Treasury Notes

 The Administration’s Roadmap for Puerto Rico: Diverse Voices Supporting a Balanced Proposal

By: Daniel Watson

Puerto Rico and the 3.5 million Americans living there are in the midst of an economic and fiscal crisis. The Administration has worked extensively with Puerto Rican officials to find solutions to the Commonwealth’s fiscal crisis, bringing the full capabilities of the Executive branch to bear in providing assistance to speed Puerto Rico’s economic recovery. But as Treasury Secretary Lew, NEC Director Zients, and HHS Secretary Burwell have made clear, only Congress has the authority to provide Puerto Rico with the necessary tools to address its near-term challenges and promote long-term growth.

The Administration released a legislative proposal to provide Puerto Rico with four key elements to help resolve this crisis:

  • Provide tools for Puerto Rico to comprehensively restructure its financial liabilities in a fair and orderly manner under the supervision of a federal bankruptcy court.

  • Enact strong fiscal oversight as a condition of the broader restructuring to help strengthen Puerto Rico’s fiscal governance and establish sufficient safeguards to ensure Puerto Rico adheres to its plan and fully implements its proposed reforms.

  • Provide a long-term solution to Puerto Rico’s historically inadequate Medicaid treatment by increasing access to coverage, raising the standard of care and preventing Medicaid’s unstable financing from worsening Puerto Rico’s fiscal crisis.

  • Reward work and support growth by providing Puerto Rico access to proven measures such as an Earned Income Tax Credit (EITC) that would create incentives for work and increase participation in the formal economy.  Congress could also consider providing Puerto Rico with an expanded Child Tax Credit (CTC).

The elements of this proposal have been described as crucial, bold, comprehensive, and balanced. We all have a stake in Puerto Rico’s future. Here’s a summary of what a wide range of publications, organizations and experts have been saying about the Administration’s plan: 


W‎all Street Journal Editorial: Saving Puerto Rico From Itself
"The Obama Administration wants Congress to pass a new chapter of bankruptcy law for territories. Under Article IV of the Constitution, Congress has “Power to dispose of and make all needful Rules and Regulations” for territories. The fear that giving Puerto Rico access to bankruptcy would set a precedent for states is misplaced because of constitutional language that enshrines the dual sovereignty of states. As a co-equal sovereign, the federal government can’t restructure state debt."
"To restore economic growth, the island needs a wholesale debt restructuring that provides certainty to investors and tax relief to Puerto Ricans. Bankruptcy with a tough review board offers a chance to impose fiscal discipline and prevent the need for more federal assistance in the future.‎" READ MORE 

Bloomberg Editorial: The Drastic Step to Save Puerto Rico

“What's crystal-clear is that Puerto Rico's debt, which outstrips that of any U.S. state except California and New York, is unsustainable. The commonwealth had its first mini-default in August. It may be unable to make a $354 million payment on securities that include its general obligation bonds on Dec. 1. It will have only about $5 billion available to pay $18 billion in principal and interest payments due from 2016 to 2020. Its negotiations with creditors over voluntary restructuring have hit a wall. And then there's this: One of Puerto Rico's pension funds faces a $30 billion shortfall, with only 0.7 percent of the assets it needs to pay benefits.”

“First and foremost, as the administration and members of the U.S. Federal Reserve have argued, Congress must extend to Puerto Rico the protections of U.S. bankruptcy law. That would enable orderly debt renegotiations with Puerto Rico's bondholders. Continued congressional inaction on this front is inexcusable and, given the growing influence of Puerto Rican voters, it also seems politically unwise.” READ MORE


Washington Post Editorial: A rescue plan for Puerto Rico

“There was long-overdue drama at a Capitol Hill hearing Thursday. We are referring, of course, to Treasury Department counselor Antonio Weiss’s testimony before the Senate Committee on Energy and Natural Resources, in which he warned of a looming ‘humanitarian crisis’ in the financially distressed commonwealth of Puerto Rico.”


