Puerto Rico oversight sparks fears
Federal board seen as too powerful
Puerto Ricans have been calling upon Congress for months to step in and help alleviate the island’s debt crisis. Last week an initial answer emerged, when the House Natural Resources Committee passed the Puerto Rico Oversight, Management and Economic Stability Act. The PROMESA bill made it through the committee with a 29-10 vote, while sparking fierce opposition from some Puerto Rican advocates.
Among the bills more contentious provisions is the creation of a seven-member federal control board, with members largely appointed by Congress (where Puerto Rico has no vote) and the power to overrule the Puerto Rican government in the course of promoting economic growth and reform.
While the bill provides for debt restructuring — a major request from many Puerto Rican advocates — it does not grant the long-requested Chapter 9 bankruptcy powers.
Angelo Falcón, president of the National Institute for Latino Policy, said that while the legislation takes the important step of officially acknowledging Puerto Rico’s plight, it seems unlikely to resolve the long-term economic situation and has generation opposition to the control board.
“This bill is a positive step at a certain level. At least it shows some recognition of the problem,” Falcón told the Banner in a phone interview. “[However] there’s a big pushback on the whole control board idea. A lot of people are putting out positions in the Puerto Rican community totally opposing that aspect of it.”
On the web
PROMESA legislative summary: http://naturalresources.house.gov/uploadedfiles/promesa_packet_-_5-18.pdf
The legislation provides for debt-restructuring, a move many consider crucial if Puerto Rico is to emerge from its current financial crisis.
Deepak Lamba-Nieves is the research director of the San Juan-based Center for a New Economy, which has been analyzing Congress’ efforts around Puerto Rico’s debt and, since 1998, has been studying the territory’s economy. While Lamba-Nieves told the Banner that the bill fails overall to resolve the problem, one valuable step it did make, he said, was to apply restructuring to the entirety of the island’s debt, including general obligation bonds.
Legislators chose to create a new form of territory-specific debt restructuring — as opposed to extending Chapter 9 powers to the island — in order to prevent setting a precedent for insolvent states, according to the bill’s legislative summary. Some legislators, including Rep. Tom McClintock (R-CA), previously expressed concerns that granting Puerto Rico the power to declare bankruptcy would cause investors to assume that states may take a similar course, prompting them to consider state bonds as more risky.
In the bill, legislators appeared to alleviate bondholders’ fears that allowing Puerto Rico to restructure its debt would harm their interests. The legislative summary states that “any proposed plan for [debt] adjustment by the board must be in the ‘best interest of the creditors.’”
The PROMESA bill establishes a seven-member federal control board with sweeping authority over the island. With its mission of promoting balanced budgets and government reform, it has the ability to override territorial laws and regulations related to its financial plan as well as compel Puerto Rico’s government to sell assets, consolidate agencies and reduce workforces. The board also may prevent the government from carrying out legislation, contracts or rule in order to “promote financial stability and economic growth,” according to its legislative summary. Its members would be appointed by the president and Congress.
Lamba-Nieves said that although the Puerto Rican government’s attempts to handle the island’ finances have been troubled, it is still the entity democratically elected by residents. Instituting a non-elected board with ability to reject decisions by the government goes too far, he said.
“The Puerto Rican government for years has not had the best behavior in managing the fiscal aspects of the economy but that doesn’t mean the solution lies in imposing a board that would render them almost legally useless. The cost is too high for what we are being given in return, which is the possibility of debt restructuring,“ Lamba-Nieves said. “It gives it widespread power and domain of execution that is unjust and overstepping its bounds. It basically does away with the democratically-elected institutions of Puerto Rico.”
He said the board essentially represents a Congressional takeover the island’s main management, something that feels far too much like a reversion of Puerto Rico to colonial status.
“If that’s not a colony, then I don’t know what you would call a colony these days,” he said.
The control board will use its influence over Puerto Rico’s budget to acquire funds to support itself, according to the legislation’s text.
Estimates peg Puerto Rico’s pension system as underfunded by more than $40 billion, and fears have circled that pensions may be cut. The PROMESA bill acknowledges that pensions are a significant matter for consideration. However, Lamba-Nieves said this does not necessarily mean that pensions receive protections: The board is authorized to examine the situation and may determine to raise or lower payments.
Other bill provisions could mean that workers are paid less than those on the mainland. One piece exempts Puerto Rico from the recent federal expansion of overtime coverage. Eligibility for overtime pay would continue to apply to those who earn up to $23,600, instead of expanding to cover those who earn up to $47,476.
Another provision provides the Puerto Rico’s governor with the ability to expand exemption from the federal minimum wage. Currently, Puerto Rico employers can pay workers under age 20 a lower-than-minimum wage of $4.25 per hour during their first 90 days in the job, according to The Wall Street Journal’s Real Time Economics blog. In comparison, the federal minimum wage is $7.25 per hour. The PROMESA bill authorizes Puerto Rico’s governor to, if he chooses, extend the $4.25 sub-minimum wage to new hires age 20 to 25 for up to four years.
Lamba-Nieves said while the intention behind this provision seems to be to make it easier for employers to hire younger workers, if enacted, it is likely to prompt workers to leave for the U.S. mainland and its higher wages. Puerto Rico already is experiencing mass population exodus, and as youth are less likely to have children or own homes, they are an especially mobile demographic.
The bill also calls for the creation of a Congressional Task Force to report on any barriers to economic growth caused by federal laws and programs and recommend changes to them as needed.
Even with this task force, Falcón and Lamba-Nieves said the bill is unlikely to bring long-term improvements. The task force’s study period is too brief, with the report due by Dec. 31 this year, Lamba-Nieves said. Additionally, the task force faces two other limitations: It will not necessarily consult with non-governmental entities, labor unions and civil society groups — and thus may get too narrow a view of the situation — and has no assigned funding, he said.
“From our reading, this task force is a minute effort compared to what we really need,” Lamba-Nieves said. “It fails to even try to create an environment where a broad consultation of Puerto Ricans are included in a process that will ultimately attempt to define economic development prospects for the future.”
Falcón similarly regarded the legislation’s potential as short-term. Any plan for economic development requires resources to be invested in the territory, something not promised in this legislation, Falcón said.
“A lot of people are clear that it doesn’t mean any clear solution to the long-term economic situation,” Falcón said. “Even if Puerto Rico may not pay all of the debts back, the money’s going to have to come out of Puerto Rico and into the hands of these vulture funds and bondholders.”
“The bill falls very short of being a plausible solution to Puerto Rico,” Lamba-Nieves said.
The bill is expected to be voted on by the full House in early June.