The U.S. Supreme Court on Monday agreed to consider a former Puerto Rico state senator's claim that he cannot be retried on corruption charges involving a trip to Las Vegas to watch a boxing bout after his original conviction was thrown out.
The court said it would hear an appeal filed by Hector Martinez Maldonado, who served in Puerto Rico's Senate from 2005 until his 2011 conviction, and businessman Juan Bravo Fernandez, the former president of a private security company.
Bravo Fernandez sought to bribe Martinez Maldonado in order to win passage of bills that would benefit his business, according to prosecutors. The case focused in part on allegations that Bravo Fernandez paid for Martinez Maldonado to travel to Las Vegas in 2005 to watch a boxing match involving Puerto Rican fighter Felix "Tito" Trinidad.
In 2011, both were convicted for their role in the alleged bribery scheme, but the Boston-based 1st U.S. Circuit Court of Appeals threw out their convictions in 2013.
Federal prosecutors said they would seek a new trial. But Martinez Maldonado and Bravo Fernandez said a new trial should be barred because it would violate the constitutional protection against "double jeopardy," which prevents people from being tried on charges for which they already have been acquitted.
Their lawyers say double jeopardy applies because the jury had acquitted the two men of some of the criminal charges concerning conduct closely related to the actions on which the retrial would be focused.
The appeals court ruled in favor of the prosecution last year.
It is the third case concerning Puerto Rico that the Supreme Court has taken up recently. Last week, the justices heard oral arguments over the U.S. Caribbean territory's bid to revive a law that would allow it to cut billions of dollars in debt at public utilities..
The court is also considering a second criminal case that concerns double jeopardy.
The case the court agreed to hear on Monday is Bravo Fernandez v. United States, U.S. Supreme Court, No. 15-537.
(Reporting by Lawrence Hurley; Editing by Will Dunham)
The composer and star of "Hamilton," one of Broadway's most popular musicals, is ramping up his call for Congress to provide relief to debt-ridden Puerto Rico.
In a New York Times op-ed published Monday, Lin-Manuel Miranda asked that the commonwealth, home to more than 3.5 million people, be afforded the same options as a U.S. city or state.
"If Puerto Rico were an American city, it could declare bankruptcy, as Detroit did in 2013," Miranda wrote. "If it were a state, the federal government would surely have already declared emergency measures to help the most vulnerable. But since it is a territory of the United States, there is no system in place to handle the financial and humanitarian crisis that is happening right now."
Both Democrats and Republicans, from House Speaker Paul Ryan to Sen. Elizabeth Warren, have expressed support for action that would offer the island, where Miranda's parents were born, a lifeline. But with more than $70 billion in debt obligations and economic misery mounting, the process appears stalled.
In his Times piece, Miranda quotes from the real Alexander Hamilton's famous plea, delivered in a letter from his home in St. Croix in the Virgin Islands amid hurricane devastation nearly 250 years ago, when he asked, "O ye, who revel in affluence, see the afflictions of humanity and bestow your superfluity to ease them."
Earlier this month, the playwright went to Washington to stand with Senate Democrats pushing a bill that would allow the commonwealth to declare bankruptcy.
"What we need is the ability to restructure and get Puerto Rico out of the hole it's in," said Miranda, joining Warren and N.Y. Sens. Chuck Schumer and Kirsten Gillibrand at a news conference. "So I'm urging Congress. If Hamilton tickets will help, I'm happy to do that too."
As stakeholders work toward a solution to Puerto Rico’s debt crisis, it is critical that we adhere to the principle that any restructuring should require the approval of a majority of creditors and should respect the rights and concerns of all creditor classes.
In contrast, any House bill that does not permit fair negotiations and instead includes the “cram down” provisions favored by the Obama administration that would force nonconsensual debt restructurings on creditors will fail to preserve Puerto Rico’s access to the capital markets, which is critical for the commonwealth’s economic future and its ability to meet citizens’ needs. It would also fail to address the fundamental operational and fiscal problems that have hamstrung Puerto Rico’s economy.
With the right structure in place, fair deals can be reached between the commonwealth and its creditors. A case in point is the restructuring agreement reached between the Puerto Rico Electric Power Authority and its creditors that I helped negotiate. This nearly $8 billion deal provides a good precedent. It was approved last month by the Puerto Rican legislature and is progressing well.
Any legislation must include the ability to reach and preserve consensual deals like this and allow all stakeholders to work toward a successful resolution of Puerto Rico’s debt issues.
STEPHEN SPENCER
Minneapolis
The writer is a financial adviser to major creditors of Puerto Rico.
A federal judge in San Juan on Monday threw out a new tax that Puerto Rico had tried to impose on the American retailing giant Walmart, calling it unlawful.
Walmart had argued that the new tax would confiscate more than 100 percent of its profit from operations in Puerto Rico, making it one of the most onerous taxes on earth.
The judge, José Antonio Fusté of the United States District Court in Puerto Rico, said in his opinion on Monday that it gave him no pleasure to throw out the tax, considering the commonwealth’s dire financial condition. But he said it was unlawful and that Puerto Rico’s crisis was not an excuse “to take revenue that it’s not entitled to, to pay for essential services.”
The new tax was more than triple the old rate, he said, “designed to capture Walmart Puerto Rico, the biggest fish in the pond.”
If Walmart paid it on time, and waited to get a refund through the usual channels, it would most likely never see the money again, he added.
