bailout, which I thought my party was supposed to
be against. So I am curious to see how we proceed, Mr.
Chairman. Again, I apologize for not having any specific
questions, but, really, I am not really sure how to ask.
I tell you what, let's just wrap up with this point. And if
anybody wants to respond to any of that, I would be more than
happy to give you what little time I have left. Or not.
Chairman Duffy. I believe Dr. Krueger wanted to--
Mr. Mulvaney. Dr. Krueger, okay, sure.
Ms. Krueger. I am afraid the situation is so dire that the
question is not whether some of the bond holders will, but
whether they will lose a lot or lose less. If there is no legal
framework, all the lawyers I know, and I am not a lawyer, say
that it will be a messy, long, drawn-out process.
I am an economist, and, as long as that is going on, the
likelihood that there will be new investors and there will be
others in Puerto Rico--or, sorry, and other growth in Puerto
Rico will be very limited.
As to the PREPA, the electric company, it has been high
cost. It has lost money most of those years, unfortunately,
despite what you call socialization. It is very high cost,
$0.27 a kilowatt hour, remember, after the oil price decrease.
So that is well above U.S. levels.
Mr. Mulvaney. As an economist, let me ask, in my last few
seconds, don't you think we set a dangerous precedent by
changing the law so that, after the fact, pensioners and
retirees in Puerto Rico would be paid before pensioners and
retirees in the States, who have loaned them money? That is to
you, Dr. Krueger.
Ms. Krueger. Very quickly, the problem is that, somehow or
other, Puerto Rico can't make all those payments. If it were
required to do so--I don't know how you would require it, but
if you did, the lights would go out. There would be no fire or
police. The very basic things of government have to continue.
And I think they would choose that at a critical point. It
hasn't happened yet, and I hope it won't happen. I hope we can
address the issue sooner, as the chairman suggested that
Speaker Ryan has wanted to do, and I think is the appropriate
thing to do. But the alternative is really awful.
Mr. Mulvaney. Thank you, Doctor. Thank you, everyone.
Chairman Duffy. Before you yield back, I would ask for
unanimous consent for 15 extra seconds. I just want to be
clear--I think the gentleman from South Carolina made a really
good point, but I just want to be clear--when you talk about a
bailout, are we talking about a bailout of pensions over
creditors, or are we saying that bankruptcy is a bailout? I
just wasn't sure what the point was.
Mr. Mulvaney. No, it is just, I guess, my objection is to
using the term ``creditors,'' because in here we are always
saying that the creditors are bad people. Creditors are big
banks. They are vulture funds. And the municipal bond market,
more so than perhaps any financial security, the overwhelming
group of investors are these same retirees and same pensioners.
Chairman Duffy. Okay.
Mr. Mulvaney. It is just in a different place.
Chairman Duffy. Thank you. The gentleman yields back. The
Chair now recognizes the gentleman from Missouri, Mr. Cleaver,
for 5 minutes.
Mr. Cleaver. Thank you. Thank you, Mr. Chairman. This is, I
think, heartwarming to see that, for the most part, we are all
trying to figure out a way to solve a major crisis.
And, Dr. Zandi, in your simulations, it was a little
chilling to assume that, by 2020, if nothing happens, we end up
with a population in Puerto Rico of about 3.3 million, which
means that the migration would increase significantly to this
country.
So the truth of the matter is, we are going to pay, one way
or another. Am I going down the right road?
Mr. Zandi. I think that is entirely correct, yes. If you
just kind of connect the dots, it is pretty dire for Puerto
Rico and that, obviously, is going to be a cost to all of the
mainland, as well.
Mr. Cleaver. Yes. I think we are weird in the English
language. We make some terms toxic, and then we can't use them.
So we don't need to call it, but I would call it, let's say,
``sweet juice.'' If we ``sweet juice'' Puerto Rico, we are
going to have to do it one way or another.
And I am concerned. Would you have any response to the
gentleman from South Carolina?
Mr. Zandi. Yes. To the initial point you made about
prioritization of the liabilities, putting the pensioners ahead
of the creditors, the GO bonds, I would say two things. First,
I think that should be left up to the restructuring framework.
Empower an entity, like the Financial Stability Council, to
go through and figure that out. What is in the best interest of
the island's residents and for everyone, all the stakeholders
involved, including the creditors and the pensioners. So I
think that is something that should be left to that entity.
The second thing I would say, just as a point of something
to consider in the prioritization process, is that, of course,
the pensioners, and we are talking about, at least the data I
have seen, 330,000 current and future pensioners, they are
residents of the island, for the most part.
And if they don't get their pension payment, then that is
just going to exacerbate, severely exacerbate, the economic
effect on the island. The creditors, the folks who own the
bonds, they are distributed around the world. And you are
right, they are me, they are you, in the funds that we own. But
the pain of that would be distributed much more widely across
the globe.
But the pensioners are sitting on the island, and
obviously, it just complicates the matters for the island's
economy.
Mr. Cleaver. Thank you. So, if we do nothing, unemployment
is going to fall, because people are going to leave. And if the
unemployment begins to drop, the tax base, is even further
eroded.
So there should be little doubt that we have to do
something. The question, I think, is what exactly we are going
to do. And, frankly, Newt Gingrich was probably the most
articulate person who proposed that we allow States to enter
into bankruptcy. Now, Puerto Rico is a territory, but we do
municipalities.
I know the municipal bond markets would tremble at the
thought of any kind of bankruptcy, because it might damage the,
I think, $3 trillion municipal bond market. And all of you
gave, I think, fabulous responses in your opening statements.
So if the four of you were able to sit in a room together,
being as brilliant and smart as you are, and probably all of
you are members of MENSA, what do you think you could work on,
just off the bat, assuming that we would agree with what you
presented?
Mr. Zandi. Just very quickly, I think, listening to the
testimony, there is significant agreement. The only point of
contention that I could hear was around how broad the
restructuring framework should be. Should it be solely Chapter
9, or should it be something broader than that?
And there is a lot of debate, reasonable debate and
discussion, around that issue. And that is where we would
probably have the conversation. And I think it would be
important to have here, as well.
Mr. Cleaver. Mr. Batlle, you were trying to say something?
Mr. Batlle. I just wanted to add that I think you touched
upon the most important point here. I don't know what would
come out of that meeting between the four of us, but that is
what needs to happen.
I think what we have missed so far is a genuine good faith
sit down, face-to-face, between creditors, the government, not
their advisors, the government, and a truthful discussion with
real numbers that both sides can agree on, because right now
the relationship between the two sides, from where I stand,
outside--I am not part of any of the discussions--it seems to
me that discussion is not happening.
And I think that is the first step for any type of
resolution going forward.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Isaac. If I could just get one word in there--
Chairman Duffy. Very quickly.
Mr. Isaac. --I disagree a little bit with Dr. Zandi. I
believe that, from my experience trying to run the FDIC during
a banking crisis, the most important thing to do right now is
don't let this thing spread more broadly than it already is.
And right now there is a problem that is small enough and
isolated enough that it can be identified, and it can be fixed.
If we start changing bankruptcy rules, I don't know where that
goes, but nothing good is going to happen from that.
If you say, we are going to go ahead and use bankruptcy
rules on State debts and allow them to reorganize, Illinois or
whatever the State is, and I think that is taking us down a
road we don't want to go down. And it will be very, very costly
and extremely disruptive of the markets.
Chairman Duffy. The gentleman's time has expired. The Chair
now recognizes the gentleman from Colorado, Mr. Tipton, for 5
minutes.
