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DISCUSSION DRAFT, H.R. _____, 

‘‘PUERTO RICO OVERSIGHT, 

MANAGEMENT, AND ECONOMIC 

STABILITY ACT (PROMESA)’’ 

LEGISLATIVE HEARING 

BEFORE THE

COMMITTEE ON NATURAL RESOURCES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

Wednesday, April 13, 2016 

Serial No. 114–36 

Printed for the use of the Committee on Natural Resources 

( 

Available via the World Wide Web: http://www.fdsys.gov 

or 

Committee address: http://naturalresources.house.gov 

(II) 

COMMITTEE ON NATURAL RESOURCES 

ROB BISHOP, UT, Chairman 

RAU ́ L M. GRIJALVA, AZ, Ranking Democratic Member 

Don Young, AK 

Louie Gohmert, TX 

Doug Lamborn, CO 

Robert J. Wittman, VA 

John Fleming, LA 

Tom McClintock, CA 

Glenn Thompson, PA 

Cynthia M. Lummis, WY 

Dan Benishek, MI 

Jeff Duncan, SC 

Paul A. Gosar, AZ 

Rau ́l R. Labrador, ID 

Doug LaMalfa, CA 

Jeff Denham, CA 

Paul Cook, CA 

Bruce Westerman, AR 

Garret Graves, LA 

Dan Newhouse, WA 

Ryan K. Zinke, MT 

Jody B. Hice, GA 

Aumua Amata Coleman Radewagen, AS 

Thomas MacArthur, NJ 

Alexander X. Mooney, WV 

Cresent Hardy, NV 

Darin LaHood, IL 

Grace F. Napolitano, CA 

Madeleine Z. Bordallo, GU 

Jim Costa, CA 

Gregorio Kilili Camacho Sablan, CNMI 

Niki Tsongas, MA 

Pedro R. Pierluisi, PR 

Jared Huffman, CA 

Raul Ruiz, CA 

Alan S. Lowenthal, CA 

Matt Cartwright, PA 

Donald S. Beyer, Jr., VA 

Norma J. Torres, CA 

Debbie Dingell, MI 

Ruben Gallego, AZ 

Lois Capps, CA 

Jared Polis, CO 

Wm. Lacy Clay, MO 

Jason Knox, Chief of Staff 

Lisa Pittman, Chief Counsel 

David Watkins, Democratic Staff Director 

Sarah Lim, Democratic Chief Counsel 

(III) 

CONTENTS 

Page 

Hearing held on Wednesday, April 13, 2016 ......................................................... 1 

Statement of Members: 

Bishop, Hon. Rob, a Representative in Congress from the State of Utah ... 1 

Prepared statement of ............................................................................... 3 

Grijalva, Hon. Rau ́l M., a Representative in Congress from the State 

of Arizona ...................................................................................................... 3 

Prepared statement of ............................................................................... 5 

Pierluisi, Hon. Pedro R., a Representative in Congress from the Territory 

of Puerto Rico ................................................................................................ 6 

Prepared statement of ............................................................................... 7 

Statement of Witnesses: 

Johnson, Simon, Professor of Global Economics and Management, MIT 

Sloan School of Management, Cambridge, Massachusetts ........................ 45 

Prepared statement of ............................................................................... 46 

Kent, Andrew, Professor of Law, Fordham University School of Law, 

New York, New York .................................................................................... 28 

Prepared statement of ............................................................................... 29 

Letter to Chairman Bishop with Supplementary Testimony ................ 34 

Kirpalani, Susheel, Partner, Quinn Emanuel Urquahart & Sullivan, New 

York, New York ............................................................................................. 37 

Prepared statement of ............................................................................... 39 

Miller, John V., CFA, Managing Director, Co-Head of Fixed Income, 

Nuveen Asset Management, Chicago, Illinois ............................................ 15 

Prepared statement of ............................................................................... 17 

White Paper submitted for the record ..................................................... 18 

Weiss, Antonio, Counselor to the Secretary, U.S. Department of the 

Treasury, Washington, DC ........................................................................... 9 

Prepared statement of ............................................................................... 11 

Williams, Hon. Anthony A., Senior Strategic Advisor, Dentons, U.S. LLP, 

Washington, DC; Former Mayor of Washington, DC ................................. 12 

Prepared statement of ............................................................................... 13 

Additional Materials Submitted for the Record: 

Associated General Contractors of America—Puerto Rico Chapter, April 

11, 2016, Letter submitted for the record ................................................... 83 

CCAGW, April 19, 2016, Letter submitted for the record ............................. 91 

Jubilee USA Network, April 13, 2016, Letter submitted for the record ...... 89 

List of documents submitted for the record retained in the Committee’s 

official files .................................................................................................... 93 

National Assoc. of Counties, National League of Cities, U.S. Conference 

of Mayors, Government Finance Officers Assoc., International City/ 

County Management Assoc., April 14, 2016, Letter submitted for the 

record ............................................................................................................. 90 

Olmos, Jose O., Leader within the Veteran and Military community in 

Puerto Rico, April 12, 2016, Letter submitted for the record .................... 85 

Outdoor Alliance, April 12, 2016, Letter submitted for the record .............. 87 

PIMCO Blog, Congress Needs to Act on Puerto Rico’s Debt Crisis, and 

‘PROMESA’ Could Work, April 26, 2016 .................................................... 93 

Plaskett. Hon. Stacey E., a Delegate in Congress from the U.S. Virgin 

Islands, Prepared Statement of ................................................................... 82 

Puerto Rico Builder’s Association, April 12, 2016, Letter submitted for 

the record ....................................................................................................... 88 

SIFMA Asset Management Group, April 21, 2016, Letter submitted for 

the record ....................................................................................................... 92 

(1) 

LEGISLATIVE HEARING ON DISCUSSION 

DRAFT, H.R. _____, ‘‘PUERTO RICO OVERSIGHT, MANAGEMENT, AND ECONOMIC 

STABILITY ACT (PROMESA)’’ 

Wednesday, April 13, 2016 

U.S. House of Representatives 

Committee on Natural Resources 

Washington, DC 

The committee met, pursuant to call, at 10:09 a.m., in room 

1324, Longworth House Office Building, Hon. Rob Bishop [Chairman of the Committee] presiding. 

Present: Representatives Bishop, Gohmert, Lamborn, Wittman, 

Fleming, McClintock, Benishek, Duncan, Gosar, Labrador, 

LaMalfa, Denham, Cook, Wasterman, Graves, Newhouse, Hice, 

Radewagen, MacArthur, Mooney, Hardy, LaHood, Grijalva, 

Bordallo, Costa, Tsongas, Pierluisi, Huffman, Ruiz, Lowenthal, 

Cartwright, Beyer, Torres, Dingell, Gallego, Polis, and Clay. 

Also Present: Representatives Velazquez, Serrano, and Gutierrez. 

The CHAIRMAN. The committee is going to be in order. We are 

meeting today to hear testimony on the discussion draft of the 

Puerto Rico Oversight, Management, and Economic Stability Act. 

Under Committee Rule 4(f), oral opening statements are limited 

to the Chair, the Ranking Member, the Vice Chair, and the designee of the Ranking Member. I am going to ask unanimous consent that other Members’ opening statements be made part of the 

hearing record if they are submitted to the Clerk by 5 p.m. today. 

Hearing no objection, so ordered. 

I also ask unanimous consent that Mr. Serrano, Ms. Velazquez, 

and Mr. Gutierrez, if they appear, be allowed to sit on the dais, and 

also Mr. Duffy as well. 

Hearing no objection, so ordered. 

I will also now excuse Mr. Duffy, who is a key player in this, 

obviously—he is going to be the sponsor of the legislation—who 

wished to be here, but he is also chairing another subcommittee at 

this very moment. So, because of that conflict, he is not going to 

be able to join us here now. 

I now recognize myself, if I could, for a brief opening statement. 

STATEMENT OF THE HON. ROB BISHOP, A REPRESENTATIVE 

IN CONGRESS FROM THE STATE OF UTAH 

The CHAIRMAN. In the past couple of months, this committee has 

held multiple oversight hearings on this particular issue. This will 

be the fourth committee meeting we have had on testimony related 

to the situation in Puerto Rico, which is a whole lot of hearings. 

If you add them end to end, we would have enough video of just 

these hearings for a good daytime soap opera. We would give ‘‘Days 

2 

of Our Lives’’ a run for the money on the longest running daytime 

soap. And it would be just as riveting as those shows are, as well. 

But the issue that is facing us has been basically decades in the 

making. There is over $118 billion in debt from bonds and pension 

liabilities that are there. Puerto Rico has not had an audited financial statement for 2 years. They are already in default on portions 

of their debt. We have to do something different. 

Without the tools to ensure implementation of extensive government and economic reforms, Puerto Rico will continue to be on the 

cusp of default and run the risk of future calls for financial assistance or bailouts. 

This bill includes reforms that can begin transitioning the island 

away from elements of cronyism, allow for privatization of an 

energy sector, and boost domestic activity that will be not only a 

short-term solution to the situation but also provide the island the 

tools to revitalize their economy in the long-term solution of it. 

The Brookings Institute’s Barry Bosworth recently said, ‘‘When 

you can’t pay, you can’t argue with the terms that much.’’ Well, unfortunately, that is where we have come to. The United States 

needs to create a mode of strong oversight and reform in Puerto 

Rico’s system, in which the government has grown simply too big, 

the debts are out of control, and the people are subject to overregulation. Enough is enough. 

Some have proposed massive Federal spending and bailouts. This 

is simply a nonstarter and would pile on top of the problems that 

have led to Puerto Rico’s current financial fiscal woes. 

Others have sought to prioritize one group of creditors over 

another. That is a nonstarter. This bill protects existing creditorto-debtor and creditor-to-creditor relationships according to existing 

law and the Constitution. And it fosters some much-needed change 

to move Puerto Rico toward economic freedom, privatization, and 

prosperity, while at the same time protecting taxpayers. 

So, once again, let me emphasize, this is not going to be a bailout. This is going to be an effort to try and establish something 

based on precedents that have happened in the past to control the 

economic situation that is currently there. But, also, it is significant that within this bill are elements to try and provide economic 

viability going to the future. There has to be a way of making sure 

this problem does not come up over and over again. 

I think what we have done over the years—I mean, this is also 

a unique process that we have tried to evolve in this particular bill. 

This is, as I said, the fourth public hearing we have had only on 

Puerto Rico. That is unusual. They have sent out two discussion 

drafts so that people could look at them and respond, which is unusual. We have tried to make sure that we do this not behind 

closed doors but out in public. We have received a whole bunch of 

recommendations from all sorts of different groups and have tried 

to incorporate as many as possible, I think most of them in this 

particular bill. I think we have done a good job. This is a good bill. 

