[Senate Hearing 114-307]
[From the U.S. Government Publishing Office]
S. Hrg. 114-307
FINANCIAL AND ECONOMIC CHALLENGES
IN PUERTO RICO
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 29, 2015
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
20-867-PDF WASHINGTON : 2016
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 4
Grassley, Hon. Chuck, a U.S. Senator from Iowa................... 17
WITNESSES
Pierluisi, Hon. Pedro R., Resident Commissioner of Puerto Rico,
U.S. House of Representatives, Washington, DC.................. 7
Acosta, Melba, president, Government Development Bank for Puerto
Rico, San Juan, PR............................................. 8
Holtz-Eakin, Douglas, Ph.D., president, American Action Forum,
Washington, DC................................................. 10
Marxuach, Sergio M., policy director, Center for a New Economy,
Old San Juan, PR............................................... 11
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Acosta, Melba:
Testimony.................................................... 8
Prepared statement........................................... 37
Grassley, Hon. Chuck:
Opening statement............................................ 17
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 43
Holtz-Eakin, Douglas, Ph.D.:
Testimony.................................................... 10
Prepared statement........................................... 45
Responses to questions from committee members................ 54
Marxuach, Sergio M.:
Testimony.................................................... 11
Prepared statement........................................... 54
Responses to questions from committee members................ 58
Pierluisi, Hon. Pedro R.:
Testimony.................................................... 7
Prepared statement........................................... 62
Responses to questions from committee members................ 70
Warner, Hon. Mark R.:
Prepared statement........................................... 82
Wyden, Hon. Ron:
Opening statement............................................ 4
Prepared statement........................................... 82
Communications
Alomar, Rafael Cox............................................... 85
Freytes, Dennis O................................................ 90
Fundacion Francisco Carvajal..................................... 98
Hispanic Federation.............................................. 99
Ortiz-Daliot, Jose A............................................. 103
Puerto Rico College of Physicians and Surgeons................... 104
Puerto Rico Healthcare Community Leaders......................... 123
Puerto Rico Hospital Association................................. 133
Puerto Rico Manufacturers Association............................ 136
Ramirez, Miriam J., M.D.......................................... 138
Rivera, Jorge A.................................................. 139
FINANCIAL AND ECONOMIC CHALLENGES
IN PUERTO RICO
----------
TUESDAY, SEPTEMBER 29, 2015
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:11
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Crapo, Thune, Toomey, Wyden,
Schumer, Stabenow, Nelson, Menendez, Bennet, Casey, and Warner.
Also present: Republican Staff: Chris Campbell, Staff
Director; Tony Coughlan, Tax Counsel; Preston Rutledge, Tax
Counsel; and Jeff Wrase, Chief Economist. Democratic Staff:
Michael Evans, General Counsel; Elizabeth Jurinka, Chief Health
Policy Advisor; Todd Metcalf, Chief Tax Counsel; Joshua
Sheinkman, Staff Director; and Tiffany Smith, Senior Tax
Counsel.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
Good morning, and welcome to today's hearing to consider
the various financial and economic challenges in Puerto Rico.
We have all watched with great interest as the debt situation
in Puerto Rico has unfolded.
Whenever we talk about this issue, there are a number of
interested parties, including policymakers here in Washington,
bondholders, and of course the people of Puerto Rico.
According to the statements from the Puerto Rican
government, the territory's debt of more than $72 billion is,
quote, ``not payable.'' Some of that debt includes General
Obligation bonds which have a constitutional first priority,
and some includes debt of public corporations. In all, we are
talking about roughly 17 different debt-issuing entities in
Puerto Rico.
Puerto Rico's debt has more than doubled since 2000,
despite the billions of dollars infused into its coffers from
the Federal stimulus enacted in 2009 and from health care
funding increases included in the Affordable Care Act. Even
with those boosts in Federal funding and the related increases
in Commonwealth spending, all we see is added Commonwealth
debt. Moreover, there is a lack of reliable data indicating
what Puerto Rico has to show in return in terms of
infrastructure, efficiencies, and improved economic
performance.
One reason we are having this hearing today is to give us a
chance to gather additional information. As Senator Grassley, a
former chairman of the Finance Committee, can attest, this
panel has done a great deal over the years to clarify the
interplay between issues like Federal tax and health care
policy and the impact they have on Puerto Rico and other
territories.
I know that Ranking Member Wyden is committed to working
with me to update and improve our understanding of this
situation so that Congress can make decisions using the best
available information. I think it would be extremely difficult
to ask Congress to make important decisions and appropriately
allocate resources without first understanding what the facts
are and what problems need to be fixed.
Accompanying today's hearing, we have made available an
updated overview of Federal tax policy and its interplay with
Puerto Rico. This document was produced by our friends at the
Joint Committee on Taxation.*
---------------------------------------------------------------------------
* For more information, see also, ``Federal Tax Law and Issues
Related to the Commonwealth of Puerto Rico,'' Joint Committee on
Taxation staff report, September 28, 2015 (JCX-132-15), https://
www.jct.gov/publications.html?func=startdown&id=4840.
---------------------------------------------------------------------------
We also have several other reports addressing Federal
health care policies in Puerto Rico, provided by the
Congressional Research Service. And I have made public the
responses that I received from inquiries I made to the
Department of Health and Human Services on this issue.
In the days leading up to this hearing, I have heard from
many interested parties, virtually all of whom have their own
ideas about what needs to be done here. Some of these proposals
have been helpful, others not so much.
For example, I have heard that we can expect to see
increased strains on Puerto Rico's health care system,
especially given the demographic and economic realities on the
island. One source of this stress seems to stem from the
Affordable Care Act, which contains future cliffs where funding
will be pared down and, according to some, the cliffs will hit
Puerto Rico particularly hard. Of course, for me it is not
surprising to learn that there are inequities and financial
harms resulting from the health care law.
Even so, these problems and any proposed solutions are
multidimensional and extremely complicated. Questions of
funding and resource allocation are always difficult, and they
implicate a number of issues.
It is not as simple as just deciding to give more health
funds to Puerto Rico, because doing so would necessarily mean
reduced funding for other priorities, increased taxes, or even
more Federal debt. That is the unpleasant budget arithmetic
that we face. There are no easy answers.
For a long time, the people of Puerto Rico have suffered
under a weak economy, including double-digit unemployment
rates, very low labor force participation rates, and a bloated
public sector. With many residents of the island facing a lack
of opportunity or any expectations of a brighter future, Puerto
Rico has increasingly seen out-migration. All of this
contributes to the fiscal challenges the territory now faces.
According to independent analysts, there are significant
barriers to job creation and labor force participation in
Puerto Rico. Some of these barriers stem from Federal
entitlement programs. Others can be attributed to the
application of other Federal laws and regulations. In other
words, I do not think we can just lay all the blame on Puerto
Rico.
For example, analysts across the political spectrum agree
that Federal laws have increased the cost of energy in Puerto
Rico and that the island's regulatory processes and
bureaucratic red tape stifle business activity. And sadly, for
the children in Puerto Rico, its education system, to quote
Secretary of Education Duncan, ``has been plagued by a
revolving door of leaders and political patronage.''
In short, and to put it mildly, Puerto Rico faces enormous
fiscal and economic challenges. While the government of Puerto
Rico has taken some steps in recent years to address these
matters, many more changes, significant and fundamental
changes, need to be made.
Fortunately, Puerto Rico has a number of advantages to its
credit, and we have seen successful turnarounds from over-
indebtedness elsewhere, such as here in the District of
Columbia and in New York City. I hope to see Puerto Rico join
the list of successful turnaround experiences, and I know that
everyone here wants the people of Puerto Rico to experience a
future with increased economic opportunity and growth.
Before I conclude, I just want to make sure that we
acknowledge the negative long-term impact Puerto Rico's
unsustainable debt has had, and will continue to have, on the
island's residents and what lessons we should take from their
experience. As the Congressional Budget Office has repeatedly
warned over the past several years, despite some recent
declines, our Federal deficits under current law will soon rise
again, and Federal debt will grow, as it has in Puerto Rico, to
beyond 100 percent of the size of our economy.
According to CBO, if we do not change course, we will
increasingly have less fiscal flexibility, and we will run the
risk of a fiscal crisis at the Federal level. Absent some kind
of fundamental correction, it is not hard to imagine the
devastating effects from unsustainable debt that are now being
felt by Americans living and trying to work in Puerto Rico also
being felt throughout the entire country.
Now I will close by noting that this is the Finance
Committee, with broad areas of jurisdiction, including Federal
tax policy and health care policy. There are, of course, many
other aspects of Federal policy that are also relevant to
Puerto Rico's situation but fall into other committees' areas
of jurisdiction, including Federal labor policies, Federal laws
governing shipping vessels, bankruptcy law, and others.
However, I ask that our witnesses keep their focus on areas of
the Finance Committee jurisdiction. This is not, for example, a
hearing on chapter 9 of the Bankruptcy Code, or a hearing on
Puerto Rico's status as a territory.
And let me just say that I am concerned about Puerto Rico
very much. I do not think this country has done its job either
in helping Puerto Rico in doing some of the things that should
be done. Then again, Puerto Rico has brought a lot of these
calamities on itself. But I think there is blame enough to push
around on a lot of people.
[The prepared statement of Chairman Hatch appears in the
appendix.]
The Chairman. And with that, I wish to welcome all of our
witnesses, and I will now recognize our ranking member, Senator
Wyden, for his opening statement.
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Mr. Chairman, and thank
you for holding this hearing.
There are more than 3 million United States citizens living
in the Commonwealth of Puerto Rico, where long-standing
economic challenges have developed into a real and very
immediate crisis. No single policy or harsh austerity platform
is going to save the day. The solutions in Puerto Rico must be
focused first and foremost on helping its millions of American
citizens get ahead in the private economy and putting that
system on solid ground.
In order to accomplish that task, policymakers in
Washington and San Juan need to take a hard look at the origins
of the crisis. To move forward, you need an understanding of
what is holding you back.
The core of Puerto Rico's challenge is simply that the
Commonwealth, its public corporations, and other entities
issued more debt than they are now able to pay back. Without a
process for restructuring that debt, the problem does not go
away on its own. But just solving the immediate crisis is not a
long-term solution. You have to find ways to modernize and grow
the economy, or you find yourself right back here again.
For example, the Commonwealth's electric utility, which is
responsible for the largest share of Puerto Rico's debt, still
burns diesel fuel to generate power. By converting archaic
generators to use lower-cost, cleaner-burning natural gas, the
utility could make more money on the power itself. But that
type of conversion requires up-front investment, and Puerto
Rico cannot attract that investment without addressing the
immediate financial crisis.
Many engaged in this debate blame Puerto Rico's economic
struggles on the ending of an old tax policy that gave
corporations tax-free income in the Commonwealth. But in my
view, the history is a lot more complicated than that,
especially when it comes to taxes.
Companies based in Puerto Rico are foreign in the eyes of
the IRS, the same as if their headquarters were in Mexico,
China, or the U.K. But there is a major benefit that no other
foreign companies get, which is access to American incentives
for investments in research and development and manufacturing.
There are a lot of people who view Puerto Rico as a tax haven
tucked within the United States, and that is one reason why.
There are also other special breaks that are unavailable in
the mainland. For example, there is a longstanding policy known
in the tax world as the rum cover-over, which for decades
provided a big economic boost to Puerto Rico. But in recent
years, instead of being invested in roads or schools or health
care, the proceeds from the rum cover-over have mostly gone
straight to the large distillers.
And the Commonwealth's own tax policy has been less than
helpful as well. By some estimates, Puerto Rico collects less
than half of its sales tax. It recently put in place a program
to attract certain Americans and their firms by zeroing out
local taxes on capital gains, with no requirement that there be
a contribution to the economy. Under a local tax break known as
Act 20, service providers who move to the Commonwealth have
their corporate tax rate drop from 30 percent to 4 percent.
These strategies may appeal to some companies and attract
some wealth, but there is not a lot of evidence to suggest that
they are steering Puerto Rico's economy towards sustainable
prosperity. Scaling back or eliminating overly generous or
ineffective tax breaks ought to be on the table as part of any
long-term financial recovery plan.
Now in this debate, some have argued that Puerto Rico's
safety net programs are too generous and need to be rolled
back. For example, there is a belief among some that Puerto
Rico needs a lower minimum wage. But changing the law to cut
people's pay makes hardly any sense when American citizens in
Puerto Rico already make less than half as much, on average, as
those in the mainland United States. In addition, lowered wages
and putting new tatters in the safety net are going to drive
more young workers to the mainland, and you want those young
workers as an important and vital engine of future economic
growth.
The Medicaid program in Puerto Rico is less generous than
in the mainland U.S., and its capped funding system means that
it continues to face harsh spending limits that undermine the
ability to meet the health care needs of the lowest-income
American citizens. In addition, Puerto Rico is locked out of
one of the most successful pieces of the Medicare Prescription
Drug Program, which is the Part D low-income subsidy. The
people this hurts are already dealing with very limited means
on a daily basis.
A better funding system for Medicaid and improvements to
Medicare also ought to be on the table. Puerto Rico could adopt
an Earned Income Tax Credit to help raise incomes and encourage
employment. The Child Tax Credit could be a bigger help to more
families, and the Commonwealth could change its own tax
policies to make sure it is able to invest in education and
infrastructure in the years ahead.
It is important to move ahead with policies that amount to
more than what might be the policy equivalent of a momentary
sugar high. The bottom line is that the solutions have to help
Puerto Rico and its millions of American citizens build a
stronger economic future, or else this debt cycle will continue
and continue and continue.
Mr. Chairman, I want to also thank our witnesses. I am
going to have to be a little bit in and out this morning. I
hope to be able to hear our witnesses.
But I thank you, and my hope is that, here on the Finance
Committee, we can come up with a practical, bipartisan set of
policies to address these issues.
Thank you.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Well, we are going to count on your help,
Senator, and help from both sides to try to resolve this
problem. It is in the best interests of Puerto Rico and our
country.
I would like to take a few minutes to introduce our
distinguished panel of witnesses. Our first witness is
Congressman Pedro Pierluisi. The Resident Commissioner of
Puerto Rico since January 2009, Congressman Pierluisi has
served as Puerto Rico's sole member of Congress. He currently
sits on the House Judiciary and Natural Resources Committees
and, in the past, served on both the House Ethics and Education
and the Workforce Committees.
Congressman Pierluisi was born in San Juan and has 24 years
of legal experience in the private and public sectors,
including 4 years as the Attorney General of Puerto Rico. He is
a graduate of both Tulane University and George Washington
University Law School.
Our second witness is Ms. Melba Acosta, President of the
Government Development Bank for Puerto Rico. Ms. Acosta has
previously served as the Secretary of the Treasury Department,
Chief Public Financial Officer, Director of the OMB, and Chief
Information Officer of Puerto Rico, as well as the Chief of
Staff of the Municipality of San Juan.
She is a certified public accountant as well as an
attorney. Ms. Acosta earned a bachelor's degree in accounting
from the University of Puerto Rico, an MBA from the Harvard
Business School, and a J.D. from the University of Puerto Rico
School of Law.
Our third witness is Dr. Douglas Holtz-Eakin. We are always
happy to welcome him back to the committee. He is president of
the American Action Forum. Dr. Holtz-Eakin's long resume
includes his recent service as Commissioner of the
congressionally chartered Financial Inquiry Commission,
Director of the nonpartisan Congressional Budget Office, and
Chief Economist of the President's Council of Economic
Advisers.
He first began his career at Columbia University and later
worked at Syracuse University, where he became the trustee
professor of economics at the Maxwell School, chairman of the
Department of Economics, and associate director of the Center
for Policy Research. Dr. Holtz-Eakin currently serves on the
boards of the Tax Foundation, National Economists Club, and the
Research Advisory Board for the Center for Economic
Development.
Last but certainly not least, we will hear from Mr. Sergio
M. Marxuach. He is public policy director at the Center for a
New Economy. Prior to his current post, Mr. Marxuach served as
Deputy Secretary of Commerce and Economic Development for
Puerto Rico. Before that, he was an associate at the New York
law firm of Curtis, Mallet-Prevost, Colt, and Mosle, where he
worked in Latin American and international corporate
transactions.
Mr. Marxuach has a bachelor's degree in economics and
political science from Yale University, as well as a J.D. and
master's degree in foreign service from Georgetown University.
I really want to thank each of you for your participation
and your diligent work and service, as well as your comments
here today. I ask that each of you keep your initial remarks to
5 minutes. And we will start with you, Congressman Pierluisi,
and go from there. Is that all right?
Mr. Pierluisi. Yes, thank you.
STATEMENT OF HON. PEDRO R. PIERLUISI, RESIDENT COMMISSIONER OF
PUERTO RICO, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, DC
Mr. Pierluisi. Chairman Hatch, Ranking Member Wyden, and
members of the committee, the crisis in Puerto Rico is not new.
The 3.5 million U.S. citizens I represent have endured it for
many years. Based on any metric, Puerto Rico's economy has
lagged behind the States' for decades. The Puerto Rico
government spends more than it receives, leading to deficits
and debt.
My constituents are becoming your constituents in
unprecedented numbers. Between 2004 and 2014, Puerto Rico's
population declined by over 7 percent. The exodus is changing
the character of Puerto Rico and the composition of the
American electorate. To tackle the crisis, we must act with
boldness and vision. If we are faint-hearted, we will fail.
The core economic problem is lack of growth. So Puerto Rico
must implement a strategy to increase capital investment.
Government reform is essential. Puerto Rico has an inefficient
central government whose competence and credibility are
questioned by prospective investors. The government has
stifled, rather than unleashed, the private sector's potential.
Fiscal reform is also required. The Puerto Rico government
must live within its means and cut spending. It must modernize
its tax system, which requires some companies to pay 39 percent
and others to pay under 5 percent. Recently the government
increased taxes to support its excess spending. These taxes
must be repealed or refashioned.
Once Puerto Rico has an equitable tax policy, the
government must collect what it imposes, something it now does
poorly. Furthermore, the Puerto Rico government must ensure
access to affordable electricity, a modern transportation
system, and other basic infrastructure. Many of these services
are provided by public corporations that are in financial
distress, carry significant debt, and require reform.
The Governor of Puerto Rico has asserted that if Puerto
Rico continues on its present course, its $71 billion debt is
unpayable. But this course can and must change. With sound
economic and fiscal policies, the debt will become easier to
manage. Puerto Rico's Constitution provides that debt service
on bonds issued or guaranteed by the central government take
priority over other expenditures. These bonds must be paid,
period.
There are 18 government entities in Puerto Rico that issue
bonds. Each is in a different financial condition and has
different legal terms governing its bonds. Contrary to the
Governor's strategy, each should be considered on a case-by-
case basis.
Finally, the Governor has portrayed the debate about
whether Puerto Rico will meet its obligations to creditors as
``us versus them.'' The countless men and women from Puerto
Rico who own our bonds know better.
Like the people of Puerto Rico, Congress is right to expect
more from the government of Puerto Rico, but it would be the
height of hypocrisy for this committee to criticize Puerto Rico
without acknowledging the Federal Government's shared
responsibility for this crisis. The crisis is rooted in Puerto
Rico's undemocratic and undignified territory status.
Congress treats Puerto Rico in discriminatory fashion,
under numerous programs within this committee's jurisdiction.
My Senate allies and I have filed bills to address these
disparities, and the committee should act on them. Otherwise,
spare us the lectures about Puerto Rico's own failings.
This is not just a Puerto Rico problem; it is an American
problem requiring an American solution. If you treat us like
second-class citizens, do not expect us to have a first-class
economy. If you treat us in appalling fashion under Medicaid
and Medicare, do not claim surprise that our health care system
is in dire condition. If you exclude us from tax credits that
encourage individuals to work, do not add insult to injury by
attributing our low labor participation rate to generous
welfare benefits or urging our exemption from the minimum wage.
If you do not extend the SSI program to Puerto Rico and you
treat us unequally under TANF, do not express disbelief that
one in four Puerto Rico residents lives in extreme poverty.
I look forward to the day when my constituents have the
exact same rights and responsibilities as your constituents.
For Puerto Rico to prosper, it must be treated equally, and to
be treated equally, it must become a State. Until then, there
is much this committee can do to empower Puerto Rico. I urge
you to act.
Thank you.
The Chairman. Thank you so much.
[The prepared statement of Mr. Pierluisi appears in the
appendix.]
The Chairman. Ms. Acosta, thank you.
STATEMENT OF MELBA ACOSTA, PRESIDENT, GOVERNMENT DEVELOPMENT
BANK FOR PUERTO RICO, SAN JUAN, PR
Ms. Acosta. Thank you, Mr. Chairman, Ranking Member Wyden,
and members of the committee.
The fiscal, economic, and liquidity crisis in Puerto Rico
has passed the tipping point. The legislature has declared an
emergency. Puerto Rico has no access to the capital markets on
sustainable terms, and it endures a crisis beyond what any
jurisdiction in the United States has faced in generations.
The crisis threatens the health, safety, and welfare of the
3.5 million American citizens in Puerto Rico. It did not
develop overnight, but is the culmination of decades of ill-
advised policies both in San Juan and Washington, coupled with
a stagnating economy, seemingly unlimited access to easy
credit, and a market willing to lend.
Puerto Rico's economy was disproportionately impacted by
the financial crisis, and growth continues to pose a
significant challenge. In fact, unemployment remained above 15
percent for many years following the financial crisis, and is
currently at 11 percent. With today's labor participation rate
at only 40 percent, Puerto Rico's unprecedented economic
difficulties have contributed to rising budget deficits and
deficit financing.
Today, Puerto Rico has amassed $73 billion in debt and over
$45 billion in unfunded pension liabilities. Governor Garcia-
Padilla took office in 2013 and has been honest and forthcoming
about this crisis. He has forcefully responded to these
unprecedented challenges.
Since taking office, he has reduced the budget deficit by
raising revenues and cutting expenses; reduced general fund
expenses by almost 20 percent; imposed labor reforms across the
entire government, including freezing wages and salaries and
reducing payroll; imposed unprecedented cost-control measures
at the central government and public corporations; implemented
comprehensive pension reform to address Puerto Rico's unfunded
pension liabilities; pursued public-private partnerships to
promote investment on the island; and approved and overseen
ongoing debt restructuring negotiations at the Puerto Rico
Electric Power Authority, just to name a few.
Notwithstanding these difficult efforts, Puerto Rico faces
an immediate liquidity crisis. Earlier this year, it became
apparent that additional measures were needed, and Puerto Rico
commissioned a team of economists led by Dr. Anne Krueger,
former deputy managing director of the IMF, to undertake a
comprehensive analysis of Puerto Rico's challenges. Dr. Krueger
and her team identified a number of economic shocks that have
contributed to economic stagnation, recommended measures to
reverse negative economic trends, and highlighted the need for
debt relief.
In light of the report's findings, our Governor ordered the
creation of a working group to develop a Plan for Economic
Development and Fiscal Institutional Reform. The plan calls for
significant and challenging reforms across nearly all aspects
of the economy and government, including comprehensive private-
sector labor reform and dramatic cuts to expenditures and
operating subsidies.
It proposes legislation to create an independent control
board appointed by the Governor, with jurisdiction over
government entities in Puerto Rico to ensure compliance with
the plan. In addition, it also calls on the Federal Government
to act. This includes treating Puerto Rico equally in terms of
Medicare and Medicaid funding and providing Puerto Rico with
tax treatment that encourages investment and growth. And
finally, the plan recognizes that widespread debt relief across
the island is required, and proposes a voluntary exchange offer
to give Puerto Rico much-needed debt relief.
Achieving economic growth and avoiding a more chaotic
situation in Puerto Rico will likely depend on obtaining access
to a legal framework to address our liabilities in an orderly
manner.
In conclusion, I would like to reiterate that Puerto Rico
has passed the tipping point and faces an immediate liquidity
crisis. We have taken the important step of developing a clear
roadmap to address these challenges.
Reasonable minds may differ as to specific measures that
must be taken. However, the fact remains that Puerto Rico faces
immediate challenges that require Federal action. Most
importantly, Puerto Rico needs equal Medicare and Medicaid
funding and a legal framework through which it can adjust its
debts and address its financial difficulties.
I thank the committee for recognizing the urgency of the
situation and for giving Puerto Rico the opportunity to
participate in today's hearing.
The Chairman. Well, thank you very much.
[The prepared statement of Ms. Acosta appears in the
appendix.]
The Chairman. Dr. Holtz-Eakin?
STATEMENT OF DOUGLAS HOLTZ-EAKIN, Ph.D., PRESIDENT, AMERICAN
ACTION FORUM, WASHINGTON, DC
Dr. Holtz-Eakin. Chairman Hatch, Ranking Member Wyden,
members of the committee, thank you for the privilege of
appearing today. You have my written statement; let me make a
few brief main points.
The first, as has been pointed out, is that Puerto Rico has
a serious growth problem. Its GDP is expected to decline over
the next 10 years. Its unemployment rate is expected to remain
elevated in most forecasts. The population will continue to
decline, and those population losses are concentrated in the
skilled and prime-age working population. Their work
participation is low, and overall employment is expected to be
flat at best. And fundamentally, Puerto Rico is still operating
on a 1960s-style, government-led economic strategy, and that
needs to change.
Coupled with this, Puerto Rico has a deep fiscal problem.
It has run chronic deficits and is expected to continue to do
so in the future. Its borrowing costs, as a fraction of
revenue, have risen sharply and are now nearly double the 10
percent that most people consider a point of alarm.
It has a high level of debt relative to GDP, especially
when one compares it to other States. But its debt-to-GDP ratio
does not look high when compared to other sovereign debt crises
in the countries that got into them. And that, I think, is
instructive, because what it says is, we can look to the
experience of the IMF and other international bodies in working
out sovereign debt crises, and the experience particularly of
Latin America and South America, for guidelines on how to be
successful in Puerto Rico. And we know that the rough playbook
for success in situations of poor economic growth and very high
debt has some key components.
Component number one is to keep taxes as low as possible
and avoid sharp tax increases, which are detrimental to long-
term growth, and reform them, as the Congressman pointed out,
where appropriate, to be more pro-growth. That is part of the
playbook. And address the chronic deficits, largely on the
spending side, if at all possible.
But not all spending is created equal. You have to preserve
core functions of government, the investments and the education
that are central to long-term economic growth, and instead
focus on transfer programs as the mechanism for reining in
excess spending.
It is also important to liberalize labor and product
markets and to remove onerous regulations. I think there is a
good case to be made for that in Puerto Rico. And while I am
sympathetic to Ranking Member Wyden's concerns over the social
safety net, the minimum wage does stand out as an economic
impediment in Puerto Rico.
The ratio of the minimum wage to the median wage--so, sort
of how the minimum wage is relative to wages in the States and
territories--Puerto Rico is at about 77 percent. In all the
other States and territories, the next highest is 59 percent.
That is South Dakota and Guam, tied.
If you wanted to just get down to that 59 percent, you
would have to have the minimum wage go from $7.25 to about
$5.50. If you wanted to get Puerto Rico into the middle of the
pack of all States and territories, the minimum wage would have
to be $4.50. And so, as a matter of labor-market policy, I
think it has to be something that people think about.
And then lastly, you need to privatize where necessary. And
the key from the perspective of the near-term outlook is, if
one puts in place this kind of a credible program, access to
capital markets can be restored, bridge financing can
materialize, and you can pursue the rest of the reforms as you
go.
So those reforms--economic reforms, budgetary reforms--I
think, should be the centerpiece of discussions, and they
dominate any legal or process reforms that others might want to
pursue. You have to change the fundamentals on the economy and
on the budget.
And I thank you for the chance to be here today, and I look
forward to your questions.
[The prepared statement of Dr. Holtz-Eakin appears in the
appendix.]
The Chairman. Mr. Marxuach?
STATEMENT OF SERGIO M. MARXUACH, POLICY DIRECTOR, CENTER FOR A
NEW ECONOMY, OLD SAN JUAN, PR
Mr. Marxuach. Good morning, Chairman Hatch, Ranking Member
Wyden, and members of the United States Senate Committee on
Finance.
For the record, my name is Sergio Marxuach. I am the policy
director at the Center for a New Economy, Puerto Rico's only
not-for-profit, independent, and nonpartisan think tank. I
thank you for the opportunity to appear today before this
committee to discuss Puerto Rico's financial and economic
challenges.
Puerto Rico, usually invisible to the U.S. media, has been
in the news recently, especially since the Governor announced
that the island's public debt of around $72 billion, equivalent
to 103 percent of its GNP, was ``unpayable'' and needs to be
restructured.
The island, a U.S. territory since 1898, has experienced
severe economic problems for several years now. Its economy has
been contracting, or stagnant, at least since 2006, and
unemployment, poverty, and inequality levels are extremely
high, especially in comparison with the 50 States in the
mainland.
Furthermore, decades of fiscal and economic mismanagement
have engendered an economy characterized by chronic primary
deficits, high debt-to-GNP ratios, low employment levels in the
formal economy, an enlarging formal economy encompassing both
legal and illegal activities, significant government corruption
and predatory rent-seeking behavior in both the public and
private sectors, substantial tax evasion, a hollow productive
base, and high levels of private consumption and indebtedness
enabled by having access to a stronger currency than its
economic fundamentals would warrant.
In our opinion, the parallels with Greece are quite evident
for all to see and none to misunderstand. Notwithstanding this
dismal economic situation, the island managed to triple its
public debt from $24 billion in 2000 to $72 billion in 2015.
Indeed, during this period, Puerto Rico's public indebtedness
grew at a compounded annual growth rate of 7.6 percent, while
its income, measured by GNP, grew at a nominal rate of only 3.6
percent.
Given that Puerto Rico's indebtedness grew at an average
annual rate two times faster than the growth rate of its income
during the past 15 years, it should not be surprising that
Puerto Rico's public debt currently exceeds its GNP. To be fair
however, for decades the borrowed money was put to good use, to
finance the construction of public schools, hospitals,
highways, and other essential infrastructure. The problem is
that, during the last 20 years or so, a large portion of the
money borrowed by issuing long-term debt was issued to finance
budget deficits, operating expenses, and classic borrowed
spending.
We at CNE had warned for years--since 2006, actually--that
Puerto Rico's levels and rates of indebtedness were not
sustainable. In February 2014, the three principal rating
agencies ratified our analysis by downgrading the
Commonwealth's debt as well as the debt issued by several of
its agencies and instrumentalities to a speculative or non-
investment grade.
The rating downgrades had a material adverse effect on the
Commonwealth's finances, because they essentially shut down its
access to capital markets, at least capital at reasonable
rates. This at a time when the central government is still
running a sizable budget deficit, several of the Commonwealth
agencies and instrumentalities face significant maturities in
the near term, the economy is contracting at an estimated
annual rate of 1.2 percent, liquidity is running extremely
tight, and net out-migration has increased to levels not seen
since the 1960s.
Given the magnitude and multiplicity of challenges faced by
Puerto Rico, it should be obvious that there are no quick fixes
to solve the island's fiscal and economic problems. In our
opinion, what is needed in the short term is a two-pronged
action program, both at the Federal level and in Puerto Rico.
In Washington, Congress needs to implement a comprehensive
program, remove some of the disadvantages imposed on Puerto
Rico under the current political arrangement, and eliminate
some longstanding discriminatory policies. The current
situation simply does not allow for piecemeal action by
Washington. A wide-ranging plan is needed. Specifically, this
committee could introduce legislation on two issues that could
have a positive and significant short-term impact on both the
fiscal and economic growth parts of the problem.
On the fiscal side, the cost of the government health plan
is one of the principal drivers of Puerto Rico's budget
deficit. Providing Puerto Rico equal treatment under Federal
health programs such as Medicare, Medicaid, and the Affordable
Care Act would provide the Commonwealth with some much-needed
fiscal space to address a long-standing injustice inflicted on
Puerto Ricans. For the truth of the matter is that Puerto Rican
workers and employers pay the same payroll taxes as workers and
employers in the United States, yet benefits to Puerto Rico are
unfairly rationed by Federal legislation.
On the economic growth side of the equation, we recommend
extending the Federal Earned Income Tax Credit program to
Puerto Rico. The Federal EITC is the most effective anti-
poverty program in the United States. Recent research also
shows that it encourages work, promotes savings, helps poor
families smooth out the effect of unexpected financial shocks,
and builds a strong sense of future orientation among
recipients. Extending this program to Puerto Rico, which would
provide a significant wage supplement to Puerto Rican working
families, could be expected to stimulate aggregate demand in
the short term.
Outside the scope of this committee's jurisdiction, a
Federal comprehensive package could include approving
legislation to authorize the Puerto Rican government to allow
distressed agencies and municipalities to file for bankruptcy
under chapter 9, exempting Puerto Rico from coast-wide shipping
laws which require the use of relatively expensive U.S. vessels
for trade within Puerto Rico and the U.S. mainland, and
approving legislation to relax the overly binding income and
asset limits that apply to recipients of certain social
assistance programs in Puerto Rico.
This Federal assistance would be conditioned on Puerto Rico
in turn agreeing to increase tax revenues by improving
enforcement efforts, closing down ineffective tax loopholes and
modernizing its property tax system, cracking down on
government corruption, significantly improving its Byzantine
and unduly opaque financial reporting, reforming an
unnecessarily complicated permitting and licensing system that
stifles innovations, undertaking affirmative actions to
materially lower energy and other costs of doing business in
the island, and finally, substantially improving educational
standards.
In addition to all of the above, Puerto Rico unfortunately
also needs to obtain some debt relief. After years of relying
on accounting gimmicks, forward refundings, back-loaded ``scoop
and toss'' refinancings, capitalized interest payments, and
other short-term expensive liquidity fixes, the Commonwealth
has finally admitted that its debt is unsustainable.
While it is true--and I agree with Dr. Holtz-Eakin on
this--that Puerto Rico's capacity to repay its debt ultimately
depends on restoring economic growth in the island, there can
be no economic recovery without debt sustainability. And that
in turn is not possible without significantly restructuring at
least some of its debt.
In my written testimony, I mention some recent findings
about why that is necessary, but I am running--actually, I am
over time. I am going to skip that one.
Basically, a recent study by Carmen Reinhart finds that
softer forms of crisis resolution such as debt rescheduling,
temporary payment standstills, and bridge lending operations
were generally not followed by higher growth and better
ratings. And these crisis resolution tools were in general
ineffective in solving a debt crisis that has been dragging on
for years. Therefore, obtaining significant debt relief for
Puerto Rico appears to be a necessary condition to restore
economic growth on the island.
On the other hand, it should be obvious that obtaining debt
relief is not sufficient in and of itself to jump-start
economic growth. The important point in the case of Puerto Rico
is that any savings derived from a reduction in debt service be
used exclusively to advance and implement a renewed industrial
policy, broadly defined, based on horizontal policies such as
the ones described above; discovering new sectorial
opportunities through a process of dialogue and consultation
with key stakeholders in the island, both in the private and
civic spheres; and identifying spillovers, externalities, and
other areas where society could learn more.
This new learning, in turn, will lead to new investment in
research and development, increased productivity, identifying
new areas of comparative advantage for Puerto Rican firms,
higher economic growth, and the creation of high-quality jobs
which, at the end of the day, is what will categorically end
Puerto Rico's economic stagnation. We at the Center for a New
Economy are currently working with experts from Columbia,
Brown, MIT, and Brookings, among other institutions, to develop
this medium- and long-term industrial policy for Puerto Rico.
Finally, I would be negligent if I did not raise the
question of whether Puerto Rico has reached the limits of what
it can do to improve the quality of life of its people within
the constraints imposed by its subordinate political status.
Neither a sovereign country nor a State of the Union, Puerto
Rico has no authority to negotiate international treaties, no
access to emergency financing from multilateral institutions,
no monetary policy instruments, limited fiscal policy tools,
nominal representation in Congress, and the U.S. Supreme Court
has determined that it is constitutionally permissible for
Congress to discriminate against Puerto Rico in the application
of Federal programs as long as there exists a rational basis
for doing so.
Thus, Puerto Rico lives in a state of permanent limbo, a
status that is both humiliating to Puerto Ricans and unworthy
of the United States. Simply stating that it is up to Puerto
Ricans to decide their political status, while true, is
insufficient, because the U.S. Congress has longstanding legal
and moral obligations with respect to Puerto Rico that it has
failed to honor.
Congressional failure to act not only highlights a shameful
lack of political will, it also weakens the United States'
moral standing and jeopardizes its ability to effectively
utilize its soft power in the international arena when it
argues, for example, for better treatment for Hong Kong by
China, for the Palestinians by Israel, or for Greece by members
of the Eurozone. In this context, I would like to quote from
the remarks made just a few days ago by an extraordinary man
who came to this magnificent building to address a rare joint
session of Congress.
Drawing from a deep well of wisdom that has accumulated for
over 20 centuries, he stated, and I quote, ``Your own
responsibility as members of Congress is to enable this
country, by your legislative activity, to grow as a Nation. You
are the face of its people, their representatives. You are
called to defend and preserve the dignity of your fellow
citizens in the tireless and demanding pursuit of the common
good. For this is the chief aim of politics. A political
society endures when it seeks as a vocation to satisfy common
needs by stimulating the growth of all its members, especially
those in situations of greater vulnerability or risk.
Legislative activity is always based on care for the people. To
this, you have been invited, called, and convened by those who
elected you.''
In conclusion, Mr. Chairman, I thank you and the committee
once again for the opportunity to participate in this important
public policy debate, and I look forward to answering any
questions that you or committee members may deem appropriate to
ask.
Thank you.
[The prepared statement of Mr. Marxuach appears in the
appendix.]
The Chairman. Well, thank you, sir. The ranking member
needs to leave, so I am going to turn to him for his questions
first, then I will turn to Senator Grassley.
Senator Wyden. Mr. Chairman, thank you for the courtesy.
And let me ask the witnesses a question this way. It is not
exactly an atomic secret that it is a big challenge around here
to get bipartisan solutions to major issues.
Now, you all heard me say in my opening statement that I do
not believe that cutting large new holes in Puerto Rico's
safety net is part of a strategy for a long-term plan for
prosperity. I outlined that in my statement.
So I think I would like to go down the row and ask each of
you four distinguished witnesses to give an example in your
view of what Puerto Rico could work on with this committee, on
a bipartisan basis, to help move ahead. And let us just go
right down the row.
Congressman, I am very glad to have you here. I watched
your very fine work in the House, and we have talked. But you
understand the challenge. The challenge is to see if we can
find a way to move forward in a bipartisan fashion, the
government of Puerto Rico and colleagues on this committee,
where there are obviously different views. Let us start with
the Congressman.
Mr. Pierluisi. As you all know, I fight for equal rights
for the American citizens of Puerto Rico, equal political
rights and equal treatment in Federal programs. But I will be
very specific, to answer your question.
Something concrete you could do is to improve the treatment
of Puerto Rico under both the Medicaid and the Medicare
programs. And let me explain the impact that it would have.
Just changing the Medicaid program as it applies to Puerto Rico
so that it would cover our constituents up to 100 percent of
Federal poverty level, would give Puerto Rico, the government
of Puerto Rico, at least $1.5 billion more to deal with the
health needs of our population.
That would help Puerto Rico in terms of its liquidity
issues. It would help Puerto Rico in terms of balancing its
budgets. Because you have to understand, when you are talking
about Puerto Rico, you are not talking about Costa Rica or the
Dominican Republic. You are talking about American citizens who
can hop on a plane from one day to the next and move to the
States, if you are not treating them adequately, if they do not
have a decent quality of life. So that is being concrete.
The other program that you can deal with is Medicare. It is
atrocious that we have the same payroll taxes in Puerto Rico,
and there are disparities in the way the Medicare program
applies. Hospitals do not get paid the same. Medical providers
do not get paid the same, and Advantage Plans in Puerto Rico do
not get paid the same.
That money, hundreds of millions of dollars--more than
that--would be flowing through our economy, and it should. And
it would help the economy to grow, particularly the health
sector.
Senator Wyden. And as the Congressman and all of you heard,
I did talk specifically in my opening statement about Medicaid
and Medicare reforms. For purposes of this question, put
yourself in the position of trying to find support on that side
of aisle and this side of the aisle for the kind of reform that
will move us forward.
Ms. Acosta?
Ms. Acosta. Thank you. I think, in many important matters,
we--even with our political differences--can agree. And I
really would like to think that that is true. I totally agree
with the statement just made by Congressman Pierluisi.
The health matters in Puerto Rico, and not only the fiscal
matters, certainly, as he mentioned, would have a direct impact
on the finances of the government. But it is also a
humanitarian matter.
Right now there are physicians in Puerto Rico leaving the
island, there are elderly people not having the services. And
because of certain reductions, certain costs are going to
happen in January, more people are going to enter into the
government-sponsored program. That means we are going to have
an even larger deficit of $200 to $300 million.
In addition to that, when the ACA funds expire, that means
to Puerto Rico an additional $1 billion deficit of funds that
Puerto Rico is going to have, and we have to find them. So
certainly I totally agree with the Congressman's statements.
And I have to say, the problem in Puerto Rico is not
necessarily that we have too much debt, it is that we have too
much debt and we do not have growth. We need growth. We need to
create the growth, to increase the economy. We need to create
the jobs so people stop going out of Puerto Rico and actually
stay in Puerto Rico.
So certainly when we have talked about having a structure,
a regime, that could help us restructure our debt, what I mean
is that the debt is literally suffocating Puerto Rico. I mean,
people say that we have more expenses now. No, we are paying
more debt now than before.
Right now, our debt consumes our $1.5 billion in payments.
Years and years before, it was less than $600 million. So we
need a regime that could help us move forward, and that is why
we have been asking for chapter 9. And we agree, again, with
H.R. 870, which was another way in which we can agree, with
differences.
Senator Wyden. I am already over my time. Still, take the
lodestar as something that can be bipartisan with my
colleagues.
Dr. Holtz-Eakin. I can count on you to ask hard questions,
Senator, thanks. [Laughter.]
I think the number-one thing in solving a problem is to
actually be able to identify it, measure it, and track it. And
I think one of the very troubling aspects of this situation is
that there are not good, high-quality budgetary documents
prepared according to some sort of international standard that
provide a transparent way to see the financing problem. And
there has never been, to my knowledge, out of the various
reforms that have been proposed, a genuine debt-sustainability
analysis.
Those are things that this committee and Puerto Rico both
need, and I do not think those should be partisan issues. Let
us get better information, and let us guide the reform process
using standard tools of debt sustainability, not snapshots on
deficits and things like that, because that is the fundamental
problem.
And if a program is put in place that provides sustainable
debt, as I mentioned, the record is that that instills a lot of
confidence in investors. It opens capital markets. It will
bring in fixed investment into Puerto Rico. That is the growth
issue. Without that, there is no success.
So I know it is a process answer, but I think it is a
really important one.
And on the substance, just avoid the errors of the past,
right? Section 936, targeted tax breaks, triple tax
exemptions--those are not broad-based economic policies that
generate growth.
Senator Wyden. All right. One last witness.
Mr. Marxuach. Thank you. I think there is one Federal
program that has broad bipartisan support outside of defense
and security appropriations. It is the Earned Income Tax
Credit. I cannot think of any other Federal legislation since
the mid-1970s that has been both adopted and improved by both
Republican and Democratic Presidents and Congresses.
In terms of the impact it would have in Puerto Rico, it
would provide a significant wage supplement to Puerto Rican
workers, to the hardest-hit poor families in Puerto Rico, and
that would have a short-term stimulus on aggregate demand.
It is not a fix-all-be-all, but in the short term, it is
one of the few things that I think would both obtain support
from both sides of the aisle and help the Puerto Rican economy
in the short term.
Senator Wyden. One of the reasons I mentioned it in my
opening statement--and I thank Chairman Hatch for his
courtesy--is because that program, of course, had Republican
roots. That is something that clearly does fit this kind of
litmus test.
Mr. Chairman, again, thank you for your courtesy, and I
look forward to working with all our colleagues to try, as my
question suggests, to work on a bipartisan basis to actually
get something done.
Thank you, Mr. Chairman.
The Chairman. Thanks, Senator.
Next, Senator Grassley, and then I will ask my questions.
OPENING STATEMENT OF HON. CHUCK GRASSLEY,
A U.S. SENATOR FROM IOWA
Senator Grassley. Thank you for your courtesy, and thank
you for holding a very important hearing, Mr. Chairman.
During the summer, I have had several meetings with people
with different points of view on Puerto Rico, including the
political leadership of the community. And I would prefer to
just make a statement now so you know kind of where, as
chairman of the Judiciary Committee, I am coming from. I will
continue to be open to discussions in the future as well. So I
will take a few moments to make these points.
Puerto Rico's debt crisis did not happen overnight. It has
been years in the making. Puerto Rico now has one of the
largest deficits of all municipal governments in the United
States.
The Krueger report explains that the root cause of this
problem is decades of stimulus spending and economic
stagnation. Instead of making difficult decisions to cut
spending and balance its budget, the government kept borrowing
to finance its operations using tax-exempt bonds to roll over
debt coming due.
Finally, as we know and we have been discussing here, the
game is up. As the Governor has said, debt is not payable and
must be restructured. Now Congress is asked to step in and
address Puerto Rico's debt situation.
No doubt a comprehensive approach is needed to restore
fiscal balance and economic growth. Puerto Rico's debt is not
sustainable without growth, and growth is not possible without
local and Federal structural reforms. The government's fiscal
and economic growth plan aims to provide a roadmap that
achieves these goals. The plan asks Congress for meaningful
help to restore economic development.
One proposal is to extend chapter 9 bankruptcy to Puerto
Rico so that its municipalities can restructure their debt.
Chapter 9, though, would only affect certain debt, as it is not
applicable to the sovereign constitutional debt,
constitutionally protected General Obligation bonds.
As with any single proposal, chapter 9 alone will not solve
Puerto Rico's financial problems. Therefore, if we agree with
the experts that structural reforms are critical to growth,
then Congress should work to help Puerto Rico help itself.
We should consider exempting Puerto Rico from the Jones
Act, which limits competition and raises the cost of living for
island residents. Congress could also exempt Puerto Rico from
the Federal minimum wage, which New York Times columnist Paul
Krugman has stated is too high for Puerto Rico. Full-time
employment at the minimum wage is equivalent to 77 percent of
per capita income versus 28 percent here on the continent.
Thus, eliminating the Federal minimum wage mandate would help
grow Puerto Rico's economy.
However, congressional help without meaningful reform by
the Puerto Rican government will not work. Puerto Rico needs to
tackle difficult problems as part of any serious growth policy
reform. Critics, however, of the government's plan argue that
proposals do not go far enough. There is no mechanism to ensure
that the proposals are ever implemented, and a local control
board, if one is ever created, will be ineffective due to local
politics and pressure.
Perhaps then a Federal financial control board should be
part of a comprehensive approach to remove obstacles to certain
fiscal reform, like the fact that the government employs almost
25 percent of Puerto Rico's workers.
Historically, these oversight and control boards--which
Congress created, for instance, in New York City probably 35
years ago, the District of Columbia more recently--have shown
success.
At the end of the day, it is likely that neither Congress
nor Puerto Rico alone can solve this crisis, but now is the
time for Puerto Rico to have the will and the courage needed to
make difficult decisions so that this debt cycle is never again
repeated, or otherwise anything that Congress might do would be
of little avail if things do not change where the problem was
created.
I yield the floor.
The Chairman. Thank you, Senator.
I think I will claim my time now, at this point.
Dr. Holtz-Eakin, this question is for you. I have heard
frequently from a number of people that employers and workers
in Puerto Rico pay the same Federal payroll taxes that are paid
in the States, and that Puerto Rico's Medicare beneficiaries
pay the same premiums, yet at the same time, the Medicare
program treats hospitals, insurance providers, doctors, and
patients in Puerto Rico differently than they are treated in
the States.
Now many, including a number of Senators, have claimed that
this is unfair and should be rectified. Given your knowledge of
our health care laws and rules and the various Federal health
programs, do you agree with the claim that people in Puerto
Rico pay the same taxes as in the States with respect to
Medicare, but are treated in an unequal fashion?
Dr. Holtz-Eakin. Well fairness, obviously, is in the eye of
the beholder, but I will just point out that Medicare Part B,
Part C, and Part D are 75-percent financed out of general
revenue and not out of payroll taxes or premiums. And that
means that they are financed by income taxes. So Puerto Ricans
do not pay income taxes, and so they do not contribute fully to
the financing of the Medicare program.
There is no dedicated payroll tax for Medicaid, and so it
is all out of general revenue at the Federal level. The same
situation arises there, so there are not equal contributions
in, and then it is up to the Congress to set the rules for what
the support levels will be going out.
The Chairman. Well, let me ask you--maybe you and Mr.
Marxuach--another question.
Looking at Puerto Rico's economy, analysts at the Federal
Reserve Bank of New York have identified a number of challenges
and recommended that Puerto Rico take a number of steps to
promote growth and improve the overall health of the island's
economy. These steps include reducing barriers to job creation
and labor force participation, reforming the island's energy
industry, lowering the cost of doing business, and partnering
with industry in promoting independent policy evaluation by
producing better data.
And like most reasonable people, I believe that Puerto Rico
faces a number of specific economic challenges, and that these
challenges will not go away if the strategy is simply to shave
obligations to debtors and obtain more Federal tax incentives
or funds for various benefit programs.
So, in looking for pro-growth policies that can promote
economic activity in Puerto Rico, I wonder if you could tell
me, both you and Mr. Marxuach, what you believe are the
comparative advantages in Puerto Rico that should be built upon
to stimulate growth, and what ideas you might have to
accomplish this goal.
Dr. Holtz-Eakin. Go ahead.
Mr. Marxuach. Well, we are actually working on that right
now, Senator, as I mentioned in my testimony, with a group of
experts at Columbia University and Brown and other places.
Puerto Rico does have some advantages in having a fairly
highly educated workforce, a bilingual workforce. Our
geographic position traditionally has been an asset that I
think has been under-utilized by Puerto Rico.
There are opportunities in areas like research and
development of new medicines that we are undertaking right now.
We need to do a lot more there, especially drugs that affect
certain population groups, especially Hispanics and Latinos, in
our case.
Also, there is a lot more that can be done in terms of
research and development of green energy initiatives. Puerto
Rico has a great engineering school. Again, that has been
greatly under-
utilized. We lose a lot of graduates from those schools to,
basically, Fortune 500 companies.
There is a lot more we could be doing in tourism, believe
it or not. Tourism as a share of the economy is still a
relatively low part of our GNP. The problem there is that we
cannot compete on a cost basis. Of all the low-income Caribbean
islands, we have to target--and to be fair, some efforts have
been done in this area--more high-end kind of tourists who are
looking for a different experience.
So we do have some advantages. What we are lacking is a
comprehensive strategy to implement it over the medium to long
term, with specific milestones and objectives that we can
measure along the way. And also, to be fair, we in Puerto Rico
have in some sense created this problem by not following up or
following through on what past administrations have done.
We do suffer from what--it is in the literature--I will
call a refounding syndrome. Every party, or every new Governor
who comes in, seems to believe that whatever was done by the
previous administration is illegitimate or in some way invalid.
So they take it upon themselves basically to destroy whatever
was contracted by the previous administration. And obviously
this has hurt our ability to grow.
But yes, there are areas we can exploit and----
The Chairman. My time is up, but let me have Dr. Holtz-
Eakin's answer.
Dr. Holtz-Eakin. I would be happy to get back to you with a
longer answer, but just to pick up on some of the key items,
first of all, the New York Fed has it exactly right on the need
for reforms.
And I think an emphasis on tourism is entirely appropriate,
given the location and other advantages. The complaint will be
that those are not high-wage jobs, but you cannot support high-
wage jobs, given what is going on in Puerto Rico right now.
The areas that have the opportunity to grow those are in
medical science and health, where there are already existing
footprints; in aerospace, which has a footprint. And in
general, Puerto Rico needs to build on all of those and have a
diversified strategy and not one that is pinned on a single
policy or industry.
The Chairman. Senator Schumer, you are next.
Senator Schumer. Yes, thank you, Mr. Chairman. I want to
thank you and Ranking Member Wyden for holding this hearing to
discuss the dire economic and financial situation in Puerto
Rico.
There are 3.5 million Puerto Ricans living on the island
today, another 5.2 million in the United States, including over
1 million in my home State of New York. Sadly, as the economic
situation in Puerto Rico has deteriorated, residents have felt
the need to flee their homeland.
This population shift from the island to the mainland will
continue as long as their economic situation worsens, until the
only ones left are those who do not have the resources or
ability to move. And at that point, we will have a humanitarian
crisis on our hands as well, if not before.
We have a basic American responsibility to aid all American
citizens in times of crisis, regardless of where they live. And
beyond that basic imperative, if we fail to offer Puerto Rico
assistance now, this problem will not be contained to the
island.
We need to be concerned with these issues not only because
Puerto Ricans are part of the American family and deserve the
quality of life that we all expect, but because a failure now
would ultimately result in a Puerto Rican financial crisis that
could become a drag to our entire economy.
So I have introduced legislation to address several of the
most pressing issues facing the people of Puerto Rico,
including the legislation to allow Puerto Rico to access
chapter 9 bankruptcy protections. I did it along with my
colleague, another chief sponsor, Senator Blumenthal of
Connecticut.