Mr. Tipton. Thank you, Mr. Chairman. Just by way of
preamble, when Dr. Krueger's point that she had made that the
situation is so dire, Mr. Zandi's point saying that we need to
be able to spread the pain, and then Mr. Isaac's comment that
right now we have a somewhat isolated problem and we need to be
able to address it before it spreads.
I truly think that there is a broader lesson for
government, not just in Puerto Rico, at the Commonwealth level,
but for our States, for our Federal Government, as well, when
we look over to Greece.
When governments over-promise and under-perform, simply by
ability and through mismanagement, you create real problems
that ultimately spread the pain far further than I think any of
us want.
And I think that we need to be addressing some of those
root causes, as well, rather than being reactive, be proactive.
And Washington would be a great starting point for a lot of
that.
Mr. Isaac, I would like to first go to you. You commented a
little bit on the super committee that is being proposed by
Treasury. Would you, perhaps, like to expand a little bit on
why this might be a mistake, in regards to allowing Puerto Rico
to be able to restructure all of its debt, including its
general obligation funds, and how this plan could hurt other
State and municipal debt owners or issuers in the United
States?
Mr. Isaac. I would be happy to. First of all, it is hard
for me to comment on what the Treasury is proposing, because it
seems to change with regularity. So and I am not sure what
their current proposal is. I guess they are testifying this
afternoon or sometime today, and maybe we will learn more about
where they are right now.
I believe that it would be a serious mistake to restructure
the general obligation bonds. The government of Puerto Rico,
when it created COFINA, knew that it was violating the law. It
said so, publicly. It was violating its own constitution. They
called these extra constitutional bonds.
So everybody knew what the game was, and they were heading
down the path they should not have headed down. And they
shouldn't take this period right now as an opportunity to go
ahead and make these bonds superior, or even pro gratis or Pari
Passu with the general obligation bonds.
If they do that, and if Congress allows them to do that, I
don't know where it stops throughout the United States. Every
State will be tempted to do it, or, at least, a lot of the
States will be tempted to do it.
And the credit markets, I believe, would be in a state of
chaos and it will affect a lot of banks, because banks are big
holders of municipal debt. And, in terms of our own banking
system, I shudder at the thought of that.
Mr. Tipton. Following that line of thought, we would
probably see rates increase, causing more pain, and ultimately,
more cost.
Mr. Isaac. Certainly, the borrowing costs on municipal debt
and State debt would go up a lot.
Mr. Tipton. In order to try and be a little bit solutions-
oriented, the District of Columbia obviously had some
challenges. Chairman Duffy actually has a piece of legislation
that is going to allow for a limited duration council, only if
the island's elected leaders are willing to be able to accept
the council, somewhat a little bit similarly to what happened
to challenges that were right here in the District of Columbia.
Is a financial stability council important to the
rehabilitation in Puerto Rico's finances?
Mr. Isaac. I believe it is critical, and I believe that
D.C. is a good example, and we should emulate that. It was
very, very successful what was done in the district. And
something along those lines, I think, would work very well in
Puerto Rico.
Mr. Tipton. Great. Just to broaden this net a little bit,
we have a piece of legislation that Senator Hatch has put
forward, in regards to the Puerto Rico Systems Act. And the
bill addresses Puerto Rico's financial crisis, but it also
includes provisions intended to be able to reform the public
retirement systems outside of Puerto Rico.
Specifically, this bill does include provisions that it
would impose new disclosure obligations on the State and local
government plans, as well as creations of a new type of plan
designed for State and local governments that would not impose
future liability on plan sponsor.
And, one of the reasons for that inclusion into the Puerto
Rico debt crisis has been exacerbated by severely underfunded
plans, obviously, in Puerto Rico's public employee plans. With
the aggregate under being that we are seeing at the State and
local defined benefit pension plans in the United States
exceeding about $4 four trillion right now, how important, Dr.
Isaac, is it for us to be able to move forward with mandatory
necessary reforms?
Mr. Isaac. I am not an expert on Senator Hatch's plans. I
have reviewed it, but not in any depth. I would tell you that I
know him and have for a long time. And I think he is brilliant.
He is a very public-spirited representative of our government,
and I would think anything he proposed is certainly worth
merit, has a lot of merit and is worth considering seriously.
But I am not an expert on his particular provisions, and so
I would hate to go much further than that.
Mr. Tipton. Okay. Thank you. My time has expired, Mr.
Chairman.
Mr. Mulvaney [presiding]. The gentleman's time has expired.
We now recognize the gentlewoman from New York, Ms. Velazquez,
for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Zandi, we have
heard how so many people are concerned about the U.S. municipal
bond market. Given that the island has already defaulted on
some issues, has the U.S. bond market been impacted?
Mr. Zandi. No. There is no evidence of that.
Ms. Velazquez. Many of the island's bonds are covered by
bonds insurance. How does this help insulate the market from
the impact of defaults?
Mr. Zandi. The insurance will pay out under conditions,
certain conditions of default and help cushion the blow to the
bond holder. So it reduces the cost to the bond holders. Of
course, the insurance companies have to pay it out.
Ms. Velazquez. Right. When it comes to providing Puerto
Rico with debt restructuring authority, some are suggesting
that this, by itself, could undermine the U.S. municipal bond
market. Several municipalities have declared bankruptcy,
however, including Detroit. Did this situation impact the U.S.
municipal bond market over the long term?
Mr. Zandi. No, there is no evidence of that. If you look at
yield spreads in the bond market, municipal bond yield relative
to risk-free Treasury rates, they have shown no impact. And, of
course, Puerto Rico has been under severe financial stress for
more than 2 years, and this thing has been gathering steam.
And it is pretty obvious that there are going to be
defaults and restructuring. And there has been no impact on any
of the rest of the municipal bond market. There has been,
obviously, an impact on the Puerto Rican debt. It is trading,
depending on what you are looking at, at less than 50 cents on
the dollar, but the rest of the bond market has been
unaffected.
The other thing to point out is, there is no effect on
flows into mutual funds, municipal bond funds.
Ms. Velazquez. So, what you are saying is that--
Mr. Zandi. None.
Mr. Velezquez. --establishment of a debt restructuring--
Mr. Zandi. Investors have said, quite clearly, in their
voting with their money, that Puerto Rico's situation is Puerto
Rico's situation. It is no one else's problem.
Ms. Velazquez. Right. In the next 6 months, there is nearly
$3 billion due in bond payments, of which half is for GDB, GO,
and COFINA debt. Do you believe the island will be able to make
this payment?
Mr. Zandi. I think it would be incredibly difficult, and
the governor has pretty much said no. The bond market
investors, the guys who put the money on the line, are saying,
no, this isn't going to happen. They are not going to be able
to make those payments.
Ms. Velazquez. If Chapter 9, alone, was enacted, would it
allow Puerto Rico to restructure all of these pending debt
payments?
Mr. Zandi. No. Chapter 9 for municipals and public
corporations, again, is a very positive, big step in the right
direction, but it doesn't put Puerto Rico on a sustainable
path. And I think, if we are going to empower an entity, like
the financial stability council, to get this on a sustainable
path, we have to give that council all the tools that it needs
to be able to do that. And that means broader restructuring
authority.
Limiting it to Chapter 9 for municipalities, and for--now,
it could be I am wrong. It is possible, rare, but possible. But
we should give the tools to this entity just in case, because
there is no room for error, here.