I look forward to hearing the testimony from the distinguished 

panel that we have here, and I appreciate you taking the time to 

join us today. 

[The prepared statement of Mr. Bishop follows:] 

3 

PREPARED STATEMENT OF THE HON. ROB BISHOP, CHAIRMAN, COMMITTEE ON

NATURAL RESOURCES

For the past few months, the committee has held three oversight hearings and 

received testimony from a variety of stakeholders relating to Puerto Rico. Today, the 

committee will review legislation to begin addressing the deepening fiscal crisis in 

Puerto Rico. This situation is the result of decades of mismanagement and a staterun economy destined for failure. With over $118 billion in debt in the form of bonds 

and unfunded pension liabilities, Puerto Rico has not produced audited financial 

statements for 2 years and has already defaulted on portions of its debt. 

The situation will become much worse when Puerto Rico fails to make debt payments in less than a month. Large-scale defaults will occur, impacting millions of 

Americans both in Puerto Rico and on the mainland. Unfortunately, because the situation has gotten so dire, broad reforms are required now. Without tools to ensure 

transparency and implementation of extensive government and economic reforms, 

Puerto Rico will continue on the cusp of default and run the risk of future calls for 

a financial bailout. 

This legislation eliminates that risk by creating a strong, independent oversight 

board to ensure needed reforms are carried out. The Board will be empowered to 

audit the Puerto Rican government and its corporations to see what’s on the books 

and identify needed reforms and efficiencies. This will greatly aid with ongoing voluntary debt restructuring. 

The bill includes reforms to begin transitioning the Island away from decades of 

state-run cronyism—allowing for privatization of its energy sector and a boost to domestic economic activity. 

Let me be very clear of what this bill is not. It is not Chapter 9—a tool designed 

specifically by statute for municipalities of sovereign states. Puerto Rico is a U.S. 

territory. This bill is also not ‘‘Super’’ Chapter 9. To the contrary, it would ensure 

that no such dangerous precedent is set for states or in municipal bond markets by 

addressing the unique legal status of territories. 

Certain groups are irresponsibly and falsely claiming that this bill is a bailout of 

Puerto Rico, which I vigorously oppose. Nothing could be further from the truth. 

This bill protects taxpayers by ensuring not one dime of taxpayer money is used to 

pay Puerto Rico’s debt or otherwise bailout its government. 

Recently, Brooking Institution economist Barry Bosworth said ‘‘when you can’t 

pay, you can’t argue over the terms that much.’’ Unfortunately, it has come to that: 

the United States needs to create a mode of strong oversight and reform to rein in 

Puerto Rico’s system in which the government has grown too big, the debts are out 

of control, and its people are subject to over-regulation and cronyism. Enough is 

enough. 

Some have proposed massive new Federal spending. This is simply a non-starter 

and would pile on top of the problems that have led to Puerto Rico’s current fiscal 

woes. Others have sought to prioritize one group of creditors over another. This is 

also a non-starter. 

This bill protects existing creditor-to-debtor and creditor-to-creditor relationships 

according to existing law and the United States Constitution. It fosters much needed 

changes to move Puerto Rico toward economic freedom, privatization and prosperity, 

while at the same time protecting taxpayers. 

It is a good bill and I look forward to hearing testimony from the distinguished 

panel here today. 

The CHAIRMAN. With that, I will recognize Mr. Grijalva if he has 

an opening statement. 

STATEMENT OF THE HON. RAU ́ L M. GRIJALVA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARIZONA 

Mr. GRIJALVA. Thank you, Mr. Chairman. 

Today, we are continuing the process toward passing legislation 

to help the people of Puerto Rico deal with a humanitarian crisis 

because of over $70 billion in unpayable debt. 

It is worth stressing that we are here because the people of 

Puerto Rico need our help. Residents of Puerto Rico are struggling 

to receive basic services, with some hospitals now quite literally in 

4 

the dark. On top of that, the Zika virus continues to ravage the island. Officials at the Centers for Disease Control and Prevention 

recently stated that they are quite concerned about the U.S. territory and tourist designation of Puerto Rico, stressing that one out 

of every four in Puerto Rico could host the Zika virus within a year. 

In the meantime, wealthy Wall Street hedge funds that hold 

Puerto Rican bonds are spending millions of dollars to spread misinformation in an effort to block congressional action. These vulture funds are now aggressively campaigning against a solution to 

help the island relieve its debt. They are more interested in padding their profits than ensuring the well-being of American families 

suffering in Puerto Rico. 

As Members of Congress, we have to decide tomorrow who comes 

first: vulture funds and others who steadfastly refuse to join other 

investors in good faith on a compromised solution or the American 

people in Puerto Rico. 

The leadership of the House, Republicans and Democrats, has 

been working with Chairman Bishop and the Treasury Department 

to develop legislation that we can all support to provide Puerto 

Rico with the tools that they will need to solve this crisis. 

Today, we are discussing the results of these bipartisan discussions, and we are all hopeful that the bill, as proposed, will work. 

To quote Secretary of Treasury, Jack Lew, ‘‘The question to us is, 

does the bill’s restructuring authority work? It has to work, or it 

is not going to be acceptable.’’ This will be one of the key questions 

we will look to our distinguished panel of witnesses to answer. 

While the bill contains a strong oversight board to ensure that 

Puerto Rico will make the tough decisions to get on a path of a balanced budget and sound fiscal practices, there are a number of 

other concerns we have with the bill and the process. 

We continue to insist that the oversight board should not impose 

further austerity, which will be counterproductive toward efforts to 

restore the island’s economy. 

We question the merit of authorizing a transfer of thousands of 

acres of the Vieques National Wildlife Refuge away from all the 

American people. 

We also stress, as the Treasury Department does, that Puerto 

Rico will be unable to make any fiscal plan work going forward 

without the Medicaid support that is called for in the Treasury proposal and that such assistance be provided to smaller territories, 

as well. Puerto Rico’s underfunded pensions should not be raided 

to help pay the debt, and the pensioners must be made whole. 

We cannot see the logic behind lowering the minimum wage to 

$4.25 an hour for the very group of people we need to stay on the 

island in order to anchor this recovery. 

Mr. Chairman, you and your staff deserve to be commended for 

your willingness to work in an honest and open process to address 

the crisis in Puerto Rico. To that end, I remain hopeful that we will 

be able to pass a bill out of committee tomorrow that will enjoy the 

support of all members, and I continue to pledge to work with you 

to realize that goal. 

The people of Puerto Rico deserve no less, and the effort on their 

behalf should be constant with the perspective that I think is needed in this discussion: something that will help the people of Puerto 

5 

Rico and not something that will satisfy a particular political agenda or be the vehicle to assure that the vulture fund holders receive 

their full reimbursement that they are holding out for. 

With that, I yield back and thank you, Mr. Chairman. 

[The prepared statement of Mr. Grijalva follows:] 

PREPARED STATEMENT OF THE HON. RAU ́ L M. GRIJALVA, RANKING MEMBER, 

COMMITTEE ON NATURAL RESOURCES

Thank you Mr. Chairman. Today we are continuing the process toward passing 

legislation to help the people of Puerto Rico deal with a humanitarian crisis because 

of over $70 billion in unpayable debt. 

It is worth stressing that we are here because the people of Puerto Rico need our 

help! Residents of Puerto Rico are struggling to receive basic services, with some 

hospitals now quite literally in the dark. On top of this, the Zika virus continues 

to ravage the island. Officials at the Centers for Disease Control and Prevention 

(CDC) recently stated that they are ‘‘quite concerned’’ about the U.S. territory and 

tourist destination Puerto Rico, stressing that one out of every four people in Puerto 

could host the Zika virus within a year. 

In the meantime, wealthy Wall Street hedge funds that hold Puerto Rican bonds 

are spending millions of dollars to spread misinformation in an effort to block congressional action. These vulture funds are now aggressively campaigning against a 

solution to help the island relieve some of its debt. They are more interested in padding their profits than ensuring the well-being of American families suffering in 

Puerto Rico. 

As Members of Congress, we have to decide tomorrow who comes first—vulture 

funds and others who steadfastly refuse to join other investors in a good faith, compromise solution, or, the American people in Puerto Rico. 

The leadership of the House—Republicans and Democrats—has been working 

with Chairman Bishop and the Treasury Department to develop legislation that we 

can all support to provide Puerto Rico with the tools they will need to solve the 

crisis. 

Today we will be discussing the result of these bipartisan discussions and we are 

all hopeful that the bill as proposed will work. To quote Secretary of the Treasury 

Jack Lew: ‘‘The question to us is does that bill’s restructuring authority work? It 

has to work or it’s not going to be acceptable.’’ 

This will be one of the key questions we will look to our distinguished panel of 

witnesses to answer. While the bill contains a strong Oversight Board to ensure that 

Puerto Rico will make the tough decisions to get on a path of balanced budgets and 

sound fiscal practices, there are a number of other concerns we have about the bill 

and the process: 

• We continue to insist that the Oversight Board should not impose further 

austerity, which will be counterproductive toward efforts to restore the 

island’s economy. 

• We question the merit of authorizing the transfer of thousands of acres of the 

Vieques National Wildlife Refuge away from the American people. 

• We also stress, as the Treasury Department does, that Puerto Rico will be 

unable to make any fiscal plan work going forward, without the Medicaid support that is called for in the Treasury proposal and that such assistance be 

provided to the smaller territories as well. 

• That Puerto Rico’s underfunded pensions should not be raided to pay debt 

and that pensioners must be made whole. 

• We cannot see the logic behind lowering the minimum wage to $4.25 an hour 

for the very group of people we need to stay on the island to anchor the 

recovery. 

Mr. Chairman, you and your staff deserve to be commended for your willingness 

to work in an honest and forthright way to address the crisis in Puerto Rico. To 

that end I remain hopeful that we will be able to pass a bill out of the committee 

tomorrow that will enjoy the support of all Members and I continue to pledge to 

work with you to realize this goal. The people of Puerto Rico deserve no less. 

The CHAIRMAN. Thank you. 

6 

The Vice Chair is not here and I would like to get to the panel 

as quickly as possible, but would be remiss if we do not get to the 

designee of the Ranking Minority Member, Mr. Pierluisi, since he 

has a little bit to do with this particular topic. 

Mr. Pierluisi, you are recognized for an opening statement. 

STATEMENT OF THE HON. PEDRO R. PIERLUISI, A REPRESENTATIVE IN CONGRESS FROM THE TERRITORY OF 

PUERTO RICO 

Mr. PIERLUISI. Thank you. 

Chairman Bishop, I want to begin by thanking you and your 

staff for the hard work you have put into this bill. You have been 

a gentleman, tough when you need to be, but always open and fair. 

The CHAIRMAN. Wait, would you say that one more time? I will 

give you an extra 15 seconds. Especially after last night, would you 

say that just one more time? 