Because there are many factors that have and continue to
contribute to the economic situation, I have some questions for
our panelists.
First, I want to ask----
Senator Nelson. Would the Senator yield for 10 seconds?
Senator Schumer. Sure.
Senator Nelson. The statement that the Senator from New
York has made applies to the State of Florida as well. A
million Puerto Ricans, if we do not solve this problem, will
move to New York and Florida. So I thank the Senator for
raising this issue.
Senator Schumer. Thank you. Frankly, I have been
disappointed by the lack of urgency of many of my colleagues in
taking up and supporting this important piece of legislation.
I have heard a lot of excuses and justifications for this
inaction. I have heard others say the legislation will not
solve a fiscal crisis in Puerto Rico and we must come up with
other solutions. Well, I agree. It is not the only solution.
I have never said that this one piece of legislation is the
salve that cures all of Puerto Rico's wounds, and I believe we
must continue to work towards finding the policy solutions that
will help Puerto Rico address economic issues in the long term,
and I have introduced other bills to do that. But providing
Puerto Rico with access to chapter 9 bankruptcy protections is
not only the equitable thing to do, it is an incredibly
important resource that can help Puerto Rico address its
current fiscal crisis in the near term. It is not a silver
bullet, but it helps and is needed dramatically. This is not an
esoteric debate. The Puerto Rican people cannot wait any
longer.
So today I am sending a letter with colleagues to Chairman
Grassley of the Judiciary Committee urging Mr. Grassley at the
very least to hold hearings on the upcoming piece of
legislation. We have to move the process forward and hold a
hearing and, hopefully, a markup shortly thereafter.
And one other issue before I ask my questions: health care
is another great issue affecting us.
As was mentioned, Puerto Rico is treated differently in
several key health care programs: Medicare, Medicaid, and under
the ACA. Some examples are, Part B: beneficiaries in Puerto
Rico are not automatically enrolled in Part B; they have to opt
in. Part D: low-
income beneficiaries in Puerto Rico cannot afford to pay for
their medicines, and they do not get assistance through the
low-income subsidy program. Physician payments under Medicare:
Puerto Rico has the lowest payments of all the States, even
though they do not have the lowest cost of living. Medicaid:
Federal funding for Medicaid in Puerto Rico is capped. And so
I, along with Representative Pierluisi, have introduced a bill
that would address all these inequities.
The bill is called Improving the Treatment of U.S.
Territories Under the Federal Health Care Programs, and it has
four co-
sponsors whom I am proud to have on the bill: Senators Menendez
and Nelson, who are here today, and Senators Blumenthal and
Gillibrand.
So these are my two questions to, particularly, our two
representatives of Puerto Rico who are here today, and we
welcome them. Can you explain how access to chapter 9 would be
a particularly useful tool to deal with some of the issues
facing Puerto Rico in the near term? And just talk a little bit
about how the people of Puerto Rico feel about the unfair and
inequitable medical treatment under Medicare and Medicaid and
our other programs--to both Representative Pierluisi and Ms.
Acosta.
And I am finished.
Mr. Pierluisi. Senator Schumer, thank you; thank you so
much for introducing both pieces of legislation. I have
counterpart legislation in the House, as you know.
I previously addressed the Medicaid and Medicare issue, so
I will now address, for the sake of time constraints, the
chapter 9 issue.
It is not a panacea. I have never proposed it that way. In
fact, I do not like talking about bankruptcy insofar as Puerto
Rico is concerned. I do believe that our debt is payable. You
might need to restructure, of course, where we have to, in
particular cases.
One example is the Puerto Rico Electric Power Authority,
the public utility. It has been under an indulgence agreement
with its creditors for now a bit more than a year. So clearly
it has not been able to pay its debts as they become due. Now,
negotiations are ongoing, but there is no chapter 9 available.
Perhaps you do not need to use chapter 9, but you should
have it available. There is no principled basis for not giving
access to Puerto Rico to chapter 9 of the Bankruptcy Code. We
had it for 45 years, and then for no reasons explained in the
Congressional Record, we were left out. The life of a
territory----
And since then, now that we could be using it, now that our
Legislative Assembly could be saying the Power Authority should
be eligible to go to Bankruptcy Court and seek to reorganize
itself, we are helpless. It would assist even in the process of
negotiations, because it would foster fair negotiations to have
chapter 9 as a backup.
So it is a very practical thing to propose. Not that I am
proposing bankruptcy, simply that we should have the same
treatment as the States do in the mainland.
Senator Schumer. Ms. Acosta?
Ms. Acosta. Yes. Certainly having a mechanism to deal with
our debt--it is an extremely urgent matter. And you mentioned
that it is an urgent matter.
I mean, Puerto Rico is having a liquidity crisis. We have
been able to run the government by taking one-time measures
that cannot be repeated. So we are in the process right now, as
you know, of asking our creditors to sit down at the table and
do a consensual agreement with us, because we do not have
chapter 9.
The example of the restructuring of the electric company is
just the best one. We have reached an agreement with almost
half of the creditors, but there is another half that has not
come to the table.
The problem here is timing. We need to have a solution
soon, because we are running out of money. As the Governor
mentioned, we are starting this process, and the idea is to
respect the differences between the General Obligation bonds
and COFINA.* So that process is going to take some time. But if
we had chapter 9, it could be a faster process.
---------------------------------------------------------------------------
* Corporacion del Fondo de Interes Apremiante, also known as the
Puerto Rico Sales Tax Financing Corpration.
---------------------------------------------------------------------------
And I agree, maybe we do not have to use chapter 9, but
just having the tool is going to really, really help us. As I
was saying before, Puerto Rico has a large amount of debt, but
Puerto Rico has no growth. So every year a larger amount of our
budget is going to pay debt. We pay more money to pay debt, we
put in more money to the pension plans, more money to the
health care, and then the operations of the government are
actually being reduced.
There is a point at which we have to decide whether to
provide basic services to our citizens--security, health,
education--or to pay our debt. And what we are saying is, come
to the table, bondholders, sit with us and try. It is best for
everybody, even for them, for Puerto Rico to move forward and
have growth.
So certainly, having a regime, a chapter 9 regime, is going
to really help us. And as I said, I want to mention that we
have a liquidity crisis. We are keeping the government open,
but it certainly is taking some time.
In regard to the health matter that you mentioned, I
totally agree. In both cases, in chapter 9, on the Medicare and
Medicaid issue, it is a matter of fairness. It is a matter of
saying, why do all the States have access to chapter 9 and
Puerto Rico does not? Why do the American citizens living in
the States not have caps on Medicare and Medicaid, and Puerto
Rico has those caps on?
It is not only a fiscal matter. It is also, as I mentioned
before, a humanitarian matter. So thank you.
Senator Schumer. Thank you.
The Chairman. We will turn to Senator Menendez.
Senator Menendez. Well, thank you, Mr. Chairman, and I
appreciate you holding this hearing on a critical issue--as we
just heard, a crisis--that affects 3.5 million American
citizens.
And I like to keep reminding everyone that Puerto Rico is
not a foreign country. Because I was shocked, when I was in the
House of Representatives, that I would have members of the
House of Representatives come and ask me whether they needed a
passport to visit Puerto Rico. That is true. That is true.
And that mentality is appalling, considering the fact that
Puerto Ricans have fought and shed blood for American ideals
and values in every war since World War I. Among the most
decorated in the military history of the United States was an
all-Puerto Rican division during the Korean War, the 65th
Infantry Division.
So it is amazing to me that we have this attitude as if
Puerto Rico is some foreign country and this is about foreign
assistance. This is about--if the 3.5 million citizens of the
United States who happen to call Puerto Rico home came to the
United States, they would be able to vote. They would have all
of the obligations, but also all of the benefits, of American
citizenship, certainly in their health care, among other
things.
And unfortunately, we are seeing a significant number of
them. I see them in my home State of New Jersey. We have a long
history of a sizable Puerto Rican population in our State, but
they are coming in significant numbers because there is not, in
many of their minds, a light at the end of the tunnel.
So they are citizens of this great country, just as much as
you and I, Mr. Chairman, and therefore that means we have a
responsibility of not turning it from a crisis into a full-
blown tsunami.
Now certainly, identifying the causes of the problem are
important. There is no question in my mind that local fiscal
decisions over many administrations have created a part of the
challenge. They played a significant role, and I recognize
that.
I also recognize this crisis did not happen overnight. I
believe the current administration inherited many of these
problems and has taken a number of significant steps to improve
the situation. And I believe--as I have worked with Congressman
Pierluisi, who has done such an outstanding job in this
regard--that the inequities at the Federal level have
significantly contributed to the problem we face today, as he
eloquently spoke of.
So we have not only a role but a responsibility to help
meet this challenge.
Now, I think there is no good reason why Puerto Rico should
not have equal access to chapter 9. I do not believe it is a
panacea, but to the extent that you can get people to come
negotiate with you in good faith, if they know chapter 9 is
available, then all of a sudden we have a process to negotiate
which would enable them to restructure a portion of their debt
in an orderly, legal, and efficient manner.
Puerto Rico is included in nearly every other aspect of the
Bankruptcy Code, and only lost access to chapter 9 after an
obscure and non-debated provision was slipped into a larger
bill in 1984. Now, I do not have the time here to get into why
that happened, but there were reasons.
Now, I am a sponsor of the legislation that Senator Schumer
talked about to correct this inequity. And I understand that is
outside of the committee's jurisdiction, but so many of the
things that we are talking about here, without the ability to
orderly reorganize, are going to be virtually impossible, at
the end of the day. So I think that is incredibly important.
I think there are enormous inequities in health care, and I
have been dealing with that on this committee for some time. I
have offered several efforts here. We skipped over the Puerto
Rican hospitals in terms of health care technology, and
everybody admits it was a mistake. But we have not helped them
correct the mistake, despite our efforts to do so.
You know there are several bills that I have introduced to
address these health care inequities, most recently with the
Improving the Treatment of U.S. Territories Under Federal
Health Programs Act of 2015, which is S. 1961. This is a
comprehensive bill that includes provisions ranging from
ensuring the island has equitable and sustainable Medicaid
funding to changes to Medicare to ensure equity to hospitals,
physicians, and seniors on this island.
I think, Dr. Holtz-Eakin, when asked a question about how
do we get growth, one of the things you said was, having a more
significant, sustainable health industry in the island. Well,
it is going to be difficult to achieve that if you cannot be
reimbursed in an equitable way.
And several of the bill's provisions do not even require a
legislative fix, which is what is really alarming here. If we
wanted to help Puerto Rico, CMS is capable of finding an
alternative way to calculate Medicare Disproportionate Share
Hospital payments to account for the fact that Puerto Ricans do
not have access to SSI, and to adjust payments in Medicare
Advantage rules to more accurately reflect the situation facing
plans on the island. That could be done by CMS. Those policy
changes do not require any new legislation and would have a
substantial impact on the health care system in Puerto Rico.
Another area where U.S. citizens living in Puerto Rico are
treated unfairly is in the refundable tax credits. As the
Resident Commissioner noted in his testimony, Puerto Rico is
partially excluded from the Child Tax Credit and completely
prohibited from receiving the Earned Income Tax Credit. With a
labor participation rate that is significantly below the
mainland's, we should be doing everything we can to incentivize
work, which is exactly what the EITC does.
And it makes no sense that an American citizen living in
Puerto Rico is ineligible for the EITC, yet if the same citizen
moved to the mainland, they would be able to benefit, even
though they would have an identical Federal tax liability.
And taken together, I think these common-sense steps would
help pull Puerto Rico back from the brink of collapse. They
would create an opportunity to set the stage for economic
growth and give the government a fighting chance to dig out of
this hole.
Now, finally, Mr. Chairman, I have heard some other
suggestions, such as driving down the wages for Puerto Rican
workers. I believe these suggestions are shortsighted and
counterproductive. They will only exacerbate the problem.
The poverty rate in Puerto Rico is approximately 45
percent--45 percent--and the per capita income is one-third of
the mainland average, with 37 percent of the population relying
on nutritional assistance just to eat. Just to eat. It seems to
me that the last thing Puerto Rican workers need right now is a
pay cut.
I know that people look at section 936 and say that that
was a mistake. Well, we have Enterprise Zones; we have
Empowerment Zones. States all across the country are offering
tax breaks in order to create investment and growth.
So we have to look at all of this in the totality for the
3.5 million citizens who have served this country, who still
serve this country. If you go with me, Mr. Chairman, to visit
the Vietnam Memorial, you will see a disproportionate number of
Latino names and a disproportionate number of Puerto Rican
names on that wall.
So this is about doing the right and moral thing by 3.5
million American citizens, and I will look forward, beyond this
hearing, to some action, both by this committee and, hopefully,
the Judiciary Committee, as we work together to ensure a
greater future for the people of Puerto Rico.
And my questions were answered by members of the panel. I
appreciate their testimony.
The Chairman. Thank you, Senator.
Senator Nelson?
Senator Nelson. If you boil this down, it is a matter of
right and wrong. It is a matter of fairness.
All along the last decade or so, Puerto Rico has suffered
economically as a result of policies of the United States
Government: the loss of the major military installations and
the financial boost that they gave to the island, the loss of
some of the pharmaceutical companies because of that position
expiring, and now a change in the law that has been on the
books since 1984 with regard to the crisis that we are facing.
And it is simply not fair.
I think Senator Menendez and Senator Schumer, who have
preceded me in their comments, have spoken of things that I
would associate myself with. And of course, my State of Florida
has a huge population, estimated at a million, of
puertorriquenos all over Florida, but a lot who are
concentrated in the Orlando area.
Now I wonder, if we do not solve this problem, whether it
is the health care problem--Medicaid, Medicare Advantage--if we
do not solve the bankruptcy problem and things just rock along
like they are, how many more American citizens residing in
Puerto Rico are going to move to the mainland?
And you know what that means. They are coming to places
like New York and Florida, and, of course, we are glad to have
them. But what degree of expertise and educational population
is going to move from the island to the mainland? That is not
good for Puerto Rico.
Congressman, do you want to comment on that?
Mr. Pierluisi. Very much so. See, there is consensus here,
Mr. Chairman, that the worst problem Puerto Rico is facing is
lack of economic growth. And a related aspect of that is the
loss of population.
It is very hard, if not impossible, to grow if you are
losing population, and we are losing population to the tune of
about 1.5 percent net per year now, for more than 10 years.
They are leaving, yes, to places like Florida. And why? That is
the question. They leave because of lack of good quality of
life. They are leaving because of lack of jobs. They are
leaving because of lack of good-
paying jobs.
And for some to suggest that we should have a lower minimum
wage does not make sense to me. If you lower the minimum wage
in Puerto Rico, you will be giving the people of Puerto Rico an
additional incentive to leave. The cost of living in Puerto
Rico is comparable to the one in Florida. If you lower the
minimum wage in Puerto Rico, you are basically giving people an
incentive to simply rely on welfare benefits. It makes no
sense.
We should stop treating Puerto Rico differently. We should
treat Puerto Rico equally. That is a long-term plan that would
make sense.
And I have to react to Dr. Holtz-Eakin's comment about
Puerto Ricans paying payroll taxes but the Medicare program
being 75 percent funded by general revenues. Well, let me
remind the members of this committee as well as Dr. Holtz-Eakin
that close to one-half of U.S. households in the mainland do
not owe Federal income taxes, and nobody is suggesting removing
them from programs like Medicare, Medicaid, and so on.
It is a policy reason why we are not paying Federal income
taxes, but at the same time there is a policy reason for
excluding us from a lot of Federal programs.
So we have to be smart about this. We have to make sure
that in Puerto Rico we have a decent quality of life, and that
involves health programs. That involves having, for example,
participation in the Earned Income Tax Credit and Child Tax
Credit programs, like Mr. Marxuach was suggesting.
Because when you look at them all, what you are doing is
improving the quality of life in Puerto Rico. They are fellow
American citizens. You should not be looking the other way. You
should not be ignoring us. If you do so, you do it at your own
peril.
The Chairman. Well, thank you. Thank you, Senator Nelson.
Dr. Holtz-Eakin, you have heard these comments from a
variety of people here. Do you have any comments you would care
to make to help us to understand this better and what we should
be doing about the inequities that appear to exist that have
been made in formal complaints?
Dr. Holtz-Eakin. So on health spending, it has many
dimensions, and it is important to think clearly about what
additional spending would do. Additional health spending by the
Federal Government into Puerto Rico is not a pro-growth
strategy. You do not generate long-term economic growth by
having health spending. It is a desire to consume something,
not to generate saving investment.
The Chairman. It may be good, but it does not necessarily
create jobs.
Dr. Holtz-Eakin. It is not going to do that. It might
relieve some budgetary pressure, but so would Federal checks of
any type. So the real question is, as a matter of health
policy--objectives in population health, objectives in
reimbursement rates for providers and others, on hospitals--do
you want to modify these programs? That is the issue.
But do not confuse it as sort of solving the budgetary and
growth problems, which are the core problems in Puerto Rico. So
that is, I think, something just to be very clear about when
you analyze the problem and the solutions you come up with.
The Chairman. All right. Ms. Acosta, let me ask you--I have
a couple of questions. They are asked for good purposes, but I
would like to have your response.
I understand that there are roughly 17 or 18 different
debt-issuing entities involved in Puerto Rico's indebtedness,
and some have put the amount of indebtedness at around $73
billion. It has also been reported that the debt has roughly
doubled over the last 15 years or so. In fact, you have kind of
indicated that, some of you here today.
And we have been told that some of Puerto Rico's debt could
be restructured, and that some of it involves General
Obligation bonds with certain protections under Puerto Rico's
constitution, as well as some debts of municipalities.
Now, I have several questions about the scale and scope of
this debt. I will read through them all first and then give you
a chance to respond.
First, what is the best and most accurate source we can go
to in order to find a clear and perhaps audited picture of
Puerto Rico's government or government-backed indebtedness: who
the debtors are, how much debt each of them has issued? I would
like to know that. Maybe I should ask these separately. What
about that? Where do we go to get the clear and perhaps audited
picture, preferably an audited picture, of Puerto Rican debt?
Ms. Acosta. Yes, the Government Development Bank, which is
the entity that I preside over, is the fiscal agent for the
government. And we issue actually a quarterly document that we
file with our legislature which contains all the debt that
Puerto Rico has.
As you very well mentioned, we have, just to give an
example, GOs, the General Obligation debts. We have guaranteed
debts; they are not GOs, but they are guaranteed, which is
similar to GOs. We have the debt from all the public
corporations, the ones that we know and even others that I, no
doubt, would know. We have COFINA pay for sales tax,
municipalities' debt, GDB's own debt. So actually we issue a
report quarterly with all the different issuers, all the debt.
The Chairman. I would like you to help the committee and
send us material, if you can, on the debt so that we at least
understand that.
Ms. Acosta. Sure. Sure.
The Chairman. This has to be done right away, because you
have been indicating that you are going insolvent in November,
I guess.
Ms. Acosta. We are. We are. Definitely, I will be more than
happy to send you the information.
The Chairman. Thank you.
Ms. Acosta. Yes, certainly.
The Chairman. Number two, what is there to show for the
resources that were borrowed, coupled with nearly $3 billion
Puerto Rico received from the Federal stimulus and more than $6
billion of Medicaid relief funding provided in the Affordable
Care Act?
Ms. Acosta. Yes, the monies provided by the Affordable Care
Act actually reduced the amount that the Puerto Rican
government was basically putting in the budget from our own
monies. The amount coming from the general fund, which is our
own funds, was reduced when we received the ACA, and certainly
ACA has been a huge relief for Puerto Rico. That is why the
cliff that is coming in 2018 is going to create a large budget
problem.
In regards to the American Recovery and Reinvestment Act
funds, ARRA funds were----
The Chairman. Let me get that right. You merged those funds
with your general funds?
Ms. Acosta. No, no, no. We do not merge.
The Chairman. I did not think that----
Ms. Acosta. We have the health plan that is provided by the
government to the citizens of Puerto Rico.
The Chairman. So that is where you put the monies?
Ms. Acosta. It helped to pay the health plan, exactly. It
helped to pay the health plan that we provide to the citizens,
along with general funds, monies from the Governor of Puerto
Rico.
The Chairman. All right. The third question I have is, do
you and others associated with the government in Puerto Rico
intend to improve the transparency and availability of
financial and economic data related to Puerto Rico's government
finances and the health of its economy? If we do not get really
well-audited figures, it is going to be pretty hard to help
here. I want to help you; I do not think Puerto Rico is treated
fairly, for the most part.
So my goal is to help you, but we are going to have to have
real figures. We are going to have to have really good
information from you in order to help you.
Ms. Acosta. Yes. We totally agree with you that our
information is not the best information it can be, and
certainly that is why the fiscal plan that we put together
actually is investing money in changing our system.
Part of the plan is that--the systems that we have are very
old, and the Treasury Department, which is the entity in charge
of all the expenses and revenues, actually right now is
acquiring a totaly new system.
We are putting in new data and different data. For example,
when we show the fiscal adjustment plan, we also issue a new
report that has never been issued, so a report prepared by
Conway MacKenzie, and it has to do with the cash flow of the
whole government, not only the central government, but all the
other agencies.
The Chairman. But you are going to have to provide that to
us.
Ms. Acosta. I am more than happy to.
The Chairman. We will need that as soon as we can get it,
now.
Ms. Acosta. Certainly. Certainly. I will send that.
The Chairman. Let me ask you some questions about Puerto
Rican pension liabilities, because this is something that is
bothering a lot of members of Congress. And this is, again, a
question for you, Ms. Acosta.
You mention in your written testimony that Puerto Rico's
public pension plans represent $45 billion in liabilities. That
is in addition to the $73 billion that has been discussed.
Ms. Acosta. That is right.
The Chairman. So you are talking about a lot of money here.
From what I understand, approximately $18 billion of the
roughly $73 billion of the Puerto Rican debt that we hear a lot
about is General Obligation debt backed by the full faith and
credit of the Commonwealth.
Now, I wonder if you can tell me whether the pension
liabilities are also backed by the full faith and credit of the
Commonwealth and how Puerto Rico plans to deal with its public
pension debt. Because I understand that is a very, very big
problem right now.
Ms. Acosta. No, the pension obligation bonds are not backed
by the full faith. There is around $3 billion of debt, and
certainly it is a big problem. You mentioned it is a big
problem. Both of the largest systems, the teachers and the
general employees, are running huge deficits. Most of the $45
billion is coming from those two.
And the problem is that those systems are running out of
assets. For both, actually, the assets are depleted by 2018, so
that means that there are no assets to pay the pension, and
that means that the money to pay the pensions of Puerto Ricans
who have retired is going to come from the general fund.
So we have to find almost another $900 million to put into
the pension plan so we can keep paying the pensions.
This is one of the reasons, Congressman, that we are saying
that we need to restructure debt and we need some time. We need
some time to adjust our finances. And that time, if our
creditors actually give us what we probably will be requesting,
which is some time with no payment of principal and probably no
interest payment, the idea is to just borrow the money to
actually put it into the pension plans, because they badly need
that.
The Chairman. All right. We have Dr. Holtz-Eakin here, who
ran our Congressional Budget Office in this country, and who of
course is a person we rely on rather heavily. And both sides
do. He is totally honest.
You have listened to these answers; what are your
suggestions?
Dr. Holtz-Eakin. Well, I would echo the importance of
having a set of transparent, audited financials that are
comprehensible.
The Chairman. I think we have those now.
Dr. Holtz-Eakin. But I think the nature of the analysis is
also very important. As I mentioned earlier, I have never seen
a debt sustainability analysis. As you know, the Congressional
Budget Office puts out a long-term budget outlook on a regular
basis that contains a debt sustainability analysis. The U.S.
Federal Government flunks that analysis.
And we have not seen anything like that for the current
policy in Puerto Rico, nor have we seen it for the proposed
reforms, such as the Governor's Work Group, for example.
Those proposed reforms and anything this committee does
should contain a real sustainability analysis to find out
whether the measures are sufficient to solve the problem that
Puerto Rico faces.
The Chairman. So you would recommend that we have to get
this type of material before we really can solve the problem.
Ms. Acosta. The Anne Krueger report is a debt
sustainability analysis, and we can happily provide that to you
too.
Mr. Pierluisi. Mr. Chairman, if you allow me, I would like
to comment on a couple of these issues you have raised.
The Chairman. All right.
Mr. Pierluisi. I will be brief.
The Chairman. Well, let me just preface this. One thing
that bothers me is that I know the government has swelled there
tremendously, and I presume the pension plans have swelled as
well.
And sooner or later, somebody is going to have to get these
things under control before the American people as a whole,
including Puerto Ricans, really want to do something about
this.
But go ahead. I just want to hear some----
Mr. Pierluisi. I will be brief. In terms of ARRA funding,
stimulus funding, it was spent in Puerto Rico in accordance
with the legislation approved by Congress. I, for one, wanted
to see more infrastructure project funding, but that was not
the will of Congress.
The Chairman. Well, I think you should keep fighting for
that.
Mr. Pierluisi. Yes. In terms of Medicaid, the program, I
remind you that in Puerto Rico the FMAP we have, it is 55/45.
So we are assuming 45 percent of the expense, whereas if we
were treated as a State, we would be assuming less than 20
percent of the expense. And we are not covering anything close
to 100 percent of Federal poverty level.
The Chairman. Part of the reason is, you do not pay taxes.
How do you answer that?
Mr. Pierluisi. I already discussed, as a matter of policy,
that that really should not be an issue, because you do help
people, regardless of their ability to pay Federal taxes. You
do it nationwide now.
In terms of financial information, to me there is no excuse
for the government of Puerto Rico to have failed to publish
audited financial statements for the last 2 fiscal years. And
you are definitely entitled to get that information.
With respect to the budget----
The Chairman. Let me interrupt. On that point, unless you
get those to us, I do not see how we can solve any problems
here. So that has to be the first thing we get, and they have
to be accurate financials. Let's face it, we have two houses of
Congress and 535-plus people who are going to have to vote on
this, and we had better have the right tools and we had better
have the right information and we had better have the best
possible economic information, or nothing is going to be done.
Ms. Acosta. Yes. We now have many financial reports that
have never, ever been prepared by the government, like the
quarterly report.
The Chairman. Well, I am counting on you.
Ms. Acosta. I will be sending those to you.
The Chairman. All right.
Keep going.
Mr. Pierluisi. In terms of our budgeting system, definitely
we have to revise the way we budget. We should adopt a zero-
based budgeting system, because we have no margin for error. We
do not have----
The Chairman. Well, I understand that you are government-
heavy down there.
Mr. Pierluisi. Exactly. And I have been criticizing the
level of spending from day one. The first thing the current
administration did was to increase spending by about 9 percent,
by $850 million the first year in office. And I said, ``Do not
do that.'' They ended up adopting a slew of new taxes that
affected our ability to grow, affected the private sector.
But I am not going to belabor that point. We do have to
change the budgeting system, because we need to justify every
penny we are spending. In addition, we need to make sure that
it is not a fictitious budget, that we include in the central
government budget everything that we are spending on, including
subsidies to government-owned entities.
And finally, on your pension liabilities concern, which I
share, let me just tell you that back in the year 2000, there
was massive reform of the pension system in Puerto Rico. We
changed it from an earned pension system to a contribution
system, back in the year 2000.
In year 2013, there was another round of reform. And in
terms of the legal liability here in question, there is Supreme
Court case law in Puerto Rico recognizing the property and
contractual rights of pension holders in Puerto Rico, to the
extent that they are vested, to the extent that they are
already getting a pension. And there is, I believe, also
Federal case law along those lines.
So that is why I share your concern. To the extent those
liabilities will affect the general revenues of the central
government of Puerto Rico, it will be hard to deal with, but we
will be legally obligated to do so.
Ms. Acosta. Can I just comment quickly on something that
the Congressman mentioned?
The Chairman. Sure.
Ms. Acosta. I think it is important, Congressman, that we
understand our budget and the changes that have happened from,
let us say, 2011, 2012, to today.
The current budget that has been approved for both 2015 and
2016 contains the total amount of debt that has to be paid. The
debt service is included.
The Chairman. We are pretty sure about the debt.
Ms. Acosta. I know, but in comparison--the Congressman
keeps saying that we are increasing our budget. The budget has
increased only in the amount of debt service and the amount
that we are allocating to the pension because of the program
that you just mentioned.
Just to give you an example, in 2012 the budget was $9.2
billion. But you know what? There was $870 million of debt
payment, GO and PBA,* government guaranteed debt, that was not
paid. It was refinanced. And year after year, as Mr. Marxuach
mentioned, that was commonly known as the ``scoop and toss.''
They would scoop the debt and throw it to the future.
---------------------------------------------------------------------------
* The Puerto Rico Public Buildings Authority.
---------------------------------------------------------------------------
So that budget of 2012 of $9.2 billion, if you add the $800
million that was not being paid, it would take you up to over
$10 billion.
The current budget is lower. When you look at the
operational expenses, it is lower. But there is a big chunk of
debt that we are putting in that was not being paid in the
past, debt and retirement.
So no, that is not correct that we have been increasing our
expenses. We are paying the debt that did not used to be paid,
and we are taking all the measures. If you look at everything--
services, contracts, professional services--everything is going
down. The only amounts that are going up are debt and the
amount that is put in the retirement system.
It is easy to play with the numbers, but when you look at
the detail, you can actually understand that we have been
decreasing the expenses.
The Chairman. All right.
Mr. Marxuach. Mr. Chairman, can I add one more thing, since
you are asking for information?
The Chairman. Yes.
Mr. Marxuach. I submitted for the record an analysis of
Puerto Rico's fiscal balance. I actually did look at the
audited financials we had available from 1998 to 2013. And I
provided the committee for the record a summary of both the
revenue and expenditures sides, including interest pending, so
the committee could have an idea from that summary that I
prepared, at least for those 15 years, how spending has
developed.
We do not have audited financials for 2014, so that is why
I had to end my analysis in 2013.
The Chairman. All right, I will accept that.
Now, let us finish with Dr. Holtz-Eakin. I am sorry to make
you the skunk at the picnic, but----
Dr. Holtz-Eakin. It has happened before, Senator.
[Laughter.]
The Chairman. It sure has up here.
But I would like you to summarize what we ought to do here,
or at least give us what your recommendations are and bring
some realism into this so that my fellow members of Congress
can say, ``All right, we have the facts. Let us see what we can
do.''
Dr. Holtz-Eakin. As I emphasized----
The Chairman. It is a big job I am giving you.
Dr. Holtz-Eakin. Yes. As I emphasized, the primary focus
should be on policies that restore economic growth.
The Chairman. Right.
Dr. Holtz-Eakin. So, for example, the Governor's Work Group
put out a proposal. If you look at it, whatever you might think
of the policy merits on the tax and the spending side, and I
have some reservations, it does not change the growth
trajectory. So it does not work.
So you have to have a fundamental focus on better long-term
economic growth. Without that, nothing gets solved.
The Chairman. Well, let me interrupt you for a second. Do
you think chapter 9 would be a useful tool?
Dr. Holtz-Eakin. So, there may be a place somewhere down
the road for chapter 9, but I have deep reservations about the
inordinate focus on it in dealing with the current crisis. As a
lesson of life, changing the rules in midstream generates
unintended consequences, and that is something to worry very
much about.
I am not a legal scholar, but I think you should consult
legal scholars about the applicability of chapter 9 to all the
institutions that are in Puerto Rico. My understanding is, that
is an issue.
It is also important to do the analysis and find out where
those bonds are. I think roughly 30 percent of the bonds are
held by Puerto Ricans. And a one-sided haircut, which is what
chapter 9 provides--it is not a creditor/debtor negotiation;
this is one-sided by the debtor--that haircut imposed on Puerto
Ricans is not going to help them.
So I have been confused by the focus on chapter 9. I do not
think it is a place that the Judiciary committee should go and
then just stop. There are much bigger problems that have to be
dealt with.
The Chairman. There is a reason why chapter 9 has not been
supposed to apply. I should say reasons. But I share some of
your skepticism there.
Keep going.
Dr. Holtz-Eakin. I think you have the growth imperative. It
has to be a growth that builds off the island's inherent
capabilities. It cannot be something that is a sugar high,
force-fed by Federal policies.
I have spent a long time in my tax policy career looking at
section 936, and it did not serve the island well in the long
run. And this is an underperforming economy, not for the past 5
years, the past 10 years, the past 20 years. It has been
underperforming for a long, long time. It does not match growth
rates of its Caribbean neighbors. It does not match growth
rates of the U.S. States.
So there really has to be a rethinking of it. It is too
government-centric; there is not enough room for the private
sector to grow. Puerto Rico has to do its part on some of those
things.
But the Congress has to take care of issues like the Jones
Act, and there really are things that can be helpful to the
island.
I am not a big fan of the health spending as growth policy
or a fix for the budget, but there is a place to make sure, for
example, that an 11-percent cut in Medicare Advantage in Puerto
Rico, which is how the vast majority of Medicare recipients are
served, does not endanger the sustainability of Medicare
Advantage. Medicare Advantage is one of our better health
programs, and that is an 11-percent cut when most MA plans are
getting something that looks like a 2-percent, maybe a 3-
percent increase. I would worry about that.
So you need to avoid going in the wrong direction on some
of the social safety net programs while you are building the
economic growth aspects.
And there is going to be, I think, no substitute for
dealing with the budgetary problems within the context of
Puerto Rico's legislative process and political process. I am,
again, somewhat skeptical of the applicability of control
boards, which are meant to circumvent the legislature and
politics as the solution to this problem. A successful control
board has to be independent enough and have authority enough to
impose the desired budgetary remedies. A control board
independent enough would have to be basically imposed on Puerto
Rico and infringe on its sovereignty. And I think that is a
problematic thing for the Federal Government to do.
A control board that is not of that nature is probably not
going to be independent enough to be effective.
So I think a focus on core budgetary solutions through the
regular order is the way to go, and I do not think Puerto Rico
is analogous to DC or New York, for that reason. I think it is
a different animal.
The Chairman. Well, thank you. This has been a helpful
hearing to me, and all I can say is, get us the facts and
figures and let me see what our colleagues on both sides of the
aisle want to do.
I am not for doing things that are just going to continue
the problems--just extend them out. And then we have to find
some way of having this operate on a fair basis, and we have to
have a way of showing that as citizens of the United States of
America, you are going to be treated fairly.
I would like to see that happen. The question is how, and I
am not sure we have enough information to really make these
earthshaking decisions up here. And besides, it is more than
one committee too. So we will see what we can do.
I would love to resolve this problem, because I care a
great deal for the Commonwealth and want you to succeed in
every way. But I know one thing: it is very government-centric
and very government-heavy. And that occurred too easily,
probably.
All I can say is, help us to know what we can do. This
hearing is helpful. I am still not sure what to do. If there is
a board, it probably would have to be independent. If we modify
title XI to put you in there, there are other factors there
that militate against that.
So we could use whatever professional advice you can give
us up here as to how best to do this and still have Puerto Rico
rebound upwards, rather than downwards, just keeping programs
going that literally are not justified.
So I am open, and I think others on this committee are
open. I do not think anybody wants to see you suffer or be
mistreated or not treated fairly, so help us to know what to
do. And I do think that Dr. Holtz-Eakin is right on a number of
items here that you should take to heart and see what you can
do to resolve them.
Well, with that, I will recess until further notice, and we
thank all of you for appearing here today. It means a lot to me
personally. And we will recess until further notice.
Ms. Acosta. Thank you very much.
[Whereupon, at 12:05 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Melba Acosta-Febo, President, Government
Development Bank for Puerto Rico, San Juan, PR
Chairman Hatch, Ranking Member Wyden, and members of the Committee:
My name is Melba Acosta-Febo, and I am the President of the
Government Development Bank for Puerto Rico (the ``GDB''). Before
assuming this position in October 2014, I was the Secretary of Treasury
of the Commonwealth of Puerto Rico.
I want to thank the Committee for giving the Commonwealth of Puerto
Rico (``Puerto Rico'') and the GDB the opportunity to participate in
this hearing. The GDB is charged with safeguarding the long-term fiscal
stability of Puerto Rico and promoting its economic competitiveness.
The GDB is also charged with serving as the fiscal agent and financial
advisor for Puerto Rico and all of its instrumentalities. The GDB has a
significant interest in and knowledge of the subject matter of this
hearing.
the crisis in puerto rico
The fiscal, economic, and liquidity crisis in Puerto Rico has
passed the tipping point. The Legislative Assembly has declared a state
of emergency, Puerto Rico has lost access to the capital markets on
sustainable terms, and Puerto Rico faces an economic and liquidity
crisis beyond what any jurisdiction in the United States has faced in
generations. This crisis threatens the health, safety and welfare of
the 3.5 million Americans living in Puerto Rico, many of whom are
moving to the mainland--notably to Florida--at a rate of almost 100,000
per year. As I describe below, this crisis did not develop overnight,
and it is not the result of any one factor, political decision or
political party. Rather, this crisis is the culmination of decades of
ill-advised public policy--both in San Juan and in Washington--coupled
with a persistent stagnating economy, seemingly unlimited access to
easy credit, and a market willing to lend.
While the United States economy as a whole has recovered from the
recent financial crisis, Puerto Rico's economy never came out the other
side of that crisis, having contracted more than 20 percent in real
terms over the last 8 years, which few countries in the world have
experienced. Federal policy towards Puerto Rico has, if anything,
exacerbated the situation. For example, the repeal and phase-out by
Congress of Section 936 of the U.S. Internal Revenue Code, which
provided tax benefits for certain businesses (including large
pharmaceutical companies) operating in Puerto Rico, has led to a
significant contraction in employment in Puerto Rico's manufacturing
sector. By some estimates, between 1996-2014 the phase-out of Section
936 itself caused the loss of 270,000 jobs when its total effect is
calculated. Chairman Hatch, to his credit, worked with Puerto Rico and
introduced a replacement to Section 936 in 2001. Had that legislation
been enacted, the crisis we find ourselves facing today may well have
been avoided.
Puerto Rico's fragile fiscal state and the breakdown of its
healthcare system have also been adversely affected by chronic
underfunding of Medicare and Medicaid. Under Medicaid, for example,
Congress both caps the amount of Medicaid funding that the Federal
Government provides annually to Puerto Rico ($329 million in 2015) and
limits the share of Federal matching funds (known as Federal Medical
Assistance Percentage (FMAP) at a fixed percentage (55 percent)). The
Patient Protection and Affordable Care Act (ACA) provided some relief
from these formulaic limitations but those funds are scheduled to be
depleted in fiscal year 2017. Several members of this Committee
introduced S. 1961, which would address many of the inequities in how
Federal healthcare programs are applied to Puerto Rico.
The contraction of Puerto Rico's economy has resulted in rising
budget deficits at all levels of government, including at Puerto Rico's
municipal or ``public'' corporations. Historically, to close
unanticipated operating deficits, Puerto Rico and its public
corporations relied on debt financing, and the credit markets had been
willing to supply the funds. So while the economy has contracted by
more than 20 percent over the past 8 years, outstanding public debt has
increased by more than 60 percent. Today, Puerto Rico and its public
agencies, divisions, instrumentalities and public corporations
collectively have amassed approximately $73 billion in public debt. In
addition, Puerto Rico's public pension funds, although subject to a
major overhaul in 2013 that reduced future accruals, still face
significant unfunded actuarial accrued liabilities--approximately $45
billion by some estimates--and will run out of funds altogether to pay
benefits to their 166,000 beneficiaries by 2018 without substantial
additional governmental contributions, contributions that will put
further strain on Puerto Rico's budget.
Beyond these economic and fiscal constraints, Puerto Rico's labor
and demographic characteristics are bleak. Unemployment has remained at
elevated levels since the financial crisis: Puerto Rico's unemployment
rate as of June 2012 was 14.6 percent but has since dropped to 11.6
percent as of June 2015 while unemployment in the rest of the United
States has dropped to 5.1 percent. While the labor participation rate
in the United States was 62.6 percent as of July 2015, the labor
participation rate in Puerto Rico was 39.5 percent as of July 2015,
which is a symptom of deeper structural problems and a combination of
local and Federal policies that often incentivize individuals not to
work. In 2014 there were 660,500 non-farm jobs in Puerto Rico, which is
approximately 100,000 fewer jobs than in 2005 or a 13 percent decline
over the period; an economy with a total labor force of about 1.2
million persons lost more than 100,000 jobs in less than a decade. By
contrast, the number of non-farm jobs in the mainland increased by 4
percent over the same period. Poverty levels are also extremely high.
Indeed, the median annual household income is $19,000, which is only
36.7 percent of the median income in the United States. Moreover, due
to outmigration to the mainland, Puerto Rico's population has declined
every year since 2006; the same year of the phase-out of Section 936.
Puerto Rico's demographic trends are also deeply troubling. The
remaining population is becoming increasingly elderly and outside the
labor force. Persons 60 years and older represent more than 20 percent
of the population (the highest in the United States) and children aged
5 years or less have decreased from approximately 295,406 in 2000 to
approximately 187,371 in 2014, a reduction of 37 percent. This means
Puerto Rico will have fewer people participating in the economy going
forward, shrinking the tax base and making it more challenging to
service its outstanding debt and finance necessary public services.
actions taken by puerto rico to address the crisis
Puerto Rico's Governor, the Hon. Alejandro Garcia-Padilla, took
office in 2013. Governor Garcia-Padilla has been honest and forthcoming
about the crisis that Puerto Rico faces and has forcefully responded to
these unprecedented challenges in an effort to achieve fiscal
sustainability and to place Puerto Rico on a path for long-term
success. Since taking office, the Governor and the Legislature have
materially reduced budget deficits by raising revenues and cutting
expenses; imposed unprecedented cost-control measures at the central
government and public corporations (including suspension of economic
clauses of collective bargaining agreements, across-the-board freezes
of wages and salaries, prohibiting extraordinary labor bonuses);
established strict limits on government payroll (as of May 2015, there
were 116,000 Central Government employees, compared to 158,000 in May
2008, a 27 percent reduction in central government employment);
eliminated subsidies to public corporations such as the Puerto Rico
Water and Sewer Authority; implemented comprehensive pension reform
that sought to shift all government employees from defined benefit to
defined contribution pension plans, and increased employee
contributions to the retirement systems; enacted a law known as the
Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the
``Recovery Act'') to create an orderly process to restructure the debt
of Puerto Rico's public corporations; approved and overseen ongoing
debt restructuring negotiations at the Puerto Rico Electric Power
Authority (``PREPA''); prohibited GDB from providing deficit-financing
loans; completed and is actively exploring public-private partnerships
for state-owned assets and operations; and reformed rates at certain
public corporations.
These measures build on the work of successive administrations that
have tried to address Puerto Rico's stagnant economy through a mix of
policies that have increased taxes, reduced the size of the public
sector, reduced pensions to current employees, and increased water
rates and highway tolls. In each case, however, economic growth has
failed to materialize, and budget deficits have persisted as Puerto
Rico's tax base has shrunk, creating an even greater dependence on
deficit financing. As a result of persistent economic stagnation, more
than half a million Puerto Ricans have left the island in the last 10
years seeking better opportunities on the mainland. This is a trend
that does not augur well for our future.
Notwithstanding 10 years of tax and rate increases and the
reduction of the government's workforce and reform of government wages
and benefits, Puerto Rico faces an immediate liquidity crisis resulting
from its inability to access the credit markets on sustainable terms to
refinance upcoming debt-service obligations. In recent months, Puerto
Rico has been forced to implement emergency ``one time'' measures to
keep the government functioning, including borrowing from the State
insurance companies, terminating monthly set-aside payments for debt
service on the central government debt, delaying payment of tax refunds
to residents and further stretching payment of accounts payables to
vendors and third parties. While these emergency measures have
temporarily avoided a shutdown of the Government of Puerto Rico,
without access to the capital markets to refinance maturing debt,
Puerto Rico may run out of emergency measures by the end of this year
(and before a large general obligations payment due in January 2016),
threatening the ability of the Government to continue to provide
essential services to its residents and to pay its debts when due. In
order to protect the 3.5 million citizens of the United States living
in Puerto Rico, immediate action is required.
the krueger report
After it became apparent that the difficult fiscal adjustment
measures taken by Puerto Rico in 2013 and 2014 were not having the
desired result of restarting economic growth and stabilizing public
finances, the Governor commissioned a team of economists led by Dr.
Anne Krueger, the former Chief Economist at the World Bank and First
Deputy Managing Director of the International Monetary Fund (IMF), to
undertake a comprehensive analysis of Puerto Rico's fiscal and economic
challenges with the goal of identifying a course of action that could
return the island to fiscal health and economic growth.
In June 2015, Dr. Krueger published her findings in a report
entitled Puerto Rico--A Way Forward, which is commonly referred to as
the Krueger Report. I have attached a copy of the Krueger Report, for
inclusion in the hearing record, as Exhibit A,\1\ which I hereby
incorporate into my testimony. The Krueger Report identified a number
of economic shocks--including the phase-out of section 936 noted above,
a sharp decline in home prices during the recent financial crisis, and
the Great Recession, among others--that have contributed to Puerto
Rico's economic stagnation. The Krueger Report further identified a
number of supply side factors contributing to the weak state of the
economy, including relatively high labor costs, complex labor
regulation and structural disincentives to work, outmigration of 1
percent annually (roughly 10 times the rate of West Virginia, the only
State currently experiencing subzero growth), and the high costs of
energy and transportation, among others. In addition to economic
factors, the Krueger Report also identified a number of fiscal problems
that have contributed to Puerto Rico's unsustainable debt-load.
Specifically, the Krueger Report indicates that Puerto Rico's revenue
projections have historically contained extremely optimistic
assumptions, leading to an annual revenue shortfall of roughly $1.5
billion.
---------------------------------------------------------------------------
\1\ The Krueger Report, ``Puerto Rico--A Way Forward'' can be found
on the Senate Committee on Finance website, or at http://www.gdbpr.com/
documents/PuertoRicoAWayForward.pdf.
Beyond identifying the cause of Puerto Rico's crisis, the Krueger
Report identified prescriptive measures to reverse these trends and
created a model to project future financing gaps after implementing the
recommended measures. The Krueger Report's recommendations included
items that must be implemented by Puerto Rico itself, as well as items
that require assistance and policy change at the Federal Government.
Critically, the Krueger Report found that even after implementing many
of the recommended economic and fiscal measures, large residual
financing gaps would persist well into the next decade, implying a
critical need for debt relief from a significant proportion of the
principal and interest falling due in Puerto Rico over the next 6
years.
the fiscal and economic growth plan
Promptly after the Krueger Report's release, Governor Garcia-
Padilla ordered the creation of the Working Group for the Fiscal and
Economic Recovery of Puerto Rico (the ``Working Group'') and charged it
with developing a plan for economic growth and fiscal and institutional
reform. The Working Group, in conjunction with its advisors, conducted
extensive due diligence on various Commonwealth funds, agencies and
public corporations that are supported by taxes and appropriations and
that have contributed to the fiscal deficits identified in the Krueger
Report, in order to create a holistic projection of Puerto Rico's
finances and to examine various measures that could be implemented to
address ongoing financing gaps. I serve on the Working Group in my
capacity as President of GDB, and I have intimate familiarity with its
diligence and findings.
On September 9, 2015, the Working Group released its conclusions
and recommendations in a document titled the Puerto Rico Fiscal and
Economic Growth Plan. I have attached a copy of the Fiscal and Economic
Growth Plan, for inclusion in the hearing record, as Exhibit B,\2\
which I hereby incorporate into my testimony. The Fiscal and Economic
Growth Plan reviews the historical measures taken to increase taxes and
reduce expenses; analyzes the current liquidity and fiscal position of
Puerto Rico; recommends certain fiscal and economic reform and growth
measures, including measures that require action by the U.S.
Government; proposes a new law known as the Fiscal Responsibility and
Economic Revitalization Act that authorizes the Governor to establish
and appoint members, from a list provided by third parties, to a
financial control board in Puerto Rico; and identifies significant
projected financing gaps, even assuming the implementation of the
recommended fiscal reform and economic growth measures.
---------------------------------------------------------------------------
\2\ The Working Group for the Fiscal and Economic Recovery of
Puerto Rico report, Puerto Rico Fiscal and Economic Growth Plan, can be
found on the Senate Committee on Finance website, or at http://
bgfpr.com/documents/PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf.
Although I have already touched on the historical measures and
current liquidity and fiscal position of Puerto Rico, I would like to
highlight briefly certain key portions of the Fiscal and Economic
---------------------------------------------------------------------------
Growth Plan for the benefit of the Committee.
First, the Fiscal and Economic Growth Plan calls for significant--
and in many cases, painful--local reforms across nearly all aspects of
the economy and government. The Fiscal and Economic Growth Plan
includes reforms to labor and welfare laws, tax and permitting
simplification and reform, consolidation of schools and the elimination
of municipal and higher education subsidies. It also proposes the
adoption of a new accounting systems, a new budgetary process, and
reforms to the structure of Puerto Rico's Treasury Department in
particular and fiscal decision-making processes more generally. These
``structural reforms'' are aimed at spurring economic growth while new
revenue and expense measures are aimed at restoring Puerto Rico's long-
term fiscal health.
Second, the Fiscal and Economic Growth Plan proposes legislation to
be adopted by Puerto Rico's Legislative Assembly that would create an
independent control board with jurisdiction over most government
entities in Puerto Rico so as to assure budgetary discipline. Like
control boards in other jurisdictions, Puerto Rico's control board will
consist of qualified individuals who have knowledge and expertise in
finance, management, and the operation of government. The control board
will have the ability to monitor and ensure compliance with budgetary
targets.
Third, the Fiscal and Economic Growth Plan calls on the U.S.
Government to support Puerto Rico's effort to ensure long-term fiscal
sustainability and growth. Specifically, the Fiscal and Economic Growth
Plan calls on Congress to allow Puerto Rico access to a legal framework
to restructure its liabilities in an orderly process; to provide
equitable Medicare and Medicaid treatment and funding to address the
humanitarian concerns tied to the healthcare crisis in Puerto Rico; to
exempt Puerto Rico from the Jones Act to reduce costs and improve the
ease of doing business; to modify Federal minimum wages rules, welfare
programs, and labor laws applicable to Puerto Rico to incentivize
people to work and increase the labor participation rate; and to
provide Puerto Rico with a tax treatment that encourages U.S.
investment and job growth on the island. With respect to this last
item, the chairman and other members of the committee, as well as our
Resident Commissioner, the Hon. Pedro Pierluisi, have moved forward
legislation that would have helped Puerto Rico compete against foreign
countries and attract manufacturing investment. These pro-growth
measures could include amending the U.S. Internal Revenue Code to add a
new Section 933A to permit U.S.-owned businesses in Puerto Rico to
elect to be treated as U.S. domestic corporations; enacting an economic
activity tax credit for U.S. investment in Puerto Rico designed as a
targeted, cost-efficient version of former Section 936 of the Internal
Revenue Code; and exempting Puerto Rico from base erosion and/or
minimum tax measures in the event the U.S. moves towards a territorial
taxation system.
Finally, like the Krueger Report, the Fiscal and Economic Growth
Plan recognizes that, notwithstanding implementation of key measures to
restore growth in Puerto Rico, significant financing gaps will remain
over the next decade necessitating debt relief across the
Commonwealth's many different credits. The Working Group's advisors
have already begun discussions with creditors that own significant
amounts of Puerto Rico's debt. The goal of these discussions is to
achieve, through consensual negotiations, an agreement with creditors
to amend the payment terms of the Commonwealth's debt so as to avoid
widespread defaults and to give Puerto Rico the breathing room
necessary to implement the Fiscal and Economic Growth Plan.
debt relief and the necessity of a restructuring regime for puerto rico
Notwithstanding Puerto Rico's best efforts to adjust its debts in a
consensual manner as contemplated and discussed above in the context of
the Fiscal and Economic Growth Plan, the likelihood of success would be
materially improved if Puerto Rico had a legal framework within which
to do so. The unavailability of any feasible legislative option to
adjust debts has created an overall environment of uncertainty that
makes it more difficult to address Puerto Rico's fiscal challenges and
further threatens Puerto Rico's economic future. I would like to
explain why this is so important for Puerto Rico, and how the lack of
such a framework has already had significant adverse consequences in
our ongoing restructuring efforts at PREPA.
As many of you may know, I testified in February before the
Subcommittee on Regulatory Reform, Commercial, and Antitrust Law of the
Committee on the Judiciary of the U.S. House of Representatives about
the harmful effects associated with having no legal regime for debt
restructuring in the context of a hearing on a bill to extend the
protections of Chapter 9 to Puerto Rico. I described Puerto Rico's
attempt to fill a statutory gap left by Congress in the Bankruptcy Code
through the passage of the Recovery Act. The Recovery Act permits
Puerto Rico's public corporations to adjust their debt in an orderly
process--with creditor input and court supervision--much like the U.S.
Bankruptcy Code while ensuring the continued provision of essential
public services to residents in the event of a fiscal emergency at one
of the public corporations.