Ms. Velazquez. So, Mr. Zandi, Puerto Rico already does not
have access to the credit market. In that sense, it is not
Greece. Greece has access to the credit markets. What this
means for Puerto Rico is that the islands only children's
hospital, large CT, and MRI machines, and has 70 vacant nursing
positions, that therapy sessions for special education students
are at risk, that supplies of gasoline for ambulances, police
cars, and fire engines, were nearly cut off, that towns have
gone without water, due to the lack of vendor payment, that
food supply for inmates were almost cut because suppliers were
not paid, that contractors, now, wait on average 4 months or
more for the government to pay their bills.
The reality is that, after facing payment delays, some
suppliers are threatening, or have shut off the provision of
important public--there is a lot of blame to go around,
mismanagement of the Puerto Rican government.
Mr. Batlle, you worked for the Government Bank, and, while
you were in office, the debt doubled. So there is a lot of
blame to go around, including this same body, because we lack
public policy uniformity when it comes to the U.S. territories.
So look at how much reimbursement they get when it comes to
Medicare and Medicaid. We subject Puerto Rico to the same
standards that we subject hospitals here and any other
institution, and, yet, they don't have the resources to abide
or to comply with those standards.
When it comes to the Jones Act, when it comes to so many
other issues, we give and we take away. We promote economic
growth in Puerto Rico by providing Section 936 when we needed
to showcase Puerto Rico, as Ms. Krueger said, as the jewel of
the Caribbean, sending a message, what, to Cuba, Fidel Castro,
this is what it takes to be a good partner?
But now that Puerto Rico is not needed to showcase what a
good relationship with the United States means, no longer is an
asterisk, Puerto Rico cannot be a nuance for the United States
Government. And you know what? We will pay. We will provide the
tools, or we will pay later.
One point two million Puerto Ricans, basically, have left
the island. And they are living in Florida. So be prepared to
provide for their legal education and healthcare in your own
Congressional districts.
Thank you.
Chairman Duffy. The gentlelady yields back. The Chair now
recognizes the gentleman from Maine, Mr. Poliquin, for 5
minutes.
Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very
much. My heart goes out to the families in Puerto Rico. I don't
know how you got into this mess. Your economy is shrinking.
Forty percent of the adults on the island have jobs, working-
age adults. Twenty-five percent of the total jobs are for the
government. Half of the population lives below the poverty
line. The young are leaving.
This is a mess. Now, the folks who run the government down
there, I don't know what they have been doing. There is a
constitutional mandate on the territory, unless I am mistaken,
that limits debt to about 15 percent of the tax revenues on the
island. But COFINA was created to circumvent that law, to add
to the debt level.
So, now, you have $73 billion of debt, GOs, and revenue
bonds. Thirty-six percent of the tax revenues generated on the
island goes to pay the interest and principal payments on the
debt. And you have a $2 billion interest payment in a couple of
months. Who in the heck is responsible? And where are those
people now?
Now, I represent Maine's second district. The real Maine,
not Northern Massachusetts, the real Maine. We are hardworking
people, and we are honest people. We struggle for every buck we
can make, struggling through the worst economy in 70 years. And
a lot of these retirees own Puerto Rican bonds. They have lent
money to the territory.
And so, now, you folks come to us, wanting what? So I will
tell you Mr. Chairman, I am all about solving this problem. For
me, and for the people I represent in Maine, any solution has
to include a structural fit for the government structure on
this island, who got us into this mess, so it doesn't happen
again, because it is just not fair.
Now, Detroit has gone through some really tough times. And
they were able to solve their problems and hold people
accountable. So I don't know which of you individuals up here
today can answer the question.
But I am going to ask you, Mr. Batlle, are the people who
were responsible for this mess still running the government
down in Puerto Rico?
Mr. Batlle. I would say that, as I mentioned in my oral
testimony, everybody here is accountable for what happened. So,
no, some of them are and some of them aren't, but all--
Mr. Poliquin. Okay. Let me ask you another question. I am
the former State Treasurer in Maine, so we deal with the muni
market all the time, and we deal with incentives all the time.
Were there any incentives in place then, or now, in the folks
who are running the government, to increase their debt levels,
beyond levels that are clearly unsustainable?
Mr. Batlle. Incentives for--
Mr. Poliquin. Yes, are there any electoral or governance
incentives, right now, in the territory, that would incent
people who run the government to increase their debt levels?
Mr. Batlle. Not to my knowledge.
Mr. Poliquin. Then how did you get in this mess? Ms.
Krueger?
Ms. Krueger. If I may, and there are problems within the
government, in terms of the inefficiency of tax collection, and
administration in general that have accounted for it. It is no
individual, but it is the system, which you are quite correct.
Mr. Poliquin. All right. Let's dig into that a little bit.
My understanding is that only 56 percent of the taxes owed in
the territory are actually collected. Is that right? Why?
Ms. Krueger. It is hard to know a number, because there is
a large informal sector--
Mr. Poliquin. Okay, fine. That is the report I have. It is
about 56 percent. Why?
Ms. Krueger. There is a large informal sector, because,
indeed--
Mr. Poliquin. What does an informal sector mean, people
don't want to pay their taxes?
Ms. Krueger. People who are working and not paying taxes,
yes, outside--
Mr. Poliquin. Well, no one wants to pay their taxes, but if
you owe your taxes, you pay them, right? So why aren't these
taxes collected? Mr. Batlle?
Mr. Batlle. Sir, the taxing authority in Puerto Rico is a
very dysfunctional entity.
Mr. Poliquin. It is a cultural thing? Did I hear that
right?
Mr. Batlle. Dysfunctional. The taxing authority.
Mr. Poliquin. It is dysfunctional. What makes it
dysfunctional? It is dysfunctional in Greece, too.
Mr. Batlle. I will tell you that the--
Mr. Poliquin. People don't want to pay their taxes there,
and then you complain because you can't run the government. And
you have to borrow more, and it puts everybody at risk. I know
it is dysfunctional. How do you fix it?
Mr. Batlle. There has to be consequences to people who
don't pay taxes.
Mr. Poliquin. What kind of consequences?
Mr. Batlle. Whatever consequences could be incorporated
into the system.
Mr. Poliquin. Okay.
Mr. Batlle. I am not an expert on that in my area, but--
Mr. Poliquin. Mr. Chairman--
Mr. Batlle. --there have to be consequences.
Mr. Poliquin. Thank you, sir. And I am not trying to badger
anybody, it is just that I represent people who are coming to
us to ask to be on the hook to bail out people who weren't
responsible. There has been reckless behavior down in this
territory, and in other parts of this country. It is not just
the territory. Other parts of this country, including, here, in
Washington.
They are looking for bailouts. So I will tell you, Mr.
Chairman, I am out of time. I am all for a solution, as long as
there are structural changes to fix this problem, so that we
don't go down this path again. Thank you.
Chairman Duffy. The gentlemen yields back. The Chair now
recognizes Mrs. Maloney from New York for 5 minutes.
Mrs. Maloney. All right. I want to thank you, Mr. Chairman
and Mr. Ranking Member, for allowing me to participate in this
hearing and, really, for having this very important hearing.
Puerto Rico is home to 3.5 million American citizens, and they
face a severe financial crisis. I believe we have an obligation
to help our fellow citizens.
And New York City has a long history with Puerto Rico. The
very first, a Puerto Rican veteran, was from El Barrio in East
Harlem of New York. The very first elected party official,
first elected official, many leadership and the arts came from
what we call the cradle of Puerto Rican advancement in the
United States, East Harlem or El Barrio.
