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PUERTO RICO’S DEBT CRISIS 

AND ITS IMPACT ON 

THE BOND MARKETS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 25, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–75 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SEAN P. DUFFY, Wisconsin, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

ROBERT HURT, Virginia 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

ANN WAGNER, Missouri 

SCOTT TIPTON, Colorado 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

AL GREEN, Texas, Ranking Member 

MICHAEL E. CAPUANO, Massachusetts 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

JOHN K. DELANEY, Maryland 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 25, 2016 ............................................................................................ 1 

Appendix: 

February 25, 2016 ............................................................................................ 39 

WITNESSES 

THURSDAY, FEBRUARY 25, 2016 

Batlle, Juan Carlos, Senior Managing Director, CPG Island Servicing, LLC .... 7 

Isaac, William M., Senior Managing Director and Global Head of Financial 

Institutions, FTI Consulting ............................................................................... 8 

Krueger, Anne O., Senior Research Professor of International Economics, 

Johns Hopkins University School for Advanced International Studies ........... 5 

Zandi, Mark, Chief Economist, Moody’s Analytics ................................................ 10 

APPENDIX 

Prepared statements: 

Batlle, Juan Carlos ........................................................................................... 40 

Isaac, William M. .............................................................................................. 75 

Krueger, Anne O. .............................................................................................. 82 

Zandi, Mark ...................................................................................................... 92 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Mulvaney, Hon. Mick: 

Written statement of Thomas Moers Mayer .................................................. 102 

Batlle, Juan Carlos: 

Clarification Regarding Remarks by Congresswoman Nydia Velazquez ..... 129 

(1) 

PUERTO RICO’S DEBT CRISIS 

AND ITS IMPACT ON 

THE BOND MARKETS 

Thursday, February 25, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:11 a.m., in room 

2128, Rayburn House Office Building, Hon. Sean Duffy [chairman 

of the subcommittee] presiding. 

Members present: Representatives Duffy, Mulvaney, Tipton, 

Poliquin, Hill; Green, Cleaver, Ellison, Delaney, Heck, Sinema, and 

Vargas. 

Ex officio present: Representative Waters. 

Also present: Representatives Velazquez and Maloney. 

Chairman DUFFY. The Subcommittee on Oversight and Investigations will come to order. Today’s hearing is entitled, ‘‘Puerto 

Rico’s Debt Crisis and Its Impact on the Bond Markets.’’ 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Also, without objection, members of the full Financial Services 

Committee who are not members of this subcommittee may participate in today’s hearing for the purposes of asking questions and 

giving an opening statement. 

Before we begin, I want to take a brief moment as we start today’s hearing to recognize the Speaker of the Puerto Rican Legislative Assembly, Jaime Perello, who is here with us today. We are 

grateful for his participation and all the insight he has given both 

sides of the aisle, as we try to navigate the issues on Puerto Rico. 

So thank you for being here, Jaime. 

The Chair now recognizes himself for 5 minutes for an opening 

statement. According to the Government Accountability Office 

(GAO), individual investors account for 75 percent of America’s 

nearly $3.7 trillion in the municipal bond market. 

Bonds are an important source of financing for State and local 

governments to pay for a variety of public projects, such as infrastructure and schools. They are also considered a relatively safe security for retail investors, many of whom depend on the income 

that bonds yield in their retirement. 

2 

Despite Puerto Rico’s relatively small size, it is one of the Nation’s largest issuers of municipal bonds, in part because the bonds 

are triple tax exempt, at the Federal, state, and local level. 

For this reason, Forbes estimates that about 20 percent of U.S. 

bond funds hold Puerto Rican debt. However, Puerto Rico is now 

struggling with $73 billion in bonded debt, spread across 18 different issuers, eclipsing the size of the GNP. 

In the words of one of our witnesses here today, ‘‘Puerto Rico 

faces hard times. Structural problems, economic shocks, and weak 

public finances have yielded a decade of stagnation, out-migration, 

and debt. Financial markets once looked past these realities, but 

have since cut off the Commonwealth from normal market access 

of crisis loans.’’ 

But the crisis may already be here. At over 12 percent of the island’s unemployment rate, it is nearly double the next State. Labor 

force participation is 20 points lower than on the mainland, and 

nearly half of the island’s population now lives below the poverty 

line, which is absolutely unacceptable. 

It is no wonder that 7 percent of the island has left in the last 

2 years, many of whom have come to the mainland in search of opportunity, after the island’s economy has shrunk by 13 percent 

since 2006. 

This is further compounding the island’s crisis, as its workforce 

flees, as its tax base erodes, and it becomes harder to service the 

island’s massive debt, which now accounts for one out of every 

three dollars the Commonwealth now spends. 

The 3.5 million Americans living in the U.S. territory deserve the 

attention and support of Congress, which is why we are here today. 

After decades of mismanagement, Puerto Rico’s investors also deserve better. And borrowers all over the country, from Wisconsin 

to Texas to Puerto Rico should be given our careful consideration. 

Speaker Ryan, a great Wisconsinite, has committed this House 

to developing a responsible solution to Puerto Rico’s debt crisis by 

the end of next month. We owe it to all parties to ensure that our 

response does not have negative implications for the rest of the 

bond market. 

The governors of Arizona and Iowa have both sent letters to leadership in the House and the Senate cautioning against unprecedented steps being pushed by the Obama Administration to address Puerto Rico’s debt, which the governors warn could have a 

significant impact on the cost of borrowing for states, municipalities, and investors, not just in Puerto Rico, but across the country 

as a whole. 

I appreciate our witnesses being here today, including those 

whom I know have traveled some distance to be part of today’s 

hearing. I look forward to learning more from all of you about the 

causes of Puerto Rico’s crisis, the health of the island’s financial 

services sector, and the impact on investors. 

Mostly, I hope to hear how Puerto Rico can return to growth and 

to the capital markets, how we can have a positive impact on the 

people and the citizens on the island. And that is what this is 

about. This is about people. This is about prosperity. This is about 

opportunity. This is about growth. This is about doing the right 

3 

thing by the Puerto Rican people, whom, as we all know, are Americans. 

I am sure all of my colleagues on this committee agree with that 

assessment. And I know we are going to have a great bipartisan 

movement and effort to come up with a solution that works for the 

island. 

So with that, I yield to the ranking member of the subcommittee, 

Mr. Green from Texas, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman, and I will claim the 47 

seconds that you did not utilize, by unanimous consent. My consent. Thank you, again, and I thank the witnesses for being 

present today. 

And I do concur with you, Mr. Chairman. We all agree that we 

should do the right thing with reference to Puerto Rico and the 

Americans who are in Puerto Rico. The question that we will confront today is very simply put: Will we, in the Congress, allow the 

Americans in Puerto Rico to do the very same things that we allow 

the Americans in the 50 States to do? 

Will we allow them access to bankruptcy, as we currently do for 

the Americans in the 50 States? I am talking about under Chapter 

9 of the Bankruptcy Code. And it is interesting to note that Chapter 9 applied to Puerto Rico from 1933 to 1984. And then mysteriously, for some reason, Puerto Rico was exempt from Chapter 9. 

But what the Congress giveth, the Congress can taketh away. 

And the Congress can return it, if I may coin a phrase. And I think 

that we may be at a point where we need to do so. I would also 

add this, that Chapter 9 would not be enough. 

There needs to be an opportunity to have something that allows 

us to look into the future and deal with the fiscal necessities of 

Puerto Rico. This restructuring process might be called some sort 

of independent counsel or board, if you will. But it has to have autonomy and independence. 

I would also add that the Administration has made a comment 

that I find favor with, the EITC, as well as helping with Medicaid, 

because a good many of the persons there have only Medicaid as 

a means of healthcare. 

This is an important issue for us. I believe that we can find a 

consensus. The mandate has been given by the Speaker. But it is 

up to us to have the will to follow through. Now, let me ask you 

this question quickly, because it will come up, the notion that it is 

unfair to change the rules in the middle of the game. 

I concur. It is. But the truth is, you have look at all of the rules. 

The Supreme Court has promulgated a rule that we have to adhere 

to, as well. And the Supreme Court has said that, because Congress has this enormous power to exercise, with reference to bankruptcy, that when you make these investments, you have to consider the fact that Congress can change the rules. And Congress 

can do so retroactively. 

So the argument that we shouldn’t change the rules in the middle of the game is a good one. That is why we are going to consider 

all of the rules, which allows rules to be changed. I will say more 

about that, as we progress, I am sure. 

With that said, I am honored now to yield time to the gentlelady 

from New York, New York’s 7th Congressional District, who has 

4 

been a preeminent leader in this area, the Honorable Nydia Velazquez. My time, remainder in residue, plus the 47 seconds. 

Mr. VELEZQUEZ. Thank you, Mr. Chairman, and Ranking Member Green. After today’s hearing in this committee and the Committee on Natural Resources, I am hopeful that we will move from 

convening hearings to drafting legislation. 

And I believe that two principles must be met. First and foremost, Puerto Rico needs tools to restructure its unsustainable debt. 

What is critical is that the island be given the authority to promptly address all of its various debt obligations. This means not just 

the $20 billion in public corporation debt, but, also, the remaining 

$50 billion in general obligation, Government Development Bank, 

and territorial tax revenue, or COFINA. 

By itself, Chapter 9 will address only a small sliver of this debt 

and do little to remove the black cloud hovering over the island. 

That is why we need a broader, territorial-level restructuring 

mechanism. 

Second, an oversight board must be structured in a manner that 

does not undermine Puerto Rico’s autonomy. If a control board 

takes the people’s power away, it would just be viewed as another 

imperialistic power grab by the U.S. Government. 

It will be the height of hypocrisy for the Federal Government to 

take away decision-making authority, due, in part, to the policies 

enacted by this very same body. Don’t forget that Congress created 

and then eliminated the preferential tax policies that have played 

a massive role in this crisis. And I am referring to 936. 

The ranking member mentioned the fact that Puerto Rico was 

covered under bankruptcy law protection from 1933 to 1984. So 

when people talk about changing the rules of the game, let’s look 

at what the United States Federal Government, U.S. Congress policies have produced and the implication that it has had in Puerto 

Rico. 

What they need is not only bankruptcy protection, but, also, economic growth. And the only way to do that and to accomplish that 

is by enacting the types of tax incentives that will enable investors 

to come and invest in Puerto Rico. 

Thank you, and I yield back. 

Chairman DUFFY. The gentlelady yields back. I now want to welcome our witnesses. Dr. Anne Krueger is a senior research professor of institutional economics at the School for Advanced International Studies at John Hopkins University, and she is a graduate 

of the University of Wisconsin, I believe. 

Mr. Juan Carlos Batlle is a senior managing director and co-head 

of CPG Island Servicing. 

Mr. William Isaac is senior managing director and global head 

of financial institutions at FTI Consulting. He is a former Chair of 

the FDIC. I believe you were the youngest Chair of the FDIC, if 

I recall. 

And finally, we have Dr. Mark Zandi. He is the chief economist 

at Moody’s Analytics and is a frequent witness on the Hill. 

So I thank you all for being here today. The witnesses will now 

be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, the witnesses’ written statements 

will be made a part of the record. 

5 

Once witnesses have finished presenting their testimony, each 

member of the subcommittee will have 5 minutes within which to 

ask questions of each of the witnesses. 

As a reminder, please note you have three lights on your table. 

The green light, obviously, means go. The yellow light means that 

you have 1 minute left. And the red light means that your time is 

up. 

So if you get asked a question in yellow and you are finishing 

it, a brief time span into red, that is okay. But if you are going 

over, we will try to move on to the next witness. The microphones 

are sensitive. Please make sure you are speaking directly into 

them. 

With that, Dr. Krueger, you are now recognized for an oral presentation of your testimony for 5 minutes. 

STATEMENT OF ANNE O. KRUEGER, SENIOR RESEARCH PROFESSOR OF INTERNATIONAL ECONOMICS, JOHNS HOPKINS 

UNIVERSITY SCHOOL FOR ADVANCED INTERNATIONAL 

STUDIES 

Ms. KRUEGER. Thank you, Mr. Chairman, and members of the 

subcommittee. I am very pleased to be here. I have submitted written testimony, and I will try to keep my opening statement very 

short. 

Puerto Rico is a beautiful island, and it should be the jewel of 

the Caribbean. It has all kinds of advantages, including, of course, 

English and Spanish, including, of course, the U.S. dollar, U.S. law 

and order. 

It also has some disadvantages coming from the United States 

Federal Government, as well. Unfortunately, over the past 10 or 15 

years, the disadvantages that it has done to itself, plus those done 

by the Federal Government, plus those inflicted by the world economy have led Puerto Rico into a very long period of stagnation. 

