Friday, April 29, 2016

Puerto Rico Debt Deadline Looms With Washington Still Haggling - The New York Times

In December, House Speaker Paul D. Ryan instructed lawmakers to find a “responsible solution” to Puerto Rico’s debt crisis in the first three months of this year, giving the island plenty of time to prepare for a May 1 deadline on a $422 million debt payment.
So much for that.
That deadline is imminent, but Republicans in the House and Democrats in the administration are still haggling over the terms of a bill to rescue Puerto Rico. Missing the payment risks further destabilizing its shrunken economy. And there are concerns that the passage of any legislation could be delayed until the island nears the tipping point of its debt woes: a $2 billion debt payment due on July 1.
The May 1 payment consists mainly of principal and interest due from Puerto Rico’s Government Development Bank, a uniquely powerful institution that has played a leading role in the island’s borrowing and financial affairs for decades. Its activities are so numerous and critical that analysts have worried for months that the bank’s failure would have untold ripple effects across the island. Puerto Rico’s governor, Alejandro García Padilla, who has warned about defaults for months, has expressed frustration with Washington’s inability to act quickly.
“On Monday there will be a default,” he said on Wednesday. The bank has until the close of business on Monday, since the May 1 due date falls on a Sunday.
But the bigger issue may be that second, larger debt bill due in July, roughly $800 million of which is constitutionally guaranteed, giving the payment of it legal priority even over the funding of essential public services, such as police patrols, ambulances or drinking water. Investors who hold the guaranteed debt say they are prepared to fight to enforce their legal rights, no matter how much it may shock and anger the island’s residents.
“There’s too much discord,” said Matt Fabian, a managing director at Municipal Market Analytics, referring to the rancor over the rescue bill. “This was supposed to be a very controlled process, and it just got out of hand.”
 
In addition to lobbying Congress, some of the bondholders are sponsoring television ads that depict the rescue of Puerto Rico as an odious taxpayer bailout. And some other creditors are in quiet talks with representatives of the Puerto Rican government, testing the waters for a sweeping negotiated debt reduction that might obviate congressional action.
Despite the power and importance of the Government Development Bank, its debts are not backed by any taxing power or constitutional guarantee. If it defaults on the looming $422 million payment, its creditors have little legal recourse. And much of the bank’s debt, in the form of municipal bonds, is held by more than 100 credit unions on the island — financial institutions that tend to serve mom-and-pop savers in Puerto Rico’s poor and remote communities.
“The island’s credit unions represent the nest egg of nearly 1,000,000 Puerto Rican families (one of every four Puerto Ricans) that trust their livelihood and savings in these financial institutions,” said the credit unions’ primary regulator in a statement released last year, when the sector held Government Development Bank debt with a face value of slightly more than $500 million, according to regulatory records. The regulator’s spokesman did not answer messages Thursday.
Historically, the credit unions were required to invest only in very safe assets. But in 2009 their regulators made an exception, allowing them to buy and hold riskier bonds, as long as the bonds were issued by some branch of the Puerto Rican government. The change gave the Government Development Bank a new way to raise money, by selling its bonds to the credit unions.
As a result, those institutions wound up with outsize exposure to the bank, which itself was found insolvent last year by Puerto Rico’s Commissioner of Financial Institutions. Officials on the island have been seeking a way to protect the credit unions from the bank’s expected default, but it is not clear what the mechanism would be, or whether it could even be put in place in time.
A payment default by the Government Development Bank would add to the list of extreme measures that Puerto Rico has undertaken to stretch its dwindling cash while waiting for Congress to enact its rescue package. It has already removed assets from its workers’ compensation pool and public pension system to pay bills, taken cash from low-priority bonds to make payments due on high-priority bonds, and extended a highway privatization, giving up future toll revenue in exchange for upfront payments of $115 million.
On Monday, holders of roughly $9 billion of bonds issued by the island’s Electric Power Authority are scheduled to buy $111 million more in bonds as part of a complicated agreement to keep the power company liquid and preserve a consensual restructuring deal. Those investors must decide by Monday whether handing over $111 million is worth it, under the current confused and deteriorating circumstances. But Puerto Rico has warned that if the new money does not materialize it may sue the creditors.
Photo
The Government Development Bank. A $422 million payment on its debt is due May 1. Credit Ana Martinez/Reuters
This group of bondholders, mainly mutual funds and other financial institutions, has emerged as one of four main creditor groups with a stake in the rescue legislation.
Another major group consists of bond insurers, known as “monolines,” which have insured about one-fifth of Puerto Rico’s total $72 billion of outstanding bonds. Their backing promised to make the affected investors whole every time Puerto Rico defaulted on an insured bond. Along with the first group, the monolines are deeply concerned about the methods the rescue legislation would use to ensure that different types of creditors are treated fairly.
A third creditor group consists of financial institutions that bought roughly $3.5 billion of general-obligation bonds that Puerto Rico sold in 2014, its last borrowing before losing virtually all market access after ratings agencies downgraded it to junk status. The 2014 bonds were purchased eagerly by hedge funds because they promised a high yield and because general-obligation bonds are explicitly guaranteed by Puerto Rico’s constitution.
Holders of this block now argue that Congress should not interfere with Puerto Rico’s constitutional promises; the Treasury Department has argued that none of Puerto Rico’s bonds should be exempt from the bill’s restructuring framework.
The fourth major creditor group consists of investors who hold so-called Cofina bonds, which were sold from 2006 onward, backed by a dedicated sales tax. These bonds were advertised as virtually default-proof, but as Puerto Rico’s troubles have mounted over the last year, the Cofina investors have grown worried that the island may decide to divert their sales tax revenue to pay some other creditor group, such as the general-obligation bondholders, who say the constitution gives them first calling rights on all the island’s resources.
The Cofina bondholders’ secret weapon is an agreement that the bonds will “accelerate” in the event of a payment default, meaning that instead of waiting for a 30-year maturity, the holders would immediately be entitled their full present value. This feature makes the Cofina bondholders the only group that would actually benefit from a default on their holdings — and a wild card in the deck that Congress keeps shuffling.




When House Speaker Paul D. Ryan ordered debt relief for Puerto Rico, he may not have known just how intractable the differences were going to be. Credit Andrew Harnik/Associated Press




Puerto Rico Debt Deadline Looms With Washington Still Haggling

Thursday, April 28, 2016

House conservatives voice skepticism over Puerto Rico bill

House conservatives say they’re worried that a bill to institute financial oversight over Puerto Rico and restructure its debt could set harmful precedents that stifle the bond market and trample states rights.

They also fear a last-ditch bailout of Puerto Rico could be necessary if the legislation fails to help it.

The House is expected to miss a crucial May 1 deadline to pass a bill to help Puerto Rico settle more than $70 billion in debt.

Several dark money groups have run ad ads panning the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) as a bailout, though no taxpayer money will be sent to Puerto Rico under the current proposal.

Rep. Dave Brat (R-Va.), a member of the conservative House Freedom Caucus, said PROMESA isn’t a bailout on its face, but he’s concerned that one could be necessary if the fiscal oversight board it establishes fails to clean up Puerto Rico’s debt.

"I don't think it's fair to say it's going to be a bailout upfront. I think that's accurate, but the major is concern is will it end up being a backstop?,” Brat said Wednesday. “If we go along with setting up a control board and something goes wrong...who’s the backstop?

“And who was the backstop for when federal policy utterly failed and lost half the stock market’s value in half a day?” he said. “The American people.”

Some conservatives aren’t opposed to debt restructuring in principal, but worry about certain precedents the bill could set.