Unfortunately, the Recovery Act has been held unconstitutional by
the U.S. Court of Appeals for the First Circuit on the theory that the
Recovery Act is preempted by section 903 of the Bankruptcy Code, which
it held prohibits Puerto Rico from passing a law allowing for the
adjustment of debt through a method of composition (Puerto Rico has
filed a petition for certiorari with the Supreme Court of the United
States). The practical and unfortunate result of this decision is that
no legal regime is currently available for Puerto Rico to adjust debts
through a court-supervised process.
the lack of a restructuring framework already has consequences,
as demonstrated by prepa
The consequence of this predicament has already shown its impact in
recent and ongoing debt restructuring discussions between PREPA and its
creditors. I believe it is helpful to give the committee context as to
why this is so important. Specifically, PREPA has been able to reach a
consensual agreement with a substantial group of its bondholders (both
original and secondary market purchasers) and all of its fuel line
lenders, which collectively hold nearly $4 billion of PREPA's
outstanding obligations. However, a consensual restructuring has been
held up by a few institutions that, in the absence of an effective
debt-restructuring regime, can try to hold up or opt out of a
comprehensive restructuring. The Recovery Act was specifically designed
to avert this free rider situation.
What is more, even if all of the major institutional creditors with
whom PREPA is currently negotiating were to agree to a consensual debt
restructuring plan, the unavailability of a court to oversee the
restructuring process and, ultimately, approve and validate the plan,
adds complexity, cost, and delay to the process, none of which is in
the interests of creditors, consumers, or PREPA's other stakeholders.
Indeed, parties will be hesitant to lend new money, or buy new
securities, without the finality offered by the approval of an
adjustment plan by a court of competent jurisdiction as contemplated in
Chapter 9 or the Recovery Act. In addition, without such a framework,
even if PREPA reaches a consensual agreement with all of its key
creditor groups, in the absence of an ability to bind ``holdouts'' such
as could be achieved through a process like Chapter 9 or the Recovery
Act, there is a built-in incentive for ``free riders'' to sit on the
sidelines while other creditors bear the burden of the debt adjustment.
The cost of dealing with such ``free riders'' is ultimately borne by
the creditors that participate in the restructuring. In a worst-case
scenario, free-riders can drive up the costs of a restructuring to the
point where no deal can be consummated, even with creditors who would
otherwise be willing to participate, because the cooperative creditors
are unwilling to subsidize the recoveries of the holdouts. This problem
would not exist under Chapter 9 or a Recovery Act framework where a
supermajority of creditors willing to compromise can bind a dissenting
minority looking for a free ride.
Finally, it is worth emphasizing two of the primary benefits of a
bankruptcy regime. The first is the availability of interim or
``Debtor-in-Possession'' financing while negotiations with creditors
ensue, which has the critical benefit of avoiding a liquidity crisis.
Such financing is not available under current law. With no court
empowered to approve and supervise such financing, the Commonwealth and
its instrumentalities will continue to deplete much-needed resources
until a consensual restructuring is consummated. Access to such interim
financing would help ensure that the Commonwealth and its
instrumentalities can continue to provide basic government services to
its residents while debt adjustments are implemented and a resolution
to the debt restructuring discussions is achieved. Second, in the event
that efforts to reach a consensual agreement fail, there would be a
stay against creditor suits that would help protect the residents of
Puerto Rico and the island's economy from the legal morass that would
ensue.
In the case of PREPA, if negotiations continue for any lengthy
period of time (as they have so far), or an event beyond PREPA's
control occurs (such as a hurricane that generates unanticipated
costs), PREPA could be left unable to provide power to millions of
Americans. I need not explain the health and humanitarian consequences
in such a scenario.
To be clear, I discuss PREPA only as one example of the difficulty
of restructuring debts in the absence of a clear legal regime. And
while PREPA is making progress towards a consensual restructuring,
PREPA has been in negotiations for well over a year and a number of
significant creditors continue to hold out, hoping to free ride on
those creditors who have already agreed to the deal. But for Puerto
Rico, PREPA is only one of the nearly 17 Puerto Rico issuers that may
need to adjust their debt as contemplated by the Fiscal and Economic
Growth Plan. The absence of a legal regime to restructure the
Commonwealth's liabilities in an orderly process may potentially doom
the ability of the Commonwealth and its creditors to achieve a
comprehensive debt restructuring that will allow Puerto Rico to jump
start its stagnant economy.
conclusion
In conclusion, I would like to reiterate that the situation in
Puerto Rico has passed the tipping point, and that Puerto Rico, in the
face of an immediate liquidity crisis, has no access to the capital
markets on sustainable terms and faces significant financing gaps over
the next decade. Puerto Rico has taken the important step of developing
a clear roadmap to address these challenges, which roadmap requires the
implementation of difficult and painful measures, including the
creation of a control board to monitor spending and compliance with the
fiscal and economic growth plan.
I stress that while reasonable minds may differ as to the propriety
of the specific measures that need to be taken--both at the local and
Federal levels--the fact remains that Puerto Rico faces significant
liquidity and financing shortfalls that require the U.S. Government to
act. Congress must act now because the failure to act is not an option
for the 3.5 million Americans living in Puerto Rico. Indeed, Federal
action is essential, as outlined in the Krueger Report and the Fiscal
and Economic Growth Plan and discussed in detail above, including
parity for Medicaid and Medicare funding. Puerto Rico also speaks in
unison in seeking access to a legal regime to adjust its debts as one
necessary and critical step to achieving the objectives of the Fiscal
and Economic Growth Plan.
The current crisis in Puerto Rico has been long in the making; it
is the byproduct of a now decade-long stagnation in economic activity
on the island, stagnation that threatens the ability of Puerto Rico to
meet the essential needs of its residents and to avoid a disorderly
default on its $73 billion of indebtedness. But, as part of the United
States and subject to its laws and regulations, Puerto Rico can only do
so much for itself to mitigate the crisis and avoid these devastating
results. It needs the assistance of the U.S. Government to get out of
this crisis, to achieve equitable funding in important Federal programs
such as Medicaid and Medicare, to eliminate discrimination against it
(versus the Virgin Islands, for example) in the application of the
Jones Act and to give it access to an insolvency regime to facilitate
an orderly restructuring of its debts. These areas in which we need
immediate changes in Federal law and policy can help to facilitate an
orderly resolution of Puerto Rico's current crisis. We have been unable
to forestall a more chaotic situation by executing ``one time''
emergency measures; however, without an insolvency regime there will be
greater loses to our creditors, our economy and our people.
I thank the Committee for recognizing the urgency of these matters
by holding this hearing, and for giving the Puerto Rico and the GDB the
opportunity to participate here today. I look forward to working with
all of the members of the Committee to ensure that the health, safety
and well-being of 3.5 million United States citizens is safeguarded and
to making common cause with you in creating a better future for all the
residents of Puerto Rico.
______
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a hearing to examine
Puerto Rico's current economic conditions and long-term fiscal health:
Good morning and welcome to today's hearing to consider the various
financial and economic challenges in Puerto Rico.
We've all watched with great interest as the debt situation in
Puerto Rico has unfolded. Whenever we talk about this issue, there are
a number of interested parties, including policymakers here in
Washington, bond holders, and, of course, the people of Puerto Rico.
According to statements from the Puerto Rican Government, the
territory's debt of more than $72 billion is ``not payable.'' Some of
that debt includes General Obligation bonds which have a constitutional
first priority, and some includes debt of public corporations. In all,
we're talking about roughly 17 different debt-issuing entities in
Puerto Rico.
Puerto Rico's debt has more than doubled since 2000, despite the
billions of dollars infused into its coffers from the Federal stimulus
enacted in 2009 and from health care funding increases included in the
Affordable Care Act. Even with those boosts in Federal funding and the
related increases in Commonwealth spending, all we see is added
Commonwealth debt. Moreover, there is a lack of reliable data
indicating what Puerto Rico has to show in return in terms of
infrastructure, efficiencies, and improved economic performance.
One reason we're having this hearing today is to give us a chance
to gather additional information. As Senator Grassley--a former
Chairman of the Finance Committee--can attest, this panel has done a
great deal over the years to clarify the interplay between issues like
Federal tax and health care policy and the impact they have on Puerto
Rico and other territories.
I know that Ranking Member Wyden is committed to working with me to
update and improve our understanding of this situation so that Congress
can make decisions using the best available information. I think it
would be extremely difficult to ask Congress to make important
decisions and appropriately allocate resources without first
understanding what the facts are and what problems need to be fixed.
Accompanying today's hearing, we have made available an updated
overview of Federal tax policy and its interplay with Puerto Rico. This
document was produced by our friends at the Joint Committee on
Taxation. We also have several reports addressing Federal health care
policies and Puerto Rico provided by the Congressional Research
Service. And I've made public the responses that I received from
inquiries I made to the Department of Health and Human Services on this
issue.
In the days leading up to this hearing, I have heard from many
interested parties, virtually all of whom have their own ideas about
what needs to be done here. Some of these proposals have been helpful;
others, not so much.
For example, I have heard that we can expect to see increased
strains on Puerto Rico's health care system, especially given the
demographic and economic realities on the island. One source of this
stress seems to stem from the Affordable Care Act, which contains
future cliffs where funding will be pared down and, according to some,
these cliffs will hit Puerto Rico particularly hard.
Of course, for me it is not surprising to learn that there are
inequities and financial harms resulting from the health care law. Even
so, these problems and any proposed solutions are multidimensional and
extremely complicated. Questions of funding and resource allocation are
always difficult, and they implicate a number of issues. It isn't as
simple as just deciding to give more health funds to Puerto Rico,
because doing so would necessarily mean reduced funding for other
priorities, increased taxes, or even more Federal debt.
That is the unpleasant budget arithmetic that we face. There are no
easy answers.
For a long time, the people of Puerto Rico have suffered under a
weak economy, including double-digit unemployment rates, very low labor
force participation rates, and a bloated public sector. With many
residents of the island facing a lack of opportunity or any
expectations of a brighter future, Puerto Rico has increasingly seen
out-migration.
All of this contributes to the fiscal challenges the territory now
faces.
According to independent analysts, there are significant barriers
to job creation and labor force participation in Puerto Rico. Some of
these barriers stem from Federal entitlement programs. Others can be
attributed to the application of other Federal laws and regulations.
For example, analysts across the political spectrum agree that
Federal laws have increased the cost of energy in Puerto Rico and that
the island's regulatory processes and bureaucratic red tape stifle
business activity. And sadly, for the children in Puerto Rico, its
education system, to quote Secretary of Education Duncan, ``has been
plagued by a revolving door of leaders and political patronage.''
In short, and to put it mildly, Puerto Rico faces enormous fiscal
and economic challenges. While the government of Puerto Rico has taken
some steps in recent years to address these matters, many more
changes--significant and fundamental changes--needed to be made.
Fortunately, Puerto Rico has a number of advantages to its credit,
and we have seen successful turnarounds from over-indebtedness
elsewhere, such as here in the District of Columbia and in New York
City. I hope to see Puerto Rico join the list of successful turnaround
experiences and I know that everyone here wants the people of Puerto
Rico to experience a future with increased economic opportunity and
growth.
Before I conclude, I just want to make sure we acknowledge the
negative long-term impact Puerto Rico's unsustainable debt has had and
will continue to have on the island's residents and what lessons we
should take from their experience.
As the Congressional Budget Office has repeatedly warned over the
past several years, despite some recent declines, our Federal deficits
under current law will soon rise again and Federal debt will grow, as
it has in Puerto Rico, to beyond 100 percent of the size of our
economy. According to CBO, if we don't change course, we will
increasingly have less fiscal flexibility and we run the risk of a
fiscal crisis at the Federal level. Absent some kind of fundamental
correction, it is not hard to imagine the devastating effects from
unsustainable debt that are now being felt by Americans living and
trying to work in Puerto Rico also being felt throughout the entire
country.
Now, I will close by noting that this is the Finance Committee,
with broad areas of jurisdiction, including Federal tax policy and
health care policy. There are, of course, many other aspects of Federal
policy that are also relevant to Puerto Rico's situation but fall into
other committees' areas of jurisdiction, including Federal labor
policies, Federal laws governing shipping vessels, bankruptcy law, and
others. However, I ask that our witnesses keep their focus on areas of
Finance Committee jurisdiction.
This is not, for example, a hearing on chapter 9 of the bankruptcy
code or a hearing on Puerto Rico's status as a territory.
With that, I wish to welcome all of our witnesses, and I will now
recognize Ranking Member Wyden for his opening statement.
______
Prepared Statement of Douglas Holtz-Eakin, President,
American Action Forum *
---------------------------------------------------------------------------
* The opinions expressed herein are mine alone and do not represent
the position of the American Action Forum. I thank Gordon Gray, Sarah
Hale, and Curtis Arndt for their assistance.
---------------------------------------------------------------------------
introduction
Chairman Hatch, Ranking Member Wyden, and members of the Committee,
I am pleased to have the opportunity to appear today. In this
testimony, I wish to make three basic points:
Puerto Rico's economic outlook is poor, reflecting a continuation
of past, steady declines in output and employment. This
trajectory could be stabilized or substantially improved with
policy reforms.
Puerto Rico's budget outlook is dire, but is not beyond being put
on a sustainable trajectory with sound policies that do not
defer difficult choices.
The policy choices arrayed before Puerto Rican and Federal
policymakers should be evaluated based on the degree to which
they address root causes of the Commonwealth's budget
challenges. The most widely discussed change, Chapter 9
bankruptcy protection for Puerto Rican governmental entities,
would not improve economic growth, would not change the budget
trajectory, and is not something that should be pursued at this
time.
I will discuss each in additional detail.
economic outlook
The Puerto Rican economy has been in steady decline for over a
decade, which has and will continue to exacerbate the Commonwealth's
fiscal challenges. The strict mathematical and practical reality is
that any sustainable solution to Puerto Rico's must involve an economic
growth component that boosts output, employment rolls, and income.
Economic Output
Puerto Rico has seen real output plummet since 2005, while Moody's
predicts essentially stagnant territorial income for the next decade.
This growth assumption incorporates an expectation of the inability of
the Commonwealth to strike the proper balance between fiscal
consolidation and economic growth. Pure austerity--poorly targeted tax
increases and indiscriminate cessation of services--would have anti-
growth effects and could contribute to tepid growth in the future,
while more innovative fiscal consolidation approaches could be
buttressed by enhanced revenues from stronger growth.
Unemployment peaked in 2010, with an increase of nearly 50 percent
from 2005. While this high rate of joblessness has attenuated, it is
projected to remain at persistently high levels--averaging nearly 13
percent over the next 10 years.
A key contributor to Puerto Rico's economic challenge has been net
emigration. Over 300,000 Puerto Ricans have left since 2005, with net
emigration and population decline expected to persist for the next
decade, albeit at a slower pace. This has significantly curtailed the
Commonwealth's labor force as a whole. Despite a declining population,
the labor force participation rate has declined apace, highlighting
structural weakness in labor markets beyond net emigration.
Echoing other indicators of the labor markets, payrolls have
declined precipitously in the past 10 years, while a policy-agnostic
outlook assumes flat employment levels over time. Stable payrolls
however, compared to recent experience, are a positive sign and could
provide policymakers with a predictable wage and tax base in the
contemplation of future fiscal policies.
Figure 1: Historical and Projected Output
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 2: Unemployment
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 3: Labor Force Trends
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 4: Employment
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 5: Total Personal Income
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Personal Income growth has remained under 3 percent since 2008 and
is projected to average about 2 percent over the next 10 years. While
far from ideal, stable income growth paired with steady payrolls could
again provide a predictable wage and tax base around which to design
pro-growth, fiscal consolidation.
summary of economic outlook
Every major economic indicator of Puerto Rico's economic well-being
shows a Commonwealth in a protracted retrenchment. However, there are
indications that major emigration flows and steep economic declines may
have passed, leaving a trajectory of tepid though predictable growth.
How Puerto Rico addresses its fiscal challenges, however, could
radically alter this outlook for good or for ill.
budget outlook
By any objective measure, the budget outlook for Puerto Rico is
troubling. The Commonwealth, through policy choices compounded by
economic difficulty, has seen its debt obligations grow inexorably over
the past decade and is projected to continue. Addressing these dual
challenges is essential to an improved budgetary trajectory. This
necessity must also reconcile immediate concerns over liquidity with
the need for longer-term structural reforms.
Historical and Recent Developments
Puerto Rico has maintained structural deficits for some time,
driven by economic conditions, policy choices, and unrealistic revenue
and expenditure estimates.\1\ Accounting for timing shifts and non-
recurring budget events, structural deficits have been and will remain
considerable.
---------------------------------------------------------------------------
\1\ http://www.bgfpr.com/documents/puertoricoawayforward.pdf.
---------------------------------------------------------------------------
Figure 6: Structural Deficits
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The analysis by the Center for a New Economy of Puerto Rico's
finances is instructive here.\2\
---------------------------------------------------------------------------
\2\ http://grupocne.org/2015/06/16/fiscal-situation-update-
analysis-of-the-governors-budget-request-for-fiscal-year-2016/.
With persistent borrowing, debt service has grown as a share of
general fund expenditures. More indicative of a borrower's ability to
repay debt however, is debt service as a share of revenues. This simple
metric incorporates many elements that signal a borrower's wherewithal
to manage debt: interest reflects not only past borrowing, but the
terms and credit worthiness of the borrower demonstrated by the
interest rate underlying debt service costs; revenue reflects the
strength of the economy and the ability of a government to harness
national resources through tax policy. A common bright-line for
identifying distressed sovereign borrowers is when interest exceeds 10
percent of revenues. The Commonwealth reached this level as of March
2015.
Figure 7: General Fund Debt Service Burden
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 8: Public Debt
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
General fund debt has risen rapidly, but is only part of the
problem. Puerto Rico's debt portfolio is largely driven by entities
other than the central government. The Commonwealth's public sector
debt has more than tripled over the last 15 years, rising to over $72
billion today.\3\ The composition of this debt however, is instructive,
and reveals the complicated nature of financing the Commonwealth's
expenditures.
---------------------------------------------------------------------------
\3\ http://www.bgfpr.com/documents/CommonwealthQR-5-7-15.pdf.
\4\ This reflects most of what comprises the Commonwealth's debt.
For specific exclusions, see footnotes 1 and 2 on page 63 of: http://
www.bgfpr.com/documents/CommonwealthQR-5-7-15.pdf.
Table 1: Composition of Public Debt \4\
----------------------------------------------------------------------------------------------------------------
Public
Year Commonwealth Municipalities Corporations Total
----------------------------------------------------------------------------------------------------------------
2009........................................ 9,939 2,997 40,044 52,980
2010........................................ 10,303 3,231 43,289 56,823
2011........................................ 10,363 3,537 45,284 59,184
2012........................................ 11,844 3,872 49,045 64,760
2013........................................ 12,329 3,882 48,746 64,957
2014........................................ 14,336 4,193 48,744 67,273
2015........................................ 15,050 4,114 48,079 67,244
----------------------------------------------------------------------------------------------------------------
Source: Quarterly Report of the Commonwealth of Puerto Rico.
As of June 2015, the public sector debt for Puerto Rico stood at
$71.1 billion. Over $48 billion of this total is attributed to debt
issued by Puerto Rico's public corporations.\5\
---------------------------------------------------------------------------
\5\ http://www.bgfpr.com/documents/
PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf.
Table 2: Debts of Public Corporations
------------------------------------------------------------------------
Total Bonds
Public Corporation and Notes
------------------------------------------------------------------------
Aqueduct and Sewer Authority............................... 4,779
Convention Center District Authority....................... 554
Electric Power Authority................................... 9,054
Highways and Transportation Authority...................... 6,530
Housing Finance Authority.................................. 263
Industrial Development Company............................. 262
Infrastructure Financing Authority......................... 2,184
Port of the Americas Authority............................. 235
Ports Authority............................................ 275
Public Buildings Authority................................. 4,316
Public Finance Corporation................................. 1,091
Sales Taxes Financing Corp. (COFINA)....................... 15,224
University of Puerto Rico.................................. 556
Others..................................................... 2,757
------------
Total.................................................. 48,079
------------------------------------------------------------------------
Source: Quarterly Report of the Commonwealth of Puerto Rico
These entities provide public and business-like services to
Commonwealth residents, with the bulk of the indebtedness comprised of
debt of the Sales Tax Financing Corp (COFINA), which in itself was
originally created to finances existing debts; the Island's power
utility (PREPA), which has recently agreed to a restructuring of some
of its mature obligations; the Highway and Transportation Authority
(PRHTA); the Aqueduct and Sewer Authority (PRASA); and the Public
Buildings Authority (PBA). The major ratings agencies have continuously
downgraded the general obligations of the Commonwealth as well as
issuances of Puerto Rico's principal public corporations, which are
rated below investment grade by Fitch, Moody's and S&P.\6\
---------------------------------------------------------------------------
\6\ http://www.bgfpr.com/documents/SupplementtoQuarterlyReport6-30-
15.pdf.
---------------------------------------------------------------------------
Near Term Challenges and Outlook
Prospectively, the Commonwealth faces significant challenges in
both the near and long term. Of most immediate concern is the claim
that Puerto Rico is facing a liquidity crisis, and will be unable to
meet its payment obligations beginning in November of this year.\7\ The
financial advisor to the Government Development Bank for Puerto Rico
estimates that this cash constraint will persist through December
before improving until June. At that point Puerto Rico is again
expected to face a liquidity challenge. It is important to note that
this advisor also expects that the Commonwealth will be able to manage
the immediate challenge. Moreover, the June challenge does not appear
insurmountable, as the cash flow analysis that underpins the June
shortfall assumes certain payments that should not take priority over
existing obligations such as deferred tax refunds and ``economic
development fund'' expenditures.
---------------------------------------------------------------------------
\7\ http://www.bgfpr.com/documents/
150825ConwayMacKenzieLiquidityUpdateReport.pdf.
---------------------------------------------------------------------------
Longer Term Challenges
As noted above, the GDP outlook is poor, with growth remaining
depressed over the foreseeable future. The Commonwealth's future
financing gap is also a source of serious concern.
Figure 9: Projected Borrowing Needs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
According to a recent estimate by former first deputy managing
director of the International Monetary Fund, Anne Krueger and others,
under current policy and accounting for other factors, the Commonwealth
faces a financing gap of over $64 billion over the next 10 years.\8\
Under current conditions, capital markets are highly unlikely to supply
this financing to the Commonwealth. Accordingly, long-lasting and
meaningful policies must be pursued to confront the duel challenge of
tepid growth and an unsustainable fiscal outlook.
---------------------------------------------------------------------------
\8\ http://www.bgfpr.com/documents/puertoricoawayforward.pdf.
Any approach to altering Puerto Rico's budget trajectory must
improve the employment outlook. These should include lowering the
Federal minimum wage to levels appropriate for the island's wage scale.
The Federal minimum wage is quite high relative to wages in the
Commonwealth--the ratio of the minimum wage to the median wage is 77
percent, the highest of any State or territory. The next highest (South
Dakota and Guam) is 59 percent, which would require a minimum wage of
$5.55 in Puerto Rico. Lowering the minimum wage to put Puerto Rico in
the middle of the rankings of States and territories would require a
minimum wage of $4.50. The minimum wage is simply too high for Puerto
---------------------------------------------------------------------------
Rico.
At the same time, the Commonwealth should undertake reforms of its
labor market to bring employment practices into closer alignment with
the rest of the United States. Some degree of these approaches was
recognized in the ``Fiscal and Economic Growth Plan,'' but reforms
should go farther than the plan pursues.\9\ For example, the Governor's
plan would seek to exempt Puerto Rico from future minimum wage
increases rather than reduce the current wage and would maintain,
albeit with eased exemption, mandatory December bonuses.
---------------------------------------------------------------------------
\9\ http://www.bgfpr.com/documents/
PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf.
Additional reforms should be pursued to reduce regulatory
impediments and other burdens on business. These efforts should include
addressing concerns for shipping costs by reforming the application of
the Jones Act to Puerto Rico. While the Government Accountability
Office did not make a conclusive determination of what overall effect
this might have, limited exemptions, such as for natural gas, could be
beneficial.\10\
---------------------------------------------------------------------------
\10\ http://www.ny.frb.org/outreach-and-education/puerto-rico/2014/
Puerto-Rico-Report-2014.pdf.
Beyond these measures, Puerto Rican policy makers should address
reforms at root causes, rather than defer these challenges. This
includes measures to enhance economic growth, as well as the key
drivers of the Commonwealth's budget challenges. This should include
structural reforms aimed at Puerto Rico's major public sector
corporations, as well as pensions. Some of the reforms to the public-
sector corporations pursued in the ``Fiscal and Economic Growth Plan,''
such as depoliticizing PREPA, are worthwhile but insufficient. In the
cases of some of these large public-sector corporations, PREPA in
particular, a privatization should be considered, both from the
standpoint of the Commonwealth's balance sheet, as well as efficient
delivery of services. Addressing unneeded municipal expense should form
part of a budget plan. In some municipalities, 98 percent of budgets
are payrolls, which suggests that these entities could be consolidated
without diminishing services.\11\ Puerto Rico has undertaken important
pension reforms in the past several years, but with public pension
liabilities of $43.5 billion, this area of Commonwealth finance must
also be further reformed.\12\ While additional tax collection should be
part of the Commonwealth's budget reforms, it should not reflect the
bulk of the solution, which must be found among the key drivers of
Puerto Rico's debt.
---------------------------------------------------------------------------
\11\ http://www.caribbeanbusinesspr.com/prnt_ed/municipalities-can-
save-money-and-be-more-efficient-with-county-system-11093.html.
\12\ http://grupocne.org/2015/06/16/fiscal-situation-update-
analysis-of-the-governors-budget-request-for-fiscal-year-2016/.
I am less optimistic regarding the appointment of a control board
with the authority to institute meaningful budget reforms. Control
boards were involved in addressing budget challenges in New York and
Washington DC. Unfortunately, it is hard to imagine a board that
simultaneously respects the sovereignty of the Commonwealth and has
sufficient political independence to be successful. For example, the
board proposed in the ``Fiscal and Economic Growth Plan,'' would be
---------------------------------------------------------------------------
relatively limited in its scope and authority.
What the Commonwealth should not be pursuing, and what Congress
should not entertain, is extension of Chapter 9 bankruptcy law to the
government corporations. Chapter 9 would not increase economic growth.
Chapter 9 would not alter the fundamental fiscal trajectory. For these
reasons, it should not be pursued, at least at this time.
Moreover, it could hinder future well-being in the Commonwealth.
First, while Puerto Rico will face challenges seeking financing in
capital markets, Chapter 9 would enshrine these challenges with
perpetually higher borrowing costs at such time that Puerto Rico is
even able to access external financing. Chapter 9 would not address the
root causes of Puerto Rico's ills, but rather defer them to future
generations.
conclusion
The economic and budgetary outlook for Puerto Rico is dimmed by
past experience. If meaningful policy reforms are not put in place to
address the persistently low growth, outmigration and high
unemployment, then the budgetary outlook will remain distressed. As a
complement, if the major institutions and elements of Puerto Rico's
debt growth are left unreformed, then the economic outlook will be
further damaged by a debt crisis and resulting diminished investment.
Both facets of Puerto Rico's challenge must be addressed
simultaneously, an effort that would dramatically improve the
Commonwealth's future.
______
Questions Submitted for the Record to Douglas Holtz-Eakin
Questions Submitted by Hon. Orrin G. Hatch
Question. Would you recommend any changes in federal tax policy
that would affect Puerto Rico and, if so, what specific changes would
you recommend and why?
Answer. Puerto Rico is in part dependent on federal reimbursements
of rum excise taxes. These reimbursements are currently based on an
enhanced, ``temporary'' basis that is routinely renewed in Congress's
annual tax ``extenders'' package. If this package is not renewed,
Puerto Rico (and the U.S. Virgin Islands) would receive lower
reimbursements--a combined $168 million in subsidies.\1\ As part of
broader tax reform measures, Congress should regularize its tax
policies to improve predictability and stability of provisions like the
extenders.
---------------------------------------------------------------------------
\1\ https://www.jct.gov/publications.html?func=startdown&id=4677.
Question. We've all heard the argument that the so-called
Affordable Care Act provided streams of elevated health care funding
for Puerto Rico that came with cliffs, where the ramped up spending
will, under the law, be lowered down the road. Now, some people--
including more than a few outspoken proponents of the Affordable Care
Act--are telling us that those cliffs will cause undue harm to the
people of Puerto Rico and must be either eliminated or delayed. As I
said in my opening statement, it is no surprise to me that the
---------------------------------------------------------------------------
Affordable Care Act imposes harm on Americans.
My question is whether you agree with me that, if the funding
cliffs written into that law are simply removed by effectively
increasing federal health care funding to Puerto Rico, we will
necessarily see reduced healthcare funds for states, fewer available
funds for other federal programs, higher taxes, expanded debt, or some
combination of all of these outcomes. Do you share that view? Why or
why not.
Answer. I agree. Increasing federal outlays for Puerto Rico
involves either higher taxes or borrowing by the Treasury.
Alternatively, it would be possible to avoid this by cutting spending
elsewhere--either state-based health programs or other priorities.
As an aside, there is no compelling case to remove the sunset. As
was made clear by Melba Acosta in her responses to your questions, when
the ACA funding was provided Puerto Rico cut its spending on health and
directed it elsewhere. Obviously a higher level of health spending was
not desired or Puerto Rico would have kept its funding in place. When
the ACA cliff occurs, the same sequence can simply be run in reverse.
______
Prepared Statement of Sergio M. Marxuach, Policy Director,
Center for a New Economy, San Juan, PR
``The paths of progress in history have proved to be more
devious and unpredictable than the putative managers of history
could understand.''
--Reinhold Niebuhr, ``The Irony of American History'' (1952)
Good morning, Chairman Hatch, Ranking Member Wyden, and members of
the United States Senate Committee on Finance. For the record, my name
is Sergio Marxuach, and I am the Policy Director at the Center for a
New Economy, Puerto Rico's only, not-for-profit, independent, and non-
partisan think tank. I thank you for the opportunity to appear today
before this Committee to discuss Puerto Rico's financial and economic
challenges.
Puerto Rico, usually invisible to the U.S. media, has been in the
news recently, especially since the governor announced that the
island's public debt of $72 billion, equivalent to 103 percent of its
GNP, was ``unpayable'' and needs to be restructured.\1\
---------------------------------------------------------------------------
\1\ In Puerto Rico, GNP, which measures income earned by residents
or by locally owned production factors, is a more accurate measure of
economic activity than GDP, due to distortions induced by the transfer
pricing practices of multinational companies operating in the island.
For a technical analysis of the GNP/GDP gap in Puerto Rico, see
``Economic Growth'' by Barry P. Bosworth and Susan M. Collins in The
Economy of Puerto Rico: Restoring Growth (Brookings Institution Press:
Washington, DC, 2006), p. 17-81.
The island, a U.S. territory since 1898, has experienced severe
economic problems for several years now. Its economy has been
contracting or stagnant at least since 2006, and unemployment, poverty,
and inequality levels are extremely high, especially in comparison with
the 50 States in the mainland.\2\
---------------------------------------------------------------------------
\2\ To put the situation in perspective, consider that Puerto
Rico's per capita income is one third of the United States' and close
to one half of the poorest State, Mississippi; its poverty rate is 46
percent in comparison with 15 percent in the United States as a whole;
and 38 percent of its population receives nutritional assistance, while
only 13 percent of the population in the 50 States receives such
assistance.
Furthermore, decades of fiscal and economic mismanagement have
engendered an economy characterized by: (1) chronic primary deficits;
(2) high debt-to-GNP ratios; (3) low employment levels in the formal
economy; (4) a large informal economy, encompassing both legal and
illegal activities; (5) significant government corruption and predatory
rent-seeking behavior in both the public and private sectors; \3\ (6)
substantial tax evasion; (7) a hollow productive base; and (8) high
levels of private consumption and indebtedness enabled by having access
to a stronger currency than its economic fundamentals would warrant. In
our opinion, the parallels with Greece are quite evident for all to see
and none to misunderstand.
---------------------------------------------------------------------------
\3\ ``Rent-seeking'' can be defined as the pursuit of uncompensated
value from other economic agents, in contrast with profit-seeking,
where economic agents seek to create value through mutually beneficial
economic activity.
Notwithstanding this dismal economic situation, the island managed
to triple its public debt from $24 billion in 2000 to $72 billion in
2015. Indeed, during this period Puerto Rico's public indebtedness grew
at a compound annual rate of 7.6 percent, while its income (GNP) grew
---------------------------------------------------------------------------
at a nominal rate of only 3.6 percent.
Given that Puerto Rico's indebtedness grew at an average annual
rate two times faster than the growth rate of its GNP during the past
15 years, it should not be surprising that Puerto Rico's public debt
currently exceeds its GNP. To be fair, however, for decades the
borrowed money was put to good use to finance the construction of
public schools, hospitals, highways, and other essential
infrastructure. The problem is that during the last 20 years or so, a
large portion of the money borrowed by issuing long-term debt was used
to finance budget deficits, operating expenses, and classic pork-barrel
spending.
We at CNE had warned for years that Puerto Rico's levels and rates
of indebtedness were not sustainable.\4\ In February 2014, the three
principal rating agencies ratified our analysis by downgrading the
Commonwealth's debt, as well as debt issued by several of its agencies
and instrumentalities, to speculative or non-
investment grade. Since then, the Commonwealth and its agencies and
instrumentalities have been downgraded further by the three main rating
agencies.
---------------------------------------------------------------------------
\4\ See, for example, CNE's Policy Brief--Municipal Fiscal Crises
in the United States: Lessons and Policy Recommendations for Puerto
Rico, published in April 2006.
The rating downgrades had a material adverse effect on the
Commonwealth's finances because they essentially shutdown its access to
the capital markets, at least at reasonable rates. This, at a time when
the central government is still running a sizeable budget deficit,
several of the Commonwealth's agencies and instrumentalities face
significant maturities in the near term, the economy is contracting at
an estimated annual rate of 1.2 percent, liquidity is running extremely
tight, and net outmigration has increased to levels not seen since the
---------------------------------------------------------------------------
1960s.
Given the magnitude and multiplicity of challenges faced by Puerto
Rico, it should be obvious that there are no quick fixes to solve the
island's fiscal and economic problems.
In our opinion, what is needed in the short-term is a two-prong
action program, both at the Federal level and in Puerto Rico. In
Washington, Congress needs to implement a comprehensive program, remove
some of the disadvantages imposed on Puerto Rico under the current
political arrangement, and eliminate some long-standing discriminatory
policies. The current situation simply does not allow for piecemeal
action by Washington, a wide-ranging plan is needed.
Specifically, this Committee could introduce legislation on two
issues that could have a positive and significant short-term impact on
both the fiscal and economic growth parts of the problem.
On the fiscal side, the cost of the Government Health Plan is one
of the principal drivers of Puerto Rico's budget deficit.\5\ Providing
Puerto Rico equal treatment under Federal health programs, such as
Medicare, Medicaid, and the Affordable Care Act would provide the
Commonwealth with some much-needed fiscal space and address a long-
standing injustice inflicted on Puerto Ricans. For the truth of the
matter is that Puerto Rican workers and employers pay the same payroll
taxes as workers and employers in the mainland, yet benefits to Puerto
Rico are unfairly rationed by Federal legislation.\6\
---------------------------------------------------------------------------
\5\ Commonwealth of Puerto Rico Quarterly Report, dated May 7,
2015, p. 20-21 and 37-40.
\6\ See United States Government Accountability Office, U.S.
Insular Areas: Multiple Factors Affect Federal Health Care Funding,
GAO-06-75 (October 2005), and Puerto Rico: Information on How Statehood
Would Potentially Affect Selected Federal Programs and Revenue Sources,
GAO-14-31 (March 2014).
On the economic growth side of the equation, we recommend extending
the Federal Earned Income Tax Credit (EITC) program to Puerto Rico. The
Federal EITC is the most effective anti-poverty program in the United
States. Recent research also shows that it encourages work, promotes
savings, helps poor families smooth out the effect of unexpected
financial shocks, and builds a strong sense of future orientation among
recipients.\7\ Extending this program to Puerto Rico, which would
provide a significant wage supplement to Puerto Rican working families,
could be expected to stimulate aggregate demand in the short-run.
---------------------------------------------------------------------------
\7\ See Bruce D. Meyer, ``The Effects of the Earned Income Tax
Credit and Recent Reforms'' in Tax Policy and the Economy, Volume 24,
Jeffrey R. Brown, ed. (University of Chicago Press, 2010); Sara
Sternberg Greene, The Broken Safety Net: A Study of Earned Income Tax
Credit Recipients and a Proposal for Repair, New York University Law
Review, Vol. 88, No. 2, May 2013; V. Joseph Hotz, Charles H. Mullin,
and John Karl Scholz, Examining the Effect of the Earned Income Tax
Credit on the Labor Market Participation of Families on Welfare, NBER
Working Paper 11968 (National Bureau of Economic Research: Cambridge,
MA, 2006); and Chuck Marr, Chye-Ching Huang, and Arloc Sherman, Earned
Income Tax Credit Promotes Work, Encourages Children at School,
Research Finds (Center on Budget and Policy Priorities: Washington, DC,
2014), among others.
Outside the scope of this Committee's jurisdiction, a Federal
comprehensive policy package could include approving legislation to
authorize the Puerto Rican Government to allow its distressed agencies
and municipalities to file for bankruptcy under Chapter 9 of the U.S.
Bankruptcy Code; exempting Puerto Rico from coast-wise shipping laws
(Jones Act), which require the use of relatively expensive U.S. vessels
for trade between Puerto Rico and the U.S., and approving legislation
to relax the overly binding income and asset limits that apply to
---------------------------------------------------------------------------
recipients of certain social assistance programs.
This Federal assistance would be conditioned on Puerto Rico
agreeing to (1) increase tax revenues by improving enforcement efforts,
closing down ineffective tax loopholes, and modernizing its property
tax system; (2) crack down on government corruption; (3) significantly
improve its Byzantine and unduly opaque financial reporting; (4) reform
an unnecessarily complicated permitting and licensing system that
stifles innovation; (5) undertake affirmative actions to materially
lower energy and other costs of doing business in the island; and (6)
substantially improve educational standards.
In addition to all of the above, Puerto Rico also needs to obtain
some debt relief. After years of relying on accounting gimmicks,
forward refundings; back-loaded ``scoop and toss'' refinancings,
capitalized interest payments, and other short-term, expensive
liquidity fixes, the Commonwealth has finally admitted that its debt is
unsustainable.
While it is true that Puerto Rico's capacity to repay its debt
ultimately depends on restoring economic growth in the island, there
can be no economic recovery without debt sustainability and that, in
turn, is not possible without significantly restructuring at least some
of the debt.
According to a recent paper by Carmen Reinhart and Christoph
Trebesch, `` `kicking the can down the road' via cash flow relief and
debt rescheduling does not facilitate economic recovery in debtor
countries. In protracted crises, growth only picks up after deeper debt
relief, such as after the Brady plan.'' \8\
---------------------------------------------------------------------------
\8\ Carmen M. Reinhart and Christoph Trebesch, Sovereign Debt
Relief and Its Aftermath, Faculty Research Working Paper Series, John
F. Kennedy School of Government, RWP 15-028 (June 2015), p. 33.
Analyzing 35 debt relief episodes in 30 middle and high-income
countries during period between 1978 and 2010, these researchers found
(1) that ``sovereign debt relief averaged . . . 16 percent of GDP and
36 percent of external debt in the middle-high-income emerging markets
[crises]'' during that period and (2) emerging market countries that
received significant debt relief reported, on average, an 11 percent
increase in per capita income during the 5 years following ``decisive
---------------------------------------------------------------------------
debt relief.''
They conclude that ``softer forms of crisis resolution, such as
debt rescheduling, temporary payment standstills, and bridge lending
operations were not generally followed by higher growth and better
ratings;'' and, ``These crisis resolution tools were ineffective in
solving debt crises that had been dragging on for several years.'' \9\
Therefore, obtaining significant debt relief for Puerto Rico appears to
be a necessary condition to restore economic growth in the island.
---------------------------------------------------------------------------
\9\ Id. at p. 34.
On the other hand, it should be obvious that obtaining debt relief
is not sufficient, in and of itself, to jumpstart economic growth. The
important point in the case of Puerto Rico, is that any savings derived
from a reduction in debt service be used exclusively to advance and
implement a renewed industrial policy, broadly defined, based on
horizontal policies such as the ones described above, discovering new
sectorial opportunities through a process of dialogue and consultations
with key stakeholders in the private and civic spheres, and
``identifying spillovers, externalities, and other areas where society
could learn more.'' \10\
---------------------------------------------------------------------------
\10\ Joseph E. Stiglitz and Bruce C. Greenwald, Creating a Learning
Society: A New Approach to Growth, Development, and Social Progress
(Columbia University Press: New York, 2014),
p. 489.
This new learning, in turn, would lead to: new investment in R&D,
increased productivity, identifying new areas of comparative advantage
for Puerto Rican firms, higher economic growth and the creation of
high-quality jobs, which at the end of the day is what will
categorically end Puerto Rico's economic stagnation. We at the Center
for a New Economy are currently working with experts from Columbia,
Brown, MIT, and Brookings, among other institutions, to develop this
---------------------------------------------------------------------------
medium to long-term industrial policy for Puerto Rico.
Finally, I would be negligent if I did not raise the question of
whether Puerto Rico has reached the limits of what it can do to improve
the quality of life of its people within the constraints imposed by its
subordinate political status. Neither a sovereign country nor a State
of the union, Puerto Rico has no authority to negotiate international
treaties, no access to emergency financing from multilateral
institutions, no monetary policy instruments, limited fiscal policy
tools, nominal representation in Congress, and the U.S. Supreme Court
has determined it is constitutionally permissible for Congress to
discriminate against Puerto Rico in the application of Federal programs
as long as there exists a ``rational basis'' for doing so.
Thus, Puerto Rico lives in a state of permanent limbo, a status
that is both humiliating to Puerto Ricans and unworthy of the United
States. Simply stating that it is up to Puerto Ricans to decide their
political status, while true, is insufficient because the United
States' Congress has long-standing legal and moral obligations with
respect to Puerto Rico that it has failed to honor. Congressional
failure to act not only highlights a shameful lack of political will,
it also weakens the United States' moral standing and its ability to
effectively utilize its ``soft power'' in the international arena, when
it argues for better treatment for Hong Kong by China, for the
Palestinians by Israel, or for Greece by members of the Eurozone.\11\
---------------------------------------------------------------------------
\11\ See Joseph S. Nye, Jr., Soft Power: The Means to Success in
World Politics (Public Affairs: New York, 2005)
In this context I would like to quote from the remarks made just a
few days ago by an extraordinary man who came to this magnificent
building to address a rare joint session of Congress. Drawing from a
deep well of wisdom that has accumulated for over twenty centuries, he
---------------------------------------------------------------------------
stated:
``Your own responsibility as members of Congress is to enable this
country, by your legislative activity, to grow as a nation. You are the
face of its people, their representatives. You are called to defend and
preserve the dignity of your fellow citizens in the tireless and
demanding pursuit of the common good, for this is the chief aim of all
politics. A political society endures when it seeks, as a vocation, to
satisfy common needs by stimulating the growth of all its members,
especially those in situations of greater vulnerability or risk.
Legislative activity is always based on care for the people. To this
you have been invited, called and convened by those who elected you.''
\12\
---------------------------------------------------------------------------
\12\ Pope Francis, remarks before the Congress of the United
States of America, September 24, 2015.
In conclusion, Mr. Chairman, I thank you and the Committee once
again for the opportunity to participate in this important public
policy debate and look forward to answering any questions that you or
---------------------------------------------------------------------------
Committee Members may deem appropriate.
See also, ``Puerto Rico Fiscal Balance, 1998-2013,'' Sergio M.
Marxuach, Center for a New Economy, September 29, 2015 and ``Analysis
of the Governor's Budget Request for Fiscal Year 2016,'' Sergio M.
Marxuach, Center for a New Economy, June 2015, http://
www.finance.senate.gov/imo/media/doc/Senate%20Finance%20Testi
mony%20-%20Sergio%20Marxuach.pdf.
______
Questions Submitted for the Record to Sergio M. Marxuach
Question Submitted by Hon. Orrin G. Hatch
Question. Would you recommend any changes in federal tax policy
that would affect Puerto Rico and, if so, what specific changes would
you recommend and why?
Answer. We recommend extending the federal Earned Income Tax Credit
(``EITC'') program to Puerto Rico. The federal EITC is the most
effective anti-poverty program in the United States. Recent research
also shows that it encourages work, promotes savings, helps poor
families smooth out the effect of unexpected financial shocks, and
builds a strong sense of future orientation among recipients.\1\
Extending this program to Puerto Rico, which would provide a
significant wage supplement to low-income Puerto Rican working
families, could be expected to stimulate aggregate demand in the short-
run.
---------------------------------------------------------------------------
\1\ See Bruce D. Meyer, ``The Effects of the Earned Income Tax
Credit and Recent Reforms'' in Tax Policy and the Economy, Volume 24,
Jeffrey R. Brown, ed. (University of Chicago Press, 2010); Sara
Sternberg Greene, The Broken Safety Net: A Study of Earned Income Tax
Credit Recipients and a Proposal for Repair, New York University Law
Review, Vol. 88, No. 2, May 2013; V. Joseph Hotz, Charles H. Mullin,
and John Karl Scholz, Examining the Effect of the Earned Income Tax
Credit on the Labor Market Participation of Families on Welfare, NBER
Working Paper 11968 (National Bureau of Economic Research: Cambridge,
MA, 2006); and Chuck Marr, Chye-Ching Huang, and Arloc Sherman, Earned
Income Tax Credit Promotes Work, Encourages Children at School,
Research Finds (Center on Budget and Policy Priorities: Washington, DC,
2014), among others.
______
Questions Submitted by Hon. Maria Cantwell
Question. Paired federal-local action: You say that what is needed
for Puerto Rico in the short term is ``a two-prong action program, both
at the federal level and in Puerto Rico.'' On the Federal side you
recommend: equal treatment under federal health programs; extending the
EITC; allowing municipalities access to Chapter 9 of the Bankruptcy
Code; an exemption from the Jones Act; and relaxing income and asset
limits on certain social assistance programs. This federal assistance,
you say, should be conditioned on Puerto Rico agreeing to: increasing
tax revenues by improving enforcement, closing loopholes and reforming
property taxes; cracking down on corruption; improving financial
reporting; reforming permitting and licensing; lowering energy costs;
and improving educational standards.
Assuming Congress is prepared to enact some of the Federal actions
you recommend provided Puerto Rico agrees to some of the conditions you
recommended, what do you recommend as a mechanism to monitor and
enforce Puerto Rico's implementation of the conditions you have
recommended?
Answer. See our answer to the question on partnership below.
Question. Would you describe in a bit more detail the six
conditions you have recommended that Puerto Rico agree to, and describe
for each whether the Puerto Rico government has developed a plan and
taken meaningful steps to implement each recommendation?
Answer. In general, tax revenues are a function of (1) compliance
and enforcement; (2) legislation; and (3) economic growth.
Tax evasion in Puerto Rico is widespread, and tax enforcement
traditionally has been lax and fairly slipshod. To put it
diplomatically, there is certainly room for improvement in this area.
In terms of legislation, the Puerto Rico tax code is chock-full of
credits, deductions, exclusions, exemptions, and special rates that
have been enacted in a scattershot manner to promote ``economic
growth.'' Part of the problem is that the Puerto Rico Department of the
Treasury has no instruments to measure the effectiveness of these tax
expenditures in generating either growth or employment and they
significantly erode the tax base, resulting in a tax system with
relatively high statutory rates applied to a relatively small base.
That is precisely the opposite of the mainstream consensus among tax
economists who favor low rates applied to a relatively large tax base
to in order to minimize economic distortions.
Furthermore, the property tax system in Puerto Rico has not been
thoroughly overhauled since the 1950s. This has resulted in a situation
that can be charitably characterized as dysfunctional.
Finally, economic growth has been stagnant at least since 2006, so
there has been little revenue growth generated from economic activity.
To be fair, the Government of Puerto Rico hired KPMG in 2013 to
carry out an extensive analysis of the Treasury Department's
operations, to propose changes to the tax code and other improvements
to the tax collection system. Unfortunately many of these
recommendations have not been implemented.
Second, the corruption of government institutions is particularly
harmful to economic growth as it engenders social mistrust, has a
chilling effect on investment, and leads to the inefficient allocation
of scarce resources. From an economic perspective, good institutions
ensure at least two desirable outcomes: first, they guarantee that
there is relatively equal access to economic opportunity, what is
commonly referred to as a ``level playing field;'' and second, they
ensure that those who provide labor and capital are appropriately
rewarded and their property rights are protected.
Puerto Rico may be reaching the outer limits of its government
institutional framework, as the economic playing field is increasingly
tilted in favor of those with political connections and the providers
of both labor and capital are concerned about the protection of their
respective rights. Simply put, reforming our institutions and
eradicating corruption from the system is a necessary condition, but
not sufficient, to reignite economic growth in the island.
Third, the Commonwealth has had longstanding problems with its
accounting, financial and fiscal controls, and thus, with its financial
reporting in general. According to the most recent Commonwealth Report:
The Commonwealth's accounting, payroll and fiscal oversight
information systems have deficiencies due to obsolescence and
lack of compatibility that have adversely affected the
Commonwealth's ability to supervise and control expenditures.
Agencies often incur expense overruns that are not detected in
time to permit the implementation of corrective measures during
the same fiscal year. At the present time, three of the
Commonwealth's agencies which are responsible for over 50% of
the General Fund expenses have separate accounting systems that
are unable to interact on a timely basis with the
Commonwealth's central accounting system. In addition, the
Commonwealth's central accounting system still relies on
various manual processes for recordkeeping that are only
reviewed and updated at the end of the fiscal year in
connection with the issuance of the audited financial
statements. These deficiencies also affect the Commonwealth's
ability to timely and accurately report financial information
to the market, and to complete its audited financial statements
in a timely manner. (emphasis is ours)
A committee named by the Secretary of Treasury to evaluate and
submit recommendations with respect to the Commonwealth's
accounting systems has concluded its work and presented its
findings and recommendations to the Secretary of Treasury. Such
findings and recommendations are being evaluated to determine
next steps. Some of the proposed changes are expected to
improve the Commonwealth's ability to monitor, control and
forecast expenses.\2\
---------------------------------------------------------------------------
\2\ Commonwealth of Puerto Rico, Financial Information and
Operating Data Report, November 6, 2015, p. 42.
Fourth, for decades the government of the Commonwealth has
unsuccessfully tried to reform an unnecessarily complicated permitting
and licensing system that stifles innovation. The permitting process--
whereby the government oversees construction and real estate
development projects, the commercial use of equipment and facilities,
and the periodic renewal of various business licenses--suffers from
several serious problems. These problems raise the costs of doing
business, undercut the drive for employment growth, and retard economic
---------------------------------------------------------------------------
development.
Puerto Rico's regulatory environment deters business entry, hampers
job creation, and erodes competitive pressures in many ways.
Occupational licensing requirements create artificial entry barriers,
restricting the supply of services and raising prices to consumers.
Government oversight of business entry and location decisions raises
entry costs and affords commercial rivals the opportunity to block
entry. ``Buy local'' laws insulate business interests from foreign
competition and raise prices for consumers. Like many provisions of the
tax code, these aspects of the regulatory environment serve special
business interests at the expense of the general welfare. They reflect
and promote a business culture focused on rent seeking.
Fifth, the Puerto Rico Electric Power Authority (``PREPA'')
supplies substantially all of the electricity consumed in the
Commonwealth. PREPA owns all transmission and distribution facilities
and most of the generating facilities that constitute Puerto Rico's
electric power system.
Notwithstanding its state-sanctioned monopoly status, PREPA managed
to sustain net losses of $267 million during fiscal year 2014, compared
with net losses of $283 million during fiscal year 2013 and net losses
of $346 million during fiscal year 2012.
PREPA's operating results have been adversely affected in recent
years by a decrease in electric energy demand caused in part by a
declining population and a prolonged recession, high fuel costs which
result from reliance on oil for energy generation, high capital
expenditure requirements associated with ageing generating facilities,
and a high level of debt. As of September 30, 2015, PREPA's debt
included $8.229 billion of outstanding revenue bonds and $696 million
under bank working capital lines of credit. PREPA also owed GDB
approximately $35 million under a line of credit.
During the past year or so, the Government of Puerto Rico has taken
several steps to restructure PREPA. For example:
On May 27, 2014, the Governor signed into law Act No. 57 of
2014 (``Act 57-2014''), known as ``The Energy Transformation and Relief
of Puerto Rico Act.'' Act 57-2014 provides that two entities will
oversee the new law's implementation. The Puerto Rico State Office of
Energy Policy (``SOEP'') (formerly the Energy Affairs Administration),
will be responsible for developing and promoting the Commonwealth's
energy policy, and the Puerto Rico Energy Commission (``PREC''), will
be responsible for overseeing and regulating the implementation of the
Commonwealth's energy policy. Among its duties, PREC will be
responsible for approving the electricity rates proposed by PREPA.