Now, I would like to just note and put into historical
reference what we are confronting today. New York City, the
city that I am proud to represent, also faced a huge financial
crisis back in the 1970s, and there was a reaction by some in
Congress to do nothing. Let them die. Let's do nothing to help
New York.
Gratefully, the Majority in Congress responded to the
crisis in New York, and helped the City and its people rebuild.
And that was to the benefit of our entire Nation, not just to
the City and State, but our entire Nation. And the solution
that Congress put forward involved a control board, a
restructuring law, and a $2.3 billion loan from the Federal
Government.
We faced a similar crisis with the auto industry in New
York, and again, not in New York, in our country, out in
Michigan. And, again, our country responded by restructuring,
offering loans, and we now have an auto industry that survived
and is now exporting and creating American jobs.
So I feel we have a responsibility to get in there and
help, and help them restructure it and help them rebuild. I
would like to ask, and I would like to really comment on Dr.
Zandi's testimony that what we should approach what is
confronting us now is a territorial bankruptcy regime that
would, when you said that it would not disrupt the broader
municipal bond market, that seems that should be the way that
we would go. And I think that is really important, your
testimony that it would not disrupt the municipal bond market.
A territorial bankruptcy regime, by definition, would not
be available to States. It would only be available to the five
territories that we have, or it could be drafted specifically
for Puerto Rico.
I want to compliment and applaud Chairman Duffy. He is the
only Republican, that I am aware of, who has tried to confront
this problem and come forward with constructive solutions. He
has introduced a bill that grants Puerto Rico access to Chapter
9 bankruptcy, just like every other State has.
And there is absolutely no justification, in any way,
shape, or form, for excluding Puerto Rico from Chapter 9. And I
want to thank Chairman Duffy for his leadership in putting this
forward.
But I think it is also important to remember that much of
Puerto Rico's $72 billion worth of debt is what is known as
special revenue debt, which enjoys unique protections under
Chapter 9.
So even if they had Chapter 9, there would be a whole area
that would be protected from restructuring. I hear that,
roughly, only 30 percent of the debt would be available for
restructuring under Chapter 9. Is that correct, Dr. Zandi? If
we had Chapter 9, how much of Puerto Rico's debt could be
restructured?
Mr. Zandi. For sure, 30 percent of the debt. There is a
reasonable debate as to whether the other debt, parts of the
debt, would fall under Chapter 9. But that would have to
adjudicated, and it would go through a court process.
And just looking, a similar kind of question came up in the
Detroit bankruptcy about eligibility, and that just dragged on
for 12, 18 months. And Puerto Rico doesn't have that time.
Mrs. Maloney. So I think we have to consider a more
comprehensive option, like a broader restructuring regime, that
can bring in all of the creditors to the table, including the
secured creditors.
And that is why I believe, Mr. Duffy, we have to look at
expanding it to a territorial restructuring and put everybody
at the table.
But my question is for Dr. Zandi: What difficulties would
Puerto Rico face in negotiating a restructuring under a regime
that coves only roughly 30 percent of their debt?
Mr. Zandi. I think if you do the arithmetic, if they can
only get 30 percent of the debt restructured, that wouldn't put
Puerto Rico on a sustainable path. They would continue to have
significant fiscal problems, economic problems, and you would
not have solved the issue. It would be back here. We would be
back here, again, discussing this and trying to figure out what
to do.
So I don't believe that is sufficient to solve this problem
in a sustainable way, as other Congressmen have said that we
should.
Mrs. Maloney. So we need to consider stronger tools than
Chapter 9, you would say, Dr. Zandi, correct?
Mr. Zandi. Yes, I do. And I don't say this lightly, because
I do think we need to be cognizant of the cost, potential cost.
I think Mr. Isaac brings up an important point that we need to
think through.
But I think, at the end of the day, Puerto Rico is not a
State. States, under the 10th Amendment of the Constitution,
will never go down the path that was being proposed here for
Puerto Rico.
And, again, the proof, or the basis, for this perspective
that gives me confidence is in the marketplace. Investors who
have money on the line are saying that this is not going to be
an issue for the rest of the country.
Mrs. Maloney. Okay. So do you think a territorial
bankruptcy regime would be sufficient?
Mr. Zandi. Yes. And just a restructuring framework. It
doesn't necessarily have to be bankruptcy. That is perhaps the
cleanest way. But there are other ways of doing it. But there
has to be a framework to allow a restructuring of all of the
liabilities that the island is struggling with, all of the
debt, and all of the unfunded pension liabilities.
Mrs. Maloney. And that would have the least impact on
taxpayers, too.
Mr. Zandi. I think, at the end of the day, that is the only
way to put Puerto Rico on a sustainable path and limit the
fallout on the rest of the municipal bond market economy and
financial system.
Mrs. Maloney. Thank you very much.
My time has expired. Thank you very much, Chairman Duffy
and Ranking Member Green, for your work on this. And I thank
all the panelists for your thoughtful presentations today.
Chairman Duffy. And I appreciate your positive comments,
Mrs. Maloney, but your time has expired. Thank you.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you very much, Mr. Chairman.
Let's start with bankruptcy, in general. I must tell you,
friends, I marvel at how bankruptcy has become a taboo for the
committee, when, for many years now, there has been this
clarion call, if you will, to eviscerate Dodd-Frank and replace
it with some sort of super bankruptcy for the big banks.
It just seems to me that if bankruptcy is good enough for
the big banks--and that is a bailout if you want to call it
such--it seems like it ought to be good enough for Puerto Rico.
It just seems to me that we can do for Puerto Rico what persons
are proposing currently to do for the big banks.
Literally, eviscerate--well, if not eviscerate, emasculate
Dodd-Frank, so that there will not be the opportunity to have
the orderly liquidation of these huge mega banks. Now, with
reference to someone indicating that it was unfair, or it would
create some sort of--disrupt the balance, if we moved to change
the bankruptcy rules, we did it in 1984.
And it seems to me that things are still functioning fairly
well. And, immediately after 1984, there was not this great
disruption in the markets. We changed it, 1984. The law allows
for it to be done.
Investors who invest understand that it can be done when
they make the investments. They understand this. These are very
sophisticated investors, the people who actually make the
investments. So they understand that Congress can change the
rules retroactively, because we have changed the rules
retroactively. Nothing new. It happens.
I don't advocate doing it on some sort of routine basis,
but I do believe that, when we have a crisis of this magnitude,
such that we will, with our inaction, allow Puerto Rico to
become the Greece of the western hemisphere, I think we ought
to act. We ought not just allow this to occur.
Now, with reference to the 30 percent, Mr. Zandi, this is
the case, because of the specific revenue bonds. And for
edification purposes, these are bonds that, in a Chapter 9
bankruptcy, when you get the automatic stay, you are still
going to be paying the principal and interest on those, under
the automatic stay.
The others, the 30 percent you are talking about, will be
subject to the automatic stay, which is why you have to have
some methodology by which you can bring everybody to the table
at the same time, if you are going to get a long-term solution
to a crisis of this magnitude.
I believe that Detroit has benefited greatly. I think that
those who prefer D.C., I am not going to argue with you about
it. But I think that a good argument can be made that, if we
can do it for Detroit, we can do it for Puerto Rico, as well.
And, finally, before we go to another round, if there is
going to be another round, Mr. Chairman, I would like to go to
Mr. Zandi and ask him the following.