Rep. Raul Labrador, another Freedom Caucus member, said he could only support a bill that respects debt payment priorities written into Puerto Rico’s constitution and doesn’t prioritize payments to pensioners. He cited concerns that doing so could lead to violations of state constitutions and stifle the bond market.

"Whatever we do on Puerto Rico cannot affect our states and cannot affect the way that we're going to respond to any fiscal crisis in the future for any of the states,” said Labrador, a member of the House Natural Resources Committee, which is handling the bill. “I think if we can get those two things, most conservatives can support a bill that gives the debt restructuring mechanism to the island of Puerto Rico."

Freedom Caucus Chairman Jim Jordan (R-Ohio) echoed Labrador’s concerns about prioritizing pension payments over bond payments.

"If you move them up and treat them different like they did in Detroit, then now it's not one thing that happened in Detroit. It's becoming a pattern...and my understanding is that is has implications for the entire bond market,” said Jordan, citing Detroit’s bankruptcy in 2014. “ And that is a real concern."





Labrador also said he was squabbling over the specificity of the bill’s language with Natural Resources Committee leaders who he said are risking executive overreach to gain Democratic support.

The fight that I'm having right now with the people who drafted this bill is that they want the language to be loose enough that we can get enough votes from the Democrats,” said Labrador. “Well guess what? If the language is loose enough, you're going to be able to get around the language."

By Sylvan Lane

House conservatives voice skepticism over Puerto Rico bill

Congress Is Running Out of Time to Save Puerto Rico

On Sunday, Puerto Rico will likely default again on some of its debts, which now total over $70 billion. The island will struggle to provide vital public services like water and electricity if it can provide them regularly at all. Its economy has not grown in over a decade, and there is a $28 billion gap in funding over the next five years alone. Over the next decade, many people will face very real consequences from the developing crisis, and as always, the pressure to emigrate to the continental United States remains high. For many, the situation is fight-or-flight.

No state has recently faced such dire straits as Puerto Rico, even during the Great Recession. But Puerto Rico is not a state. It is an entity that is often almost completely at the whim of Congress, the most dysfunctional body in national politics today. Congress has toyed with policy on the island for decades, leaving a confusing and contradictory set of legislation and precedents behind. Today, gridlock politics in Congress threaten to deny Puerto Rico the very tools it needs to fight its battle.

For much of the rest of the country, congressional deadlock is at worst an infuriating reality of the current partisan divide. It may be an enemy of progress, but not necessarily its sole determinant. The American economy has rebounded despite years of bitter fighting and sequesters and budget showdowns, and for most Americans, life has improved, despite a political environment that favors inaction and bluster. In Puerto Rico, however, the crisis will approach life-or-death if it is allowed to continue. Public hospitals and health-care facilities may close, exacerbating an ongoing crisis that already sees Puerto Rican patients receiving far worse health care than their mainland counterparts. Many of those who remain on the island after the mass exoduses of the past half-decade are the poorest, the sickest, and the oldest, and the island’s population and tax base are still plummeting. To add injury to injury, Puerto Rico has become the primary American front in the public-health fight against Zika, just as the health, economic, and social infrastructure needed to fight the virus are eroding.

Puerto Rico has few political mechanisms to solve its own problem, and the crisis is far beyond the reach of most of the tools that it does have. Raising taxes on a declining and impoverished tax base can’t close its massive deficit. Vague proposals to spur economic growth and industry seem unrealistic given the nature of the challenges ahead, and the island has lost many of the tax incentives that once made it such an attractive destination for business subsidiaries. Puerto Rico has attempted to solve its debt issues by granting itself bankruptcy powers under rules that grant service providers in the states the ability to seek relief, but that decision remains under Supreme Court review and has been opposed in no uncertain terms by the federal government. With even its power of self-determination under review, Puerto Rico has only one real option for assistance: Congress.

However, the existing plans in the House and the Senate seem designed to underwhelm, if they can even garner enough support to pass in the first place. Responding to public pressure from the popular playwright and actor Lin-Manuel Miranda, House Speaker Paul Ryan said that his plan would help the island. But it refuses to grant a bailout, instead offering a byzantine process to install an appointed financial-oversight board for Puerto Rico that could vote to allow it to restructure its debts and would control its finances. Essentially, the solution is soft colonialism by a new name. The plan also exempts Puerto Rican workers under 25 years old from the labor protections of a federally-mandated minimum wage and overtime regulation, with the goal of making Puerto Rico’s job market more competitive in comparison to its neighbors. This provision alone might make the legislation difficult to pass in Congress, and even if it is removed the plan is still very much at risk of falling victim to ordinary partisan obstructionism.

So far, a bailout or any real injection of funds into Puerto Rico has been deemed a non-starter, even though the territory has always been much poorer and in much worse financial straits than states. Even without any bailout provisions, the bill still stalled after being introduced in the GOP-led Natural Resources Committee by Republican Chairman Rob Bishop. Democrats have expressed reservations about the sweeping powers of the oversight board and its minimum wage provisions, but the real hold-up seems to be complex wrangling between the Republican leadership and multiple other constituencies, including the conservative Freedom Caucus and groups representing different bondholders. Some of the most conservative legislators see the bill as a path towards a bailout or oppose assistance to the territory in any terms. Representatives of those who hold the territory’s general obligation bonds oppose the bill as well, because it would allow Puerto Rico to restructure its debts and delay payment, as well as limit the ability of bondholders to sue if it defaults. The concerns of ordinary Puerto Ricans, by contrast, have largely been ignored.

Congress isn’t new to this debate; its past actions helped create the issues that have culminated in Puerto Rico’s current crisis. After the island was taken as a possession after the Spanish-American War, the Supreme Court decided in a series of “Insular Cases” that the totality of citizenship rights and state powers only applied to states and people living in so-called “incorporated territories,” which were retroactively defined as Alaska and Hawaii. Puerto Rico was left as an “unincorporated territory,” despite Congress establishing a formal independent government and constitution—actions which Puerto Rico’s highest court holds made it a de facto incorporated territory. That argument has gone unacknowledged by the Court, Congress, and the executive branch.

In the years since, the federal government has assigned and overridden territorial powers and burdens at whim. In 1984 Congress specifically carved Puerto Rico out from Chapter 9 municipal bankruptcy protections that it once had, offering no reason for singling out the territory. Also in 1996, Congress passed legislation to phase out Section 936 of the federal tax code, a law that exempted U.S. industries from taxes on income in Puerto Rico. With no replacement plan to promote development or growth, Puerto Rico’s economy suffered. Those two decisions have led almost directly to the current debt crisis.

Federal decisions have also eroded Puerto Rican finances and health care in other ways. Puerto Ricans have been required by Congress to pay Medicare payroll taxes like every other citizen, but Medicare spending has been cut in the island. Medicaid, the program that pays for much of the health care of poor and low-income people, has a cap at just 20 percent of true costs in Puerto Rico, an amount well below the national average and the rates set in the fifty states. The Medicaid underpayment deficit alone accounts for almost one-fifth of the current total deficit in the territory. A legislative medical-funding scheme could both help right the financial ship in Puerto Rico and help its crippled health-care system face the siege of Zika.

Congress, in essence, has kept from Puerto Rico the privileges of self-determination afforded to states, while refusing to use its expansive authority in the territory to lift its population up to the economic and medical standards enjoyed by those on the mainland. This is a political limbo. On the one hand, Puerto Rico clearly does not have the tools to handle its own affairs and Congress and the courts have been loathe to grant it additional powers of sovereignty. On the other, Congress keeps a hard line of minimal intervention and minimal support. As an end result, Puerto Ricans get a controlling power that dominates not through direct, overbearing intervention, but through its conspicuous absence.