In August 2014, PREPA initiated negotiations with its
principal creditors, including bondholders, bank lenders, monoline
insurers, and the GDB to restructure its debt.
In September 2015, PREPA announced it had reached agreements
``in principle'' to restructure its debt with an Ad Hoc Group of
Bondholders that own approximately 35% of PREPA's outstanding bonds and
with a group of bank lenders.
The effectiveness of those agreements, however, is contingent
on the Puerto Rico legislature approving the so-called PREPA
Revitalization Act. According to the most recent Commonwealth Report:
``The PREPA Revitalization Act sets forth a framework for PREPA to
execute on the agreements with creditors reached to date. Among other
things, the PREPA Revitalization Act would (1) enhance PREPA's
governance processes; (2) adjust PREPA's practices for hiring and
managing management personnel; (3) change PREPA's processes for
collecting outstanding bills from public and private entities; (4)
improve the transparency of PREPA's billing practices; (5) implement a
competitive bidding process for soliciting third party investment in
PREPA's infrastructure; (6) allow for the refinancing of existing PREPA
bonds through a securitization that would reduce PREPA's indebtedness
and cost of borrowing; and (7) set forth an expedited process for the
Energy Commission to approve or reject PREPA's proposal for a new rate
structure that is consistent with its recovery plan.'' \3\
---------------------------------------------------------------------------
\3\ Commonwealth of Puerto Rico, Financial Information and
Operating Data Report, November 6, 2015, p. 197-198.
As of the date of this document, however, it is not clear whether
(1) Garcia-Padilla has the votes to enact the PREPA Revitalization Act
or (2) a final agreement will be reached with PREPA's creditors. Nor
has the Administration put forth an estimated date of when all these
reforms will have a positive net effect on rates paid by PREPA's
---------------------------------------------------------------------------
customers.
Sixth, a dramatic gain in educational attainment stands out as a
major contributor to Puerto Rico's past economic growth. However, there
is evidence that this area of former strength is now encountering
significant problems. Families that can afford to do so are abandoning
the public school system in response to problems of violence,
perceptions of declining quality, and a lack of accountability at all
levels. These problems are similar to those faced by many large urban
systems on the mainland, but the rate of deterioration seems more rapid
in Puerto Rico.
The Puerto Rico Senate recently passed a bill for major education
reform in Puerto Rico. As of this writing, however, the Puerto Rico
House of Representatives has not acted on this bill. If enacted and
signed into law by the governor, it is probable that different interest
groups within the Puerto Rico Department of Education Bureaucracy will
oppose the implementation of this reform.
Question. Case studies: On page 6, you write about an analysis of
35 debt relief episodes in 30 countries.
Did this analysis include an examination of monitoring and control
mechanisms that were used to ensure implementation of financial and
policy reforms?
Answer. No. Most, though not all, of the debt relief episodes
analyzed in that paper occurred in the context of negotiating a
structural reform package as a predicate for obtaining short-term
liquidity from the International Monetary Fund. The IMF usually
monitors the progress of the implementation of financial and policy
reforms in countries that have agreed to undertake the implementation
of structural adjustment policies.
Question. What advice would you give the Committee regarding
mechanisms to ensure implementation of reforms?
Answer. See our answer to the question on partnership below.
Question. Partnership: Currently, the U.S. Treasury has a Puerto
Rico Working Group that is providing technical assistance to the Puerto
Rico Government. In addition, the Governor is recommending the
establishment of a local Control Board to implement elements of his 5-
year plan.
Do you have any suggestions on ways that the local Control Board
and the Treasury Working Group could be brought more closely together
in partnership to better assure positive outcomes?
Answer. This is really a political economy problem. On the one
hand, if the Treasury Working Group takes over the fiscal oversight
function completely it may suffer from a lack of legitimacy and
representation. On the other hand, the proposed Commonwealth's Control
Board, as structured right now, may suffer from a lack of credibility
with the capital markets and, it may fail, due to political pressures,
to impose adequate accountability standards on other agencies of the
Puerto Rican government. The problem therefore is to identify the
proper tradeoff between these two options.
In this case we recommend the Committee analyze the option of
establishing a fiscal council with representatives from both the
Federal and the Commonwealth governments and from the private sector.
According to the International Monetary Fund:
Fiscal councils are independent public institutions aimed at
promoting sustainable public finances through various
functions, including public assessments of fiscal plans and
performance, and the evaluation or provision of macroeconomic
and budgetary forecasts. By fostering transparency and
promoting a culture of stability, they can raise reputational
and electoral costs of undesirable policies and broken
commitments.\4\
---------------------------------------------------------------------------
\4\ International Monetary Fund, The Functions and Impact of Fiscal
Councils, IMF Policy Paper, July 16, 2013, p. 1.
These councils have been used, with mixed success to be honest, in
several countries to stabilize government finances and oversee the
---------------------------------------------------------------------------
implementation of fiscal and economic reforms.
Question. Industrial Policy: On page 7, you mention the CNE's work
with experts at Columbia, Brown, MIT, Brookings and others to develop a
medium to long-term industrial policy for Puerto Rico.
Can you outline the general approach that this research is taking
and when you expect that a formal paper on this work will be available?
Answer. What Puerto Rico needs the most is to grow its economy.
Short-term fixes will not work and short sightedness by the government
on matters pertaining to economic development is partly to blame for
our current situation. It is important to understand that the
comparable situation here is not that of a two-year business cycle. A
more realistic time horizon for registering significant economic gains
in a country could be up to 10 years.
Crafting development and growth strategies is an endeavor best
suited to academics and economic development experts. It should also
stem from a country dialogue process to insure legitimacy and sustained
acceptance by civil society. A project like this is already underway
and led by CNE. The project is identified as the Roundtable for a New
Economy, and in it, CNE and its partners--Professor Joseph Stiglitz and
the Initiative for Policy Dialogue at Columbia University (IPD), the
Brookings Institution (BI), and the Watson Institute for International
Studies and Public Affairs at Brown University--aim to create a
transformation agenda based on well-thought policy solutions that
command the support of a broad group of key stakeholders. This novel
project combines top-notch research and civic engagement to transcend
the current juncture and restructure the island's outdated economic
model.
Unique in resources, structure and processes, this bold initiative
will inspire first-class actionable research and policy making as the
foundation for a series of dialogues that will engage a wide swath of
Puerto Rican stakeholders in considering, discussing, crafting and
implementing the optimal policy solutions to current challenges. We are
working within a three-year time horizon to produce and divulge
specific research products and policy proposals, but are currently
accelerating the project's timeline due to the urgency of Puerto Rico's
situation.
______
Prepared Statement of Hon. Pedro R. Pierluisi, Resident Commissioner of
Puerto Rico, U.S. House of Representatives
Chairman Hatch, Ranking Member Wyden, and members of the committee:
Thank you for holding this hearing and inviting me to testify.
Puerto Rico, a U.S. territory home to 3.5 million American
citizens, is experiencing the most severe crisis in its history. At the
outset, it is important to emphasize that the crisis in Puerto Rico is
not new; it has been simmering for years without attracting much
attention. Now that it has reached a particularly acute stage, the
press and the public have taken notice. My testimony will outline the
nature of the crisis and then recommend concrete steps that can be
taken at the local and Federal level to resolve it.
My constituents are understandably weary of studies, reports, plans
and working groups. They are tired of empty promises and ill-informed
proposals. They want, and they deserve, action on the part of political
leaders in San Juan and Washington, DC. They seek smart policies,
swiftly implemented, that will have a tangible impact on their lives.
Accordingly, my testimony will focus less on explaining how bad
things are and more on how we as policymakers can make them better. I
will look backward only to the extent it helps delineate a path
forward.
the nature of the crisis
The current crisis has three main components.
First, the crisis is economic. Puerto Rico is a U.S. jurisdiction,
so the 50 States--not foreign nations--serve as the proper point of
comparison. By any economic metric, the performance gap between the
States and the territory is large. Puerto Rico's economy has lagged
behind that of the States for at least four decades. Except for one
year of slight growth in fiscal year 2012, Puerto Rico's economy--as
measured by the territory's gross national product--has contracted
every year since fiscal year 2007.\1\ The Puerto Rico Government
Development Bank's Economic Activity Index (GDB-EAI), which is highly
correlated with GNP, has fallen by 20 percent since 2005.\2\ Since the
Federal Government began collecting state-by-state statistics in the
1970s, Puerto Rico's unemployment rate has always been far higher and
its labor participation rate--the share of adults in a jurisdiction
working or seeking work--has always been far lower than those of any
State. Puerto Rico's current unemployment rate is 11.6 percent,
compared to a U.S. national average of 5.1 percent. Approximately
995,000 individuals are employed in Puerto Rico, about 220,000 (22
percent) of whom are employed by the central government, its public
corporations, or one of the island's 78 municipal governments. The
number of people currently working in Puerto Rico--995,000--is nearly
250,000 (or 20 percent) less than the number of people who were working
on the island a decade ago in August 2005. Meanwhile, over 130,000
individuals are presently seeking, but cannot obtain, employment.\3\
Many other individuals have stopped searching for work altogether. The
territory's labor participation rate is under 40 percent, compared to a
U.S. national average of over 62 percent.\4\ The number of island
residents living at or below the Federal poverty level exceeds 46
percent, compared to a national average of about 16 percent.\5\
---------------------------------------------------------------------------
\1\ See ``An Update on the Competitiveness of Puerto Rico's
Economy,'' Federal Reserve Bank of New York (July 31, 2014), at page 3,
available at www.newyorkfed.org/outreach-and-education/puerto-rico/
2014/Puerto-Rico-Report-2014.pdf. Gross national product is generally
considered a more accurate measure of Puerto Rico's economy than gross
domestic product.
\2\ See Puerto Rico Fiscal and Economic Growth Plan, Working Group
for the Fiscal and Economic Recovery of Puerto Rico, at page 8
(September 9, 2015), available at www.bgfpr.com/; see also GDB-EAI
(June 2015), at page 7, available at www.bgfpr.com/documents/2015-Jun-
GDB-EAI.pdf.
\3\ See Bureau of Labor Statistics, U.S. Department of Labor,
available at www.bls.gov/eag/eag.pr.htm and data.bls.gov/timeseries/
LASST720000000000003.
\4\ See Puerto Rico Institute of Statistics (July 2015), at page 3,
available at www.estadisticas.gobierno.pr/iepr/Estadisticas/
InventariodeEstadisticas/tabid/186/ctl/view_
detail/mid/775/report_id/2b640ee2-d186-45b9-84a1-765e7345c188/
Default.aspx?f=1.3,1.4,2 (citing a labor participation rate of 39.5
percent).
\5\ See U.S. Census Bureau, 2014 American Community Survey,
available at www.factfinder.census.gov/faces/tableservices/jsf/pages/
productview.xhtml?fpt=table.
Second, Puerto Rico's crisis is fiscal. Although it is difficult to
paint a completely accurate historical picture of Puerto Rico's public
finances, because statistics published by the government of Puerto Rico
are often unavailable, incomplete or inconsistent with other official
sources of information, there is no dispute that the central
government's annual expenditures have exceeded its annual revenues for
many years. Moreover, Puerto Rico has numerous bond-issuing public
corporations that provide a variety of essential services, and several
of these corporations are in severe financial distress and have
accumulated significant debt over the last 15 years. Puerto Rico's
total public sector debt has steadily grown since the mid-1980s, with
the sharpest increase taking place in the period since 2001, when the
government of Puerto Rico began to shift from borrowing for capital
investment to borrowing to fund government operations, to compensate
for declining revenue resulting from economic weakness, and to cover
increased spending. The debt was less than $20 billion in 1985,
approximately $22.5 billion in 1995, over $42 billion in 2005,
approximately $56.5 billion in 2008, and $71 billion in 2015--which is
roughly equal to Puerto Rico's GNP.\6\
---------------------------------------------------------------------------
\6\ See D. Andrew Austin, ``Puerto Rico's Current Fiscal
Challenges: In Brief,'' Congressional Research Service, at page 1,
available at www.fas.org/sgp/crs/row/R44095.pdf.
Puerto Rico's debt structure is complex. Approximately 18
government entities have bonds outstanding. For example, there are
$18.6 billion in bonds issued ($13.1 billion) or guaranteed ($5.5
billion) by the central government; $15.2 billion in bonds issued by
the Puerto Rico Sales Tax Financing Corporation--COFINA--that are
backed by sales tax revenue; and bonds issued by public corporations
like the electric power authority (PREPA; $8.1 billion), the highways
and transportation authority (PRHTA; $6 billion), and the water and
sewer authority (PRASA; $3.7 billion). The terms, source of repayment
and level of legal protection for each class of bonds are different.
For instance, Puerto Rico's constitution, which was authorized and
approved by Congress in the 1950s, provides that debt service payments
to owners of bonds issued or guaranteed by the central government are
to be prioritized over all other expenditures. There has typically been
high demand for bonds issued by U.S. territories, because the yields
are high relative to bonds issued by States and because Congress
enacted legislation decreeing that the interest income generated on
territory (and District of Columbia) bonds is not taxable at the
Federal, State or local level--regardless of where the investor
resides. Currently, nearly all bonds issued by government entities in
Puerto Rico are classified as non-investment (junk) grade by the credit
rating agencies. Puerto Rico's ability to issue new bonds at a
reasonable interest rate is highly uncertain and, as a result, the
territory government faces severe liquidity challenges.\7\ The fiscal
challenges confronting Puerto Rico are compounded by the massive
underfunding of its government pension systems.\8\
---------------------------------------------------------------------------
\7\ See Conway MacKenzie, Commonwealth of Puerto Liquidity Update
(August 25, 2015), available at www.bgfpr.com/documents/
150825ConwayMacKenzieLiquidityUpdateReport.pdf.
\8\ See Michelle Kaske, ``Puerto Rico's Bonds Overshadow Pension
Fund Poised to Go Broke,'' Bloomberg Business (September 25, 2015),
available at www.bloomberg.com/news/articles/2015-09-25/puerto-rico-s-
bonds-overshadow-pension-fund-poised-to-go-broke; see also Mary
Williams Walsh, ``Fierce Debt Puts Pensions at Risk in Puerto Rico,''
N.Y. Times (November 26, 2012), available at www.nytimes.com/2012/11/
27/business/puerto-rico-races-to-rescue-its-pension-
fund.html?hpw&_r=1&pagewanted=print.
Finally, the crisis is demographic. My constituents are relocating
to the States in extraordinary numbers, which--as U.S. citizens--they
can do for the price of a one-way plane ticket. According to the U.S.
Census Bureau, in 2000, Puerto Rico's population was a little over 3.8
million. By 2014, it had fallen by almost 7 percent to 3.5 million. In
2014, an estimated 84,000 individuals moved from Puerto Rico to the
States, while 20,000 residents of the States moved to Puerto Rico, for
a net population loss of 64,000.\9\ In both degree and duration, this
level of migration from a single jurisdiction appears to be
unprecedented in modern American history. There are now over 5.2
million individuals of Puerto Rican birth or descent living in the 50
States, compared to 3.5 million individuals residing on the island (3.4
million if individuals born outside of Puerto Rico are not included in
the calculation).\10\
---------------------------------------------------------------------------
\9\ See www.census.gov/hhes/migration/data/acs/state-to-state.html.
Of the 84,000, 28,000 (33 percent) moved to Florida, where over one
million individuals of Puerto Rican birth or descent now reside; 7,400
moved to Pennsylvania; 6,300 moved to Texas; 4,000 to 5,000 moved to
New York, Massachusetts, California, Connecticut, and New Jersey; and
1,000 to 2,000 moved to Virginia, Ohio, Mississippi, South Carolina,
Georgia, North Carolina, Illinois, and Maryland. Up to 1,000 moved to
26 other States.
\10\ See U.S. Hispanic Origin Groups, by Population, 2013,
available at www.pewhispanic.org/2015/09/15/the-impact-of-slowing-
immigration-foreign-born-share-falls-among-14-largest-us-hispanic-
origin-groups/ph_2015-09-15_hispanic-origins-02-2/; see also ``It's
Official: One Million Puerto Ricans in Florida! And the South Keeps
Growing,'' Center for Puerto Rican Studies, Hunter College, CUNY
(September 2015), available here.
Clearly, the three components of the crisis are interconnected. As
Puerto Rico's economy deteriorates, migration to the U.S. mainland
increases. As migration increases, consumer spending and government tax
collections decrease. The government may respond by raising taxes or
reducing spending on public services, which tend to spur further
migration. Assuming it has access to the markets, the government also
borrows to finance the deficit at high interest rates, a short-term
measure that compounds Puerto Rico's long-term problems, adding to its
overall debt burden and crowding out government investments in health,
safety, education, infrastructure and other priorities that are (by
necessity) subordinated to the repayment of principal and interest.
solutions to the crisis
To break this cycle, both the Puerto Rico Government and the
Federal Government must make fundamental changes. If the crisis has
taught us a single lesson, it is that a ``business as usual'' approach
in San Juan and Washington, DC will fail.
Solutions at the Puerto Rico government level
The core economic problem in Puerto Rico is the lack of growth, and
so the Puerto Rico government must--first and foremost--craft and
implement a comprehensive pro-growth strategy. (Historically, Puerto
Rico's problem is not the inability to devise economic plans, but the
inability to execute those plans.) If a government policy or program
inhibits growth, it should be discarded, unless there is a compelling
reason to retain it. To generate growth, the government must work
relentlessly to attract job-creating capital investment in Puerto Rico
from local and external sources in all sectors of the economy,
including manufacturing, retail, agriculture, tourism, professional
services, aviation, health and construction. This diversified approach
is the only way to meaningfully address the severe unemployment problem
in Puerto Rico, which is structural in nature. Individuals who are
working in the formal economy are less likely to leave Puerto Rico.
They will spend more money on goods and services, pay more in
consumption and income taxes, and require less support from the Federal
and territory governments. These men and women must earn a living wage
to support themselves and their families, however, and so I strenuously
oppose any effort to exempt Puerto Rico workers (of any age) from the
Federal minimum wage of $7.25 per hour. This ill-conceived proposal
would dramatically increase migration, create a disincentive to work,
and widen--rather than close--the gap between Puerto Rico and the
states.
In theory, Puerto Rico should be an attractive location for capital
investors, particularly relative to foreign jurisdictions in the
region. The island is blessed with natural beauty, a rich history, and
a vibrant culture. As a U.S. territory, Puerto Rico provides would-be
investors with all of the benefits associated with the world's most
stable and trusted banking, currency, and legal systems. Although
Puerto Rico's public education system requires major reforms, there is
no shortage of skilled, industrious and bilingual individuals who are
ready to work. Puerto Rico's status as a U.S. jurisdiction furnishes
numerous other comparative advantages in this respect. For instance,
the territory receives over $60 million annually from the U.S.
Department of Labor (DOL) under the Workforce Innovation and
Opportunity Act to provide training for youth, adults and dislocated
workers that have lost their jobs and need to rapidly acquire new
skills. The DOL also provides about $17 million in annual funding to
support three Job Corps centers in Puerto Rico that provide vocational
training to island youth so they are prepared to enter the workforce.
The U.S. Small Business Administration administers various programs in
Puerto Rico that help small businesses obtain bank loans and venture
capital, develop sound business plans, and compete for Federal
contracts. The U.S. Department of Commerce, through its Economic
Development Administration, provides grants and loans to support
economic development projects throughout Puerto Rico. The Rural
Development arm of the U.S. Department of Agriculture provides grants,
loans and loan guarantees to help improve infrastructure and enhance
public services in the territory's rural communities. Puerto Rico must
take full advantage of these and other Federal programs that are not
available to its foreign competitors and that can serve as catalysts
for economic growth.
In practice, however, the amount of job-creating, growth-generating
capital investment in Puerto Rico's private sector is far lower than it
should be. The main reason is that Puerto Rico has an excessively
bureaucratic and inefficient central government whose competence and
credibility--when it comes to fiscal policy, budgeting, financial
recordkeeping, tax collection, business permitting, professional
contracting, use of modern technology and overall performance--are
questioned by companies and individuals deciding whether and where to
open a store, build a factory, construct or acquire a hotel, buy a
stock or bond, and otherwise invest their money. Anyone who has dealt
with the Puerto Rico Government knows how opaque and difficult to
navigate it can be. In short, rather than facilitating Puerto Rico's
economic growth, the territory government has constrained it. Instead
of unleashing the private sector's potential, the government has
stifled it. While this is a serious, self-inflicted wound, it is also
one that can be healed with the proper course of treatment. But without
the right medicine, the patient will not recover.
Beyond improving government, Puerto Rico needs to reform its fiscal
policies in order to compete--and win--in the global economy. Puerto
Rico must learn to live within its means, especially given its
uncertain access to the capital markets. To reduce unnecessary
spending, the territory should adopt ``zero-based'' budgeting, in which
each agency of the central government is required to freshly justify
its proposed expenses every fiscal year, rather than automatically
enshrining those expenses (with or without adjustments) in each
successive budget request. On the revenue side, the current corporate
tax system is complicated and inequitable. Many companies pay the top
marginal rate of 39 percent, while other companies doing business on
the island pay less than 5 percent in income taxes pursuant to multi-
year agreements signed with the government. While there is an
appropriate place for targeted tax incentives, the government should
not pick winners and losers. Instead, it should establish a simple and
fair tax system that creates an environment in which companies compete
based on their relative merits, not on who can extract the most
generous tax deal from the government. I have a straightforward
proposal to address this problem that I am happy to brief the Committee
on.
Moreover, in recent years, the Puerto Rico Government has
prioritized raising revenue to support its profligate spending habits,
when it should be focused, laser-like, on promoting growth.
Accordingly, the government has enacted a welter of new business taxes
that have exerted a stranglehold on the economy and discouraged job
creation. These new taxes are poorly conceived, poorly implemented, and
must be repealed or refashioned. Once Puerto Rico has a sensible and
stable tax policy in place, the government must collect the taxes it
imposes. According to recent studies by respected Puerto Rico
economists, an estimated 44 percent of sales taxes and 28 percent of
all taxes are not presently collected by the government. This sort of
dysfunction is a disservice to the public and a warning sign for
potential investors who value predictability and competence.
In addition, the Puerto Rico government must take all reasonable
steps to ensure that businesses and households on the island have
access to affordable and reliable electricity generated from natural
gas or renewable sources; a modern transportation system of roads,
highways and bridges; and other basicinfrastructure like water and
wastewater services. As noted, these respective services are provided
in Puerto Rico by public corporations--PREPA, PRHTA, PRASA--that, to
varying degrees, are experiencing severe financial distress and
struggling with significant debt loads. To the extent these public
corporations have become obstacles to economic growth, they must be
fundamentally reformed. In certain instances, Puerto Rico's public
corporations should enter into public-private partnerships,
transferring the operation of assets (and the revenues from those
assets) to the private sector. In Puerto Rico, public-private
partnerships have already proven to be a valuable tool to improve a
public corporation's fiscal standing, to maintain and improve existing
assets and to undertake new infrastructure projects that might
otherwise be financially infeasible.
Finally, on the issue of Puerto Rico's ability and willingness to
pay its debt, five points are in order. First, the Governor and his
advisors have claimed that, if Puerto Rico continues on its current
path, the debt is ``unsustainable'' and ``unpayable.'' However, the
current path can and must change. If the government of Puerto Rico
takes serious and realistic steps to cut unnecessary spending,
implement a fair tax system and collect the taxes it is owed, and
execute a growth-oriented strategy, the debt situation can be made far
more manageable. Second, Puerto Rico--a U.S. jurisdiction--values the
rule of law and reveres the territory constitution authorized and
approved by Congress. Therefore, debt service on the $18.6 billion in
bonds issued or guaranteed by the central government must be
sacrosanct. Most of these bonds carry reasonable interest rates. The
exception is a $3.5 billion bond emission from March 2014, which
carried a coupon rate of 8.0 percent. The Federal Government should
explore whether it can help the Government of Puerto Rico refinance
this bond issue on more affordable terms, as well as whether it can
help the Government of Puerto Rico obtain short-term bridge financing
to meet immediate liquidity needs. Third, as noted above, there are
approximately 18 government entities in Puerto Rico with bonds
outstanding. The financial condition of each entity is different, as
are the legal terms governing the bonds they issue. This Governor's
strategy to essentially treat the territory's debt as monolithic is
unwise and unlikely to produce the desired outcome. Instead, each
entity should be considered on a case-by-case basis. Fourth, the Puerto
Rico Government must comprehend that Puerto Rico will need to access
the bond market in the future in order to make critical investments for
the benefit of the public. The government's recent actions have badly
tarnished Puerto Rico's credibility and standing among investors, and
it must take great care not to pursue a strategy going forward that
will make permanent adversaries of those whose capital it will one day
require. And fifth, the Puerto Rico Government must bear in mind that
countless numbers of its own residents own Puerto Rico bonds either
directly or indirectly through pension funds, credit unions, mutual
funds, and retirement accounts. Many of these individuals depend on
their monthly interest payments to make ends meet. Hundreds of
thousands of Puerto Rico residents are member-owners of credit unions.
The Governor and his advisors have sought to create the narrative that
the debate over whether Puerto Rico will pay its debts is a story of
``us'' versus ``them.'' That is far from the case.
Solutions at the Federal Government level
As the foregoing demonstrates, I am the first to insist that the
government of Puerto Rico must take steps to address the island's toxic
brew of economic, fiscal and demographic problems. That said, any
notion that the territory alone got itself into this situation and the
territory alone must extricate itself from this situation is totally
false. The truth is that the Federal Government bears tremendous
responsibility for the crisis in Puerto Rico, and so Congress and the
president must be part of any solution.
The root cause of Puerto Rico's crisis is our political status, a
subject that is within the jurisdiction of the Senate Energy and
Natural Resources Committee, but a topic that I hope every U.S. Senator
comprehends and considers with care, because the Constitution vests
Congress with nearly unlimited power over its territories.
Because Puerto Rico is a territory, my constituents fight for this
country in the armed forces but cannot vote for their President and
Commander-in-Chief, are not represented in the Senate, and have a
single non-voting delegate in the House. In this position, I can
introduce bills and vote on my committees, but I cannot vote on the
House floor. Accordingly, Puerto Rico has limited capacity to use the
political process to protect and promote its interests, which is the
essence of our democratic system of government. Simply stated, Puerto
Rico's status cannot be reconciled with the principles the United
States strives to uphold at home and promotes abroad.
Moreover, because Puerto Rico is a territory, Congress has a
license to treat Puerto Rico worse than the States under Federal
spending and tax credit programs, and Congress often uses that
license.\11\ This is not a partisan critique; both Republicans and
Democrats, acting over the course of many years, are to blame.
---------------------------------------------------------------------------
\11\ See ``Puerto Rico: Information on How Statehood Would
Potentially Affect Selected Federal Programs and Revenue Sources,''
U.S. General Accountability Office (GAO-14-31; March 31, 2014),
available at www.gao.gov/products/GAO-14-31; see also Pedro R.
Pierluisi, ``Statehood Is the Only Antidote for What Ails Puerto
Rico,'' N.Y. Times (July 10, 2015), available at www.nytimes.com/2015/
07/11/opinion/statehood-is-the-only-antidote-for-what-ails-puerto-
rico.html?_r=0.
Some of the worst disparities that Puerto Rico confronts are under
Federal programs within the jurisdiction of the Finance Committee. For
---------------------------------------------------------------------------
example:
Medicaid is the Federal-State health insurance program for the
poor. Federal funding for a State Medicaid program is open-
ended, but capped for Puerto Rico. The Federal Government
currently provides about $1 billion a year in Medicaid funding
for Puerto Rico. In comparison, the Federal Government provides
annual Medicaid funding of $3.6 billion for Mississippi (which
has the lowest per capita income of any State) and $5 billion
for Oregon (which has a similar population size to Puerto
Rico). Federal law also requires Puerto Rico to pay a much
larger share of the cost of operating its Medicaid program (45
percent) than a similarly-situated State would pay (17
percent). Finally, due to a defect in Federal law, at some
point within the next several years, Federal funding for Puerto
Rico's Medicaid program will fall from about $1 billion a year
to about $400 million a year unless Congress takes action.
Medicare is the Federal health insurance program for the elderly.
Employers and employees in Puerto Rico pay the same Federal
payroll taxes and Medicare beneficiaries in Puerto Rico pay the
same monthly premiums as their counterparts in the States, and
these payroll taxes and premiums fund a significant portion of
the Medicare program. Nevertheless, Puerto Rico patients,
doctors, hospitals and health insurance providers are treated
unequally in key respects under Medicare Part A (inpatient
hospital care), Part B (physician care and outpatient hospital
care), Part C (Medicare Advantage) and Part D (prescription
drug coverage).\12\
---------------------------------------------------------------------------
\12\ For an in-depth-discussion of the disparities that Puerto Rico
faces under Medicaid and Medicare, see the section-by-section summary
of H.R. 2635, Improving the Treatment of the U.S. Territories Under
Federal Health Programs Act of 2015, available at
http://pierluisi.house.gov/.
Health Insurance Exchanges: Under the central provision of the
2010 Affordable Care Act, many individuals and families can
purchase health insurance through an exchange or
``marketplace'' operated either by the Federal Government or a
State government, with the Federal Government providing
subsidies to those households with annual incomes below a
certain level. The Congressional Budget Office projects that,
within a few years, 25 million Americans will receive health
insurance coverage through the exchanges and the Federal
Government, over the next decade, will spend over $1 trillion
on exchange subsidies and related expenditures. Puerto Rico and
the other territories were unable to establish State exchanges
and territory residents are not eligible to participate in a
---------------------------------------------------------------------------
Federal exchange.
Supplemental Security Income, administered by the Social Security
Administration, provides monthly cash assistance to blind,
disabled or elderly individuals who have limited or no income.
SSI applies in all 50 States, the District of Columbia, and one
U.S. territory. However, since its inception in 1974, SSI has
not been extended to Puerto Rico. A far less generous block
grant program known as Aid to the Aged, Blind, and Disabled
(AABD) applies in Puerto Rico in lieu of SSI. While the average
monthly SSI payment in the States is $540--and close to $650
for beneficiaries under the age of 18--the average monthly AABD
payment in Puerto Rico is less than $80. Moreover, while the
SSI program requires no financial contribution from State
governments, the Government of Puerto Rico must pay a 25
percent ``match'' in order to access its annual AABD block
grant from the U.S. Department of Health and Human Services.
Temporary Assistance for Needy Families (TANF) is a Federal block
grant program that enables States and territories to help low-
income families with children meet their basic needs. Puerto
Rico currently receives a basic TANF grant of $71.6 million a
year. But, unlike the States, Puerto Rico is not eligible for
three other TANF funding streams--namely, supplemental grants,
contingency funds and mandatory child care funds. Also, unlike
in the States, Federal law imposes an annual cap on the overall
funding that Puerto Rico can receive under a variety of Federal
public assistance programs, including TANF, title IV-E foster
care and adoption assistance programs, and AABD. Puerto Rico's
overall annual cap--which is set by section 1108(a) of the
Social Security Act--is only $107.2 million, and has not been
increased since 1996.
The Child Tax Credit, which was established in 1997, seeks to ease
the financial burden that families incur when they have
children. The CTC is refundable, meaning that it can exceed a
taxpayer's tax liability and result in a cash payment from the
Federal Government to low-income households that owe little or
no income tax. The refundable portion of the CTC currently
applies in Puerto Rico, but in limited and unequal fashion.
Island families with one or two children are not eligible for
the refundable portion of the CTC at all. And while island
families with three or more children are eligible for a CTC
refund, an alternative formula--which is less generous than the
formula available in the 50 States and the District of
Columbia--is used to calculate the amount of the refund
payment.
The Earned Income Tax Credit, which was established in 1975, has
become the Nation's largest anti-poverty cash assistance
program. Because it is refundable, an EITC recipient need not
owe Federal income taxes to receive the benefit. The EITC
creates a financial incentive for individuals to seek and
retain employment because it increases the ability of workers
in low-paying jobs to support themselves and their families.
The EITC has never been extended to Puerto Rico.
The disparities that Puerto Rico faces under the aforementioned
Federal programs, especially when their impact is considered
cumulatively, have been devastating for the territory. The disparities
are harmful to Puerto Rico's real economy, because they mean billions
of dollars less are circulating throughout the island on an annual
basis, available to be spent and invested. The disparities are
detrimental to Puerto Rico's fiscal condition, since the territory
government spends or borrows to compensate for the shortfall in Federal
support, exacerbating deficits and debt. And the disparities contribute
to Puerto Rico's demographic disaster by compromising the quality of
life of my constituents and impelling them to move to the States,
where--unlike in Puerto Rico--they are entitled to equal treatment
under all Federal laws.\13\
---------------------------------------------------------------------------
\13\ For further discussion of the causal relationship between
Puerto Rico's disparate treatment under Federal programs and the
economic, fiscal and demographic crisis in the territory, see Rep.
Pedro R. Pierluisi, testimony, hearing on ``Examining Procedures
Regarding Puerto Rico's Political Status and Economic Outlook,'' House
Subcommittee on Indian, Insular and Alaska Native Affairs (June 24,
2015), available at http://naturalresources.house.gov/calendar/
eventsingle.aspx?EventID=398833.
As set forth in the accompanying footnote, I have introduced
legislation to eliminate or mitigate the program disparities within the
Finance Committee's jurisdiction, and in certain cases a U.S. Senator
has introduced companion legislation.\14\ I urge the Committee--
respectfully, but in the strongest possible terms--to take action on
these bills. Congress cannot in good conscience criticize Puerto Rico
without acknowledging the fact that Congress shares culpability for the
territory's problems.
---------------------------------------------------------------------------
\14\ See (1) H.R. 1125 (Pierluisi) and S. 1602 (Menendez, Nelson,
Rubio), Puerto Rico Hospital HITECH Amendments Act of 2015; (2) H.R.
1417 (Pierluisi, Curbelo), Puerto Rico Hospital Medicare Reimbursement
Equity Act of 2015; (3) H.R. 1418 (Pierluisi) and S. 1453 (Schumer),
Puerto Rico Medicare Part B Equity Act of 2015; (4) H.R. 1822
(Pierluisi), Supplemental Security Income Equality Act; (5) H.R. 2635
(Pierluisi) and S. 1961 (Schumer, Blumenthal, Gillibrand, Menendez,
Nelson), Improving the Treatment of the U.S. Territories Under Federal
Health Programs Act of 2015; (6) H.R. 3552 (Pierluisi), Child Tax
Credit Equity for Puerto Rico Act of 2015; (7) H.R. 3553 (Pierluisi),
Earned Income Tax Credit Equity for Puerto Rico Act of 2015; (8) H.R.
365 (Pierluisi; 113th Congress), Territorial TANF Equity Act of 2013;
(9) H.R. 3966 (Pierluisi; 113th Congress), Territories Medicare
Prescription Drug Assistance Equity Act of 2014.
On a separate note, the Finance Committee is considering
legislation to reform the taxation of corporate income attributed to
operations outside of the 50 States and the District of Columbia--that
is, corporate income attributed to Puerto Rico, the four other U.S.
territories, and foreign jurisdictions. An important purpose of
reforming the current ``international'' business tax system is to
promote U.S. growth and job creation, to reduce incentives for U.S.
companies to move jobs or the entire company overseas, and to make the
U.S. more attractive and competitive for multinationals to invest and
create jobs. While Puerto Rico and the other territories are treated as
``international'' for some (though by no means all) purposes under the
Internal Revenue Code, they are U.S. jurisdictions, home to millions of
U.S. citizens. Jobs in Puerto Rico are American jobs. The laudable goal
of tax reform--to encourage investment and employment in the United
States--will not be fully achieved if the legislation has the effect of
discouraging job-creating investment in Puerto Rico. Tax reform should
seek to foster economic opportunities in Puerto Rico to the same degree
and extent as in the States.\15\
---------------------------------------------------------------------------
\15\ See Letter from Rep. Pedro R. Pierluisi to Senate Finance
Committee Regarding International Business Tax Reform and Puerto Rico
(January 8, 2014), available at http://pierluisi.house.gov/sites/
pierluisi.house.gov/files/1.8.14%20Rep.%20Pierluisi%20%28Puerto%20
Rico%29%20Comment%20on%20Chairman%20Baucus%20Staff%20Discussion%20Draft%
20on%
20International%20Business%20Tax%20Reform.pdf.
In addition, although I recognize that this subject is within the
jurisdiction of the Senate Judiciary Committee, I would be remiss if I
did not briefly mention the pending legislation--H.R. 870 (Pierluisi)
and S. 1774 (Blumenthal, Schumer, Booker, Durbin, Gillibrand, Heinrich,
Hirono, Leahy, Menendez, Murphy, Nelson, Reid, Sanders, Warner,
Warren)--to provide Puerto Rico with state-like treatment under Chapter
9 of the Federal bankruptcy code. Congress has empowered each State
government to authorize an insolvent ``municipality''--defined as a
political subdivision, public agency, or instrumentality of the State--
to restructure its debts in an orderly fashion under the supervision of
a Federal bankruptcy judge, in accordance with Federal law. A State
government may authorize, or decline to authorize, its insolvent
municipalities to file for Chapter 9 protection. The power to decide
rests with the State government. Unfortunately, while Puerto Rico is
treated like a State under the chapters of the Bankruptcy Code
involving individuals and corporations, it is not treated like a State
under the chapter pertaining to municipalities. Congress did grant
Puerto Rico the power to authorize its municipalities to adjust their
debts between 1938 and 1984, but in 1984--for reasons unknown--Congress
excluded Puerto Rico from Chapter 9. H.R. 870 and S. 1774 would rectify
this unprincipled disparity. Under the bills, Puerto Rico could seek to
restructure the debts of its severely distressed public corporations,
not the central government. Chapter 9 provides a forum for the Federal
courts to consider the best interests of all stakeholders and to reach
a fair, equitable and binding resolution. Chapter 9 can be a useful
tool even if it is not used, since the prospect of a Chapter 9 filing
by a municipality can foster consensual negotiations between a
municipality and its creditors. If Chapter 9 is appropriate for the
States, it is appropriate for the U.S. territory of Puerto Rico. I ask
you: if Chapter 9 is good enough for your constituents, why isn't it
good enough for mine? \16\
---------------------------------------------------------------------------
\16\ For a list of individuals and organizations that have endorsed
H.R. 870 and S. 1774, see http://pierluisi.house.gov/media-center/
press-releases/running-list-of-editorials-letters-and-statements-in-
support-of-hr-870.
In closing, I want to return to the subject of Puerto Rico's
political status, the fundamental problem from which nearly all of
---------------------------------------------------------------------------
Puerto Rico's other problems emanate.
I look forward to the day when the U.S. citizens that reside in
Puerto Rico can vote for their national leaders and fully partake in
debates over national policy that affect every aspect of their lives.
I look forward to the day when Puerto Rico will be treated equally
as a matter of right, and does not have to beseech and beg this
Congress to treat the territory fairly or even just a little better
than it does now.
I look forward to the day when Federal policy towards Puerto Rico
is consistent and coherent--when Puerto Rico is not classified as
domestic under one section of the Federal tax code and international
under another section of the code, or included in nearly all chapters
of the Federal bankruptcy code but excluded from one critically-
important chapter for no evident reason.
I look forward to the day when Puerto Rico is not treated in
shockingly immoral fashion under Federal health programs for lower-
income and elderly individuals, as if we are lesser human beings than
residents of Utah, Oregon, Florida or New York.
I look forward to the day when Puerto Rico is not excluded from the
SSI program, which helps the most vulnerable members of our society--
elderly, blind and disabled individuals who live in extreme poverty--
afford food, clothing and shelter.
I look forward to the day when my constituents have the exact same
rights and responsibilities as their fellow American citizens in the
States--not better treatment, not worse treatment and not ``special''
treatment.
That new day is just over the horizon. Puerto Rico voted against
territory status and for statehood in 2012, and it is likely that
voters in the territory will confirm their desire for statehood in a
federally-sponsored referendum in 2017. Puerto Rico will then use every
appropriate means to petition Congress to enact legislation making the
territory a State. In the history of this country, no valid statehood
petition by a territory has been rejected by the Federal Government. In
the immediate term, there is much that the Puerto Rico Government and
the Federal Government can do to help the territory manage its
economic, fiscal and demographic crisis. However, for Puerto Rico to
truly prosper, it must be treated equally. And to be treated equally,
it must become a State.
Tinkering around the edges of this problem will not suffice. Bold
action that goes straight to the heart of the problem is required.
______
Questions Submitted for the Record to Hon. Pedro R. Pierluisi
Questions Submitted by Hon. Orrin G. Hatch
Question. Would you recommend any changes in federal tax policy
that would affect Puerto Rico and, if so, what specific changes would
you recommend and why?
Answer. As stated in my written testimony, I recommend that
Congress enact legislation to extend the federal Earned Income Tax
Credit to Puerto Rico and to fully extend the federal Child Tax Credit
to Puerto Rico. Both of these are refundable tax credits--meaning they
are claimed by millions of households in the 50 states who owe no
federal income taxes--and the latter already partially applies to
Puerto Rico.
The Earned Income Tax Credit, which was established in 1975, is
widely recognized as the nation's most effective anti-poverty
assistance program. I recommend the EITC's extension to Puerto Rico
because it rewards work, and the territory has a very low labor
participation rate. The EITC creates a financial incentive for
individuals to seek and retain employment, increasing the ability of
workers in low-
paying jobs to support themselves and their families. The EITC has
never been extended to Puerto Rico. Its extension to the territory
would provide a direct stimulus to the economy, increasing purchasing
power and consumer demand.
These positive outcomes would also be generated if Congress were to
fully extend the Child Tax Credit to Puerto Rico. The CTC was
established in 1997 and seeks to ease the financial burden that
families incur when they have children. The refundable portion of the
CTC currently applies in Puerto Rico, but in limited and unequal
fashion. Island families with one or two children are not eligible for
the refundable portion of the CTC at all. And while island families
with three or more children are eligible for a CTC refund, an
alternative formula--which is less generous than the formula available
in the 50 states and the District of Columbia--is used to calculate the
amount of the refund payment. Congress should amend the law so that the
CTC has its full, intended effect in Puerto Rico.
On the business tax side, I wrote a detailed letter to the
Committee on January 8, 2014, laying out my views on how potential
legislation should treat Puerto Rico. The letter is attached.
Question. In a response to various questions that I recently posed
to Health and Human Services Secretary Burwell, I have been told that
the Department of Health and Human Services (HHS) has been working
closely with the government of Puerto Rico, and with you, to gain a
better understanding of the health care challenges Puerto Rico faces. I
was also told that efforts to help confront those challenges would
likely require both administrative and legislative action. Of course,
it would be helpful to everyone in Congress if we could be informed
about the specifics of what the administration is doing along these
lines, particularly--at least for our purpose in this committee--in
those areas related to health policy, tax policy, and other areas under
our jurisdiction. Since HHS--and perhaps other agencies of the federal
government as well--have reportedly been working closely with you on
these matters, could you describe the work that has been done to date
and the results of that work, including any administrative policy
changes that have occurred or are being planned?
Answer. I have repeatedly urged HHS and CMS to exercise their
discretion to make immediate improvements in various rules and formulas
used to calculate payments to Puerto Rico under the Medicare and
Medicaid programs. I can provide a full briefing to the Committee on
each of the specific requests I have made. Most recently, I sent CMS a
detailed paper--which I have attached--outlining three administrative
requests related to Medicare. These proposals are as follows: (a) CMS
should use an alternative means for calculating Puerto Rico's Practice
Expense GPCI (Geographic Practice Cost Index) payment formula to
adequately compensate doctors who treat Medicare patients in the
territory; (b) CMS should exercise its discretion to ensure Puerto Rico
hospitals are not shortchanged by administratively providing a proxy
for the Supplemental Security Income (SSI) factor in the Medicare
Disproportionate Share Hospital (DSH) payment formula as it applies to
Puerto Rico hospitals (existing statute already states that Medicare
DSH payments made to Puerto Rico hospitals should be computed in the
same manner and to the extent as payments made to hospitals in the
states); and (c) CMS should remove the local matching requirement from
the annual Enhanced Allotment Program (EAP) funding that CMS provides
Puerto Rico and the other territories in lieu of the Medicare Part D
low-income subsidy.
I have also introduced a bill that would provide a statutory fix to
these three issues. See Sections 203, 212, and 231 of H.R. 2635/S.
1961, Improving the Treatment of the U.S. Territories Under Federal
Health Programs Act of 2015. Whether through administrative action by
CMS or legislative action by Congress, these disparities should be
eliminated.
Question. What, in your view, are Puerto Rico's comparative
advantages, which should be built upon to help promote economic growth
on the island? What pro-growth policies would you recommend?
I discussed this subject at length in my written testimony, and to
complement that testimony I offer some additional observations and
ideas here. Puerto Rico has talented professionals working across
multiple sectors. In particular, there are several sectors of Puerto
Rico's economy that have the potential to be strengthened.
Manufacturers, particularly small and medium size enterprises, are
poised to serve as a backbone for growing the economy. The
pharmaceutical, life sciences, and medical device sector, as well as
the aeronautical and space industries, are potential growth areas
within the manufacturing sector. The engineering school at the
University of Puerto Rico-Mayaguez is one of the most reputable
engineering schools in the United States, with its graduates heavily
recruited for federal positions with NASA, NSF, the United States
Patent and Trademark Office, and other federal agencies. This speaks to
the human capital in Puerto Rico and the capacity of its system of
higher education to help grow the economy in the engineering and
technical fields.
Unfortunately, the U.S. Department of Commerce missed an ideal
opportunity this summer to support the manufacturing sector in Puerto
Rico when it bypassed for selection the application of the Puerto Rico
Industrial Development Company (PRIDCO) to designate the entire island
for participation in the ``Investing in Manufacturing Communities
Partnership'' (IMCP) program--an initiative of the current
Administration designed to focus federal economic development funds on
distressed manufacturing communities with potential for growth. Through
IMCP, communities are given federal support in developing comprehensive
economic development strategies that strengthen their competitive edge
for attracting global manufacturer and supply chain investments. At a
minimum, I recommend that the Commerce Department formally designate
Puerto Rico as a supplemental selectee for the IMCP program based on
the earlier-submitted PRIDCO application.
Puerto Rico, because of its geographic location and rich natural
resources, also has potential for growth in the tourism industry. The
hotels, restaurants, and tourism-oriented retailers stand to benefit
from boosts in visitor arrivals. This week, a Spain-based airline
announced plans to return to the Puerto Rico market after an absence of
almost three years. Once its service connecting San Juan and Madrid
commences in May, Puerto Rico's non-stop connections with cities in
Europe will uptick to 11 flights a week. Expansion of air service
should also be coupled with strategies to grow cruise ship arrivals and
the nautical tourism industry. Just last week, the third largest cruise
ship in the world arrived for the first time in Puerto Rico, indicative
of the attractiveness of San Juan for cruise ship port calls. Yet,
certain federal rules and regulations unnecessarily restrain growth in
the nautical tourism sector. For example, in 2011, I offered an
amendment on the House floor to the Coast Guard Reauthorization Act
that would have made a narrow modification to the Passenger Vessel
Services Act of 1886 (PVSA) as it applies to Puerto Rico. This
amendment, which was adopted on the House floor with significant
bipartisan support, would have authorized foreign-flagged vessels to
transport tourists and other paying passengers between ports within
Puerto Rico. Current federal law allows foreign-flagged vessels to
transport customers from a port in Puerto Rico to any port in the
Caribbean region outside of Puerto Rico, including to ports in the
neighboring U.S. Virgin Islands, where the PVSA does not apply. Yet,
these same vessels cannot be used to transport tourists and other
paying passengers between Puerto Rico's ports. So, for example,
individuals and businesses in Puerto Rico cannot charter
foreign-flagged megayachts or specialty cruise passenger ships to
operate excursions for tourists who wish to travel between Puerto
Rico's various marinas. Regrettably, the Senate stripped this sensible
House provision from the bill before it become law--thereby depriving
the U.S. of an opportunity to compete fairly with foreign jurisdictions
in the Caribbean when it comes to attracting investment in nautical
tourism. While the increased nautical tourism that my amendment would
have opened the door for would not alone solve the economic challenges
in Puerto Rico, it is but one example of a cost-free change in federal
policy that could make a meaningful difference. More ships mean more
shore-side investment. Ships require repair work, spare parts, and
fuel. Their owners pay insurance and docking fees. And when the
tourists on these vessels disembark at different ports around Puerto
Rico, they eat at restaurants, go shopping, rent cars and otherwise
inject money into the local economy. Yet, these net positives fell on
deaf ears to the Senate. I urge the Senate to reverse its position on
this matter.
The Administration can also intensify its focus and become more
creative in working to boost visitor arrivals in Puerto Rico. I
propose, for example, that Voice of America begin to run targeted ads
in South American or European markets, particularly in countries
participating in the U.S. Visa Waiver Program, that would promote
travel to Puerto Rico. The U.S. Postal Service could also issue an
international postage stamp that would feature Puerto Rico and
encourage travel to the island. And finally, the Corporation for Travel
Promotion that Congress established in 2009, and that it reauthorized
in 2014, should work with the International Trade Administration at the
Commerce Department, on specific strategies and marketing focus to
generate greater visitor arrivals in Puerto Rico.
Apart from enacting the EITC and health care fixes like the HITECH
Act for participation of Puerto Rico hospitals to convert to electronic
health records under the Medicare program, Congress and the federal
government should actively seek out ways to bolster Puerto Rico's
manufacturing, agriculture and visitor industries.
Question. In July 2011, Puerto Rico expanded Medicaid eligibility
to cover adults without children with incomes up to 100 percent of the
poverty level. Then, in January 2014, Puerto Rico again expanded its
Medicaid eligibility to include residents with income up to 133 percent
of the local poverty level. What can you tell me about the impact of
these Medicaid expansions? Have enrollments expanded? What has been the
cost to Puerto Rico and the federal government?
Answer. The premise of the question is incorrect. Because of capped
federal funding, Puerto Rico's Medicaid program--both before and after
the ACA--cannot come close to covering individuals earning up to 100
percent of the FPL, much less 133 percent. A chart showing current
eligibility levels under the Puerto Rico Medicaid program is pasted
below. I have introduced legislation that would provide state-like
treatment to Puerto Rico under Medicaid, up to 100 percent of the FPL.
See Sections 101 to 104 of H.R. 2635/S. 1961, Improving the Treatment
of the U.S. Territories Under Federal Health Programs Act of 2015.
Puerto Rico Medicaid Standard Monthly Income Eligibility Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
PRPL Coverage as Percent
Household Size PRPL FPL Delta of FPL
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 $550.00 $980.83 $430.83 0.56
2 $650.00 $1,327.50 $677.50 0.49
3 $750.00 $1,674.17 $924.17 0.45
4 $850.00 $2,020.83 $1,170.83 0.42
--------------------------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Medicaid Standard Annual Income Eligibility Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
PRPL Coverage as Percent
Household Size PRPL FPL Delta of FPL
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 $6,600.00 $11,770.00 $5,170.00 0.56
2 $7,800.00 $15,930.00 $8,130.00 0.49
3 $9,000.00 $20,090.00 $11,090.00 0.45
4 $10,200.00 $24,250.00 $14,050.00 0.42
--------------------------------------------------------------------------------------------------------------------------------------------------------
PRPL: Puerto Rico Poverty Level
FPL: 2015 Federal Poverty Guidelines for the 48 Contiguous States and DC
Question. It is my understanding that Puerto Rico does not cover
nursing home services in its Medicaid program. How much does Puerto
Rico spend on Long-Term Services and Supports in Puerto Rico? Could you
explain how Long-Term Services and Supports are provided and paid for
in Puerto Rico if Medicaid is not being used?
Answer. It is my understanding that the Puerto Rico Medicaid
program does not cover institutional long-term care because it cannot
afford to do so as a result of the annual spending cap for the program
that Congress has established under Section 1108 of the Social Security
Act. Partly as a result of the Medicaid program not covering this
service, there are very few institutional long-term care facilities in
Puerto Rico. This situation makes it difficult to care for the aging in
Puerto Rico, and it aggravates a situation already made worse for
persons with disabilities who need long-term care because of the
exclusion of Puerto Rico from the Supplemental Security Income (SSI)
program. I represent the highest number of Social Security
beneficiaries in the U.S. House of Representatives--845,860 as of
December 2014, according to the Social Security Administration. The
2010 Decennial Census indicates that 14.5 percent of Puerto Rican's
population is 65 years of age or older. This percentage has increased
according to the most recent ACS population estimates available from
the U.S. Census Bureau, rising to 17.3 percent in the 2014 estimates.
By comparison, the figure is 14.5 percent for the United States as a
whole. These realities demonstrate the importance of Congress adjusting
upward or eliminating the Medicaid cap on Puerto Rico's Medicaid
program, while also providing for fairer treatment under the FMAP.
For more information, see ``U.S. Insular Areas: Multiple Factors
Affect Federal Health Care Funding,'' U.S. Government Accountability
Office (GAO), GAO-06-75, October 17, 2005.