As the chairman already mentioned, Puerto Rican income per 

capita is down, population is down, labor force participation is less 

than 40 percent, contrasted with 62 percent on the mainland, and 

we are worried that is too low. And there are other problems. 

Many of these problems have causes that can be, at least partially corrected. And there are three things that have to happen in 

order to get things sorted out. Puerto Rico has to resume growth. 

Without growth, there is no hope over the longer term for any solution. 

To resume growth, however, its fiscal policies have to be amended in such a way as to become sustainable, which they are not currently. That is the second thing. And the third thing is that there 

has to be some kind of debt restructuring. 

Debt, in the short run, is not sustainable, consistent with Puerto 

Rican growth. I will take my time, briefly, on each of these. No 

matter what happens, there is no way that today Puerto Rico could 

cut expenditures enough and raise taxes enough, quickly, to make 

a difference, in terms of the sustainability of its debt over the next 

several years. 

Tax receipts don’t come in sharply after you change taxes. And, 

indeed, in Puerto Rico’s case, the likelihood is that, if taxes rose 

very much (except for reforms in the tax structure) what would 

6 

happen is that, first, Puerto Ricans would leave the island. More 

would go on welfare and there would be a lower participation rate 

and more in the informal sector. 

Restructuring debt has to happen, because the government just 

can’t pay everything, especially going forward, where there are 

pension liabilities and other things. But the thing I will focus a 

minute on is growth. 

Growth has to resume. Without it, nobody can borrow, because 

future receipts will not be enough to cover it. And they are not 

going to be able to borrow, given the current state. Puerto Rico has 

lost market access. So that is critical. 

What else is needed for growth? The fiscal situation must be addressed, but, also, there are a number of things, both Federal and 

Commonwealth, that have impeded growth measures and need to 

be changed. Some of these are things where something can be done 

and should be done, by the Commonwealth. 

They include things to make a more level playing field for business. Right now Puerto Rico, by the World Bank, is ranked 49th 

in ease of doing business, in the world economy. The United States 

mainland is ranked seventh, which gives you some idea. 

Some things take years in Puerto Rico. Registering property is a 

good example. There has not been property revaluation since 1954. 

There are a number of things that could be done. The Puerto Rican 

government itself could become much more efficient. 

The number of school teachers has increased about 30 percent 

over the past several decades, while the number of students has 

dropped about the same amount. Some things need correcting within the public sector, but, also, in a way that Puerto Rico treats 

business. 

There are other things to be done that would help a great deal. 

The Treasury’s proposal for the Earned Income Tax Credit would 

certainly make a difference. Finding a fairer formula for Medicaid 

and block grants would be important in all of this. 

There are a number of other things that can be done, at both the 

Federal and the State level. But, above all, we can’t get very far 

without debt restructuring. And debt restructuring would be a 

long, drawn out process without some kind of legal framework for 

it, which now does not exist. 

As you know, the Commonwealth tried to do it, itself. That was 

thrown out. It is a Federal responsibility. But, at the Federal level, 

right now, as someone mentioned, there are 18 different issuers of 

debt in Puerto Rico. And without somehow cleaning that up, there 

is going to be enough uncertainty hanging over markets and hanging over potential investors in Puerto Rico, that it will forestall 

growth. 

So simply addressing the debt is a first prerequisite, along with, 

then, doing things to restore growth and getting the fiscal situation, going forward, straightened out. 

Thank you very much. 

[The prepared statement of Dr. Krueger can be found on page 82 

of the appendix.] 

Chairman DUFFY. Thank you. 

Mr. Batlle, you are recognized for 5 minutes. 

7 

STATEMENT OF JUAN CARLOS BATLLE, SENIOR MANAGING 

DIRECTOR, CPG ISLAND SERVICING, LLC 

Mr. BATLLE. Thank you, Chairman Duffy, and distinguished 

members of the subcommittee. From 2011 to 2012, I served as 

president of the Government Development Bank for Puerto Rico 

and previously held senior positions with Banco Santander’s investment banking arm on the island, working primarily in public finance matters of the municipal market for 15 years. 

Focusing concurrently on the root causes of our problems, our 

banking sector, and the impact of the crisis on the municipal market makes it evident that we are faced with a dynamic situation, 

whose eventual resolution will rest on the actions or inaction of 

Congress and Puerto Rico. 

In my view, the root causes for our problems are many. A lack 

of execution and follow through, as our leaders have put forth economic development plans that all shared similar principles, but all 

failed, not because they were flawed, but because we were unable 

to implement them. 

An unwillingness to change and adapt, during and after the 

State filed a Section 936. Petty political parties infighting prevailed, and we failed to compromise and to execute. Decades of fiscal mismanagement, insatiable public sector crowded out the private sector. And the lack of adequate regulation over the Government Development Bank. 

A fragmented government-wide technological structure, exemplified by the recent dismantling of the Office of the Chief Information Officer, after significant progress that included a pilot project 

to produce real-time financial data and financial statements. Ironically, our best talent from this office now works for the United 

States Digital Service here in Washington. 

A completely dysfunctional Internal Revenue Service that facilitates tax evasion. Unfair and discriminatory funding of Federal 

health programs that aggravate budget deficits. The enactment of 

tax laws that encourage over-concentration of local wealth in Puerto Rico-only assets, resulting in unimaginable loss of wealth. 

And lack of trustworthy and timely financial data and budgetary 

forecasts that eventually led to a complete loss of market confidence and market access. Our failure to execute on politically unpopular matters, given excessive partisan politics and a self-centered private sector are the main reasons that a fiscal oversight 

and control board is necessary. 

Since 2006, our banking sector has lost 43 percent and 31 percent of its assets and deposits, respectively, and gone through four 

FDIC-assisted consolidations. Last year, over 4,000 homes were 

foreclosed, 27,000 since 2008, and over 20,000 are currently in the 

foreclosure process. 

Today, this sector, the banking sector, has achieved healthy capital ratios and stabled delinquency ratios, after a costly transformation. But a banking sector can’t really be healthy when a government and economy are not. And it is the subject of excessive 

regulatory examinations and stifling reporting requirements. 

Under a fiscal oversight and control board, regulators could provide relief and additional technical assistance, without abandoning 

8 

their obligations, allowing banks to direct resources towards more 

agile lending and fueling economic activity. 

Puerto Rico’s bonded debt represents approximately 1.8 percent 

of the $3.7 trillion bond market. Roughly 80 percent of this debt 

is held directly, or indirectly, by individuals in their own accounts, 

or through pension and mutual funds. 

A restructuring of public debt through any mechanism other 

than good faith, consensual negotiations, or existing tools, like 

Chapter 9, could further delay Puerto Rico’s ability to recover its 

credibility and market access, with additional and collateral damage spreading to the banking sector, credit unions on the island, retirees nationwide and locally, and other individuals. 

The overall municipal bond market also stands to lose. An unfamiliar or disorderly debt restructuring process would have negative 

effects on the entire municipal bond market, given its reliance on 

the rule of law and certainty. 

A fiscal oversight and control board, with a trusted and familiar 

tool, like Chapter 9, preceded by mediated, consensual negotiations, 

would mitigate the impact on investors and the municipal bond 

market. 

Mr. Chairman, upon reviewing testimony from prior Congressional hearings, it dawned on me that we seem to forget we all are, 

and have been, responsible parties to our problems. Everyone 

blames politicians. Politicians blame each other. And all the ones 

who do the blaming forget, we were part of the problem, too, the 

3.5 million citizens in Puerto Rico, this U.S. Congress, the White 

House, bond holders, and all stakeholders alike. 

But crisis is the mother of opportunity. The situation we face 

today gives us a unique chance to shape our future. Our failure to 

execute, compromise, and live within our means, and the lack of action by Congress in the past, have left no other choice—an independent fiscal oversight and control board with a debt-restructuring mechanism that incentivizes consensual negotiations with 

access to Chapter 9, as a last resort, complemented by meaningful 

economic stimulus, are necessary. 

However, bear in mind that you don’t fix someone’s mistake by 

fixing it for them, but rather by fixing it with them. 

Thank you very much. 

[The prepared statement of Mr. Batlle can be found on page 40 

of the appendix.] 

Chairman DUFFY. Thank you. 

Mr. Isaac, you are recognized for 5 minutes. 

STATEMENT OF WILLIAM M. ISAAC, SENIOR MANAGING DIRECTOR AND GLOBAL HEAD OF FINANCIAL INSTITUTIONS, 

FTI CONSULTING 

Mr. ISAAC. Thank you. It is a pleasure to be here today, talking 

about Puerto Rico. Toward the end of my career, which has now 

spanned some 50 years, nearly 50 years, and, believe me, I hope 

it goes on another 50 years, or at least a lot longer. I am not ready 

to retire. 

The situation in Puerto Rico takes me back to the beginning of 

my time at the FDIC, in March of 1978, when I was appointed by 

9 

President Carter and confirmed by the Senate to be one of three 

Directors of the FDIC. 

My then current employer, which, at the time, was the largest 

bank in Kentucky, had a going away dinner for me one evening, 

shortly before I left. The Executive Secretary of the FDIC flew to 

Louisville that evening, on the evening of my dinner. And the next 

morning, I met with him in the lobby of the hotel where he was 

staying, and he swore me in. 

We then drove straight to the airport to fly to Puerto Rico to handle the failure of one of the island’s largest banks, Banco Credito. 

That was my first day in office. There was no Chairman of the 

FDIC at that time. The position was vacant, as was the Comptroller of the Currency position, the other Board Member of the 

FDIC. 

So the 34-year-old, newly minted Board Member of the FDIC was 

about to be tested under fire. I remember saying that day to the 

professional FDIC staff, ‘‘I hope somebody in this room knows what 

they are doing, because I don’t.’’ 

Banco Credito was a very large bank, by the standards of those 

years, and there were few potential buyers in Puerto Rico. So we 

broke the bank into two pieces, sold two-thirds of the bank to 

Banco Popular, the largest bank in Puerto Rico. And we sold the 

other one-third to the Spanish bank, Santander. 

That was my first several days at the FDIC. My tenure as the 

Director of the Board lasted 2 years. And then, when President 

Reagan was elected, he appointed me as Chairman of the FDIC in 

1981. 

It was an extremely tumultuous time. We dealt with some 3,000 

bank and thrift failures, including Continental Illinois, 9 of the 10 

largest banks in Texas, and many other large banks throughout 

the country, and thrifts. 

The problems we are addressing today are largely due to some 

of the unique features of Puerto Rico’s relationship with the United 

States. While the challenges faced by the Commonwealth are substantial, I believe there is a way to assist the Commonwealth in 

organizing its finances and restructuring a portion of its debt within existing legal frameworks. 

Successfully doing so will help position the Commonwealth for 

much-needed economic growth and restore confidence. But we need 

to go about it the right way. Specifically, I am very concerned 

about proposals coming from the Treasury, which propose so-called 

Super Chapter 9 bankruptcy, or a super control board, that would 

provide for the restructuring of all of Puerto Rico’s debt, even its 

constitutional debt. 

Granting this authority would be unprecedented and would have 

far-reaching implications, including, most certainly, raising the cost 

of borrowing for the 50 States. Moreover, long-term financial stability for Puerto Rico’s government will require continued access to 

financial markets, which will be difficult and more expensive, if the 

Treasury plan should be enacted. 

I believe the best approach to address Puerto Rico’s challenges 

would be comprised of two parts. First, Congress should treat Puerto Rico like any U.S. State, by allowing the Commonwealth’s municipalities to access Chapter 9 for bankruptcy. 

10 

This would allow Puerto Rico to legally restructure 75 percent of 

its debt, including debt incurred by COFINA, a public corporation 

created by the Commonwealth to circumvent its constitutional debt 

limit. 

That said, because of Puerto Rico’s track record in managing its 

finances, and its failure to produce reliable financial data, the idea 

of granting it Chapter 9 has been controversial. That brings me to 

the second part of my recommendation. Congress should create a 

Federal control board to oversee Puerto Rico’s finances. 

The control board should not have the ability to negotiate with 

creditors or to restructure debt. But it could be empowered with 

the ability to recommend normal Chapter 9 bankruptcy for specific 

instrumentalities of the Commonwealth, subject to appropriate financial tests. 

I close by thanking you, Chairman Duffy, Ranking Member 

Green, and the members of the subcommittee. I understand you received a copy of my testimony, and I would be happy to respond 

to any questions you might have. 

[The statement of Mr. Isaac can be found on page 75 of the appendix.] 

Chairman DUFFY. Thank you. 

And Dr. Zandi, you are recognized for 5 minutes. 