Mr. PIERLUISI. You have been a gentleman, tough when you need 

to be, but always open and fair. 

I know the responsibility you have been handed is heavy and at 

times thankless, but you and I, and our colleagues, should not lose 

sight of the stakes here and never forget how much what we are 

doing matters to regular people, whether it is a teacher in 

Aguadilla, a doctor in Ponce, a policeman in Mayaguez, a specialneeds student in Caguas, or a middle-class family in San Juan or 

Salt Lake City who bought a Puerto Rico government bond and are 

concerned about their investment. If we cannot get a balanced, bipartisan bill to the President’s desk, the consequences for Puerto 

Rico and the island’s creditors are likely to be grave. 

Trust me, there are provisions in this bill that I dislike, and 

there are items not in the bill, like equity under Medicaid and refundable tax credits, that I believe should have been included. It 

is easy to object to a bad provision in a bill or to the exclusion of 

a good provision from a bill and therefore to say ‘‘no’’ to a bill. But 

I respect those on both sides of the aisle who are looking at the bill 

holistically and working hard to get to a ‘‘yes.’’ 

The broad question I will pose to our witnesses today is this: 

Does the bill achieve its intended purpose, which is to help Puerto 

Rico address its current crisis and create the foundation for a 

brighter future? 

Let me break the bill down into its component parts. 

First, Title I and Title II establish a seven-member, temporary, 

independent oversight board, subject to strong ethics and conflictof-interest rules, given specific responsibilities, that will terminate 

once certain conditions are satisfied. 

Chairman Bishop and I worked together on those titles, and 

while this point is subject to reasonable debate, I believe these 

titles are a dramatic improvement over the earlier version of the 

bill and now, more or less, strike the appropriate balance between 

effectiveness in instilling fiscal discipline and respect for the democratic process. 

The board’s main function is to provide broad oversight over 

fiscal policymaking in Puerto Rico. The board will provide guardrails for the government of Puerto Rico, but in no way supplant the 

territory’s elected leaders. The Governor will be responsible for 

7 

developing a long-term fiscal plan, and the Governor and Legislative Assembly will be responsible for crafting annual budgets in 

line with that fiscal plan, subject to the board’s ultimate approval. 

During the fiscal year, compliance with the budget will be monitored, and any material variances between what was projected to 

occur and what is actually occurring will be identified. And Puerto 

Rico’s elected leaders will have multiple opportunities to take remedial action as they deem appropriate. In short, the board will have 

a supervisory role and will only assume a more active, hands-on 

role as a last resort. 

I will ask the witnesses whether they believe the board’s powers 

are properly calibrated. 

Second, section 206, Title III and Title IV, taken together, provide Puerto Rico with a debt-restructuring mechanism. Section 407 

provides a territory government with a temporary stay of litigation, 

which, let me underscore, is intended to create an environment for 

consensual negotiations with creditors, not to encourage otherwise 

avoidable defaults. 

Under the collective-action provision in Title VI, the oversight 

board will help debt-issuing entities in Puerto Rico and their creditors to try to reach voluntary agreements to restructure debt. If 

any entity reaches an agreement with a sufficient number of creditors, who will be grouped into pools or classes, that agreement will 

become binding on all the creditors in that pool. However, if an 

agreement cannot be reached, the board may authorize the entity 

to go to court and adjust that using the Bankruptcy Code provisions that apply in every state in the Nation. 

So you see, the board is overseeing the debt-restructuring mechanism. I will ask the witnesses, especially Mr. Weiss, about these 

provisions of the bill, whether they are workable, and, if not, what 

changes need to be made to make them work. 

Let me just give you the bottom line. This is the bottom line: My 

constituents and I will accept this oversight, provided—let me say 

again—provided we also get a meaningful debt-restructuring mechanism. Unless I get the witnesses and experts on this, starting 

with Treasury, to vouch that the debt-restructuring mechanism in 

this bill is acceptable and is going to provide the necessary relief 

to the government of Puerto Rico, I will not go for this bill. 

And let me emphasize, we need to work, both sides of the aisle 

here. Otherwise, this is not going to happen. Puerto Rico is going 

to continue deteriorating, people are going to continue migrating to 

the states, and it is going to be an embarrassment not only for 

Puerto Rico, but for the United States at large. 

That is the bottom line. Let’s work. Let’s work this bill. Let’s get 

it done. 

The CHAIRMAN. Thank you. 

Mr. PIERLUISI. Thank you. 

[The prepared statement of Mr. Pierluisi follows:] 

PREPARED STATEMENT OF THE HON. PEDRO R. PIERLUISI, A REPRESENTATIVE IN

CONGRESS FROM THE TERRITORY OF PUERTO RICO

Chairman Bishop, I want to begin by thanking you and your staff for the hard 

work you have put into this bill. You have been a gentleman—tough when you need 

to be, but always open and fair. I know the responsibility you have been handed 

is heavy and, at times, thankless. But you, and I, and our colleagues should not lose 

8 

sight of the stakes here, and never forget how much what we are doing matters to 

regular people, whether it is a teacher in Aguadilla, a doctor in Ponce, a policeman 

in Mayaguez, a special needs student in Caguas, or a middle-class family in San 

Juan or Salt Lake City who bought a Puerto Rico government bond and is concerned 

about their investment. If we cannot get a balanced, bipartisan bill to the 

President’s desk, the consequences for Puerto Rico and the island’s creditors are 

likely to be grave. Trust me, there are provisions in this bill that I dislike, and there 

are items not in the bill—like equity under Medicaid and refundable tax credits— 

that I believe should have been included. It is easy to object to a bad provision in 

the bill, or to the exclusion of a good provision from the bill, and therefore to say 

‘‘no’’ to the entire bill. But I respect those on both sides of the aisle who are looking 

at the bill holistically and working hard to get to ‘‘yes.’’ 

The broad question I will pose to our witnesses today is this: Does the bill achieve 

its intended purpose, which is to help Puerto Rico address its current crisis, and 

create the foundation for a brighter future? 

Let me break the bill down into its component parts. 

First, Title I and Title II establish a seven-member, temporary, independent oversight board, subject to strong ethics and conflict-of-interest rules, given specific responsibilities, that will terminate once certain conditions are satisfied. Chairman 

Bishop and I worked together on these titles, and—while this point is subject to reasonable debate—I believe these titles are a dramatic improvement over the earlier 

version of the bill and now more or less strike the appropriate balance between effectiveness in instilling fiscal discipline and respect for the democratic process. The 

board’s main function is to provide broad oversight of fiscal policymaking in Puerto 

Rico. The board will provide guardrails for the government of Puerto Rico, but in 

no way supplant the territory’s elected leaders. The Governor will be responsible for 

developing a long-term fiscal plan, and the Governor and legislative assembly will 

be responsible for crafting annual budgets in line with that fiscal plan, subject to 

the board’s ultimate approval. During the fiscal year, compliance with the budget 

will be monitored, any material variances between what was projected to occur and 

what is actually occurring will be identified, and Puerto Rico’s elected leaders will 

have multiple opportunities to take remedial action as they deem appropriate. In 

short, the board will have a supervisory role and will only assume a more active, 

hands-on role as a last resort. I will ask the witnesses whether they believe the 

board’s powers are properly calibrated. 

Second, Section 206, Title III, and Title VI, taken together, provide Puerto Rico 

with a debt restructuring mechanism. Section 407 provides the territory government 

with a temporary stay of litigation, which—let me underscore—is intended to create 

an environment for consensual negotiations with creditors and not to encourage otherwise avoidable defaults. Under the collective action provision in Title VI, the oversight board will help debt-issuing entities in Puerto Rico and their creditors try to 

reach voluntary agreements to restructure debt. If an entity reaches an agreement 

with a sufficient number of creditors, who will be grouped into pools or classes, that 

agreement will become binding on all creditors in that pool. However, if an agreement cannot be reached, the board may authorize the entity to go to court and adjust debt using the bankruptcy code provisions that apply in every state in the 

Nation. I will ask the witnesses, especially Mr. Weiss, about these provisions of the 

bill, whether they are workable, and—if not—what changes need to be made to 

make them work. 

Thank you. 

The CHAIRMAN. Let me now introduce our witnesses. 

I appreciate all of you coming, many of you for a second time, to 

be with us here. 

First, Mr. Antonio Weiss, who is the Counselor to the Secretary 

of the U.S. Department of the Treasury. 

Thank you. Sorry you had such a difficult time in traffic getting 

up here. 

The Honorable Anthony Williams, Senior Advisor for Dentons 

U.S. LLP and former Mayor of Washington, DC, as well as somebody who has been involved in these types of boards in the past. 

Mr. John Miller, CFA, who is the Managing Director and CoHead of Fixed Income, Nuveen Asset Management, from Chicago. 

9 

Thanks for being here. 

Professor Andrew Kent, Professor of Law at Fordham University 

in New York. 

Mr. Susheel Kirpalani—did I come close? Susheel. No, I wasn’t 

even close. He is a partner from Quinn Emanuel Urquahart & 

Sullivan—even the company has a long name—also from New 

York. 

Thank you for being here. And I will try to get the name right 

as we go from here on in. 

And also, Professor Simon Johnson, who is a Professor of Global 

Economics and Management at MIT Sloan School of Management 

in Cambridge. 

I also would like to mention that we did invite Mr. Timothy Lee 

from the Center for Individual Freedom to testify. However, he was 

obviously busy and declined to actually come and talk to us 

directly. 

Let me remind the witnesses of the rule here. Your entire testimony is part of the record. The oral part we have right now has 

to be limited to 5 minutes. I would just remind you, I think you 

have all been here before, but if not, the lights in front of you, 

green is we are on a roll. When you have a minute left, the yellow 

light will appear. And when it is red, I really want you to stop in 

mid-sentence so we can get everything through. We will try and 

keep that 5 minutes as sacrosanct. 

With that, the Chair now recognizes Mr. Weiss for your 

testimony. 

STATEMENT OF ANTONIO WEISS, COUNSELOR TO THE 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY, 

WASHINGTON, DC 

Mr. WEISS. Chairman Bishop, Ranking Member Grijalva, and 

members of the committee, thank you for inviting Treasury to testify today. 

We are encouraged by the seriousness of purpose that the 

committee has brought to this task. Significant progress has been 

made in designing the elements of the bill. But more work is required, as I will describe, to ensure a responsible solution to the 

escalating crisis in Puerto Rico. We look forward to continue working with you and your staff to further refine the legislation immediately following today’s hearing. 

As this committee is well aware, Puerto Rico is already in 

distress. The Commonwealth has already defaulted on its debt. 

Litigation is mounting. Puerto Rico has no access to credit markets, 

even the costliest ones. 

The effects of the crisis become more evident each passing day. 

