Puerto Rico Officials to Testify on Debt Crisis Before Senate Panel
Puerto Rican officials will appear before a skeptical United States Senate panel on Tuesday to explain why the island may need federal assistance by the end of the year and how lawmakers preoccupied with the federal debt might help without setting an unwelcome precedent.
Officials on the island recently warned that their government would, in effect, run out of cash in November, even though it owes big payments to creditors in December and early January.
Puerto Rico has not issued audited financial statements for the last two years, and some members of the Senate Finance Committee say that before the federal government commits funds to help tide it over its crisis, they need to know more about the federal money the island has already received and how it was used.
“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,” said Senator Orrin G. Hatch, Republican of Utah, who is chairman of the finance committee.
Mr. Hatch said that Puerto Rico had suffered for years with high unemployment and a shrinking economy, and had used borrowed money to provide some semblance of normalcy for the island’s residents. In light of the outcome, he said, it made sense to consider whether Puerto Rico might hold lessons for other American jurisdictions.
“Despite some recent declines, our federal deficits under current law will soon rise again,” he said. “Federal debt will grow, as it has in Puerto Rico, to beyond 100 percent of the size of our economy.”
Mr. Hatch said it was not hard to imagine Americans on the mainland struggling with “the devastating effects from unsustainable debt that are now being felt by Americans living and trying to work in Puerto Rico.”
The hearing will be the first on Puerto Rico’s troubles since Gov. Alejandro García Padilla announced in June that the debt was “unpayable” and called for a negotiated moratorium.
Since then, a working group of top Puerto Rican officials has been drafting a five-year plan that is meant to restore economic growth on the island and provide the means for making debt payments in the future. The working group has called for reductions in Puerto Rico’s debt payments while reforms are being carried out. But how that would be accomplished was unclear.
Last week, Puerto Rico’s Government Development Bank released a statement saying it hoped to negotiate a broad debt exchange, in which creditors would hand in the shaky bonds they now hold and receive new, more reliable bonds in return.
The bank’s summary did not reveal how large the difference in value between the two groups of bonds was expected to be, but it said that the “transaction will be structured to take into account the priorities of the debt that creditors hold.”
That seemed to suggest that Puerto Rico would follow its existing laws for deciding which types of bonds would get priority. The island has issued many different kinds of bonds, and some investors have worried that in the process of restructuring the debt, Puerto Rico might change some of the existing priorities.
Puerto Rico also sought last week to allay investors’ concerns that it might have miscalculated the total concessions it would seek from investors when the negotiations begin in mid-October.
On Friday, the working group issued a statement saying that it had reviewed a recent client presentation to that effect by Morgan Stanley, and found “a number of unstated, unsupported and erroneous assumptions that have significantly misled the market.”
The statement went on to list the places where its members believed Morgan Stanley had misinterpreted the five-year plan. Morgan Stanley declined to comment because the presentation was not intended for public circulation. One member of the working group, Melba Acosta Febo, will be among those to testify on Tuesday.
While concerns about the ranking of Puerto Rico’s creditors may surface at the hearing, the Senate Finance Committee’s primary jurisdiction is over fiscal affairs. Senator Hatch said he had already requested information on federal tax policies regarding Puerto Rico from the congressional Joint Committee on Taxation, as well as several reports from the Congressional Budget Office on health policy on the island.
In the last several months, Puerto Rico officials have complained that residents of the island pay just as much Medicare and Medicaid taxes as Americans on the mainland, but in return receive benefits that are less valuable. The senators seemed to be trying to determine what was causing the discrepancy.
For example, dedicated taxes do not pay for the entire Medicare and Medicaid programs; a significant portion of the cost is also covered by personal income taxes. Since Puerto Ricans who live on the island are not required to pay federal income taxes, the senators were trying to learn whether that explains why they have been getting the lesser benefits.
“Questions of funding and resource allocation are always difficult,” Mr. Hatch said. “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.”
In July, the senator wrote to the Treasury secretary, Jacob J. Lew, asking for information about federal tax programs that affect Puerto Rico. He also asked whether the Obama administration was considering any rule changes that could increase “the flow of transfers from the general fund of the Treasury to Puerto Rico” by executive order.
In his response, Mr. Lew did not cite any coming changes in federal transfers to Puerto Rico, focusing instead on the separate question of whether Puerto Rico should be permitted to use Chapter 9 municipal bankruptcy to solve its problems. The current federal bankruptcy code specifically excludes it, and Mr. Lew said he believed Puerto Rico needed some sort of tested legal framework.
A version of this article appears in print on September 29, 2015, on page B7 of the New York edition with the headline: Puerto Rico Officials to Testify on Debt Crisis Before Senate Panel . Order Reprints| Today's Paper|Subscribe
Puerto Rico’s Governor Alejandro Garcia Padilla in his office at La Fortaleza Palace in San Juan.