Puerto Rico is expected to go through a court-supervised debt restructuring soon, and any request for a tax refund from Walmart would almost certainly get lost in the crowd of bondholders, labor unions, lawyers and others jockeying to recover their money.
Walmart expressed satisfaction with the decision. “Today’s ruling is a victory not only for Walmart Puerto Rico but also for our customers, our more than 14,000 Puerto Rican associates, and the many Puerto Rican suppliers and farmers who depend so heavily on us,” Lorenzo Lopez, a spokesman, said.
The company did not explicitly threaten to leave Puerto Rico if it did not prevail, but it did argue in court that no business could operate for long in a place that confiscated all of its profit.
Walmart, based in Bentonville, Ark., is Puerto Rico’s largest employer outside the government, operating 48 large, busy stores under several names. People joke that since Walmart’s arrival on the island in 1992, they no longer have to go anywhere else, because they can eat all their meals and buy everything they need there.
Walmart is also the island’s biggest remitter of tax revenue. About $15 billion of Puerto Rico’s outstanding debt is backed by a dedicated sales tax that Walmart helps to collect.
Juan Zaragoza, Puerto Rico’s treasury secretary, said in a statement that the treasury believed the federal court had no jurisdiction and should not have handled the case.
“For this reason, from the beginning, we contemplated the possibility of appealing a decision unfavorable to the interests of the people of Puerto Rico,” Mr. Zaragoza said. Officials were still analyzing the lengthy opinion, he said, but would appeal soon. “We will raise on appeal all the procedural errors that, in our opinion, took place during the trial,” he said.
The dispute began in 2015, when Puerto Rico amended its alternative minimum tax for companies. That type of tax tries to catch those who might otherwise use loopholes to avoid paying what they owe. Companies calculate their taxes each way, then pay the higher amount.
The tax changes included a big increase in the rates for companies operating big-box stores on the island. Walmart said in its lawsuit that the highest new rate was reserved for businesses on the island with revenue of more than $2.75 billion, and the only company that met that description was Walmart.
Puerto Rico has had trouble balancing its budget every year for at least a decade. It accumulated a $72 billion debt, in part, by issuing long-term bonds just to get the cash to balance its budget, a practice widely considered unsustainable. At the time the legislature was amending the alternative minimum tax, it was trying to plug a $125 million budget hole.
Walmart also cited evidence that Puerto Rican lawmakers had sought to raise its taxes high enough to pay for other businesses on the island to get a tax reduction. Walmart argued that this violated its rights under the Equal Protection Clause of the United States Constitution, and Judge Fusté agreed.
Puerto Rican officials said the tax changes were appropriate because big companies like Walmart, with branches all over the world, let their supplier branches sell goods to their retail branches at artificially inflated prices. That made the retail outlets look as if they had little or no profits, and therefore had to pay little or no income tax.
They also said the case did not belong in federal court. The right procedure, they said, was for Walmart to pay its tax, apply for a refund and then, when that was denied, bring suit in a Puerto Rican court.
“That is true, so long as the tax-refund procedure will afford Walmart Puerto Rico a plain, speedy and efficient remedy,” Judge Fusté said.
He then described at length the way Puerto Rico has been “kiting checks,” shifting money from one creditor to pay another and “warehousing” money in a vault to claim that it had made payments without deducting the funds from its books.
“The government has been cannibalizing itself at an astonishing rate,” the judge said. He concluded that if Walmart paid the tax on demand, it would be sending the money to an insolvent government that would never pay it back.
A Walmart in San Juan, P.R. Walmart employs more than 14,000 people in Puerto Rico, second only to the government.Credit Dennis M. Rivera for The New York Times
NEW YORK – President Barack Obama dangles U.S. dollars before the Castros while Congress stonewalls Puerto Rico’s pleas for debt restructuring. The Tampa Bay Rays take the field in Havana as San Juan fends off New York hedge funds wielding legal baseball bats. The Rolling Stones play a free concert for Cubans; Puerto Rico can’t get no satisfaction.
As Cuba rises and Puerto Rico falls, it’s worth considering the diverging trajectories of these two ex-Spanish colonies that the Puerto Rican poet Lola Rodriguez de Tio described more than 100 years ago as “two wings of the same bird.” Even as the resumption of diplomatic ties with the U.S. opens new possibilities for Cuba, Puerto Rico’s current status as a U.S. commonwealth has turned into an ugly dead end.
Puerto Rico is defaulting in slow motion on $70 billion worth of debt. Its economy has shrunk nine of the past 10 years. A few hundred kilometers to the west, meanwhile, economic reforms are creating new livelihoods for self-employed Cubans, whose material conditions are improving. Buoyed by the arrival of new tourists, remittances, and foreign investments, Cuba’s economy grew by 4 percent last year.
And when the U.S. embargo is lifted, Cuba — which for much of the 19th and 20th centuries was the Caribbean’s predominant economy — is likely to take a growing bite out of Puerto Rico’s fortunes, in tourism, manufacturing and services. And that’s before accounting for Puerto Rico’s existing fiscal straits, which will lead to shrinking government services, higher costs imposed by utilities under siege from creditors and a string of broken social promises and busted pensions.
True, Cubans don’t have democracy. Then again, at the national level, neither do Puerto Ricans: Despite being U.S. citizens, they can’t vote for president or in Congress, which these days mostly ignores them. Cubans may face the threat of arbitrary detention and abuse. But they’re much less likely than Puerto Ricans to be shot dead on the street, or to be victimized by drug traffickers or other criminals.