“Mr. Weiss backed up his words with the administration’s most comprehensive policy proposals yet, the most important of which would require congressional action. Specifically, he advocated not only permitting Puerto Rico’s municipalities and public corporations to file for bankruptcy, which would affect about a third of its $73 billion debt, but also extending the bankruptcy option to the commonwealth government itself. He called for a permanent fix to the island’s Medicaid program, which faces crippling uncertainty because of limits on federal assistance unlike those of the 50 states. And to address its lagging labor force participation – a huge drag on economic growth – he proposed creating an Earned Income Tax Credit to encourage low-wage workers’ return to the job market.” READ MORE


New York Times Editorial: Save Puerto Rico Before It Goes Broke

“Puerto Rico’s government is on the verge of running out of money. A messy default is in nobody’s interest, which is why Congress ought to move swiftly to provide the American territory with a way to restructure its huge debt and revive its economy.

“The Obama administration last week offered the outline of a rescue plan to help the island and the 3.5 million American citizens who live there. The plan would impose new oversight on the island’s finances and expand access to government programs like Medicaid and the earned-income tax credit. Crucially, it asks Congress to change the law so that Puerto Rico’s territorial government and its municipalities can seek bankruptcy protection.” READ MORE


The Economist: For richer, for poorer

“The administration of Barack Obama has released a sensible plan to repair Puerto Rico’s finances. It would allow indebted government agencies, such as the island’s power company, to declare bankruptcy, and would provide for a restructuring of other debts and pension obligations. The federal government would also oversee the territory’s future public spending; as a sweetener, residents of the territory would gain full access to various anti-poverty schemes that are less generous there than on the mainland.
“If Congress spurns this plan, Puerto Rico’s government will be forced to raise taxes to crippling levels and slash spending to pay its bills. That would hit the island’s residents, 40% of whom live below the poverty line, hard. It is difficult to imagine the federal government ignoring the humanitarian crisis that would probably follow. In addition, emigration to the mainland would presumably jump, initiating a vicious cycle whereby a shrinking tax base leads to rising taxes and curtailed services, prompting further emigration. As American citizens, the migrants will be eligible for public support of various kinds on the mainland. There is no question, in other words, that America will end up bearing much of the cost of Puerto Rico’s past profligacy. The only question is how considered and efficient its assistance will be.” READ MORE


Orlando Sentinel: Give hand to Puerto Rico to ease crisis

“Buckling under a $73 billion debt load, Puerto Rico is on the brink of a financial collapse. Help from Congress is urgently needed for this U.S. territory and its 3.5 million U.S. citizens.

“While some of Puerto Rico's creditors are downplaying the severity of its fiscal crisis, U.S. Treasury Department officials aren't. Last week, one of them told a U.S. Senate panel, ‘In the very near future, Puerto Rico will face impossible choices among providing essential public services, delivering promised pension benefits and paying its debt.’" READ MORE


Larry Summers: Puerto Rico is a test of whether financial interests control Washington

“Last week, the Treasury Department announced their recommended approach to the profound economic and financial crisis engulfing Puerto Rico. It is big, bold and broadly appropriate, and it should be the basis for prompt congressional action. How things play out from here will be an important test of whether Washington is, as some allege, controlled by financial interests.”

“An extension of the bankruptcy code to cover Puerto Rico is the centerpiece of the Treasury’s proposal. The proposal makes the judgment that a comprehensive plan is necessary. The development of the plan it leaves to Puerto Rico, its creditors and the judiciary. The Treasury takes the bold and, I believe, appropriate step of proposing a bankruptcy procedure that can address all of Puerto Rico’s debt and pension issues, rather than excluding some debts from consideration altogether.

“It is hard to see why people of good will should oppose such a measure. Some argue that there has as yet been insufficient forensic accounting. At one level this is true. Before an actual restructuring in bankruptcy plan could be agreed upon, much more financial analysis is surely required. But enough is known now to leave no doubt: Puerto Rico’s debts cannot be serviced in full and so a bankruptcy procedure is required, even if its precise outcome cannot be predicted. One of the many virtues of a bankruptcy procedure is that it will provide the financial analysis that is required to move forward." READ MORE


Mayor Bill deBlasio & José Calderόn: Congress must act to save Puerto Rico

“President Obama took an important step when he made his support for the Puerto Rican people clear by announcing a series of recommendations for tackling this crisis. Acknowledging that severe austerity is not the way to solve this unsustainable debt, the president’s plan calls on Congress to give Puerto Rico the option to address this crisis through restructuring its debt; strengthening their Medicaid program; and allowing the island to access the Earned Income Tax Credit, a program that promotes economic growth while rewarding hard work.”