Puerto Rico Officials to Testify on Debt Crisis Before Senate Panel
Officials on the island recently warned that their government would, in effect, run out of cash in November, even though it owes big payments to creditors in December and early January.
Puerto Rico has not issued audited financial statements for the last two years, and some members of the Senate Finance Committee say that before the federal government commits funds to help tide it over its crisis, they need to know more about the federal money the island has already received and how it was used.
“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,” said Senator Orrin G. Hatch, Republican of Utah, who is chairman of the finance committee.
Mr. Hatch said that Puerto Rico had suffered for years with high unemployment and a shrinking economy, and had used borrowed money to provide some semblance of normalcy for the island’s residents. In light of the outcome, he said, it made sense to consider whether Puerto Rico might hold lessons for other American jurisdictions.
“Despite some recent declines, our federal deficits under current law will soon rise again,” he said. “Federal debt will grow, as it has in Puerto Rico, to beyond 100 percent of the size of our economy.”
Mr. Hatch said it was not hard to imagine Americans on the mainland struggling with “the devastating effects from unsustainable debt that are now being felt by Americans living and trying to work in Puerto Rico.”
The hearing will be the first on Puerto Rico’s troubles since Gov. Alejandro García Padilla announced in June that the debt was “unpayable” and called for a negotiated moratorium.
Since then, a working group of top Puerto Rican officials has been drafting a five-year plan that is meant to restore economic growth on the island and provide the means for making debt payments in the future. The working group has called for reductions in Puerto Rico’s debt payments while reforms are being carried out. But how that would be accomplished was unclear.
Last week, Puerto Rico’s Government Development Bank released a statement saying it hoped to negotiate a broad debt exchange, in which creditors would hand in the shaky bonds they now hold and receive new, more reliable bonds in return.
The bank’s summary did not reveal how large the difference in value between the two groups of bonds was expected to be, but it said that the “transaction will be structured to take into account the priorities of the debt that creditors hold.”
That seemed to suggest that Puerto Rico would follow its existing laws for deciding which types of bonds would get priority. The island has issued many different kinds of bonds, and some investors have worried that in the process of restructuring the debt, Puerto Rico might change some of the existing priorities.
Puerto Rico also sought last week to allay investors’ concerns that it might have miscalculated the total concessions it would seek from investors when the negotiations begin in mid-October.
On Friday, the working group issued a statement saying that it had reviewed a recent client presentation to that effect by Morgan Stanley, and found “a number of unstated, unsupported and erroneous assumptions that have significantly misled the market.”
The statement went on to list the places where its members believed Morgan Stanley had misinterpreted the five-year plan. Morgan Stanley declined to comment because the presentation was not intended for public circulation. One member of the working group, Melba Acosta Febo, will be among those to testify on Tuesday.
While concerns about the ranking of Puerto Rico’s creditors may surface at the hearing, the Senate Finance Committee’s primary jurisdiction is over fiscal affairs. Senator Hatch said he had already requested information on federal tax policies regarding Puerto Rico from the congressional Joint Committee on Taxation, as well as several reports from the Congressional Budget Office on health policy on the island.
In the last several months, Puerto Rico officials have complained that residents of the island pay just as much Medicare and Medicaid taxes as Americans on the mainland, but in return receive benefits that are less valuable. The senators seemed to be trying to determine what was causing the discrepancy.
For example, dedicated taxes do not pay for the entire Medicare and Medicaid programs; a significant portion of the cost is also covered by personal income taxes. Since Puerto Ricans who live on the island are not required to pay federal income taxes, the senators were trying to learn whether that explains why they have been getting the lesser benefits.
“Questions of funding and resource allocation are always difficult,” Mr. Hatch said. “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.”
In July, the senator wrote to the Treasury secretary, Jacob J. Lew, asking for information about federal tax programs that affect Puerto Rico. He also asked whether the Obama administration was considering any rule changes that could increase “the flow of transfers from the general fund of the Treasury to Puerto Rico” by executive order.
In his response, Mr. Lew did not cite any coming changes in federal transfers to Puerto Rico, focusing instead on the separate question of whether Puerto Rico should be permitted to use Chapter 9 municipal bankruptcy to solve its problems. The current federal bankruptcy code specifically excludes it, and Mr. Lew said he believed Puerto Rico needed some sort of tested legal framework.
A version of this article appears in print on September 29, 2015, on page B7 of the New York edition with the headline: Puerto Rico Officials to Testify on Debt Crisis Before Senate Panel . Order Reprints| Today's Paper|Subscribe
Puerto Rico Officials to Testify on Debt Crisis Before Senate Panel
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