The Financial Oversight and Management Board, created through a 2016 law signed by President Barack Obama, is pushing steep reductions to public spending in Puerto Rico to pay off the more than $70 billion it owes bondholders. Puerto Rico’s annual general fund budget is approximately $9 billion.
Tight budgets have already forced Puerto Rico to reduce city budgets, close about 300 schools, and more than double tuition at its public universities as the economy nears its 13th consecutive year in recession.
Grijalva and other critics have attacked the fiscal board’s plans as “austerity” measures that will only exacerbate Puerto Rico’s economic malaise and lead residents to flee the island, while the board says Puerto Rico must pay off its debts to encourage long-term investment.
“The control board, with some of the proposed cuts, has aggravated the recovery and made it more difficult,” said Grijalva, whose Natural Resources committee oversees issues related to Puerto Rican affairs. “It’s our responsibility as a committee — now as a majority — to treat the citizens of Puerto Rico as coequals.”
Grijalva said he will push for the committee to visit Puerto Rico and conduct a “fact-finding” mission about the board and economic recovery, which could be followed by oversight hearings.
In a statement, a spokesman for the fiscal board pointed to a letter it sent last month to Democratic members of Congress that cited projections of a ballooning Puerto Rican deficit in the long-term.
“The Commonwealth must implement additional structural reforms, as well as use the shorter-term surpluses to manage those longer-term deficits,” wrote José B. Carrión III, chairman of the board. “Doing so would enable the Commonwealth to reach fiscal balance, improve the Island’s competitiveness, and increase the resources available for managing the Commonwealth’s long-term liabilities and, critically, reinvest in the people of Puerto Rico.”
The letter by Carrión also strongly denies that the board has exacerbated Puerto Rico’s economic woes, instead blaming the local government for its alleged refusal to implement the board’s proposed cuts.
The question of how to restructure Puerto Rico’s debt crisis has become increasingly urgent as the island tries to recuperate from Hurricane Maria, which killed thousands of people and caused an estimated $43 billion of dollars in damages.
Since the hurricane, the fiscal board has increased its estimates of what Puerto Rico should pay its bondholders, since the U.S. government spent millions of dollars on the island to help it recover from the storm, according to Democrats' letter. Puerto Rico’s state government has feuded with the board’s impositions but has little recourse, because it does not choose who is on it.
The White House selects the members of the board off a list created by members of Congress, with each party able to select its own slate. Puerto Rico, a commonwealth of the United States, has a delegate in Congress, but that delegate does not have voting power.
On Thursday, Democratic lawmakers also sent a letter to the fiscal board demanding a full accounting of its proposals. Their push marks a turn in the Democratic Party away from the Obama administration’s support for the board’s policies of cutting social services to heal its financial wounds.
The letter, organized by the Congressional Progressive Caucus, was signed by three leading contenders for the 2020 presidential nomination — Sens. Bernie Sanders (I-Vt.), Elizabeth Warren (D-Mass.) and Kirsten Gillibrand (D-N.Y.) — as well as more than two dozen House Democrats.
“The financial control board is imposing massive austerity by people who nobody elected,” said Federico de Jesús, principal of FDJ Solutions, a consulting firm, and the former deputy director of the Puerto Rico governor’s office in Washington. “House Democrats should be looking into whether the debt restructuring deals are sustainable and can be paid without inflicting more harm than good.”
Puerto Rico’s economy entered a tailspin from which it never recovered in the mid-2000s, in part because a special tax credit that had boosted manufacturing on the island was phased out. By 2015, Puerto Rico’s governor had declared the island’s debt “not payable,” but Puerto Rico was barred from filing for Chapter 9 bankruptcy under federal law.
Congress in 2016 passed Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which created the board and tasked it with restructuring Puerto Rico’s debt.
The latest negotiation proposed by the fiscal board would require Puerto Rico to make hundreds of millions in payments a year for the next four decades, said Héctor R. Cordero-Guzmán, a professor at Baruch College of the City University of New York who has also worked at the Center for Puerto Rican Studies at Hunter College.
The board and Puerto Rico’s governor have feuded over the board’s authority, as the government has ignored some of its mandates, prompting court battles. Puerto Rican Gov. Ricardo Rosselló, approaching a reelection bid in 2020, recently approved millions in holiday bonuses for government employees earlier this month over the objections of the fiscal oversight board.
Puerto Rico’s economy shrank by 8 percent in the year that ended this June, according to the Wall Street Journal, and the unemployment rate remains more than three times that of the mainland United States.
“Economic experts have warned this approach is likely to exacerbate a downward economic spiral and population loss that has afflicted Puerto Rico for over a decade,” the letter from Democratic lawmakers states. “We strongly urge you to adjust your current policy approach.”
The letter also demands an “accounting and a justification” for the budget the board has allocated for 2018 to 2023. In March, a federal judge overseeing Puerto Rico’s bankruptcy case approved nearly $50 million in legal fees for the board. Proskauer Rose filed for $15.9 million, and O’Melveny & Myers did so for more than $16 million. The costs of the legal fees are paid for by island residents.
“The amount of money the board has been paying for lawyers is a scandal, and people in Puerto Rico are very mad about it,” said Ramón Luis Nieves, a former state senator in Puerto Rico who has been critical of the board. “We know they need real counsel, but the rates are outrageous.”
The letter also questions whether fiscal board members have conflicting allegiances, noting that two of them have worked for Santander Bank, which helped underwrite Puerto Rico’s mounting debt obligations. That has raised the prospect that the same people deciding how much bondholders get paid back stand to benefit financially.
Grijalva said he will use the committee’s authority, potentially including its subpoena powers, to investigate potential conflicts of interest on the fiscal board.