Dear Members of Congress:
Yesterday the House Subcommittee on Insular Affairs of the Committee on Natural Resources held a hearing described as “The Status of the Puerto Rico Electric Power Authority (PREPA) Restructuring Support Agreement.” Given the fact that Governor Rosselló and two members of the Financial Oversight and Management Board testified before the Committee, it is apparent that the gravity of topics discussed is far greater than the hearing’s rather technical title would suggest. National Taxpayers Union’s (NTU) supporters across the country, including those residing in the Commonwealth of Puerto Rico, would agree. This hearing is the latest but not the only reminder of the need for Congress to evaluate conditions since passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), and urgently undertake new steps to help secure the Commonwealth’s economic future.
As many of you who were serving in the previous Congress may recall, NTU has been actively involved in the development of a legislative response to aid Puerto Rico’s recovery, including PROMESA. We have offered advice, on a granular level, concerning tax, budget, regulatory, and economic policy affecting the Commonwealth (and by extension the rest of the United States). We urge you to access our documents that include a letter to the Committee on Natural Resources, a Legislative Memorandum on Puerto Rico’s finances, a letter to Congress on the need for comprehensive reforms, as well as our comments sent to the Task Force on Economic Growth in Puerto Rico.
Yesterday’s Committee proceedings, while ostensibly focused on a financial restructuring pact between the Commonwealth’s energy agency and its investors, are nonetheless emblematic of several larger problems confronting leaders on the mainland and the island. PROMESA has now been in place for roughly nine months, while the Financial Oversight Board created by the legislation has been operating for roughly six months. Although these time periods may not be sufficient to draw full, final conclusions about the impact of PROMESA, there is considerable evidence which, in NTU’s opinion, can inform several early, important observations.
1) Realistic Budgeting Remains a Challenge. Several witnesses yesterday testified about improvements in the quality of information inputs and assumptions in the Governor’s revised fiscal plan to which the Oversight Board agreed. Yet, several key decision points remain this year that could adversely affect the viability of its provisions. For one, the Board conditioned its approval of the Governor’s blueprint upon reaching agreement (by April 30) on pension spending reductions, cuts to holiday bonuses for government employees, and worker furloughs. The latter two steps would take place unless the Governor developed alternatives achieving an improvement in cash position – thus creating a “fiscal cliff” dynamic for the upcoming annual budget with which federal lawmakers should be familiar. Although pension reforms would also need to be outlined, the actual 10 percent reduction would not have to be reached until 2020 – despite the fact that the Commonwealth’s three largest retirement funds could be depleted entirely in Fiscal Year 2018. These provisos could, absent constant vigilance, result in budgetary gimmicks that serve neither Puerto Rico’s taxpayers nor the Commonwealth’s recovery. Congress’s moral authority on the topic of budget process integrity is not pristine. Nonetheless, federal policy can, and should, offer the most helpful experiential guidance possible to the Commonwealth.
2) PROMESA’s Debt Management Provisions Are Not Functioning as Intended. Immediately at issue in yesterday’s hearing was whether a painstakingly constructed agreement between PREPA and a majority of its creditors will be ratified in its current form, or whether the Governor’s wish to renegotiate the terms (with the Oversight Board’s blessing) will prevail. Is this part of a pattern that ultimately reflects on PROMESA and undermines the good intentions of those who worked so hard for its passage? NTU would urge Congress to concentrate on this question now. In our comments to the Economic Growth Task Force last year, we noted that the final version of PROMESA was “admirably strengthened to ensure that Puerto Rico’s unsustainable debts be resolved and restructured equitably.” Section 201 of the legislation specifically stipulates that any fiscal plan “respect the lawful priorities or lawful liens, as may be applicable in the constitution, other laws, or agreements of a covered territory.” Yet, the Oversight Board has just approved a financial blueprint which, in the next two years alone, would yield just one-fourth of the resources necessary to service “lawful” debts, and which reprioritizes the “lawful” order of payment. Furthermore, as Ike Brannon of the Cato Institute recently noted, the Commonwealth’s plan undermines government pension reform in another way, by “defining almost its entire budget as ‘essential services,’ making it difficult for any restructuring to accomplish much of anything except to reduce bond payments.” This would be precisely the situation NTU warned about in advocating against a Chapter 9-style bankruptcy procedure for Puerto Rico; as we have documented, settlements under Chapter 9 for U.S. localities have increasingly resorted to artifices that avoid creating useful pressure for pension reforms and instead burden taxpayers.
3) Deeds Must Match Words on Growing the Commonwealth’s Economy. Virtually all witnesses at yesterday’s hearing expressed the need to restore long-term prosperity to Puerto Rico and its residents. Still, few concrete actions have been taken on the island or the mainland toward this end. NTU has offered a plethora of options that officials in Washington and San Juan could pursue, many of which already have a bipartisan pedigree in legislative language. Just a few of our federal-level recommendations include:
- Prudent adjustments to federal tax policy toward the Commonwealth, by embracing changes that most closely resemble the system-wide tax reforms currently under contemplation (e.g., lower rates, territoriality, and reduced penalties on dividend earnings);
- Solid relief from Jones Act restrictions (offered previously by Rep. Pierluisi), extra steps to address the regional disparity created by U.S. wage laws, and legislation expanding the utility of Public-Private Partnerships; and
- Enterprise zone legislation proposed in a previous Congress by Speaker Ryan and Rep. Fortuño.
Other organizations and individuals will likely espouse additional or opposing opinions to NTU’s, but economic growth should be a goal that unites each and every stakeholder in this discussion. Taxpayers may have disparate views on the most equitable tax laws, government funding recipients may have differences over budget priorities, citizens may express a range of feelings on the island’s status, and creditors may be struggling over whose claim should be paid first. But, all would benefit greatly from a vibrant economy that increases employment opportunities, boosts family income, revitalizes business activity, creates lasting financial resilience, and restores investor confidence in Puerto Rico’s future.
When NTU engaged in PROMESA’s development, we explicitly reiterated that the legislation was not a taxpayer bailout; indeed, to the extent it succeeded in stabilizing and expanding the Commonwealth’s economy, the law could help to prevent such a calamity. Bipartisan U.S. government leadership is needed now to take further measures. NTU will be undertaking additional efforts to facilitate and expedite those measures. Accordingly, our staff and supporters welcome the opportunity to work with all of you in coming days.
Pete Sepp, President