Health, education, and public safety services have been curtailed 

because the government is out of cash and cannot pay its bills. 

Suppliers are owed more than $2 billion. Hospitals have closed 

floors and terminated employees. The largest hospital system in 

Puerto Rico just notified its staff that it must lay off nearly 500 

workers, 10 percent of its workforce. 

Last week, the Governor was forced to declare a state of emergency for the GDB, the Commonwealth’s key fiscal agent and lender of last resort. That action restricts the ability of Puerto Rico’s 

10 

agencies, municipalities, and other public instrumentalities from 

withdrawing deposits at the bank, and it threatens to disrupt many 

programs and services throughout the island. A moratorium on all 

debts of the Commonwealth has been authorized by the local legislature and may be invoked for the GDB, which has a major 

payment coming due in just 2 weeks. 

In October of last year, as this committee knows, the Administration introduced a comprehensive plan that included four key 

elements: broad restructuring authorities, independent oversight, 

adequate funding of healthcare services, and incentives to drive 

economic growth. 

While the Administration believes all elements of its legislative 

proposal are essential to arrest the crisis in Puerto Rico and set the 

stage for economic renewal, the legislation under consideration 

today attempts to address the two most urgent requirements: debt 

restructuring and fiscal oversight. 

I commend the committee for producing draft legislation that 

seeks to provide Puerto Rico with those essential tools and attempts to do so in a way that provides the ability to reach a sustainable solution for all of Puerto Rico’s debts. However, despite the 

progress that has been made, there are still vital questions of 

workability in the draft bill that must be resolved. 

First, we support tools that facilitate voluntary restructurings, 

but the bill’s version of a collective action clause imposes, in our 

judgment, an unworkable, mandatory process that will only delay 

the ability to reach a comprehensive resolution. Under the proposed approach, all of Puerto Rico’s numerous debtors would have 

to complete a complicated process before any single entity could 

begin to restructure. 

Second, any stay on litigation must ensure that the Commonwealth has sufficient breathing space to allow for voluntary 

negotiations, which we strongly support. A stay must also allow for 

a transition without interruption from these voluntary negotiations 

into a period of restructuring if it is needed. As drafted, there is 

risk that a stay may terminate prior to the commencement of restructuring, resulting in a gap and a chaotic race to the courthouse. 

Third, the process for entering restructuring should not require 

a supermajority of the board. A minority of the board should not 

have veto power at the critical juncture when all other options 

have been exhausted. 

Finally, the legislation must more evenly balance competing policy priorities. Undermining the minimum wage and overtime rules 

in Puerto Rico, thereby increasing disparities in pay between 

Puerto Rico and the mainland, is not a recipe for economic growth. 

And the legislation must offer a responsible process to ensure the 

retirement security of the 330,000 citizens in Puerto Rico that will 

depend on their pension benefits. 

In short, while the committee has made great progress, there is 

additional work to do. If Congress does not act, the situation can 

only grow worse. Action is required today to protect the safety and 

economic well-being of the 3.5 million American—— 

The CHAIRMAN. Mr. Weiss, you have 2 seconds to finish up here. 

Mr. WEISS [continuing]. Citizens of Puerto Rico. And we look forward to continuing working with you after this hearing. 

11 

1 Addressing Puerto Rico’s Economic and Fiscal Crisis and Creating a Path to Recovery: Roadmap for Congressional Action. Dated October 21, 2015. Available at: https:// 

www.whitehouse.gov/sites/default/files/roadmap_for_congressional_action_puerto_rico_final.pdf. 

[The prepared statement of Mr. Weiss follows:] 

PREPARED STATEMENT OF MR. ANTONIO WEISS, COUNSELOR TO THE SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC 

Chairman Bishop, Ranking Member Grijalva, and members of the committee, 

thank you for inviting Treasury to testify today. We are encouraged by the seriousness of purpose that the committee has brought to this task. Significant progress 

has been made in designing the elements of the bill. But more work is required to 

ensure a responsible solution to the escalating crisis in Puerto Rico. 

We look forward to continue working with you and your staff to further refine the 

legislation immediately following today’s hearing. 

URGENT SITUATION IN PUERTO RICO

As this committee is well aware, Puerto Rico is already in distress. The Commonwealth has already defaulted on its debt. Litigation is mounting. Puerto Rico has 

no access to credit markets, even the costliest ones. Puerto Rico’s debt trades at 

prices between 10 and 70 cents on the dollar. 

The effects of the crisis become more evident by the day. Health, education, and 

public safety services have been curtailed because the government is out of cash and 

cannot pay its bills. Suppliers are owed more than $2 billion. Hospitals have closed 

floors and terminated employees. The largest private hospital system in Puerto Rico 

recently notified its staff that it must layoff nearly 500 workers, 10 percent of its 

workforce. 

There are inadequate funds to respond to the spreading Zika virus. Fuel supplies 

for the government’s ambulances, police cars, and fire trucks are dangerously close 

to being cut off. 

Last week, the Governor was forced to declare a state of emergency for the 

Government Development Bank (GDB), the Commonwealth’s key fiscal agent and 

lender of last resort. That action restricts the ability of Puerto Rico’s agencies, municipalities, and other public instrumentalities from withdrawing deposits held at 

the Bank. It also threatens to disrupt many programs and services throughout the 

Island. 

A moratorium on all debts of the Commonwealth has been authorized and may 

be invoked for the GDB, which has a major payment coming due in 2 weeks. 

COMMENTS ON THE PROPOSED LEGISLATION

In October of last year, the Administration introduced a comprehensive plan that 

included four core elements: broad restructuring authorities, independent oversight, 

adequate funding of healthcare services, and incentives to drive economic growth.1

While the Administration believes all elements of its legislative proposal are essential to arrest the crisis in Puerto Rico and set the stage for economic renewal, 

the legislation under consideration today attempts to address the two most urgent 

requirements: debt restructuring and fiscal oversight. 

I commend the committee for producing draft legislation that seeks to provide 

Puerto Rico with those essential tools and attempts to do so in a way that provides 

the ability to reach a sustainable solution across all of Puerto Rico’s debts. However, 

despite the progress that has been made, there are still vital questions of workability in the draft bill that must be resolved. 

First, we support tools that facilitate voluntary restructurings. But the bill’s 

version of a collective action clause imposes an unworkable, mandatory process that 

will only delay the ability to reach a comprehensive resolution. Under the proposed 

approach, all of Puerto Rico’s numerous debtors would have to complete a complicated process before any single entity could begin to restructure. 

Second, any stay on litigation must ensure that the Commonwealth has sufficient 

breathing space to allow for voluntary negotiations. A stay must also allow for a 

transition without interruption from voluntary negotiations to a period of restructuring, if needed. As drafted, there is a risk the stay may terminate prior to the 

commencement of a restructuring, resulting in a chaotic race to the courthouse. 

Third, the process for entering restructuring should not require a super-majority 

vote of the Board. A minority of the Board should not have veto power at the critical 

juncture when all other options have been exhausted. 

12 

Finally, the legislation must more evenly balance competing policy priorities. Undermining the minimum wage and overtime rules in Puerto Rico, thereby increasing 

the disparities in pay between Puerto Rico and the mainland, is not a recipe for economic growth. Rather, we believe a locally administered Earned Income Tax Credit 

is a more powerful and effective way to stimulate the economy and encourage work. 

The Administration also opposes efforts to undermine the protection of the Vieques 

National Wildlife Refuge and other wildlife refuges nationally from development and 

environmental destruction. 

And, the legislation must offer a responsible process to ensure the retirement 

security of the 330,000 citizens in Puerto Rico that will depend on their pension 

benefits. 

CONCLUSION

In short, while the committee has made progress, there is additional work to do. 

If Congress does not act, the situation will only get worse. Action is required now 

to protect the safety and economic well-being of the 3.5 million American citizens 

in Puerto Rico. 

The CHAIRMAN. Good answer. 

Mayor Williams, we will turn to you, please. 

STATEMENT OF THE HON. ANTHONY A. WILLIAMS, SENIOR 

STRATEGIC ADVISOR, DENTONS, U.S. LLP, WASHINGTON, DC; 

FORMER MAYOR OF WASHINGTON, DC 

Mr. WILLIAMS. Mr. Chairman, Ranking Member, members of the 

committee, I think you will be pleased to know that I am going to 

summarize my oral testimony and just make some key points: one 

point being I applaud the committee, its staff, and Treasury for 

working together on a consensus approach to a pressing problem, 

not just for Puerto Rico, but a national problem as well. I speak 

as an American citizen with some experience in these matters, having served as a CFO under the control board, so to speak, in 

Washington, DC, and then later as mayor. 

And the observations I would make would be, number one, I 

think the bill does well in installing a competent group of noninterested, disinterested if you will, professionals who can serve on 

the oversight board. As well, I would also observe and applaud the 

fact that the board will be equipped with the resources of skilled 

professional staff in order to perform its oversight duties. 

I would further observe that an important part of the board’s 

work would be working with officials in Puerto Rico on the establishment of a long-term budget and financial plan—and I think this 

is crucially important—and using that budget and financial plan as 

a basis, that financial information and settled expectations as a 

basis, for any debt restructuring or concessions that have to be 

made, recognizing—and I applaud this element of the bill—that the 

oversight board will ultimately serve as a facilitator and a convener 

to allow elected officials to take the first opportunity to seize advantage and see opportunity in this crisis. 

An example of one area where I hope the board will use its influence with elected officials going forward is using its influence with 

elected officials to establish in Puerto Rico a strong financial entity—you could call it a financial director, you could call it a CFO— 

but, I would argue, to consolidate the treasury functions, the 

controllership functions, the budget functions in one person who 

has some degree—even after the control period, some degree of 

13 

autonomy so that you have an umpire in the situation to call balls 

and strikes, set a revenue estimate that everybody respects. 

The final observation I would make is, once the work of this bill 

is in place, expectations settled, and good stewardship has been established on the island, I would agree with the observation of Mr. 

Weiss that it is crucially important that economic incentives be in 

place to allow the economic renewal in Puerto Rico to go forward. 

Those are my observations in summary, Mr. Chairman, and I 

look forward to answering your questions. 

[The prepared statement of Mr. Williams follows:] 

PREPARED STATEMENT OF ANTHONY A. WILLIAMS, SENIOR STRATEGIC ADVISOR TO

DENTONS, U.S. LLP; FORMER MAYOR OF WASHINGTON, DC 

On January 26, I submitted testimony to this committee in support of a bill the 

purpose of which was to provide Federal support to constructively address Puerto 

Rico’s fiscal challenges and assist in its economic recovery. At the time, there was 

no bill, and, as such, my comments, drawn from my experience in working in concert with the control board that Congress created for Washington, DC, and later as 

its Mayor, were necessarily to provide a set of general considerations that this committee ought to consider in fashioning legislation. Now, only 2 months later, with 

much thanks for the earnest efforts of this committee and its seasoned and highly 

skilled professional staff, with the benefit of important insights and perspectives offered by the leadership at Treasury, there is such a bill and I wish to supplement 

my prior testimony to comment on it. 

