An Obama administration proposal aimed at stemming Puerto Rico’s spiraling fiscal crisis received a lukewarm reception before a Senate panel Thursday, with some Republicans asking for better data on the problem and some Democrats calling on the administration to show more ingenuity and urgency to solve it.
Speaking at a Senate hearing on the growing effect of the commonwealth’s economic crunch, a top Treasury Department official warned that the island’s debt crisis is morphing into a humanitarian one.
“In the very near future, Puerto Rico will face impossible choices among providing essential public services, delivering promised pension benefits and paying its debt,” Antonio Weiss, the Treasury Department’s point person on Puerto Rico, told the Senate Committee on Energy and Natural Resources on Thursday.
Weiss outlined a series of actions that the administration wanted Congress to consider to help Puerto Rico, which has been suffering through a decade-long recession and is buried under $73 billion in debt. He said lawmakers should create a new class of bankruptcy only available to U.S. territories that would allow Puerto Rico to restructure all of its debt. The plan would also broaden the availability of federal tax breaks for island residents, including the earned-income tax credit, widen access to Medicaid and create a mechanism for congressional oversight of the island’s troubled finances.
With the commonwealth on course to run out of cash before the end of the year, “inaction is not an option,” Weiss said.
Sen. Lisa Murkowski (RAlaska), the committee’s chairman, said that she was sympathetic to Puerto Rico’s plight but needs verifiable numbers about the island’s finances before she can help craft a solution. Puerto Rico has not produced an audited financial statement in two years and, she said, other financial reports have come up with widely varying numbers for the island’s debt-service costs.
Nonetheless, Murkowski said, “Puerto Rico’s short-term liquidity crunch is real, and action is required.” The island has been effectively shut out of the municipal bond market for two years, and even bonds that are nominally guaranteed under the commonwealth’s constitution are trading at no more than 70 percent of their original value.
Creditors, including hedge funds that bought Puerto Rican debt even after its economic problems were well known, have opposed extended bankruptcy protection to the island, saying that such a change would be akin to changing the rules in the middle of the game. If creditors knew that bankruptcy were an option, they said, they probably would not have lent money to the island.
Although the administration’s new bankruptcy proposal would apply only to U.S. territories, some investors oppose it because they are concerned that it could eventually be expanded to cash-strapped states to help them restructure debt that is guaranteed by their constitutions.
Others have argued that Puerto Rican officials, who in recent years have trimmed public payrolls, slashed pensions and raised taxes, should do even more to raise revenue and pay back the island’s creditors.
“There is a lot Puerto Rico can do to help itself even under existing authority,” said Jorge San Miguel, a lawyer who represents clients before Puerto Rico’s government-run electric utility.
Among the ideas being pushed by some of his clients are for Puerto Rico to further improve tax collections, privatize assets such as highways, centralize procurement, streamline permitting to encourage development, and trim taxpayer subsidies to the University of Puerto Rico.
But Sen. Bernie Sanders (I-Vt.), a candidate for the Democratic presidential nomination, and Sen. Elizabeth Warren (D-Mass.), were among those who urged the administration not to allow any solution that protects investors, who made risky bets with hopes of making hefty profits, at the expense of everyday Puerto Ricans.
“This is a human tragedy,” Sanders said, noting Puerto Rico’s rising poverty and declining labor force participation. “Wall Street should not be believing that you can get blood from a stone.”
Warren said Treasury officials should do all they can as quickly as they can to help Puerto Rico — much as they did to help the financial system during the 2008 Great Recession.
“Treasury needs to step up and do more,” she said, noting that Puerto Rico understands that “there is no bailout on the table. After all,” she added wryly, “they are no giant bank.”