“The time has come for Congress to act. Supporting and protecting Puerto Rico during this time of need is a moral and practical obligation. If we don’t act, if we don’t rise to our responsibility to our fellow citizens — who have never hesitated in their commitment to the nation — we risk losing Puerto Rico as we know it. We risk leaving millions of Americans behind at the bottom of a mountain of debt, which will ultimately trigger a full-blown humanitarian crisis for Puerto Rico and our nation.” READ MORE


Peter Orszag: The Help That Puerto Rico Needs

“After years of irresponsible fiscal management, Puerto Rico has few good options to address its growing debt crisis. But in most tales of bad behavior, there comes a point where continued punishment for past mistakes becomes counterproductive. We're reaching that point on Puerto Rico, and the Barack Obama administration has put forward a sensible new approach.”

“The plan requires legislation, and in today's polarized Congress, that's a daunting prospect. But as former Treasury Secretary Tim Geithner once emphasized, in a crisis, "plan beats no plan." The administration has one. Its congressional opponents don't.”  READ MORE​


Jared Bernstein: A balanced plan for Puerto Rico

“These measures will help get Puerto Rico back to the starting line, but growth-oriented changes targeted at the island’s weak labor market are also essential. Right now, the labor force participation rate on the island is a low 40 percent (the comparable rate for the mainland is 62 percent). This rate may be biased down somewhat by workers in the “informal” sector, i.e., off the books, but even in the formal sector, wages are much lower than on the mainland. The Puerto Rico median wage is about $9.40, compared with more than $17 on the mainland. Consumer prices, as far as I can tell, are not much lower in Puerto Rico, so these differences are real. 

“That is why one of the best parts of the administration’s plan is to bring the federal earned-income tax credit to Puerto Rico. The EITC is both strongly pro-work and one of our most effective poverty reducers, lifting over 6 million people out of poverty in 2013. But while the program is popular with policymakers across party lines, it has never been in place in Puerto Rico.” READ MORE


Hispanic Federation: “[Puerto Rico’s] challengescannot be resolved without major federal action”

“What is abundantly clear is that the island’s $72 billion debt is unpayable and its accompanying economic challenges cannot be resolved without major federal action. We applaud President Obama and Secretary Lew for endorsing the need for federal action and investment for Puerto Rico and will work with all parties to demand Congress act on these and many other needed reforms.

“Specifically, the Administration’s plan wisely calls on Congress to enact broad bankruptcy protections and debt restructuring powers for Puerto Rico, which the island currently does not have the ability to undertake. More significantly, the administration is advocating for major reforms and investments to improve access to Medicaid, along with an economic growth plan that would enact an earned income tax credit and expand a child tax credit for island residents. If enacted, this will generate billions of dollars of economic activity for the Commonwealth.” READ MORE


AFSCME & UAW: “A Bold and Essential Plan”

Confronting this near desperate situation, the President and his economic team at the Department of the Treasury have stepped up to the plate with a bold and essential plan. Now, it’s time for the Congress to engage with the Administration and demonstrate that it still has the capacity to effectively govern and solve significant problems affecting the American people. Doing nothing is not an option.

“The Administration’s plan puts the people of Puerto Rico on more equal footing with the 50 states and the District of Columbia regarding federal health care programs and the Earned Income Tax Credit. It provides Puerto Rico with a rational process to restructure its debt and maintain fiscal discipline. The plan addresses the critical challenges facing the Puerto Rican people: health care and fiscal crises driven by an exceedingly weak economy and eroding standards of living.” READ MORE


SEIU: President Obama’s plan for Puerto Rico is“significant step forward”

“Creating parity between Puerto Rico and the 50 states in terms of access to federal healthcare funding and the Earned Income Tax Credit will both address a longstanding injustice and provide crucial economic stimulus. The plan’s call for an orderly restructuring of the commonwealth's debt properly balances the need for sustaining an economy that supports working people in Puerto Rico with the concerns of creditors.