Granted, the government of Puerto Rico is not blameless in this saga. Its public-services monopolies are extraordinarily inefficient; the territorial government has not been good with spending, budgeting, or long-term fiscal planning; and the two major parties––for statehood and the status quo––have supported some congressional reforms with the goal of forcing the other side’s hand, instead of promoting good governance. However, the federal government still has a certain responsibility to its citizens, regardless of the actions of their home state or territory. Whether this responsibility is taken seriously with respect to Puerto Rico will reveal whether the United States has truly moved on from its colonialist past.

As it currently stands, without swift federal intervention Puerto Rico will be left as a floundering, sinking no-man’s land, instead of a thriving home to millions of proud Americans. Congress’s dysfunctions might run so deep that they keep it from even addressing a humanitarian crisis in the country, a total failure of the body’s special duty towards Puerto Rico. Congress’s current plan might provide short-term relief, but it is a bit of a Hobson’s choice. The bill on the table could still further entrench a colonialist solution––less and less territorial oversight over finances––and may not even entirely fix the problem. But Puerto Ricans are at the mercy of Congress in finding some solution. Even if statehood is not the final answer, the people living in Puerto Rico deserve the same helping hand that would be given to the people of any state.






As Puerto Rico reaches another debt cliff, political dysfunction on the mainland spells disaster.

Congress Is Running Out of Time to Save Puerto Rico

Puerto Rico's Governor Says the Island Will Default on Monday

Puerto Rican officials talked tough ahead of a major debt payment due on Monday, with the U.S. territory’s governor predicting default, and chances slipping for a restructuring deal with creditors.
Speaking to reporters on Wednesday, Governor Alejandro Garcia Padilla said “there will be a default on Monday,” adding, “I don’t think there is a deal on the table that avoids a default.”
Puerto Rico’s Government Development Bank, the island’s primary fiscal agent, owes creditors $422 million on Monday, a payment Garcia Padilla has said the bank cannot afford. The looming default is part of a broader economic crisis in the Caribbean haven plagued by $70 billion in total debt, a shrinking population and a 45% poverty rate.



Restructuring talks are ongoing between GDB and a creditor group holding more than $1 billion of its roughly $4 billion in total debt. The group includes hedge funds Solus, Brigade and Claren Road.



Last week, a source close to the matter told Reuters the GDB and the creditor group struck a deal on a debt exchange that could be worth between 47 and 50 cents on the dollar. The end value depends on whether Puerto Rico reaches a broad restructuring deal with all of its creditors. But two other sources at the time said sides were not close to a deal.

The first source on Wednesday said the offer remains but its prospects seem bleak, adding there is “no indication” of progress on a deal or even a forbearance agreement that would let the sides talk through Monday’s deadline.
Garcia Padilla already declared a state of emergency at GDB, and signed a law this month allowing him to impose a moratorium on any debt payment he deems necessary.
The governor will exercise that power at GDB if Monday arrives with no deal, his spokesman, Jesus Manuel Ortiz, told reporters on Wednesday. “As of today, we don’t have the cash to make the payment,’ Ortiz said.
Restructuring talks at GDB started slowly this year on hopes the U.S. Congress would legislate a fix. Congress continues to debate a contentious bill to allow Puerto Rico to restructure its debt, but it likely remains weeks away from a vote.
The GDB is the main liquidity source for Puerto Rico’s public agencies. A default threatens other operations on the island and could affect broader debt restructuring talks being led by the GDB.
Puerto Rico's Governor Says the Island Will Default on Monday

Wednesday, April 27, 2016

Puerto Rico senators reject debt moratorium bill as bond payment deadline looms

Senators in Puerto Rico say they will not approve an amended bill that would exclude certain bonds issued by the government from a debt moratorium.

A caucus of senators from Puerto Rico's ruling party said Tuesday that the bill is not consistent with the $70 billion debt restructuring that the U.S. territory is seeking from Congress.

The amended bill sought to exempt general obligation bonds and others from a recently approved law that allows the governor to declare a debt moratorium amid a dire economic crisis. Gov. Alejandro García Padilla had repudiated the amendments sought by a majority of representatives.

Senators are scheduled to vote on the amended bill on Tuesday.

The debt-ridden island faces a $422 million bond payment deadline Sunday with no sign that the U.S. Congress will act in time to help.

Further complicating lawmakers' efforts to steer the U.S. territory away from economic collapse are ads airing nationwide that claim the legislation amounts to a financial bailout, even though the bill has no direct financial aid.

Some House conservatives have latched onto that argument, making it difficult for Speaker Paul Ryan, R-Wis., to garner enough support for the bill. Natural Resources Committee Chairman Rob Bishop, R-Utah, says he is reworking the bill, and a new version could come as soon as this week.

It's unlikely, however, to come in time for Puerto Rico to avoid default on the nearly half-billion-dollar debt payment.

Based on reporting by The Associated Press.

Puerto Rico senators reject debt moratorium bill as bond payment deadline looms

Monday, April 25, 2016

Paul Ryan's Biggest Test Yet: Saving Puerto Rico From Congress

Puerto Rico’s complex debt crisis is shaping up as the first true test of Paul Ryan’s six-month old speakership.



The Wisconsin Republican has pledged publicly that the U.S. House will find a "responsible" solution to the island’s debt crisis. The issue may not factor widely in the November elections, but failure could prove disastrous -- both to Ryan’s credibility and in terms of the billions of dollars Congress would need to prop up the island’s finances.

Unlike many of his previous challenges, this isn’t a mess he can blame on his predecessor. If he can’t forge a solution, it also doesn’t bode well for Ryan’s ability to bring his recalcitrant conservative caucus along on other spending and tax plans, which could be a recipe for the continuing gridlock and peril that ousted John Boehner.
"To me, this is his first high hurdle. This belongs to him. This is his," said Representative Lynn Westmoreland, a Georgia Republican who briefly mulled running for speaker, but ultimately backed Ryan and later decided not to run for re-election this year. 
The high stakes explain why Ryan’s office has been involved -- often behind the scenes -- from the start. It could also ultimately find him having to strong-arm or bypass fellow conservatives, a move that would also break his promise for a new, bottom-up approach to running the House. 
Either way, time is running short. Congress is already blowing through a May 1 debt repayment deadline and Ryan needs to get something through both chambers before July 1 to avoid a likely default by Puerto Rico and a failure that could haunt his tenure.
Ryan’s immediate decision will be how much more time to give Natural Resources Chairman Rob Bishop of Utah, who Ryan put in charge of the bill, to forge a solution before taking over.

‘Bring Order’

Ryan himself has said inaction on Puerto Rico’s impending fiscal crisis could have deep ramifications for the U.S. "Our primary responsibility is to protect the American taxpayer and to help bring order to the chaos that will befall Puerto Rico if the status quo continues going in the direction it’s going," he told reporters on April 14.
But Ryan and his lieutenants have conceded that congressional action will slip past a May 1 deadline for a $422 debt repayment by the territory. Next up is a $2 billion payment due on July 1, raising the specter of default on some of the territory’s general obligation bonds.
When Ryan was chosen as speaker in October, Republicans had high hopes he could unite a fractured caucus. And he has largely enjoyed positive early reviews from House members, who praise him for returning more power to committees and rank-and-file members. 
But Ryan has also had his share of struggles, including missing an April 15 deadline for the House to pass a fiscal 2017 budget. Ryan had said kick-starting the budget process would be part of his promised return to legislative "regular order." His efforts have instead found him wrestling with the same fiscal conservatives in the House Freedom Caucus and others that helped to usher Boehner out the door last fall.