Sir, with reference to the broadening of this, beyond what
Chapter 9 will afford, if we broaden, and we bring everybody to
the table, would you juxtapose that to what happens if we only
bring--and I think you have done this, but I would like for you
to do it again, to help provide additional clarity, if you only
bring that 30 percent that we are talking about, that Chapter 9
might afford us, what will the difference be?
Mr. Zandi. If we only get the 30 percent through the
bankruptcy, Chapter 9 bankruptcy, and you do the arithmetic, it
is very likely that we haven't solved Puerto Rico's problems.
It is unsustainable.
So I think it is important. And, again, that is my
arithmetic, but I think it is important to provide the tools
necessary for other people to do this work in more detail and
to figure it out. And give them the tools to be able to
restructure the liabilities more broadly, if necessary, to put
Puerto Rico on solid ground.
And I do think it is reasonable to treat Puerto Rico
differently than a State. It is not a State. It is a territory.
It has the same relationship to the Federal Government as does
Detroit has to the State of Michigan. And that is why I think
it is perfectly reasonable and ultimately vital that we allow
for this broader restructuring framework to go forward.
Otherwise, my sense is, my view is this problem will not be
solved, and we will be back here, again, trying to figure it
out.
Mr. Green. I yield back, Mr. Chairman.
Chairman Duffy. The gentleman yields back. For those who
are willing to participate, and if the panel is okay with it,
we would like to do a second round. We have lost a few Members,
so it won't take as long. So, with no objection, the Chair
recognizes himself for 5 minutes.
I have to say, Mr. Zandi, I would have to imagine that, if
that statement was made to the residents of Puerto Rico, that
the relationship of Puerto Rico to the United States is that of
Detroit to Michigan, I would have to imagine you would probably
get some pretty significant objections.
But with that said, I want to look at the debt that is out
there. And, to your point, you have indicated that, well, if
you offer Chapter 9, that might only be 30 percent, and 30
percent isn't enough to deal with the issues on the island. Is
that a fair enough statement that you have made at today's
hearing?
Mr. Zandi. Yes, just to clarify, to your previous point, I
said that in the context of the debt, not in the context of the
broader frame that you put it in.
Chairman Duffy. Okay. But you would also agree that we are
having a conversation about what is the solution.
Mr. Zandi. Yes.
Chairman Duffy. What do we do, as Congress, so we have the
power to decide whether it is 30 percent, whether it is 100
percent, or whether it is 75 percent. I am not advocating that
COFINA be included, but I am not saying that it shouldn't be
included.
But if COFINA is included, we are not at 30 percent. We are
going to get up to 75 percent.
Mr. Zandi. You are right.
Chairman Duffy. And if we choose, as legislators, to do
that, is the 75 percent of debt restructuring sufficient to
address the issues on the island and still protect Wisconsin
and Texas, States and municipalities, from increases in
interest rates?
Mr. Zandi. Yes, in theory. This is a matter of theory and
practice. Are you going to actually accomplish what you want to
accomplish with your legislation?
Chairman Duffy. That is always a question for Congress,
theories and--
Mr. Zandi. Well, no. You are trying to solve a problem. So
are we going to solve this problem or not?
Chairman Duffy. That is why we are here today. We are
trying to solve the problem, right? That is the point of the
hearing. That is the point of the testimony. But I don't want
people to be misled that our proposal can only hit 30 percent.
Mr. Zandi. You are absolutely right. And I tried to say,
every single time that this question has been asked, because it
is a key question, and I say, ``For sure, 30 percent.''
Chairman Duffy. And this will be a question for us, what--
Mr. Zandi. Yes.
Chairman Duffy. --how do we structure--
Mr. Zandi. Right. Yes.
Chairman Duffy. --bankruptcy and how much of the debt does
it touch?
Mr. Zandi. But you are absolutely--I don't want to mislead
anybody.
Chairman Duffy. Thank you. So, I know. I wanted to make
sure we were clear on that.
Mr. Zandi. Right.
Chairman Duffy. Mr. Isaac, former Chair of the FDIC, I
think you recently said, ``Puerto Rico's debt situation has a
potential of significantly rattling the financial markets, and
banks need to take notice.'' What is at stake? Why? With regard
to banks? If this question isn't properly handled?
Mr. Isaac. Pardon?
Chairman Duffy. If this question isn't properly handled,
what do you mean by that?
Mr. Isaac. I am concerned that the banks have made loans
all over the country, in reliance on certain rules of
bankruptcy. They understand the rules. They understand what
general obligation bonds mean. And they understand the
difference between a general obligation bond and a revenue
bond.
And, if we say that, through our actions in Puerto Rico,
that all those distinctions that you have been relying on don't
work anymore, you are no longer in favored status when you have
a general obligation bond--
Chairman Duffy. That would create uncertainty, right?
Mr. Isaac. Enormous uncertainty.
Chairman Duffy. And is uncertainty bad for our markets?
Mr. Isaac. As former Chairman of the FDIC, I used to hate
uncertainty. I wanted to know what was going to happen each day
when I woke up.
Chairman Duffy. Thank you for that.
Dr. Krueger, as the former chief economist for the World
Bank and the managing director of the IMF, it is my
understanding that, when we have distressed countries, the
benchmark for debt servicing has been 18 to 22 percent. I think
that is--I read that somewhere.
The proposal from Puerto Rico has been that 15 percent of
revenue would go to debt servicing. Does that make sense?
Should it be 15 percent? Should we get up to 18 to 22? Where
should that number be--or percent be, I should say?
Ms. Krueger. That number depends, in part, of course, on
the country situation. And it varies a bit, of course, by
country. I think more accurately what the Fund does is try to
look at what needs to be done, structurally, to change growth
prospects, at the same time as to get whatever tax and
expenditure adjustments are necessary, and then look
prospectively at what we call the primary surplus will be going
forward.
It is defined as the amount of revenue, over and above
other government expenditures, that will come in. And, in
general, we look at the primary surplus, rather than an 18 or
22 percent number to ask what could be reasonable.
And those numbers vary all over the place. When I was
there, I think we had one country where, indeed, something like
20 percent of GDP was primary surplus going to debt service for
a year or two. Another country it was three. It makes a big
difference what the inflation rate is and things like that.
I don't think there is any hard and fast rule on 15 or 18
percent. There are many other things to be taken into account.
Chairman Duffy. Okay. I think everybody would understand
and agree that this institution is very sensitive to taking
taxpayer money and using it in the form of a bailout. If you
haven't noticed that, you haven't been paying attention.
And, so, there is some conversation about bankruptcy being
a bailout. Now, I would ask the panel, I would normally think
of a bailout as this institution taking Federal taxpayer money
and giving it to another institution to bail them out.
Do you all see bankruptcy as a bailout? Yes? Dr. Krueger?
Ms. Krueger. Do you want me to start? Bankruptcy comes
about when there is no alternative, which is, I am afraid, the
Puerto Rican case, or, more accurately, when the alternative is
worse. And the alternative, in this case, for Puerto Rico, of
not getting something now means probably no growth, which, as I
said, also means some other things, and continuing fiscal
unsustainability, which leads to uncertainty, which leads to
more problems. The normal--
Chairman Duffy. And could that lead to the call for this
institution actually to bail them out? To actually send
taxpayer money to the island?
Ms. Krueger. The normal procedure is, when things get to
that shape in countries, what happens is that without some
short-term money, things are grinding to a halt, and the
downward spiral is making things even worse.