I am most pleased about the contents of the draft legislation and I come before 

this committee to endorse both its balance and the bipartisan efforts that necessarily were at the cornerstone of crafting it. Like most bills that gain support from 

competing perspectives, this bill, which offers a realistic set of provisions than can 

lead to a sustainable solution and a vibrant and financially healthy Puerto Rico, has 

aspects that each constituency likes and others that are less desired by the same 

constituency. Other constituencies have yet different likes about the bill and aspects 

they wish could be otherwise. But such is the nature of compromise, just as fostering compromise and consensual agreement are also to be at the heart of the contemplated oversight board’s role if the legislation is enacted. 

So why do I endorse the proposed bill and urge its adoption? At the outset, permit 

me to observe that many of the concepts that I felt would be fundamental to fiscal 

recovery legislation for Puerto Rico when I last spoke to this committee are in fact 

present in the proposed bill. Because many of the principles that made DC’s board 

successful are also key elements of the Puerto Rican oversight legislation, I wish 

to highlight them as well as a couple of additional components that are especially 

well suited to address Puerto Rico’s fiscal challenges. 

First, the criteria established for selecting the oversight board’s composition will 

assure input from seven well experienced professional members who will understand the complexities of government budgeting and operations and relevant legal 

and financial considerations that arise in fiscal distress situations. Importantly, too, 

some of its members are expected to either now live, grew up on the Island or have 

been involved in businesses there, and, as such, will have a deep appreciation for 

the culture and values of its people and institutions. 

Second, the board is going to be fully staffed with an executive director and other 

important senior officials; and that’s critical. There is much to be done; and to do 

its work, the board needs to develop a comprehensive understanding of the structures, workings and financial processes of the executive and legislative branches of 

Puerto Rico’s government. Assembling a meaningful complement of sophisticated 

board employees, some importantly drawn from the Island’s populace, is needed. 

Then, too, the board needs a talented team of legal and financial professionals to 

interface with similar professional who have been representing the Puerto Rican 

government and its creditors; and the legislation anticipates such retentions as well. 

As for the board’s offices, the legislation contemplates that the board will be well 

staffed both in DC and in San Juan, and that, too, is vital to the board’s success. 

Third, Title II of the draft legislation gives the board a robust set of tools to work 

with Puerto Rican officials to develop viable cost saving solutions; and, clearly, the 

intent of the legislation is to have the board forge cooperation and reach a consensus 

among the government entities and their creditors to implement a series of wellconceived initiatives that are both tangible and attainable from the CommonVerDate Mar 15 2010 08:50 Sep 07, 2016 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 J:\114TH CONGRESS\FULL COMMITTEE\COMPLETE\04-13-16\99800.TXT DARLEN
14 

wealth’s perspective, yet also factor in and respect the perspective of the Commonwealth’s creditors. Unquestionably, there will need to be some belt-tightening if the 

board is to effectively fulfill its mandate; and the legislation confers on the board 

the means to fashion real solutions that will narrow the budgetary gaps being experienced by many of Puerto Rico’s territorial-level government components—and, to 

the fullest extent possible, accomplish its cost containment goals through hands-on 

consensus building. 

This leads to a fourth virtue of the legislation, namely, that before there were to 

be any allocation of creditor concessions that might be needed to achieve the legislatively required balanced budgets, whether any such concessions would need to come 

from labor interests or from bondholders, all reasonable means should first be employed to narrow the extent of budget deficits. As such, the centerpiece of the 

board’s work will be to look for ways to makes budget narrowing initiatives as palatable and constructive as possible, recognizing that accomplishing what the government can itself achieve through fiscal discipline is its fundamental obligation before 

being entitled to ask others to contribute to a solution. 

Fifth, and related, Title III of the bill vests the board with the ability to exercise 

debt adjustment powers, something that I stated in my prior testimony is a vitally 

necessary if the oversight board is to be effective. But, importantly, the legislation 

clearly directs the board to invoke its debt adjustment powers only as a last resort. 

What the bill, instead, unmistakably favors is that the board act as a facilitator and 

honest broker in assisting creditors and the Commonwealth’s various governments 

in reaching an equitable resolution to allocate any shortfall that cannot be solved 

through operational efficiencies and other cost saving. While having such debt adjustment powers is vital to the board’s ability to effectively encourage the parties 

to reach consensual accords, a resolution borne out of compromise is always preferable. Settlement of the challenging and complex issues that will arise is certainly 

favored by the bill’s requirement that all consensual solutions be exhausted before 

any resort to the board’s debt adjustment authority can be invoked. Implicit in that 

directive is the recognition that reaching an agreed set of solutions not only expedites the resolution process, it reduces both the cost and delays of an adversarial 

process, and brings with it finality and certainty. The experience of contested proceedings in similar types of matters teaches that each of the benefits that can be 

achieved through a consensual and non-judicial resolution process are real and 

meaningful, and far preferable to a litigated battle over competing perspectives 

about what is fair. 

With those observations about what commends adoption of this committee’s wellconceived legislative proposal, afford me to conclude with two other observations: 

While not in the present bill, I’d like to see Congress also consider legislation that 

can provide economic incentives for new and meaningful investment in the Island’s 

economy. Too many talented people of Puerto Rico have found it necessary to leave 

their homeland in search of jobs in the states; and affording a constructive and financially feasible opportunity for those who would like to return is both the right 

thing to do and could bring with it real excitement for businesses and entrepreneurs 

to invest in the Island’s future. Puerto Rico has a rich and healthy past, and there 

are compelling reasons for its economy to once again flourish. Legislation that can 

help promote real economic growth opportunities on the Island ought to be something Congress ought soon adopt. 

Let me close by addressing again the anxieties that naturally arise when some 

form of government oversight is part of a resolution process. Yes, every situation 

is unique; and while Puerto Rico’s situation is clearly not the same as Washington, 

Detroit, New York, Cleveland or Harrisburg, all of which have been under some 

form of an oversight regime, at the outset of every such oversight process, there has 

always been strenuously voiced complaints about having an additional governmentally-created body be given authority to assist local elected leaders in finding 

and guiding needed solutions. But the lessons drawn from other notable places that 

were subject to oversight does instruct that if done with due respect for those in 

public office, and with keen awareness of both community leadership and an eye on 

business interests, good and sustainable solutions can and have occurred. New York, 

once in serious financial troubles in the late 70s, is as vibrant and financially robust 

as any large city in the world; and first hand I can attest to the fiscal distress that 

was the marque of this city and that led Congress to act only 20 years ago; but look 

at us now. 

So, too, I believe if the oversight board does its job well, rather than disaffecting 

the populace simply because it has been called into action, it can instead help forge 

hope, cooperation, belief in a strong future, and generate a real desire of the people 

of Puerto Rico to get behind and be part of the Island’s financial and economic 

15 

rebirth. Unquestionably, these goals clearly stand at the heart of the proposed legislation; and I do believe it will not be long before we will be looking back at today, 

appreciating both the bipartisan leadership of Congress as well as the understanding of the Commonwealth Government and its creditors, who with their hard 

work and in the spirit of compromise have collectively brought us the legislation 

now proposed—legislation poised to help foster an exciting and sustainable future 

that Puerto Rico justly deserves while fairly treating its creditors. 

The CHAIRMAN. Thank you. 

Mr. Miller. 

STATEMENT OF JOHN V. MILLER, CFA, MANAGING DIRECTOR, 

CO-HEAD OF FIXED INCOME, NUVEEN ASSET MANAGEMENT, 

CHICAGO, ILLINOIS 

Mr. MILLER. Thank you, Chairman Bishop and Ranking Member 

Grijalva, for the committee’s leadership on Puerto Rico and for the 

opportunity to speak with you today regarding the draft legislation 

to address the fiscal crisis in Puerto Rico. My name is John Miller, 

and I am Managing Director and Co-Head of Fixed Income at 

Nuveen Asset Management. I have spent my entire 23-year career 

researching and managing municipal bonds on behalf of investors, 

the last 20 years with Nuveen. 

The team that I oversee currently manages over $113 billion in 

municipal securities, and within that team I am directly managing 

approximately $20 billion in the most credit-sensitive, high-yield 

municipal securities. In these roles, I am making investment decisions and transacting in the municipal market every day. And because I do so on behalf of Nuveen’s clients, I am also speaking with 

financial advisers to individual investors nearly every day. 

I highlight this in order to emphasize that I am in continuous 

contact with the concerns of long-term, dedicated municipal bond 

investors and I have a deep understanding of what drives increases 

and decreases in demand for municipal bonds over time and 

through historically significant municipal credit events such as 

this, as well as how investors evaluate a diverse array of credit 

risks in the marketplace. 

So I am not here in an attempt to promote or degrade any specific Puerto Rican security. Nuveen has invested in a few Puerto 

Rican bonds in a few of our products, but our overall exposure is 

relatively small. However, I do care deeply about what happens 

next in Puerto Rico, what potential outcomes could mean for the 

broader municipal bond market, what could constitute positive or 

negative precedent, and what could constitute market contagion 

risk. 

It is important to acknowledge that the financial distress already 

exists in Puerto Rico as well as the numerous complex, competing 

stakeholder claims, the nonpayment of which are very likely to 

trigger a massive amount of litigation in the relatively near future. 

Given the worsening conditions, Nuveen Asset Management believes that this draft legislation has the potential to create a framework under which orderly, fair, and transparent resolution can be 

achieved for bondholders while also fostering the conditions necessary for economic growth in Puerto Rico. 

16 

It is clear that the marketplace for Puerto Rican bonds is already 

anticipating restructuring. The highest valued security, which is 

the general obligation debt, is priced in trading generally between 

58 cents on the dollar to 67 cents on the dollar. Yields for Puerto 

Rico debt average above 12 percent, while the yields of AAA municipal securities average just 2.6 percent. So, current pricing and current yields demonstrate that the market is already recognizing that 

default and debt restructuring are inevitable. 

Even while Puerto Rican securities have fallen into this distressed territory, the broader municipal bond market has experienced consistent and steady appreciation since the end of the year 

2013. And this appreciation has been coincident with individual 

investor demand growing, as measured by strong municipal bond 

mutual fund inflows, during each of the last 10 calendar quarters. 

Much of the investor base in Puerto Rican securities has shifted 

from traditional mutual funds to nontraditional or opportunistic 

hedge funds. According to Morningstar, 75 percent of municipal 

bond mutual funds owned Puerto Rican securities in 2013, but that 

figure had dropped to less than 50 percent by the end of the year 

2015. So this shift in holdings to hedge funds from mutual funds 

I think mitigates the risk to individual investors that are long-term 

dedicated to the muni market. 