Ryan’s Mess

While he can try to pin many of those woes on Boehner, Ryan owns the Puerto Rico problem.
It was Ryan who cut the deal with Democrats last December that kept Puerto Rico out of the sweeping omnibus spending bill. In return, Ryan promised to offer a plan by March 31 to deal with the territory’s $70 billion debt crisis.
The House Natural Resources Committee did produce a discussion draft, HR. 4900, before the deadline, but efforts to agree on some orderly combination of a federal financial oversight board and a framework for debt restructuring have since stalled. Republicans, Democrats and U.S. Treasury Department officials differ on details, including the scope of the board’s powers, how to deal with creditors, and how long creditors should be blocked from suing the island.
This is all playing out amid intense lobbying -- not only by Puerto Rico’s government, but also insurers and holders of Puerto Rico bonds, who themselves are split.

‘Bailout Scheme’

Some of the loudest objections to the current draft being negotiated by Bishop are coming from House Republicans, including many on the committee itself. Some cast the proposed legislation as a "bailout scheme" -- if not an actual bailout -- something adamantly disputed by Ryan.
"Puerto Rico’s increasing fiscal problems are the result of mismanagement and unsustainable policies enacted by the local government and under no circumstance will I support a taxpayer-funded bailout of Puerto Rico," said Representative Doug Lamborn of Colorado, a member of the committee.
Such complaints are contributing to doubts about Ryan’s ability to deliver consensus within his own conference. They’re also raising questions about Ryan’s efforts to restore more legislative decision-making to the committees, as opposed to the speaker imposing his will. 
"The underlying governing dynamic that forced John Boehner to depart is still there -- whether on budget or Puerto Rico or any other number of issues coming up," said Representative Charlie Dent of Pennsylvania, co-chairman of a group of House Republican moderates. "That’s not a criticism of Paul, by the way. That’s just a statement of fact and an acceptance of reality. Face it, we have a number of members who have a very difficult time getting to ‘yes,’ and that is structural and it does not matter who is speaker."
But Dent said there’s "an urgency" and "this one of those issues of governance you got to get done, even if we’re going to need Democrats to help us pass the bill."

Bottom-Up Approach

A House leadership aide responded that Ryan’s bottom-up push to let the committee do its work may not be as neat and tidy as having the speaker jam the legislation through, but Ryan remains committed to it. The aide also noted that Ryan has always said the bill would require bipartisan support in order to make it through the Senate, and he remains optimistic a bill will be passed.
To boost his cause, Ryan’s office has been circulating opinions from some conservative fiscal groups in support of the bill and arguing that it is not a bailout of Puerto Rico, including one from the influential Americans for Tax Reform, founded by Grover Norquist.
"The Oversight Board has the authority to mediate voluntary restructuring between stakeholders, and if (and only if) this breaks down, the board has the authority to facilitate court supervised restructuring. This is NOT chapter 9 bankruptcy," read one statement from the group, which added that any suggestions that this is a bailout are false.

Supportive Democrats

When it comes to Puerto Rico, Ryan has won plaudits from Democrats for his approach.
Representative Luis Gutierrez of Illinois says the speaker has been approachable and collegial in the discussions. But he says that, in retrospect, Minority Leader Nancy Pelosi and Democrats should have pushed harder to include Puerto Rico language in the spending deal last year -- when they had more urgent leverage.
Now, Ryan finds himself pushing a legislative effort and trying to reach a bipartisan deal with fellow Republicans who are skeptical about the bill, which Representative Tom Cole said is gaining a "high profile" in districts in "a very volatile political year."

Advertising Blitz

Some House Republicans are being hit back home with ads from groups that describe the bill as a bailout, which Bishop said has only added to confusion among his constituents.
"All they’ve heard is that same stupid ad," said Bishop. "It is bizarre that the number one issue in the First District of Utah is Puerto Rico."
"We ought to just legislate and do the best we can," said Cole, who said he believes Ryan will get the bill through.
Ryan, during a news conference Thursday, sounded defensive about the bill’s progress. "We made the deadline which was to get the bill introduced by the end of the first quarter," he said, referring to his March 31 promise.
"Now, the Resources committee is working on technical aspects," said Ryan. "I think they are doing very well. We just want to do it right."


Paul Ryan's Biggest Test Yet: Saving Puerto Rico From Congress

Hedge funds want Puerto Rico to borrow more cash

Some hedge fund investors in Puerto Rico’s debt, staring at the possibility they will be forced to take a severe haircut as part of a reorganization of the territory, have recently floated a novel plan: Have the island’s government borrow even more money, The Post has learned.

Several funds that  own Puerto Rico’s general obligation (GO) bonds are telling members of Congress they want to exchange their debt for newly issued bonds, sources close to the situation told The Post — even though Puerto Rico can’t pay its present $72 billion in debt.

The proposal would result in the funds retaining more of their profits than they would if Congress allowed Puerto Rico access to a court-supervised reorganization — but is still a risk for House Speaker Paul Ryan, who is trying to craft a bill Republicans, Democrats and creditors can support.

The clock is ticking. Puerto Rico is facing a May 1 debt payment it can’t afford to make. Ryan wants to present legislation to Congress next week, sources said.

The GO bondholders want Congress to create a “control board” to sell $6 billion in bonds backed by an existing petroleum tax.

The lenders would exchange some of their debt, now trading at 60 cents, for new bonds they believe would trade at more than 80 cents, one source said.

What Puerto Rico would get from the deal is a lower interest rate, around 5 percent, compared with the 8.7 percent it pays now, and a later maturity, the source said.

The control board would have the right to reduce most of the 13 different classes of debt but not the GO bonds.

“A partial cram-down is a compromise,” said a source close to the GO bondholders.

The Obama administration has been pushing for the right to impair all creditors, so Puerto Rico can reduce its debt and get more breathing room.

That would never pass muster with the conservative Republican wing, so Ryan is in a tight space — pressing to see how far he can push a bill and not lose that conservative support. Ryan’s office did not return calls.

By Josh Kosman

Hedge funds want Puerto Rico to borrow more cash

Monday, April 11, 2016

Week ahead: Puerto Rico, budget top House agenda

The House is coming back from recess and jumping right into the Puerto Rico debt crisis.

House lawmakers are expected to unveil the Puerto Rico Oversight, Management, and Economic Stability Act on Monday. It follows a discussion draft released two weeks ago by the House Natural Resources Committee. That panel is scheduled to hold a hearing on the bill Wednesday at 10 a.m.

Lawmakers are scrambling over how to help the island deal with its $72 billion in debt. Democrats want to allow the territory to be able to declare bankruptcy. But the island's creditors have lobbied hard against that idea. Republicans have floated aid for the island in exchange for new oversight.

Puerto Rico isn't the only big issue waiting for lawmakers. The House is also barreling toward a deadline for rolling out its fiscal 2017 budget. Leadership will have until the middle of the week to resolve a split between fiscal hawks who want spending under the levels set in last year's budget deal and defense hawks who want increased military spending.

The Senate is scheduled to be busy holding hearings on cybersecurity and protecting taxpayer information. Lawmakers are also slated to hold hearings on the controversial EB-5 investment visa program. The upper chamber is also beginning its appropriations process, with committees holding hearings on budgets for the Securities and Exchange Commission and Commodities Futures Trading Commission.