In fact, by many other yardsticks, you’re better off being born in Cuba than Puerto Rico. Don’t take my word for it. Look at the World Factbook put out by those raving socialists at the Central Intelligence Agency. Lower infant mortality? Check! Same with lower unemployment, higher literacy, and a lower overall death rate.
Things weren’t supposed to turn out this way for the island that President John F. Kennedy touted three months after the Bay of Pigs invasion as “a source of hope and inspiration to those of us deeply concerned with charting new courses of social progress for our Hemisphere.”
The proximate cause of Puerto Rico’s current distress is its crushing debt, which has tripled since 2000. And yes, irresponsible and corrupt legislators and executives (and the voters who elect them) deserve much of the blame.
But the larger problem has been Puerto Rico’s relationship with its federal overlords, who have oscillated between patronizing micromanagement and malign neglect — devising ill-suited development strategies, granting and then revoking economic benefits, imposing regulations that undermined the island’s competitiveness and creating disincentives for work.
Consider the Washington-backed effort to turn Puerto Rico into a manufacturing hub. During the late 1940s, U.S. companies were given federal and local tax breaks to locate on the island. But U.S. minimum wage laws and trade agreements with other nations gradually eroded Puerto Rico’s competitive advantages. Moreover, instead of investing in the island, U.S. companies brought their profits back to the mainland.
In 1976, the U.S. tried again, sweetening the pot for companies with the Federal Tax Reform Act. That created new jobs in chemicals, pharmaceuticals and electronics, but at huge fiscal cost as mainland corporations gamed tax laws. When the U.S. phased out the tax breaks, the island’s manufacturing employment took a big hit — a blow that Puerto Rico’s legislators are quick to blame for the island’s decline, not least because it conveniently absolves them for their own bad decisions.
The Republican-controlled U.S. Congress is now debating what to do about Puerto Rico’s fiscal mess. The island’s top officials have all but begged for the ability to restructure the debt of its municipalities under Chapter 9 of the U.S. bankruptcy code — a power Puerto Rico long had until Congress took it away. Better yet would be the ability also to restructure its general obligation debt, which it can’t realistically pay.
Congress seems unlikely to allow restructuring. Instead, the Republican majority wants to impose a fiscal control board that takes over Puerto Rico’s fiscal affairs. Analysts at Puerto Rico’s Center for a New Economy have argued against this approach’s “colonial and imperialistic overtones,” which also contradict the GOP’s devolutionary, small-government philosophy. Instead, they advocate passing a “fiscal responsibility law” with strict enforcement provisions.
As smart as this idea looks on paper, the island’s repeated failures to put its own fiscal house in order undermine that case. On the other hand, imposing a control board without granting debt relief risks accelerating Puerto Rico’s downward spiral.
That brings us back to the central question of Puerto Rico’s sovereignty. A control board for Puerto Rico would be all-too-consistent with its quasi-colonial status: Its legislators and executives behave irresponsibly in part because the buck doesn’t stop with them. The island depends on the federal government for a quarter of its revenues, on terms that Washington sets, while it’s straightjacketed by federal regulations that hurt its competitiveness and estrange it from neighboring economies.
Making Puerto Rico a state wouldn’t necessarily cure it of bad fiscal behavior (see: Illinois). And independence would bring huge challenges. But remaining a commonwealth isn’t working either. More than a half-century after JFK called Puerto Rico a “source of hope and inspiration,” its predicament should be a source of shame for every American. Its U.S. citizens have rates of poverty and unemployment that dwarf those on the mainland, and diminishing prospects that make a mock of the American Dream. They don’t even enjoy the full benefits of the U.S. Constitution.
Their lot won’t fundamentally improve until they seize control of their own destiny and choose between statehood or independence. And when they finally make that choice, Congress should honor it, either welcoming Puerto Rico as the 51st state or allowing it to be independent.
Once Cuba gained its independence from U.S. control in 1902, it became theoretically free to make its own mistakes, notwithstanding the colossus to the north looking over its shoulder. And Lord knows Cuba made plenty of them, even before its current detour through socialist privation and repression. Over the years, Cuba has nonetheless delighted in tweaking Uncle Sam in the United Nations over Puerto Rico’s “colonial” status, and is doubtless enjoying some quiet schadenfreude over its neighbor’s troubles.
Yet these two islands can lift each other up. In addition to their shared history and culture, they face some similar demographic and economic challenges, and have some complementary strengths — Puerto Rico’s pharmaceutical industry and Cuba’s nascent biotechnology sector, for instance. An unlikely partnership, perhaps. But as Obama has noted about Cuban policy, we know what hasn’t worked. Maybe it’s time to try something different for Puerto Rico too.
The U.S. Congress must protect Puerto Rico from investor lawsuits so that the island's government can face a debt crisis and address what the U.S. territory's governor describes as a building humanitarian crisis, he said on Thursday.
Leaders in Congress agree that Puerto Rico needs an independent board to help face $70 billion in debt and a 45 percent poverty rate, but Governor Alejandro Garcia Padilla said the island needs more urgent help.
"Congress can legislate a stay on any legal action until that oversight board kicks in," Padilla told reporters on a conference call.
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Financial woes mean Puerto Rico cannot confront the Zika virus as it should, Padilla said, citing estimates that more than 20 percent of island residents could be infected this year with the virus linked to birth defects.
School septic tanks, a mosquito breeding ground, are overflowing in Puerto Rico, which lacks money to pay contractors to empty them, Padilla said.
"The humanitarian crisis in Puerto Rico is real and continues to grow with each passing day."
