At Senate Hearing, Calls for Urgent Action on Puerto Rico

by Sandra Lilley /  / Updated 

A day after the Treasury Department unveiled a plan that relies on Congress to take action on Puerto Rico, most of those testifying at a Senate hearing painted a picture of an economic emergency that required a more immediate, all-hands-on-deck strategy.

"Puerto Rico is running out of cash and will soon exhaust its emergency measures," said Puerto Rico governor Alejandro García Padilla at the Senate Committee on Energy and Natural Resources hearing Thursday. "Puerto Rico will have no choice but to default."

Despite severe cutbacks and tax increases, Puerto Rico is expected to run out of money in November; it faces a $72 billion-dollar debt. While a 1984 law allows states to restructure their municipalities' debts through Chapter 9 as was done in Detroit, Puerto Rico as a U.S. territory was shut out of the legislation. As he has done before, Puerto Rico's governor urged lawmakers to change that.

"We are not seeking a bailout - we ask for access to a legal framework to restructure our liability," García Padilla said at the hearing.

Puerto Rico's resident commissioner in Washington, Pedro Pierluisi, told the senators, "You cannot treat the people of Puerto Rico as second-class citizens and then be surprised when we don't have a first-class economy."

Unlike Puerto Rico's governor, Pierluisi advocates for statehood; he is a member of the rival New Progressive Party. Yet both men - as well as the Obama administration, a majority of economists and several legislators - insisted that the first step in helping the island is for Congress to amend the law on Chapter 9.

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This is opposed by some in the investment community who bought Puerto Rico bonds when they were at distressed prices and who do not want to see a restructuring that may impact their returns.

"Any resolution must keep faith with the debt investment community because those are the individuals and institutions along with future equity investors needed to support Puerto Rico's recovery," said Steven Fetter, founder of Regulation Unfettered, who said he was opposed to allowing Chapter 9 regarding Puerto Rico's beleaguered public energy utility, PREPA.

Vermont senator and Democratic presidential candidate Bernie Sanders took a jab at the investment community, saying funds had bought Puerto Rican bonds at 30 cents to 70 cents on the dollar and were getting 11 percent returns "while kids are going hungry."

"Wall Street should not be believing you can get blood from stone," said Sanders, who rattled off statistics such as the loss of 20 percent of Puerto Rico's jobs since 2006 and a childhood poverty rate of 56 percent. "That is a human tragedy," he said.

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But it wasn't just hedge funds and investors who were chided about Puerto Rico.

Massachusetts Democratic Sen. Elizabeth Warren took the Treasury Department to task for issuing a plan that she said required congressional action instead of more immediate executive action.

"The people of Puerto Rico are in a lousy position - they're crushed in debt they cannot repay," Warren said.

"I'll push on Congress, but frankly I think Treasury should step up and show more leadership," she said. Treasury should be as "creative" in helping Puerto Rico as when the "big banks called for help."

"Puerto Rico is not trying to protect its profitability, they just want to make sure famiies have a chance to build a future for themselves and their kids," she said.

Antonio Weiss, counselor to Treasury Secretary Jacob Lew, addressing Sen. Lisa Murkowski, R-Alaska, that the department "will leave no stone unturned" and that the administration recognizes it has a role to play along with Congress. Weiss said in his opening statement that without government action Puerto Rico's situation could become "a humanitarian crisis."

He also said many of the proposals advocated by Treasury - such as bringing Puerto Rico Medicaid payments to parity with the states and giving Puerto Rican families access to the Earned Income Tax Credit (EITC) can be done in a fiscally responsible way. Weiss added that bankruptcy "would cost nothing to the federal government."

Beneath fiscal woes, the status question

Puerto Rico's fiscal emergency cannot be seen without the context of its territorial status, a fact that was brought up several times during the hearing. Sen. Murkowski said that as the only member of the Senate who was born in a territory, she was paying "keen attention" to Puerto Rico. Alaska was a U.S. territory from 1912 to 1959.

Sen. Ron Wyden, D-OR, said resolving the issue of Puerto Rico's territorial status was an underlying question he felt strongly about. He said the current status quo puts Puerto Rico "on a glidepath" for continued fiscal problems.

Wyden asked Puerto Rican economist Sergio Marxuach, of the non-partisan Center for a New Economy, how Puerto Rico's status as a territory affected the island's finances. Leaving politics aside, Marxuach said, "it certainly has harmed the economy." Marxuach said having limited fiscal tools without being a state or a sovereign country was "an almost unsolvable problem."

This was echoed by economist Joseph Stiglitz at a discussion on Puerto Rico's debt held Wednesday night at Columbia University in New York.

"Another problem of being a colony - is that you don't get to pass your own economic framework," Stiglitz said.

But Puerto Rico's governor, who favors the current commonweath status, said to Wyden that fiscal issues are not always about status, such as the problems in Detroit.

And in his opening statement, García Padilla stressed that time is running out.

"Inaction is not an option," he said.

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