Your week ahead:



Tuesday:

  • Senate Finance Committee: Hearing on examining cybersecurity and protecting taxpayer information, 10 a.m
  • Senate Appropriations subcommittee on financial services: Hearings to examine proposed budget estimates and justification for fiscal 2017 for the Securities and Exchange Commission and Commodity Futures Trading Commission., 10:30 a.m.
  • House Rules Committee: Business Meeting: H.R. 2666: No Rate Regulation of Broadband Internet Access Act. The bill would bar the FCC from setting rates for monthly Internet service. H.R. 3340: Financial Stability Oversight Council Reform Act; H.R. 3791: The bill would raise the consolidated assets threshold under the small bank holding company policy statement and for other purposes.


Wednesday:

  • Senate Environment and Public Works Committee: Hearing to examine the role of environmental policies on access to energy and economic opportunity, 9:30 a.m.
  • Senate Judiciary Committee: Hearing to examine EB-5 targeted employment areas, 10 a.m.
  • Senate Budget Committee: Hearing to examine budgeting for outcomes to maximize taxpayer value, 10:30 a.m.
  • Senate Agriculture Committee: Hearing on "Energy and the Rural Economy: The Impacts of Oil and Gas Production," 10 a.m.
  • House Natural Resources Committee: Legislative Hearing on a Discussion Draft of the "Puerto Rico Oversight, Management, and Economic Stability Act, 10 a.m.
  • House Small Business Committee: Hearing entitled "Keep It Simple: Small Business Tax Simplification and Reform, Main Street Speaks," 11 a.m. The panel has another hearing entitled "Keep It Simple: Small Business Tax Simplification and Reform, the Commissioner Responds," at 2:30 p.m.


Thursday:

  • Senate Banking subcommittee on investment and subcommittee on economic policy: Joint hearings to examine current trends and changes in the fixed-income markets, 10 a.m.
  • House Science Committee hearing entitled "Can the IRS Protect Taxpayers Personal Information?" 10 a.m.
  • House Small Business Committee: Hearing entitled "Regulation: The Hidden Small Business Tax," 10 a.m.


Recap the week with Overnight Finance:

Monday: New limits on offshore tax deals; Panama Papers fallout

Tuesday: Obama takes on offshore tax deals

Wednesday: Fight over financial adviser rule; New tax rules sink drug merger



Thursday: Sanders, Clinton take the gloves off in Wall Street fight

By Sylvan Lane

Week ahead: Puerto Rico, budget top House agenda

Saturday, April 09, 2016

Draft bill for Puerto Rico will only hurt the island

Puerto Rico: The direct translation is "Rich Port City." As Washington insiders debate the resolution bill recently proposed by the House Natural Resources Committee, it's worth acknowledging that it isn't a rich port city at present. It can be again — and it should be again — but this bill won't get Puerto Rico there.

The first time I visited Puerto Rico was with a law school friend, and I spent three weeks on la isla del encanto, "the enchanted island." It certainly was, and I fell in love with it. I have since taken my sons there for treasured family vacations.

The first thing that struck me was that the very moment the plane landed, every single passenger started to clap and cheer. The passengers next to me couldn't understand my surprise and asked, "Doesn't everyone clap when you land at your home?"

As American citizens, Puerto Ricans have traditionally been among the most highly decorated soldiers in American wars, and over 40,000 Puerto Rican soldiers fought in World War II. We think of Puerto Rico as another place, but Puerto Rico sits at the heart of America's past and its future.

This is the reason it is such a shame that some in Washington are trying to perpetrate a great fraud on the Puerto Rican people. They hesitate to exempt Puerto Rico from detrimental union-backed initiatives.

For example, the Jones Act, adopted to subsidize union labor at American ports, puts Puerto Rico at a tremendous disadvantage in international trade. Why have domestic unions insisted on preventing Puerto Rico from obtaining an exemption from this job-killing law? I can only imagine it is because they're afraid it would prove rescinding Jones Act red tape might create more jobs in the United States as well.

And President Obama's recent trip to Cuba makes things worse for Puerto Rico. Caribbean island tourism is the lifeblood of Puerto Rico's economy. Obama chose to open up relations with Cuba at this key moment in Puerto Rico's future and just gave a tremendous boost to what will become Puerto Rico's newest competitor.

Appeals to conservative principle may no longer carry the day in this Congress, but they deserve a try anyway. Here goes: Property rights were the foundation of the Constitution and the republic it created. When government suddenly decides that a creditor's rights are void, without warning, we live in a banana republic.

That is the way the late Venezuelan President Hugo Chávez used to deal with his creditors. When he grew frustrated with the operation of private industry, he simply nationalized it. Make no mistake, the House bill effectively nationalizes Puerto Rican debt, Chávez-style. Even worse, the bill would force the retirees and pension funds who hold Puerto Rican debt to fund this government bailout.

The draft bill proposed by the House Natural Resources Committee contains a "cram-down" of creditors that would allow Puerto Rico to walk away from its debts — once again, Chávez-style. House Republicans rightly opposed a mortgage cram-down during the financial crisis, and so it's certainly inconsistent that they would embrace the concept here.

This modus operandi has grave consequences for the island. If future creditors know their contractual rights can be suspended on a political whim, the interest rates they charge will go up. There is no way around that basic law of economics here: It will mean borrowing costs for the island will increase going forward. There is no reason to inflict that kind of pain on an island that has already seen such struggle.

Members of Congress will be remembered for how they act on this issue. Ahead lies the entitlement reform debates for which Speaker Paul Ryan (R-Wis.) made his name. If they waiver here, how will they ever bolster the courage to press entitlement reform forward in future fights?

Verret is an assistant professor at the Antonin Scalia Law School at George Mason University, a senior scholar with the Mercatus Center at George Mason University, and former chief economist and senior counsel to Chairman Jeb Hensarling (R-Texas) of the House Financial Services Committee.

By J.W. Verret

Draft bill for Puerto Rico will only hurt the island

Friday, April 08, 2016

Pelosi Statement on Natural Resources Committee’s Scheduled Puerto Rico Legislative Hearing

Washington, D.C. – Democratic Leader Nancy Pelosi released the following statement after the House Natural Resources Committee announced it will hold a legislative hearing on Chairman Rob Bishop’s discussion draft of legislation to address Puerto Rico’s fiscal crisis and unsustainable debt burden:

“As Republicans schedule a hearing and move toward a markup of Chairman Bishop’s discussion draft, we hope we can continue our collaborative and constructive process to improve the bill and reach our goal of bipartisan, consensus legislation.

“Democrats continue to believe that more progress can be made on various aspects of the legislation.”

Pelosi Statement on Natural Resources Committee’s Scheduled Puerto Rico Legislative Hearing - Democratic Leader Nancy Pelosi

Special Report - Puerto Rico's other crisis: impoverished pensions

When Puerto Rico attempted to shore up its chronically underfunded public-employee pensions in 2013, Francisco del Castillo “knew grown men and women who wept.”

Under the reform package, retirement ages rose. So did employee contributions. Current and future participants were transferred to less-generous defined-contribution accounts, similar to 401(k) retirement savings plans. Del Castillo, then the deputy chief of the island’s largest government-employee pension system, said members of his own staff who were on the verge of retirement suddenly faced the prospect of working seven or eight more years for reduced benefits.

The law extracted “a pound of political flesh” from those, like del Castillo, who helped craft it, he said. “We wanted it to work.”

It didn’t, largely because Governor Alejandro Garcia Padilla’s government hasn’t held up its end of the bargain.

To give the politically painful fixes time to take hold, the reforms required government employers to fund the pensions in the short term through annual lump-sum payments. The central government was supposed to have made $367.6 million in such payments since 2014; so far, it has forked over just $22.7 million.