The government of Puerto Rico highlighted the territory owes vendors, including those who provide gasoline to police and fire departments and maintain schools, $1.9 billion. In addition, it has yet to pay out $50 million in 2014 tax refunds.
The White House and Congress agree that Puerto Rico cannot face its financial crisis alone but leaders have not agreed on whether the island should be able to seek relief in the courts.
Puerto Rico cannot use bankruptcy laws to address its debt problems, tools that were available 20 years ago.
Paul Ryan, speaker of the U.S. House of Representatives, has promised to have a Puerto Rico rescue bill before the end of the month and Padilla has applauded that commitment.
That bill, though, will create an oversight board to negotiate with creditors rather than granting Puerto Rico immediate protection akin to bankruptcy, according to Congressional sources familiar with the draft legislation.
Democratic leaders this week outlined a different plan: allow Puerto Rico time, perhaps as much as a year, for some breathing room to work out a deal with a stay on its debt payments.
Republican and Democratic leaders, along with the Treasury Department, will likely have to hash out details of a bill but Padilla said granting a stay on investor lawsuits was a needed interim step.
Congressional Republicans working on the Puerto Rico legislation have not decided whether they have the authority to freeze investor lawsuits or whether doing so would cause more confusion, said the sources.
Puerto Rico negotiated a restructuring of debt owed by the power utility, known by its initials as PREPA, but even then it was a partial solution.
Padilla said PREPA, which accounts for 14 percent of the territory's overall debt load, took 19 months to reach a deal with 62 percent of the power utility's creditors.
"That is maybe the showcase on why Congress need(s) to approve the framework, the legal framework and to help with the holdouts," Padilla said. Negotiations are ongoing, he said.
(Reporting by Patrick Rucker in Washington and Daniel Bases in New York; Editing by Meredith Mazzilli and Matthew Lewis)
Thousands of college students from the University of Puerto Rico (UPR) approved a three-day, full-campus shutdown Tuesday to protest recent austerity measures, which they say endanger the higher education system.
The students held a general student assembly, after which they marched through the university and closed all entrances to the campus. The students also called for the resignation of top university officials and announced they would consider an indefinite strike if their demands are not met.
At about 6:00 am Wednesday, the eight gates of the UPR were closed a reported 1,968 students decided to demand the immediate payment of remittances to the UPR by the Department of Finance, and the elimination of the freezing of the so-called “formula 9.6%."
The formula 9.6% requires the state to assign the University of Puerto Rico 9.6% of its annual revenues. The basis of this law is that the state has the social obligation to invest in a public institution of higher learning, to create and maintain a state university, without which no modern society can prosper.
"We must ensure the public funding of the university and cuts cannot be accepted as a solution to the crisis," said Naphtali Sanchez, representative of education to the negotiating committee that was established Monday in the assembly.
General Assembly 2010 to vote whether or not to strike | photo:California Student Union Website /Oduarto Gamelyn
to the detriment of essential public services. In July, the government faces a debt repayment of US$1.9 Billion.
At the main entrance of the campus, the student Victor Velez Perez outlined some of the consequences the austerity measures have had on the quality of educational services during the past nine years.
"The administration is not guaranteeing us our own, permanent teachers. We need to have teachers who stay with us to foster that sense of permanence. Having contract teachers, transitory teachers, it affects our training," said Velez Perez.
At the meeting, the students also rejected a study commissioned by the Board of Governors of the UPR to the Association of Governing Boards of Universities and Colleges, which recommends consolidating functions of regional campuses, including other reforms.
A number of teachers have announced support for the strike, such as Professor Rafael Bernabe, a gubernatorial candidate for the Party of the Working People (PPT).
Student during 2010 anti-austerity protests in Puerto Rico. | Photo: California Student Union Website /Oduarto Gamelyn
The students are calling for people all over the country to join the protest against "unpayable debt" and austerity.
Republicans at House Natural Resources Cmte plan to circulate draft components of Puerto Rico bill in next two weeks and make bill language public by March 31, according to a cmte aide.
Cmte will have legislative hearing and mark up the bill in early April, aide says
NOTE: House Speaker Paul Ryan urged committees with jurisdiction to come up with a solution to Puerto Rico’s fiscal problems by end of first quarter
Natural Resources Cmte Chair Rob Bishop said he considers creating oversight board with powers to help restructure some of Puerto Rico’s $70b debt
The companies with the most at stake in Puerto Rico’s debt crisis have become buyers of the island’s bonds.
MBIA Inc.’s National Public Finance Guarantee Corp. and Ambac Financial Group, which together insure about $19 billion of the U.S. territory’s principal and interest against default, have used millions from their investment portfolios to buy Puerto Rico securities they guarantee. Some of the bonds trade for as little as pennies on the dollar because no payments come due until decades from now, when the commonwealth’s current bout of fiscal turmoil will be a distant memory.
“As the bonds are insured by National, we are very familiar with the credit profile of the bonds and the purchase price made it an attractive investment, especially for insured debt,” Chris Young, National’s chief financial officer, said in an e-mail.
The investments reduce the payouts the insurers could face if the island defaults and signal a bet that at least some bondholders will fare better-than-expected when Puerto Rico restructures its $70 billion of debt. Governor Alejandro Garcia Padilla wants owners of tax-backed securities to accept almost $23 billion less than they’re owed, with the prospect of recovering their losses if the island’s economy breaks out of its years-long recession.