So that sometimes what happens is money comes with it, but
that normally is repaid. Now the art of bankruptcy is to find a
law which gives enough room so that when their things are
really in dire, dire straits, so there is no alternative, there
can be a mechanism so that you just don't go downhill forever.
But, at the same time, creditor rights are protected, as
much as you possibly can, because otherwise creditors aren't
going to lend. So finding that balance is what is really hard.
Chairman Duffy. What is key. Thank you. Just quickly, and I
am done, but does anyone disagree with that point that
bankruptcy is a bailout? No one is raising their hand. I will
take that as you don't agree that bankruptcy's a bailout.
With that, my time expired long ago. The Chair now
recognizes the ranking member of the subcommittee, the
gentleman from Texas, Mr. Green, for 5 minutes.
Mr. Green. I thank you, Mr. Chairman. Let's continue with
the bailout proposition, because it is important to note that
when you are in bankruptcy, the creditors come to the table,
and it is all about trying to get some agreement as to how the
creditors will go forward.
And if there is a loss, it is the creditors, not the
citizens, who are not a party to the bankruptcy, who end up
taking the loss. The creditors, not the citizens. Now,
taxpayers can be involved in business, but it is not because
they are citizen taxpayers that they are at the table. They are
at the table, because there was some investment.
So it is those who have invested. And we have to make that
clear, because there seems to be a belief, among some of us,
that in bankruptcy the court orders money from the Treasury to
be used to satisfy some need, which is absolutely, totally, and
completely untrue. It is not the case.
Now, moving forward, let's see a show of hands of the
persons who are here with us today as witnesses, and I thank
you, of those who would favor bankruptcy. You may favor more,
but see bankruptcy as a part of the solution. If you think
bankruptcy is a part of the solution, I just want to get this
on the record, would you kindly raise your hand?
All right. Let the record reflect that all of the members
of the panel--you may lower your hands--see bankruptcy as a
part of the solution.
Now, Mr. Isaac, you have been in the banking business for
some time. And you are aware of bankruptcy laws, to a great
extent. I am assuming this, okay? But when it comes to banks,
when they have a problem, they usually close them on Friday.
The FDIC comes in. then, they open them up on Monday, generally
speaking. Is that a fair statement?
Mr. Isaac. That is a fair statement.
Mr. Green. All right. And so, if in banking--and by the
way, FDIC is sort of a fund that is developed from a premium
paid by banks. Is that a fair statement?
Mr. Isaac. That is correct.
Mr. Green. Okay. So you have the FDIC, you have the banks.
Now, if banks made an investment in some aspect of the Puerto
Rican economy, they did so understanding that they might make
money or they may lose money. Even banks can lose money. Would
you agree that they would have to do that with that
understanding, that they would make or lose? It is not always a
winning proposition. You can't arbitrage a bank.
Mr. Isaac. That is correct. It is a risk business.
Mr. Green. Right. Although, I do confess that there is a
way, sometimes, to arbitrage with the spread and something that
we went through in 2008. But that is not a part of this
hearing.
So if banks can lose money, then this may be one of those
times when banks may have to take a haircut--haircut is another
way of saying lose some money--just as other investors may have
to take a haircut.
And, by the way, I am not in favor of having anybody lose
money. But we have a crisis that we have to resolve. And we are
not going to resolve the crisis by allowing it to continue
without some intervention. So the question is, to what extent
do we intervene?
I remember in 2008, Mr. Zandi, when--and I think you were
around and a part of many of these discussions, trying to
determine what the amount of the--what was it, the TARP?
Mr. Zandi. TARP. TARP program.
Mr. Green. TARP. Yes, trying to determine the TARP was a
big question. We had someone to come in and testify that we
needed a certain amount of money, with about five sheets of
paper.
Mr. Zandi. Yes.
Mr. Green. And with those five sheets of paper, we started
a process. But we had a big debate about how big it should be.
So we are into that big debate now about how big this should
be.
It is what we have done before. We do this. This is why we
are here, to have these debates. And Mr. Duffy and I will,
hopefully, try to come to a consensus so that we can resolve
this and not have a measure that doesn't go far enough, because
we have seen what happens when you don't go far enough.
You can actually exacerbate the problem. And that is not
what we want to do. We want to resolve the problem.
With that said, Mr. Chairman, I yield back.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the ranking member of the full Financial Services
Committee, the gentlelady from California, Ms. Waters.
Ms. Waters. Thank you so very much, Mr. Duffy. Let me tell
you how pleased I am that you are holding this hearing. I think
this absolutely needed to be done, and I am very appreciative
that you are doing this.
Let me direct a question to Dr. Zandi and, perhaps, Dr.
Krueger, too. Throughout your testimony, you have spoken of the
importance of expanding the Medicaid program to improve health
outcomes and of introducing the Earned Income Tax Credit, as a
strong incentive to find taxable employment.
Chairman Duffy. If I could just briefly interrupt the
ranking member, if you could speak a little bit louder, I think
the panelists are having a hard time hearing you. I'm sorry.
Ms. Waters. They can't hear me? Usually, that is not the
case.
Chairman Duffy. That is usually not the problem.
Ms. Waters. What is wrong today? Okay. The questions that I
have are for Dr. Zandi and, I believe, Dr. Krueger. Throughout
your testimony, you have spoken of the importance of expanding
the Medicaid program to improve health outcomes and of
introducing the Earned Income Tax Credit, as a strong incentive
to find taxable employment.
Specifically, I am told you mentioned that the cost of
these proposals, when fully operational, would be roughly $2
billion a year. Will you please explain how the cost of these
programs would be offset by the expected increase in labor
force participation and tax revenues and anticipated decrease
in healthcare expenditures?
Secondly, what would be the expected costs if these
critical social welfare programs were not made available? Is it
possible that the lost revenues and unemployment expenses could
exceed $2 billion per year? Starting with Dr. Zandi.
Mr. Zandi. Okay. So just to be clear on Medicaid, all I am
arguing is that the funding for Medicaid in Puerto Rico should
be the same as the funding on the mainland. If you have that
same threshold, then, I think, you have gone a long way to
helping Puerto Rico, because under current law that is not the
case. And the funding will decline in late 2017, 2018.
And this is key for Puerto Rico, because half of the
population is on Medicaid. And without those benefits, this
will be very serious. That, just to be precise there, my
calculation of the cost is $2 billion per annum on a present
value basis.
So over the next 10 years. So $20 billion, over the next 10
years, on a present value basis. If you do it by CBO
accounting, it probably comes closer to $30 billion. That is in
nominal dollars.
You make an excellent point, and that is, if we don't take
steps like funding Medicaid fully and adopting an EITC, and
other steps, the economy of Puerto Rico will continue to
shrink, which means the fiscal situation will continue to
erode, which means we will be back here, again, talking about
Puerto Rico's problems.
It means the tax base erodes. It means less tax revenue,
and the costs will continue to mount. If we do these things, in
addition to some other things I propose in the written
testimony, get Puerto Rico moving in a positive direction, that
gives you positive revenue growth.
And I haven't done the calculation, whether that pays fully
for the Medicaid expansion and EITC, but it probably comes
pretty close, yes. So I think it is a very reasonable thing to
do. And, frankly, I don't see any other option, because if we
don't get Puerto Rico moving north, as opposed to south,
nothing works. Nothing works.
Ms. Waters. Thank you very much.
Dr. Krueger, you have a minute or so to add to that.