Question. Hospitals in Puerto Rico have been eligible to receive
Medicaid HITECH payments, which are incentive payments under the
Medicaid program that are meant to encourage hospitals to develop
electronic medical records capability. I'm hoping you can tell me how,
if at all, Puerto Rico has benefitted from these payments. How much
money--in aggregate--has Puerto Rico received through these payments?
And, what is the current status of implementation of electronic medical
records in Puerto Rico?
Answer. For the two payment years under which HITECH incentive
payments have been available for hospitals under the Medicaid program,
CMS reports that it has paid out a total of $49,360,201 to 49 hospitals
in Puerto Rico--with 46 hospitals receiving these incentive payments in
the aggregate amount of $46.7 million in the first payment year and
three hospitals receiving a combined amount of $2.7 million in the
second year.
Expansion of the HITECH Act by Congress to embrace Puerto Rico
hospitals under the Medicare side of the program is essential if Puerto
Rico providers are to receive the same tools, support, and incentives
that are available in the rest of the United States and that are needed
in Puerto Rico in order to develop and build out a health information
network that would be interoperable with, and ultimately keep pace
with, the state of health information technology infrastructure being
established in the rest of the United States. Numerous scholars have
published research validating the economic growth generated around
health information technology and the savings in overall health care
costs achieved with applying this technology to the sector. The
government of Puerto Rico and CMS are actively collaborating on ways to
maximize participation on the island of the Medicaid HITECH program and
to strengthen program controls.
Additionally, the Puerto Rico Hospital Association reports that
while hospitals in Puerto Rico are working with the government of
Puerto Rico and CMS to improve upon the cumbersome parts of the HITECH
application and implementation processes, the number of hospitals in
Puerto Rico eligible for and actually participating in the Medicaid
side of the program represents a higher percentage of participation as
compared with hospitals in many states. Congress should spare no time
in enacting legislation to correct its oversight in law which prevents
hospitals in Puerto Rico from becoming meaningful users of certified
electronic health record technology under the Medicare side of the
program. This is especially important given the high number of Medicare
beneficiaries residing in Puerto Rico as compared with the states. I
have introduced bipartisan legislation to achieve this purpose; this
legislation is H.R. 1225/S. 1602, the Puerto Rico Hospital HITECH
Amendments Act of 2015, and Section 202 of H.R. 2635/S. 1961, the
Improving the Treatment of the U.S. Territories Under Federal Health
Programs Act of 2015.
Congress of the United States
House of Representatives
Washington, DC 20515-5401
January 8, 2014
The Hon. Max Baucus The Hon. Orrin G. Hatch
Chairman Ranking Member
Senate Committee on Finance Senate Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Baucus and Ranking Member Hatch:
On November 19, 2013, Chairman Baucus released a staff discussion draft
of legislation to reform the taxation of corporate income attributed to
operations outside of the 50 states and the District of Columbia. This
includes corporate income attributed to the U.S. territory I represent,
Puerto Rico; to the four other U.S. territories; and to foreign
jurisdictions. A summary of the staff discussion draft, under the
heading ``Unaddressed Issues and Requests for Comments,'' states: ``The
staff discussion draft does not separately address the taxation of
foreign subsidiaries doing business in the U.S. territories. Comments
are requested regarding the appropriate scope of U.S. taxation of such
territory operations in light of the changes proposed in the staff
discussion draft.''
Given that, in the absence of legislative provisions regarding the
taxation of controlled foreign corporations (CFCs) in the territories,
they would be taxed in the same manner as CFCs in foreign
jurisdictions, I write to provide a comment on this issue. I have held
numerous conversations about this matter with your counterparts on the
House Committee on Ways and Means, Chairman Dave Camp and Ranking
Member Sander Levin, as well as with senior officials in the Obama
Administration. I look forward to discussing this important subject in
more detail with you and your staffs as the effort to enact
comprehensive tax reform moves forward.
My first point is the most fundamental. As the staff discussion draft
explains, an important purpose of reforming the current international
business tax system is to ``promote U.S. growth and job creation,'' to
``reduce incentives for U.S. companies to move jobs or the entire
company overseas,'' and to ``make the U.S. more attractive and
competitive for multinationals to invest and create jobs.'' As you
know, while Puerto Rico and the other territories are treated as
``international'' for some (though by no means all) purposes under the
Internal Revenue Code, the territories are U.S. jurisdictions, home to
millions of U.S. citizens. Jobs in the U.S. territories are American
jobs. The laudable goal of tax reform--to encourage investment and
employment in the United States--will not be fully achieved if
provisions are included in the legislation that have the effect of
discouraging job-creating investment in Puerto Rico and the other
territories. Tax reform should seek to foster economic opportunities in
the American territories to the same degree and extent that it seeks to
promote those opportunities in the states.
Puerto Rico and the other territories face severe economic and fiscal
challenges. For at least four decades, Puerto Rico's economic
performance has been far worse than any state according to every
indicator, and the gap between Puerto Rico and the states is widening,
not narrowing. The November 2013 unemployment rate in Puerto Rico was
14.7 percent, which is 7.7 percent above the U.S. national average. In
December, Moody's Investors Service placed Puerto Rico's general
obligation and other bonds--which the three main credit rating agencies
have rated one notch above junk status--on review for downgrade. The
Puerto Rico Government Development Bank's Economic Activity Index (GDB-
EAI)--a useful tool for evaluating the overall health of the
territory's economy--was 5.7 percent lower in November 2013 than in
November 2012, and the cumulative Fiscal Year 2014 GDB-EAI (July-
November) was about 5.3 percent below the corresponding period in 2012.
In November, in a clear sign of the gravity of the situation, the White
House assigned an inter-agency team to work with the government of
Puerto Rico to ``strengthen Puerto Rico's fiscal situation and economic
outlook.'' Primarily because of the lack of economic opportunities in
Puerto Rico, island residents are leaving in staggering numbers for the
states. Between 2004 and 2013, the territory's population fell from
3,826,878 to 3,615,086--a loss of 211,792 individuals or 5.5 percent.
As the Committee considers provisions related to Puerto Rico for
inclusion in tax reform legislation, I respectfully ask that you bear
in mind that, in economic and demographic terms, Puerto Rico is in an
extraordinarily delicate and deteriorating condition.
Forty years of empirical evidence establishes, beyond any doubt, that
Puerto Rico's economic problems are inextricably linked to its
political status. As a territory, Puerto Rico is treated unequally
under, or excluded entirely from, key federal spending and tax credit
programs, most of which are within the jurisdiction of your Committee.
This disparate treatment is the principal reason why Puerto Rico's
economy has consistently struggled, regardless of who holds power in
Washington or San Juan. I support statehood for Puerto Rico, and do so
in meaningful part because history shows that every territory that
joins the Union experiences a substantial increase in its economic
activity and standard of living. Statehood is the only status that will
enable Puerto Rico, on an enduring basis, to reduce unemployment,
attract investment, retain talent, promote growth, and manage our
deficits and debt. A November 2012 referendum on the island
demonstrated that a majority of my constituents oppose the current
territory status and that there are now more people in Puerto Rico who
support statehood than who support any other status option, including
the current status. To honor this democratic vote, and to most
effectively assist the economic development of Puerto Rico, I
respectfully urge the Committee, as part of comprehensive tax reform,
to provide for the equal treatment of Puerto Rico under the refundable
Child Tax Credit program and to extend to Puerto Rico the refundable
Earned Income Tax Credit program. I also request that the Committee
take separate legislative action to treat Puerto Rico equally in
Medicare, the Temporary Assistance for Needy Families (TANF) program,
Supplemental Security Income (SSI), and Medicaid.
My hope and expectation is that Puerto Rico will soon become a full and
equal member of the American family, that island residents and
corporations will be treated in the same manner as their counterparts
in the states under all federal spending and tax programs, and that
local leaders will no longer need to seek special treatment under
federal law in order to encourage companies to invest and create jobs
in Puerto Rico. Until that day arrives, however, I believe that it is
appropriate for Congress to enact tax provisions that are tailored for
Puerto Rico and the other U.S. territories, given that the territories
are treated in unequal fashion under many federal programs; that
territory residents will continue to relocate to the states if there
are not sufficient economic opportunities available to them at home;
and that these are American--not foreign--jurisdictions. But a caveat
is in order. In the past, federal legislation to exempt territory
income from corporate taxation has arguably done more to benefit
companies than to benefit Puerto Rico, so it is important that any
provision included in corporate tax reform legislation be designed to
promote job creation or other measurable contributions to the island's
economic development. I trust that you, your counterparts on Ways and
Means, and the Obama Administration fully share this objective.
If the Committee, notwithstanding the arguments I have made, is
inclined to treat foreign subsidiaries doing business in Puerto Rico
and the other U.S. territories in more or less the same fashion as
foreign subsidiaries doing business in foreign jurisdictions, I ask the
Committee--at a minimum--to adopt the following proposal, which I
believe would be fair and beneficial.
As background, although there are meaningful differences between the
various business tax proposals in Chairman Baucus' staff discussion
draft and the proposals contained in the discussion draft released by
Chairman Camp in October 2011, both drafts seek to ensure that reform
does not result in base erosion--that is, does not encourage U.S.
companies to shift an even greater share of their production to low tax
``foreign'' jurisdictions. Therefore, both chairmen have made proposals
under which the United States would impose a tax on certain profits of
CFCs operating in jurisdictions where the local tax is below a certain
minimum rate. In the event that a foreign jurisdiction raises its rate
to the minimum level, the U.S. would not impose this levy. In effect,
this could create a global minimum level of taxation.
Although the overarching purpose of the various base erosion proposals
that have been put forward for discussion is to equalize the tax
treatment provided in all jurisdictions, such a provision could create
an unintended problem in the case of Puerto Rico absent modification.
Puerto Rico's highest corporate income tax rate is 39 percent, which is
well above the minimum rate that would be established under any of the
proposals to prevent base erosion. However, to attract investment, the
Puerto Rico government has entered into multi-year agreements with many
CFCs affiliated with companies based in the states. These agreements
provide for the CFC in question to pay a reduced income tax rate that
is substantially below the minimum rate called for under the base
erosion proposals. The Puerto Rico government may not be able to
unilaterally modify or set aside the income tax agreements in the event
that base erosion provisions are enacted. In that event, Puerto Rico's
corporate tax rates would be below the minimum rate proposed in the
staff drafts and, as a result, Puerto Rico would not be able to derive
any fiscal benefit from the additional revenue raised as a result of
the application of tax reform to CFCs doing business on the island.
Consistent with the principle that tax reform should help and not hurt
Puerto Rico, I therefore propose the following modification to the base
erosion provisions:
Until the expiration of the multi-year tax reduction agreements
that are in place at the time of the enactment of federal tax reform
legislation, any revenue raised as a result of the application of base
erosion provisions to business activities in Puerto Rico would be
granted by the U.S. government to the territory government.
Congress should place reasonable conditions on the granted
revenue, requiring that such revenue be used by the Puerto Rico
government for specified public purposes, such as initiatives to reduce
the cost of electricity and water, improving the public education
system, enhancing public safety, and reducing public debt.
Thank you in advance for your attention to this matter, and I look
forward to working with you and your colleagues on the Committee to
ensure that whatever tax reform legislation is enacted by Congress
promotes job-creating investment in Puerto Rico and the other U.S.
territories. Sincerely,
Pedro R. Pierluisi
Member of Congress
cc: The Honorable Dave Camp, Chairman, House Committee on Ways and
Means
The Honorable Sander M. Levin, Ranking Member, House Committee on Ways
and Means
The Honorable Ron Wyden, U.S. Senator
______
HHS Administrative Relief Proposals for Puerto Rico
Requested by Rep. Pedro R. Pierluisi
June 15, 2015
Modify Practice Expense Geographic Practice Cost Index (GPCI)
Payment Formula
[Proposed Legislative Solution: Section 212 of H.R. 2635]
Description of Problem
Puerto Rico doctors who serve traditional, fee-for-service Medicare
patients are unfairly treated under the current Practice Expense
Geographic Practice Cost Index (GPCI) payment formula determined by CMS
on an annual basis. Lack of fair treatment under the GPCI system is an
important factor behind the well-documented exodus of Puerto Rico
physicians to the U.S. mainland. The Medicare program compensates
doctors pursuant to the Physician Fee Schedule (PFS). Three separate
Relative Value Units (RVUs) are associated with the calculation of a
physician payment under the PFS. The Physician Work RVU reflects the
relative time and intensity associated with providing a Medicare
service. The Practice Expense RVU reflects the costs of maintaining a
practice (such as renting office space, buying supplies and equipment,
and paying staff). The Malpractice RVU reflects the cost of malpractice
insurance. GPCIs are adjustments that are applied to each of the three
RVUs in order to account for geographic variations in the costs of
practicing medicine in different areas within the United States.
UsingU.S. Census Bureau data, the Centers for Medicare and Medicaid
Services (CMS) has calculated for Puerto Rico the lowest Work GPCI,
Practice Expense GPCI, and Malpractice GPCIs of any payment locality in
the United States, including the other territories. The Practice
Expense GPCI calculated for Puerto Rico is particularly problematic,
and there is strong evidence to suggest that the current formula--
particularly its reliance on residential rent data as a proxy for
commercial rent data--unduly disadvantages Puerto Rico, and results in
payments to physicians that do not adequately capture the actual cost
of practicing medicine in the territory. Additionally, the Practice
Expense GPCI assumes a national market for the cost of medical supplies
and equipment. CMS assigns every payment locality the same value for
this part of the GPCI, which works to Puerto Rico's disadvantage.
Doctors in Puerto Rico face higher shipping rates and logistical
challenges in acquiring medical supplies and equipment than their
counterparts in the 48 contiguous states. For Calendar Year 2015,
Puerto Rico's Practice Expense GPCI is 0.705, whereas the state with
the lowest Practice Expense GPCI is West Virginia at 0.836--a huge gap.
Proposed Administrative Solution
In proposing and finalizing Calendar Year 2016 and future year GPCIs,
CMS should utilize an alternative means for calculating Puerto Rico's
Practice Expense GPCI. Relying on residential rent data from the
American Community Survey (ACS) is inadequate in the case of Puerto
Rico due to the lack of a developed rental market there. CMS should
explore substituting U.S. Postal Service rental information, employing
a private sector-developed model, using an inflation or adjustment
factor for the residential data reported for Puerto Rico, or analyzing
and validating data that would capture actual costs from doctors and be
complied by the Puerto Rico Institute of Statistics. Rep. Pierluisi
made specific suggestions for improving the GPCI calculations for
Puerto Rico in official comment letters during the rulemaking process
for Calendar Years 2013 and 2014.\1\ CMS should re-examine those
suggestions. Additionally, CMS should develop a shipping differential
to apply to the cost of medical supplies and equipment value for Puerto
Rico and also possibly for the other non-contiguous jurisdictions
(Alaska, Hawaii, and the other territories). See for example,
Reimbursement Transportation Cost Payment Program (RTCP) by Department
of Agriculture.
---------------------------------------------------------------------------
\1\ See Rep. Pierluisi's letter of September 6, 2013.
---------------------------------------------------------------------------
Provide SSI Proxy to Calculate Medicare DSH Payments for
Puerto Rico Hospitals
[Proposed Legislative Solution: Section 203 of H.R. 2635]
Description of Problem
CMS should ensure Puerto Rico hospitals receive fair Medicare
disproportionate share hospital (DSH) payments. Since the 1980s, CMS--
through the Medicare DSH program--has provided additional financial
support directly to hospitals that treat a high percentage of the most
vulnerable population groups--Medicaid beneficiaries, low-income
Medicare beneficiaries, and the uninsured. The formula that CMS uses to
calculate Medicare DSH payments to hospitals consists of several
factors, including a factor called ``Medicare SSI days.'' This factor
measures the number of times a hospital treats a patient who has
Medicare Part A and who receives benefits under the federal
Supplemental Security Income (SSI) program. The formula operates to
Puerto Rico's disadvantage because Congress has not extended the SSI
program to the territory. While the ACA modified the formula used to
distribute Medicare DSH payments nationally--a modification which
substantially improved the amount Puerto Rico hospitals receive--the
modified formula still uses the ``Medicare SSI days'' factor in two
places.
Proposed Administrative Solution
CMS should exercise its discretion to administratively provide a proxy
for the SSI factor in the Medicare DSH payment formula as it applies to
Puerto Rico hospitals given that residents of Puerto Rico are
statutorily ineligible for SSI payments regardless of whether or not
they meet the income thresholds required for SSI eligibility. Rep.
Pierluisi proposes in Section 203 of H.R. 2635 that HHS credit a Puerto
Rico hospital for a Medicare SSI day when a patient the hospital treats
has Medicare Part A and either (1) receives benefits under SSI, (2)
receives benefits under the Aid to the Aged, Blind and Disabled (AABD)
program that applies in Puerto Rico in lieu of SSI, or (3) is a ``dual
eligible'' enrolled in both Medicare and Medicaid.
But CMS can take administrative action to address this problem without
the need for Congress to enact legislation. Under 42 U.S.C. Section
1395ww(d)(9)(D), Congress appears to state that Medicare DSH payments
made to Puerto Rico hospitals should be computed ``in the same manner
and to the extent'' as payments made to hospitals in the states. The
statute, which is complicated and confusing, provides CMS with ample
authority to utilize a proxy for SSI in the case of Puerto Rico. If
Congress wanted to ensure that Puerto Rico hospitals would be
shortchanged, it stands to reason that it would not have written the
statute as it did.
Remove Matching Requirement from EAP Funds Used for Medicare
Part D Assistance
[Proposed Legislative Solution: Section 231 of H.R. 2635]
Description of Problem
Puerto Rico and the other territories cannot fully use--and currently
forfeit to the federal government--annual Enhanced Allotment Program
(EAP) funding that CMS provides in lieu of the Medicare Part D low-
income subsidy (LIS). Part D covers prescription drugs. It is
voluntary, requiring a monthly premium. If a beneficiary is enrolled in
traditional Medicare, the beneficiary can purchase standalone Part D
coverage through a private drug plan. If the beneficiary is enrolled in
a Medicare Advantage (MA) plan, the beneficiary pays a monthly Part D
premium to that plan. In the 50 states and the District of Columbia,
Medicare beneficiaries with annual income below 150 percent of the
federal poverty level are eligible to receive a low-income subsidy from
the federal government, which reduces or eliminates their monthly
premium and other out-of-pocket costs associated with Part D. The
subsidy is paid directly by the federal government to the beneficiary's
plan, whether it is a standalone drug plan or an MA plan. However,
beneficiaries in Puerto Rico and the other territories are not eligible
for the low-income subsidy. Instead, CMS provides each territory
government with an ``enhanced allotment''--known as an EAP--to
supplement the territory's annual Medicaid cap under Section 1108 of
the Social Security Act. Under the EAP formula, the Puerto Rico
government is eligible to receive about $44 million a year, a paltry
amount compared to the $400-$600 million that low-income seniors in the
territory would receive directly if they had access to LIS. (Under EAP,
the USVI receives about $1.1 million annually; Guam about $817,000; the
CNMI about $114,000; and American Samoa about $270,000.) Moreover, CMS
requires each territory government to pay a 45 percent local match in
order to draw down EAP funds, just as the territory governments must do
to access all other federal Medicaid funding because they have a 55
percent FMAP. The Puerto Rico government annually returns about half of
its $44 million in annual EAP funding to the federal government because
it struggles to meet the local match, even though the funding is badly
needed. Specifically, in FY 2011, Puerto Rico forfeited $28 million;
$26 million in FY 2012; $22 million in FY 2013; and $25 million in FY
2014.
Proposed Administrative Solution
CMS should remove the local matching requirement from EAP funding,
which was arguably not intended to apply in the first place. An
independent analysis of the statute provided by the American Law
Division of the Congressional Research Service indicates CMS has ``gap
filling authority'' due to the ambiguous nature of the relevant section
of law that provides EAP funding and rules. Because of the ambiguity
and case law, CMS has the ability both to reasonably apply the FMAP to
the EAP and to reasonably refrain from doing so. Use of the EAP
requires submission and approval of a plan separate and distinguishable
from the ``State plan'' required for regular Medicaid assistance and to
which the FMAP is tethered. Therefore, CMS would be on sound legal
footing if it were to take a fresh look at the applicable law and to
revise/refine its practice of subjecting EAP to the FMAP. Allowing
Puerto Rico to access 100 percent of its annual EAP funding without a
local match would relieve local resources and increase the amount of
federal funding already appropriated and otherwise available to help
poor seniors in Puerto Rico pay for prescription drugs. [SEE ATTACHED
CRS MEMORANDUM]
______
Congressional Research Service
Informing the legislative debate since 1914
MEMORANDUM June 9,
2015
To: Hon. Pedro Pierluisi; Attention: Jed Bullock
From: Edward C. Liu, Legislative Attorney, x7-9166
Subject: Amounts for Territories Under Sec. 1935(e) of the Social
Security Act
_______________________________________________________________________
This memorandum responds to your request for an analysis of
Sec. 1935(e) of the Social Security Act (SSA),\1\ which authorizes
federal financial assistance for territories that provide medical
assistance for prescription drugs to low-income individuals who are
also eligible for prescription drug benefits under Medicare Part D.\2\
---------------------------------------------------------------------------
\1\ 42 U.S.C. Sec. 1396u-5(e).
\2\ 42 U.S.C. Sec. Sec. 1395w-101 et seq.
---------------------------------------------------------------------------
Background
Medicare is a federal program that pays for health care for individuals
who are disabled, or who are 65 and older.\3\ Medicaid is a joint
federal-state program which provides health coverage for certain low-
income individuals.\4\ Under Medicaid, health care expenses of eligible
individuals are covered pursuant to a federally approved state plan,
and the state is subsequently reimbursed by the federal government for
a portion of those expenses known as the state's federal medical
assistance percentage (FMAP), which varies from state to state
according to each state's per capita income. Specifically, Sec. 1903(a)
of the SSA provides that the federal government ``shall pay to each
State which has a plan approved under this title . . . an amount equal
to the Federal medical assistance percentage . . . of the total amount
expended during such quarter as medical assistance under the State
plan.'' \5\ Territories are also allowed to establish Medicaid plans
and are reimbursed pursuant to their applicable FMAP, which is set at
55%. However, Sec. 1108 of the Social Security Act imposes a ceiling on
the amount of federal Medicaid assistance that can be paid to a
territory in any given fiscal year, while federal Medicaid funding to
the states and the District of Columbia is open-ended.\6\
---------------------------------------------------------------------------
\3\ See CRS Report R40425, Medicare Primer, coordinated by Patricia
A. Davis and Scott R. Talaga.
\4\ See CRS Report R43357, Medicaid: An Overview, coordinated by
Alison Mitchell.
\5\ 42 U.S.C. Sec. 1396b(a).
\6\ 42 U.S.C. Sec. 1308(f), (g).
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA), created a voluntary, outpatient prescription drug benefit
for Medicare beneficiaries, known as Medicare Part D.\7\ Some Medicare
beneficiaries, referred to as ``dual-eligible individuals'' are also
eligible for coverage under a state's Medicaid plan, which provides
health coverage for low income individuals. Under the MMA, Part D is
the primary source of drug coverage for dual-eligible individuals, and
the Act created premium and cost-sharing subsidies for these
individuals to facilitate their purchase of coverage under Part D.\8\
Prior to Medicare Part D, the prescription drug costs of these
individuals would have been shared by the state and federal government
under the state's Medicaid plan. In order to offset the federal
government's costs in subsidizing dual-eligible individuals under
Medicare Part D, the MMA included a ``clawback'' provision which
requires states to pay a percentage of the costs that they would have
incurred for this population if Medicaid were still the primary
payer.\9\
---------------------------------------------------------------------------
\7\ For more information about Medicare Part D, see CRS Report
R40611, Medicare Part D Prescription Drug Benefit, by Suzanne M.
Kirchhoff and Patricia A. Davis.
\8\ 42 U.S.C. Sec. 1395w-141.
\9\ 42 U.S.C. Sec. 1396u-5(c).
Residents of the territories are not eligible for the low-income
subsidies under Medicare Part D. However, under Sec. 1935(e) of the
SSA, if the territory ``establishes and submits to the Secretary a plan
. . . (for providing medical assistance with respect to the provision
of prescription drugs to part D eligible individuals), the amount
otherwise determined under section 1108(f) (as increased under section
1108(g)) for the [territory] shall be increased.'' \10\ This additional
federal Medicaid assistance is available only if the plan ``provides
medical assistance with respect to the provision of covered part D
drugs,'' and if the territory ``provides assurances that additional
amounts received by the [territory] that are attributable to the
operation of this subsection shall be used only for such assistance and
related administrative expenses.'' \11\
---------------------------------------------------------------------------
\10\ 42 U.S.C. Sec. 1396u-5(e)(1)(B).
\11\ 42 U.S.C. Sec. 1396u-5(e)(2)(A), (B). The Secretary may also
establish other criteria that the plan must meet. 42 U.S.C. Sec. 1396u-
5(e)(2)(C).
Application of the FMAP to the Sec. 1935(e) Increase
You have asked whether there is statutory authority for limiting the
amount of federal financial assistance under Sec. 1935(e) by applying
the FMAP to the amount of prescription drug expenses attributable to
the plan established by a territory under that section.
Statutory Text
In order to obtain the increase in the annual federal Medicaid
assistance, Sec. 1935(e) requires a territory to establish and submit a
``plan'' providing prescription drug coverage for Part D eligible
individuals. Section 1935(e) further requires that any amounts
attributable to this increase in the annual limit must be used only for
prescription drug coverage. However, Sec. 1935(e) does not make any
explicit mention of the FMAP, either to state that it is applicable to
the increase in federal assistance, or to disavow such applicability.
The requirements that Sec. 1935(e) does impose would not appear to be
incompatible with the application of the FMAP. The FMAP would not
appear to frustrate either the submittal of a plan providing
prescription drug coverage or the use of increased federal funds under
this subsection for such expenses.
On the other hand, neither does the language of Sec. 1935(e) appear
incompatible with the use of the increased federal assistance without
applying an FMAP.
Looking more broadly at the rest of the SSA, and particularly within
Title XIX of the SSA which establishes the Medicaid program, the phrase
``the State plan'' is frequently used to refer to the medical
assistance plan established under Sec. 1902 to provide coverage for
low-income individuals generally.\12\ The plan under Sec. 1902 is
clearly subject to the FMAP as it makes reference specifically to the
``non-Federal share of the expenditures under the plan.'' \13\
Arguably, the use of the word ``plan'' in Sec. 1935(e) could be read as
incorporating the same meaning of ``plan'' under Sec. 1902, or at least
the accompanying FMAP.\14\ On the other hand, Sec. 1935(e) does not
identify the required plan using either a definite article or the
adjective ``State,'' raising the possibility that the use of the word
``plan'' in Sec. 1935(e) is meant to refer to a distinct type of plan
that is narrowly focused on dual-eligible individuals solely for
purposes of that section.\15\
---------------------------------------------------------------------------
\12\ 42 U.S.C. Sec. 1396a.
\13\ 42 U.S.C. Sec. 1396a(a)(2).
\14\ Ratzlaf v. United States, 510 U.S. 135, 143 (1994) (``A term
appearing in several places in a statutory text is generally read
thesame way each time it appears.'').
\15\ Atlantic Cleaners and Dyers, Inc. v. United States, 286 U.S.
427, 433 (1933) (The general presumption that repeated phraseshave the
same meaning ``readily yields when there is such variation in the
connection in which the words are used as reasonablyto warrant the
conclusion that they were employed in different parts of the act with
different intent.'').
Section 1903 of the SSA may also be relevant in that it provides that
the federal government ``shall pay to each State which has a plan
approved under this title [Title XIX] . . . an amount equal to the
Federal medical assistance percentage . . . of the total amount
expended during such quarter as medical assistance under the State
plan.'' \16\ The dual-eligible plan under Sec. 1935(e) is a plan under
Title XIX, and it is required to provide medical assistance with
respect to prescription drug coverage. Therefore, Sec. 1935(e) and
Sec. 1903 might be read in conjunction to support the argument that
federal assistance under a Sec. 1935(e) plan should be limited to the
FMAP. However, one could also argue that Sec. 1903 was enacted well
before Sec. 1935(e), when the only type of state plan under Title XIX
was the generic state plan under Sec. 1902, and that Sec. 1903 should
not be read to encompass a Sec. 1935(e) plan.
---------------------------------------------------------------------------
\16\ 42 U.S.C. Sec. 1396b(a).
Legislative History
With respect to the Sec. 1935(e) increase in federal Medicaid
assistance, the conference report accompanying the MMA provides little
additional information regarding the applicability of the FMAP to that
increase. The conference report simply states:
Residents of territories would not be eligible for regular low-
income subsidies. However, territories would be able to apply
for additional Medicaid funds. The total amount available is
$28.125 million beginning in the last 3 quarters of 2006, $37.5
million in 2007 and increasing in subsequent years by the
annual percentage increase in prescription drug costs for
Medicare beneficiaries. In order to obtain these funds,
territories would be required to provide assurances that
additional funds would be used for covered drugs and
administrative costs (with no more than 10 percent of the total
used for administrative expenses.) \17\
---------------------------------------------------------------------------
\17\ H. Rept. 108-391, at 510.
As with the statutory text of Sec. 1935(e), no mention of the
applicability vel non of the FMAP to the increased federal assistance
is made in the conference report. Still, there are two points about the
---------------------------------------------------------------------------
conference report that may be relevant to the instant discussion.
First, the report acknowledges that the low-income subsidies available
to the 50 states and the District of Columbia are not available in the
territories, and further suggests that the enhanced federal assistance
under Sec. 1935(e) is a substitute for those low-income subsidies.
Second, the conference report's discussion of the House bill indicates
that this earlier version of the bill would have eventually provided
for the full federal assumption of the costs of the low-income
subsidies for dual-eligible individuals. In contrast, the final version
that was enacted into law includes a ``phased-down state contribution''
under which the states retain some financial responsibility
indefinitely for the costs of individuals that have transitioned from
Medicaid to Part D. Together, these two points may support the
inference that Congress considered and rejected a proposal in which the
cost of prescription drug coverage for dual-eligible individuals in the
50 states would be borne entirely by the federal government under
Medicare. To the extent that Sec. 1935(e) is intended to approximate
the position of the states vis-a-vis the low-income subsidies under
Medicare Part D, the report may support a further inference that the
cost of covering prescription drugs under Sec. 1935(e) for dual-
eligible individuals was intended to be shared by both territorial and
federal coffers.
Chevron Deference
The preceding review of the statutory text and legislative history
reveals that neither source explicitly acknowledges an intent to apply
the FMAP to the increased federal assistance under Sec. 1935(e), nor
appears to bar the application of the FMAP. Instead, it may be most
accurate to describe both the text and legislative history as being
entirely silent on this point. In the seminal Chevron v. Natural
Resources Defense Council, the Supreme Court held that if a court were
to conclude that the text and legislative history taken as a whole
still did not clearly indicate Congress' intent, and the statute
explicitly or implicitly indicates that Congress delegated authority to
the agency to make rules filling in the gaps of the legislation, an
agency's interpretation of a statute should be accorded such deference
that it will only be overturned if it is an unreasonable
interpretation.\18\ Here, the SSA appears to grant the Secretary such
``gap filling'' authority, both with respect to the SSA generally and
specifically in the context of Sec. 1935(e).\19\ Further, the statutory
text and legislative history of Sec. 1935(e) appears to be ambiguous
with respect to application of the FMAP. Therefore, if the Secretary
interprets Sec. 1935(e) as requiring application of the FMAP to the
increased federal assistance under that section, such an interpretation
would be accorded deference to the extent that it is reasonable. In
this case, application of the FMAP to federal assistance under Medicaid
is a common feature of the program, and the 50 states and the District
of Columbia are required to contribute, at least partially, to the low-
income subsidies for dual-eligible individuals under Medicare Part D.
Both of these facts would appear to support a court's conclusion that
the Secretary's interpretation was reasonable, and therefore
permissible under the Supreme Court's holding in Chevron.
---------------------------------------------------------------------------
\18\ Chevron v. NRDC, 467 U.S. 837, 844 (1984).
\19\ 42 U.S.C. Sec. Sec. 1302, 1396u-5(e)(2)(C).
______
Prepared Statement of Hon. Mark R. Warner,
a U.S. Senator From Virginia
While I find these theoretical discussions interesting, the people
of Puerto Rico need practical solutions. The average debt service cost
for U.S. States hovers between 5-10 percent of revenue, while Puerto
Rico is facing an average of 36 percent over the next 5 years
(excluding Federal transfers). Clearly, this is unsustainable.
Soon after I was elected Governor of Virginia, I found out the
Commonwealth was facing a $6 billion budget deficit. We cut spending
and reorganized government to close the gap. I have to emphasize,
however, that this was in a place with a population of 7-8 million
people, more than twice the size of Puerto Rico, and therefore
substantially better-suited to use fiscal policies to put the
Commonwealth back on solid footing.
Puerto Rico has a smaller population and a much larger debt burden.
The island's government has already taken drastic measures to address
its fiscal challenges, including public pension cuts, tax increases,
tax administration reforms, reductions in public sector employment,
school closings, and transitioning retirement benefits from a defined
benefit to a defined contribution system.
I remain unconvinced as to how Puerto Rico can service its debt
burden without destroying basic public services and ruining its
economy.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
There are more than 3 million United States citizens living in the
Commonwealth of Puerto Rico, where longstanding economic challenges
have developed into a very real and very immediate crisis.
No single policy or harsh austerity platform is going to save the
day. The solutions in Puerto Rico must be focused, first and foremost,
on helping its millions of American citizens get ahead and putting its
economy on solid ground by any available means.
In order to accomplish that task, policymakers in Washington and in
San Juan need to take a hard look at the origins of the crisis. Puerto
Rico won't be able to move forward until there's an understanding of
what's holding it back.
The core of Puerto Rico's problems is simply that the commonwealth,
its public corporations, and other entities issued more debt than
they're able to pay back. Without a process for restructuring that
debt, the problem won't go away on its own. But just solving the
immediate crisis is not a long-term solution. Puerto Rico also needs to
find ways to modernize and grow its economy, or it will find itself
right back here again.
For example, the Commonwealth's electric utility, which is
responsible for the largest share of Puerto Rico's debt, still burns
diesel fuel to generate power. By converting its archaic generators to
use lower cost, cleaner-burning natural gas, the utility could make
more money on the power it sells. But that type of conversion requires
upfront investment, and Puerto Rico can't attract that investment
without addressing its immediate financial crisis.
A lot of people engaged in this debate blame Puerto Rico's economic
struggles on the ending of an old tax policy that gave corporations
tax-free income in the commonwealth. But in my view, the history is a
lot more complicated than that, especially when it comes to taxes.
Companies based in Puerto Rico are foreign in the eyes of the IRS--
the same as if their headquarters were in Mexico, China, or the UK. But
there's a major benefit that no other foreign companies get, which is
access to American incentives for investments in R&D and manufacturing.
There are a lot of people who view Puerto Rico as a tax haven tucked
within the U.S., and this is a big reason why.
There are also other special breaks that are unavailable in the
mainland. For example, there is a longstanding policy known in the tax
world as the rum cover-over, which for decades provided a big economic
boost to Puerto Rico. But in recent years, instead of being invested in
roads or schools or health care, the proceeds from the rum cover-over
have mostly gone straight to large distillers.
And the Commonwealth's own tax policy has been less than helpful as
well. By some estimates, Puerto Rico collects less than half of its
sales tax. It recently put in place a program to attract certain
Americans and their firms by zeroing out local taxes on capital gains,
with no requirement that they contribute to the economy. Under a local
tax break known as Act 20, service providers who move to the
commonwealth have their corporate tax rate drop from 30 percent to 4
percent.
These strategies may appeal to some companies and attract some
wealth, but there's not much evidence to suggest they're steering
Puerto Rico's economy toward prosperity. Scaling back or eliminating
overly generous or ineffective tax breaks should be on the table as
part of any long-term financial recovery plan.
In this debate, some people have made the argument that Puerto
Rico's safety net programs are too generous and need to be rolled back.
For example, there's a belief among some that Puerto Rico needs a lower
minimum wage. But changing the law to cut people's pay makes hardly any
sense when American citizens in Puerto Rico already make less than half
as much on average as those in the mainland U.S. In addition, lower
wages and a tattered safety net will drive more young workers to the
mainland, costing the island a vital engine of growth.
The Medicaid program in Puerto Rico is less generous than in the
mainland U.S. And its capped funding system means that it continues to
face harsh spending limits that undermine its ability to meet the
health care needs of the lowest-income U.S. citizens.
In addition, Puerto Rico is locked out of one of the most
successful pieces of the Medicare prescription drug benefit, which is
the Part D Low-Income Subsidy. The people this hurts already live with
extremely limited means.
A better funding system for Medicaid and improvements to Medicare
should be on the table. Puerto Rico could adopt an Earned Income Tax
Credit to help raise incomes and encourage employment. The Child Tax
Credit could be a bigger help to more families. And the commonwealth
could change its own tax policies to make sure it's able to invest in
education and infrastructure in the years ahead.
It's important to move ahead with policies that amount to more than
a momentary sugar high. The bottom line is that the solutions have to
help Puerto Rico and its millions of American citizens build a stronger
economic future, or else the debt cycle will continue.
______
Communications
----------
Letter Submitted for the Record by Rafael Cox Alomar,
Assistant Professor of Law, University of the District of Columbia
David A. Clarke School of Law
[email protected]
(202) 274-5303
September 28, 2015
The Honorable Orrin G. Hatch
Chairman
Committee on Finance
U.S. Senate
219 Dirksen Senate Office Building
Washington, DC 20510
The Honorable Ron Wyden
Ranking Member
Committee on Finance
U.S. Senate
219 Dirksen Senate Office Building
Washington, DC 20510
Re: Committee Hearing on Financial and Economic Challenges in Puerto
Rico
Dear Chairman Hatch and Ranking Member Wyden,
In anticipation of the Finance Committee Hearing on the Financial
and Economic Challenges besieging Puerto Rico, to be held on Tuesday,
September 29, 2015, I am hereby submitting this written statement for
the Finance Committee's consideration and incorporation into the record
of the proceedings.
I. Introduction
The colossal collapse of Puerto Rico's fiscal edifice--and, more
importantly, the crisis's ever-increasing ripple effect on the pricing
and financial viability of the United States' $4.3 trillion municipal
bond market \1\--has brought to bear not only the systemic infirmities
of the island's archaic economic and governmental models but even more
poignantly the inadequacy of its current neocolonial relationship with
Washington. The commonwealth status, as it stands, does not serve the
people of Puerto Rico well, and it certainly does not promote
Washington's geopolitical interests in the Western Hemisphere, either.
---------------------------------------------------------------------------
\1\ Puerto Rico's default could potentially cost states and cities
across the United States billions of dollars in additional interest
rate charges. For a provocative argument, see Larry McDonald, ``Could
Puerto Rico Default Hammer the $3.7 Trillion U.S. Muni Bond Market in
2014?'' Forbes, Jan. 3, 2014, http://www.forbes.com/sites/
larrymcdonald/2014/01/03/puerto-rico-default-to-re-price-the-3-7-
trillion-municipal-bond-market-in-2014.
It is no secret that Puerto Rico today is on the verge of virtual
bankruptcy. And, yet, the writing has been on the wall for some time
now. In the words of President Obama's Task Force on Puerto Rico's
Status, ``After several years of negligible growth, high unemployment,
and deficit increases, the Puerto Rican economy started to slow as
early as 2006 . . . leading to the sharpest economic contraction on the
island since the late 1980s.'' \2\
---------------------------------------------------------------------------
\2\ President's Task Force on Puerto Rico's Status, Report by the
President's Task Force on Puerto Rico's Status (Washington, DC: White
House, 2011), 38.
The picture is bleak indeed. And all available economic indicators
confirm it. As the Government Development Bank of Puerto Rico (GDB)
makes clear in its most recent Quarterly Report (dated May 7, 2015),
Puerto Rico's GNP for fiscal years 2013 and 2014 ``decreased by 0.2%
and 0.9%, respectively.'' \3\ In its Quarterly Report GDB also confirms
that ``although the forecast for fiscal years 2015 and 2016 has not
been made public, the cumulative values for the monthly economic
indicators for fiscal year 2015 indicate that the real gross national
product for fiscal year 2015 could also show a decrease during the
first 9 months of fiscal year 2015.'' \4\
---------------------------------------------------------------------------
\3\ Government Development Bank for Puerto Rico, Commonwealth of
Puerto Rico Quarterly Report Dated May 7, 2015 (San Juan: Government
Development Bank for Puerto Rico, 2015), 50.
\4\ Ibid.
As regards employment figures during this same period, the GDB also
concludes in its Quarterly Report that ``total employment in the island
fell by 0.8% as compared to the same period for the prior fiscal year,
and the unemployment rate averaged 13.1% compared to 14.7% for the same
period of the prior fiscal year.'' \5\ Unemployment in the island is
persistently higher than in any of the 50 states or the District of
Columbia,\6\ while the labor participation index has recently
fluctuated between 38% and 41%, among the lowest in the world.\7\
Puerto Rico's chronic incapacity to generate jobs at home or to
successfully compete in the global labor market is the most eloquent
demonstration of the island's broken institutional repertoire.
---------------------------------------------------------------------------
\5\ Ibid.
\6\ President's Task Force, 2011 Report by the President's Task
Force on Puerto Rico's Status, 38.
\7\ Report on the Competitiveness of Puerto Rico's Economy, The
Federal Reserve Bank of New York, June 29, 2012, iii.
A decade of negative growth has led to widespread poverty,
pervasive migration, and insurmountable levels of public debt. Close to
45% of Puerto Ricans live in poverty \8\ (twice as many as in
Mississippi, the poorest state in the United States), and 38% receive
food stamps (three times as many as in the mainland).\9\ Not
surprisingly, these conditions have led to a massive exodus not seen
since the days of Operation Bootstrap in the 1950s.\10\ Puerto Rico's
population has decreased from 3.81 million in 2000 to 3.667 million in
2012. Between 2000 and 2012, 141,000 people left the island; in the
last 2 years alone, Puerto Rico has lost 59,000 residents, or 1.5% of
its population.\11\
---------------------------------------------------------------------------
\8\ D'vera Cohn, Eileen Patten, and Mark Hugo Lopez, ``Puerto Rican
Population Declines on Island, Grows on U.S. Mainland,'' Pew Research,
Aug. 11, 2014,
http://www.pewhispanic.org/2014/08/11/puerto-rican-population-
declines-on-island-grows-on-u-s-mainland/.
\9\ Ibid.
\10\ During this period, approximately 500,000 people left the
island for jobs on the mainland. See Michael A. Fletcher, ``Puerto
Rico, with at Least $70 Billion in Debt, Confronts a Rising Economic
Misery,'' Washington Post, Nov. 30, 2013,
http://www.washingtonpost.com/business/economy/puerto-rico-with-at-
least-70-billion-in-debt
-confronts-a-rising-economic-misery/2013/11/30/f40a22c6-5376-11e3-9fe0-
fd2ca728e67c_story
.html.
\11\ Maye Primera, ``Puerto Rico se vacia lentamente,'' El Pais,
Aug. 19, 2014, http://internacional.elpais.com/internacional/2014/08/
18/actualidad/1408390645_767393.html.
And, to make matters worse, those who are leaving are precisely the
ones Puerto Rico needs the most at this juncture: young, well-educated,
productive professionals in their prime who cannot survive at home.
This brain drain is, undoubtedly, one of the crisis's most tragic
---------------------------------------------------------------------------
phenomena.
Puerto Rico, the third-largest municipal bond issuer in the United
States after New York and California,\12\ has long enjoyed unencumbered
access to the markets, due in no small measure to its bonds' high
yields and triple exemption from federal, state, and local taxes.\13\
Yet negative growth, together with uncontrolled deficit financing, has
led to unmanageable levels of public debt. According to figures from
the Commonwealth's Government Development Bank, as of May 31, 2015, the
total outstanding debt of the island's government (including its
instrumentalities and municipalities) was of $72.204 billion,
``equivalent to approximately 104% of the Commonwealth's gross national
product for fiscal year 2014.'' \14\
---------------------------------------------------------------------------
\12\ Close to 75% of U.S. municipal bond funds own Puerto Rican
bonds.
\13\ Fletcher, ``Puerto Rico, with at Least $70 Billion in Debt.''
\14\ Government Development Bank for Puerto Rico, Commonwealth of
Puerto Rico Quarterly Report Dated May 7, 2015 (San Juan: Government
Development Bank for Puerto Rico, 2015), 18.
So far, the pro-cyclical measures enacted by the local
authorities,\15\ far from containing the crisis, have further arrested
the island's economic growth, while ``adversely affecting governmental
revenues.'' \16\ More specifically, the 4.5% increase in the island's
sales tax (from 7% to 11.5%),\17\ which went into effect on July 1,
2015, has had a chilling effect on consumption, while leading to
further tax evasion and even lesser revenues.
---------------------------------------------------------------------------
\15\ See Ley Num. 3-2013 [Law No. 3 of 2013], 2013 L.P.R.A. 3
(2013) (P.R.) (reform to the Employees' Retirement System); Ley Num.
160-2013 [Law No. 160 of 2013], 2013 L.P.R.A. 160 (2013) (P.R.) (reform
to Teachers' Retirement System); Ley Num. 162-2013 [Law No. 160 of
2013], 2013 L.P.R.A. 162 (2013) (P.R.) (reform to Judiciary Retirement
System); Ley Num. 66-2014 [Law No. 66 of 2014], 2014 L.P.R.A. 66 (P.R.)
(legislation approving sale of U.S. $3.5 billion of general-obligation
bonds); Ley Num 71-2014 [Law No. 71 of 2014], 2014 L.P.R.A. 71 (2014)
(P.R.) (Puerto Rico Public Corporation Debt Enforcement and Recovery
Act).
\16\ Government Development Bank, Commonwealth of Puerto Rico
Quarterly Report, July 17, 2014, 5.
\17\ See P.R. Law No. 72-2015 of May 29, 2015.
The deficits have become so pervasive, short-term financing and
liquidity sources so scarce,\18\ and the avalanche of credit downgrades
so monumental \19\ that on June 28, 2015 the Government of Puerto Rico
announced to the world that the island's debt ``is not payable.'' \20\
Shortly thereafter, on August 3, 2015, the Public Finance Corporation
(PFC), a GDB subsidiary, was unable to service its debt. The GDB's lack
of liquidity precluded the legislature from appropriating the necessary
funds for servicing the $58 million payment due to the creditors of the
Public Finance Corporation.
---------------------------------------------------------------------------
\18\ Ted Hampton, ``Puerto Rico's Liquidity Remains at Risk Despite
Recent Borrowings, Restructuring Law,'' Moody's Investors Service, Aug.
1, 2014, https://www.moodys.com/research/Moodys-Puerto Rico's-
liquidity-remains-at-risk-despite-recent-borrowings PR_305269?WT.mc_id=
NLTITLE_YYYMMDD_PR_305269.
\19\ In February 2014, the credit ratings of Puerto Rico's general-
obligation bonds and commonwealth-guaranteed bonds were lowered to
noninvestment grade (commonly known as ``junk status'') by Moody's
Investors Service, Standard and Poor's Ratings Services, and Fitch
Ratings. Soon thereafter, in July 2014, each of the credit agencies
lowered the commonwealth's ratings by two notches into junk status. And
from then on, the list of further downgrades has gone in crescendo. As
recent as September 10, 2015, Standard and Poor's lowered its ratings
on Puerto Rico's true-backed debt (COFINA) to `CC' from `CCC-'.
http://www.reuters.com/article/2015/09/10/usa-puertorico-debt-
idUSL1N11G37S20150910.
\20\ Michael Corkery and Mary Williams Walsh, ``Puerto Rico's
Governor Says Island's Debts Are `Not Payable,' '' The New York Times,
June 28, 2015.
The default on the PFC's debt not only marks the beginning of a
long and protracted legal battle, on multiple fronts, between Puerto
Rico and its creditors, but equally importantly brings to the fore the
apparent incapacity of the island's current fiscal team to articulate
and execute, on its own, a successful exit strategy from this
labyrinth. To the extent Puerto Rico was unable to reach a compromise
with PFC debt holders, who different from GO bondholders enjoy no full,
faith and credit guarantee under the Commonwealth Constitution,\21\ it
is highly unlikely it will be able to craft a consensual deal with
those creditors against whom it holds less bargaining power. In short,
with no precise strategy at hand, no access to an emergency source of
liquidity, no Chapter 9 bankruptcy protection for its municipalities
and public corporations, and none of the tools available to sovereign
nations, Puerto Rico stands today at a perilous crossroads.
---------------------------------------------------------------------------
\21\ P.R. Const. Art. VI, Sec. 8 (``In case the available revenues
including surplus for any fiscal year are insufficient to meet the
appropriations made for that year, interest on the public debt and
amortization thereof shall first be paid, and other disbursements shall
thereafter be made in accordance with the order of priorities
established by law.'')
For Puerto Rico, the only way forward appears to be brokering a
deal with the Obama Administration and Congress whereby, on the one
hand, the Federal Government and Puerto Rico sit on the same side of
the negotiating table with the island's creditors; while dismantling
the current colonial arrangement that has bred most of the fiscal and
---------------------------------------------------------------------------
economic evils afflicting the island today.
The perpetuation of a territorial relationship with Washington,
fostering values of dependency while severely limiting the island's
policy options, has no doubt exacerbated the catalysts behind the
meltdown, making it even harder for Puerto Rico to overcome an
endogenous economic depression in a weakened global economy.
Thus, the opportunity has arisen for turning around the economic
collapse by way of concurrently addressing the island's status
quagmire.
The time is ripe for Congress to articulate a coherent policy for
addressing the Puerto Rican labyrinth.\22\
---------------------------------------------------------------------------
\22\ Beyond uttering vague and sporadic statements in favor of
providing technical assistance to local authorities, the political
branches of Washington have yet to shoulder their part of the blame.
See, e.g., Dereck Wallbank, ``Congress Open to Puerto Rico Technical
Aid, Hoyer Says,'' Bloomberg, July 8, 2014, http://www.bloomberg.com/
news/2014-07-08/congress-open-to-puerto-rico-technical-aid-hoyer-
says.html.
II. The Financial Control Board Proposal and the ``Structural''
Problem
Following the release of its Fiscal and Economic Growth Plan, on
September 9, 2015, the Government of Puerto Rico announced its
intention to engage in far-
reaching debt restructuring negotiations with its creditors.\23\
---------------------------------------------------------------------------
\23\ See, for instance, Michelle Kaske, ``Puerto Rico Sends
Reassurance as Debts Talks Poised to Begin,'' Bloomberg Business,
September 25, 2015.
It seems as if the Commonwealth's fiscal team intends to begin
negotiations with the island's creditors by mid-October. However, the
island's systemic institutional infirmities, its acute illiquidity, its
lack of access to Chapter 9's restructuring mechanism and the absence
of consensus among the wide panoply of creditors besieging it will in
all probability drive any unilateral attempt at restructuring to
---------------------------------------------------------------------------
failure. And this is precisely what must be averted at all costs.
As both Chairman Hatch and Treasury Secretary Lew have suggested
``Puerto Rico needs an orderly process to restructure its unsustainable
liabilities;'' \24\ ``orderly resolution of debt defaults are preferred
to chaotic ones'' \25\ that ``could cause long-term damage to the
health, safety and financial well-being of the families living and
working in Puerto Rico.'' \26\
---------------------------------------------------------------------------
\24\ Letter from Secretary Lew to Chairman Hatch, July 28, 2015.
\25\ Letter from Chairman Hatch to Secretary Lew, July 17, 2015.
\26\ Letter from Secretary Lew to Chairman Hatch. July 28, 2015.
However, the island's liquidity deficiency is of such magnitude
that ``neither the Commonwealth nor GDB may be able to honor all of
their obligations as they come due nor may the Commonwealth be able to
fund all necessary governmental programs and services if it does not
have sufficient access to the capital markets or alternative sources of
financing to satisfy its liquidity needs.'' \27\ According to Conway
MacKenzie, Inc., a U.S. based consulting firm retained by the GDB,
avoiding ``full cash depletion at the Treasury's Concentration Account
by September 2015'' will be highly improbable ``in the absence of new
TRANs or other cash flow financing for fiscal year 2016.'' \28\
---------------------------------------------------------------------------
\27\ Qualifying Report, May 7, 2015, 15.
\28\ Ibid., 49.
A humanitarian crisis of grave proportions will soon unfold in this
U.S. territory of 3.6 million U.S. citizens if the political branches
in Washington, in conjunction with the island's elected officials, fail
to craft an innovative strategy for cleaning up this mess.\29\
---------------------------------------------------------------------------
\29\ As regards the health aspects of this impending humanitarian
crisis see, for instance, Lizette Alvarez and Abby Goodnough, ``Puerto
Ricans brace for Crisis in Health Care,'' The New York Times, August 2,
2015.
It is against this background, that the idea that Congress (in the
exercise of its authority under the Constitution's territory clause)
should pass legislation establishing a federal financial control board
over Puerto Rico has begun to gain momentum in Washington (and bond
holders) circles.\30\ This proposition should not be taken lightly. It
merits grave and careful consideration.