It’s not the first time the insurers have bet that prices of bonds they stand behind have fallen too far. During last decade’s housing crisis, MBIA bought residential mortgage-backed securities that it was left covering after a default. The strategy reduced the outflow of claims payments and allowed the company to sell at a profit when prices recovered.
“It’s the normal course of business for them,” said Edwin Groshans, an analyst who tracks the insurers at Height Securities, a Washington-based broker dealer. “They’ve been insuring bonds for decades, so they have a very long track record of what a loss content is in certain scenarios.”
National boosted the amount of Puerto Rico securities it holds in its $4 billion bond portfolio to $585.6 million at the end of 2015 from $1.8 million the year before, according to its annual statement to state regulators on Feb. 29. Ambac, which has $2.6 billion of fixed-income investments, increased its commonwealth holdings to $87.4 million from $1 million a year earlier, the company’s disclosures show. The amounts reflect par value of the bonds once they mature rather than what the companies actually paid.
The jumps largely resulted from purchases of debt repaid with a dedicated share of Puerto Rico’s sales taxes. National spent about $100 million in August scooping up discounted senior sales-tax bonds worth $585 million that don’t begin paying interest or principal until 2040. Ambac in October and December paid about $10 million for $86 million of variable-rate highway bonds maturing in 2027 and 2028 and senior sales-tax debt that defers all payments until 2054.
“As part of our disciplined asset liability management program, we invest strategically and opportunistically in select Ambac insured bonds,” Abbe Goldstein, a spokeswoman for Ambac, said in an e-mail.
Who Loses?
Since the purchases, Puerto Rico has proposed foisting deep losses on owners of the sale-tax-backed securities, known by the Spanish acronym Cofina. Under the restructuring plan released on Feb. 1, those bondholders would recover about 49 percent of what they’re owed, compared with 72 percent on general obligations, which have the first claim on the government’s funds. Officials are working on a revised proposal after bondholders weighed in on the initial offer.
The specter of widespread defaults by the island has taken a toll on the insurers’ shares, causing MBIA to tumble 46 percent in the two years through December, while Ambac lost 43 percent. They’ve since recovered some as Puerto Rico moves closer toward completing a deal with creditors to cut its power company’s debt: MBIA has risen 41 percent this year to $9.14, and Ambac climbing 16 percent to $16.29, as of 10:02 a.m. in New York. Ambac and MBIA’s National insured about $10 billion and $9 billion of Puerto Rico principal and interest payments, respectively, at the end of 2015.
The insurance company’s recent investments have yielded mixed results. Ambac’s senior sales-tax bonds maturing in 2054, which it bought in October for 6.4 cents on the dollar, last traded Monday for 7.8 cents. National’s largest commonwealth bond purchase, acquired for 19.8 cents in August, last traded Feb. 18 at 19.6 cents.
The decisions may still pay off. Along with reducing how much they’d have to cover if Puerto Rico defaults, the companies may receive more than they paid for the securities under a restructuring, according to Groshans, the Height Securities analyst.
“The first benefit is not having to make the insurance payment on that bond,” Groshans said. “The second benefit is if they’re right, then the amount that they’ll recapture via the restructuring proceeding should generate cash for them to make other payments.”
Young, National’s chief financial officer, declined to comment on whether the increase in Puerto Rico holdings was part of a strategy to reduce claims payments.
“It was an attractive investment for our investment portfolio,” he said.
Time is growing short for Congress to help Puerto Rico out of the worst debt crisis any state or territory of the United States has faced since the Great Depression nearly 100 years ago. By every possible measure, Puerto Ricans are facing a grim present and an even darker future unless Congress offers a helping hand.
What Puerto Rico needs is access to the same type of debt restructuring framework that every one of the 50 states of the union can use as an economic shelter of last resort. Congress can supply it, and should.
We’re not talking bailout here. No federal loans or grants are required. What Puerto Rico needs is an act of Congress before a deadline for repayment as early as May. Action by lawmakers will allow the island to sidestep a catastrophic default that will lead to years of litigation and leave creditors short of the full amount they are owed.
It’s hard to see how the lenders can get everything they’re due. In all, Puerto Rico owes $72 billion, the sad result of irresponsible borrowing and the end of U.S. tax-code provisions that gave investors an incentive to do business there. For technical reasons, the restructuring would affect only $49 billion of that amount, but that is still a very big number for the island territory to cope with. Consider: Typical state spending, according to testimony in Congress, requires about 5 percent of tax revenue on payments of interest and principal to bondholders. But at this moment, this type of debt is eating up 36 percent of Puerto Rico’s tax revenues.
That’s unsustainable, no matter how much Puerto Ricans tighten their belts. Already the crisis has led to massive layoffs in government and the private sector, and reduced the island’s gross national product, personal income and business activity. Teachers who manage to remain employed haven’t seen a raise on a base salary of $1,750 a month since 2008. It’s a bleak picture all around.
Then there’s unemployment. It stands at 12.2 percent, according to the U.S. Labor Department, which is bad enough, but it’s down from 16 percent in recent years. How has Puerto Rico managed to lower the jobless rate amid a financial crisis? Well, that’s where Florida comes in.
One of every 13 people left the island between 2010 and 2015, many destined for Florida. Of the estimated 300,000 who left since 2012, tens of thousands came to the Sunshine State, where more than 1 million Puerto Ricans live.
Many of them would rather go back home, but there is no way for them to do so until Congress opens the door to a way out of the financial mess in order to reignite economic growth.