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST, MOODY’S 

ANALYTICS 

Mr. ZANDI. Thank you, Chairman Duffy, and members of the 

subcommittee, for the opportunity to be here today. The views that 

I am going to express are my own, and not those of Moody’s Analytics or the Moody’s Corporation. 

I will make three points in my remarks. Point number one, 

which is now the obvious, the Puerto Rican economic and financial 

crisis is very severe. You provided a long list of statistics to demonstrate that. 

For me, the most telling is the fact that the job base of the island 

has declined by 10 percent over the past 10 years. Just for context, 

in the financial crisis that we went through a few years ago, peakto-trough employment nationally fell by 6 percent. And, of course, 

the island’s recession continues on. It is unabated. 

The fiscal situation is very dark, $70 billion in debt, another $45 

billion or so in unfunded pension liabilities. You add it up, divide 

by GNP, which is the Gross National Product of the island, the resources that the island has to pay on the debt, it is 160 percent. 

Just for context, Illinois, which is the State under the most significant financial stress, has a debt plus unfunded pension liability 

to GDP ratio of closer to 20 percent; New Jersey, 15 percent; and 

in my own home State of Pennsylvania, which has had its own fiscal issues, it is 5 percent. So the situation is very dark. 

Point number two, the legislation you sponsored, H.R. 4199, is a 

very positive step in the right direction. I think the two key aspects 

of that are very good steps. The first, obviously, is Chapter 9 bankruptcy for Puerto Rican municipalities and public corporations. 

Obviously, that is a necessary condition for putting the fiscal situation on sounder ground. The quid pro quo for that is the opting 

in by Puerto Rican lawmakers to a financial stability council, a 

11 

board that has—I think it has a nice balance of authority to get 

what needs to get done, done, but, also, respect the sovereignty of 

the island. I think you did a nice job of accomplishing that balance. 

Point number three, I think lawmakers should do more. I don’t 

think your legislation is enough. The Chapter 9 bankruptcy for municipalities and corporations covers, for sure, about 30 percent of 

the island’s debt. There is some debate, reasonable debate, as to 

does it cover other liabilities. 

And that will have to be adjudicated, go through some court process. And judging by what Detroit has gone through, that could take 

a long time. And I don’t think we have time. 

So I would recommend that you shift from Chapter 9 bankruptcy 

to a broader restructuring framework that would maintain the 

board, as you have described it, an opt-in for the lawmakers of 

Puerto Rico, but they have broader authority around all of the liabilities that the island is struggling with, beyond just the debt of 

the corporations and the municipalities, including the GO debt and 

the unfunded pension liabilities. 

This authority, this restructuring framework, should also allow 

for a timeout to, against litigation, let everyone sort this thing 

through and kind of nail things down. There needs to be a voting 

mechanism to ensure that a handful of creditors can’t stop the way. 

And, as Mr. Isaac pointed out, I believe, there are 20 different creditor groups. It clearly suggests a very messy process. 

Ultimately, if they can’t come to an agreement, there is some 

kind of court process to work through the problems. So I would 

counsel that what you propose is great. I just don’t think it is going 

to put the island on a sustainable path. 

Then the other thing I say that I would recommend that you address is, and this goes to Dr. Krueger’s comment. She is absolutely 

right, nothing works unless the economy’s growing. And I, in my 

written testimony, talk and lay out a number of different economic 

policy proposals that I would consider to help the island. 

But most importantly, most critically, you have to get Medicaid 

on sound ground here. Under current law, Medicaid funding is 

going to decline beginning mid-2017, 2018. And half of the residents of Puerto Rico rely on Medicaid and hundreds of thousands 

of people will be affected by this. And I think it is very important 

to put that on sounder ground. 

Thank you, again, for the opportunity, and I look forward to your 

questions. 

[The prepared statement of Dr. Zandi can be found on page 92 

of the appendix.] 

Chairman DUFFY. I appreciate the panel’s opening statements. 

The Chair now recognizes himself for 5 minutes for questions. 

Dr. Zandi, I will probably come back to you, if I have time, at 

the end. But you mentioned we deal with 30 percent of our debt, 

but I know there is some debate. Mr. Isaac brought this up, but 

depending on where COFINA falls, it looks like we could actually 

deal with 75 percent of Puerto Rican debt, excluding the GO bonds, 

which would probably be a lot closer to where you would like to be. 

But that is a conversation, I think, that we have to continue to 

have. 

12 

I will move on, though. Mr. Batlle, I mentioned in my opening 

that Terry Branstad, the Governor of Iowa, recently wrote Congressional leaders, in both the House and the Senate, and expressed 

some concern about Treasury’s plan, which is probably consistent 

with Mr. Zandi’s testimony, about a restructuring that would violate the constitution of Puerto Rico, offering broad restructuring, 

including general obligation bonds. 

And you kind of mentioned this, but could you go a little further? 

Does that set a dangerous precedence? And would it, likely, raise 

the borrowing cost, not just in Puerto Rico, but would it raise the 

costs in other parts of the country, have an impact on other states 

and municipalities? 

Mr. BATLLE. Yes. Thank you for that question, Mr. Chairman. 

And I do think going down the path of a more broad restructuring 

regime would definitely have an impact on the overall municipal 

market. 

I think the best way I would describe the municipal market, not 

to be disrespectful to it, but it is a very boring market, I would say. 

It likes predictability, stability, and it doesn’t like surprises. It is 

a market used by a lot of both individuals, retirees, and this investment vehicle is looking for a stable, fixed income into their accounts. 

And, I think, introducing an alien or new mechanism, that is 

completely unfamiliar and unknown, to an otherwise stable and 

very large market, on which the 50 States and the territories depend, or, say, subdivisions of the states and the territories rely on 

to raise necessary capital for infrastructure development and many 

other needs, would set a very dangerous precedent. 

I think it would be highly speculative to go into any discussions 

as to what type of financial impact it would have, but, at the least, 

it would definitely create volatility, uncertainty, which would 

translate, naturally, into higher costs or higher losses, depending 

on which side of the aisle you sit. 

Chairman DUFFY. And you live on the island, right? You live in 

Puerto Rico? 

Mr. BATLLE. Yes. 

Chairman DUFFY. And, so, going to the fiscal stability board and 

opportunity growth board, some will say a control board. I meet 

with a lot of the elected officials on the island and I get some 

pushback. And, as Ms. Velazquez mentioned, there is concern 

about sovereignty and perceptions. 

And I am very sensitive to that. I think we want to have complete buy-in to a plan that comes from Congress. I hear from politicians, with maybe one perspective, but do you know where the people in Puerto Rico fall on this issue? Do they support some form 

of board that can help get the finances and the budgeting in order? 

Can you speak for them, by chance? 

Mr. BATLLE. If I were to speak for them, and I will say this is 

my personal opinion on what I hear from the people I talk to, I do 

think, and I actually do strongly believe, that there would be 

strong support for a fiscal oversight and control board. 

And on, if I expand just 1 minute, the proposal or the type of 

structure that I propose in my written testimony, it is actually 

13 

something that I think would get in the buy-in necessary from the 

politicians, also, on the island, from leaders. 

That is why I call it an oversight and control, where you would 

have an initial phase, during which Puerto Rico would get the 

chance to deliver on the compromises and promises that we need 

to make to get things moving forward on the fiscal and economic 

side, and also on the debt restructuring side. 

But there has to be very specific metrics, very specific milestones 

to be accomplished. And any non-compliance under this would 

automatically convert this oversight board into a control board that 

would have a lot more teeth into the decision-making process in 

Puerto Rico. 

But I do think there will be acceptance within the population for 

that type of structure. 

Chairman DUFFY. And the 5 minutes is just not enough time, but 

I want to go to you, Dr. Krueger. Quickly, you talk about growth, 

and I think growth is so important. You just can’t have one component of some form of bankruptcy and oversight. We have to have 

growth on the island. 

If you are thinking outside the box, and I don’t have a lot of time 

left, can you give me some ideas on what we could do, in Congress, 

that could stimulate or incentivize growth and investment on the 

island? 

Ms. KRUEGER. I think there are a number of things. There are 

Federal laws that really impede Puerto Rico. For example, the 

Jones Act on shipping, which I know is a political hot potato, but 

Puerto Rico lies right next to some other Caribbean islands. All of 

them are dependent on oil for their fuel, for electricity generation. 

Puerto Rico pays 40 percent more than the other islands and 

there are other factors. Puerto Rico is not eligible for the Earned 

Income Tax Credit. Getting that through, which Treasury has proposed, would, indeed, very likely increase the formal participation 

rate, which would help. 

Puerto Rico is subject to the mainland minimum wage law, and 

Puerto Rico per capita income is well below that of the poorest U.S. 

mainland State. Doing something to amend that so there could be, 

for example, a period of apprenticeship or a period for young people, youth employment, to learn skills on the island would make a 

difference. 

It would not do it all overnight, however. All of these things 

would take some period of time. I know I have to stop here. 

Chairman DUFFY. Thank you. And I would have asked you— 

going into the red zone. But thank you. My time has expired. 

The Chair now recognizes Mr. Delaney for 5 minutes. 

Mr. DELANEY. Thank you, Mr. Chairman. I just have a quick 

question, and it is related, but not directly on point to the bankruptcy. 

Maybe for Dr. Zandi, Puerto Rico is unique in terms of their ability to offer tax incentives to U.S. citizens who domicile in Puerto 

Rico for 183 days. And they maintain their status as citizens of the 

United States. 

And I have no issue with people who have done that, because it 

is perfectly permissible and perfectly legal under the laws, as they 

are now. But have you thought about the potential drain that has 

14 

on the U.S. income tax base? And should we be thinking about 

that, as part of other aid we provide Puerto Rico? You mentioned 

Medicaid, which I do agree with you. I think should be funded, so 

that we can stabilize that situation. 

And, I guess, set the most efficient way to get Federal dollars 

into the Puerto Rican economy and would we be better off doing 

things more directly and not allowing them to put in place a 

scheme that would continue to drain or reduce the U.S. tax base? 

Mr. ZANDI. Yes, I am sympathetic to what you are saying. I think 

that there are many other more effective ways of helping the island’s economy. And the most obvious to me is the Earned Income 

Tax Credit, the EITC, which has a lot of bipartisan support. 

We have a lot of evidence of it working, and it is particularly critical to Puerto Rico, because it will bring people out of the underground economy, the shadow economy. Someone made the point 

that labor force participation in Puerto Rico is 40, 45 percent, the 

lowest anywhere in the country. 

Bring them back into the taxable base and establish a broader 

culture of paying your taxes. So if I were king for the day, I would 

take the tax benefit you described and use that to pay for, or help 

pay for, the EITC. I think that would be the best step to help the 

island, long run. 

Mr. DELANEY. I yield back my time. Thank you. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentleman from South Carolina, Mr. Mulvaney, for 

5 minutes. 

Mr. MULVANEY. I thank the chairman. I want to talk about what 

both the chairman and the ranking member mentioned in their 

opening statements, which is their concern, and my concern, our 

concern, that this is about people, because it is about people, but 

not about maybe the people they were mentioning. 

There is a New York Times article out this morning, and I will 

quote from it. It says that, ‘‘Most Puerto Rican debt is held by individuals. They are mostly over 65. They mostly have incomes of less 

than $100,000 a year. They are not vulture funds, they are your 

friends and neighbors.’’ 

I understand that the Treasury’s plan would change the 

prioritization of payments in Puerto Rico to prioritize payments to 

Puerto Rican pensioners, before bond holders get paid. So the 

Treasury plan would pay pensioners in Puerto Rico, before we pay 

the pensioners who lent Puerto Rico money in the first place. 

And I want to know how that is fair, because it strikes me as 

not being fair. In fact, it reminds me, Mr. Chairman, of something 

that many of us in the Class of 2010 ran against when, during the 

Chrysler bankruptcy, we changed the laws in this body to give priority to unions over the pensioners from the Indiana Teachers and 

Firemen’s Fund. It wasn’t fair then, and it wouldn’t be fair now. 

I also understand, in doing some research, that some of the debt 

revolves around the state or the government-owned electric company, which has not raised its rates on its people since 1989. 

So, again, I ask, is it fair for us to ask pensioners and retirees, 

some of whom may live in South Carolina, to incur greater debts 

on their own debt, in the future, or to lose prioritization here, so 

that the Puerto Rican government can continue to provide belowVerDate Nov 24 2008 15:36 Jun 22, 2017 Jkt 023718 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\23718.TXT TERI
15 

market, subsidized electricity to their residents? That doesn’t strike 

me as fair. 