In addition to the shifts in investor allocations which have 

already occurred in anticipation of Puerto Rican restructuring, the 

draft legislation serves to substantially mitigate, if not eliminate, 

the concerns around negative legal precedent from municipal 

securities. 

And I would highlight the critical difference between a U.S. territory, which is ultimately subject to the control of the U.S. 

Congress, versus a state, which has sovereignty in its fiscal matters. If the proposed legislation were to become law, this would be 

a territory-specific law and therefore not applicable to 98 percent 

of the municipal bonds in the marketplace, as they are issued by 

entities that are on the mainland. 

It is our opinion that there is no legal budgetary or market-based 

reason to believe that a territorial-specific law would set a precedent for even the most fiscally stressed states. Even lower-rated 

states, such as Illinois, do not need and would not benefit from restructuring of their bonded debt. Admittedly, Illinois is currently 

mired in political gridlock and that clouds our near-term outlook, 

but we feel the state has the economic base and fiscal capacity to 

independently address its own budget and pension challenges. 

Since the draft legislation began to circulate roughly 2 weeks 

ago, the municipal bond market has generally been steady and has 

continued to strengthen, with continued inflows into municipal 

bond mutual funds around the industry. In addition, Puerto Rican 

bond valuations specifically did not move down in reaction to the 

draft or the release of the draft. And, in contrast, it was the imposition of the Commonwealth debt moratorium which did serve to 

weaken Puerto Rican-specific securities in the marketplace, but not 

the possibility of U.S. congressional involvement. 

The horizon to measure market reaction has been short-lived, but 

we believe that the territorial-specific nature of the legislation, the 

strength of an independent control board, the transparency, and 

17 

fairness of a more orderly process, would all be features that are 

welcomed by the municipal bond market. 

Thank you very much. 

[The prepared statement of Mr. Miller follows:] 

PREPARED STATEMENT OF JOHN MILLER, MANAGING DIRECTOR, CO-HEAD OF FIXED

INCOME, NUVEEN ASSET MANAGEMENT, CHICAGO, ILLINOIS

Thank you, Chairman Bishop and Ranking Member Grijalva, for the committee’s 

leadership on Puerto Rico and for the opportunity to speak with you today regarding 

the Draft Legislation to address Puerto Rico’s fiscal crisis. My name is John Miller. 

I’m Managing Director and Co-Head of Fixed Income at Nuveen Asset Management. 

I have spent my entire 23-year career researching and managing municipal bonds 

on behalf of investors, the last 20 with Nuveen. The team that I oversee currently 

manages over $113 billion of tax-exempt municipals. Within that team, I directly 

manage approximately $20 billion of the most credit sensitive, high-yield municipal 

securities. In these roles, I am making investments and transacting in the municipal market every day, and because I do so on behalf of Nuveen’s clients, I am also 

speaking with Financial Advisors to individual investors nearly every day. I highlight this in order to emphasize that I am in continuous contact with the concerns 

of long-term dedicated municipal bond investors. I have a deep understanding of 

what drives increases and decreases in demand for municipal bonds over time and 

through historically significant municipal credit events such as this, as well as how 

investors evaluate a diverse array of credit risks in the marketplace. 

I am not here in an attempt to promote or degrade any specific Puerto Rican security. While Nuveen is invested in a few Puerto Rican bonds in a few of our products, 

our overall exposure on behalf of clients is relatively small. However, I care deeply 

about what happens next in Puerto Rico, and what the potential outcomes could 

mean for the broader municipal bond market, what could constitute a positive or 

a negative precedent, and what could constitute market contagion risk. 

It is important to acknowledge the financial distress that already exists in Puerto 

Rico, as well as the numerous and complex competing stakeholder claims, the nonpayment of which are very likely to trigger a massive amount of prolonged litigation 

in the near future. Given these worsening conditions, we at Nuveen Asset Management believe the draft legislation has the potential to create a framework under 

which an orderly, fair and transparent resolution can be achieved for bondholders, 

while also fostering the conditions necessary for economic growth in Puerto Rico. 

It is clear that the marketplace for Puerto Rican bonds is already anticipating a 

restructuring. The highest valued security, General Obligation or GO debt, is currently priced at between $58 and $64 per $100 of outstanding debt. Yields for 

Puerto Rico’s debt average above 12 percent while the yields of AAA municipal securities average 2.6 percent. Current pricing and yields demonstrate the market already recognizes default and debt restructuring are inevitable. 

Even while Puerto Rican securities have fallen into this distressed territory, the 

broader municipal bond market has experienced a consistent and steady appreciation since year-end 2013, and this appreciation has been coincident with steady increases in individual investor demand as measured by strong municipal bond 

mutual fund in-flows during each of the last 10 calendar quarters. 

Much of the investor base of Puerto Rican securities has shifted from traditional 

mutual funds to non-traditional or opportunistic hedge funds. According to 

Morningstar, 75 percent of municipal bond mutual funds owned some Puerto Rican 

securities in 2013, versus less than 50 percent by the end of 2015. This shift in holdings to hedge funds from mutual funds mitigates the risks to retail investors. 

In addition to the shifts in investor allocations which have already occurred in anticipation of a Puerto Rican restructuring, the draft legislation serves to substantially mitigate, if not eliminate, the concerns around negative legal precedent for 

municipal securities. I would highlight the critical difference between a U.S. 

Territory, which is ultimately subject to the control of the U.S. Congress, versus a 

state which has sovereignty in its fiscal matters. If the proposed legislation were 

to become Law, this would be a Territory specific law, and therefore not applicable 

to 98 percent of the municipal bonds in the marketplace as they are issued by entities that are on the mainland. 

It is our opinion there is no legal, budgetary or market-based reason to believe 

that this Territorial-specific legislation would set a precedent for even the most fiscally stressed states. Even lower rated states, like Illinois, do not need and would 

not benefit from restructuring bonded debt. While admittedly Illinois is currently 

18 

mired in political gridlock which clouds our near-term outlook, the state still has 

the economic base and fiscal capacity to independently address its budget and pension challenges. 

Since the draft legislation began to circulate roughly 2 weeks ago, the municipal 

bond market has generally been steady and has actually strengthened, with continued inflows into municipal bond funds across the industry. In addition, Puerto Rican 

bonds valuations specifically did not move down in reaction to the release of the 

Draft. In contrast, it was actually the Commonwealth’s debt moratorium legislation 

which served to weaken the marketplace for Puerto Rican securities recently, not 

the possibility of U.S. congressional involvement. While the time horizon to measure 

market reaction has been short lived, we believe the Territorial-specific nature of 

the legislation, the strength of an independent control board, the transparency and 

fairness that a more orderly process could bring, would all be features welcomed by 

the municipal bond market. 

Thank you for the opportunity to testify today and I welcome your questions. 

***** 

White Paper Submitted for the Record by Mr. Miller 

Puerto Rico’s Course Forward 

NUVEEN Asset Management 

MARKET COMMENTARY

FEBRUARY 2016 

By: Molly Shellhorn, Vice President, Senior Research Analyst and Shawn P. O’Leary, 

Senior Vice President, Senior Research Analyst 

The next few months will be critical to determining Puerto Rico’s future. With 

large debt service payments looming in May and July, and Congressional action becoming increasingly likely, events are quickly moving the Commonwealth to a point 

where the government’s stance toward creditors could become more adversarial in 

the near term. In this paper we briefly review Puerto Rico’s current fiscal situation, 

the Commonwealth’s proposals thus far, and what we expect from the federal 

government. 

We also explore how the Commonwealth’s competing priorities are likely to stack 

up against one another given limited resources to pay all obligations in full. General 

obligation and COFINA (Puerto Rico Sales Tax Financing Corporation) bondholders 

may soon be engaged in a bitter inter-creditor battle while simultaneously competing with more sympathetic pensioners. 

We then consider whether debt restructuring in Puerto Rico actually threatens 

the stability of the municipal market. Puerto Rico’s unique situation will not likely 

set a broad precedent for either the market or other municipal issuers, but opponents of restructuring have claimed otherwise. We’ll demonstrate that Puerto Rico 

truly is an outlier, and why we think its fiscal distress should stay contained to the 

island. Regardless of what transpires going forward, untangling Puerto Rico’s difficulties will be a lengthy process. Investors should not expect a quick resolution. 

Puerto Rico’s Economic Situation Is Critical 

Puerto Rico’s economic challenges persist, and the catalyst for a turnaround is unclear. The Commonwealth has been in recession since 2006 primarily due to the expiration of federal tax incentives that previously incentivized U.S. firms to operate 

on island. Between 2009 and 2014, Puerto Rico’s real national product declined 

2.3%. Puerto Rico’s planning board estimates another decline of 0.7% for the current 

fiscal year. 

Unemployment remains very high at 12.2% as of December 2015, and labor force 

participation remains well below average at 45.5%. Median family income in Puerto 

Rico is just 34.4% of the U.S., and the poverty rate is an elevated 46.2%. Total nonfarm employment has stabilized, down only 0.3% year-over-year in December 2015, 

but employment is still 15% below peak levels reached in 2005. 

Economic contraction and a lack of job opportunities have encouraged significant 

out-migration, particularly among working-age residents and young families. 

Between 2010 and 2015, Puerto Rico’s population dropped an estimated 6.7%. Outmigration threatens to permanently erode Puerto Rico’s economic base and ultimately the government’s ability to structurally balance the budget. 

19 

As tax revenues suffered over the last decade, the government relied on tax increases and long-term borrowing to cover annual operating deficits rather than cut 

expenditures or address inefficiencies, poor tax compliance and corruption. A long 

history of overestimating revenues and lack of budgetary control only exacerbated 

the structural budget gap and overreliance on debt to fund operating expenses. 

Following significant rating downgrades into junk territory and growing market 

concern about debt affordability, Puerto Rico has essentially lost market access to 

continue borrowing for cash flow. The government recently lowered general fund 

revenue expectations to $9.21 billion from $9.46 billion for the current fiscal year, 

and projects the government is at ‘‘risk of not having sufficient liquid resources to 

meet obligations as they come due.’’ 

Specifically, the government warned that Puerto Rico may be unable to make the 

Government Development Bank’s (GDB) $422 million debt service payment due May 

1, followed by a significant $1.3 billion payment due July 1 for general obligation 

(GO) and Commonwealth-guaranteed debt. 