Some Republican lawmakers remain skeptical. They’ve raised an important point: Allowing Puerto Rico to enter into a financial restructuring might weaken investor confidence in general obligation bonds issued by the 50 states, raising their costs of borrowing in the future.
To avoid this outcome, Congress should craft a restructuring under the Territorial Clause of the U.S. Constitution that is designed only for Puerto Rico — and only this time. Puerto Ricans won’t like it, but the deal must include a federal oversight board to ensure that Puerto Rico lives within its means and meets its reduced debt obligations.
This is by no means an ideal solution. Lenders will take a haircut, and it will revive complaints among Puerto Ricans that they’re being treated like a colony. That, unfortunately, is the price of getting into a financial mess — and the only way out of the nightmare.
Read more here: http://www.miamiherald.com/opinion/editorials/article65097862.html#storylink=cpy
A protester in Puerto Rico holds a sign that reads: “We didn’t take out a loan. We didn’t see a dime. We’re not going to pay.” Ricardo ArduengoAP
“Lawmakers grill officials on severity of Puerto Rico’s debt crisis,” (Feb 25) explains well the significant doubts lawmakers have about the Treasury’s proposals. Treasury officials’ testimony lacked details on the major expenses that have to be adjusted to reflect Puerto Rico’s new economic reality and didn’t identify who will pay for its proposals.
House Natural Resources Committee Chairman Rob Bishop (R-Utah) asked the Treasury’s Antonio Weiss if everything should be put on the table, given the severity of the debt crisis. For example, should Congress give a federal control board the authority to revise all “acquired rights” that have been approved by local courts in Puerto Rico in past decades? Acquired rights include hundreds of millions in Christmas bonuses to all government employees — $120 million — and pensions to retired teachers and judges and their widows. Acquired rights also include pensions to senior executives of government enterprises, like the insolvent Electric Utility, plus police escort and office expenses of former governors.
The Treasury officials didn’t explain if the board should have authority over local procurement contracts and authority to name and remove officials of the 100-plus government-controlled entities in Puerto Rico. Many government-controlled entities there have their own budgets and treasuries, such as the insolvent Electric Utility. These entities have independent bank accounts that are used to pay high salaries and pensions of former board directors. Treasury should recommend giving the board the authority to name and remove senior officials in the government-controlled entities, and the authority to approve and amend their budgets, as the DC board did.
The Treasury also proposed extending the earned income tax credit for Puerto Rico. Yes, the EITC would be an effective tool to promote labor market participation in Puerto Rico, which is the lowest in the nation. But who will pay its estimated $6 billion cost?
A fair budget proposal to extend the EITC to Puerto Rico would ask the wealthy on the island to pay for it. According to the latest tax analysis done by Government Accountability Office auditors, there would be sufficient federal income taxes paid in Puerto Rico to pay for the EITC and solve the fiscal crisis.
Deleting IRC Section 933, which now exempts island residents from federal income taxes, would also end the unfair tax competition Puerto Rico is waging against the 50 states. More than 200 millionaires have come to the island to avoid federal taxes on their financial investments. This tax loophole is a blatant abuse of the IRC Section 933. Congress should demand the wealthy in Puerto Rico first pay their fair share before asking the taxpayers in the 50 states to help them fix their fiscal and debt crisis.
Puerto Rico’s main water utility may not have enough money to repay certain bonds if it needs to redirect funds to pay contractors, according to a filing on the Municipal Securities Rulemaking Board’s website.
The Puerto Rico Aqueduct and Sewer Authority’s board on Feb. 16 approved an alternative plan to divert money to pay contractors if the agency fails to obtain another source of funding by June 30, according to the March 4 filing posted on MSRB’s website, called EMMA. Prasa wants to create a new entity that would sell $750 million of debt backed by dedicated revenue, called a securitization bond, to finance capital projects and repay outside workers and businesses. Island lawmakers are working on legislation that would allow the transaction.
Without the bond sale, Prasa may need to use its available cash to pay contractors rather than make monthly interest and principal payments on certain debt, including state revolving fund loans, rural development bonds and a note held by the Puerto Rico Public Finance Corp, according to the EMMA notice.
“Such insufficiency will reduce the amount available to pay the interest accrual and principal accrual on certain commonwealth guaranteed indebtedness and commonwealth supported indebtedness,” according to the filing.
Bonds that still would have sufficient funds for repayment include Prasa’s 2008 Series A and Series B revenue bonds guaranteed by the commonwealth, according to the notice.
Prasa had $4.7 billion of debt as of Sept. 30. The bonds carry junk ratings from the three largest credit-rating companies.
The New York Times reported last week on some of the details of the Obama Administration’s recovery plan for Puerto Rico, and it does not bode well for investors — or for states and municipalities that borrow money.
The island’s government is $72 billion in debt, with billions more in unfunded pension obligations. It has been in recession for a decade during which time it has never run a balanced budget, and today it is nearly bankrupt. The government has appealed to the federal government to help, and the Treasury has drawn up a plan. A major feature of that plan is that it will ignore the law by putting government employee pensions in front of general obligation bondholders in the hierarchy of credits, despite the provision of Puerto Rico’s Constitution that mandates GO bondholders will be paid before all other government obligations. The rationale for doing so is, essentially, that public sector pension holders are in greater need of the money than the investors (many of whom are retirees and pensioners themselves), so this ex post change is simply a matter of fairness.
The bondholders, naturally, do not like this. After lending money to the Puerto Rican government under the explicit assurance that they would have the highest priority in all payment scenarios, having this promise revoked seems a tad unfair, as well as blatantly illegal.