Ms. Krueger. First, I agree with everything that Dr. Zandi
said, but I would make the point even more strongly. If the
formula for providing Medicaid to block grants were the same
for Puerto Rico, that be a huge difference in Puerto Rican
payments.
And the current payments are expected to expire in 2017,
which, if something is not done, is going to be another big
hole in the Puerto Rican budget, because they are mandated that
they must do it.
And it is not that healthcare would improve. It is that the
funding must be done by the Commonwealth, by Federal law. And
any other State in the United States gets more funding for the
same--if you use the same formula, Puerto Rico would get more,
too.
As to EITC, obviously, if more people enter the formal
labor force and start paying taxes, even though they get EITC,
there is a huge offset there, but the big offset, I think, is
in getting Puerto Rico turned around and on a proper growth
path.
Costs of welfare, in general, will go up across Medicaid,
everything, until such time as the Commonwealth turns around.
And they will come either on the island, or on the mainland, if
people leave.
So it is not a U.S. choice to avoid. It is only a question
of where the pain comes and how much there is, I think.
Mr. Zandi. Just one quick point, Congresswoman? All of the
budgeting that is being done now is under the assumption that
this Medicaid fix will occur. If it does not take place, then
all of these budget assumptions that are being--with the
governors putting forward and what the bond holders are
assuming, everything, it is just not going to work. It is going
to be many times worse than what we expect right now.
So this is a working assumption of everyone out there, that
this is going to happen.
Ms. Waters. All right. Thank you very much, and I yield
back.
Chairman Duffy. The gentlelady yields back. The Chair now
recognizes the gentleman from Minnesota, Mr. Ellison, for 5
minutes.
Mr. Ellison. Thank you, Mr. Chairman, and thanks to the
ranking member, as well. And, also, thank you to the panel.
Dr. Zandi, thanks for being here. I have read that some
economists believe that Puerto Rico's current problems began
with the winding down of Section 936. Section 936, for the
record, provided American companies with incentives to invest
and create jobs in Puerto Rico.
Would bringing back Section 936 generate economic activity
and jobs? Would restoring it enable Puerto Rico to pay off its
creditors in time?
Mr. Zandi. I think the expiration of 936, and it was
completely wound down by the year 2006. And that was the year
that the economy peaked in Puerto Rico. Employment peaked,
population peaked.
So, yes, I think the expiration of the tax benefit under
936 has contributed. There are many other factors, obviously,
but it is one factor in the 10-year long recession in Puerto
Rico. Would I bring it back? I think if--we were talking about
this earlier--if I were king for the day, I would say no.
I would use that resource and that money, and I would use
it to fund the EITC, a Child Tax Credit, which, by the way,
also incents work. But we want to get a culture of people
paying their taxes. It has been aptly demonstrated here that
there is a big underground economy. People don't trust the
system, and they are not paying.
And, so, we have to change that. And the EITC and the Child
Tax Credit would go a long way to incenting people to get into
the formal economy, start paying their taxes. It will make this
whole thing work out a lot better. So, if I were doing this,
that is where I would spend my attention and the resources.
Mr. Ellison. Thank you. Also, do any of the other panelists
have any comments on that? Yes, Dr. Krueger?
Ms. Krueger. Yes, I would agree with Dr. Zandi, but add
that, indeed, even the 936, when it came, brought in the high-
value added skill using things, and that is not Puerto Rico's
comparative advantage, first.
But, secondly, we did it once. We took it back once. What
would convince people that Congress, if they did it again,
would not take it back at some later date? And I would think
the effects of it, the second time around, would be far smaller
than they were the first time. And the first time, it helped
the people who didn't need the help as much.
Mr. Ellison. Yes. Thank you for your thoughts on that. And
here is another question for the panel. What sectors of the
Puerto Rican economy have the most potential to grow? You can
start, Doctor.
Ms. Krueger. I can take a crack at it.
Mr. Ellison. Okay.
Ms. Krueger. The first thing I ever taught in an
international trade course was that you can never tell what
will spring up when you change incentives. And that is true.
The things that become big industries and big users of the
labor force very often are things that nobody ever dreamt of
ahead of time. So it is very hard to tell.
But tourism in Puerto Rico has not thrived, except at the
high end, partly because of minimum wage. Dominican Republic's
minimum wage is very low. Puerto Ricans are competing when
their minimum wage is about 10 times as high. Not that it
should be that low, but it should be somewhere in between,
probably, for that purpose.
But tourism, there are very few more tourist spends now
than there were in 1980, despite the boom of tourism all around
the Caribbean. It doesn't make any sense. I think that there
should be a booming corporate headquarters for companies,
probably mostly European, that do business in both North and
South America.
It hasn't happened. And I think a lot of this problem we
have been discussing accounted for it. But Puerto Rico should
be a major corporate headquarters sector, provide financial
services for both North and South America, and other things
that would take advantage of the U.S. dollar, U.S. law and
order, U.S. protection of various kinds, and the advantage of
the geographic location, and the Spanish and English
connection.
Mr. Ellison. Great. Others?
Mr. Zandi. Yes, I would agree. The most obvious is the
tourism industry, which has languished for lots of reasons. And
the infrastructure of Puerto Rico is quickly eroding and making
it more difficult for that to be a mass market for tourism.
But that is the most obvious comparative advantage. And I
do think financial services is a place where there would be
significant potential. There is a lot of capital flowing from
South America, Central America, into the United States.
Now, right now, it is mostly going into Miami, in Florida.
But I don't see any reason why Puerto Rico couldn't get its
fair share of that capital flow. And I think that would be a
significant boon to the economy.
Mr. Ellison. Good.
I will yield back and say thank you, again, to the panel
and to the chairman and the ranking member.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the gentleman from South Carolina, Mr. Mulvaney, for
5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman. I thank the panel
for sticking around. Mostly, I want to talk to my colleagues,
if I may, because a couple of items have come up, from both Mr.
Green and Mr. Duffy, regarding bankruptcy.
I think it was referred to as a taboo. Some question
whether or not some of us thought it was a bailout. Certainly,
no one here, gentlemen, is suggesting that a bankruptcy filing
is somehow a transfer from the Treasury to the island
government. That is not the point.
The point, to my friend Mr. Green, would be that the
understanding of the lenders, which you talked about at some
length, is critical here and central to the issue. And you used
the word banks. I will use retirees. But when the retirees in
my district invested in these bonds, they did so under a
certain understanding.
Yes, part of the understanding was that they could lose
money. But another part of the understanding was that the
general obligation, the taxing authority of the island was
pledged as security. And, in exchange for that promise, that
legal promise, that contract, my retirees accepted a lower rate
of interest.
If they had known that maybe the pensioners would go first
on the island of Puerto Rico, that they might be made
subordinate to that flow of funds, they may have demanded a
higher rate of interest. But it was a legal contract.
And what we are talking about here is not allowing
bankruptcy. I used to practice bankruptcy law a little bit. I
know what it is. I know that it can be helpful at particular
times. But what we are talking about here is allowing
bankruptcy after the fact. My folks have lent to Puerto Rico--
Mr. Green. Will the gentleman yield, since he has invited
me into the conversation by naming me?
Mr. Mulvaney. I will. And I think Mr. Duffy will be a
little bit liberal with the time, since this is the end of the
discussion. But my folks have lent money under the
understanding that it be repaid in a certain fashion and that
bankruptcy could not be used, as it is used in other States or
as it is used in corporations, that it was different.