---------------------------------------------------------------------------
\30\ See, for instance, Dear Colleague letter authored by
Congressman Jeff Duncan (R-SC), June 19, 2015. Also, Jack Casey,
``Puerto Rico Control Board Discussion Simmers in Congress,'' The Bond
Buyer, September 4, 2015.
As a threshold matter, it is essential to discard the possibility
of blindly extrapolating the 1995 District of Columbia Revitalization
Act to the Puerto Rican scenario. The District's $722 million budget
deficit and $5 billion unfunded pension liability (as measured by 1995
standards) \31\ pale in comparison to Puerto Rico's chronic $2.5
billion per year budget deficits (3.5% of GNP) and over $33 billion
unfunded pension liability.\32\ While certain provisions of the
District's Revitalization Act would certainly prove useful in the
Puerto Rican context, such as for instance those addressing
governmental cash-flow problems,\33\ these measures alone will prove
insufficient to assure the island's long-term sustainability.
---------------------------------------------------------------------------
\31\ Michael Janofsky, ``Congress Creates Board to Oversee
Washington, DC,'' The New York Times, April 8, 1995.
\32\ Qualifying Report, 43-46. Krueger Report, 15.
\33\ Pursuant to the District's Revitalization Act, the U.S.
Treasury, inter alia, provided the District short-term capital to
refinance close to $500 million in debt; assumed the District's $5
billion unfunded pension liability; increased the federal Medicaid
payment to 70%; and took over the financing of the courts and the
prison facilities.
As the 2015 Krueger and the 2014 Federal Reserve Bank of New York
Reports have both suggested, solving Puerto Rico's woes will require
much more than a powerful dose of austerity. It will also require doing
away with the applicability to Puerto Rico of a host of federal
statutes and regulations, such as the Jones Act (1920 Merchant Marine
Act as amended), which have severely diminished the island's
competitiveness in the global economy.\34\
---------------------------------------------------------------------------
\34\ Krueger Report, 1; Update on the Competitiveness of Puerto
Rico's Economy, Federal Reserve Bank of New York, July 31, 2014, 9.
While it is true that local politicians have recklessly mismanaged
the island's finances, it is pretty clear that the fundamentals of
Puerto Rico's political relationship with the U.S. are highly
unsatisfactory. The political status meltdown has clearly spilled over
to the island's fiscal and economic health. Therein lies what some
voices in Congress have now come to describe as the island's
---------------------------------------------------------------------------
``structural'' problem.
In light of the above-referenced observations, the Senate's Finance
Committee would be well advised to pay heed to the following
recommendations as it explores the possibility of introducing a
financial control board bill for Puerto Rico:
1. The proposition that the federal government ``cannot'' and ``should
not'' extend to Puerto Rico bridge financing facilities is
unrealistic. Addressing the island's long-term structural
asymmetries, will require in the short-term access to external
sources of liquidity. If seen in light of the impending debt
service deadlines facing the island's central government and public
corporations (totaling close to $3.5 billion over the next 10
months),\35\ and these entities' incapacity to access the markets,
it becomes patently clear that there will be no successful debt
restructuring without short-term liquidity. Nothing, as a matter of
law or policy,\36\ stands in the way of the Treasury's or the
Federal Reserve's assistance by way of facilitating Puerto Rico
appropriate short-term financing facilities within a wider
revitalization strategy that brings to the fore the federal
financial control board mechanism. One thing must go with the
other.
---------------------------------------------------------------------------
\35\ GOs: $357 million of interest due in January 2016 and $805 of
principal and interest in July same; COFINA: $1.2 million of interest
due in November 2015, February and May 2016; PREPA: $196 million of
interest in January 2016 and $420 million of principal and interest in
July 1 same; GOB: $354 million in December 2015 and $422 million in May
2016; PR Highway and Transportation Authority: $106 million of interest
in January 2016 and $220.7 million of principal and interest in July
same; PR Public Buildings Authority: $102.4 million of interest in
January 2016 and $207.6 million of principal and interest in July same;
PRASA: $86.5 million of interest in January 2016 and $135.1 million of
principal and interest in July same; PR Financing Authority: $37.2
million of interest in January 2016 and $77.8 million of principal and
interest in July same.
\36\ See, for instance, Arturo Estrella (Professor of Economics at
Renseelaer Polytechnic Institute), Puerto Rico Debt and the U.S.
Federal Government: Potential Assistance Tools and Policy Practice
(Discussion Paper Prepared at the Auspices of the Fundacion Carvajal),
October 2014.
2. The sheer magnitude and complexity of Puerto Rico's debt
restructuring negotiations (an exercise without precedent in Puerto
Rico's history) will no doubt require that any federal financial
control board legislation bestow on the control board broad
authority to engage the island's creditors in the restructuring
negotiations--bearing in mind, of course, the fiduciary duties that
would necessarily make the board accountable to the people of
---------------------------------------------------------------------------
Puerto Rico and to Congress.
3. Federal legislation establishing a financial control board for
Puerto Rico (legislation that would amend the Federal Relations Act
(48 U.S.C. Sec. 731 et. seq.)) must also contain explicit
provisions detailing a fixed and specific timetable for Puerto
Rico's decolonization. As soon as Puerto Rico hits the applicable
fiscal and economic growth benchmarks the federal financial control
board legislation would put in place, the people of Puerto Rico
should then face a stark choice between sovereignty and annexation.
For this approach to work, the political branches in Washington
must pay attention to the following elements. First, the status quo
must be discarded from the outset because it is both the source of
the structural crisis besieging the island and a colonial
anachronism at odds with the U.S.'s geopolitical interests in the
Americas.\37\ Second, the sovereignty formula presents, in of
itself, a dual choice between separate sovereignty and associated
sovereignty (as both terms are defined under Public International
Law). Third, the annexation alternative would amount to Puerto Rico
becoming a ``part'' of the United States as an ``incorporated''
territory--bearing in mind that it befalls on Congress to spell out
the conditions the island would then have to meet in order to, on
the one hand, bear the fiscal and economic burdens of statehood
and, on the other, enter the Union as a state on an equal footing
with the 50 states.
---------------------------------------------------------------------------
\37\ It was Ranking Member Wyden who summed it up best when, in
adjourning the Senate's Resources Committee Hearing on Puerto Rico, he
said: ``Two out of 3 of you seem to believe that the current status and
enhanced Commonwealth are no longer options. . . . So looking forward
it seems to me that it's especially important to see if the 3 of you
can come to an agreement on the language of a ballot that, in effect,
has 2 remaining options: statehood, or sovereignty as an independent or
freely associated State. Absent an agreement of the 3 of you it seems
that this will just go round and round some more.'' See Puerto Rico:
Hearing before the Committee on Energy and Natural Resources, United
States Senate, One Hundred Thirteenth Congress, First Session, to
Receive Testimony on the Nov. 6, 2012, Referendum on the Political
Status of Puerto Rico and the Administration's Response, 113th Cong.
35-36 (2013).
---------------------------------------------------------------------------
III. Conclusion: A Path to Decolonization
The Puerto Rican fiscal crisis presents a unique opportunity for
articulating a sound policy for disentangling an ancient jigsaw
puzzle--the solution of which has so far eluded Washington. The current
territorial condition of Puerto Rico has become an albatross around the
neck of any possible path for undoing the epic fiscal crisis besieging
the island and, no doubt, a source of acute embarrassment to the people
of Puerto Rico and to the United States.
I call on the members of the Senate's Finance Committee to analyze
the issues raised in this written statement and do what is right by
Puerto Rico.
Cordially,
Rafael Cox Alomar
c. Chris Campbell, Majority Staff Director of the Senate Finance
Committee
______
Statement of Dennis O. Freytes
[email protected]/FL: (407) 298-1151/PR: (787) 946-5859
_______________________________________________________________________
U.S. SENATE FINANCE COMMITTEE HEARING ON PUERTO RICO--
SEPTEMBER 29, 2015
SUPPORT U.S. TERRITORY OF PUERTO RICO
MASTER RECOVERY AND PROSPERITY PLAN
HONORABLE U.S. SENATORS: THANKS for receiving and reading my testimony!
It is the sacred DUTY of the Federal Government (U.S. President, U.S.
Congress, U.S. Federal Courts/Supreme Court) to exercise its oversight
and fairly support the U.S. Territory of Puerto Rico (under Article 4--
U.S. Constitution's Territorial Clause), in its hour of need to include
to end the Fiscal and Economic crisis! Plus, ensure a fair/equal U.S.
Citizenship; end the federally undemocratic Territorial Status! Treat
all U.S. Citizens--(including Puerto Ricans) equally under just laws!
For the Purpose of these hearings, I recommend passage of H.R. 870, the
Puerto Rico Chapter 9 Uniformity Act of 1915 (Debt Restructure--that is
fairly applied to other States, and did apply to Puerto Rico until 1984
when the U.S. Congress removed Puerto Rico).
The U.S. Territory of Puerto Rico--with Federal Government fair support
and constructive oversight--needs to develop a comprehensive (not
piecemeal) Economic/Fiscal Recovery and Prosperity Plan; take action to
do various structural reforms to get Puerto Rico out of economic
recession; create good jobs that will also help improve the U.S.
Economy; ensure fairness/equality and progress for the good of all U.S.
Citizens; help stem the Puerto Rican exodus to the States!
BACKGROUND
U.S. Citizens with Puerto Rican Heritage/Roots are about 9 million
strong; are the 2nd largest Hispanic Group in the U.S. (most live in
the States--can Vote in Federal Elections; are mostly concentrated and
are the majority of Hispanics) in Central Florida (swing State), and
New York. The U.S. Territory of Puerto Rico has about 3.6 million U.S.
Citizens, more than about 22 States. (It used to be more than 24
States, but, the Exodus has taken its toll; taxing the resources of the
States they move to.)
For over 117 years, Puerto Rico has faced discrimination where
Residents suffer a 2nd Class U.S. Citizenship, including American
Veterans who have shed blood, sweat, and tears for our beloved USA!
These American Citizens don't have any rights to Vote for their U.S.
President/Head of State nor have just representation in the U.S.
Congress that determines their destiny nor statutory permanent U.S.
Citizenship nor full benefits (they paid for) . . . nor treated justly
under fair laws!
This is WRONG--un-American--strikes at the essence of the U.S.
Republic's Representative Democracy ``consent of the governed;'' the
building block of our democracy--the U.S. Citizens--with protected
individual civil rights--so there is no tyranny of a majority!
It takes two to tango! The Federal Government has been mostly
benevolent with Puerto Rico; but, it has treated U.S. Citizens residing
there un-justly. Thus, the Federal Government must lead--move to Stop
Institutional discrimination; take action to redress a wrong. In Fiscal
matters, the Puerto Rican Government has behaved irresponsibly--like
drunken Sailors (no offense to the Sailors). . . . Thus, both must take
action (for the good of all U.S. Citizens):
RECOMMENDATIONS
Federal Government:
Equal/Fair application of our ``We the People'' U.S. Constitution--
for all under our noble U.S. Flag! Overturn the racist Insular
Cases (1901-1925+)--where a racist Supreme/Federal Courts UN-
FAIRLY held--Puerto Rico to be an un-incorporated U.S.
Territory; more foreign and domestic; belongs to but, is not
part of the U.S. . . . (Terms not found in the U.S.
Constitution); the U.S. Congress can discriminate
(differentiate) in applying the U.S. Constitution to U.S.
Citizens residing in Puerto Rico. . . .
Terminate statutory/un-permanent 2nd Class U.S. Citizenship!
Break Puerto Rico's trite federally un-democratic Territorial
Shackles!
Support Puerto Rico on finding solutions to the fiscal, economic/
job, and security problems . . . This includes treating Puerto
Rico (with about 3.7 million U.S. Citizens) fairly like it
treats other U.S. Jurisdictions (New York, Detroit, Chicago . .
. when in financial problems; debt restructure . . .)!
** Example: New York (with 9 million U.S. Citizens), from 1975-1986,
went through a dire fiscal/economic crisis. In this case, the Federal
Government--backed up or guaranteed New York's loans/bonds (with fees
attached) until New York resolved its fiscal problems; was solvent
(paid fees), and prosperous again; continued to make mayor
contributions to the MACRO U.S. Economy. . . .
Pass (on a non-partisan basis):
H.R. 870, the Puerto Rico Chapter 9 Uniformity Act of 1915 (Debt
Restructure--that is fairly applied to other States).
H.R. 727--Puerto Rico Statehood Admission Process Act--STATEHOOD:
YES or NO.
** Yes vote means: Equal U.S. Citizenship; own State Identity and
State Sovereignty--like other States of our ``Union of States''
have (e.g., The Lone Star State-Republic of Texas). . . .
(This bill has over 110 Congressional Co-Sponsors; but, U.S. Senate
Sponsors are needed to support Equal U.S. Citizenship!)
* NOTE: 2nd Alternative--the Federal Government conducts a sanctioned
Referendum between constitutionally defined Non-Territorial Options:
STATEHOOD vs INDEPENDENCE. (and its forms)
Besides, the Federal Government should:
Create Federal Enterprise Zone--provide economic development
incentives--tied to Job creation, and other Metrics.
Exempt Puerto Rico from the 1920 Jones Shipping Act--Legislate to
exclude Puerto Rico from this trite un-competitive Act--that
raises prices that consumers pay and has other negative impacts
on the MACRO U.S. Free Market Economy (especially to Puerto
Rico, Hawaii, Alaska, and others).
Provide Federal Oversight: As last resort, if the PR Government does
not show internal/local results soon--The Federal Government
must positively act to resolve the situation directly. . . .
Take any other actions for fairness; the good of ALL U.S. Citizens,
no matter where they reside.
U.S. Territory of Puerto Rico Government:
Internal Actions:
1. Government:
Reform/cut the size of Government (Territorial/Local/Public
Corporations . . .): consolidate the 139 Government Agencies
into about 75; cut municipalities from 78 to about 45;
regionalize some government functions--into about 8 Government
Service Regions--decentralize Territorial control, as
appropriate and with safeguards;
prioritize needs; use modified 0-Base Budgeting (make Agencies
justify their Budgets);
establish a Government Professional Merit System based on metrics
and evaluations (non-partisan); Workfare not Welfare (all abled
un-employed work at least 25 hrs. a Week--Community Services .
. .) as the Government coordinates with the Private sector for
jobs;
Streamline/make Government more responsive, effective, efficient,
compassionate, and accountable.
2. Fiscal Policies:
end dependency on spiraling high interest rate Loans to pay
operating deficits; a growing $72+ Billion Debt (which is
actually closer to about $163 billion);
reform the Tax structure (make it simpler--with incentives for
those that work and invest;
prioritize needs (essential necessities first: water, electricity,
security, health, education, transportation, care of the
indigent . . .) than other nice to have things if the budget
allows, cut government spending, balance the budget;
eliminate the operational and structural debt in the long run;
bring liquidity to the ``Banco de Fomento;''
Don't over-tax because it can kill the economy . . . but, provide
incentives for capital and business enterprises . . . etc. that
will grow the economy; bring in more Revenues.
3. Educate/Re-train the Work Force for today's Job Market.
Establish a seamless and coordinated education system (under a
State or Territory Board of Education--5 Division Chiefs): (1)
Pre-K; (2) K-12, (3) Vocational Schools, (4) Community/
Colleges, and (5) Universities. (Public, Private or Chartered)/
with an Education Jobs Advisory Council made up of Community
Leaders--include accomplished Businesspersons;
Start education at Pre-K level;
Establish good education Standards based on the foundation/
priorities of: Reading, Writing, STEM (science, technology,
engineering and mathematics), Social Sciences, Personal Affairs
(Conduct, Management, Responsibilities, Discipline, and
Tolerance); Critical Thinking;
Establish a seamless and coordinated education system (under a
State or Territory Board of Education--5 Division Chiefs): (1)
Pre-K; (2) K-12, (3) Vocational Schools, (4) Community/
Colleges, and (5) Universities. (Public, Private or Chartered)
(With a Core and Elective Curriculum);
Teach to Individual Learning Style (e.g. 4-MAT Learning System);
use technology.
Performance Scholarships (Government/Public/Private)
4. End Territorial Status through Statehood: provide stability for
investors/
capital investment; stem the vast historic exodus of Puerto Ricans
(many professionals) to the States (as they vote with their moving feet
for equality and better opportunities).
5. Unleash the Entrepreneurial Spirit
Transform PR's Economy/Jobs from Centralized Government Based to
Private Sector/Business Based;
minimize regulations, permit process; income inequalities;
create an incentive based (Investors, Managers; Worker profit
sharing)--tempered Free Market economy that is competitive on
the Global Stage.
Recommendations: (For both the U.S. and Puerto Rico)
We need to demand our government come up with proper solutions, now.
Some are:
l. Prioritize needs;
2. Implement correctly modified Zero-Base Budgeting;
3. Cut spending;
4. Stimulate (with incentives) the economy to create more jobs and
growth;
5. Gradually stop borrowing or keep it at 20% of GDP;
6. Cut the size of the government;
7. End unneeded regulation;
8. Reform the Tax System;
9. Balance the budget;
10. Establish work fare--end dependence (except/compassion for the
truly disadvantaged);
11. Reform entitlement programs that we can afford;
12. Provide incentives/profit sharing formula (Investors, Management,
and Workers);
13. Induce fair opportunity; a level playing field;
14. Deal with income inequality--Fairness in a tempered FREE Market/
Enterprise System;
15. Facilitate Business (includes Small Business); liberate the
entrepreneurial spirit!
OTHER FACTS:
Facts are: the Federal Government desperately treats American
Hispanics-loyal Puerto Rican U.S. Citizens by denying full Civil
Rights; in many programs, like--MEDICARE, MEDICAID, Social Security,
SSI funding for the poor . . . where Puerto Ricans pay fully and
receive less than the States.
Also, it excludes Puerto Rico from Federal Code 9-Debt Restructure
(which all States have); doesn't exempt Puerto Rico from the 1920 Jones
Act (monopolized Shipping Law) that hurts Puerto Rico's economy and the
MACRO U.S. Economy. . . . Even Bill Gates stated that the Federal
Government treats Puerto Rico wrong! The Feds must be fair; help, not
sink, Puerto Rico.
The Federal Government has been benevolent in many ways, but, it
doesn't treat Puerto Rico equally or fairly. U.S. Citizens/American
Veterans, from Puerto Rico, don't have full civil rights; don't receive
all benefits; are under the will of Congress with no just
representation or federal voting rights for their Head of State-U.S.
President.
Congress has passed many good Laws like the: Foraker Act (1900)
creating a Civilian Government; Jones Act (1917) provides a 2nd Class
U.S. Citizenship; U.S. Law 600--Federal Relations Act (1950) allows
Puerto Rico its local Constitution (approved in 1952--with a local form
of Republican government but, still under the will of Congress). There
are a number of Laws and Federal Programs that treat Puerto Rico almost
like an incorporated State of the Union with only local powers, but,
still under the will of Congress.
Plus, the designation of a Federal Court District (under Article III of
the U.S. Constitution); the presence of the principle Federal Agencies
on the Island; the integration of Puerto Rico's culture to the Macro
USA National Western Culture, and its treatment by Federal Agencies (as
can be done) as a State--has transformed the 1898 Puerto Rico to
today's Puerto Rico that has become a fully integrated U.S. Territory;
aspiring to become a full Partner of the U.S.--ready to enter the
``Federal Union of Sovereign States'' that come together equally under
our U.S. Constitution. Puerto Rico sacrifices, serves, defends,
contributes, and spills blood for our U.S.--deserves to be treated
equally!
A representative Government should serve the People, not be their
Master; unfairly subjugate them with no right to just representation in
Congress. There is no true democracy without equal representation;
protected individual civil rights. Even if one U.S. Citizen can't Vote
. . . it is one too many!
* Note: About 5 million U.S. Puerto Ricans have ``voted with their
feet''--moved to the States (with more on the way)--wanting equal
rights, benefits, and better opportunities. To stem the flow, resolve
PR Status. . . .
But, the Federal Government still has oppressive powers to discriminate
(differentiate) in applying the U.S. Constitution to Puerto Rico. This
is incongruent with what the U.S. stands for--equal/protected civil
rights!
Puerto Ricans/Hispanics are part of the kaleidoscopic or intertwined
strong threads that make up the resilient (red, white, and blue) Fabric
of the USA--the land of Free Immigrants (united under our ``We the
People'' U.S. Constitution/Flag--with own identities, respect, and
tolerance for others; have made valuable contributions (created
hundreds of thousand Mainland jobs).
Besides, Puerto Ricans have help develop and defend our USA since
1513--(Puerto Rican Ancestors fought in the U.S. War of Independence,
Civil War). Since, Puerto Rico became a U.S. Territory in 1898--it has
bravely sacrificed, shed blood and tears--under the American Flag--till
today!
In the interim Status resolution--the Federal Courts/U.S. President/
Congress must give more weight to the Bill of Rights/Constitutional
Amendments--Incorporate Puerto Rico; overturn the biased and racist
rooted Insular Cases (Bidwell; Balsac)--that, along with the old
Territorial Clause--are still, today--the veiled basis for Federal
discrimination in applying the U.S. Constitution, and un-democratic
governance of Puerto Rico.
In sum, Puerto Rico's economy is subservient, but, contributes to the
U.S. economy/jobs (which also has its problems). To move forward the
U.S. Federal Government must cut Puerto Rico's territorial shackles as
Puerto Rico conducts structural internal reforms . . . that will bring
prosperity as we work for the good of all: Family, Community, Puerto
Rico, USA, and Humanity.
The Federal Government controls Puerto Rico, under the undemocratic
U.S. Territorial Clause, to include: the economy/business market,
currency, security, borders, shipping, taxes, benefits; oversees all
local laws; can cede PR to another Nation. Plus, PR has a 2nd Class
statutory U.S. Citizenship (can't vote in Federal elections/for their
U.S. President; has no just representation in the Congress that
determines its destiny); has no power in Congress--only one Resident
Commissioner--(without a vote) that represents millions of U.S.
Citizens (does the job of about 6 Representatives and 2 Senators)!
Besides, Puerto Rico is an island colonial possession of the U.S.--
which contributes in many ways to the U.S. defense, macro economy,
creation of American jobs, and in other areas. But, its economic growth
is: forcefully linked to the U.S. economy; hamstrung by many imposed
senseless stranglehold U.S. regulations and the must use of un-
competitive and very costly * American Ships--which adversely impacts
on PR's and the U.S. economy/creations of jobs!
* Note: Puerto Rico, Alaska, Hawaii, and others agree (and want to
change) this unfair and uncompetitive shipping--that cost their
economies and consumers much more than other continental States . . .
but, Puerto Rico has no just representation; no power in Congress to
fight for its U.S. Citizens!
These regulatory shackles are a hindrance to ``Free Market'' that kills
competition; monopolizes shipping; reduces incentives for capital
investment; raises immensely the cost of products and services-
including electricity. . . . Besides, along with the territorial status
(which fuels investor uncertainty) and other factors, it adversely
affects PR's economy; denies, to an extent, a ``Free Market'' with
competition, and incentives for capital investment; stifles economic
growth, creation of good jobs. . . .
Bill Gates (Microsoft has operations in PR--with an educated workforce)
is quoted as saying that the way the U.S. treats Puerto Rico is ``just
wrong. . . .'' Plus, on Shipping--the Federal Government must take
action to redress this wrong; ensure we have an competitive open Market
(with incentives) that will boost the economy/create more jobs; reform
the trite 1920 Jones Act, as we also protect our U.S. Merchant Marine.
. . .
CLOSE
``No Taxation without just representation!'' Many in PR are forced to
pay Federal taxes (without just representation), such as: Social
Security, Medicare, Payroll, and other indirect/invisible taxes, but,
U.S. Citizens there don't get full rights or benefits. . . .
The Federal Courts/Supreme Court needs to, also, take action by
overturning the Insular Cases (Bidwell and Balzac) that, during racist
and biased times, have allowed the U.S. Congress to discriminate when
applying the U.S. Constitution to Puerto Rico--to this day!
Loyal U.S. Puerto Ricans/Hispanics (which cherish their U.S.
Citizenship), and Ancestors--have contributed greatly to the advanced
civilized development of the now U.S. (since 1513)--107 years before
the Pilgrims; bravely fought in the U.S. War of Independence and other
Wars; have courageously defended our noble U.S. Flag with utmost
sacrifice and blood . . . (Includes, from 1899--the valiant
Borinqueneers--U.S. 65th Infantry Regiment--Winners of the
Congressional Gold Medal--highest honor U.S. Congress can bestow)!
The USA MANTEL of LIBERTY (includes Hispanics/Puerto Ricans)--is made
from a strong resilient Fabric of intertwined golden Multi-Threads of
loyal and constructive contributing Individuals and Groups; Natives and
Immigrants--with own Individual and State Identities, Customs, and
Traditions (based on the MACRO Western Culture)!
WE ARE UNITED (with respect, tolerance, responsibility, duty . . .
loyalty)--under our U.S. Flag (that represents ``WE the
People'')/Constitution; Humanitarian Values (Right to Life,
Creed, Equality, Fair Opportunity, Justice, pursuit of
happiness); and Good Principles--that liberates the
Entrepreneurial Spirit in a tempered Free Market; with a Safety
Net for the disabled and disadvantaged; reasonable Freedom to
be--for all!
OUR USA, is a Kaleidoscope of Beauty; has the best Quality of Life
in the World--as we work together to sustain what we have; but,
also strive (with reason) for PROGRESS--make positive
improvements (Security, Food, Medical, Housing, Education, Grow
our Economy, Creation of Jobs, Fair Income . . . Social
Justice); work together for the good of ALL: Family, Community,
State, USA, and Humanity!
Let's advocate (illuminate the truth)--stand up for a just cause, don't
fall trapped to political excuses, distortion, generalizations,
speculation, or stonewalling by close-minded closet Chauvinists, or
support actions that lead to impasse that result in Voter segregation
of loyal U.S. Citizens! Let's work together for the good of all:
Family, Community, USA, and Humanity!
THANKS for the many good things you do for our beloved noble USA!
HOOAH!
John Oliver Video: https://www.youtube.com/watch?v=CesHr99ezWE
Equality for Puerto Rico:
https://www.youtube.com/watch?v=5EWzqvRZJOY
Harvard (Feb. 2014)--Chief Judge Torruella:
https://www.youtube.com/watch?v=aixtvS4Jack#t=20
* QUESTION--for PRESIDENTIAL-CONGRESSIONAL CANDIDATES *
What will you do to--end a Statutory 2nd Class U.S. Citizenship--where
U.S. Citizens (including American Veterans) that have sacrificed; shed
Blood, Sweat and Tears for our noble USA, but,
can't VOTE for their U.S. President/Head of State;
don't have JUST REPRESENTATION in the U.S. Congress that determines
their Destiny or full permanent U.S. Citizenship nor full
benefits (like MEDICARE, MEDICAID, Social Security, etc., they
pay for);
BREAK the U.S. Territory of Puerto Rico's 118 years' undemocratic
federal shackles?
Also, what action will you take to get the Federal Government to DO ITS
PART--in dealing with the economic, fiscal, security, and other
problems facing U.S. Puerto Rico; stop institutional discrimination;
includes EQUAL TREATMENT under just Laws--like U.S. Bankruptcy Laws;
protected Individual Civil rights? (Remember, PR is at times powerless
to act because of U.S. Colonial Status!) THANKS!
This strike's at the essence/equal application of our U.S.
Republic's ``We the People'' Constitution (with a
Representative Democracy--``consent of the Governed'')--where
the BUILDING BLOCK is the U.S. CITIZEN--with protected
Individual Civil Rights--so, there is no Tyranny of a majority!
Best Wishes! Respectfully,
Dennis O. Freytes, U.S. Army Retired; Community Servant Leader
Master Public Administration (MPA); Master Human Resources (MHR);
Bachelor Business Administration (BBA)--Management; other Courses;
Former Professor (PMS)/Department Director University of Puerto Rico;
Trustee, Valencia College (confirmed by the Florida Senate twice);
Work: Senior Leader; Executive, Manager, Advisor/Consultant--in
Business, Non-Profit, Government, U.S. Army. Served: Florida Governor
Jeb Bush--Member Policy Transition Team; U.S. President Policy
Transition Advisory Committee; Non-Partisan Congressional Advisor, etc.
(Please, see Master Professional Resume--that includes work with the
Small Business Administration; many other Organizations.)
ENCLOSURE--EQUALITY FOR PUERTO RICO
We leave no American Veteran or 1st Responder behind!
There is one RACE--the Human RACE!
Judge on MERIT based on fair opportunity--a Level playing field!
THE TIME IS NOW!
Canto Claro como un Gallo de Manati!
* The Feds Discriminates Against 2nd Class U.S. Citizens! *
Our Federal Government preaches equality in our U.S. Republic with a
``We the People'' Constitutional Representative Democracy--``Consent of
the Governed'' . . . under our noble American Flag!
In our times--how can the U.S. be a just Representative Democracy, when
millions of its loyal born Citizens (including American Veterans) in
the U.S. Territory (Colony) of Puerto Rico--can't Vote for their
President/Head of State; don't have fair representation in the U.S.
Congress that controls their destiny or same full benefits or
entitlements (they paid for) or a permanent U.S. Citizenship--as other
U.S. Citizens?
Other facts are: the Federal Government desperately treats loyal Puerto
Rican U.S. Citizens by--denying full civil rights; as it discriminate
in many Federal programs, like--MEDICARE, MEDICAID, Social Security,
SSI funding for the poor . . . (Where Puerto Ricans pay fully, but,
receive less than other U.S. Citizens)!
Also, the Federal Government--excludes Puerto Rico from Federal Code 9-
Debt Restructure (which all States have); doesn't exempt Puerto Rico
from the 1920 Jones Act (monopolized Shipping Law) that hurts Puerto
Rico's economy and the MACRO U.S. Economy; controls Puerto Rico's
borders, currency, economy, shipping, defense, foreign affairs,
business market--under the federally undemocratic, and outdated
Territorial Clause!
The U.S. Citizen (with protected individual civil rights) is the
fundamental building block of our representative democracy!
This un-American wrong (discrimination against U.S. Citizens-Hispanics-
Puerto Ricans-Veterans); strike's at the soul or essence of our U.S.
Republic with an evolved Constitutional Representative Democracy (which
we now own)--``Consent of the Governed'' with protected Individual
Civil Rights for ALL!
There is no fair/equal treatment under just laws--when millions of
loyal 2nd Class U.S. Citizens (including U.S. Veterans) are unfairly
subjugated by Congress/the Federal Government! Even if one U.S. Citizen
can't vote . . . its one too many! You are either for Equality and
fairness or you discriminate!
Where is the MEDIA and American Patriots' out-cry; action to get the
Federal Government to do right?
The Federal Government should serve all U.S. Citizens equally--must do
right (without giving old biased excuses); take action--stand to
protect full Individual Civil Rights as it fairly applies the U.S.
Constitution; equal protection under just laws!
Let's stand up for a just cause; educate based on facts . . . (don't be
trapped by political old excuses, distortion, generalizations,
speculation, or stonewalling by close-minded closet Chauvinists, or
support actions that lead to impasse that result in Voter segregation
of loyal U.S. Citizens!
TAKE ACTION CONCURRENTLY:
1. PASS H.R. 870, the Puerto Rico Chapter 9 Uniformity Act of 1915
(Debt Restructure--that is fairly applied to other States)
2. Support Puerto Rico on finding solutions to the fiscal, economic/
job, and security problems. . . . This includes treating Puerto Rico
(with about 3.7 million U.S. Citizens) fairly (like it treats other
U.S. Citizens)!
** New York (with 9 million U.S. Citizens) from 1975-1986 went
through a dire fiscal/economic crisis. In this case, the
Federal Government--backed up or guaranteed New York's loans/
bonds (with fees attached) until New York resolved its fiscal
problems; was solvent and prosperous again; continued to make
mayor contributions to the MACRO U.S. Economy. . . .
3. Federal Enterprise Zone (FEZ)--Declare Puerto Rico a FEZ--that
provides economic development incentives--tied to Job creation, and
other Metrics.
4. 1920 Jones Shipping Act--Legislate to exclude Puerto Rico from this
trite Act (which needs to be updated because it's detrimental to the
U.S. MACRO Economy; especially to Puerto Rico).
5. Federal Oversight: As last resort, if the PR Government does not
show internal/local results soon--The Federal Government must
positively act to resolve the situation directly. . . . (This is about
the suffering People first; not its Government!)
The Federal Government must respect PR's local plebiscite (Nov. 2012)
results:
* End Territorial Status: 54% (958,915); * Statehood: 61+% (824,195); *
Independence 5% (74,812)--(has never received more than 5% in the past)
. . . (Total Voted: 78+%) The plebiscite results were clear: a Non-
Territorial Status through Statehood won as duly ratified by the PR's
Elections Commission. . . .
Pass (on a non-partisan basis): H.R. 727--Puerto Rico Statehood
Admission Process Act--STATEHOOD: YES or NO (This bill has over 108
Congressional Co-Sponsors; but, U.S. Senate Sponsors are needed to
support Equal U.S. Citizenship!)
** 2nd Alternative--Congress conducts a prompt sanctioned Referendum
with defined non-territorial Constitutional Options: STATEHOOD vs
INDEPENDENCE (or forms of Independence like: ELA Soberano; Free
Associate Republic).
Puerto Rico--will keep its own Boricua Identity and have Sovereignty
(like other States--the Lone Star Republic of Texas) upon becoming a
Full and Equal Member of the U.S. (``Union of States'')!
Moreover, President Obama--the U.S. Justice Department must act to
overturn unjust racist laws (Insular Cases); file a Class Action Equal
U.S. Citizenship Law Suit. . . .
The Federal Government must give more weight to the Bill of Rights/
Constitutional Amendments--Incorporate Puerto Rico; overturn the racist
rooted Insular Cases (Balsac-1922) where a biased Supreme Court made up
the term ``not incorporated'' to keep a Territory out of the path of
Statehood forever. This was not used against other Territories that
became States before nor is this term in the U.S. Constitution.
The Insular Cases (some of the same Judges served on Plessy vs
Ferguson--1896-Blacks are equal but, separate), along with the old
Territorial Clause--, are still today--the veiled basis for Federal
discrimination in desperately applying the U.S. Constitution, and un-
democratic governance of Puerto Rico.
CONTRIBUTIONS: Loyal U.S. Puerto Ricans/Hispanics (who cherish their
U.S. Citizenship), and Ancestors--have contributed greatly to the
advanced civilized development of the now U.S. (since 1513)--107 years
before the Pilgrims; bravely fought in the U.S. War of Independence and
other Wars; have courageously defended our noble U.S. Flag with utmost
sacrifice and blood since 1899--WW-I, WW-II, Korea, Vietnam until
today. . . . (Includes nine Medal of Honor Winners; the valiant
Borinqueneers--U.S. 65th Infantry Regiment--Winners of the
Congressional Gold Medal--highest honor U.S. Congress can bestow)!
Puerto Ricans/Hispanics are part of the multi-ethnic kaleidoscope or
intertwined strong threads of sub-groups that make up the resilient
fabric of the U.S. Mantel--the land of Free Immigrants with own
identities and tolerance! But, united under our U.S. Constitution; and
with State Sovereignty (like other States of our Union)--for the good
of all!
The U.S. belongs to Puerto Ricans too! Out of about 9 million Puerto
Ricans, some 5 million have ``voted with their feet''--moved to the
States (with more on the way). . . . They want to have equal rights,
responsibilities, full benefits, better opportunities . . . to stem the
exodus resolve the issues/PR Status.
Now is the time: Patriots of true Grit must stop discrimination;
advance our evolved U.S. Democracy--ensure equal protected civil rights
for all; end a statutory 2nd Class U.S. Citizenship; cut Puerto Rico's
federally undemocratic Territorial Shackles! With truth and right--WE
SHALL OVERCOME!
* NOTE: Three main sources of this U.S. Federal Government's repressive
power are:
The original outdated Territorial Clause--states: ``Congress shall
have the power to dispose of and make all rules and regulations
pertaining to the Territory . . . or Property belonging to the
U.S. . . .'' which conflicts with the Constitutional
Amendments--U.S. Citizen Bill of Rights. . . .
The discriminatory/racists vestiges of the ``Insular Cases'' (1901-
1925+/still enforced under a veil today) that allows the U.S.
Congress to discriminate when applying the U.S. Constitution to
born U.S. Citizens residing in Puerto Rico . . . which
conflicts with the Constitutional Amendments--U.S. Citizen Bill
of Rights. . . .
Federal Government's (President, Congress and Federal Courts)
incongruence; inaction to make right--after 117 years of
federal oppression; wrong interpretation of the trite original
undemocratic Territorial Clause (which wasn't meant to be
forever), and its conflict (when statutory U.S. Citizens are
involved)--with our U.S. Constitution's Individual Civil Rights
Amendment/Bill of Rights--the bed rock of our representative
democracy.
Also, we need a Constitutional Amendment to ensure--the U.S. Citizen
(with equal protected individual Civil Rights) is the building block of
our U.S. Republic with a Representative Democracy (consent of the
governed)--where the Federal Government serves all the People--U.S.
Citizens equally . . . under the jurisdiction of the United States. . .
The complex U.S. Territory of Puerto Rico's equal rights quandary--that
affects millions of discriminated U.S. Citizens, is not only about a
``Group Vote'' on the status question, but, more essentially crucial,
it's about equal application of the U.S. Constitution to all U.S.
Citizens (with full protected Individual Civil Rights); ending
institutional discrimination/2nd Class U.S. Citizenship; advancing
equality/consent of the governed--where the U.S. Citizen is the
epicenter of our Republic, not the U.S. Government's trite un-
democratic territorial control of the Land and People (without just
representation)!
______
Fundacion Francisco Carvajal
APARTADO 1298, GUAYNABO, PUERTO RICO 00970-1298 CALLE D-9, ESQ. CALLE
ESMERALDA
BARRIO LOS FRAILES, GUAYNABO, PR 00969 TEL. 1-787-731-0404 FAX 1-
787-789-4615
Financial and Economic Challenges in Puerto Rico
Hearing date, September 29, 2015
Fundacion Francisco Carvajal and Arturo Estrella, Ph.D.
P.O. Box 1298, Guaynabo, PR 00970
Executive Summary
Puerto Rico Government Debt and the U.S. Federal Government:
Potential Assistance Tools and Policy Practice
By Dr. Arturo Estrella, Professor of Economics, Rensselaer Polytechnic
Institute
The Francisco Carvajal Foundation commissioned this work in its desire
to
make a contribution to the public discussion about a very relevant
issue in
these challenging times.
The objective of the study is to analyze the tools and historical
policy practice of the Government of the United States to provide
assistance in financial crisis situations such as the one that Puerto
Rico faces today.
The discussion paper has three principal goals: to review the framework
under which federal assistance could be extended to Puerto Rico, to
examine the actual policy practice of the federal government in
addressing financial crises in the past, and to suggest possible
alternatives to deal with the pressing issues regarding the fiscal and
financial crisis in Puerto Rico. These suggestions are informed by the
analysis described above and include options that are in line with both
the principles and practices of the U.S. federal government in dealing
with prior crisis situations.
There is no simple existing law or regulation that was designed
specifically to address the problems Puerto Rico faces today. However,
a multitude of existing measures were designed to deal with similar
situations, and it is important to identify possible ways to make use
of such means and in the process to accept enthusiastically the offer
of help extended by the president of the Federal Reserve Bank of New
York to decision makers in Puerto Rico.
Based on thorough analysis and many years of experience at the Federal
Reserve Bank of New York applying laws and regulations and
participating in the creation of new regulations, the study concludes
that there are no legal or regulatory impediments that prevent the
Federal Reserve System and the U.S. Department of the Treasury from
providing financial assistance to Puerto Rico, that there are
precedents of assistance offered to other entities in previous
situations, and that the Federal Government has the tools to provide
such assistance. An important finding of the study is that treatment of
the Commonwealth of Puerto Rico under the laws and regulations of the
Federal Reserve System has been and continues to be internally
inconsistent.
The study identifies a number of stylized principles that the federal
government has followed in the past to deal with financial crises. The
principles include the following.
Exercise flexibility in interpreting statutes and regulation.
Take actions that are not prohibited as well as actions expressly
allowed by law.
Work with Congress to pass legislation that allows the federal
government to act.
Use discretion to reduce delays and preserve confidentiality.
When there's a will, there's a way.
Based on the analysis, the study suggests a non-exhaustive menu of
specific actions that the federal government could take to assist
Puerto Rico in resolving its liquidity problems while in no way
resorting to a bailout. These options include the following.
The Federal Reserve could purchase Puerto Rico debt as a U.S.
municipality under Section 14(2) of the Federal Reserve Act.
The Federal Reserve could purchase Puerto Rico debt as a foreign
country under Section 14(2) of the Federal Reserve Act.
The Federal Reserve could extend credit to Puerto Rico government
corporations under section 13(3) of the Federal Reserve Act.
Historical experience also suggests other types of loans or debt
guarantees that the federal government could provide.
The Federal Reserve and the Treasury Department could provide
financial planning assistance to the government of Puerto Rico.
These steps and others like them may be taken singly or jointly.
The federal government and its agencies can apply the same will to find
solutions that has been applied in the past to so many cases, domestic
and foreign, a sample of which is considered in the study. History
shows that when the will is there and the situation is deemed
sufficiently important, effective solutions have been found either
within the existing legal structure or by advancing that structure
further to tackle new problems.
______
Hispanic Federation
55 Exchange Place, 5th Floor 1522 K Street N.W., Suite 1130
New York, New York 10005 Washington, DC 20005-1225
T. 212-233-8955 F. 212-233-8996 T. 202-842-0235 F. 202-887-0812
www.hispanicfederation.org
Jose Calderon, President, Hispanic Federation
Written Testimony
United States Senate Committee on Finance
``Financial and Economic Challenges in Puerto Rico''
September 29, 2015
Chairman Hatch, Ranking Member Wyden, and distinguished members of the
Committee on Finance thank you for the opportunity to provide testimony
on the crisis facing Puerto Rico.
My name is Jose Calderon. I am the President of the Hispanic
Federation. Hispanic Federation is the nation's premier Latino
membership organization with a mission to advance and empower the
Hispanic community locally and nationally. For over 25 years, Hispanic
Federation has provided critical nonprofit capacity-building grants,
launched innovative community programs and led public advocacy efforts
in the areas of education, health, immigration, economic empowerment,
civic engagement, civil rights and the environment. Through its network
of nearly 100 affiliated community-based organizations, HF reaches
thousands of Hispanics each year including a large number of Puerto
Ricans living on the mainland.
Recently, Hispanic Federation has been helping to lead efforts to
support Puerto Rico and its 3.5 million U.S. citizens, along with an
extensive coalition of Latino, labor, environmental, health and
economic justice advocates from across the nation. With our partners,
we have organized press conferences in several cities from Hartford to
Orlando and we are currently working to get 100,000 signatures on a
White House petition calling for the President to respond to the crisis
and organizing a congressional briefing to inform our nation's leaders
about the situation on the island. We strongly believe the federal
government bears a social, moral and economic responsibility to
directly address the Puerto Rican debt crisis.
The ramifications of the island's economic crisis have been far
reaching: 150 public schools have already been shuttered in the last 5
years. Puerto Rico has increased the retirement age and required
heftier pension fund contributions from public sector workers. And more
pain is coming. Puerto Rico passed a budget for the fiscal year
beginning July 1, 2015 that increased the sales and use tax from 7
percent to 11.5 percent and reduced pubic investment by $674 million.
Severe current and future government budget cuts threaten to undermine
the already tenuous economic situation of hundreds of thousands of
Puerto Ricans on the island. And there is good chance that the crisis
will be increasingly felt in many U.S. states, through potential
pension asset losses and a growing reliance on local social services by
those who migrate to the U.S. In short, Puerto Rico's near calamitous
economic crisis, if left to fester, will almost certainly reverberate
far beyond the geographic limits of the island.
The reasons behind the island's current economic woes are complex, with
plenty of blame to go around: poor budget practices by the island,
federal funding shortfalls and tax policies that hamper economic
growth, predatory lending by hedge funds, and the complicated and oft
unjust relationship between the U.S. and Puerto Rico, to name just a
few. There are also wider forces to blame, such as the Great Recession,
outmigration from the island, and escalating energy and health care
costs.
Setting the stage for the crisis were stagnant economic conditions in
Puerto Rico over the past 10-15 years, brought about by the elimination
of Section 936 of the Internal Revenue Code. Section 936 encouraged
mainland companies to locate on the island. Unfortunately, when the tax
breaks were eliminated by Congress, these companies moved out. The
Great Recession of 2008 compounded this stagnation, leaving almost half
the island's residents in poverty and unemployed. Forced to seek
economic opportunity, hundreds of thousands of Puerto Ricans moved
stateside to places like Florida, draining the island's tax base which
funds basic public services.
However, structural economic inequalities--in part driven by federal
policies--date back long before the recent decline. A prime example is
the burdensome costs of transporting goods created by the U.S. Jones
Act, which has increased shipping costs by billions over many decades.
In effect, the law requires every car, food item or other product that
enters or leaves Puerto Rico to be carried on a more expensive U.S.-
flagged vessel. If a foreign-flagged ship enters the island, high taxes
and customs fees essentially double the price of transported goods.
Puerto Rico also faces growing costs to its public services. The
electricity system led by the Puerto Rico Electric Power Authority
(PREPA) is more than $8 billion in debt. A recent deal to restructure
the debt still leaves the systemic challenge of reducing sky-high
energy costs to homeowners and businesses from the outdated and
unhealthy use of fossil fuels, as opposed to cleaner, renewable energy
systems.
Federal health care funding inequities have also contributed to the
ongoing crisis. Approximately 60% of the island's population is
enrolled in Medicaid or Medicare, both which face an uncertain future
due in part to an archaic capping of federal contributions which was
imposed upon Puerto Rico. As a result, healthcare costs represent an
estimated $25 billion of its $72 billion debt.
Declining tax revenue forced risky borrowing to keep public utilities
and local government running, which in turn generated massive debt
because of predatory interest rates aimed at creating a big fiscal
windfall for hedge funds looking to make a fast buck at the island's
expense. In fact, these same hedge fund interests were backers of
changes in the island's constitution that mandated the local government
to first pay debt relief before continuing to fund schools, energy and
other vital public services.
Unfortunately, these measures will only help to exacerbate the current
vicious cycle of outmigration, with the only certainty being that more
pain for Puerto Rico is in store in the near future. Below are more
details regarding the main causes of the island's financial troubles,
focusing on labor force decline, the health care crisis, and debt and
debt service costs.
The depth and scope of Puerto Rico's economic crisis has forced leaders
on the island to make difficult and painful choices. The Commonwealth
has already laid off over 30,000 employees, raised utility and college
tuition prices, raised taxes, cut public health and pension benefits,
closed schools, and raised the retirement age. On September 8th, the
Governor announced a new round of austerity measures that calls for
additional cuts to social services, layoffs and reductions in job
protections. Meanwhile, Puerto Rico is also bracing for a health care
crisis with federal funds rapidly diminishing and no clear plan on how
to keep island residents covered in the coming years.
Puerto Rico is considering reforms to all aspects of its economy and
governance, including taxes, labor laws and administrative practices.
Negotiations are underway to explore debt restructuring and other
options, but financial interests are resisting payment reductions.
Meanwhile, there are estimates that this year's $5 billion principal
and interest payments alone would require $1,400 in increased tax
levies for every resident of the island, roughly 9% of per-capita
income. Unfortunately, Puerto Rico does not have the cash flow or tax
base to make anything close to the required payments.
Despite these cuts and the pain they're causing millions of American
citizens on the island, the same hedge fund interests who urged the
Commonwealth to continue to unwisely borrow well beyond its means are
now calling for further severe austerity and privatization measures to
protect their financial windfall. The IMF's ``Krueger Plan'' perfectly
encapsulates this thinking with its severe budget cuts and related
proposals calling for even more massive school closures and wage
reductions.
While there will undoubtedly be further fiscal pain for the families of
Puerto Rico, we do not believe the island can or should cut its way
through this crisis. Further reductions to government services and
pensions threaten to undermine the Puerto Rican economy so deeply that
it may take generations to recover. Any realistic solution must instead
include reasonable debt restructuring and relief, immediate federal
investment and reforms, and a long-term economic growth and
diversification strategy that will create living-wage jobs, grow small
businesses, improve infrastructure and provide opportunities for local
residents.
President Obama and Congress cannot stand on the sidelines when it
comes to Puerto Rico. Elected officials and civil servants in both the
executive and legislative branches have a legal and moral obligation to
support Puerto Rico in its time of dire need. Over 3.5 million U.S.
citizens are counting on them to act immediately to help the island get
through this fiscal crisis and on a path to economic recovery. Below
are select key actions the federal government can undertake to offer
resources and enact reforms to assist Puerto Rico through this fiscal
and economic crisis.
Bankruptcy Protection: Congress should pass legislation granting
Puerto Rico the right to declare Chapter 9 bankruptcy or another
orderly and fair alternative in order to renegotiate the debt and
establish a fair repayment plan. See Puerto Rico Chapter 9 Uniformity
Act--H.R. 870, introduced by Representative Pedro Pierluisi (D-PR) and
Senators Richard Blumenthal (D-CT) and Charles Schumer (D-NY).
Debt Renegotiation and Relief: President Obama should convene a
Working Group on Financial Markets to bring all parties to the table in
order to negotiate a fair debt repayment and relief deal. In doing so,
the President could sit down with all relevant stakeholders and explore
a Federal Reserve loan or any other bridge or gap financing options for
the Commonwealth of Puerto Rico. In addition, the President should
exercise his authority to convene both the Government of Puerto Rico
and its creditors, and urge the parties to find an orderly negotiated
resolution of this crisis in order to avoid further costs to the
vulnerable residents and populations in Puerto Rico.
Health Care: Congress should bolster Puerto Rico's health care
safety net by passing legislation that will eliminate the annual
Medicaid/Mi Salud funding cap on Puerto Rico in favor of funding based
on FMAP per-capita income. Congress should include all U.S. territories
in this legislation. Congress should also improve the formula for the
Medicare Disproportionate Share Hospital Program, reduce by 50% the fee
on insurers in the territories, and establish a floor for Medicare
payments. In the interim, the President should establish a multi-
billion dollar health care program as has been done in some states to
ensure vital health care services continue past 2017, when existing
funds will run out. See Improving the Treatment of the U.S. Territories
Under Federal Health Programs Act of 2015--H.R. 2635 introduced by
Representative Pedro Pierluisi (D-PR).
Energy and the Environment: President Obama should direct the
Department of Energy (DOE) and Environmental Protection Agency (EPA) to
engage in a full review and collaborative analysis of all federal
policies and programs that apply to Puerto Rico in the areas of clean
energy generation and environmental cleanup. This will ensure the
development of a comprehensive policy plan that addresses the energy,
clean environment, safety and health needs of Puerto Rico, including
the cleanup of toxic sites within the island municipalities of Vieques
and Culebra.
Jones Act: The President should grant a temporary waiver and
Congress should pass legislation that amends the costly shipping
mandates dictated by the Jones Act, which unfairly increases the prices
of imports and exports to and from Puerto Rico. Any funds from foreign-
vessel fees should also be directed to the Puerto Rico Treasury.
Tax Policy: Following the loss of Section 936 tax incentives, the
federal government should institute tax policies that foster
economically-diverse and living-wage job creation. President Obama
should also support local government implementation of an Earned Income
Tax Credit (EITC) that rewards work and supplements earnings to low-
income workers in Puerto Rico.
Federal Policy and Funding Formula Assessment: There should be a
full Administration and Congressional review of all federal policies
that apply (or not) to the Commonwealth of Puerto Rico. This review
should seek to eliminate or reduce the impact of federal policies that
put the island at an economic disadvantage, as well as look for ways to
expand access to federal investments and programs.
Puerto Rico and its citizens are inextricably intertwined with the
United States by history, emigration and economics. Puerto Ricans, both
on the island and stateside, have fought valiantly in every war since
World War I, and its citizens have contributed to this nation in
innumerable ways. Its diaspora--5 million strong, still intimately
connected to the island--are a visible presence in communities
throughout the 50 States of the Union. Just as significantly, three out
of every four municipal funds in the country hold Puerto Rico's bonds.
Because of these intimate interconnections, what affects Puerto Rico
affects the U.S. The fact that Puerto Rico faces the worst economic
crisis in more than a century should be of the highest concern to all
Americans. If Puerto Rico is forced to enact even more draconian cuts
to its budget, the island will almost certainly spiral into an even
deeper crisis. Given the interpenetration of the Puerto Rican
population and economy with the U.S., this will have incalculable
repercussions on communities, towns and cities stateside.
The time to debate or assign blame is past, as is any hope that the
U.S. could avoid economic fallout from this crisis. The real question
is, do we have the will to act in order to ameliorate its very worst
effects?