Governor Garcia Padilla's office declined to comment for this article.

Failed fixes like the 2013 reforms help explain why Puerto Rico’s public-employee pensions today are nearly broke – a financial debacle decades in the making, and now deeply entangled with the island’s $70 billion debt crisis.

Since Puerto Rico gained self-rule in the late 1940s, improvident populist governments have lavished additional pension benefits on public employees, from holiday bonuses to loans for international travel. These measures have rarely been accompanied by moves to pay for them, and occasional efforts to fill the funding gap have fallen short.

Puerto Rican leaders have been eternal optimists, “always thinking things would eventually improve,” said del Castillo, 40 years old and now legal counsel to the Teachers Retirement System (TRS), one of two main public-employee pensions on the island. “But things continued to deteriorate, and deteriorate, and deteriorate.”

Today, TRS and the other main pension fund, the Employees Retirement System (ERS), together covering about 330,000 workers and retirees, are virtually penniless. Their combined unfunded liability totals $43.2 billion. With about $1.8 billion in assets to pay $45 billion in liabilities, the 96 percent combined shortfall is among the biggest of any U.S. state pension this century, and probably the biggest ever for pensions “of this size and scale,” said Keith Brainard, research director at the National Association of State Retirement Administrators.

And they’re only sinking further. Their combined burn rate – the difference between what they pay out and what they receive in contributions – is more than $1 billion a year, forcing them to rapidly liquidate assets. At that rate, they are forecast to run out of money in 2019, according to a 2015 report by actuarial and consulting firm Milliman, on whose recommendations the government relies.

TRS officials declined several interview requests. ERS Administrator Pedro Ortiz Cortes said pensions “kind of fell off the radar” after the 2013 reforms. The legislation was “reasonable in theory,” he said, though “the ability to comply was not taken into consideration.”



SHIFTING THE BURDEN

Absent a permanent fix, the responsibility to cover benefits will shift to the Puerto Rican government, creating a pay-as-you-go system funded mostly by taxpayers. At $1 billion a year, retirement benefits would cost the island around 11 percent of annual revenue, an unsustainable burden when combined with the 36 percent of revenue now going toward paying bondholders.

The upshot is that an island of 3.5 million people, where nearly half the population lives below the poverty line and the economy has been contracting for most of the past decade, is at a crossroads where neither path forward is appealing.

It can protect pensions, forcing hedge funds and other bondholders to accept draconian cuts under a debt restructuring – a scenario that could wreck Puerto Rico’s ability to borrow internationally for years.

Or, it can lessen the burden for bondholders by cutting pensions as well, sparking domestic political backlash and fueling outmigration that would further shrink an already dwindling tax base.

“I would need to go to the U.S., sell my house and start looking for a job” if pensions were cut, said Obdulia Lopez, 60, a retired social services worker from rural Juana Diaz who lives on a pension check of about $1,000 a month, after taxes.

Puerto Rico can’t fully control which path it takes. Governor Garcia Padilla’s administration on Feb. 1 unveiled a plan that would preserve pensions while reducing what’s owed to bondholders. The Obama administration also promoted a plan to protect pensioners over investors, and Puerto Rico’s top financial adviser, turnaround specialist Jim Millstein of Millstein & Co, in February said the island has taken pension reform as far as it can under current law.

But creditors with lobbying power -- including hedge funds, mutual funds and bond insurers -- want the Puerto Rican government to do more to curb spending, on pensions and other things. One source in the creditor camp called it “insane” to propose that “bondholders … effectively take all the hit.” Another said: “Puerto Rico’s people are really the ones being victimized. If I had a heart, it would be breaking for them.”

Majority Republicans in Congress are standing with bondholders. In a written response to questions from Reuters, Utah Republican Orrin Hatch, who chairs the Senate Finance Committee, said: “It’s pretty clear a pay-as-you-go Puerto Rico pension system is no more sustainable than Puerto Rico’s debt.”

In March, a group of 170 House Republicans voiced opposition to a draft bill by the House Natural Resources Committee that would allow for debt restructuring.

Garcia Padilla has warned that without a resolution of some sort, Puerto Rico stands to default on some of its $70 billion in debt as early as May, when $422 million comes due.

The government payments into the pension funds under the 2013 law were designed to avoid the very conflict now playing out. Instead, they ended up as yet another example of how solutions can create new problems in the complexities of Puerto Rico’s crisis.

To reduce costs, Puerto Rico has cut its government payroll in recent years through layoffs and other measures that have led to declines in pension contributions. The payments from the government’s general revenue fund were calculated in part to offset those declines, so skipping them means the island’s payroll savings have only deepened the hole for retirees.

Maria Carattini Alvarado, a 72-year-old former teacher who spends more than half of her monthly pension on medicines for a blood condition, supplements her income by making ribboned hats that she sells for $5 a pop. “I’d go live with my son in Texas” if pensions were cut, Carattini said.

In Puerto Rico, teachers, as well as police officers, are ineligible for Social Security, so pension payments are often all they have in retirement. Like many retired teachers, Carattini gets affordable healthcare and housing through programs set up by the Associacion de Maestros, one of Puerto Rico’s teachers’ unions.



But those benefits could disappear, too, if pensions collapsed, said union President Aida Diaz. “If people can’t afford their dues, we can’t provide those services,” said Diaz, herself a pensioner.

Most pensions have a few decades to mature, building up assets in the early years before members retire. Puerto Rico’s pensions carried big unfunded liabilities nearly from the outset, inheriting them from retirement systems in place before the island became a self-governed U.S. commonwealth in 1948. From there, longer life expectancies helped deepen the gap.

So, too, did island leaders. Populist Luis Munoz Marin, Puerto Rico’s first elected governor, in 1956 instituted cultural excursion loans for pensioners. Puerto Rico was in “a stage of rapid social, economic and political development,” the 1956 law said, and should aim to enable “the largest possible number of Puerto Ricans to travel to foreign countries.”

Today, ERS and TRS participants can take out as much as $5,000 to travel if they can show that the trip will be culturally rewarding. The pensions also offer as much as $5,000 for personal loans and $100,000 for mortgage loans. Together, the two funds have more than $1 billion tied up in illiquid loan portfolios.



'CANDY TO CHILDREN'

The largess continued under Luis Ferre, governor from 1968 to 1972, who increased benefits and instituted mandatory Christmas bonuses. Last December, creditors griped privately when Puerto Rico doled out about $120 million of the bonuses even as it missed some minor bond payments.

Christmas and medication bonuses, ad hoc cost-of-living adjustments, death benefits and other perks were expanded periodically throughout the 1980s, ’90s and 2000s. These now account for nearly $3 billion in liabilities, according to Milliman’s latest actuarial report, even after reductions under the 2013 reforms.

Rafael Hernandez Colon, president of the Puerto Rico Senate during Ferre’s administration, said his party went along with the Christmas bonuses “for political reasons” to avoid being labeled obstructionist, but did not consider it good governance. “We looked at it as giving candy to children,” Hernandez Colon said in an interview at his foundation in Ponce, a city on Puerto Rico’s southern coast.

Yet when Hernandez Colon won the governor’s seat in 1972, his administration approved perhaps the most structurally damning benefit of all. Under a 1973 amendment to existing pension law, government employees who retired at 55, with 30 years of service, were entitled to lifetime annual payouts worth 75 percent of their salary.

That percentage was based not on a worker’s career average salary, but on the average of his three highest salaries. So those who were promoted close to retirement, or for only a short time, could earn lifetime pensions disproportionate to contributions.