And, in exchange for that set of facts, they were willing
to accept a lower rate of interest. We are not suggesting that
bankruptcy, by itself, is a bailout. We are certainly not
suggesting that bankruptcy is somehow a transfer from the
Treasury.
What we are suggesting is that it is unfair to change the
rules on the people who have lent money, in good faith and with
a certain legal understanding as to how they might be repaid.
Yes, there was a risk that they would not get repaid. But
bankruptcy was not one of the risks they signed up for.
And, with that, I will yield to the gentleman, to my
friend, and I will be happy to enter into a colloquy, if you
would like to.
Mr. Green. Thank you very much. I concur with you, to a
great extent, but I do have to acknowledge that the Supreme
Court weighed in on this. And the Supreme Court indicated that,
because Congress has this awesome authority to regulate
bankruptcy, that Congress can change the rules.
And the Supreme Court has gone so far as to say the rules
can be changed retroactively. And the people who make these
deals, who make the deals, not some of the people that you may
be addressing--and I don't want to see anybody hurt--but these
are, by definition, sophisticated investors, persons who
understand what they are doing, and are in a position to
sometimes lose.
That is unfortunate. I don't want to see anybody lose, but
that is the case sometimes. And with reference specifically to
Puerto Rico, we are talking about Americans there, Americans
here, as well. It just seems to me that there should be some
accommodation. There will have to be some compromise.
And I am willing to work out a compromise. And my trust and
belief is that you are willing to do so, as well.
Mr. Mulvaney. I appreciate that, and I will reclaim my
time. And I tend to agree with you. I have read the case that
the governor sent us from the Supreme Court from the 1930s. It
makes it clear that Congress does have the authority to do
this.
Of course, we did this, again, in the Chrysler bankruptcy,
during the auto bailout. But I would suggest to my friends, on
both sides of the aisle, that just because we have the
authority to do so does not mean that it is fair for us to do
so, or that it is right for us to do so.
So I don't think anyone is arguing here whether or not we
have the legal authority, the legislative authority, to do what
the Treasury, specifically, is suggesting. My question is
should we do it? Is it fair?
Is this one of those circumstances that is so extreme and
so unfortunate? For example, when the case from the 1930s
references the Great Depression in California, a national
calamity. From what I have read so far, much of the ills that
have befallen Puerto Rico are specific to Puerto Rico and
specific to the management of the company.
I, specifically, referenced earlier the experience with the
electric company choosing, of its own free will, not to raise
rates, money that could have been used to help pay back the
bond holders.
And I do look forward to continuing the conversation. I
want to ask one or two more questions before we leave.
Specifically, Dr. Zandi. And I want to put you on the spot,
because you weren't the only one who said this, but you were
the most recent one, so it sort of stuck in mind. We have to do
something to get Puerto Rico going. We have to do something to
fix it. I think Dr. Krueger mentioned it. Everybody agrees that
we have to have growth in Puerto Rico and have some
restructuring and so forth.
Why do we think we are better at it than the Puerto Ricans?
Mr. Zandi. I think that we aren't. They have their own
views and perspectives, and I think they should be considered.
But there are things that Congress can do and, I think, would
be very helpful to the Puerto Rican economy, that the Puerto
Ricans would welcome and that would be beneficial to U.S.
taxpayers, in the long run.
If we don't address Puerto Rico now, and the Puerto Rican
economy, I think, most of us would agree will continue to be in
recession and sink, it is going to cost taxpayers, U.S.
taxpayers, your constituents, me, money.
So we need to address this. And I think they will welcome
proposals like EITC. But, at the end of the day, they are a
sovereign entity. And they have to be involved in the decision-
making process and be involved, because they are going to have
to solve the problem and get on a sustainable path by
themselves.
Mr. Mulvaney. And if that is a basis for understanding
going forward, if we talk about the Jones Act, talk about the
EITC, we talk about tourism, we talk about the minimum wage
exemptions, that may be a basis for a future understanding.
Last question--I appreciate the chairman's liberalness,
with a small L, with the time--which is I heard something at
the very end and it struck me, which is that these assumptions,
we are making assumptions about a change in, is it Medicaid
reimbursements?
Mr. Zandi. Yes.
Mr. Mulvaney. So my understanding, and it is just very
basic, is that the current law of this country is that those
payments will go down fairly dramatically in the next couple of
years. What you are telling us is that the assumptions that
everyone has made is that Congress will change the law, in
order to fairly dramatically increase Medicaid reimbursements
to Puerto Rico in, I think, it is 2018. Is that correct?
Mr. Zandi. Yes. When I say everyone, I am saying market
participants--
Mr. Mulvaney. Right.
Mr. Zandi. --people who are looking at this, people who are
doing the budgeting in Puerto Rico. You have to make
assumptions when you do a projection.
Mr. Mulvaney. Absolutely.
Mr. Zandi. And one of the key assumptions, is, yes, that is
going to be patched.
Mr. Mulvaney. How much is that? Does anybody know?
Mr. Zandi. By my calculation, I calculated on a CBO basis,
over a 10-year period, it will probably cost $25 to $30 billion
per annum.
Mr. Mulvaney. ``Billion'' with a ``B?''
Mr. Zandi. ``Billion'' with a ``B.''
Mr. Mulvaney. So the assumption is that we will increase
the Medicaid reimbursement to Puerto Rico, beginning in 2018--
Mr. Zandi. Yes. And because you might have missed this,
what this will do is ensure that the Medicaid reimbursement to
Puerto Ricans is exactly the same as the reimbursement to you
and I, here on the mainland.
Mr. Mulvaney. Right. But it is different in the law, now.
Mr. Zandi. It is different in the law now.
Mr. Mulvaney. Okay. All right.
Mr. Chairman, thank you very much.
Chairman Duffy. The gentleman yields back. I am going to
ask unanimous consent to recognize the gentleman from Texas for
1 minute.
Mr. Green. Thank you, Mr. Chairman. I believe that Dr. King
addressed this question of it is only Puerto Rico. And I would
like to share his thoughts with you. He reminds us that life is
an inescapable network of mutuality, tied to a single garment
of destiny. What impacts one directly, impacts all indirectly.
What happened to Greece, we thought, was a problem for a
given country. But we now understand that these problems can
exacerbate other problems in the world. What happened with
credit default swaps, we thought would impact just some, maybe
in a certain market. But we found out that it could impact the
entire economy.
So I think we have to step back and get a sense that this
may not end at the water's edge in Puerto Rico. It has a
potential to surf its way all the way to the USA. I yield back.
Chairman Duffy. The gentleman yields back. I always
appreciate that I get some of the best Dr. King quotes from the
ranking member. He always puts them in so well, and I thank him
for that. And I thank the panel for coming in today.
This has been a really great discussion, and I hope that
you take away that we are all engaged in trying to find a
solution that works for Puerto Rico, that works for our
government, and that is fair, by way of everybody.
And I think it is a conversation that puts everything on
the table and looks at Puerto Rico as a whole. And we have an
eye towards the people of Puerto Rico and making sure their
lives are better, their opportunities are better, and their
future is better and brighter.
And, if they want to stay on the island, in their
neighborhoods and in their communities, they will have that
option. If they want to come to the mainland, they can make
that choice, too. But a lack of opportunity should not be the
reason why they can't stay.
So, again, I want to thank the panel for being here and for
your time and for your insightful testimony.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And, with that, without objection, this hearing is
adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
A P P E N D I X
February 25, 2016
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