And I know I don’t have many questions, because, honestly, I 

don’t know who to ask the question of, but this— 

Mr. DELANEY. If the gentleman would yield, I would— 

Mr. MULVANEY. I would be happy to. Yes, sir. 

Mr. DELANEY. Thank you. With reference to the power plant, 

when you are in Chapter 9 bankruptcy, you have to demonstrate 

that you have made a good faith effort. That would be part of the 

evidence that would be presented to the court. And if the concludes 

that the good faith effort has been made— 

Mr. MULVANEY. Reclaiming my time. And I appreciate that, and 

that is fine. But, I guess, doesn’t solve my original question, which 

is we would be asking pensioners in this country to help make up 

for the fact that, for the last 25 years, there have been no raises. 

And I will come back to you at the end, I promise, but let me finish 

my thought on this. 

Look, I am sympathetic to what the island is going through. It 

strikes me that most of the ills are self-inflicted. Dr. Krueger made, 

perhaps, what I thought were the most positive comments so far, 

which is ways that we have actually made things worse. 

We could fix the Jones Act. We could provide exemptions from 

the minimum wage laws, and those are positive things that don’t 

really cost my folks any money. And maybe that is where I think 

we should be focusing our attention. 

But everything else that we have talked about today smacks, to 

me, of a bailout, which I thought my party was supposed to be 

against. So I am curious to see how we proceed, Mr. Chairman. 

Again, I apologize for not having any specific questions, but, really, 

I am not really sure how to ask. 

I tell you what, let’s just wrap up with this point. And if anybody 

wants to respond to any of that, I would be more than happy to 

give you what little time I have left. Or not. 

Chairman DUFFY. I believe Dr. Krueger wanted to— 

Mr. MULVANEY. Dr. Krueger, okay, sure. 

Ms. KRUEGER. I am afraid the situation is so dire that the question is not whether some of the bond holders will, but whether they 

will lose a lot or lose less. If there is no legal framework, all the 

lawyers I know, and I am not a lawyer, say that it will be a messy, 

long, drawn-out process. 

I am an economist, and, as long as that is going on, the likelihood that there will be new investors and there will be others in 

Puerto Rico—or, sorry, and other growth in Puerto Rico will be 

very limited. 

As to the PREPA, the electric company, it has been high cost. It 

has lost money most of those years, unfortunately, despite what 

you call socialization. It is very high cost, $0.27 a kilowatt hour, 

remember, after the oil price decrease. So that is well above U.S. 

levels. 

Mr. MULVANEY. As an economist, let me ask, in my last few seconds, don’t you think we set a dangerous precedent by changing 

the law so that, after the fact, pensioners and retirees in Puerto 

Rico would be paid before pensioners and retirees in the States, 

who have loaned them money? That is to you, Dr. Krueger. 

16 

Ms. KRUEGER. Very quickly, the problem is that, somehow or 

other, Puerto Rico can’t make all those payments. If it were required to do so—I don’t know how you would require it, but if you 

did, the lights would go out. There would be no fire or police. The 

very basic things of government have to continue. 

And I think they would choose that at a critical point. It hasn’t 

happened yet, and I hope it won’t happen. I hope we can address 

the issue sooner, as the chairman suggested that Speaker Ryan has 

wanted to do, and I think is the appropriate thing to do. But the 

alternative is really awful. 

Mr. MULVANEY. Thank you, Doctor. Thank you, everyone. 

Chairman DUFFY. Before you yield back, I would ask for unanimous consent for 15 extra seconds. I just want to be clear—I think 

the gentleman from South Carolina made a really good point, but 

I just want to be clear—when you talk about a bailout, are we talking about a bailout of pensions over creditors, or are we saying that 

bankruptcy is a bailout? I just wasn’t sure what the point was. 

Mr. MULVANEY. No, it is just, I guess, my objection is to using 

the term ‘‘creditors,’’ because in here we are always saying that the 

creditors are bad people. Creditors are big banks. They are vulture 

funds. And the municipal bond market, more so than perhaps any 

financial security, the overwhelming group of investors are these 

same retirees and same pensioners. 

Chairman DUFFY. Okay. 

Mr. MULVANEY. It is just in a different place. 

Chairman DUFFY. Thank you. The gentleman yields back. The 

Chair now recognizes the gentleman from Missouri, Mr. Cleaver, 

for 5 minutes. 

Mr. CLEAVER. Thank you. Thank you, Mr. Chairman. This is, I 

think, heartwarming to see that, for the most part, we are all trying to figure out a way to solve a major crisis. 

And, Dr. Zandi, in your simulations, it was a little chilling to assume that, by 2020, if nothing happens, we end up with a population in Puerto Rico of about 3.3 million, which means that the migration would increase significantly to this country. 

So the truth of the matter is, we are going to pay, one way or 

another. Am I going down the right road? 

Mr. ZANDI. I think that is entirely correct, yes. If you just kind 

of connect the dots, it is pretty dire for Puerto Rico and that, obviously, is going to be a cost to all of the mainland, as well. 

Mr. CLEAVER. Yes. I think we are weird in the English language. 

We make some terms toxic, and then we can’t use them. So we 

don’t need to call it, but I would call it, let’s say, ‘‘sweet juice.’’ If 

we ‘‘sweet juice’’ Puerto Rico, we are going to have to do it one way 

or another. 

And I am concerned. Would you have any response to the gentleman from South Carolina? 

Mr. ZANDI. Yes. To the initial point you made about prioritization 

of the liabilities, putting the pensioners ahead of the creditors, the 

GO bonds, I would say two things. First, I think that should be left 

up to the restructuring framework. 

Empower an entity, like the Financial Stability Council, to go 

through and figure that out. What is in the best interest of the island’s residents and for everyone, all the stakeholders involved, inVerDate Nov 24 2008 15:36 Jun 22, 2017 Jkt 023718 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\23718.TXT TERI
17 

cluding the creditors and the pensioners. So I think that is something that should be left to that entity. 

The second thing I would say, just as a point of something to consider in the prioritization process, is that, of course, the pensioners, 

and we are talking about, at least the data I have seen, 330,000 

current and future pensioners, they are residents of the island, for 

the most part. 

And if they don’t get their pension payment, then that is just 

going to exacerbate, severely exacerbate, the economic effect on the 

island. The creditors, the folks who own the bonds, they are distributed around the world. And you are right, they are me, they are 

you, in the funds that we own. But the pain of that would be distributed much more widely across the globe. 

But the pensioners are sitting on the island, and obviously, it 

just complicates the matters for the island’s economy. 

Mr. CLEAVER. Thank you. So, if we do nothing, unemployment is 

going to fall, because people are going to leave. And if the unemployment begins to drop, the tax base, is even further eroded. 

So there should be little doubt that we have to do something. The 

question, I think, is what exactly we are going to do. And, frankly, 

Newt Gingrich was probably the most articulate person who proposed that we allow States to enter into bankruptcy. Now, Puerto 

Rico is a territory, but we do municipalities. 

I know the municipal bond markets would tremble at the 

thought of any kind of bankruptcy, because it might damage the, 

I think, $3 trillion municipal bond market. And all of you gave, I 

think, fabulous responses in your opening statements. 

So if the four of you were able to sit in a room together, being 

as brilliant and smart as you are, and probably all of you are members of MENSA, what do you think you could work on, just off the 

bat, assuming that we would agree with what you presented? 

Mr. ZANDI. Just very quickly, I think, listening to the testimony, 

there is significant agreement. The only point of contention that I 

could hear was around how broad the restructuring framework 

should be. Should it be solely Chapter 9, or should it be something 

broader than that? 

And there is a lot of debate, reasonable debate and discussion, 

around that issue. And that is where we would probably have the 

conversation. And I think it would be important to have here, as 

well. 

Mr. CLEAVER. Mr. Batlle, you were trying to say something? 

Mr. BATLLE. I just wanted to add that I think you touched upon 

the most important point here. I don’t know what would come out 

of that meeting between the four of us, but that is what needs to 

happen. 

I think what we have missed so far is a genuine good faith sit 

down, face-to-face, between creditors, the government, not their advisors, the government, and a truthful discussion with real numbers that both sides can agree on, because right now the relationship between the two sides, from where I stand, outside—I am not 

part of any of the discussions—it seems to me that discussion is not 

happening. 

And I think that is the first step for any type of resolution going 

forward. 

18 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. ISAAC. If I could just get one word in there— 

Chairman DUFFY. Very quickly. 

Mr. ISAAC. —I disagree a little bit with Dr. Zandi. I believe that, 

from my experience trying to run the FDIC during a banking crisis, 

the most important thing to do right now is don’t let this thing 

spread more broadly than it already is. 

And right now there is a problem that is small enough and isolated enough that it can be identified, and it can be fixed. If we 

start changing bankruptcy rules, I don’t know where that goes, but 

nothing good is going to happen from that. 

If you say, we are going to go ahead and use bankruptcy rules 

on State debts and allow them to reorganize, Illinois or whatever 

the State is, and I think that is taking us down a road we don’t 

want to go down. And it will be very, very costly and extremely disruptive of the markets. 

Chairman DUFFY. The gentleman’s time has expired. The Chair 

now recognizes the gentleman from Colorado, Mr. Tipton, for 5 

minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. Just by way of preamble, 

when Dr. Krueger’s point that she had made that the situation is 

so dire, Mr. Zandi’s point saying that we need to be able to spread 

the pain, and then Mr. Isaac’s comment that right now we have a 

somewhat isolated problem and we need to be able to address it before it spreads. 

I truly think that there is a broader lesson for government, not 

just in Puerto Rico, at the Commonwealth level, but for our States, 

for our Federal Government, as well, when we look over to Greece. 

When governments over-promise and under-perform, simply by 

ability and through mismanagement, you create real problems that 

ultimately spread the pain far further than I think any of us want. 

And I think that we need to be addressing some of those root 

causes, as well, rather than being reactive, be proactive. And 

Washington would be a great starting point for a lot of that. 

Mr. Isaac, I would like to first go to you. You commented a little 

bit on the super committee that is being proposed by Treasury. 

Would you, perhaps, like to expand a little bit on why this might 

be a mistake, in regards to allowing Puerto Rico to be able to restructure all of its debt, including its general obligation funds, and 

how this plan could hurt other State and municipal debt owners or 

issuers in the United States? 

Mr. ISAAC. I would be happy to. First of all, it is hard for me to 

comment on what the Treasury is proposing, because it seems to 

change with regularity. So and I am not sure what their current 

proposal is. I guess they are testifying this afternoon or sometime 

today, and maybe we will learn more about where they are right 

now. 

I believe that it would be a serious mistake to restructure the 

general obligation bonds. The government of Puerto Rico, when it 

created COFINA, knew that it was violating the law. It said so, 

publicly. It was violating its own constitution. They called these 

extra constitutional bonds. 

So everybody knew what the game was, and they were heading 

down the path they should not have headed down. And they 

19 

shouldn’t take this period right now as an opportunity to go ahead 

and make these bonds superior, or even pro gratis or Pari Passu 

with the general obligation bonds. 

If they do that, and if Congress allows them to do that, I don’t 

know where it stops throughout the United States. Every State will 

be tempted to do it, or, at least, a lot of the States will be tempted 

to do it. 

And the credit markets, I believe, would be in a state of chaos 

and it will affect a lot of banks, because banks are big holders of 

municipal debt. And, in terms of our own banking system, I shudder at the thought of that. 

Mr. TIPTON. Following that line of thought, we would probably 

see rates increase, causing more pain, and ultimately, more cost. 

Mr. ISAAC. Certainly, the borrowing costs on municipal debt and 

State debt would go up a lot. 

Mr. TIPTON. In order to try and be a little bit solutions-oriented, 

the District of Columbia obviously had some challenges. Chairman 

Duffy actually has a piece of legislation that is going to allow for 

a limited duration council, only if the island’s elected leaders are 

willing to be able to accept the council, somewhat a little bit similarly to what happened to challenges that were right here in the 

District of Columbia. 

Is a financial stability council important to the rehabilitation in 

Puerto Rico’s finances? 

Mr. ISAAC. I believe it is critical, and I believe that D.C. is a good 

example, and we should emulate that. It was very, very successful 

what was done in the district. And something along those lines, I 

think, would work very well in Puerto Rico. 

Mr. TIPTON. Great. Just to broaden this net a little bit, we have 

a piece of legislation that Senator Hatch has put forward, in regards to the Puerto Rico Systems Act. And the bill addresses Puerto Rico’s financial crisis, but it also includes provisions intended to 

be able to reform the public retirement systems outside of Puerto 

Rico. 

Specifically, this bill does include provisions that it would impose 

new disclosure obligations on the State and local government plans, 

as well as creations of a new type of plan designed for State and 

local governments that would not impose future liability on plan 

sponsor. 