To do so, we urge the Administration and Congress to resist calls by
hedge funds to force more cuts to social services. We urge Congress to
give Puerto Rico the ability to file for bankruptcy protection and to
pass legislation rectifying economic inequities including the Jones Act
and Mi Salud. We urge the President to call for a full federal agency
review of policies that are economically harmful to Puerto Rico,
including health care reimbursement, and convene his Working Group on
Financial Markets to develop an in-depth debt relief, repayment, and
investment plan to stabilize the island's economy.
We urge the Congress to take strong, substantive and constructive
action that stabilizes Puerto Rico and protects the livelihoods of 3.5
million American citizens living on the island.
Thank you for your time and consideration.
Jose Calderon
President
Hispanic Federation
______
Letter Submitted for the Record by
Jose A. Ortiz-Daliot
P.O. Box 366218, San Juan, PR 00936, (787) 764-9969, Fax (787) 765-
8955, E-Mail [email protected]
October 5, 2015
Hon. Orrin G. Hatch
Chairman
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200
Dear Senator Hatch:
I would like to submit this statement for the record to the hearing
held by the Finance Committee on September 28, 2015 on the fiscal
situation of Puerto Rico.
It is indisputable that the fiscal and economic situation of Puerto
Rico looks bleak. I agree that it is difficult to precisely ascertain
without audited financial statements. But it is also indisputable that
much of the blame for the island's present situation lies with the U.S.
government. Probably, the most powerful economic development instrument
the island had was section 936. It was not only a significant incentive
for U.S. manufacturing companies, it provided great amounts of capital
for Puerto Rican banks to invest in other economic sectors within our
economy and also served as an economic tool for an effective U.S.
foreign policy in Central American and the Caribbean in the late 1980s.
But for whatever reasons, Congress decided to repeal the biggest
economic incentive the island had to create good paying jobs--section
936 of the Internal Revenue Code, without providing a substitute
mechanism for economic growth. The present chaos we live in Puerto Rico
now started with the date of the repeal of section 936.
The other elephant in the room is the colonial situation in which we
live in Puerto Rico since 1898, due to the fact that the 1952
experiment failed to provide the island and its government the
necessary political powers a nation needs to have the ability to fight
hard economic times, such as treaty making powers (tax treaty with
Japan voided by the U.S.) and choosing transportation carriers for its
imports, particularly from the U.S. (cabotage law) as well as other
legal restraints.
The political status situation cannot go without mentioning. The U.S.,
particularly U.S. Congress, has failed on its face as a metropolitan
power to its territories. Not once since the U.S. invaded in 1898, the
Puerto Rican people have been provided the opportunity to decide their
political future. It is hard to believe coming from the U.S., the great
promoter of freedom and democracy around the world.
The 1952 exercise did not provide political options to our people. The
only option was to remain a colonial possession of the U.S., with a
Constitution of our own doing as long as it met with the standards set
by Congress which did not accept the initial draft from our
constitutional assembly. Since then, Puerto Ricans have been knocking
at congressional doors without receiving an adequate response. Every
year, the United Nations calls on the U.S. to comply with its
international responsibility to let us exercise our right to self-
determination. Never has there been a response. Puerto Ricans have held
political status plebiscites and the U.S. provides no response to its
results. The last plebiscite was held as recently as November of 2012.
Fifty four percent (54%) of the voters rejected the present colonial
political status. Puerto Rico was hoping the U.S. would take notice.
But again, the U.S. has not responded as of to date. From my
perspective, to ignore the latest expression is highly irresponsible.
Mr. Hatch, the fiscal problems we presently have are closely related to
our colonial situation, which you and your colleagues refuse to deal
with. Puerto Rico has done relatively well in spite the lack of
political powers and the constant irrational mandates imposed by the
U.S. to our government.
You, as well as the members of your committee, could very well bring
positive change, by providing Puerto Rico its right for self-
determination. That would help, significantly. We took in 2012.
Congress, as usual, has yet to response.
Sincerely,
Jose A. Ortiz-Daliot
Senator (2001-2005)
______
Puerto Rico College of Physicians and Surgeons
Colegio de Medicos-Cirujanos de Puerto Rico
P.O. Box 70169 San Juan, PR 00936 / e-mail: [email protected]
Tels. (787) 751-5979 / 751-6699 / 751-6670 / 751-7120 / Fax (787) 751-
6592--(787) 281-7669
September 28, 2015
Senator Orrin G. Hatch, Chairman
Senator Ron Wyden, Ranking Minority Member
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC 20510-6200
Re: Public Hearing of the Senate Finance Committee, ``Financial and
Economic Challenges in Puerto Rico''
Dear Messrs. Chairman and Ranking Member:
On behalf of the Puerto Rico College of Physicians and Surgeons, we
submit the following written statement for the Senate Finance Committee
hearing, ``Financial and Economic Challenges in Puerto Rico,''
scheduled for Tuesday, September 29, 2015.
Our association remains committed to working with you and the committee
to legislate the necessary changes to ensure that Medicare and Medicaid
beneficiaries and U.S. veterans receive the same medical services in
Puerto Rico as they can in all 50 states. Doctors in Puerto Rico
rightfully deserve to be appropriately reimbursed for the services they
provide in Puerto Rico just as they would if providing such care in any
U.S. state.
We believe the Finance Committee and the entire U.S. Senate agrees that
Medicare must treat every American equally, including those living in
Puerto Rico today and in the future.
Our comments today focus on one component of the physician fee schedule
formula that has a dramatically negative impact on the entire health
care system of Puerto Rico. The Geographic Practice Cost Index (GPCI)
formula as currently implemented by the Centers for Medicare and
Medicaid Services (CMS) produces Medicare reimbursements far below the
actual cost of providing care to Medicare beneficiaries in Puerto Rico.
The GPCI is designed to reflect the variation in practice costs in each
geographic locality across the United States and the territories and
has been established for each of the three components of a procedure's
relative value unit (i.e., costs for physician work, practice expense,
and malpractice insurance). This formula fails health care providers in
Puerto Rico for two primary reasons.
First, Puerto Rico is in the unenviable position of having the highest
energy prices in the nation, roughly three times the cost of energy in
California. Unfortunately, energy costs are not taken into account in
determining medical practice costs.
Second, CMS applies a formula to determine medical office rents based
on a residential housing rental rate. This is no way reflects the
actual cost of running a medical practice in Puerto Rico. Puerto Rico
has the highest percentage of HUD Section 8 rental units (i.e.,
subsidized public housing), which lowers the average housing rental
rate disproportionately to the rest of the United States. In fact,
Puerto Rico has almost 9 times the national average of 2-bedroom
renter-occupied public housing units. CMS has granted a waiver of the
Section 8 rental units in the U.S. Virgin Islands due to a similar
situation, but continues to ignore the U.S. citizens of Puerto Rico.
To illustrate, the Practice Expense (PE) GPCI for Puerto Rico in 2015
is 0.705. In the Virgin Islands, the PE GPCI is 0.960, 36% higher than
Puerto Rico. In Hawaii, the PE GPCI is 1.162, almost 51% higher than
Puerto Rico.
Data collection with respect to Puerto Rico is inadequate and the U.S.
Census does not provide meaningful data. CMS relies on deficient data
that results in inaccurate GPCI calculations for Puerto Rico. This
causes an underestimation of the actual practice costs and results in
Medicare reimbursement rates that do not reflect the cost of providing
care to Medicare beneficiaries in Puerto Rico.
We have attached a report prepared by the Puerto Rico Institute of
Statistics that examines the public housing bias in the CMS estimates
of the office rent component of the GPCI. The report estimates that the
public housing rent bias has a potential total negative economic impact
on Puerto Rico of $120 million annually.\1\ As it relates to Medicare
Part B expenditures, this bias represents between $7 and $15 million
annually--a small drop in the ocean of tens of billions of dollars
spent on Medicare Part B physician payments each year.
---------------------------------------------------------------------------
\1\ The $120-million figure breaks down as: $7-15 million in
additional Medicare Part B fee-for-service payments to providers; $50-
60 million in additional reimbursements under Medicare Advantage; and
up to $45 million in indirect and induced multiplier effects.
This bias was first introduced by CMS, without statutory mandate, in
calendar year 2012. CMS thus has the authority to correct its mistake
and should do so immediately. As the Puerto Rico Institute of
Statistics concludes, ``CMS's use of uncontrolled residential rent
estimates in different regions of the United States and Puerto Rico
introduces a bias in the calculation of the Office Rent component of
the GPCls. The bias causes an underestimation in the uncontrolled
median gross residential rent estimates in those regions with
---------------------------------------------------------------------------
relatively large segments of the population living in public housing.''
The Senate Finance Committee and the U.S. Congress have the opportunity
to provide meaningful and immediate relief to health care providers who
serve Medicare beneficiaries in Puerto Rico. With the island facing an
unprecedented financial crisis and a near collapse of the health care
system, Puerto Rico's Medicare population (American citizens who pay
full Medicare taxes) cannot afford arbitrary CMS policies that ignore
the harsh reality facing Puerto Rico.
Thank you again for your consideration of our comments. The Puerto Rico
College of Physicians and Surgeons looks forward to working with the
committee to ensure that the American citizens in Puerto Rico are
fairly treated under the law.
Sincerely,
Victor Ramos, MD MBA
President
Attachment:
http://www.estadisticas.gobierno.pr/iepr/
LinkClick.aspx?fileticket=ZdH5lxNObgs%
3d&tabid=165
______
Puerto Rico Institute of Statistics Report to the Board of Government
of the Puerto Rico Physicians and Surgeons Guild
Regarding the possible existence of a Public Housing Prevalence Bias in
the Estimation of the Office Rent component of the Geographic Practice
Cost Index (GPCI) used by the Centers for Medicare and Medicaid
Services (CMS) to provide differential compensation to physicians in
different parts of the United States and Puerto Rico for providing
services under Medicare Part B.
July 17, 2015
Author
Dr. Mario Marazzi-Santiago
To obtain a copy of this report: (1) visit http://
www.estadisticas.gobierno.pr, (2) send your request by email to
[email protected], (3) call (787) 993-3336, (4) send
your request by fax to (787) 993-3346, (5) send your request by mail to
P.O. Box 195484, San Juan, PR 00919-5484, or (6) visit the offices of
the Puerto Rico Institute of Statistics in 57 Quisqueya St., Suite
2000, San Juan, PR 00917, between the hours of 8:00 a.m. and 4:30 p.m.
The report is available in paper and in pdf. The report is free.
Suggested citation: Marazzi, M. (2015). Report to the Board of
Government of the Puerto Rico Physicians and Surgeons Guild. Instituto
de Estadisticas de Puerto Rico. Obtained from
www.estadisticas.gobierno.pr.
DISCLAIMER: This report was prepared by the Puerto Rico Institute of
Statistics (Institute) through a service agreement with the Puerto Rico
Physicians and Surgeons Guild (Colegio de Medicos Cirujanos de Puerto
Rico), using publically available data. Therefore, its use, and the
Institute's role, is limited to the clauses contained in said Agreement
and Puerto Rico Act No. 209-2003. The information that served as the
base for this report has not been verified by the Institute or any
auditors (independent or otherwise) nor have such auditors been
consulted. The Institute has made no independent verification as to the
accuracy or completeness of said information; therefore the Institute
assumes no responsibility for the information contained herein.
Accordingly, the Report is subject to modification or reconsideration
at any time.
Colaborators
JEL Consulting, Inc.
Dimarilys Bruno
Dr. Jose E. Laborde
Zaira Rosario
Medical Card Systems, Inc.
Roberto Pando
Puerto Rico Institute of Statistics
Mihaly Cienfuegos
Dr. Orville Disdier Flores
Yarlier Yalid Lopez Correa
Jacobo M. Orenstein-Cardona
Dr. Idania R. Rodriguez-Ayuso
Alberto L. Velazquez Estrada
Yoel Velazquez Oliver
Executive Summary
The Puerto Rico Physicians and Surgeons Guild (Colegio de Medicos
Cirujanos de Puerto Rico) requested the technical assistance of the
Puerto Rico Institute of Statistics (PRIS) to understand a potential
bias in the calculation of the Office Rent component of the Geographic
Practice Cost Indexes (GPCIs) prepared by the Centers for Medicare and
Medicaid Services (CMS). The GPCIs are used to adjust the compensation
that physicians receive for providing services under Medicare Part B
(see Physician Fee Schedule (PFS)) that may arise as a result of
potential differences in the costs of providing Medicare services
across different regions of the United States and Puerto Rico.
The purpose of this report is to present PRIS findings regarding CMS's
use of data from the American Community Survey (ACS) and the Puerto
Rico Community Survey (PRCS) of the U.S. Census Bureau to estimate the
median gross rent of a
2-bedroom housing unit in different regions of the United States and
Puerto Rico, which serves as a proxy for the calculation of the Office
Rent component of the GPCIs. In specific, we control for the prevalence
of non-market housing (i.e., public housing) in each PFS payment
locality to test for the existence of a bias. We find that:
(1) After controlling for non-market housing, the median gross rent
of a 2-
bedroom housing unit changes in a statistically significant way
in all PFS payment localities. This provides evidence to
support the existence of a bias related to the differential
prevalence of non-market housing in different parts of the
United States and Puerto Rico.
(2) Amongst all PFS payment localities, Puerto Rico obtains the
lowest estimate for the median gross rent of a 2-bedroom
housing unit ($360). Once HUD public housing rent thresholds
are applied, Puerto Rico continues to receive the lowest
estimate for the median gross-rent of a 2-bedroom housing unit
($510). But, in the case of Puerto Rico, this represents a
statistically significant increase of 42 percent, by far the
largest percentage increase amongst all PFS payment localities.
(3) The use of uncontrolled residential rent estimates to proxy for
commercial rents introduces a bias associated with factors
unrelated to commercial rent markets, such as the prevalence of
public housing, amongst others. Doctors in Puerto Rico have
been affected more by this statistical bias than doctors in any
part of the United States. We estimate that this statistical
bias artificially reduces Puerto Rico's GPCI by about 4
percent. According to a panel of experts, the total economic
impact of this bias could reach $120 million annually. We term
this bias the ``Public Housing Prevalence Bias.''
(4) The Department of Housing and Urban Development (HUD) has been
using for many years the ACS/PRCS to estimate adequately
controlled residential rent estimates, known as Fair Market
Rents (FMR). In fact, prior to calendar year 2012, CMS used FMR
estimates as the proxy for the Office rent component of the
GPCI. But, when CMS switched to using its own uncontrolled
residential rent estimates prepared from the ACS/PRCS, Puerto
Rico's Practice Expense GPCI fell by 20 percent, the largest
drop of any of the 89 PFS payment localities.
(5) There is evidence that suggests that the costs of renting a
high-quality residential housing unit in the San Juan, Puerto
Rico Metropolitan Statistical Area, including energy costs, is
much higher than properly controlled ACS/PRCS gross rent
estimates would suggest. In specific, the Cost of Living Index
of the Council for Community and Economic Research based in
Arlington, Virginia suggests that the rent plus energy costs in
Puerto Rico could be as high as in Beaumont, TX MSA and
Chicago, IL MSA.
We recommend several ways that CMS could proceed to correct for the
Public Housing Prevalence Bias in the Office Rent component of the
Puerto Rico Geographic Practice Cost Index. The remediation of this
situation should not have to wait any more time.
I. Introduction
Title XVIII of the Social Security Act establishes regulations for
Medicare, a health insurance program of the United States Government
for people age 65 or older,\1\ administered by the Centers for Medicare
and Medicaid Services (CMS). Participants automatically pay into the
system via payroll taxes on a regular basis throughout most of their
working lives. The program currently covers people in the United
States, Puerto Rico, the U.S. Virgin Islands, and Guam. In almost all
cases, participants pay the same percent no matter where they live or
where they obtain their medical services.
---------------------------------------------------------------------------
\1\ It also offers coverage to other people with certain
disabilities or medical conditions.
The Social Security Act also requires that CMS develop and update at
least every 3 years the Physician Fee Schedule (PFS), which is used to
determine physician compensation for providing services under Medicare
Part B. The PFS is composed of three components (Work, Practice
Expense, and Malpractice Premium) for 89 payment localities.\2\
---------------------------------------------------------------------------
\2\ The current Physician Fee Schedule (PFS) locality structure was
developed and implemented 18 years ago in 1997. It has 89 total PFS
localities; 34 localities are statewide areas (that is, only one
locality for the entire state). There are 52 localities in the other 16
states, with 10 states having 2 localities, 2 states having 3
localities, 1 state having 4 localities, and 3 states having 5 or more
localities. The District of Columbia, Maryland, and Virginia suburbs,
Puerto Rico, and the Virgin Islands are additional localities that make
up the remainder of the total of 89 localities.
The Practice Expense component is sub-divided into several components,
including the topic of this study, the Office Rent component. This
component attempts to capture the cost associated with the commercial
rent necessary for a space of sufficient size and quality to adequately
---------------------------------------------------------------------------
operate a basic doctor's office.
Section 1848(e)(1)(A) of the Social Security Act requires CMS to
develop measures of the relative cost differences among the payment
localities compared to the national average for each of the components
of the PFS. To do so, CMS prepares Geographic Practice Cost Indexes
(GPCIs) to adjust for cost differences associated with each of the
components of the costs, amongst the 89 different Medicare payment
localities.
However, currently, there is no publically available data on commercial
office rental rates with sufficient geographic detail and reliability
that can serve to adjust for cost differences associated with the
Office Rent component.\3\ Due to this lack of suitable commercial
office rent data, CMS has relied on residential rental rates as a proxy
for many years.
---------------------------------------------------------------------------
\3\ Over the years, CMS has tested several alternatives without
success.
In particular, for several years, CMS used residential rent statistics
prepared by Housing and Urban Development (HUD) using multiple sources
of information including the American and Puerto Rico Community Surveys
(ACS/PRCS) from the U.S. Census Bureau.\4\ However, starting in the
calendar year 2012, CMS tested and approved the use of its own rent
statistics it had prepared using ACS/PRCS data directly.
---------------------------------------------------------------------------
\4\ See Fair Market Rent (FMR) program of HUD: http://
www.huduser.org/portal/datasets/fmr.html.
CMS has the responsibility of making sure that the GPCIs it proposes
adequately reflect actual cost differences in the provision of Medicare
services, not other unrelated factors. To do so requires controlling
for any potential unrelated factors that may generate biases in the
calculation of the GPCIs that have economically meaningful
---------------------------------------------------------------------------
implications.
In this brief research note, we examine whether the prevalence of non-
market housing (i.e. public housing) has influenced CMS estimates for
the Office Rent component of the GPCIs, assigned to each of the 89 PFS
payment localities. In specific, we answer the following questions:
b Have differences in the prevalence of non-market housing
generated a bias in the residential rent statistics prepared by CMS to
estimate the Office Rent component of the GPCIs?
b If so, what has been its impact?
b Are there alternative methods that CMS could employ to correct
for this bias?
II. Background
Demographic developments and outlook
Over the past 10 years, Puerto Rico has experienced a loss of about 7.3
percent of its population, which is equivalent to about 278 thousand
people.\5\ This is the first population reduction in the recorded
history of Puerto Rico.\6\ The reduction owes largely to a secular
downward trend in the number of births, as well as to a relatively high
level of net outward migration. According to official population
projections, this trend is expected to continue for the rest of this
century. See Figure 1.
---------------------------------------------------------------------------
\5\ Source: U.S. Census Bureau, Annual Population Estimates 2004-
2014 (2014 vintage and 2000-10 intercensal estimates).
\6\ In the 16th Century, it is believed that the Taino inhabitants
of Puerto Rico became extinct as a culture following settlement by
Spanish colonists, primarily due to infectious diseases to which they
had no immunity. It is unclear whether the population of Puerto Rico as
a whole declined during this period.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Recent outward migrants have been relatively young, a factor which has
accelerated the aging of Puerto Rico's overall population. In 2011, the
median age in Puerto Rico surpassed the median age of the United States
---------------------------------------------------------------------------
for the first time in recorded history. See Figure 2.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Puerto Rico's housing markets
According to the 3-year estimates of the 2013 Puerto Rico Community
Survey of the U.S. Census Bureau, there are 1.6 million housing units
in Puerto Rico, of which 1.3 million are occupied. Of these,
approximately 385 thousand are occupied by a renter. In turn, of these,
115 thousand have 2 bedrooms.
Unfortunately, neither the American Community Survey nor the Puerto
Rico Community Survey ask whether the housing unit is located in a
public housing development project. Therefore, we cannot use the
results of the Puerto Rico Community Survey alone to gauge the extent
to which public housing exists in Puerto Rico.
Nevertheless, the Department of Housing and Urban Development (HUD)
publishes detailed statistics on the characteristics of residents of
public housing development projects across the United States and Puerto
Rico. In specific, according to HUD's Residential Characteristics
Report,\7\ there were at least 18 thousand 2-bedroom renter-occupied
public housing units in Puerto Rico as of May 2015. This represents
about 16 percent of all 2-bedroom renter-occupied housing units, almost
9 times the national average. See Figure 3.
---------------------------------------------------------------------------
\7\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/
public_indian_housing/systems/pic/50058/rcr.
On the other hand, Figure 4 presents the median gross rent by state and
Puerto Rico according to the 3-year estimates of the 2013 American and
Puerto Rico Community Surveys of the U.S. Census Bureau. Nationwide,
the median gross rent paid is estimated to be about $900 per month.
This is about twice the median gross rent paid in Puerto Rico of $452
---------------------------------------------------------------------------
per month.
In this research note, we examine whether these two observations are
related. In specific, we examine whether the greater provision of
public housing in Puerto Rico is in part responsible for the very low
median gross rent estimates that can be obtained for Puerto Rico from
the uncontrolled residential rent estimates that can be gleaned from
the standard tables of the Puerto Rico Community Survey of the U.S.
Census Bureau.
Why might these two variables be related? Public housing rents are
relatively very low, and are therefore typically located in the lower
part of the rent distribution. Therefore, all else equal, an increase
in the number of public housing units in the distribution will
typically tend to lower measures of central tendency, such as the
median.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
III. Methodology
We use data from the American and Puerto Rico Community Surveys 2008-10
Public Use Microdata Sample (PUMS) to estimate the Median Gross Rent
\8\ of a 2-
Bedroom Renter-Occupied Housing Unit in each of the 89 PFS payment
localities.\9\, \10\ Currently, CMS uses the results of this
survey during the 3-year period, comprising calendar year 2008 through
calendar year 2010, to estimate the GPCIs.
---------------------------------------------------------------------------
\8\ Gross rent is the contract rent plus the estimated average
monthly cost of utilities (electricity, gas, and water and sewer) and
fuels (oil, coal, kerosene, wood, etc.) if these are paid by the renter
(or paid for the renter by someone else). Gross rent is intended to
eliminate differentials that result from varying practices with respect
to the inclusion of utilities and fuels as part of the rental payment.
The estimated costs of water and sewer, and fuels are reported on a 12-
month basis but are converted to monthly figures for the tabulations.
\9\ The U.S. Virgin Islands is excluded from the analysis for lack
of a Community Survey.
\10\ We must estimate these rents, since CMS does not publish the
actual estimates used in preparing the GPCIs.
The medians are calculated using the appropriate replicate weights
provided by the U.S. Census Bureau. Public Use Microdata Areas (PUMAs)
from the 2000 Census were classified according to the PFS payment
localities used by CMS. See Table 2 in the Appendix for a table showing
the relation between the 2000 PUMAs and the PFS payment localities.
---------------------------------------------------------------------------
\11\ To generate this ``cut-off'' rent, HUD uses administrative
data on public housing rents from the Multifamily Tenant
Characteristics System (MTCS). There are several advantages of using
MTCS data to generate the cut-off rent. Regular availability of MTCS
data allows HUD to update the cut-off rent annually. Second, there is
enough MTCS data to generate cut-off rents at the geographic level of
the 89 PFS payment localities.
In order to control for differences in the prevalence of public
housing, we estimate the Median Gross Rents for a 2-Bedroom housing
unit, after excluding units which are likely to be non-market housing
units. To determine which housing units to exclude we employ a simple
criteria developed by the Department of Housing and Urban Development
(HUD).
---------------------------------------------------------------------------
\12\ In fact, these housing units are excluded from HUD's Fair
Market Rent (FMR) statistics.
In specific, using internal administrative data,\11\ HUD prepares
estimates for the rent paid by public housing tenants in each of its
regions, which it uses as thresholds or cut-offs. Housing units that
pay a rent that is equal to or lower than this rent threshold or cut-
off are considered to be either assisted housing or otherwise at a
below-market rent.\12\ See the Table 3 in the Appendix for a list of
the rent thresholds used in each of the PFS payment localities.
---------------------------------------------------------------------------
\13\ In those cases in which HUD uses a rent cut-off for part, but
not all of, a PFS payment locality, we applied the rent cut-off to the
entire PFS payment locality.
\14\ In those cases in which HUD used more than one rent cut-off
for different parts of a PFS payment locality, we used the weighted
median of the rent cut-offs. The weights used were the population
estimates from the 2010 Census for each county.
We obtained the most recent rent cut-offs for over 4 thousand counties
in the United States. The counties were classified and recoded
following the 89 PFS payment localities.\13\, \14\ Standard
---------------------------------------------------------------------------
errors were computed using the replicate weights provided in the PUMS.
We test the following null hypothesis:
Ho: Controlling for differences in the prevalence of non-market
housing does not significantly change the median gross rent of a 2-
bedroom housing unit.
against the alternative hypothesis:
Ha: Controlling for differences in the prevalence of public
housing does significantly change the median gross rent of a 2-bedroom
housing unit.
In order to compare the medians of the gross rent, we must employ a
non-parametric test for two independent variables, known as the Mann-
Whitney U test. All statistical significance tests were performed at a
95% confidence level.
IV. Results
After controlling for non-market rental housing, the median gross rent
of a 2-bedroom housing unit changes in a statistically significant way
in all PFS payment localities. See Table 1. This provides evidence to
support the existence of a bias related to the differential prevalence
of non-market housing in different parts of the United States and
Puerto Rico.
Amongst all PFS payment localities, Puerto Rico obtains the lowest
estimate for the median gross rent of a 2-bedroom housing unit ($360).
Once HUD public housing rent thresholds are applied, Puerto Rico
continues to receive the lowest estimate for the median gross-rent of a
2-bedroom housing unit ($510). But, in the case of Puerto Rico, this
represents a statistically significant increase of 42%, markedly, the
largest amongst all PFS payment localities. The second largest percent
increase is experienced by New York, Manhattan (22%). See Figure 5.
Table 1. Median Gross Rent for Two Bedrooms Housing Units by PFS payment
locality: P2008-2010
------------------------------------------------------------------------
Physicia All renter-occupied housing units that pay cash rent
Fee -------------------------------------------------------------
Schedule All units All units with
(PFS) ------------------ rent above HUD Statistically
Payment rent cut-off Percent significant
Locality Estimate S.E. ------------------ Increase change?
Area Estimate S.E.
------------------------------------------------------------------------
1. $630 4 $681 10 8% YES
Alabama,
Statewide
2. Alaska, $976 37 $992 26 2% YES
Statewide
3. $840 4 $864 8 3% YES
Arizona,
Statewide
4. $610 5 $645 10 6% YES
Arkansas,
Statewide
5. $1,484 10 $1,490 13 0% YES
Californi
a,
Anaheim-
Santa Ana
6. $1,286 9 $1,301 6 1% YES
Californi
a, Los
Angeles
7. $1,260 19 $1,281 26 2% YES
Californi
a, Marin-
Napa-
Solano
8. $1,296 13 $1,324 14 2% YES
Californi
a,
Oakland-
Berkeley
9. $1,690 48 $1,740 29 3% YES
Californi
a, San
Francisco
10. $1,606 43 $1,620 43 1% YES
Californi
a, San
Mateo
11. $1,504 34 $1,525 13 1% YES
Californi
a, Santa
Clara
12. $1,403 25 $1,421 23 1% YES
Californi
a,
Ventura
13. $1,001 6 $1,030 6 3% YES
Californi
a, Rest
of state
14. $860 10 $871 7 1% YES
Colorado,
Statewide
15. $1,047 11 $1,077 16 3% YES
Connectic
ut,
Statewide
16. $952 24 $996 22 5% YES
Delaware,
Statewide
17. $1,363 18 $1,392 38 2% YES
District
of
Columbia,
MD-VA
Suburbs
18. $1,067 10 $1,072 9 0% YES
Florida,
Fort
Lauderdal
e
19. $1,084 11 $1,097 7 1% YES
Florida,
Miami
20. $890 5 $901 4 1% YES
Florida,
Rest of
state
21. $885 7 $897 8 1% YES
Georgia,
Atlanta
22. $642 10 $688 10 7% YES
Georgia,
Rest of
state
23. Hawaii- $1,316 28 $1,352 44 3% YES
Guam,
Statewide
*
24. Idaho, $650 11 $671 11 3% YES
Statewide
25. $940 6 $950 7 1% YES
Illinois,
Chicago
26. $681 16 $719 9 6% YES
Illinois,
East St.
Louis
27. $1,013 16 $1,023 15 1% YES
Illinois,
Suburban
Chicago
28. $678 14 $699 6 3% YES
Illinois,
Rest of
state
29. $700 2 $712 7 2% YES
Indiana,
Statewide
30. Iowa, $661 8 $681 10 3% YES
Statewide
31. $690 12 $710 9 3% YES
Kansas,
Statwide
32. $608 10 $638 7 5% YES
Kentucky,
Statewide
33. $930 15 $942 18 1% YES
Louisiana
, New
Orleans
34. $680 7 $724 7 6% YES
Louisiana
, Rest of
state
35. Maine, $925 24 $950 28 3% YES
Southern
Maine
36. Maine, $671 17 $729 15 9% YES
Rest of
state
37. $1,084 11 $1,102 10 2% YES
Maryland,
Baltimore
, Surr.
Counties
38. $915 24 $942 24 3% YES
Maryland,
Rest of
state
39. $1,281 19 $1,343 16 5% YES
Massachus
etts,
Metropoli
tan
Boston
40. $915 15 $982 15 7% YES
Massachus
etts,
Rest of
state
41. $830 8 $844 13 2% YES
Michigan,
Detroit
42. $680 4 $691 9 2% YES
Michigan,
Rest of
state
43. $820 10 $840 12 2% YES
Minnesota
,
Statewide
44. $632 14 $703 12 11% YES
Mississip
pi,
Statewide
45. $742 11 $760 15 2% YES
Missouri,
Metropoli
tan
Kansas
City
46. $800 13 $812 12 1% YES
Missouri,
Metropoli
tan St.
Louis
47. $586 12 $620 5 6% YES
Missouri,
Rest of
state
48. $651 14 $689 19 6% YES
Montana,
Statewide
49. $680 11 $700 14 3% YES
Nebraska,
Statewide
50. $945 10 $960 10 2% YES
Nevada,
Statewide
51. New $1,006 12 $1,017 14 1% YES
Hampshire
,
Statewide
52. New $1,210 17 $1,250 17 3% YES
Jersey,
Northern
NJ
53. New $1,108 16 $1,146 15 3% YES
Jersey,
Rest of
state
54. New $690 9 $709 9 3% YES
Mexico,
Statewide
55. New $1,147 61 $1,400 43 22% YES
York,
Manhattan
56. New $1,118 8 $1,200 12 7% YES
York, NYC
suburbs-
Long
Island
57. New $1,027 27 $1,080 20 5% YES
York,
Poughkpsi
e-N. NYC
Suburbs
58. New $1,270 24 $1,300 12 2% YES
York,
Queens
59. New $732 8 $813 15 11% YES
York,
Rest of
state
60. North $700 2 $729 5 4% YES
Carolina,
Statewide
61. North $599 14 $620 12 3% YES
Dakota,
Statewide
62. Ohio, $700 2 $719 7 3% YES
Statewide
63. $640 6 $671 6 5% YES
Oklahoma,
Statewide
64. $871 6 $880 9 1% YES
Oregon,
Portland
65. $730 4 $740 6 1% YES
Oregon,
Rest of
state
66. $967 15 $1,017 11 5% YES
Pennsylva
nia,
Metropoli
tan
Philadelp
hia
67. $709 10 $742 6 5% YES
Pennsylva
nia, Rest
of state
68. Puerto $360 12 $510 8 42% YES
Rico,
Puerto
Rico
69. Rhode $920 16 $954 12 4% YES
Island,
Statewide
70. South $680 4 $712 7 5% YES
Carolina,
Statewide
71. South $610 14 $654 19 7% YES
Dakota,
Statewide
72. $676 8 $701 7 4% YES
Tennessee
,
Statewide
73. Texas, $955 13 $960 11 1% YES
Austin
74. Texas, $731 38 $761 29 4% YES
Beaumont
75. Texas, $825 55 $837 29 1% YES
Brazoria
76. Texas, $876 8 $884 10 1% YES
Dallas
77. Texas, $865 14 $874 11 1% YES
Fort
Worth
78. Texas, $874 51 $903 39 3% YES
Galveston
79. Texas, $861 7 $869 11 1% YES
Houston
80. Texas, $742 4 $770 6 4% YES
Rest of
state
81. Utah, $750 5 $760 8 1% YES
Statewide
82. $900 15 $925 41 3% YES
Vermont,
Statewide
83. Virgin n/a n/a n/a n/a n/a n/a
Islands,
Virgin
Islands
84. $851 7 $893 9 5% YES
Virginia,
Statewide
85. $1,114 15 $1,129 13 1% YES
Washingto
n,
Seattle-
King
County
86. $815 11 $835 10 2% YES
Washingto
n, Rest
of state
87. West $559 9 $623 14 11% YES
Virginia,
Statewide
88. $740 2 $749 10 1% YES
Wisconsin
,
Statewide
89. $658 14 $689 30 5% YES
Wyoming,
Statewide
------------------------------------------------------------------------
* The 23rd PFS payment locality includes Hawaii and Guam. However,
because Guam does not participate in the Community Surveys, it is
excluded in this analysis.
Source: Public Use Microdata Sample (PUMS), American Community Survey
(ACS) and Puerto Rico Community Survey (PRCS), 3-year estimate 2008-
2010, U.S. Census Bureau. Standard errors are calculated using
replicating weights.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
V. Discussion
How do we know there is a bias?
This research note presents evidence that the ACS/PRCS-based estimates
of the median gross rent of 2-bedroom housing units are statistically
different when we apply HUD rent thresholds to exclude housing units
whose rent is so low that they are considered to be either assisted
housing or otherwise at a below-market rent.
The relative prevalence of this type of non-market housing across
different parts of the United States and Puerto Rico has little (if
anything) to do with commercial rent markets for medical offices and
facilities in different parts of the United States and Puerto Rico.
Therefore, the use of uncontrolled residential rent estimates to proxy
for commercial rents introduces a bias related to the relative
prevalence of non-market housing across different parts of the United
States and Puerto Rico. Current CMS practice includes the use of these
biased uncontrolled residential rent estimates. Figure 6 highlights the
situation for Puerto Rico.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Does it have a meaningful impact on the GPCIs of any payment locality?
Our results indicate that physicians and surgeons in Puerto Rico have
been affected more by this statistical bias than physicians and
surgeons in any part of the United States.
In the latest review, the Practice Expense GPCI had a cost share weight
of 44.839 percent, of which 10.223 percentage points owed to the Office
Rent component.\15\ Therefore, a 42% increase in the Median Gross Rent
used as a proxy for the Office Rent component implies an increase of
Puerto Rico's GPCI by about 4%, or equivalently an increase of the
Practice Expense GPCI of Puerto Rico by about 10%.
---------------------------------------------------------------------------
\15\ See https://www.cms.gov/Medicare/Medicare-Fee-for-Service-
Payment/PhysicianFeeSched
/Downloads/CY2015-PFS-FR-GPCI.pdf.
---------------------------------------------------------------------------
What about any impacts on the broader economy and health care sector?
In order to gauge the impact of the Public Housing Prevalence Bias on
the overall Health Care sector in Puerto Rico, the Puerto Rico
Institute of Statistics formed a panel of health care experts to
independently assess the potential economic impact of this bias. In
specific, we invited a group of health care experts \16\ to prepare
estimates on the total impact of a 10% increase in Puerto Rico's
Practice Expense GPCI on Medicare receipts by entities in Puerto Rico.
---------------------------------------------------------------------------
\16\ The panel was composed of Dr. Jose E. Laborde, President, JEL
Consulting Inc., a private health care analytics company that advises
the Puerto Rico Health Insurance Administration, and Mr. Roberto Pando,
Senior VP Strategy, Medical Card System, Inc., one of the main health
insurance providers in Puerto Rico.
The calculation of such estimates relies on numerous assumptions that
need to be made about the way in which such an increase would be
implemented. However, to simplify matters, we provided panel members
with ample flexibility to make the assumptions necessary to provide a
very rough estimate of the total impact of the bias. Here is a summary
---------------------------------------------------------------------------
of the results:
b Between $7 and $15 million in additional annual expenses through
Medicare Part B's Fee For Service would be paid to Puerto Rico
physicians directly.
b Between $50 and $60 million in additional expenses would be paid
through Medicare Advantage, on account of the resulting increase in the
benchmark.
Therefore, total direct economic impact is between $57 and $75 million
annually. Moreover, taking into account indirect and induced multiplier
effects, the total impact on the health care sector could rise to as
high as $120 million annually.
Are there any additional sources of potential bias?
Yes. Figure 7 presents the distribution of the gross rent of a 2-
bedroom housing unit in the United States and Puerto Rico. In this
chart, we also include the housing units that pay no cash rent. In
Puerto Rico almost 35 percent of 2-bedroom renter-occupied housing
units pay no cash rent. In the United States, this only occurs in less
than 5 percent of units. A sizable gap also exists in housing units
that pay cash rents for less than $200 a month.
This gap can be attributed to several types of factors, including
socio-cultural differences, as well as socio-economic differences of
the residents of Puerto Rico. These factors have no bearing or any
relation to the cost of providing medical services.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Is there any source of data that controls for differences in the
prevalence of public housing?
Yes, the Fair Market Rent (FMR) estimated by the Department of Housing
and Urban Development (HUD). This statistical product is produced by
HUD using ACS/PRCS median gross rent data, amongst other sources of
historical information. The FMR is the rent used by HUD in the
implementation of its section 8 housing subsidies. In addition to the
non-market housing thresholds, the housing experts at HUD take into
account differences in the quality of the housing stock in different
parts of the United States and Puerto Rico, amongst other factors that
can bias rent statistics. For more details on the FMR methodology, see:
http://www.huduser.org/portal/datasets/fmr.html.
For how long has this been going on?
Prior to Calendar Year 2012, CMS used FMR estimates as the proxy for
the Office rent component of the GPCI. In fact, when CMS used HUD's FMR
as the proxy before Calendar Year 2012, the Practice Expense GPCI for
Puerto Rico was higher than it is today.
Moreover, Puerto Rico' s Practice Expense GPCI fell by 20 percent the
first year that CMS replaced HUD's FMR data with its own ACS/PPRCS
median gross rent estimates. See Figure 8. This was the largest drop of
any of the 89 PFS payment localities.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The identification of the Public Housing Prevalence Bias, which has
been undertaken in this study, should prompt policymakers to
immediately correct this situation which has gone on long enough.
Are there any additional data sources that control for these aspects as
well?
The Council for Community and Economic Research's (C2ER) Cost-of-Living
Index (COLI) provides reference prices in more than 300 urban and other
areas in the United States. It employs a simple methodology that
attempts to measure the cost-of-living for a specific standard of
living.
COLI is designed to answer the following question: How do urban areas
compare in the cost of maintaining a standard of living appropriate for
moderately affluent professional and managerial households?
We would argue that the relative gross rent costs of such a household
in different parts of the country is a better proxy for the cost
necessary to rent a space for a doctor's office that is adequate in
terms of space and quality for the provision of medical services. After
all, a physician's office contains sensitive equipment and supplies
that need to be stored securely in a temperature-controlled
environment. State and local health regulations do not allow a doctor
to setup an office in an inadequate facility. Said in another way,
physicians are very likely to use high-quality commercial office
spaces. In this same vein, the housing units considered in the
estimation of the median gross rent should include only the relatively
more high-quality housing units that tend to attract moderately
affluent professional and managerial households.
The COLI methodology includes a basket with 57 categories, including
the following relevant categories:
(I) Apartment Rent
Apartment complexes sampled must be suitable for a childless
professional and managerial couple with household income in the
top 20% for their area. They are required to be suitable for a
professional or managerial couple in terms of commuting,
shopping, entertainment needs, and neighborhood quality.
Apartment complexes should be no more than 10 years old.
Sampled apartments should be 950 sq.ft. or pro-rated to an
equivalent of 950 sq.ft. Sample apartments should be
unfurnished, with 2 bedrooms and 1\1/2\ or 2 baths, amongst
other criteria.
(II) Total Energy Costs
COLI takes great care in incorporating different types of energy
costs for the household, as these vary across the United States
and Puerto Rico. C2ER has developed a computer model that
incorporates local weather data from the National Oceanographic
and Atmospheric Administration. This model allows COLI to
measure the total energy costs from an equivalent level of
consumption expected of a moderately affluent professional and
managerial household.
According to the COLI results for the first quarter of 2015, apartment
rents (as specified above) and total energy costs in the San Juan,
Puerto Rico Metropolitan Statistical Area (MSA) are estimated to be
about $848 and $438 per month, respectively. Summing these components
provides a partial estimate of gross rents, which we believe is very
illustrative: $1,286 per month. See Table 2.
This places Puerto Rico's gross rent in between major metropolitan
areas of the United States, such as the Chicago, Illinois Metropolitan
Statistical Area (MSA) with an estimate of $1,326 per month, and
Beaumont, TX MSA with an estimate of $1,218 per month. Despite this
observation, the median gross rent estimate from the ACS/PRCS that are
used by CMS for Puerto Rico ($360) are less than half of the estimate
used for Beaumont, TX ($731).
Table 2. Comparison of gross rent estimates: COLI versus ACS/PRCS
------------------------------------------------------------------------
COLI--1st quarter of 2015 Median
------------------------------------ Gross Rent
for 2- CY 2015
bedroom Practice
Apartment Energy Sum housing Expense
rent unit from GPCI
ACS/PRCS
------------------------------------------------------------------------
Chicago, IL $1,158 $168 $1,326 $940 1.037
MSA
San Juan, PR $848 $438 $1,286 $360 0.705
MSA
Beaumont, TX $1,045 $173 $1,218 $731 0.902
MSA
------------------------------------------------------------------------
VI. Recommendations
1. Correct for the Public Housing Prevalence Bias in the Office
Rent component of Puerto Rico Geographic Practice Cost Index.
There are a number of ways to do this:
(a) Exclude housing units with rents below the non-market housing
rent thresholds developed by the U.S. Department of Housing and
Urban Development (HUD), when estimating the median gross
rents.
(b) Return to using the Fair Market Rents (FMR) of HUD. The FMR is
calculated with great care to control for differences in the
quality of the housing stock, as well as for the prevalence of
non-market housing. It is also based on the median gross rents
obtained from ACS/PRCS. It is available in relatively smaller
geographies (not just statewide), and can be easily converted
to the PFS payment localities.
(c) Tie Puerto Rico's office rent to a specific geography in the
United States, for instance to Beaumont, TX or to Chicago,
IL.\17\
---------------------------------------------------------------------------
\17\ A similar strategy has been followed for the U.S. Virgin
Islands in the past due to data quality issues.
---------------------------------------------------------------------------
2. Implement one of the above corrections immediately.
We estimate that the health care sector of Puerto Rico is losing
almost $120 million annually as a result of this statistical
bias. The bias was first introduced in Calendar Year 2012.
Therefore, over the course of the 3-year period between 2012
and 2015, the total income lost to Puerto Rico's health care
sector rises to $360 million. It only took one year to
implement this bias and in the process reduce Puerto Rico's
GPCI. It should not take any longer than one year to implement
the correction to this bias.
VII. Conclusion
CMS's use of uncontrolled residential rent estimates in different
regions of the United States and Puerto Rico introduces a bias in the
calculation of the Office Rent component of the GPCIs. In specific, the
Public Housing Prevalence Bias, identified in this report, causes an
underestimation in the uncontrolled median gross residential rent
estimates in those regions with relatively large segments of the
population living in public housing. This federal statistical bias
costs the Puerto Rico economy an estimated $120 million annually.
Policymakers need to immediately correct this bias. We have presented
several potential methods that could be used to correct for this bias.
References
Junta de Planificacion (2010). Multiplicadores Interindustriales de
Puerto Rico: Insumo-Producto 2002. Obtained from:
http://www.jp.pr.gov/Portal_JP/
LinkClick.aspx?link=http%3a%2f%2fgis.jp.pr.gov
%2fExterno_Econ%2fMultiplicadores%2fMultiplicadores+Interindustriales+20
02.pdf
&tabid=299&mid=969.
Appendix
Table 3: Relation between the PFS localities and the 2000 PUMAs
------------------------------------------------------------------------
PFS Locality Counties 2000 PUMA Rent cut-off
------------------------------------------------------------------------
(1) Alabama (statewide) 0100100 thru $269
0102600
(2) Alaska (statewide) 0200101 thru $347
0200400
(3) Arizona (statewide) 0400101 thru $414
0400900
(4) Arkansas (statewide) 0500100 thru $262
0501900
(5) Anaheim/Santa Orange 0606801 thru $414
Ana, CA 0607607
(6) Los Angeles, Los Angeles 0604500 thru $414
CA 0606120, and
0606122 thru
0606126
(7) Marin/Napa/ Marin, Napa, and 0601000 thru $414
Solano, CA Solano 0601303
(8) Oakland/ Alameda and 0602101 thru $414
Berkeley, CA Contra Costa 0602108, and
0602401 thru
0602410
(9) San San Francisco 0602201 thru $414
Francisco, CA 0602207
(10) San Mateo, San Mateo 0602301 thru $414
CA 0602306
(11) Santa Clara, Santa Clara 0602701 thru $414
CA 0602714
(12) Ventura, CA Ventura 0606200 thru $414
0606602
(13) Rest of all except 0600100 thru $414
California 0600900, 0601401
thru 0602002,
0602500 thru
0602602, 0602801
thru 0604407,
0606121,
0606701,
0606702, and
0607700 thru
0608200
(14) Colorado (statewide) 0800101 thru $325
0801000
(15) Connecticut (statewide) 0900100 thru $416
0902500
(16) Delaware (statewide) 1000101 thru $495
1000300
(17) DC + MD/VA District of 1100101 thru $313
Suburbs Columbia; 1100105, 2401001
Alexandria City, thru 2401107,
Arlington, and 5100100 thru
Fairfax, Fairfax 5100305
City, Falls
Church City in
Virginia;
Montgomery and
Prince George's
in Maryland
(18) Ft. Broward, Collier, 1203200 thru $269
Lauderdale, FL Indian River, 1203903
Lee, Martin,
Palm Beach, and
St. Lucie
(19) Miami, FL Dade and Monroe 1204001 thru $269
1204020
(20) Rest of all except 1200101 thru $269
Florida 1203100
(21) Atlanta, GA Butts, Cherokee, 1300700 thru $269
Clayton, Cobb, 1302000
Dekalb, Douglas,
Fayette,
Forsyth, Fulton,
Gwinnett, Henry,
Newton,
Paulding,
Rockdale and
Walton
(22) Rest of all except 1300100 thru $269
Georgia 1300600, and
1302100 thru
1304300
(23) Hawaii (statewide) 1500100 thru $414
1500307
(24) Idaho (statewide) 1600100 thru $347
1600900
(25) Chicago, IL Cook 1703401 thru $257
1703519
(26) East St. Bond, Calhoun, 1700400, 1700500, $257
Louis, IL Clinton, Jersey, and 1701000 thru
Macoupin, 1701202
Madison, Monroe,
Montgomery,
Randolph, St.
Clair, and
Washington
(27) Suburban Dupage, Kane, 1703003 thru $257
Chicago, IL Lake, and Will 1703305
(28) Rest of all except 1700101 thru $257
Illinois 1700300, 1700600
thru 1700900,
and 1701300 thru
1703002
(29) Indiana (statewide) 1800100 thru $257
1803800
(30) Iowa (statewide) 1900100 thru $289
1901900
(31) Kansas (statewide) 2000100 thru $289
2001600
(32) Kentucky (statewide) 2100100 thru $269
2102500
(33) New Orleans, Jefferson, 2201801 thru $262
LA Orleans, 2201905
Plaquemines, and
St. Bernard
(34) Rest of all except 2200101 thru $262
Louisiana 2201700, and
2202001 thru
2202500
(35) Southern Cumberland and 2300100 thru $416
Maine York 2300400
(36) Rest of all except 2300500 thru $416
Maine 2301000
(37) Baltimore/ Anne Arundel, 2400400 thru $313
Surr. counties, Baltimore, 2400602, 2400801
MD Baltimore City, thru 2400902,
Carroll, Harford and 2401201 thru
and Howard 2401204
(38) Rest of all except 2400100 thru $313
Maryland 2400300,
2400700, and
2401300 thru
2401600
(39) Metropolitan Middlesex, 2500300 thru $416
Boston Norfolk, and 2500600,
Suffolk 2501300,
2501400, 2502400
thru 2504000
(40) Rest of all except 2500100, 2500200, $416
Massachusetts 2500700 thru
2501200, 2501500
thru 2502300,
and 2504100 thru
2504800
(41) Detroit, MI Macomb, Oakland, 2602501 thru $257
Washtenaw and 2602508,
Wayne 2603200,
2603300, 2603600
thru 2604104
(42) Rest of all except 2600100 thru $257
Michigan 2602400, 2602601
thru 2603100,
2603400, 2603500
(43) Minnesota (statewide) 2700100 thru $257
2702500
(44) Mississippi (statewide) 2800100 thru $269
2802300
(45) Metropolitan Clay, Jackson, 2900800 thru $289
Kansas City, MO and Platte 2901100
(46) Jefferson, St. 2901601 thru $257
Metropolitan, Charles, St. 2901900
St. Louis, MO Louis, and St.
Louis City
(47) Rest of all except 2900100 thru $289
Missouri 2900700, 2901200
thru 2901500,
2902000 thru
2902700
(48) Montana (statewide) 3000100 thru $325
3000700
(49) Nebraska (statewide) 3100100 thru $289
3100904
(50) Nevada (statewide) 3200100 thru $414
3200511
(51) New (statewide) 3300100 thru $416
Hampshire 3301100
(52) Northern New Bergen, Essex, 3400301 thru $495
Jersey Hudson, 3401002, and
Hunterdon, 3401301 thru
Middlesex, 3401903
Morris, Passaic,
Somerset,
Sussex, Union,
and Warren
(53) Rest of New all except 3400101 thru $495
Jersey 3400200, 3401101
thru 3401203,
and 3402001 thru
3402400
(54) New Mexico (statewide) 3500100 thru $262
3501100
(55) Manhattan, New York 3603801 thru $495
NY 3603810
(56) NYC Suburbs/ Bronx, Kings, 3603400 thru $495
Long Island, NY Nassau, 3603505, 3603601
Richmond, thru 3603710,
Rockland, 3603901 thru
Suffolk, and 3604018, and
Westchester 3604114 thru
3604312
(57) Poughkpsie/ Columbia, 3601900, 3602500, $495
NYC Delaware, 3603101 thru
Dutchess, 3603303, 3603506
Greene, Orange,
Putnam,
Sullivan, and
Ulster
(58) Queens, NY Queens 3604101 thru $495
3604114
(59) Rest of New all except 3600100 thru $495
York 3601800, 3602000
thru 3602402,
and 3602601 thru
3603000
(60) North (statewide) 3700100 thru $269
Carolina 3704800
(61) North Dakota (statewide) 3800100 thru $325
3800500
(62) Ohio (statewide) 3900100 thru $257
3904800
(63) Oklahoma (statewide) 4000100 thru $262
4001700
(64) Portland, OR Clackamas, 4101301 thru $347
Multnomah, and 4101313
Washington
(65) Rest of all except 4100100 thru $347
Oregon 4101200
(66) Metropolitan Bucks, Chester, 4203901 thru $495
Philadelphia, PA Delaware, 4204303
Montgomery, and
Philadelphia
(67) Rest of all except 4200100 thru $313
Pennsylvania 4204303
(68) Puerto Rico (statewide) 7202500 thru $269
7200500
(69) Rhode Island (statewide) 4400100 thru $416
4400700
(70) South (statewide) 4500100 thru $269
Carolina 4502300
(71) South Dakota (statewide) 4600100 thru $325
4600700
(72) Tennessee (statewide) 4700100 thru $269
4703202
(73) Austin, TX Travis 4805301, 4805302, $262
and 4805304 thru
4805402
(74) Beaumont, TX Jefferson 4804300 and $262
4804400
(75) Brazoria, TX Brazoria 4804801 and $262
4804802
(76) Dallas, TX Dallas 4802301 thru $262
4802315
(77) Ft. Worth, Tarrant 4802501 thru $262
TX 4802511
(78) Galveston, Galveston 4804901 and $262
TX 4804902
(79) Houston, TX Harris 4804601 thru $262
4804625
(80) Rest of all except 4800100 thru $262
Texas 4802202,
4802400, 4802600
thru 4804200,
4804501 thru
4804503,
4804701,
4804702, 4805000
thru 4805202,
4805303, 4805500
thru 4806900
(81) Utah (statewide) 4900100 thru $325
4900700
(82) Vermont (statewide) 5000100 thru $416
5000400
(83) Virgin (statewide) n/a n/a
Islands
(84) Virginia All Counties, 5100400 thru $313
except 5103500
Alexandria City,
Arlington,
Fairfax, Fairfax
City, and Falls
Church City
(85) Seattle King 5301801 thru $347
(King County), 5302009
WA
(86) Rest of all except 5300100 thru $347
Washington 5301702, and
5302101 thru
5302200
(87) West (statewide) 5400100 thru $313
Virginia 5401200
(88) Wisconsin (statewide) 5500100 thru $257
5502500
(89) Wyoming (statewide) 5600100 thru $325
5600400
------------------------------------------------------------------------
______
Puerto Rico Healthcare Community Leaders
P.O. Box 009023547
San Juan PR 00902-3547
Written statement for the record in relation to the hearing:
``Financial and Economic Challenges in Puerto Rico''
United States Senate Committee on Finance
Tuesday, September 29, 2015, 10:00 a.m.