“People were making pensions that might not have reflected the average of what they were putting in over decades,” said Marcos Rodriguez-Ema, a banker and former government official involved in pension reform efforts in the 1990s and 2000s.

Familiar populist language peppered the 1973 legislation, vowing to “stimulate the creative vitality” of workers who had dedicated their lives to Puerto Rico, and cushion them against the “uncertainty that comes with age.”

The amendment brushed off concern about future financial strain on the pensions, saying their investments were producing revenue twice what actuaries had approved, so the “measures won’t be burdensome.”



“I feel that I was very sensitive to the pensioners and tried to comply with them in a responsible way,” Hernandez Colon, now 79, told Reuters. “Whether it was in fact responsible, you’d have to analyze it.”

The benefit structure remained in place until reforms in 1990 - during Hernandez Colon's second stint as governor - reduced benefits for future workers. Today, of ERS’s $30.2 billion total unfunded liability, about $24 billion – 80 percent – is attributable to that era, owed to people who worked, retired or were hired before the 1990 changes.

Another set of reforms in 1999, known as System 2000, eased the pensions’ long-term liabilities by moving future retirees to a defined-contribution system. But legislation to ensure adequate long-term funding for benefits, such as by increasing employer contributions, has been rare. Unlike in some states, the rate Puerto Rico contributes to its pensions is set by statute, rather than the recommendation of actuaries, and requires legislation to change. This makes pension contributions a political issue.

“People don’t want to make hard decisions today for savings that, when it would occur, they were not going to be in office,” del Castillo said.

Rodriguez-Ema helped shape what would become System 2000 as president of Puerto Rico’s Government Development Bank (GDB). He said that so long as Puerto Rico’s economy kept growing and ratings agencies weren’t concerned about pension liabilities, strengthening the pensions wasn’t a priority. “We realized we were going to have a problem, but it was in the future,” he said. “We could fund the retirement system without any problems whatsoever.”



ILL-FATED BONDS

That blithe approach came to an end by the mid-2000s, as the island’s economy showed its first signs of decline. When Anibal Acevedo Vila assumed the governor’s chair in 2005, the two pensions’ combined unfunded liability stood at around $12 billion. The new governor pushed a bill to authorize a $2 billion bond issue from the government’s books, with proceeds to go to ERS.

The bill died in Puerto Rico's legislature, a victim of political feuding.

Acevedo Vila’s next effort to boost pension funding proved disastrous. To skirt the need for legislative approval, his administration arranged for ERS to issue its own bonds – unheard-of for a public pension – and put up employer contributions as collateral. But, Acevedo Vila said, the government “needed to assure people the pension would not collapse.”

The plan was to raise $7 billion -- the amount the administration calculated was necessary to earn enough interest to cover ERS’s annual burn rate. The pension in 2008 sold $2.9 billion in the first of multiple planned tranches underwritten by UBS and arranged by Jorge Irizarry, then president of the GDB.

But Acevedo Vila, plagued by a lengthy indictment on charges he violated campaign finance laws, lost his 2008 re-election bid. (A jury later found him not guilty.) His successor, conservative Luis Fortuno, had no interest in issuing more bonds.

Instead, in what is widely viewed today as a political maneuver, Fortuno commissioned consultants Conway MacKenzie to examine his predecessor’s handling of ERS. The firm’s 2010 report excoriated the bond deal, calling elements of it so “obviously flawed and not logical” that it “could imply a lack of understanding” of the deal by island officials.

Conway concluded that UBS was hired to place the bonds locally only after Merrill Lynch failed to place them internationally, showing a lack of appetite for the full $7 billion. The report said Alfredo Salazar, GDB’s chairman at the time, and Irizarry should have known that raising less than $7 billion would fail to generate sufficient returns to pay bondholders and cover ERS’s burn rate, only adding to the pension’s liability down the road.



In separate interviews, Irizarry and Salazar said it was never the idea to issue all the debt at once. Conway’s report “misstated many facts and omitted others,” Irizarry said.

Salazar said the bonds were issued locally so they could qualify as tax-free. “We decided,” he said in an interview, “to do whatever capacity we could get in the local market and then move on to the taxable market if we needed more.”

A Conway spokesman did not return calls seeking comment. UBS and Merrill declined to comment.

Conway’s politically convenient conclusions may have taken pressure off Fortuno to solve the pensions’ problems, but few independent observers dispute one of its major findings: The bonds increased “the complexity of … fixing [ERS’s] fundamental structural problems.”

The bonds saddled pensioners with a big new obligation without generating enough returns to stave off insolvency. Chunks of government pension contributions are now going out the door to pay bondholders who rank ahead of pensioners in the payout line.

A former Acevedo Vila administration official told Reuters that if the administration had known that only $2.9 billion would be raised, it “wouldn’t have issued the bonds at all.”

Acevedo Vila insists the bonds extended the pension’s life. “I never said I fixed the problem,” the former governor, now 54, said at his law office in San Juan’s Rio Piedras neighborhood. “But I was doing something to give the pensions more time.”



FORTUNO’S EFFORTS

As governor, Fortuno signed a 2011 law that raised the government’s pension contributions – the first increase since the 1990 reforms – then appointed a bipartisan commission to explore more comprehensive changes.

In the end, he could not save the pensions, either. The commission never produced any draft legislation. Fortuno blames the man who eventually succeeded him as governor, Garcia Padilla.

In early 2012 – an election year – Fortuno’s commission began to coalesce around a proposal to reduce bonuses, raise retirement ages and increase employee contributions, Fortuno said during a phone interview from his Washington, D.C., law office.

Garcia Padilla, then a senator who headed the opposition party, withheld his party’s cooperation on any pension fixes, according to Fortuno and members of his administration. Garcia Padilla “was saying, ‘Luis Fortuno is the enemy of retirees. We’re not going to work with him. Vote against him,’ ” Fortuno said.

When pressed on whether he could have done more to reverse the pensions’ downward spiral, Fortuno said: “Maybe I could have done more in 2009 or 2010 to ram [pension reform] down the throats” of lawmakers by shutting down Puerto Rico’s government, “but I didn’t want to further shatter people’s faith in their economic future.”

As the crisis over pension funding was reaching fever pitch, Garcia Padilla, newly installed as governor, signed into law the kind of comprehensive pension reform that had eluded earlier generations – and which he had months earlier criticized Fortuno for trying to enact.

The April 2013 reform – the one del Castillo said caused some people to cry – imposed stricter terms on plan participants to improve ERS’s funding over the long term while requiring the government to pay into the system for a few years to cover short-term needs. The law “created a healing process” for ERS, del Castillo said, putting it on track to stabilize as legacy obligations die out.

Lawmakers tried to enact similar reforms at TRS, but Puerto Rico’s Supreme Court invalidated some key elements, putting teachers’ benefits in jeopardy in both the short and long term. Pension reform efforts generally have not addressed teachers, who today remain eligible for guaranteed, defined-benefit payouts.

Some people attribute this lack of action to the power of teacher groups. “They’re homogeneous, they’re well-organized, and they lobby hard,” said Hector Mayol, the top official at both ERS and TRS from 2009 to 2013. Pension cuts are more politically charged at TRS because beneficiaries don’t receive Social Security.

The 2013 law has hardly fixed ERS, though, largely because Puerto Rico has failed to follow its own law by withholding the bulk of payments into ERS, so-called additional uniform contributions (AUCs).

Maintaining pension benefits in the near term was part of the shared sacrifice to ensure pensioners’ long-term concessions were not made in vain. But 14 months after the 2013 reforms were passed – and on the heels of credit downgrades by S&P and Moody’s – Puerto Rico enacted Act 66, a fiscal emergency law that let the government suspend some financial obligations.