Restructuring Efforts Fall Short 

It is against this context Puerto Rico is struggling to find a sustainable path 

forward. Months after Governor Alejandro Garcı ́a Padilla declared the Commonwealth’s debt unpayable (signaling the potential for future debt impairment), 

creditors have generally dismissed the government’s attempts to demonstrate the 

severity of Puerto Rico’s fiscal gap. Last fall, the governor’s working group released 

a Fiscal and Economic Growth Plan (FEGP), providing a multiyear projection of revenues and expenses that identified a cumulative $14 billion financing gap over the 

next five years. In January, the 5-year gap was revised up to $16.1 billion, and the 

10-year financing gap was pegged at nearly $24 billion. 

Sizeable multiyear deficit projections underlie the Commonwealth’s recent offer to 

creditors to exchange existing bonds for new securities. The exchange, which we 

view as highly unlikely to be accepted by creditors outside of a formal restructuring 

process that includes a means of binding holdout creditors, would provide holders 

of $49.2 billion of various classifications of Puerto Rico debt with two new securities: 

$26.5 billion of base bonds and $22.7 billion of growth bonds. The plan cuts the debt 

by approximately 46% and includes a moratorium on all debt service through 2018, 

and then only interest payments until 2021. 

The exchange offer proposes that holders of GO, sales tax-backed and other securities would exchange their bonds for differing amounts of base bonds, thus yielding 

varying levels of haircuts for different classifications of bondholders. The base bonds 

would be guaranteed by a new securitization of various government revenues and 

provide Puerto Rico with a lower, more level debt service structure. The growth 

bonds would only be paid if Puerto Rico’s economic activity and resultant revenue 

collection meets or exceeds certain benchmarks. 

In our view, there is little chance bondholders will readily exchange their securities in numbers sufficient to generate the savings contemplated by the Commonwealth. We believe the exchange offer is actually the Commonwealth’s attempt to 

demonstrate to Congress the futility of reaching an orderly adjustment of debts outside the confines of a formal debt restructuring process supervised by a control 

board and/or federal courts. 

Congress May Be Ready to Act 

Until recently, it was unclear if Puerto Rico would generate enough momentum 

to motivate Congress to address the island’s distress. U.S. lawmakers, now educated 

on Puerto Rico’s precarious situation, may finally be ready to act. House Speaker 

Paul Ryan promised that Congress would address Puerto Rico’s crisis by March 31, 

and his intent to get new legislation passed appears to be serious. 

Initially, the division between Republicans and Democrats was clear. Republicans 

rejected anything considered a bailout for Puerto Rico and advocated further austerity measures. In contrast, Senate Democrats sent a letter to House leadership at 

the end ofJanuary urging quick passage of legislation granting the Commonwealth 

access to Chapter 9 bankruptcy. The letter said any bill that does not include bankruptcy would not be a ‘‘real solution’’ for Puerto Rico. U.S. Treasury Secretary Jack 

Lew has been clear about the current administration’s support for both funding 

equity for federal programs and access to a broad debt restructuring regime. 

Several Republican bills were proposed at the end of 2015. One granted the 

Commonwealth access to Chapter 9 if Puerto Rico agreed to a strong fiscal control 

board. Another called for a control board and provided additional aid. Given recent 

Congressional hearings and statements from ranking members, we expect additional 

legislative proposals to emerge soon. Senate Finance Committee Chair Orrin Hatch 

announced his intention to bring another bill in the near term and meet Speaker 

20 

Ryan’s March 31 deadline for Congressional action. Additional hearings are 

scheduled in February. 

We expect legislation providing a fiscal control or fiscal stabilization board with 

broad authority to be introduced and considered in the near term. Puerto Rico’s long 

record of poor fiscal management, overlaid on a sprawling web of interconnected 

events and overly complex debt structure, demonstrates the need for federal 

intervention. 

We now believe Congressional action appears both likely and necessary. A strong 

federal control board now seems to be inevitable and the opposition on the island 

has softened. External control and enforcement is likely the only way Puerto Rico 

can achieve structural reforms, implement difficult but necessary budgetary realignment, establish the conditions for economic growth and reestablish credibility with 

investors and thus access to the traditional municipal market. 

The debate is not about whether a control board is necessary, but about how 

much authority the board should be given. The structure and authority of the new 

oversight entity must be carefully crafted to respect Puerto Rico’s right to selfgovernance and hopefully be oriented toward establishing a foundation for future 

economic growth. Governmental reforms, improving fiscal policies, tax compliance 

and financial reporting are all critical to restoring credit quality and market 

credibility. 

It remains unclear if legislation establishing a control board will be paired with 

a legal framework to adjust Puerto Rico’s long-term debt and pension liabilities. The 

Commonwealth has attempted a consensual debt restructuring, but we are not surprised that these efforts have not yet gained sufficient traction with creditors, especially in light of the initial proposal. 

Given the wide variety and complexity of Puerto Rico’s debt obligations, the diversity of bondholders and interests involved, and the competing security pledges, realists will acknowledge there is little to no hope of a consensual resolution. Without 

some mechanism to bind holdout creditors, either through some form of bankruptcy 

or a broader collective action clause that would allow a majority bondholder vote to 

impose terms on holdouts, Puerto Rico is destined for years of litigation. 

Treasury officials estimate it could take a decade to untangle competing creditor 

claims if the situation devolves into a web of competing litigation. Years of litigation 

and inter-creditor disputes will only stifle economic growth and accelerate outmigration, further diminishing the tax base available to pay off creditors. 

We believe the final legislation must include a path for Puerto Rico to restructure 

these liabilities. We don’t advocate for restructuring authority lightly. As investors, 

we prefer political solutions that avert restructurings whenever possible. Yet we believe when an issuer reaches the point where debt reduction becomes inevitable, any 

delay only serves to engage in value destruction through additional unsustainable 

borrowings, economic contraction and/or population loss due to reduced government 

services. 

Thus the restructuring—painful as it may be—provides greater value to creditors 

than lobbying for maintaining the status quo. Puerto Rico’s recent trend of increasingly expensive and onerous debt to bridge one fiscal year to the next offered the 

Commonwealth little chance of addressing its core problems: economic contraction, 

a declining population, a bureaucratic and inefficient government and a back-ended 

debt structure requiring annual cycles of painful budgetary decisions coupled with 

new and/or higher taxes. As municipal asset managers and creditors, we are reluctant to support any adjustment of debts by issuers, but we believe it is both inevitable and necessary for Puerto Rico. 

Priorities Compete: GO, COFINA and Pensions 

The absolute size of Puerto Rico’s true fiscal gap is still unknown. The impact of 

future expenditure cuts and potential economic growth will hopefully moderate the 

$16 billion five-year gap projected by the governor’s working group. However, even 

if the gap is reduced, it’s clear to most that Puerto Rico will struggle to fully fund 

all general obligation (GO) and guaranteed debt while leaving COFINA obligations 

and pensions unimpaired. 

We see GO, COFINA and pensions as the three main expenditures in direct competition for the government’s limited resources. It is difficult to envision a scenario 

that avoids an inter-creditor legal battle between GO and COFINA bondholders, and 

we see all creditors in direct competition with pension beneficiaries. 

GO and COFINA bondholders’ interests are in direct opposition. GO debt benefits 

from a constitutional first priority on Commonwealth resources, but the COFINA 

corporation was constructed with the intention of exempting sales tax revenues from 

the definition of available resources for GO debt. 

21 

If GO debt is ever impaired in a future default, potentially as soon as this year, 

Puerto Rico will face lawsuits from GO investors demanding the government reclassify sales/VAT taxes to be considered available revenues to be redirected to GO debt 

service first. 

Similarly, should the government attempt to divert sales tax revenues away from 

COFINA to GO debt, COFINA bondholders will litigate to protect their revenue 

pledge. It does not escape notice that the current debt restructuring proposal contemplates replacing COFINA’s arguably successful securitization structure with a 

new securitized debt structure—essentially threatening to blow up one 

securitization in favor of another. 

GO and guaranteed debt and COFINA debt represent the two largest categories 

of tax-supported debt. Given that these two together represent over 60% of tax supported debt and as the government is saying it can only afford to fund a much 

smaller fraction of current debt service, it is unlikely both will emerge from this 

process unscathed. Some creditors and on-island politicians have argued passionately that the constitutional priority of GO debt must be upheld and the rule of law 

cannot be set aside. However, we believe many market commentators and some 

Puerto Rican elected officials too liberally interpret the Puerto Rico Constitution to 

mean that GO bonds and other forms of guaranteed public debt cannot be restructured. A plain reading of the constitution reveals there is no such protection from 

an adjustment of the terms of Puerto Rico’s constitutionally guaranteed debt. 

The Puerto Rican constitution clearly establishes that GO and guaranteed debt 

have first priority on available resources. Existing statutes further support the constitutional priority establishing priority norms for the disbursement of public funds. 

Payment of principal and interest on debt service is specified as the first priority, 

specifically senior to expenditures for health, safety, education, welfare and retirement systems, which all rank third on the priority list. This should not, in our opinion, be read to describe anything other than a year-to-year prioritization of debt 

service coming due for the purposes of constructing a budget. 

We believe Puerto Rico could theoretically implement a restructuring process for 

GO and Commonwealth-guaranteed debt, reduce the principle amount outstanding 

through that process and assert that their constitutional burden is met by making 

the now-reduced public debt the first budgetary priority. In other words, the constitution says only that public debt has a first priority on resources—whether that 

debt represents legacy debt at 100-cents on the dollar or restructured debt at 50- 

cents on the dollar. It is silent as to the adjustment of public debt. 

The constitutional first priority on available resources for the benefit of public 

debt does not, in our opinion, preclude the possibility of debt restructuring or impairment. Puerto Rico could attempt to restructure constitutionally guaranteed obligations and subsequently argue that the new debt will maintain a first payment 

priority, post-restructuring. Puerto Rico has warned for years of the potential need 

to reprioritize essential services ahead of other obligations, including the public 

debt. In practical terms, this means subverting the ‘‘priority norms’’ established by 

law to the extent resources are insufficient to meet both debt service and the cost 

of providing essential services. 

Though some observers point to the constitution and priority norms as evidence 

GO debt cannot be impaired, this idea has been undermined repeatedly by the territory’s own risk disclosure statements in investor communications. For example, in 

March 2014, officials disclosed that ‘‘to the extent Commonwealth resources are diverted to such essential services, there is no assurance that the Commonwealth will 

have sufficient revenues to pay debt service on GO debt.’’ 

More recently, in the unaudited draft Fiscal 2014 Basic Financial Statements, the 

government stated it may amend the Organic Act that establishes these priorities 

or enact new emergency legislation that could include a debt moratorium on the 

payment of debt service. In short, Puerto Rico has been signaling to investors for 

years its intention to reprioritize essential services over debt. 

Whether pension payments will be prioritized over debt is not yet apparent. In 

the government’s first debt restructuring proposal to creditors, both GO and 

COFINA bonds received significant haircuts while pensions were notably absent. 