“SEIU’s 29,000 members in Puerto Rico, as well as their families appreciate the president’s leadership in tackling the crisis in Puerto Rico. We urge Congress to exercise similar leadership and collaborate with the administration on a solution that offers stimulus, not austerity, and that respects the democratic rights of Puerto Ricans.” READ MORE


Center for American Progress: Let’s Not Reinvent the Wheel in Puerto Rico

“Tax policies such as the Earned Income Tax Credit and Child Tax Credit have a proven track record of raising incomes, reducing poverty rates, and putting people to work on the U.S. mainland, but they do not currently apply to Puerto Rico. Extending these programs to Americans living in Puerto Rico, an issue the Government Accountability Office has already studied, would not only address these problems but would also provide more incentives for work in the formal sector, where worker protections and tax collection are easier to enforce.

“Reigniting growth in Puerto Rico is crucial to raising incomes and ending the depression that has driven hundreds of thousands of Puerto Ricans to the mainland. Getting past the current debt crisis is the first and most important step, yet it should not be hard. The Obama administration’s plan spells out that the United States already has the legal and economic tools to handle this crisis and spark economic growth. All that is needed is for Congress to pass legislation that ensures Puerto Rico has access to the tools that the nation has already developed.” READ MORE


​​Richard Carrion: Puerto Rico’s path to recovery requires strong and decisive action

"I welcome the plan put forward by the Obama administration, as presented by Treasury Secretary Jack Lew and discussed in the U.S. Senate last week, and believe it has the necessary elements for Puerto Rico to begin its journey to recovery.  Problems that took decades to create cannot be solved in months, nor through small or isolated efforts.  A real solution will require local and federal action, support from the executive and legislative branches, backing from all political parties and the active participation of all sectors of Puerto Rican society."  READ MORE


New York Fed Economists: Some Options for Addressing Puerto Rico’s Fiscal Problems

"The reduction in the Island’s debt, and the burden of servicing that debt, should lessen the need for tax increases and other fiscal austerity measures that have been a drag on the economy. At the same time, an articulated framework to restructure the Island’s debt must be accompanied by a strong and credible fiscal program to ensure that the Commonwealth remains on a sustainable path, as our earlier report argued. Both components are vital parts of the complete package of structural reforms needed to make the Island a more competitive environment for investment and economic growth." READ MORE


Janet Murguia, NCLR: Our Fellow Americans in Puerto Rico Must Not Be Forgotten

“By law, Puerto Rico cannot avail itself of bankruptcy laws like other U.S. states and it cannot appeal to international financial institutions like other countries. Congress made these rules and it is now time for Congress to abide by them. Continuing to ignore and neglect this crisis is not an option, and Congress has a legal and moral obligation to its fellow citizens in Puerto Rico to stop shirking its responsibility.” READ MORE


Mark Zandi, Moody’s: If U.S. lawmakers do not act, the island may suffer an economic depression.

What U.S. lawmakers decide to do or not do to help Puerto Rico out of its fiscal bind in the coming weeks will determine the island’s economic path for years to come. Under almost any scenario, doing nothing will ensure that the territory’s decade-long recession will continue on through the remainder of this decade. Adopting the measures proposed by Treasury will break the economic downturn and provide a basis for a more stable fiscal situation. READ MORE


Desmond Lachman, AEI: Greek lessons for Puerto Rico

It is against this background that one has to applaud the U.S. Treasury for seeking an early and orderly restructuring of Puerto Rico's debt, which has now reached over 100 percent of the island's gross national product. To that end, the Treasury is proposing that Congress extend to U.S. territories, like Puerto Rico, Chapter 9 bankruptcy procedures that would allow the island to restructure its 18 different bond issues in an orderly way. The overriding objective of Treasury's proposal is to provide a legal framework for this to be done in an equitable and orderly manner and to avoid the legal free-for-all that would otherwise result and which, if Greece's experience offers any precedent, would be to the detriment of both the island and the creditors as a group. READ MORE

“Extending Chapter 9 would give Puerto Rico some relief and provide taxpayers some protection -- and Congress could write the law to provide more. Or it could opt for a financial control board, which could be a helpful way of combining reform and a debt restructuring. The main problem with the board idea is political: Congress may not be able to agree on something that ambitious. If it can't, it should at least allow the courts to relieve some of the debt burden. Creditors, not taxpayers, should take the hit for unwise loans.” READ MORE
Posted in:  Puerto Rico
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