And, one of the reasons for that inclusion into the Puerto Rico 

debt crisis has been exacerbated by severely underfunded plans, obviously, in Puerto Rico’s public employee plans. With the aggregate 

under being that we are seeing at the State and local defined benefit pension plans in the United States exceeding about $4 four trillion right now, how important, Dr. Isaac, is it for us to be able to 

move forward with mandatory necessary reforms? 

Mr. ISAAC. I am not an expert on Senator Hatch’s plans. I have 

reviewed it, but not in any depth. I would tell you that I know him 

and have for a long time. And I think he is brilliant. He is a very 

public-spirited representative of our government, and I would think 

anything he proposed is certainly worth merit, has a lot of merit 

and is worth considering seriously. 

But I am not an expert on his particular provisions, and so I 

would hate to go much further than that. 

20 

Mr. TIPTON. Okay. Thank you. My time has expired, Mr. Chairman. 

Mr. MULVANEY [presiding]. The gentleman’s time has expired. 

We now recognize the gentlewoman from New York, Ms. Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Zandi, we have 

heard how so many people are concerned about the U.S. municipal 

bond market. Given that the island has already defaulted on some 

issues, has the U.S. bond market been impacted? 

Mr. ZANDI. No. There is no evidence of that. 

Ms. VELAZQUEZ. Many of the island’s bonds are covered by bonds 

insurance. How does this help insulate the market from the impact 

of defaults? 

Mr. ZANDI. The insurance will pay out under conditions, certain 

conditions of default and help cushion the blow to the bond holder. 

So it reduces the cost to the bond holders. Of course, the insurance 

companies have to pay it out. 

Ms. VELAZQUEZ. Right. When it comes to providing Puerto Rico 

with debt restructuring authority, some are suggesting that this, 

by itself, could undermine the U.S. municipal bond market. Several 

municipalities have declared bankruptcy, however, including Detroit. Did this situation impact the U.S. municipal bond market 

over the long term? 

Mr. ZANDI. No, there is no evidence of that. If you look at yield 

spreads in the bond market, municipal bond yield relative to riskfree Treasury rates, they have shown no impact. And, of course, 

Puerto Rico has been under severe financial stress for more than 

2 years, and this thing has been gathering steam. 

And it is pretty obvious that there are going to be defaults and 

restructuring. And there has been no impact on any of the rest of 

the municipal bond market. There has been, obviously, an impact 

on the Puerto Rican debt. It is trading, depending on what you are 

looking at, at less than 50 cents on the dollar, but the rest of the 

bond market has been unaffected. 

The other thing to point out is, there is no effect on flows into 

mutual funds, municipal bond funds. 

Ms. VELAZQUEZ. So, what you are saying is that— 

Mr. ZANDI. None. 

Mr. VELEZQUEZ. —establishment of a debt restructuring— 

Mr. ZANDI. Investors have said, quite clearly, in their voting with 

their money, that Puerto Rico’s situation is Puerto Rico’s situation. 

It is no one else’s problem. 

Ms. VELAZQUEZ. Right. In the next 6 months, there is nearly $3 

billion due in bond payments, of which half is for GDB, GO, and 

COFINA debt. Do you believe the island will be able to make this 

payment? 

Mr. ZANDI. I think it would be incredibly difficult, and the governor has pretty much said no. The bond market investors, the 

guys who put the money on the line, are saying, no, this isn’t going 

to happen. They are not going to be able to make those payments. 

Ms. VELAZQUEZ. If Chapter 9, alone, was enacted, would it allow 

Puerto Rico to restructure all of these pending debt payments? 

Mr. ZANDI. No. Chapter 9 for municipals and public corporations, 

again, is a very positive, big step in the right direction, but it 

21 

doesn’t put Puerto Rico on a sustainable path. And I think, if we 

are going to empower an entity, like the financial stability council, 

to get this on a sustainable path, we have to give that council all 

the tools that it needs to be able to do that. And that means broader restructuring authority. 

Limiting it to Chapter 9 for municipalities, and for—now, it could 

be I am wrong. It is possible, rare, but possible. But we should give 

the tools to this entity just in case, because there is no room for 

error, here. 

Ms. VELAZQUEZ. So, Mr. Zandi, Puerto Rico already does not 

have access to the credit market. In that sense, it is not Greece. 

Greece has access to the credit markets. What this means for Puerto Rico is that the islands only children’s hospital, large CT, and 

MRI machines, and has 70 vacant nursing positions, that therapy 

sessions for special education students are at risk, that supplies of 

gasoline for ambulances, police cars, and fire engines, were nearly 

cut off, that towns have gone without water, due to the lack of vendor payment, that food supply for inmates were almost cut because 

suppliers were not paid, that contractors, now, wait on average 4 

months or more for the government to pay their bills. 

The reality is that, after facing payment delays, some suppliers 

are threatening, or have shut off the provision of important public—there is a lot of blame to go around, mismanagement of the 

Puerto Rican government. 

Mr. Batlle, you worked for the Government Bank, and, while you 

were in office, the debt doubled. So there is a lot of blame to go 

around, including this same body, because we lack public policy 

uniformity when it comes to the U.S. territories. 

So look at how much reimbursement they get when it comes to 

Medicare and Medicaid. We subject Puerto Rico to the same standards that we subject hospitals here and any other institution, and, 

yet, they don’t have the resources to abide or to comply with those 

standards. 

When it comes to the Jones Act, when it comes to so many other 

issues, we give and we take away. We promote economic growth in 

Puerto Rico by providing Section 936 when we needed to showcase 

Puerto Rico, as Ms. Krueger said, as the jewel of the Caribbean, 

sending a message, what, to Cuba, Fidel Castro, this is what it 

takes to be a good partner? 

But now that Puerto Rico is not needed to showcase what a good 

relationship with the United States means, no longer is an asterisk, Puerto Rico cannot be a nuance for the United States Government. And you know what? We will pay. We will provide the tools, 

or we will pay later. 

One point two million Puerto Ricans, basically, have left the island. And they are living in Florida. So be prepared to provide for 

their legal education and healthcare in your own Congressional districts. 

Thank you. 

Chairman DUFFY. The gentlelady yields back. The Chair now recognizes the gentleman from Maine, Mr. Poliquin, for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I appreciate it very 

much. My heart goes out to the families in Puerto Rico. I don’t 

know how you got into this mess. Your economy is shrinking. Forty 

22 

percent of the adults on the island have jobs, working-age adults. 

Twenty-five percent of the total jobs are for the government. Half 

of the population lives below the poverty line. The young are leaving. 

This is a mess. Now, the folks who run the government down 

there, I don’t know what they have been doing. There is a constitutional mandate on the territory, unless I am mistaken, that limits 

debt to about 15 percent of the tax revenues on the island. But 

COFINA was created to circumvent that law, to add to the debt 

level. 

So, now, you have $73 billion of debt, GOs, and revenue bonds. 

Thirty-six percent of the tax revenues generated on the island goes 

to pay the interest and principal payments on the debt. And you 

have a $2 billion interest payment in a couple of months. Who in 

the heck is responsible? And where are those people now? 

Now, I represent Maine’s second district. The real Maine, not 

Northern Massachusetts, the real Maine. We are hardworking people, and we are honest people. We struggle for every buck we can 

make, struggling through the worst economy in 70 years. And a lot 

of these retirees own Puerto Rican bonds. They have lent money to 

the territory. 

And so, now, you folks come to us, wanting what? So I will tell 

you Mr. Chairman, I am all about solving this problem. For me, 

and for the people I represent in Maine, any solution has to include 

a structural fit for the government structure on this island, who got 

us into this mess, so it doesn’t happen again, because it is just not 

fair. 

Now, Detroit has gone through some really tough times. And 

they were able to solve their problems and hold people accountable. 

So I don’t know which of you individuals up here today can answer 

the question. 

But I am going to ask you, Mr. Batlle, are the people who were 

responsible for this mess still running the government down in 

Puerto Rico? 

Mr. BATLLE. I would say that, as I mentioned in my oral testimony, everybody here is accountable for what happened. So, no, 

some of them are and some of them aren’t, but all— 

Mr. POLIQUIN. Okay. Let me ask you another question. I am the 

former State Treasurer in Maine, so we deal with the muni market 

all the time, and we deal with incentives all the time. Were there 

any incentives in place then, or now, in the folks who are running 

the government, to increase their debt levels, beyond levels that 

are clearly unsustainable? 

Mr. BATLLE. Incentives for— 

Mr. POLIQUIN. Yes, are there any electoral or governance incentives, right now, in the territory, that would incent people who run 

the government to increase their debt levels? 

Mr. BATLLE. Not to my knowledge. 

Mr. POLIQUIN. Then how did you get in this mess? Ms. Krueger? 

Ms. KRUEGER. If I may, and there are problems within the government, in terms of the inefficiency of tax collection, and administration in general that have accounted for it. It is no individual, 

but it is the system, which you are quite correct. 

23 

Mr. POLIQUIN. All right. Let’s dig into that a little bit. My understanding is that only 56 percent of the taxes owed in the territory 

are actually collected. Is that right? Why? 

Ms. KRUEGER. It is hard to know a number, because there is a 

large informal sector— 

Mr. POLIQUIN. Okay, fine. That is the report I have. It is about 

56 percent. Why? 

Ms. KRUEGER. There is a large informal sector, because, indeed— 

Mr. POLIQUIN. What does an informal sector mean, people don’t 

want to pay their taxes? 

Ms. KRUEGER. People who are working and not paying taxes, yes, 

outside— 

Mr. POLIQUIN. Well, no one wants to pay their taxes, but if you 

owe your taxes, you pay them, right? So why aren’t these taxes collected? Mr. Batlle? 

Mr. BATLLE. Sir, the taxing authority in Puerto Rico is a very 

dysfunctional entity. 

Mr. POLIQUIN. It is a cultural thing? Did I hear that right? 

Mr. BATLLE. Dysfunctional. The taxing authority. 

Mr. POLIQUIN. It is dysfunctional. What makes it dysfunctional? 

It is dysfunctional in Greece, too. 

Mr. BATLLE. I will tell you that the— 

Mr. POLIQUIN. People don’t want to pay their taxes there, and 

then you complain because you can’t run the government. And you 

have to borrow more, and it puts everybody at risk. I know it is 

dysfunctional. How do you fix it? 

Mr. BATLLE. There has to be consequences to people who don’t 

pay taxes. 

Mr. POLIQUIN. What kind of consequences? 

Mr. BATLLE. Whatever consequences could be incorporated into 

the system. 

Mr. POLIQUIN. Okay. 

Mr. BATLLE. I am not an expert on that in my area, but— 

Mr. POLIQUIN. Mr. Chairman— 

Mr. BATLLE. —there have to be consequences. 

Mr. POLIQUIN. Thank you, sir. And I am not trying to badger 

anybody, it is just that I represent people who are coming to us to 

ask to be on the hook to bail out people who weren’t responsible. 

There has been reckless behavior down in this territory, and in 

other parts of this country. It is not just the territory. Other parts 

of this country, including, here, in Washington. 

They are looking for bailouts. So I will tell you, Mr. Chairman, 

I am out of time. I am all for a solution, as long as there are structural changes to fix this problem, so that we don’t go down this 

path again. Thank you. 

Chairman DUFFY. The gentlemen yields back. The Chair now 

recognizes Mrs. Maloney from New York for 5 minutes. 

Mrs. MALONEY. All right. I want to thank you, Mr. Chairman 

and Mr. Ranking Member, for allowing me to participate in this 

hearing and, really, for having this very important hearing. Puerto 

Rico is home to 3.5 million American citizens, and they face a severe financial crisis. I believe we have an obligation to help our fellow citizens. 

24 

And New York City has a long history with Puerto Rico. The 

very first, a Puerto Rican veteran, was from El Barrio in East Harlem of New York. The very first elected party official, first elected 

official, many leadership and the arts came from what we call the 

cradle of Puerto Rican advancement in the United States, East 

Harlem or El Barrio. 

Now, I would like to just note and put into historical reference 

what we are confronting today. New York City, the city that I am 

proud to represent, also faced a huge financial crisis back in the 

1970s, and there was a reaction by some in Congress to do nothing. 

Let them die. Let’s do nothing to help New York. 

Gratefully, the Majority in Congress responded to the crisis in 

New York, and helped the City and its people rebuild. And that 

was to the benefit of our entire Nation, not just to the City and 

State, but our entire Nation. And the solution that Congress put 

forward involved a control board, a restructuring law, and a $2.3 

billion loan from the Federal Government. 