Dear Members of the U.S. Senate Finance Committee:
In present times, a discussion about financial and economic challenges
in Puerto Rico would be gravely incomplete without a careful assessment
of the social and economic implications of the growing disparities and
underfunding in the healthcare segment of the island. The case of
Puerto Rico represents today a unique, and concerning, scenario within
the United States (U.S.) healthcare economy. At the very macro level,
total healthcare expenses per capita are approximately $3,400 in Puerto
Rico, compared to the national average projection of $10,000 or more
for 2015.\1\ Not only is Puerto Rico very distant from U.S. average
funding levels for healthcare, but it also has significantly less
resources for healthcare than many countries with diverse healthcare
systems like Canada, France, Germany, and the UK, which are also known
to spend significantly less than the U.S. average.\2\ Many of these so
well studied and recognized healthcare systems spend $4,000-$6,000 per
capita, placing Puerto Rico's expenditure levels at a distinct
disadvantage from many perspectives, especially considering that core
inputs like prescription drugs, equipment, electric power and others
are acquired within the U.S. market, and mostly at above average
prices. Moreover, the partial and uneven implementation of the Medicare
and Medicaid programs for 5 decades has been a core element impacting
the resulting imbalances that we see today. The situation of relative
underfunding and increasing disparities within the same U.S. healthcare
economy, and the same Federal programs, has sustained itself only by
inevitably depressing professional compensation, stalling capital and
information technology investments, and by increasing barriers to
appropriate access to care for the low income population.
---------------------------------------------------------------------------
\1\ http://www.forbes.com/sites/danmunro/2015/01/04/u-s-healthcare-
spending-on-track-to-hit-10000-per-person-this-year/. Estimates for
Puerto Rico are based on the financial statements of health plans in
the island reported to the National Association of Insurance
Commissioners (NAIC). CMS reports for Medicare FFS, and reports of the
Government of Puerto Rico Office of Management and Budget.
\2\ World Health Organization (WHO) http://apps.who.int/gho/data/
node.main.78?lang=en.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
While there may be different theories about why this is the current
scenario, our call for urgent action is borne out of the following
---------------------------------------------------------------------------
facts:
1. There is a problem with the economy of Federal healthcare
programs in Puerto Rico, and over 740,000 Medicare beneficiaries and
1,600,000 Medicaid beneficiaries are directly impacted with less
benefits, much higher out of pocket costs, and less disposable income
than any similarly situated individual elsewhere in the U.S.
2. The problem is inevitably tied to decades of partial and
uneven implementation of Federal healthcare programs. Medicare and
Medicaid for Puerto Rico are impacted by particularly disparate
treatment in the statute, while the implementation of ``one-size-fits-
all'' regulation and calculations for the programs has not accounted
for basic differences in statutory benefits, eligibility, and the
socio-economic situation of Puerto Rico. The effect of unadjusted
program implementation in the face of statutory differences for so many
years has exacerbated disparities, produced harmful unintended
consequences, and pushed Puerto Rico farther to the bottom with regards
to healthcare funding.
3. There are immediate solutions available. With U.S. citizens in
Puerto Rico paying the same Medicare Tax and the same Part B premium as
any other citizen in the country, we unequivocally believe there are
legitimate ``NO-Bailout'' solutions that directly impact the capacity
of programs in Puerto Rico to provide appropriate access to quality
care, and contribute to the strengthening of the economy in general,
while also maintaining in Puerto Rico the most cost-efficient Medicare
and Medicaid programs in the nation. Moreover, historic cuts and
migration to the mainland could inevitably lead to higher costs for the
Federal Government as beneficiaries would immediately participate in
much higher-cost versions of the Medicare and Medicaid programs.
Growing Disparities With Federal Healthcare Programs
Due to historic deficiencies in the Medicare FFS reimbursement,
Medicare managed care was not viable and non-existent for beneficiaries
in Puerto Rico before 2001. Changes and protections to the lowest cost
areas defined in the Benefits Improvement and Protections Act (BIPA,
2000), and the Medicare Modernization Act (MMA, 2003) provided the
first real opportunity for the availability of coordinated care and
plan choice. Subsequently, in the first decade of the century, Medicare
Advantage (MA) became the preferred choice of beneficiaries in Puerto
Rico, especially for the dual eligible and the low income
beneficiaries. Today, Puerto Rico has the largest integrated Medicare-
Medicaid program in the nation serving over 270,000 dual beneficiaries,
and the MA program serves more than 570,000 beneficiaries in total.
Most significantly, even before the Affordable Care Act (ACA) cuts
began, the MA program in Puerto Rico had the lowest benchmark in the
nation, 25% lower than the U.S. average and 21% lower than Hawaii. The
MA program in Puerto Rico was doing a lot more, for a lot less.
Unfortunately, the ACA has provoked the highest Medicare funding cuts
in history for citizens and providers residing in the island. Since
2011, MA benchmarks have decreased 18%, and payment levels are
estimated to be $1 billion less in 2015. Puerto Rico's MA base rates
are now 38% lower than the U.S. average, and 34% lower than the lowest
state (HI). The aggregate funding reduction so far has reached over $3
billion less in MA. These reductions have already generated tangible
cuts in benefits, provider compensation and provider networks. Most
importantly, the reductions have put at risk the viability of the
program for dual eligible, Medicare Platino, and have basically
eliminated crucial help in benefits for non-dual, but low income,
beneficiaries that are also excluded by statute from the Part D Low
Income Subsidy Program (LIS). With regards to duals, the local
Government has estimated that it would need at least $600-$800 million
more from the local general fund to maintain a Medicaid program for the
dual eligible without MA.
Chart 1--Illustration of the MA Benchmarks at 0% Bonus for Every County
in the U.S.
(Only Northern Marianas, American Samoa, and Guam are not included)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Aggravating Disparities for the Low Income in MA and Part D
After the enactment of the MMA (2003), the MA program increasingly
became the vital platform for the dual eligible population and the low
income non-dual population to get appropriate access to care. MA
penetration is 75% of all Medicare, serving basically 9 out of every 10
beneficiaries with Parts A and B, while the national average
penetration is 32%. Moreover, Stand Alone PDP enrollment is
dramatically revealing, going down from 6% to 2% in Puerto Rico from
2008 to 2015, while at the national level the amount of beneficiaries
buying a stand-alone part D plan has increased from 39% to 44% (See
Chart 2). The disadvantageous socio-economic status of Medicare
beneficiaries in the island evidently impacts their decision to use MA
as their most, and for most the only, secure access to Medicare
benefits. Without a viable MA program that helps with the gaps in Part
D, access to prescription drugs for beneficiaries in Puerto Rico would
be unaffordable for the majority of the population. In regards to
hospital coverage, another example of anomalies alleviated by MA is the
fact that the regular Medicaid program in Puerto Rico does not pay for
the Part A deductible to hospitals. We estimate that over tens of
millions in uncompensated care are saved yearly by the first-dollar
hospital coverage under the MA-based Medicare Platino program for the
dual eligible in Puerto Rico.\3\
---------------------------------------------------------------------------
\3\ There are 270,000 dual beneficiaries in Medicare Platino D-SNPs
for which the Part A deductible for 2015 is $1,260. The regular
Medicaid (Mi Salud) program does not cover this cost, while the MA-
based dual program does.
---------------------------------------------------------------------------
Chart 2--MA/MAPD and PDP Enrollment in PR Compared to National
Perspective
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The recent national-level discussions about the need for socio-economic
status (SES) adjustments for risk scores and STAR (quality) rating
methodologies have underscored two key barriers for Puerto Rico with
regards to the appropriate implementation and funding for the MA and
part D programs: (1) almost 50% of MA beneficiaries are dual eligible,
and (2) the fact that Part D has much less benefits in Puerto Rico
(without the Part D LIS) compared to Part D benefits for citizens
residing in the states and Washington, DC. Important studies have
examined and concluded that plans that serve higher proportion of low
income beneficiaries are disadvantaged in the current STARs
methodology, and have proposed policy amendments accordingly
(Innovation 2013, National Quality Forum 2014, Holtz-Eakin 2015).\4\
However, while neither Congress nor CMS has acted to implement any
conforming policies, the poorest beneficiaries have lost millions in
benefits given continuing deficiencies in risk scores, and Lower-MA
Rebate, NO-Bonus scores in the STARs program. For 2014 and 2015, over
60% of MA beneficiaries were at 4.0 STARs or more (5% Bonus), while
there were none (0%) in Puerto Rico.
---------------------------------------------------------------------------
\4\ Inovalon (October 2013); National Quality Forum (August 2014);
Holtz-Eakin, Ryan; July 2015, http://americanactionforum.org/research/
medicare-advantage-stars-are-the-grades-fair.
Furthermore, the alarming increasing disparity in Medicare Advantage
has exacerbated the impact of the exclusion of the Part D LIS for
beneficiaries in Puerto Rico since the MMA (2003). It is estimated that
from 100,000-150,000 beneficiaries residing in Puerto Rico have income
between 87% FPL and 150% FPL, and would be eligible to get help from
Medicaid and/or from the Part D LIS if they resided elsewhere in the
states. The partial Part D benefits for the low income beneficiaries
aggravates the scenario with regards to quality measures. We have
repeatedly presented this problem in Congress and to CMS, but responses
have been null.\5\ Holtz-Eakin (2015) concluded that plans with high
LIS enrollment lost over $470 million to pay for benefits due to
missing the cut-off for bonus payment by less than half-star. With most
plans in Puerto Rico at 3.0 or 3.5 STARs, we estimate that the lost
funds for benefits (due to unattained MA rebate percentage and/or MA
bonus) was at least $200-$250 million in 2015, and an amount close to
$200 million in 2014.
---------------------------------------------------------------------------
\5\ The Obama 2008 healthcare proposals for PR explicitly included
the elimination of the Part D LIS exclusion, but no meaningful action
has been taken so far. The President's Task Force on Puerto Rico
recognized this problem in March 2011 and later the HHS Report to the
Task Force from April 2013 confirmed the problem. H.R. 3966 was
introduced in 2014 by Resident Commissioner Pierlusi to address the LIS
exclusion. The Community of PR presented a response with more details
to the CMS RFI on November 2014.
Effect on Low Income Citizens' Financial Circumstances, and on
---------------------------------------------------------------------------
Consumption for the Economy
There is no question that the MA cuts, the exclusion of the Part D LIS,
and the lost resources under the related to the uneven implementation
of the STARS rating program, have severely impacted the disposable
income of citizens, with an effect on Puerto Rico economy in general.
It should be noted, for example, that--different from all other
similarly situated citizens--dual beneficiaries in the island do not
get help to pay the monthly Part B premium, which is deducted from
their Social Security checks. Starting in 2006, the MA program for
duals provided consistent plan alternatives that effectively increased
the social security payments for the poorest citizens by providing a
credit to the Part B premium. Pre-ACA plan offerings mostly offered $25
or higher in monthly credits. By 2016, the average Part B credit has
gone down probably around $25pmpm. Using this assumption, 270,000
beneficiaries are each losing $300 from their pockets in 2016, and over
$80 million as a group. Moreover, although a detailed analysis has not
been not been finalized, it is fair to estimate that MA beneficiaries
in Puerto Rico are losing $45-$60pmpm from their pockets due to the ACA
reductions. This means $540-$720 per beneficiary and $300 to $400
million in the aggregate, lost as disposable income most likely to be
consumed in the local economy to cover other basic needs. With average
Social Security payments that are \2/3\ of the national average, and
the exclusion from Supplemental Security Income (SSI), we can make two
very logical and relevant conclusions (see Table 1):
1. MA cuts have a relatively higher impact on the disposable
income in Puerto Rico given the lower level of poverty, coupled with
the exclusion of Part D benefits and SSI;
2. MA cuts will directly reduce consumption in the local economy
given that circumstances almost assure the healthcare help frees income
for basic needs. This is the lowest income population in the nation,
that is also paying a higher than average cost of living (COLI, Jan-Mar
2015).
From the national perspective, on the other hand, there is also
increasing discussion and analysis about how expansions in healthcare
coverage is generating increased consumption and supporting economic
growth (WSJ Sept 2014).\6\
---------------------------------------------------------------------------
\6\ http://blogs.wsj.com/economics/2014/09/11/health-care-revenue-
rebound-could-boost-u-s-economic-growth/.
Table 1--Comparison of the Typical Low Income Beneficiary Situation in
PR vs Other Jurisdictions \7\, \8\
------------------------------------------------------------------------
Puerto Rico Perspective National Perspective
------------------------------------------------------------------------
99.1% Hispanic/Latino 7.3% Hispanic/Latino
------------------------------------------------------------------------
$12,000 Average Social Security $19,000 Average Social Security
Income Income
------------------------------------------------------------------------
30% with retirement income 48% with retirement income
------------------------------------------------------------------------
53% have education less than a 20% have education less than a
high school diploma high school diploma
------------------------------------------------------------------------
$0 Supplemental Security Income $8,841 Average Supplemental
(SSI) Security Income (SSI)
------------------------------------------------------------------------
115.4 Cost of Living Index 100.0 Cost of Living Index (COLI)
(COLI); San Juan area Ranked #35 for Jan-Mar 2015
in highest cost of living compared
to 296 U.S. metropolitan
statistical areas (Jan-Mar 2015)
------------------------------------------------------------------------
Traditional Medicare Does Not Work in Puerto Rico as in Other
Jurisdictions
---------------------------------------------------------------------------
\7\ Selected figures from: U.S. Census Bureau, American Fact
Finder, 2011-2013 American Community Survey 3-Year Estimates;
http://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml.
\8\ Cost of Living Index (COLI) of the Council For Community and
Economic Research, http://www.estadisticas.gobierno.pr/iepr/
LinkClick.aspx?fileticket=SEqx6Sl8Ugo%3d&tabid=384.
The increasing crisis in the beneficiary-chosen MA program in Puerto
Rico brings back historic disparities and underfunding in the Medicare
FFS program since 1988. For decades, Part A payments have been
distinctly lower for hospitals in the island because of a discounted
formula defined by law, and due to regulatory implementation that
further reduced payments. An example of the later is the significant
reduction in DSH payments for PR given CMS has not used a proxy for the
``Medicare SSI days'' in the formula, even when this program is also
excluded for the Territories by law. This makes the SSI days an
unrealistic indicator of the low income population in Puerto Rico, and
has reduced hundreds of millions of dollars in payments to Medicare
hospitals in the island, which is contrary to the intent of Congress in
relation to the DSH program policy. Under Part B, other examples of
issues include the potential underestimation of the geographic practice
cost indexes (GPCIs). For example, a recent study validated that the
survey used by CMS for estimating office rent costs is
disproportionally biased due to the use of 2-bedroom apartment rent
which is subsidized in a much greater proportion in Puerto Rico
relative to other jurisdictions.\9\ In general, based on data reported
by CMS as 2016 estimates, Medicare FFS payment estimates for PR are 47%
lower than the U.S. average, also an outlier at the bottom among all
jurisdictions (See Chart 3). Statutory, regulatory and context
differences over 50 years have shaped a Medicare FFS program that is
not reliable and not realistic as an accessible and appropriate
coverage option for most beneficiaries in Puerto Rico. The program in
the island is not what the ACA assumed as the good standard, like it
may be elsewhere. In Puerto Rico, it is simply not a reliable source of
what Medicare Parts A and B are supposed to be for eligible
beneficiaries.
---------------------------------------------------------------------------
\9\ Report about the Public Housing Prevalence Bias in the Office
Rent Component of the GPCIs; PR Institute of Statistics, July 2015;
http://www.estadisticas.pr.gov/iepr/
LinkClick.aspx?fileticket=ZdH5lxNObgs%3d&tabid=165.
Chart 3--Medicare FFS and Medicaid Expense in PR vs Other Jurisdictions
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Medicaid Has Also Been Extremely Different
The Medicaid program in Puerto Rico has also developed under
statutorily defined limitations since 1967. After being limited by a
statutory cap on benefits under the 1967 Medicaid amendments that
maintained the effective Federal matching percentage below 20%, the ACA
approved a defined grant for the period of 2011-2019. The new grant
totaled $6.3 billion in additional Medicaid funds, and increased the
FMAP to 55%.\10\ Still, it should be noted that the applicable FMAP
under the regular formula would be 83%. As a temporary measure, the new
allocation has been crucial to maintain the healthcare of the poorest,
while it has also helped to keep the government finances a float.
Nonetheless, the Medicaid program premiums in Puerto Rico are still 65%
lower than the U.S. average (See Chart 3, above). Moreover, there is
certainly increasing concern about the upcoming scenario when the ACA
funds run out. The program currently depends on the current annual
level of Federal funds to support the coverage for over 1.6 million
citizens. As we emphasize herein below, the ``Medicaid Cliff'' presents
a situation for the local government finances that could put at risk
the access to health for hundreds of thousands of beneficiaries and/or
increase the local government's deficit by another $1 billion or more.
---------------------------------------------------------------------------
\10\ This includes the $925 million initially allocated for an
option to start a local health insurance marketplace. Government
studies concluded that the marketplace was not viable with this fixed
amount and decided to use the funds in Medicaid.
---------------------------------------------------------------------------
The Health Insurance Providers Fee--A New Incongruence With the ACA
Finally, the uneven applicability of Sec. 9010--health insurance
provider's fee (``HIT'')--to the Territories is severely impacting the
situation of healthcare under all segments: Medicare, Medicaid and
Commercial. Our community has presented several legal analysis to HHS
and to the U.S. Treasury in relation to our understanding that the
inapplicability of many ACA provisions tied to new expenditures
supported by the tax, is also basis for the inapplicability of Sec.
9010. As recent as July 2014, HHS re-interpreted its initial policy on
the implementation of several Title I provisions of the ACA to deem
them inapplicable to Territories. Basically, plans, citizens and
governments of the Territories are being required to pay the price for
a product that they are not getting. Puerto Rico is excluded from key
provisions like the individual and the employer mandates, the
individual and small group subsidies, and the Federal funding for the
Medicaid expansion. As reviewed by Federal Courts in recent ACA
litigation, we understand the ACA is meant to be a coherent package of
provisions, not a list of independent and unrelated rights and
obligations. We contend that not re-assessing the applicability of the
HIT is incongruent with the intent of the ACA, as validated by courts
in different circumstances. The HIT is costing the PR health system
about $150 million in 2015 and would increase to annual payments of
approximately $250 million in the next few years.
General Economic Impact
As part of our efforts to present the urgent situation of Medicare and
Medicaid in Puerto Rico, we prepared estimates of the current shortfall
in Federal resources for these programs, assuming a defined parameter
of would could be an appropriate level of funding. For our exercise,
the appropriate levels are mostly based on the list of policy proposals
approved by the Puerto Rico Healthcare Crisis Coalition, which we
include as the last section of this document. We can submit more detail
or discuss the estimates with the Committee as requested.
Based on our analysis, the estimated Federal healthcare (Medicare and
Medicaid) shortfall is approximately $1.9 billion in 2015.\11\ If we
consider the exclusion of Supplemental Security Income (SSI) as well,
the shortfall is $3.6 billion. Unless urgent action is taken by
Congress and by CMS, the projected worse case may occur in 2018-2019
and would be a shortfall of $3.6 billion (not including SSI), with no
ACA funds for Medicaid and after the potential additional incremental
cuts to MA and FFS Medicare based on factors currently legislated or
still unaddressed by regulation. At the current level, the shortfall
for healthcare programs have an economic impact of approximately $3.8
billion in a year, considering direct loss and a multiplier
(2) for indirect impacts. Healthcare is mostly a local
economic activity, generating immediate impact on jobs, disposable
income of beneficiaries and providers, and local government tax
revenue. In addition, the direct impact to citizens and the economy is
supported by the new minimum Medical Loss Ratio (MLR) requirements
(85%), and the fact that currently direct medical services expenses for
the combined Medicare and Medicaid programs in PR is at around 90%. All
these factors closely link any shortfall or enhancement in healthcare
program funding to local economic performance, to benefits, and to
provider compensation.
---------------------------------------------------------------------------
\11\ Uses current MA and Mi Salud membership and premiums. The MA
shortfall is based on the minimum MA rate proposed in the Schumer bill
and the Medicaid shortfall is based on the use of 83% Federal matching
percentage instead of the cap and the 55% limit that applies today. No
projections of increased trends or increases to provider payment levels
are added, therefore estimates of the shortfall would be higher if
these factors are incorporated.
With respect to the combined impact of local expenses and lost tax
revenues, the estimate of the healthcare shortfall impact on the PR
Government's budget is currently $1.1 billion a year (using 2015). If
we estimate the impact considering a $3.6 billion shortfall after the
additional ACA grant for Medicaid runs out, it means $720 million less
in tax revenue, and an expense to the Puerto Rico Government's budget
of $1.9 billion.\12\ A $2.6 billion total. The net increase to
government expenses compared to 2015 would be $1.4 billion in order to
maintain the current Medicaid program and eligible population if there
are no legislative and administrative fixes to Medicare Advantage and
Medicaid urgently.\13\
---------------------------------------------------------------------------
\12\ For the purposes of these estimates we are simply assuming
that, given Puerto Rico's current income, corporate and consumption tax
levels, any Medicare, Medicare Advantage or Medicaid funding change
creates an impact to government tax revenue equivalent to 20% of the
change in funding.
\13\ Considers $800 million increase to cover regular Medicaid and
a $600 million increase to cover for dual eligible beneficiaries if
Medicare Platino is not viable under the MA platform.
The relation between economic performance, government finances and
Medicaid expenditures is increasingly being studied across the nation.
HHS recently published a summary of recent literature specifically
describing impacts in the finances of low income citizens, impacts on
uncompensated care, and impact on the states Gross Domestic Product
(GDP).\14\ Most of the work has also been reviewed by the Kaiser Family
Foundation, which concluded that state case studies show savings to the
local government expenses and revenue gains in relation to increased
Medicaid expenditures.\15\
---------------------------------------------------------------------------
\14\ Economic Impact of the Medicaid Expansion. Office of the
Assistant Secretary for Planning and Evaluation. Department of Health
and Human Services. March 23, 2015;
http://aspe.hhs.gov/pdf-document/economic-impact-medicaid-
expansion.
\15\ Dorn, S., et al. (March 2015). Kaiser Family Foundation and
Urban Institute (March 2015). The Effects of the Medicaid Expansion on
State Budgets: An Early Look in Select States. Kaiser Family
Foundation. Accessed at: http://kff.org/medicaid/issue-brief/the-
effects-of-the-medicaid-expansion-on-state-budgets-an-early-look-in-
select-states/.
---------------------------------------------------------------------------
Healthcare Economic Impact
The healthcare segment in Puerto Rico represents approximately 11% of
the Gross Domestic Product (GDP) and supports directly from 60,000 to
80,000 jobs. At the current underfunding levels, legitimate fixes to
Medicare and Medicaid would not only stop the growing crisis in
healthcare, but also immediately generate jobs, increases in disposable
income of the poor, increases in tax revenues and reductions in local
Government expenses on healthcare. Healthcare expenses are too low for
Puerto Rico as a community that is part of the U.S. healthcare economy
and part of the U.S. healthcare programs, as decided for many decades
by Congress and the Federal Government. It should be noted that, the
cost of living in Puerto Rico is on average significantly higher than
in the mainland. This has recently been validated when Puerto Rico was
included the Cost of Living Index (COLI) of the Council for Community
and Economic Research \16\ (C2ER) which has shown consistently that PR
is over 15% costlier than other jurisdictions for the composite index.
---------------------------------------------------------------------------
\16\ See: http://www.c2er.org/.
Contrastingly, significantly lower compensation in healthcare is part
of the context for historic levels of migration to the U.S. mainland.
The Puerto Rico Institute of Statistics just reported that in 2014
about 84,000 citizens moved to the mainland, resulting in a net
migration of 64,000. This level of migration is the highest recorded in
history, and is even higher compared to the exodus of Puerto Ricans to
the mainland in the 1950s.\17\ More specifically, data from the
American Community Survey and the PR Community Survey suggests a net
migration of 12% of the physicians in Puerto Rico moving to the U.S.
mainland between 2005-2013. The latest figures suggest that over 200
physicians are migrating from the island annually.
---------------------------------------------------------------------------
\17\ http://www.estadisticas.gobierno.pr/iepr/
LinkClick.aspx?fileticket=KmY2LP3VLPw%3d&
tabid=39&mid=590.
Moreover, with over 4.5 million Puerto Ricans residing in the mainland,
the decision for many Medicare and Medicaid to move to Florida, New
York or Texas, is much easier. At the macro level, the scoring of
policy adjustments for Puerto Rico, has to include the increased
Federal expenses related to migration. For example, if a beneficiary
---------------------------------------------------------------------------
moves from Puerto Rico to Florida, the Federal Government:
Will pay 65% more for Medicare Advantage beneficiaries, plus the
LIS as applicable;
Will pay 100% more for a beneficiary in FFS Medicare;
Will pay 115% more for a beneficiary in Medicaid.
Saving healthcare programs in Puerto Rico saves money to the Federal
Government.
Conclusion:
Congressional and Administrative Action for Healthcare Funding is Part
of the Solution for PR
We ran out of time. Healthcare in Puerto Rico cannot wait. Benefit
reductions to the poorest, increasing migration, and impacts on the
economy and the government's financial crisis are already real.
Moreover, Federal action would actually save money to the Federal
Government.
We respectfully request the U.S. Senators and staff of the Senate
Committee on Finance to carefully consider the following basic points:
1. There are legitimate legislative and administrative fixes to
Federal healthcare programs funding that can be part of the immediate
support to our economy and government finances, while NOT being a
Federal bailout. Given the cuts in MA that continue to increase, the
net result of the ACA for beneficiaries in the island is a net loss in
funding even before 2019.
2. Continuing administrative and legislative inaction in relation
to the imbalances of the Medicare and Medicaid programs in Puerto Rico
will worsen the crisis in government finances and the Puerto Rico
economy given significant incremental cuts anticipated in 2016, 2017
and 2018.
3. Not acting on healthcare in Puerto Rico can cost the Federal
Government more, given that the fixes proposed will still leave the
island at the lowest level of healthcare expenditure in all the nation.
Any beneficiary that moves from Puerto Rico to the mainland will
automatically mean higher Federal expenses of 50% or more.
4. Fixing Medicare Advantage, Part D and Medicaid for Puerto Rico
will have direct impact on beneficiaries' disposable income, on the
economy through increased consumption, on local government expenditures
and on tax revenues. Efforts to invest time and funding on other types
of economic development projects are currently hindered by the
continuing crisis in healthcare.
5. The incongruences and funding disparities in the island are a
result of decades of partial and uneven implementation of the Medicare
and Medicaid programs, which has influenced the structure and economics
of the PR healthcare system in general. In particular, we stress the
importance of corrections in the Medicare program, for which citizens
in Puerto Rico pay the same Medicare Tax and the same part B premium as
residents anywhere else.
6. The MA program in Puerto Rico has reported higher improvement
measures in the part C and part D STAR rating system compared to the
national average. CMS has noted significant improvement in quality even
at the lowest levels of cost. This means that fixes for MA and part D
will work on a highly monitored, measured, and performance improving
platform. Actually, the most cost-effective healthcare platform in the
entire U.S.
7. Common Ground: Amidst all the complexities and positions about
the economic situation of Puerto Rico, policy proposals for Federal
healthcare programs have revealed common ground across political
parties and segments both in Puerto Rico and in the U.S. We strongly
urge you to support the proposals listed by the Coalition (See last
page).
List of Legislative and Administrative Policy Proposals Approved by the
PR Healthcare Crisis Coalition
September 15, 2015
Legislative Proposals Needed for PR
1. Urgent Minimum Protection for Beneficiaries in Medicare Advantage
With Part D (MAPD), Including Duals--(A) Establish a minimum MA
benchmark rate for Territories at 20% lower than the national
average Medicare FFS per-capita costs, or at an amount equal to
the lowest MA benchmark county among the States and the
District of Columbia, whichever is the lowest; and (B)
Eliminate the exclusion of the Part D Low Income Subsidy (LIS)
for beneficiaries residing in Territories. This would provide
part D funding to cover essential benefits for all dual
eligible and citizens with incomes below 150% FPL.
2. Parity for Beneficiaries in the Medicaid Program--(A) Eliminate the
total dollar cap on Federal funding, and (B) the Federal
Medical Assistance Percentage (FMAP) limit of 55% for citizens
residing in Puerto Rico that eligible to Medicaid under the
program standards for the rest of the nation.
3. Eliminate Disparities in Traditional Medicare--In the Part A
Inpatient Prospective Payment System (IPPS) Formula, use the
regular national costs formula for 100% of the standard
operating costs and capital cost components of the DRG base
rates for inpatient services. Establish a new wage index floor
to avoid increasing disparity.
4. Medicaid DSH--Extend Medicaid Disproportionate Share Hospital (DSH)
payments for Hospitals in Puerto Rico.
5. Medicare HITECH Funds for hospitals in PR.
6. Medicare Part B auto-enrollment and waiver of late enrollment
penalty.
Administrative Adjustments Needed for PR
1. Inapplicability of Health Insurance Tax (``HIT'')--The U.S.
Treasury and HHS have the authority to deem Sec. 9010 of the
ACA inapplicable to the Territories to avoid the current
incongruence in the implementation of inter-related provisions
of the law.
2. Part A--Use of Alternative to SSI Days--Establish an alternate
indicator of ``Medicare SSI Days'' in the Part A formulas to
calculate payment using mainly the ``dual days.''
3. Adjust MA and Part D Risk Scores and STAR Ratings Based on Socio-
economic Status (SES) to account for increased challenges for
plans that serve a high proportion of dual eligible
beneficiaries (similar to national policy proposal) and the
additional distinction of the lack part D LIS benefits for
citizens residing in the territories.
4. Appropriate Part B Physician Fees--Make corrections to the Practice
Expense GPCI (current is 0.705).
Respectfully,
James P. O'Drobinak Dr. Wanda Velez
President President
Medicaid and Medicare Advantage Puerto Rico Medical Association
Association of Puerto Rico (MMAPA)
Dr. Joaquin Vargas Alicia Suarez
President, Primary Health Association of
PR IPA Association Puerto Rico
Lcdo. Jaime Pla-Cortes Eliot Pacheco
President President
PR Hospital Association Puerto Rico Community Pharmacies
Association
Jose Vazquez-Barquet, Ph.D. Dennis Rivera
President and Chairman of the Board Chairman
Puerto Rico Chamber of Commerce PR Healthcare Crisis Coalition
______
Puerto Rico Hospital Association
Mr. Jaime Pla-Cortes, Executive President
For the Hearing Record
of the
Finance Committee
U.S. Senate
Hearing on
``Financial and Economic Challenges in Puerto Rico''
September 29, 2015
Contact:
Jaime Pla-Cortes
Executive President
Puerto Rico Hospital Association
Villa Nevarez Professional Center
Suite 101
San Juan, PR 00927
(787) 764-0290
Chairman Hatch, Ranking Member Wyden and distinguished members of the
Senate Finance Committee, thank you for the opportunity to provide this
Statement for the Record on behalf of the Puerto Rico Hospital
Association. Our organization represents the 69 hospitals serving
approximately 3.6 million U.S. Citizens residing in the U.S. Territory
of Puerto Rico; a population larger than 20 States. Notably, we are
particularly proud that not only was our organization founded in 1942
but we are the home of the America's oldest continuously operated
hospital: El Hospital La Concepcion of San German, founded in 1524.
We appreciate the interest of the Committee in the current state of
Puerto Rico's economy as well as the fiscal crisis facing our local
government and its institutions. Unfortunately, our island's weak
economy, high level of poverty, record unemployment and troubled
government finances are contributing to the challenges we face in
managing a health care system designed to provide the best quality care
for the U.S. Citizens we serve each and every day.
Frankly, we face a larger challenge as we work to deliver quality
health care. Our Medicaid funding is capped and our treatment under
Medicare is significantly less than that received by identical
stateside hospitals. However, we are expected to deliver the same level
of quality care for our Citizens and visitors as that provided by our
sister stateside institutions.
The Government of Puerto Rico is behind in its Medicaid reimbursements
to the tune of at least $200 million today. Since 43% of our local
population is living in poverty every one of our member hospitals
serves Medicaid patients. This combined with our lesser Medicare
reimbursement levels has put an incredible strain on the operations of
every hospital. We also note that 40% our hospital services are for
Medicaid recipients.
We recently surveyed our member hospitals and found that over the past
12 months almost every institution has been forced to scale back
operations in some way due to the Government of Puerto Rico's delayed
Medicaid payments due to the inability to obtain an additional line of
credit through the Government Development Bank (GOB). This reduction in
services has resulted in employee cutbacks and reduced hours impacting
thousands of employees, with many hospitals reducing beds, closing
floors and eliminating specialized services as well as an additional
delay in payment of bills and payroll. One hospital is forced to close
its doors after the local government owned electrical utility announced
it would cut off its electricity service due to late payment of bills.
The facts show that Puerto Rico's hospital system is in a crisis due to
the combination of the government's delay in reimbursing its medical
providers and the secondary treatment our hospitals receive under
Medicare. We are struggling to maintain our staff and see many of our
experienced doctors and other health professionals recruited away with
offers of better compensation by stateside hospitals.
You've noted in your opening statements as well as through comments by
individual Members during this hearing that you wish to focus on
solutions that can be enacted under the Finance Committee's
jurisdiction. While there are many areas in health care where the
disparity in treatment under Medicare can be identified, my intent with
this statement is to ask your attention to the initiatives where
Congress can make a difference in the short term. In fact, each of
these initiatives addresses a fairness issue resulting from disparate
treatment of Puerto Rico hospitals. These are our priorities:
ISSUE #1: MEDICARE'S IPPS SINGLES OUT PUERTO RICO'S HOSPITALS
The federal government reimburses hospitals who admit Medicare patients
for inpatient care under a system known as the Inpatient Prospective
Payment System, or IPPS. The IPPS payment is intended to cover the
costs that a reasonably efficient hospital would incur in furnishing
high quality care.
The current IPPS results in the federal government reimbursing Puerto
Rico hospitals that treat Medicare patients a lower amount than
hospitals in the 50 states and other Territories. Puerto Rico's
hospitals are not paid the same base rate as identical hospitals in the
states, resulting in these hospitals receiving lower payments than
identical hospitals elsewhere receive per discharged patient. This is
because hospitals in Puerto Rico do not receive a base rate based on
100% of the national average operating and capital costs associated
with running a hospital. Instead, they receive a base rate based on 75
percent. When combined with the disparity in the Medicare Wage Index
administered by CMS, Puerto Rico hospitals only receive 52% of the
reimbursement given to identical hospitals elsewhere.
Puerto Rico's hospitals are the only U.S. hospitals treated under the
IPPS in this fashion. Even the other Territories are not treated this
way. We ask your support for correcting this disparity when the Senate
Finance Committee considers appropriate legislation. We believe
identical hospitals should be treated equally as they work to serve
Medicare patients, provide quality care and remain financially stable.
It's a fundamental issue of fairness.
There is no principled basis to treat Puerto Rico hospitals under the
Medicare IPPS as Puerto Rico residents pay the Medicare payroll tax
just like their fellow citizens in the 50 states and District of
Columbia. This disparate treatment significantly hampers Puerto Rico's
hospitals' goal of providing the highest quality care for almost 3.6
million U.S. citizens; a population larger than 20 States.
Legislation to address IPPS for Puerto Rico is offered by Senator
Schumer and other Members of this Committee, as part of a broader
package of reforms is included in S. 1961. This legislation would
eliminate this disparity and treat Puerto Rico's hospitals under the
IPPS the same as identical hospitals elsewhere. This solution has been
endorsed by both the American Hospital Association and the Puerto Rico
Hospital Association.
ISSUE #2: INCLUDE PUERTO RICO HOSPITALS IN THE HITECH ACT
The Health Information Technology for Economic and Clinical Health
(HITECH) Act was enacted in 2009. The goal of the HITECH Act is to
advance the design, development and operation of a nationwide health
information infrastructure that promotes the electronic use and
exchange of information. Doctors and hospitals are encouraged to use
electronic health records (EHR), so, patient care is improved, medical
errors are curtailed and lower health care delivery costs.
To promote the adoption of EHRs, the HITECH Act authorizes bonus
payments under both Medicare and Medicaid for eligible doctors and
hospitals that become ``meaningful users'' of certified EHR systems.
The Medicare incentive program consists of both ``carrots'' and
``sticks'' in that physicians and hospitals will be penalized if they
fail to adopt EHR technology by a certain date.
Unfortunately, apparently due to a drafting error, the final HITECH
legislation omitted Puerto Rico hospitals from the Medicare component
of the incentive program. The current law makes Puerto Rico physicians
eligible for both the Medicaid and Medicare payments and Puerto Rico's
hospitals are eligible for the Medicaid bonus payments, yet our
hospitals were omitted from the Medicare provision, which is likely
attributed to the definition of an eligible hospital as a ``subsection
(d) hospital,'' an acute care hospital located in the 50 states or
District of Columbia. The proposed amendment would simply add for
purposes of this Act the inclusion of subsection (d) hospitals in
Puerto Rico, thus putting Puerto Rico hospitals on parity with those in
the States.
This inadvertent exclusion significantly hampers Puerto Rico's
hospitals' efforts to adopt EHR systems putting at stake a vital
modernization initiative. Unfortunately, only Puerto Rico was excluded
from the program by a drafting error.
Bi-partisan legislation known as the Puerto Rico Hospital HITECH
Amendments Act of 2015 to correct this oversight has been introduced in
the Senate, S. 1602, by Senators Menendez, Nelson and Rubio. Both the
Puerto Rico Hospital Association and the American Hospital Association
(AHA) endorsed this fix.
ISSUE #3: MEDICARE WAGE INDEX LACKS SSI PROXY
As you know the Wage Index takes into consideration a number of factors
when determining Medicare reimbursements. Unfortunately, the Wage Index
includes SSI as a factor in the formula even though U.S. Citizens
living in Puerto Rico are ineligible for SSI. The failure of the CMS to
substitute a proxy for SSI has penalized Puerto Rico far more than
Congress intended. We have attempted to work with CMS over the past few
years to identify and put into use a proxy for SSI in the Wage Index
for Puerto Rico but so far they have not taken the necessary step. When
combined with the disparate treatment under the Medicare PPS for Puerto
Rico this omission results in our hospitals receiving approximately 52%
of the reimbursement received by an identical Stateside hospital. CMS
has the administrative authority to make this change and we ask your
help in convincing them to act promptly.
ISSUE #4: THE MEDICAID CLIFF IN 2017
Another issue needing Congress' attention will cause a further shock to
Puerto Rico's health care system in the coming 2 years is the impending
``Medicaid Cliff'' involving an allocation of federal funds included in
the Affordable Care Act to increase the amount of the Federal funds for
matching against local funds to be used for Medicaid reimbursement.
This allocation is expected to be exhausted in just 2 years; 2017. Once
these funds are exhausted, Federal matching funds will drop
significantly due to the permanent statutory cap on Federal Medicaid
funding for Puerto Rico.
We also noted during the hearing the comments of one witness who
justified disparate treatment of Puerto Rico under Medicare with a two
pointed argument. First, it was said that health care funding levels
should not be considered as part of an economic development strategy.
Second, it was noted while workers in Puerto Rico pay taxes into the
Medicare system, they do not all typically pay Federal income tax. We
respond by noting that Congress has made it a policy priority to ensure
access for quality health care for all Americans regardless of whether
they are rich or poor. If U.S. Citizens do not believe they can obtain
quality health care in Puerto Rico, they then as U.S. Citizens have the
right to find that quality health care elsewhere within the United
States.
We do not ask for a bailout and never have. However, we ask for fair
treatment and note that equal treatment for all American Citizens is a
guiding principle for our great Nation. Parity is a fair request.
Mr. Chairman, Ranking Member Wyden and members of the Finance
Committee, our health care system is in a crisis. We have offered a set
of priorities and ask to work with you to ensure fair treatment for all
U.S. Citizens when it comes to health care. These priorities deserve
prompt action and are solutions within your Committee's jurisdiction
and we look forward to working with you.
Thank you for the opportunity to share our statement with you.
______
Puerto Rico Manufacturers Association
Carlos Rivera Velez, Ph.D., PE, President
For the Hearing Record
of the
Finance Committee
U.S. Senate
Hearing on
``Financial and Economic Challenges in Puerto Rico''
September 29, 2015
Contact:
Carlos Rivera Velez, Ph.D., PE
President
Puerto Rico Manufacturers Association
P.O. Box 195477
San Juan, PR 00919
E-mail: [email protected]
Tel: (787) 641-4455
Fax: (787) 641-2535
Mr. Chairman, Ranking Member Wyden, and distinguished Members of the
Finance Committee, it is my pleasure to represent the Puerto Rico
Manufacturers Association as its elected Chairman and share our
statement with you. The PRMA is one of Puerto Rico's oldest business
organizations organized in 1928 and representing 1,200 companies in
America's largest and most important Territory. Our Members make up the
primary private sector source of local jobs.
In particular, we are concerned about the negative impact proposals
similar to last Congress' H.R. 1, or the Administration's 2016 Treasury
Budget proposal would have on Puerto Rico's manufacturing sector. We
believe these approaches would discourage investment in Puerto Rico and
accelerate the current loss of manufacturing operations and jobs.
We appreciate the special attention you are giving to the Commonwealth
of Puerto Rico in today's hearing on the current fiscal and economic
crisis facing our island of 3.56 million U.S. Citizens. We also urge
you to consider the importance of the private sector in discussions
regarding the long term resolution of today's fiscal crisis. It's
estimated that our manufacturing sector provides one-third of local tax
revenues and our high wage employees contribute even more in individual
income taxes.
Puerto Rico is unique because it is the most manufacturing dependent
jurisdiction in the United States with one-half of its GDP generated by
our sector. This is the result of the historical approach taken by the
Congress to utilize Federal tax policy as a tool to address Puerto
Rico's high poverty levels and create good paying job opportunities for
our U.S. Citizens. This approach has resulted in the creation of a
unique manufacturing ecosystem generating 320,000 direct and indirect
jobs locally. We also note that Puerto Rico and stateside interests are
directly aligned as partners in the U.S. supply and values chain and
some economists suggest 80,000 mainland jobs are generated as a result
of this relationship. The bottom line is that manufacturing jobs in
Puerto Rico are U.S. jobs.
We've previously noted in the information we've shared with the Finance
Committee that Puerto Rico was once heavily dependent on low wage
agricultural employment. Congress then began in the 1920's to provide
Federal tax policy designed to incentivize U.S. companies to set up
operations in our U.S. Territory and provide higher wage employment.
This effort continued with Operation Bootstrap in the 1950s and Section
936 created in the 1970s. When Section 936 was phased out by Congress,
most U.S. Corporate subsidiaries converted to Controlled Foreign
Corporations and today Puerto Rico is the only location in the world
where controlled foreign corporations (CFCs) employ U.S. Citizens and
operate under U.S. laws.
Frankly, the Congress' experiment in targeted tax policy was successful
and today our manufacturing sector has grown to include knowledge-based
industries such as life sciences, medical device and electronics
manufacturing. These sectors require a highly skilled workforce and
manufacturing today provides a typical wage at twice our island's per
capita income of $19,500.
We also note that Puerto Rico's manufacturing sector is an example of
21st Century advances and we are working to develop new innovations
through research in closed loop development areas as well. In fact,
global statistics today identify Puerto Rico's life sciences sector as
the fifth largest in the world.
We now face many challenges in the competitive global economy. We
compete with the lower costs of doing business offered by our regional
neighbors, such as Costa Rica and the Dominican Republic, for
investment. We are subject to the Jones Act and all other U.S. business
mandates and laws while our energy costs are three times the U.S.
average. Federal tax policy has provided us with a counter to these
challenges and we note that changes to the Federal tax code could
result in significant consequences for the long term vitality of Puerto
Rico's manufacturing sector.
We continue to be concerned as talented and well-educated young people
and their families move away from Puerto Rico to pursue better economic
opportunities. Almost 10 percent of our population has left the island
in the past 10 years, and for the first time in our history we have
seen a significant net reduction in population as a result of this
``brain drain.''
As you consider how Congress can best address the current fiscal and
economic crisis, we ask that you do no harm to our vital manufacturing
ecosystem upon which Puerto Rico has become so economically dependent
upon. We appreciate the leadership of the Chairman and Ranking Member
to foster discussion of a bipartisan strategy and approach to reform of
the Federal tax code, especially the international tax rules which
impact our manufacturing sector in Puerto Rico.
We are also grateful for the attention of the Committee and an
invitation by the Finance Committee's International Tax Working Group
to make a presentation and discuss how best to position Puerto Rico in
the future. We continue to urge that the Committee take a position of
``doing no harm'' by not putting Puerto Rico at a disadvantage compared
to foreign jurisdictions.
We continue to be concerned about the consequences which our
manufacturing base could suffer if approaches similar to last Congress'
H.R. 1, or the Administration's 2016 Treasury Budget proposal were to
become reality. Frankly, we believe their approaches would discourage
investment in Puerto Rico and cause a gradual loss of manufacturing
operations and its job base over time. Should Congress decide that you
wish to pursue a similar approach to these two proposals we ask for a
significant, competitive differential in treatment of CFCs employing
U.S. Citizens in Puerto Rico versus controlled foreign corporations
operating in foreign jurisdictions.
No one doubts the recognition by the Finance Committee of the
importance of the manufacturing sector and its role in resolving Puerto
Rico's current fiscal crisis. We seek to work with you in developing an
approach to tax reform that results in policy that is pro-growth and
best positions Puerto Rico manufacturing in a competitive position in
today's global economy.
We also recognize that tax policy is just one key tool that your
Committee may consider to provide short as well as long term solutions
to our current fiscal and economic challenges. We look forward to
collaborating with you to find positive solutions for the challenges
faced by Puerto Rico today.
Again, thank you for the opportunity to provide our statement towards
today's hearing.
Carlos Rivera-Velez, Ph.D.
______
Statement of Miriam J. Ramirez, M.D.
Former Puerto Rico State Senator
[email protected] THE MJR REPORT
C: 787-567-1333
TESTIMONY FOR THE RECORD
SENATE FINANCE COMMITTEE
HEARINGS ON PUERTO RICO--SEPTEMBER 29, 2015
Honorable Senator Hatch, Senator Wyden, and members of the committee:
My name is Miriam Ramirez, I am a medical doctor, former Senator of the
New Progressive Party in Puerto Rico, and founder of a non-partisan
grassroots movement, called Puerto Ricans in Civic Action, which
gathered more than 350,000 individually signed petitions for statehood
and delivered them to Congress in the 1980s.
In my testimony at a House Hearing, on May 22, 1986, when Congressman
Morris Udall was the Chairman, I identified our lack of full rights as
U.S. citizens as the fundamental reason for the poor economic
performance of Puerto Rico, compared to other states. Today I want to
focus my testimony on the negative consequences of the federal tax
regime that has kept Puerto Rico labeled as a ``foreign'' jurisdiction
for almost a century.
In 1996 after Section 936 was eliminated, the former Section 936 firms
used Puerto Rico's ``foreign'' tax status and converted to Controlled
Foreign Corporations (CFCs). However, the CFCs in Puerto Rico are not
obligated to create local jobs or to generate any real investments in
order to benefit from the federal tax deferral. Using transfer pricing
abuses, the CFCs in the Island are causing the U.S. Treasury to lose
billions in federal tax revenue without creating jobs and investment in
the Island. The Senate Permanent Subcommittee on Investigations
identified one company in Puerto Rico that benefitted from a tax
savings of $22 million per employee, but yet only generated 177 jobs.
Also, to exploit this special federal tax status, the supposed pro-
statehood administration of former Governor Fortuno adopted two laws in
2012. Act 20 and Act 22 entice millionaires who reside in the 50 states
to locate to Puerto Rico by taxing their corporate profits from
exported services at a flat 4% rate and allowing those profits to be
paid out to these owners free of Puerto Rico income tax. Thus, the CFC
regime in Puerto Rico has become a significant drain of tax revenue and
a formidable opponent of statehood for Puerto Rico. Keeping Puerto Rico
as a ``foreign'' country inside the United States undermines the U.S.
federal tax base and creates unfair competition against local
communities in the 50 states. But the truth is that Puerto Rio is
governed by the CFC REGIME and the economic power of super billionaires
who since Law 22 of 2012 can relocate to Puerto Rico without paying
state or federal taxes.
But that is not the only damage they do . . . they have the most
powerful Public Relations army in the World, ready to lobby and fight
against anything that endangers this outrageous tax evasion scam to the
U.S. and the U.S. Taxpayer. Their worst concern is that Puerto Rico may
become a state of the Union. They are ruthless in their attacks when
they feel threatened with that possibility and will destroy or attempt
to destroy anything or anyone that even remotely attempts to help the
U.S. citizens of Puerto Rico gain full citizen rights. The CFCs are
effectively in control of our major political parties and their
governing agenda. Whenever the people put pressure for a process of
self determination, millions of dollars appear out of nowhere to
campaign against statehood, since it will be the death knoll for the
CFC scam.
It is for this reason that it is impossible to fight against the CFCs
if we want to achieve statehood in Puerto Rico. We have to make the
CFCs part of the political status solution. Mr. Chairman, I propose
that a statehood bill, with the defined terms of admission and a 20
year transition period for maintaining the CFC's in Puerto Rico, come
out of your Committee. There is a precedent for previous statehood
bills to include temporary tax benefits, and a transition period was
included in the Senate Bill 712 in 1990.
Thank you very much.
Miriam J. Ramirez
______
Statement of Jorge A. Rivera
11016 Lakeside Vista Dr., Riverview, FL 33569
813-951-6117/[email protected]
http://puertorico51ststate.us/ http://www.VetsIDcardservices.com
September 28, 2015
The Honorable Orrin G. Hatch
Chairman
Committee on Finance
United States Senate
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Senator Hatch:
Tuesday, September 29, 2015 you will hear from Puerto Rico politicians
and others, their reasoning as to why Puerto Rico is in the fiscal
condition it is. These will be some excuses and even some lies just to
justify their point of view.
You, as well as they, do know what the basic problem for the island's
mismanagement is. Under the present Territorial status, the Government
of Puerto Rico has its hands tied behind its back and depends totally
on the U.S. Congress's whims to try to economically develop the island.
The Territorial status is the culprit. You, on October 1, 2013 and then
on December of the same year did confirm your request for the parties,
PPD, PNP and the PIP to DEFINE their status definition and to send it
to the Department of Justice for verification that they were NON-
Territorial and Constitutional.
The Statehood and Independence definition, in reality are not an issue.
Everyone knows what they are and the only thing to negotiate would be
the transitional period to whichever status the people preferred. Now,
the PPD (the party today in Government) definition is something else.
You see they want to have most of the Independence rights, things none
of the 50 States of the Union can now have, keep the U.S. citizenship,
and still stay within the umbrella of the U.S. Constitution. They call
it the ``Enhanced Commonwealth.''
They know it is unconstitutional but, they also know that if they take
out the U.S. Citizenship from their definition, the party will loose
over 50% of its members to Statehood.
For this simple reason YOU WILL NEVER see a definition of the Non-
Territorial and Constitutional Commonwealth (ELA) coming from the
Popular Democratic Party of Puerto Rico (PPD).
This is what is holding Puerto Rico back. I know that you will do
whatever the people want, or so you have said, but, how do we break
this standstill because the PPD will never admit to a Commonwealth
without the U.S. Citizenship. You must remember they control 48% of the
electorate.
Jorge A Rivera
Riverview, FL
PD: to see their nonofficial definitions of their Enhanced Commonwealth
please visit my page, http://puertorico51ststate.us/docs-page.html.
Specifically read ``La Nueva Tesis,'' ``Pacto de Asociacion,'' ``Pacto
de Futuro,'' and ``Definicion del ELA Soberano.'' And yes these are
definitions of a Free Association only that they have added the U.S.
Citizenship and the protection of the Constitution.
[all]