It isn’t just the Puerto Rican bondholders that should be angry. The problems with screwing over bondholders in order to protect government pensioners goes farther than its illegality: Doing so sets a precedent for dealing with other bankrupt states in the future. While the Administration avers that this in no way sets a precedent, since the fifty states have recourse to use Chapter 9 of the federal bankruptcy code to reorganize, the reality is otherwise.
TheTimes correctly notes that Chapter 9 makes no provision for the states extricating themselves from their own general obligation debt. No out was given for a very good reason: Foreclosing the possibility of a default up front (at least as much as possible) makes it easier and cheaper for states to borrow money.
The Obama Administration’s proposal threatens to upset this equilibrium. By upending the law and decades of precedent, the Treasury’s plan threatens to make it more difficult for the states and municipalities to borrow money as well, since their lenders see that they too, might get their promise of being first to be repaid pulled out from under them.
This administration has a long history of picking winners and losers in bankruptcy. In the Chrysler and GM bankruptcies, the secured bondholders took a major hit being reduced to unsecured status while workers and pensioners were elevated to protected status, and the Detroit bankruptcy did the same thing.
While it may seem “fair” to help little old ladies rather than mean old hedge funds, the investors who lost money in these maneuvers weren’t Wall Street plutocrats — they were regular people who invested their money into assets they thought were safe, because the law explicitly said they were. Many of them are retirees and pensioners themselves, and thousands of them will see a reduction in the value of their retirement funds. CNN recently reported that 45% of Puerto Rico’s debt is held by “middle class Puerto Ricans” and “average Joe Americans.” Abrogating bankruptcy law isn’t akin to Robin Hood — it’s transferring money from one group of retirees to another.
A Puerto Rico bailout that punishes secured bondholders would represent a short-term political win for the Treasury but at a long-run cost to the rest of the country in the form of higher borrowing rates. It would be a terrible precedent. It is hard to conceive of a reason for a Republican Congress to acquiesce to such a thing, or to allow a control board to do such a thing down the road.
Puerto Rico's governor says the Caribbean's largest solar plant will be built in the U.S. territory's western region.
Alejandro Garcia Padilla said Thursday that Oriana Energy will invest more than $160 million to build a plant capable of producing 100,000 megawatts of energy a year. He said the plant would start operating by year's end in the northwest coastal town of Isabela.
Garcia said the project would help lower electricity costs on an island where power bills are on average twice those of the U.S. mainland, in part because of its heavy dependence on petroleum.
Puerto Rico has other smaller solar plants already in operation.
Administration officials are warning of a humanitarian crisis if Congress does not move to address Puerto Rico’s debt crisis.
The island territory is not only unable to make debt service payments on about $70 billion in debt, but is struggling to fund public safety, health and education, according to Antonio Weiss, counselor to Treasury Secretary Jacob Lew. The worry is that the lack of money could have catastrophic consequences for Puerto Ricans.
“Puerto Rico is already in distress, what started as a recession has turned into a fiscal and a liquidity crisis that shows signs of becoming a humanitarian one as well,” Weiss told a House panel last week.
While House Speaker Paul D. Ryan has given the House until March 31 to address Puerto Rico’s crisis, some Republicans on Capitol Hill are questioning the Obama administration’s proposal to allow the island’s government to, in effect, declare bankruptcy.
Rep. Tom McClintock, R-Calif., said that allowing Puerto Rico to walk away from a portion of its debt through a bankruptcy-like process would undermine the sovereign debt of the other 50 states.
“I’m afraid that credit markets are going to say, ‘Well, wait a second. If they can do that to the Puerto Rican debt, they can do that for California and Illinois and New York,’” McClintock said.
A number of governors have suggested that investors will demand that states pay higher interest rates if Puerto Rico’s debt is restructured, he noted.
Weiss, though, said that proposed legislation would cover U.S. territories, of which Puerto Rico is one, and not states. The administration has talked to bond investors about the plan and they understand this. Those investors have said that any move to curb Puerto Rico’s crisis – and its continuing and projected defaults on bond payments – would help calm the fears of investors who put money into state bonds, he says.
It’s easy to understand the concerns about the island’s trajectory from a few numbers. Puerto Rico’s unemployment rate is still 12.2 percent, almost double the rate of 6.8 percent in Mississippi, the state with the highest rate, according to data from the Bureau of Labor Statistics.
Puerto Rico’s unemployment rate has dropped from more than 16 percent to its current level, but not because businesses are creating jobs there. Driving the decline in the unemployment rate is the island’s unprecedented depopulation.
Between 2010 and 2015, the U.S. population increased 4 percent, or 12.7 million people. Nearly 60 percent of the increase came from births outnumbering deaths, with the rest coming from immigration.
Over the same period, Puerto Rico lost 7 percent of its population. Births outnumbered deaths by 44,000, but one out of every 13 people left the island, a total of 296,000 who emigrated. If they had not left the island, causing the labor force to shrink, and if businesses had created the same number of jobs, the island’s unemployment rate would have ballooned to 29 percent.
Unless the United States Congress acts to modify Puerto Rico’s required debt payments, Puerto Rico won’t make the full May bond payment, Puerto Rico Gov. Alejandro García Padilla said.
On the March 2nd edition of Your Call, we’ll dig to the roots of Puerto Rico’s fiscal crisis.
The U.S. territory is $73 billion dollars in debt, having used investor-friendly tax-free bonds to finance basic services. But last June, the island’s Governor declared its debt un-payable. What roles have Washington and Wall Street played in Puerto Rico’s debt crisis and what are its far-reaching implications? It’s Your Call, with guest host Renee Kemp and you.