We faced a similar crisis with the auto industry in New York, 

and again, not in New York, in our country, out in Michigan. And, 

again, our country responded by restructuring, offering loans, and 

we now have an auto industry that survived and is now exporting 

and creating American jobs. 

So I feel we have a responsibility to get in there and help, and 

help them restructure it and help them rebuild. I would like to ask, 

and I would like to really comment on Dr. Zandi’s testimony that 

what we should approach what is confronting us now is a territorial bankruptcy regime that would, when you said that it would 

not disrupt the broader municipal bond market, that seems that 

should be the way that we would go. And I think that is really important, your testimony that it would not disrupt the municipal 

bond market. 

A territorial bankruptcy regime, by definition, would not be 

available to States. It would only be available to the five territories 

that we have, or it could be drafted specifically for Puerto Rico. 

I want to compliment and applaud Chairman Duffy. He is the 

only Republican, that I am aware of, who has tried to confront this 

problem and come forward with constructive solutions. He has introduced a bill that grants Puerto Rico access to Chapter 9 bankruptcy, just like every other State has. 

And there is absolutely no justification, in any way, shape, or 

form, for excluding Puerto Rico from Chapter 9. And I want to 

thank Chairman Duffy for his leadership in putting this forward. 

But I think it is also important to remember that much of Puerto 

Rico’s $72 billion worth of debt is what is known as special revenue 

debt, which enjoys unique protections under Chapter 9. 

So even if they had Chapter 9, there would be a whole area that 

would be protected from restructuring. I hear that, roughly, only 30 

percent of the debt would be available for restructuring under 

Chapter 9. Is that correct, Dr. Zandi? If we had Chapter 9, how 

much of Puerto Rico’s debt could be restructured? 

Mr. ZANDI. For sure, 30 percent of the debt. There is a reasonable debate as to whether the other debt, parts of the debt, would 

fall under Chapter 9. But that would have to adjudicated, and it 

would go through a court process. 

25 

And just looking, a similar kind of question came up in the Detroit bankruptcy about eligibility, and that just dragged on for 12, 

18 months. And Puerto Rico doesn’t have that time. 

Mrs. MALONEY. So I think we have to consider a more comprehensive option, like a broader restructuring regime, that can 

bring in all of the creditors to the table, including the secured 

creditors. 

And that is why I believe, Mr. Duffy, we have to look at expanding it to a territorial restructuring and put everybody at the table. 

But my question is for Dr. Zandi: What difficulties would Puerto 

Rico face in negotiating a restructuring under a regime that coves 

only roughly 30 percent of their debt? 

Mr. ZANDI. I think if you do the arithmetic, if they can only get 

30 percent of the debt restructured, that wouldn’t put Puerto Rico 

on a sustainable path. They would continue to have significant fiscal problems, economic problems, and you would not have solved 

the issue. It would be back here. We would be back here, again, 

discussing this and trying to figure out what to do. 

So I don’t believe that is sufficient to solve this problem in a sustainable way, as other Congressmen have said that we should. 

Mrs. MALONEY. So we need to consider stronger tools than Chapter 9, you would say, Dr. Zandi, correct? 

Mr. ZANDI. Yes, I do. And I don’t say this lightly, because I do 

think we need to be cognizant of the cost, potential cost. I think 

Mr. Isaac brings up an important point that we need to think 

through. 

But I think, at the end of the day, Puerto Rico is not a State. 

States, under the 10th Amendment of the Constitution, will never 

go down the path that was being proposed here for Puerto Rico. 

And, again, the proof, or the basis, for this perspective that gives 

me confidence is in the marketplace. Investors who have money on 

the line are saying that this is not going to be an issue for the rest 

of the country. 

Mrs. MALONEY. Okay. So do you think a territorial bankruptcy 

regime would be sufficient? 

Mr. ZANDI. Yes. And just a restructuring framework. It doesn’t 

necessarily have to be bankruptcy. That is perhaps the cleanest 

way. But there are other ways of doing it. But there has to be a 

framework to allow a restructuring of all of the liabilities that the 

island is struggling with, all of the debt, and all of the unfunded 

pension liabilities. 

Mrs. MALONEY. And that would have the least impact on taxpayers, too. 

Mr. ZANDI. I think, at the end of the day, that is the only way 

to put Puerto Rico on a sustainable path and limit the fallout on 

the rest of the municipal bond market economy and financial system. 

Mrs. MALONEY. Thank you very much. 

My time has expired. Thank you very much, Chairman Duffy and 

Ranking Member Green, for your work on this. And I thank all the 

panelists for your thoughtful presentations today. 

Chairman DUFFY. And I appreciate your positive comments, Mrs. 

Maloney, but your time has expired. Thank you. 

26 

The Chair now recognizes the ranking member of the subcommittee, the gentleman from Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you very much, Mr. Chairman. 

Let’s start with bankruptcy, in general. I must tell you, friends, 

I marvel at how bankruptcy has become a taboo for the committee, 

when, for many years now, there has been this clarion call, if you 

will, to eviscerate Dodd-Frank and replace it with some sort of 

super bankruptcy for the big banks. 

It just seems to me that if bankruptcy is good enough for the big 

banks—and that is a bailout if you want to call it such—it seems 

like it ought to be good enough for Puerto Rico. It just seems to 

me that we can do for Puerto Rico what persons are proposing currently to do for the big banks. 

Literally, eviscerate—well, if not eviscerate, emasculate DoddFrank, so that there will not be the opportunity to have the orderly 

liquidation of these huge mega banks. Now, with reference to someone indicating that it was unfair, or it would create some sort of— 

disrupt the balance, if we moved to change the bankruptcy rules, 

we did it in 1984. 

And it seems to me that things are still functioning fairly well. 

And, immediately after 1984, there was not this great disruption 

in the markets. We changed it, 1984. The law allows for it to be 

done. 

Investors who invest understand that it can be done when they 

make the investments. They understand this. These are very sophisticated investors, the people who actually make the investments. So they understand that Congress can change the rules 

retroactively, because we have changed the rules retroactively. 

Nothing new. It happens. 

I don’t advocate doing it on some sort of routine basis, but I do 

believe that, when we have a crisis of this magnitude, such that 

we will, with our inaction, allow Puerto Rico to become the Greece 

of the western hemisphere, I think we ought to act. We ought not 

just allow this to occur. 

Now, with reference to the 30 percent, Mr. Zandi, this is the 

case, because of the specific revenue bonds. And for edification purposes, these are bonds that, in a Chapter 9 bankruptcy, when you 

get the automatic stay, you are still going to be paying the principal and interest on those, under the automatic stay. 

The others, the 30 percent you are talking about, will be subject 

to the automatic stay, which is why you have to have some methodology by which you can bring everybody to the table at the same 

time, if you are going to get a long-term solution to a crisis of this 

magnitude. 

I believe that Detroit has benefited greatly. I think that those 

who prefer D.C., I am not going to argue with you about it. But 

I think that a good argument can be made that, if we can do it for 

Detroit, we can do it for Puerto Rico, as well. 

And, finally, before we go to another round, if there is going to 

be another round, Mr. Chairman, I would like to go to Mr. Zandi 

and ask him the following. 

Sir, with reference to the broadening of this, beyond what Chapter 9 will afford, if we broaden, and we bring everybody to the 

table, would you juxtapose that to what happens if we only bring— 

27 

and I think you have done this, but I would like for you to do it 

again, to help provide additional clarity, if you only bring that 30 

percent that we are talking about, that Chapter 9 might afford us, 

what will the difference be? 

Mr. ZANDI. If we only get the 30 percent through the bankruptcy, 

Chapter 9 bankruptcy, and you do the arithmetic, it is very likely 

that we haven’t solved Puerto Rico’s problems. It is unsustainable. 

So I think it is important. And, again, that is my arithmetic, but 

I think it is important to provide the tools necessary for other people to do this work in more detail and to figure it out. And give 

them the tools to be able to restructure the liabilities more broadly, 

if necessary, to put Puerto Rico on solid ground. 

And I do think it is reasonable to treat Puerto Rico differently 

than a State. It is not a State. It is a territory. It has the same 

relationship to the Federal Government as does Detroit has to the 

State of Michigan. And that is why I think it is perfectly reasonable and ultimately vital that we allow for this broader restructuring framework to go forward. 

Otherwise, my sense is, my view is this problem will not be 

solved, and we will be back here, again, trying to figure it out. 

Mr. GREEN. I yield back, Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. For those who are 

willing to participate, and if the panel is okay with it, we would 

like to do a second round. We have lost a few Members, so it won’t 

take as long. So, with no objection, the Chair recognizes himself for 

5 minutes. 

I have to say, Mr. Zandi, I would have to imagine that, if that 

statement was made to the residents of Puerto Rico, that the relationship of Puerto Rico to the United States is that of Detroit to 

Michigan, I would have to imagine you would probably get some 

pretty significant objections. 

But with that said, I want to look at the debt that is out there. 

And, to your point, you have indicated that, well, if you offer Chapter 9, that might only be 30 percent, and 30 percent isn’t enough 

to deal with the issues on the island. Is that a fair enough statement that you have made at today’s hearing? 

Mr. ZANDI. Yes, just to clarify, to your previous point, I said that 

in the context of the debt, not in the context of the broader frame 

that you put it in. 

Chairman DUFFY. Okay. But you would also agree that we are 

having a conversation about what is the solution. 

Mr. ZANDI. Yes. 

Chairman DUFFY. What do we do, as Congress, so we have the 

power to decide whether it is 30 percent, whether it is 100 percent, 

or whether it is 75 percent. I am not advocating that COFINA be 

included, but I am not saying that it shouldn’t be included. 

But if COFINA is included, we are not at 30 percent. We are 

going to get up to 75 percent. 

Mr. ZANDI. You are right. 

Chairman DUFFY. And if we choose, as legislators, to do that, is 

the 75 percent of debt restructuring sufficient to address the issues 

on the island and still protect Wisconsin and Texas, States and municipalities, from increases in interest rates? 

28 

Mr. ZANDI. Yes, in theory. This is a matter of theory and practice. Are you going to actually accomplish what you want to accomplish with your legislation? 

Chairman DUFFY. That is always a question for Congress, theories and— 

Mr. ZANDI. Well, no. You are trying to solve a problem. So are 

we going to solve this problem or not? 

Chairman DUFFY. That is why we are here today. We are trying 

to solve the problem, right? That is the point of the hearing. That 

is the point of the testimony. But I don’t want people to be misled 

that our proposal can only hit 30 percent. 

Mr. ZANDI. You are absolutely right. And I tried to say, every 

single time that this question has been asked, because it is a key 

question, and I say, ‘‘For sure, 30 percent.’’ 

Chairman DUFFY. And this will be a question for us, what— 

Mr. ZANDI. Yes. 

Chairman DUFFY. —how do we structure— 

Mr. ZANDI. Right. Yes. 

Chairman DUFFY. —bankruptcy and how much of the debt does 

it touch? 

Mr. ZANDI. But you are absolutely—I don’t want to mislead anybody. 

Chairman DUFFY. Thank you. So, I know. I wanted to make sure 

we were clear on that. 

Mr. ZANDI. Right. 

Chairman DUFFY. Mr. Isaac, former Chair of the FDIC, I think 

you recently said, ‘‘Puerto Rico’s debt situation has a potential of 

significantly rattling the financial markets, and banks need to take 

notice.’’ What is at stake? Why? With regard to banks? If this question isn’t properly handled? 

Mr. ISAAC. Pardon? 

Chairman DUFFY. If this question isn’t properly handled, what do 

you mean by that? 

Mr. ISAAC. I am concerned that the banks have made loans all 

over the country, in reliance on certain rules of bankruptcy. They 

understand the rules. They understand what general obligation 

bonds mean. And they understand the difference between a general 

obligation bond and a revenue bond. 

And, if we say that, through our actions in Puerto Rico, that all 

those distinctions that you have been relying on don’t work anymore, you are no longer in favored status when you have a general 

obligation bond— 

Chairman DUFFY. That would create uncertainty, right? 

Mr. ISAAC. Enormous uncertainty. 

Chairman DUFFY. And is uncertainty bad for our markets? 

Mr. ISAAC. As former Chairman of the FDIC, I used to hate uncertainty. I wanted to know what was going to happen each day 

when I woke up. 

Chairman DUFFY. Thank you for that. 

Dr. Krueger, as the former chief economist for the World Bank 

and the managing director of the IMF, it is my understanding that, 

when we have distressed countries, the benchmark for debt servicing has been 18 to 22 percent. I think that is—I read that somewhere. 

29 

The proposal from Puerto Rico has been that 15 percent of revenue would go to debt servicing. Does that make sense? Should it 

be 15 percent? Should we get up to 18 to 22? Where should that 

number be—or percent be, I should say? 