ERS is still waiting on about $345 million of the combined $367.6 million in AUCs owed by Puerto Rico's central government, according to data provided by ERS. Actuary Milliman raised the AUC for the current year, in part to offset decreases in pension contributions from layoffs and other payroll cuts, and in part to make up for previous years' missed payments.

But Ortiz Cortes, the ERS administrator, said the pension has not received any of this year's infusion from the central government, and only about $23 million from municipalities, public agencies and other employers.

That means next year's AUC will shoot even higher, and Ortiz Cortes said his staff has been told by the island’s budget officials not to expect close to a full payment then, either.

Through a spokeswoman, Budget Director Luis Cruz Batista declined to comment.

“It’s going to be a bumpy road” for pensions, Ortiz Cortes said. “Whatever goes down, it’s going to be bumpy.”



(Edited by John Blanton)



Special Report - Puerto Rico's other crisis: impoverished pensions

Puerto Rico Activists Crash Federal Reserve Panel With Creative Protest

Over a dozen activists descended on a building where Federal Reserve chair Janet Yellen and her three living predecessors were speaking on Thursday to demand that the Fed bail out Puerto Rico’s cash-strapped government.
The demonstrators, who are affiliated with the progressive Fed Up coalition, distributed Puerto Rican flags and empanadas as Puerto Rican music played outside Manhattan’s International House, a student residence. Yellen was there for an extremely rare panel discussion alongside past Fed chairs Ben Bernanke, Paul Volcker and Alan Greenspan, who participated via videostream.
The activists were joined by Puerto Rican lawmaker Manuel Natal, who was in town to participate in a panel discussion hosted by City Council Speaker Melissa Mark-Viverito on Friday.
“They have two mechanisms under their authority to help Puerto Rico: one is to provide a bailout to Puerto Rico similar to the one they did to banks, the same banks that are now in Puerto Rico making a fortune out of our fiscal situation,” Natal said. “And the second would be to buy our debt” and charge Puerto Rico interest rates that are lower than the market would offer.
The activists claim that since the Fed had the authority to buy trillions of dollars of bad debt from Wall Street banks after the 2008 financial crisis, it can do the same for the debt of Puerto Rico.
Economic observers with knowledge of the Fed’s functions consider that argument dubious. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who was an economist at the Fed Board of Governors for many years, said that the Fed is not allowed to buy municipal debt — of the kind Puerto Rico owes — that comes due over a period longer than six months. He also said such a purchase would be inconsistent with the Fed’s dual mandate of maintaining price stability and full employment. 
The Fed has “never bailed out any insolvent entity as far as I know. They always demand collateral sufficient to cover any loan,” Gagnon said, as the Fed did when it provided aid to major U.S. banks.
Natal, the lawmaker, also believes some of Puerto Rico’s debt has been issued unconstitutionally and can therefore be nullified. 
DANIEL MARANS/THE HUFFINGTON POST
Puerto Rico lawmaker Manuel Natal (left) and a fellow activist outside International House in Manhattan.


Greg Williams, a spokesman for Jubilee USA, a coalition of faith-based groups that advocates for global debt relief policies, declined to endorse a Fed bailout, but suggested the Fed could broker a deal instead.
“We support a proposal where the Fed facilitates a restructuring process,” Williams said.
More important than the details of the demonstrators’ demands, however, is the protest’s political symbolism in the midst of a heated battle over Puerto Rico’s future. The demonstration was perhaps the most colorful in a series of political moves and counter-moves by the Puerto Rican government and its sympathizers on one hand and the commonwealth’s bondholders and their allies on the other. Both seek to influence a congressional rescue plan that could enable Puerto Rico to restructure its debts.
Members of Congress from both parties are negotiating changes to the draft of a relief bill released last week by the House Committee on Natural Resources, which has jurisdiction over U.S. territories.
But many in Puerto Rico, and some progressives in the mainland United States, object to the Washington-based federal oversight board the bill would introduce to audit Puerto Rico’s finances and recommend reforms. Under the terms of the bill, Puerto Rico would pursue voluntary compromises with its creditors; failing that, the board could greenlight court-supervised debt restructuring that would force bondholders to accept the losses.
Those critics of the draft bill — including lawmaker Natal — view the board as having the trappings of American colonial rule over Puerto Rico.
Critics of the draft House bill say it has the trappings of American colonial rule over Puerto Rico.
They also argue that Puerto Rico should not have to meet any conditions to gain access to court-supervised debt restructuring. Puerto Rico, unlike the fifty mainland states, lacks the power to grant its municipalities and public corporations federal bankruptcy protections.
Puerto Rico is taking a multi-pronged approach to secure debt relief that appears designed to increase its leverage with creditors and win terms that are as favorable as possible. 
The island’s governor, Alejandro Garcia Padilla, signed a bill on Wednesday that would empower him to declare a state of emergency and enact a moratorium on the island’s $70 billion debt. Puerto Rico’s next major debt payment — a $422 million tranche — comes due on May 1.
Daniel Hanson, a Puerto Rico specialist for the financial analysis firm The Height, wrote in an email newsletter that Puerto Rico’s creditors will likely challenge the moratorium in court, where Puerto Rico’s “playbook is not likely to be persuasive to American courts adjudicating the contracted rights of creditors.”
Garcia Padilla has said the island is incapable of paying its debts in full. Puerto Rico has enacted spending cuts and tax hikes in recent years that have stifled its economy and depleted its social services, creating a situation that many people already characterize as a humanitarian crisis.
Puerto Rico also argued for the right to enforce a local bankruptcy law that went before the Supreme Court last month after lower courts had blocked the island from putting it into effect. The high court is expected to rule in the case by late June.
In Congress, Democrats sensitive to Puerto Rico’s plight — and solicitous of the votes of former island residents living on the mainland — hope to dilute some of the proposed oversight board’s sweeping powers.
The Height’s Hanson, however, expects subsequent iterations of the House bill to be “more creditor-friendly,” he wrote.
Meanwhile, organizations representing Puerto Rico’s powerful creditors have stepped up their efforts to amend the legislation to limit the restructuring authority that the island would get. The commonwealth’s bondholders include a significant number of so-called vulture funds, which are hedge funds that have bought its debt from other creditors at discounted rates on the promise of recovering the obligations’ original full-dollar value.
A group called Main Street Bondholders, which claims to represent ordinary retirees, has created a web site attacking the draft House bill for granting Puerto Rico “super Chapter 9” bankruptcy protections.
Main Street Bondholders is associated with the conservative seniors group 60 Plus, which played an active role in the fight against the Affordable Care Act. The New York Times reported in December that 60 Plus is funded by a handful of large, anonymous donors and was recruited into the effort by a Republican public relations firm that also represents BlueMountain Capital, a creditor that has been outspoken against federal government help for the island.
The fight over whether to help Puerto Rico has reached the bottom rung of American discourse — cable news ads paid for by undisclosed donors. The ad, which ran on CNN and was paid for by the Center for Individual Freedom, urges Congress to “stop the Washington bailout of Puerto Rico.” The Virginia-based conservative group does not disclose its donors. It was founded in 1998 to combat government restrictions on smoking.
The CFIF did not respond to a Huffington Post question about whether any of its funders have a financial stake in the outcome of the Puerto Rico bailout.




Daniel Marans/The Huffington Post
Activists protest at a Federal Reserve event in Manhattan, asking for relief for Puerto Rico’s debt.


Daniel Marans and Ben Walsh

Puerto Rico Activists Crash Federal Reserve Panel With Creative Protest