Guests:
Ed Morales, author and journalist, lecturer at Columbia University’s Center for the Study of Ethnicity and Race
Puerto Rico has received counteroffers to a proposal it made to creditors earlier in the year, and is working on a counterproposal, the U.S. territory said in a presentation posted on the website of its Government Development Bank on Tuesday. (bit.ly/1QkO2uI)
In a plan made public in February, Puerto Rico asked its creditors to take a huge "haircut" that would slash its total outstanding debt by about $23 billion in an opening salvo to resolve a crippling debt crisis.
"The Commonwealth has received counteroffers from certain creditor groups and is working to develop a counterproposal that is responsive to all of the creditor feedback but falls within the parameters of the Commonwealth's ability to pay," Puerto Rico said in the presentation.
Creditors of Puerto Rico's sales tax authority, COFINA, made a counteroffer in February, saying they would extend maturities but forgo cuts to principal that the original offer would entail.
Other creditor groups which have organized include holders of general obligation bonds and Government Development Bank bonds, Puerto Rico's presentation said. (Reporting by Megan Davies; Editing by Phil Berlowitz)
Puerto Rico has received counter-offers to a proposal it made to creditors earlier in the year, and is working on a counterproposal, the U.S. territory said in a presentation posted on the website of its Government Development Bank on Tuesday.
In a plan made public in February, Puerto Rico asked its creditors to take a huge "haircut" that would slash its total outstanding debt by about $23 billion in an opening salvo to resolve a crippling debt crisis.
"The Commonwealth has received counteroffers from certain creditor groups and is working to develop a counterproposal that is responsive to all of the creditor feedback but falls within the parameters of the Commonwealth's ability to pay," Puerto Rico said in the presentation. (Reporting by Megan Davies; Editing by Phil Berlowitz)
MBIA Inc (MBI.N), a bond insurer heavily exposed to fiscally troubled Puerto Rico, will report fourth-quarter earnings after the bell on Monday when investors will look for commentary on potential losses from exposure to the island's debt.
Many investors have shunned the company's shares due to uncertainty over exactly how much of its $4 billion exposure to Puerto Rico's debt is at risk as the U.S. commonwealth negotiates a restructuring deal with creditors.
Mark Palmer, who follows the stock for brokerage firm BTIG, said investors will be waiting for management's conference call on Tuesday morning for updated information on the progress of various restructuring talks.
"What investors are looking for is any sort of inkling from management in terms of what the future direction is," he said.
Palmer said investors would monitor any changes in the company's loss provisions as they try to gauge how management is viewing and preparing for potential risks.
MBIA is tipped to post earnings of 11.5 cents per share in the fourth quarter of 2015, up 15 percent on the same period last year, according to a consensus estimate compiled by Thomson Reuters I/B/E/S.
Puerto Rico's House of Representatives has approved a bill aimed at overhauling the island's power utility PREPA, pushing the agency a step closer to finalizing a deal with creditors to restructure more than $8 billion in debt.
Puerto Rico's officials also proposed a wider restructuring plan at the end of January that would cut bond holders by 45 percent in a move seen as an opening salvo in negotiations with bondholders.
MBIA's shares are trading at a substantial discount to the company's book value. The shares traded up 4.3 percent at $7 on Monday compared to a book value of $24.94 per share. Recent optimism over events in Puerto Rico has pushed the stock up 7.8 percent so far this year.
A conference call is scheduled for Tuesday 8:00 a.m. ET (1300 GMT).
(Reporting by Edward Krudy; Editing by Meredith Mazzilli)
The administrators of a top luxury hotel in Puerto Rico have been arrested and charged in a tax evasion case as the U.S. territory cracks down on corruption amid a worsening economic crisis, officials said Monday.
The island's Justice Department said Wilhelm Sack and Harold Davies Mayne of the Horned Dorset Primavera are accused of withholding more than $600,000 in room occupancy tax over the past six years.
The announcement comes nearly a year after the hotel filed for Chapter 11 bankruptcy as it struggled with nearly $1.7 million in debts, including more than $800,000 owed to Puerto Rico's Treasury Department and more than $320,000 owed to the island's struggling power company.
Sack is being held on $29,000 bond and Mayne on $232,000 bond. They are scheduled to appear in court March 14 for a preliminary hearing.
Adrian Santiago, the hotel's reservation manager, said he had no comment.
Melanie Matos, an attorney for Sack, told The Associated Press that negotiations were underway and the case is tied to an old debt being disputed in a local court and bankruptcy court.
"We hope that this can be rapidly resolved and are looking forward to giving the best service to the hotel guests," she said.
It is one of the most high-profile cases to date since authorities began pursuing suspected tax evaders late last year in an attempt to recover millions of dollars. The island government's liquidity has dwindled amid a nearly decade-long economic slump and it faces $72 billion in public debt that the governor has said is unpayable and needs restructuring.
Officials say Sack and Maynes are accused of withholding tax revenues owed to the island's Tourism Company from December 2008 to October 2015.
"Horned Dorset has been an institution for Puerto Rico tourism, holding us up high for decades in the international market," said Justice Secretary Cesar Miranda. "It's a shame they haven't met their tax obligations. ... We will pursue this case like any other."
The two men face a total of 174 charges.
The hotel in the popular tourist town of Rincon in western Puerto Rico has suites that go for up to $1,600 a night.