Ms. KRUEGER. That number depends, in part, of course, on the 

country situation. And it varies a bit, of course, by country. I think 

more accurately what the Fund does is try to look at what needs 

to be done, structurally, to change growth prospects, at the same 

time as to get whatever tax and expenditure adjustments are necessary, and then look prospectively at what we call the primary 

surplus will be going forward. 

It is defined as the amount of revenue, over and above other government expenditures, that will come in. And, in general, we look 

at the primary surplus, rather than an 18 or 22 percent number 

to ask what could be reasonable. 

And those numbers vary all over the place. When I was there, 

I think we had one country where, indeed, something like 20 percent of GDP was primary surplus going to debt service for a year 

or two. Another country it was three. It makes a big difference 

what the inflation rate is and things like that. 

I don’t think there is any hard and fast rule on 15 or 18 percent. 

There are many other things to be taken into account. 

Chairman DUFFY. Okay. I think everybody would understand 

and agree that this institution is very sensitive to taking taxpayer 

money and using it in the form of a bailout. If you haven’t noticed 

that, you haven’t been paying attention. 

And, so, there is some conversation about bankruptcy being a 

bailout. Now, I would ask the panel, I would normally think of a 

bailout as this institution taking Federal taxpayer money and giving it to another institution to bail them out. 

Do you all see bankruptcy as a bailout? Yes? Dr. Krueger? 

Ms. KRUEGER. Do you want me to start? Bankruptcy comes about 

when there is no alternative, which is, I am afraid, the Puerto 

Rican case, or, more accurately, when the alternative is worse. And 

the alternative, in this case, for Puerto Rico, of not getting something now means probably no growth, which, as I said, also means 

some other things, and continuing fiscal unsustainability, which 

leads to uncertainty, which leads to more problems. The normal— 

Chairman DUFFY. And could that lead to the call for this institution actually to bail them out? To actually send taxpayer money to 

the island? 

Ms. KRUEGER. The normal procedure is, when things get to that 

shape in countries, what happens is that without some short-term 

money, things are grinding to a halt, and the downward spiral is 

making things even worse. 

So that sometimes what happens is money comes with it, but 

that normally is repaid. Now the art of bankruptcy is to find a law 

which gives enough room so that when their things are really in 

dire, dire straits, so there is no alternative, there can be a mechanism so that you just don’t go downhill forever. 

But, at the same time, creditor rights are protected, as much as 

you possibly can, because otherwise creditors aren’t going to lend. 

So finding that balance is what is really hard. 

30 

Chairman DUFFY. What is key. Thank you. Just quickly, and I 

am done, but does anyone disagree with that point that bankruptcy 

is a bailout? No one is raising their hand. I will take that as you 

don’t agree that bankruptcy’s a bailout. 

With that, my time expired long ago. The Chair now recognizes 

the ranking member of the subcommittee, the gentleman from 

Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. I thank you, Mr. Chairman. Let’s continue with the 

bailout proposition, because it is important to note that when you 

are in bankruptcy, the creditors come to the table, and it is all 

about trying to get some agreement as to how the creditors will go 

forward. 

And if there is a loss, it is the creditors, not the citizens, who are 

not a party to the bankruptcy, who end up taking the loss. The 

creditors, not the citizens. Now, taxpayers can be involved in business, but it is not because they are citizen taxpayers that they are 

at the table. They are at the table, because there was some investment. 

So it is those who have invested. And we have to make that 

clear, because there seems to be a belief, among some of us, that 

in bankruptcy the court orders money from the Treasury to be used 

to satisfy some need, which is absolutely, totally, and completely 

untrue. It is not the case. 

Now, moving forward, let’s see a show of hands of the persons 

who are here with us today as witnesses, and I thank you, of those 

who would favor bankruptcy. You may favor more, but see bankruptcy as a part of the solution. If you think bankruptcy is a part 

of the solution, I just want to get this on the record, would you 

kindly raise your hand? 

All right. Let the record reflect that all of the members of the 

panel—you may lower your hands—see bankruptcy as a part of the 

solution. 

Now, Mr. Isaac, you have been in the banking business for some 

time. And you are aware of bankruptcy laws, to a great extent. I 

am assuming this, okay? But when it comes to banks, when they 

have a problem, they usually close them on Friday. The FDIC 

comes in. then, they open them up on Monday, generally speaking. 

Is that a fair statement? 

Mr. ISAAC. That is a fair statement. 

Mr. GREEN. All right. And so, if in banking—and by the way, 

FDIC is sort of a fund that is developed from a premium paid by 

banks. Is that a fair statement? 

Mr. ISAAC. That is correct. 

Mr. GREEN. Okay. So you have the FDIC, you have the banks. 

Now, if banks made an investment in some aspect of the Puerto 

Rican economy, they did so understanding that they might make 

money or they may lose money. Even banks can lose money. Would 

you agree that they would have to do that with that understanding, 

that they would make or lose? It is not always a winning proposition. You can’t arbitrage a bank. 

Mr. ISAAC. That is correct. It is a risk business. 

Mr. GREEN. Right. Although, I do confess that there is a way, 

sometimes, to arbitrage with the spread and something that we 

went through in 2008. But that is not a part of this hearing. 

31 

So if banks can lose money, then this may be one of those times 

when banks may have to take a haircut—haircut is another way 

of saying lose some money—just as other investors may have to 

take a haircut. 

And, by the way, I am not in favor of having anybody lose 

money. But we have a crisis that we have to resolve. And we are 

not going to resolve the crisis by allowing it to continue without 

some intervention. So the question is, to what extent do we intervene? 

I remember in 2008, Mr. Zandi, when—and I think you were 

around and a part of many of these discussions, trying to determine what the amount of the—what was it, the TARP? 

Mr. ZANDI. TARP. TARP program. 

Mr. GREEN. TARP. Yes, trying to determine the TARP was a big 

question. We had someone to come in and testify that we needed 

a certain amount of money, with about five sheets of paper. 

Mr. ZANDI. Yes. 

Mr. GREEN. And with those five sheets of paper, we started a 

process. But we had a big debate about how big it should be. So 

we are into that big debate now about how big this should be. 

It is what we have done before. We do this. This is why we are 

here, to have these debates. And Mr. Duffy and I will, hopefully, 

try to come to a consensus so that we can resolve this and not have 

a measure that doesn’t go far enough, because we have seen what 

happens when you don’t go far enough. 

You can actually exacerbate the problem. And that is not what 

we want to do. We want to resolve the problem. 

With that said, Mr. Chairman, I yield back. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the ranking member of the full Financial Services Committee, the gentlelady from California, Ms. Waters. 

Ms. WATERS. Thank you so very much, Mr. Duffy. Let me tell 

you how pleased I am that you are holding this hearing. I think 

this absolutely needed to be done, and I am very appreciative that 

you are doing this. 

Let me direct a question to Dr. Zandi and, perhaps, Dr. Krueger, 

too. Throughout your testimony, you have spoken of the importance 

of expanding the Medicaid program to improve health outcomes 

and of introducing the Earned Income Tax Credit, as a strong incentive to find taxable employment. 

Chairman DUFFY. If I could just briefly interrupt the ranking 

member, if you could speak a little bit louder, I think the panelists 

are having a hard time hearing you. I’m sorry. 

Ms. WATERS. They can’t hear me? Usually, that is not the case. 

Chairman DUFFY. That is usually not the problem. 

Ms. WATERS. What is wrong today? Okay. The questions that I 

have are for Dr. Zandi and, I believe, Dr. Krueger. Throughout 

your testimony, you have spoken of the importance of expanding 

the Medicaid program to improve health outcomes and of introducing the Earned Income Tax Credit, as a strong incentive to find 

taxable employment. 

Specifically, I am told you mentioned that the cost of these pro- posals, when fully operational, would be roughly $2 billion a year. 

Will you please explain how the cost of these programs would be 

32 

offset by the expected increase in labor force participation and tax 

revenues and anticipated decrease in healthcare expenditures? 

Secondly, what would be the expected costs if these critical social 

welfare programs were not made available? Is it possible that the 

lost revenues and unemployment expenses could exceed $2 billion 

per year? Starting with Dr. Zandi. 

Mr. ZANDI. Okay. So just to be clear on Medicaid, all I am arguing is that the funding for Medicaid in Puerto Rico should be the 

same as the funding on the mainland. If you have that same 

threshold, then, I think, you have gone a long way to helping Puerto Rico, because under current law that is not the case. And the 

funding will decline in late 2017, 2018. 

And this is key for Puerto Rico, because half of the population 

is on Medicaid. And without those benefits, this will be very serious. That, just to be precise there, my calculation of the cost is $2 

billion per annum on a present value basis. So over the next 10 years. So $20 billion, over the next 10 years, 

on a present value basis. If you do it by CBO accounting, it probably comes closer to $30 billion. That is in nominal dollars. 

You make an excellent point, and that is, if we don’t take steps 

like funding Medicaid fully and adopting an EITC, and other steps, 

the economy of Puerto Rico will continue to shrink, which means 

the fiscal situation will continue to erode, which means we will be 

back here, again, talking about Puerto Rico’s problems. 

It means the tax base erodes. It means less tax revenue, and the 

costs will continue to mount. If we do these things, in addition to 

some other things I propose in the written testimony, get Puerto 

Rico moving in a positive direction, that gives you positive revenue 

growth. 

And I haven’t done the calculation, whether that pays fully for 

the Medicaid expansion and EITC, but it probably comes pretty 

close, yes. So I think it is a very reasonable thing to do. And, frankly, I don’t see any other option, because if we don’t get Puerto Rico 

moving north, as opposed to south, nothing works. Nothing works. 

Ms. WATERS. Thank you very much. 

Dr. Krueger, you have a minute or so to add to that. 

Ms. KRUEGER. First, I agree with everything that Dr. Zandi said, 

but I would make the point even more strongly. If the formula for 

providing Medicaid to block grants were the same for Puerto Rico, 

that be a huge difference in Puerto Rican payments. 

And the current payments are expected to expire in 2017, which, 

if something is not done, is going to be another big hole in the 

Puerto Rican budget, because they are mandated that they must do 

it. 

And it is not that healthcare would improve. It is that the funding must be done by the Commonwealth, by Federal law. And any 

other State in the United States gets more funding for the same— 

if you use the same formula, Puerto Rico would get more, too. 

As to EITC, obviously, if more people enter the formal labor force 

and start paying taxes, even though they get EITC, there is a huge 

offset there, but the big offset, I think, is in getting Puerto Rico 

turned around and on a proper growth path. 

Costs of welfare, in general, will go up across Medicaid, everything, until such time as the Commonwealth turns around. And 

33 

they will come either on the island, or on the mainland, if people 

leave. 

So it is not a U.S. choice to avoid. It is only a question of where 

the pain comes and how much there is, I think. 

Mr. ZANDI. Just one quick point, Congresswoman? All of the 

budgeting that is being done now is under the assumption that this 

Medicaid fix will occur. If it does not take place, then all of these 

budget assumptions that are being—with the governors putting forward and what the bond holders are assuming, everything, it is 

just not going to work. It is going to be many times worse than 

what we expect right now. 

So this is a working assumption of everyone out there, that this 

is going to happen. 

Ms. WATERS. All right. Thank you very much, and I yield back. 

Chairman DUFFY. The gentlelady yields back. The Chair now recognizes the gentleman from Minnesota, Mr. Ellison, for 5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman, and thanks to the ranking member, as well. And, also, thank you to the panel. 

Dr. Zandi, thanks for being here. I have read that some economists believe that Puerto Rico’s current problems began with the 

winding down of Section 936. Section 936, for the record, provided 

American companies with incentives to invest and create jobs in 

Puerto Rico. 

Would bringing back Section 936 generate economic activity and 

jobs? Would restoring it enable Puerto Rico to pay off its creditors 

in time? 

Mr. ZANDI. I think the expiration of 936, and it was completely 

wound down by the year 2006. And that was the year that the 

economy peaked in Puerto Rico. Employment peaked, population 

peaked. 

So, yes, I think the expiration of the tax benefit under 936 has 

contributed. There are many other factors, obviously, but it is one 

factor in the 10-year long recession in Puerto Rico. Would I bring 

it back? I think if—we were talking about this earlier—if I were 

king for the day, I would say no. 

I would use that resource and that money, and I would use it to 

fund the EITC, a Child Tax Credit, which, by the way, also incents 

work. But we want to get a culture of people paying their taxes. 

It has been aptly demonstrated here that there is a big underground economy. People don’t trust the system, and they are not 

paying. 

And, so, we have to change that. And the EITC and the Child 

Tax Credit would go a long way to incenting people to get into the 

formal economy, start paying their taxes. It will make this whole 

thing work out a lot better. So, if I were doing this, that is where 

I would spend my attention and the resources. 

Mr. ELLISON. Thank you. Also, do any of the other panelists have 

any comments on that? Yes, Dr. Krueger? 

Ms. KRUEGER. Yes, I would agree with Dr. Zandi, but add that, 

indeed, even the 936, when it came, brought in the high-value 

added skill using things, and that is not Puerto Rico’s comparative 

advantage, first. 

But, secondly, we did it once. We took it back once. What would 

convince people that Congress, if they did it again, would not take 

34 

it back at some later date? And I would think the effects of it, the 

second time around, would be far smaller than they were the first 

time. And the first time, it helped the people who didn’t need the 

help as much. 

Mr. ELLISON. Yes. Thank you for your thoughts on that. And 

here is another question for the panel. What sectors of the Puerto 

Rican economy have the most potential to grow? You can start, 

Doctor. 

Ms. KRUEGER. I can take a crack at it. 

Mr. ELLISON. Okay. 

Ms. KRUEGER. The first thing I ever taught in an international 

trade course was that you can never tell what will spring up when 

you change incentives. And that is true. The things that become big 

industries and big users of the labor force very often are things 

that nobody ever dreamt of ahead of time. So it is very hard to tell. 

But tourism in Puerto Rico has not thrived, except at the high 

end, partly because of minimum wage. Dominican Republic’s minimum wage is very low. Puerto Ricans are competing when their 

minimum wage is about 10 times as high. Not that it should be 

that low, but it should be somewhere in between, probably, for that 

purpose. 

But tourism, there are very few more tourist spends now than 

there were in 1980, despite the boom of tourism all around the Caribbean. It doesn’t make any sense. I think that there should be a 

booming corporate headquarters for companies, probably mostly 

European, that do business in both North and South America. 

It hasn’t happened. And I think a lot of this problem we have 

been discussing accounted for it. But Puerto Rico should be a major 

corporate headquarters sector, provide financial services for both 

North and South America, and other things that would take advantage of the U.S. dollar, U.S. law and order, U.S. protection of various kinds, and the advantage of the geographic location, and the 

Spanish and English connection. 

Mr. ELLISON. Great. Others? 

Mr. ZANDI. Yes, I would agree. The most obvious is the tourism 

industry, which has languished for lots of reasons. And the infrastructure of Puerto Rico is quickly eroding and making it more difficult for that to be a mass market for tourism. 

But that is the most obvious comparative advantage. And I do 

think financial services is a place where there would be significant 

potential. There is a lot of capital flowing from South America, 

Central America, into the United States. 

Now, right now, it is mostly going into Miami, in Florida. But I 

don’t see any reason why Puerto Rico couldn’t get its fair share of 

that capital flow. And I think that would be a significant boon to 

the economy. 

Mr. ELLISON. Good. 

I will yield back and say thank you, again, to the panel and to 

the chairman and the ranking member. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentleman from South Carolina, Mr. Mulvaney, for 

5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. I thank the panel for 

sticking around. Mostly, I want to talk to my colleagues, if I may, 

35 

because a couple of items have come up, from both Mr. Green and 

Mr. Duffy, regarding bankruptcy. 

I think it was referred to as a taboo. Some question whether or 

not some of us thought it was a bailout. Certainly, no one here, 

gentlemen, is suggesting that a bankruptcy filing is somehow a 

transfer from the Treasury to the island government. That is not 

the point. 

The point, to my friend Mr. Green, would be that the understanding of the lenders, which you talked about at some length, is 

critical here and central to the issue. And you used the word 

banks. I will use retirees. But when the retirees in my district invested in these bonds, they did so under a certain understanding. 

Yes, part of the understanding was that they could lose money. 

But another part of the understanding was that the general obligation, the taxing authority of the island was pledged as security. 

And, in exchange for that promise, that legal promise, that contract, my retirees accepted a lower rate of interest. 

If they had known that maybe the pensioners would go first on 

the island of Puerto Rico, that they might be made subordinate to 

that flow of funds, they may have demanded a higher rate of interest. But it was a legal contract. 

And what we are talking about here is not allowing bankruptcy. 

I used to practice bankruptcy law a little bit. I know what it is. I 

know that it can be helpful at particular times. But what we are 

talking about here is allowing bankruptcy after the fact. My folks 

have lent to Puerto Rico— 

Mr. GREEN. Will the gentleman yield, since he has invited me 

into the conversation by naming me? 

Mr. MULVANEY. I will. And I think Mr. Duffy will be a little bit 

liberal with the time, since this is the end of the discussion. But 

my folks have lent money under the understanding that it be repaid in a certain fashion and that bankruptcy could not be used, 

as it is used in other States or as it is used in corporations, that 

it was different. 

And, in exchange for that set of facts, they were willing to accept 

a lower rate of interest. We are not suggesting that bankruptcy, by 

itself, is a bailout. We are certainly not suggesting that bankruptcy 

is somehow a transfer from the Treasury. 

What we are suggesting is that it is unfair to change the rules 

on the people who have lent money, in good faith and with a certain legal understanding as to how they might be repaid. Yes, there 

was a risk that they would not get repaid. But bankruptcy was not 

one of the risks they signed up for. 

And, with that, I will yield to the gentleman, to my friend, and 

I will be happy to enter into a colloquy, if you would like to. 

Mr. GREEN. Thank you very much. I concur with you, to a great 

extent, but I do have to acknowledge that the Supreme Court 

weighed in on this. And the Supreme Court indicated that, because 

Congress has this awesome authority to regulate bankruptcy, that 

Congress can change the rules. 

And the Supreme Court has gone so far as to say the rules can 

be changed retroactively. And the people who make these deals, 

who make the deals, not some of the people that you may be addressing—and I don’t want to see anybody hurt—but these are, by 

36 

definition, sophisticated investors, persons who understand what 

they are doing, and are in a position to sometimes lose. 

That is unfortunate. I don’t want to see anybody lose, but that 

is the case sometimes. And with reference specifically to Puerto 

Rico, we are talking about Americans there, Americans here, as 

well. It just seems to me that there should be some accommodation. 

There will have to be some compromise. 

And I am willing to work out a compromise. And my trust and 

belief is that you are willing to do so, as well. 

Mr. MULVANEY. I appreciate that, and I will reclaim my time. 

And I tend to agree with you. I have read the case that the governor sent us from the Supreme Court from the 1930s. It makes 

it clear that Congress does have the authority to do this. 

Of course, we did this, again, in the Chrysler bankruptcy, during 

the auto bailout. But I would suggest to my friends, on both sides 

of the aisle, that just because we have the authority to do so does 

not mean that it is fair for us to do so, or that it is right for us 

to do so. 

So I don’t think anyone is arguing here whether or not we have 

the legal authority, the legislative authority, to do what the Treasury, specifically, is suggesting. My question is should we do it? Is 

it fair? 

Is this one of those circumstances that is so extreme and so unfortunate? For example, when the case from the 1930s references 

the Great Depression in California, a national calamity. From what 

I have read so far, much of the ills that have befallen Puerto Rico 

are specific to Puerto Rico and specific to the management of the 

company. 

I, specifically, referenced earlier the experience with the electric 

company choosing, of its own free will, not to raise rates, money 

that could have been used to help pay back the bond holders. 

And I do look forward to continuing the conversation. I want to 

ask one or two more questions before we leave. 

Specifically, Dr. Zandi. And I want to put you on the spot, because you weren’t the only one who said this, but you were the 

most recent one, so it sort of stuck in mind. We have to do something to get Puerto Rico going. We have to do something to fix it. 

I think Dr. Krueger mentioned it. Everybody agrees that we have 

to have growth in Puerto Rico and have some restructuring and so 

forth. 

Why do we think we are better at it than the Puerto Ricans? 

Mr. ZANDI. I think that we aren’t. They have their own views 

and perspectives, and I think they should be considered. But there 

are things that Congress can do and, I think, would be very helpful 

to the Puerto Rican economy, that the Puerto Ricans would welcome and that would be beneficial to U.S. taxpayers, in the long 

run. 

If we don’t address Puerto Rico now, and the Puerto Rican economy, I think, most of us would agree will continue to be in recession and sink, it is going to cost taxpayers, U.S. taxpayers, your 

constituents, me, money. 

So we need to address this. And I think they will welcome proposals like EITC. But, at the end of the day, they are a sovereign 

entity. And they have to be involved in the decision-making process 

37 

and be involved, because they are going to have to solve the problem and get on a sustainable path by themselves. 

Mr. MULVANEY. And if that is a basis for understanding going 

forward, if we talk about the Jones Act, talk about the EITC, we 

talk about tourism, we talk about the minimum wage exemptions, 

that may be a basis for a future understanding. 

Last question—I appreciate the chairman’s liberalness, with a 

small L, with the time—which is I heard something at the very end 

and it struck me, which is that these assumptions, we are making 

assumptions about a change in, is it Medicaid reimbursements? 

Mr. ZANDI. Yes. 

Mr. MULVANEY. So my understanding, and it is just very basic, 

is that the current law of this country is that those payments will 

go down fairly dramatically in the next couple of years. What you 

are telling us is that the assumptions that everyone has made is 

that Congress will change the law, in order to fairly dramatically 

increase Medicaid reimbursements to Puerto Rico in, I think, it is 

2018. Is that correct? 

Mr. ZANDI. Yes. When I say everyone, I am saying market participants— 

Mr. MULVANEY. Right. 

Mr. ZANDI. —people who are looking at this, people who are 

doing the budgeting in Puerto Rico. You have to make assumptions 

when you do a projection. 

Mr. MULVANEY. Absolutely. 

Mr. ZANDI. And one of the key assumptions, is, yes, that is going 

to be patched. 

Mr. MULVANEY. How much is that? Does anybody know? 

Mr. ZANDI. By my calculation, I calculated on a CBO basis, over 

a 10-year period, it will probably cost $25 to $30 billion per annum. 

Mr. MULVANEY. ‘‘Billion’’ with a ‘‘B?’’ 

Mr. ZANDI. ‘‘Billion’’ with a ‘‘B.’’ 

Mr. MULVANEY. So the assumption is that we will increase the 

Medicaid reimbursement to Puerto Rico, beginning in 2018— 

Mr. ZANDI. Yes. And because you might have missed this, what 

this will do is ensure that the Medicaid reimbursement to Puerto 

Ricans is exactly the same as the reimbursement to you and I, here 

on the mainland. 

Mr. MULVANEY. Right. But it is different in the law, now. 

Mr. ZANDI. It is different in the law now. 

Mr. MULVANEY. Okay. All right. 

Mr. Chairman, thank you very much. 

Chairman DUFFY. The gentleman yields back. I am going to ask 

unanimous consent to recognize the gentleman from Texas for 1 

minute. 

Mr. GREEN. Thank you, Mr. Chairman. I believe that Dr. King 

addressed this question of it is only Puerto Rico. And I would like 

to share his thoughts with you. He reminds us that life is an inescapable network of mutuality, tied to a single garment of destiny. 

What impacts one directly, impacts all indirectly. 

What happened to Greece, we thought, was a problem for a given 

country. But we now understand that these problems can exacerbate other problems in the world. What happened with credit default swaps, we thought would impact just some, maybe in a cerVerDate Nov 24 2008 15:36 Jun 22, 2017 Jkt 023718 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\23718.TXT TERI
38 

tain market. But we found out that it could impact the entire economy. 

So I think we have to step back and get a sense that this may 

not end at the water’s edge in Puerto Rico. It has a potential to 

surf its way all the way to the USA. I yield back. 

Chairman DUFFY. The gentleman yields back. I always appreciate that I get some of the best Dr. King quotes from the ranking 

member. He always puts them in so well, and I thank him for that. 

And I thank the panel for coming in today. 

This has been a really great discussion, and I hope that you take 

away that we are all engaged in trying to find a solution that 

works for Puerto Rico, that works for our government, and that is 

fair, by way of everybody. 

And I think it is a conversation that puts everything on the table 

and looks at Puerto Rico as a whole. And we have an eye towards 

the people of Puerto Rico and making sure their lives are better, 

their opportunities are better, and their future is better and brighter. 

And, if they want to stay on the island, in their neighborhoods 

and in their communities, they will have that option. If they want 

to come to the mainland, they can make that choice, too. But a lack 

of opportunity should not be the reason why they can’t stay. 

So, again, I want to thank the panel for being here and for your 

time and for your insightful testimony. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And, with that, without objection, this hearing is adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

(39) 

A P P E N D I X 

February 25, 2016 

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