Puerto Rico’s pension obligations are virtually entirely unfunded and growing rapidly. As of June 30, 2014, the unfunded pension liability is estimated at $43.6 billion 

across three retirement systems. The Employees Retirement System has the largest 

liability, at $30.2 billion, and the lowest funded ratio at 0.42%. Pension costs will 

soon be funded on a pay-go basis, increasing budgetary pressure. By fiscal 2018, 

pay-go pension payments could reach $2 billion per year, or nearly 20% of general 

fund revenues. 

Preserving pension security is one of the administration’s stated objectives. We 

believe the government will attempt to keep pensions free from impairment and 

22 

prioritize these payments above debt service, regardless of current statutes that 

prioritize debt service ahead of annual pension costs. Threats to enact new legislation reversing the priority of payments support this. Additionally, the administration’s current debt restructuring proposal does not include any changes or 

reductions for pension beneficiaries. We believe Puerto Rico intends to leave pension 

benefits untouched while attempting to impose haircut on all other long-term 

liabilities, even those with a guarantee and a dedicated pledged revenue. 

Contagion Risk Is Low 

Municipal investors are asking if a Puerto Rico restructuring will negatively impact the broader market. Growing evidence suggests Puerto Rico is now effectively 

separated from the traditional high yield market, let alone the overall municipal 

market. We believe most institutional investors understand Puerto Rico’s unique situation, and the coming debt restructuring will not create widespread negative credit 

implications for other issuers. 

Municipal investors should note that recent debt adjustments in a handful of 

California cities, Detroit and other jurisdictions did not disrupt the market. Detroit 

filed for bankruptcy protection on July 18, 2013, and on that day the AAA Municipal 

Market Data (MMD) 30-year yield was 4.03%. By December 31, 2015, the AAA 

MMD yield rallied by 121 basis points to 2.82%. As of this writing on February 19, 

2016, AAA MMD stands at 2.78%, 125 basis points tighter than the day Detroit filed 

for bankruptcy. 

Simultaneously, Puerto Rico’s stance toward financial market creditors became increasingly hostile, from proposals to restructure debt and the beginning of what we 

expect will be a string of ongoing defaults. Municipal investors, rightly, continue to 

differentiate between individual pockets of credit stress and the much healthier 

overall market. We see no reason this will change based on how Congress addresses 

Puerto Rico’s situation. 

Market differentiation between Puerto Rican bonds and other high yield municipal bonds started even before the rating agencies downgraded Puerto Rico debt to 

below investment grade in 2013. Since then, divergence between Puerto Rico and 

the rest of the high yield market can been seen in credit spreads, fund flows and 

total returns. 

Exhibit 1 shows credit spreads for high yield indices with and without Puerto 

Rico. Since the beginning of 2014, high yield credit spreads excluding Puerto Rico 

securities narrowed 30 basis points, while spreads including Puerto Rico securities 

widened over 120 basis points. The market has clearly identified elevated risk for 

Puerto Rico debt, while spreads for other high yield municipals are more in line 

with historic norms. 

23 

Investors have already differentiated between funds with and without Puerto Rico 

holdings. The difference in net flows for funds with elevated Puerto Rico exposure 

versus funds with minimal Puerto Rico exposure is notable. Since the beginning of 

2014, funds with a less than 5% allocation of net assets to Puerto Rico reported 

inflows of $12.6 billion, equivalent to 40% of beginning assets under management 

(AUM), as shown in Exhibit 2. Over the same time period, high yield funds with 

more than 5% allocated to Puerto Rico have experienced outflows totaling 8.75% of 

AUM. This trend of diverging investor flows was sizable, orderly and largely unnoticed by market participants. 

High yield municipal funds with less than 5% allocation to Puerto Rico now represent double the AUM of high yield municipal funds with more than 5% exposure 

to Puerto Rico. At the start of 2014 that figure was only 28% more in AUM. 

High yield returns without Puerto Rico have also outperformed each year since 

2013 and the difference has increased each year. Based on the S&P High Yield 

Municipal Index, high yield returns without Puerto Rico were 1.47% and 4.29% 

higher in 2014 and 2015, respectively, than the index when Puerto Rico is included. 

A Threat to Tax-Exemption Is Possible 

We don’t see Puerto Rico creating contagion for the municipal market via investor 

reticence over purchasing securities from mainland states, other municipal issuers 

scrambling to seek debt relief or a general increase in municipal borrowing costs. 

However, market contagion is possible in the form of threats to the municipal 

bond tax exemption. The longer Puerto Rico remains unaddressed by Congress and 

unable to appropriately restructure its debts and unfunded pension liabilities, the 

longer Puerto Rico will remain in the headlines. As this plays out, the potential only 

grows for some members of Congress to view Puerto Rico’s profligate spending and 

use of debt to fund government services as representative of the entire municipal 

market. 

Of course, any curtailment of the municipal tax exemption on the basis of Puerto 

Rico’s debt abuse would be wholly unfair to the rest of the market. Puerto Rico 

spent much of the last 10 years issuing billions in debt to pay maturing debt and 

fund government services, while overall municipal debt outstanding remained more 

or less constant. Exhibit 3 shows the total municipal debt outstanding from 2005 

through 2014. 

24 

From 2005 through 2010, municipal debt outstanding grew from $3 trillion to 

$3.77 trillion as the housing market boom created abundant property taxes, permit 

fees and other revenues related to robust residential growth. This growth also created the need for new schools, roads, bridges and expanded water and sewer treatment capacity. Since the onset of the recession, however, municipal debt 

outstanding actually declined to $3.65 trillion. Issuers slowed the pace of capital investment, and refunding transactions—rather than new money issuance for 

projects—represented the majority of municipal debt issuance. From 2005 through 

2014, total municipal market debt outstanding grew at a 2.1% compound annual 

growth rate (CAGR). This period included several years of healthy capital investment to accommodate residential growth. 

We think this manageable trend in municipal debt issuance speaks to municipal 

market issuers’ long-standing history of using municipal bonds—and the benefit of 

municipal tax exemption—to responsibly invest in the country’s critical infrastructure. Puerto Rico and a limited number of other municipal issuers that rely on municipal bonds to maintain government spending do not represent the broader 

market, nor do they indicate the general health of states and municipalities. 

While Puerto Rico’s approximately $70 billion of debt makes the Commonwealth 

one of the largest issuers of municipal bonds, it represents just 1.9% of municipal 

debt outstanding. Reducing or eliminating the municipal tax exemption based on 

the actions of Puerto Rico is like treating a sprained toe by removing the patient’s 

leg. 

Could Puerto Rico Set a Negative Precedent? 

We do not believe a broad debt restructuring in Puerto Rico would lead states 

struggling with budgetary challenges (such as Illinois, New Jersey and 

Pennsylvania) to clamor to restructure their own debt. Puerto Rico attempting to 

restructure its obligations won’t encourage other states to do the same. The magnitude of Puerto Rico’s debt and the lack of an economic base to service long-term 

liabilities makes it a significant outlier in comparison to other states. The ‘‘Illinois 

is next’’ argument misleadingly suggests that Illinois—admittedly the least creditworthy U.S. state—is comparable to Puerto Rico in terms of financial stress and 

capacity to meet its obligations. 

Comparing key credit metrics for Puerto Rico and Illinois, as shown in Exhibit 

4, reveals this argument to be quite lacking. 

25 

Illinois is certainly not a model of state governance and fiscal responsibility. But 

the size of the state’s economy and tax base, and its comparatively low sales and 

income tax rates, demonstrate the state has far more flexibility to address its longterm obligations than Puerto Rico. The state’s diverse economy ranks fifth overall 

in the U.S. in terms of gross domestic product (GDP), and fourth in per capita income among the 10 most populous states. Though the state’s recovery has lagged 

the U.S., it is still growing modestly, unlike Puerto Rico. 

The scope of Puerto Rico’s challenges far outstrips those of Illinois once debt and 

unfunded liabilities are indexed to the respective government’s economies and resident incomes. Debt and unfunded pension liabilities represent just 19.5% and 39.8% 

of Illinois GDP and total household income, respectively. Puerto Rico carries debt 

and unfunded pension liabilities representing 96.1% and 259.6% of GDP and total 

household income, respectively. Simply put, Puerto Rico is much more leveraged 

than even Illinois, the lowest-rated U.S. state. It is inappropriate to compare them 

interchangeably in the context of the need for federally sanctioned debt relief. 

A political impasse has left Illinois operating without an adopted budget almost 

nine months into the fiscal year. The budget standoff has resulted in a growing 

accounts payable balance and reduced liquidity, and distracted state leaders from 

addressing pension underfunding, which remains a serious threat to the state’s 

long-term financial stability and structural budget balance. Failing to pass a budget 

and address pensions has undoubtedly weakened the state’s ability to withstand the 

next economic downturn. Illinois deserves its lowest-rated state designation. 

But Illinois’ budget stalemate, while detrimental to the state’s economy, is a political battle rather than a crisis caused by economic contraction or a fundamental inability to afford long-term obligations. The state’s budget gap for fiscal 2017 is now 

projected to increase to $5.6 billion, or 17% of estimated revenues. While not 

26 

insignificant, this budget gap is far from insurmountable. Increasing the individual 

income tax rate by 1.25% to 5.0% (from 3.75%) would generate more than 

$4.1 billion in new revenue, and go a long way to close the annual revenue gap. 

The mathematical gap in Illinois is not nearly as wide as the political chasm. While 

restructuring debt seems both appropriate and unavoidable for Puerto Rico, it is not 

the appropriate tool for Illinois and would provide the state with little budget relief. 

Some argue that Puerto Rico’s indebtedness is overstated in comparison to mainland U.S. states, as Puerto Ricans pay no federal income tax and therefore don’t feel 

the burden of the U.S. government’s debt. Once again, we believe this argument is 

designed to mislead rather than inform. It inappropriately equates two very different types of debt: municipal debt issued by state and local governments and 

sovereign debt of the United States. 

Unlike state and local government debt, sovereign debt of the United States is not 

truly amortized with regular principal payments. Rather, sovereign debt is very 

often rolled into new debt offerings with only the interest cost borne in the budget. 

Sovereigns tend to attempt to maintain their debt outstanding within a specific 

range of economic output (such as GDP), allowing the nominal amount of debt to 

grow over time but remaining within a measure of affordability as determined by 

economic activity. Thus any attempt to lump total federal government debt outstanding into state debt profiles is an attempt to inflate state indebtedness to give 

Puerto Rico’s debt the veneer of affordability. 

A more appropriate way to consider the impact of the federal government’s debt 

is to consider annual interest cost, which in fiscal year 2015 amounted to $402.4 

billion. On a per capita basis, the annual interest cost on federal debt was $1,252 

in fiscal year 2015—or just 4.2% of Illinois’ per capita income. The federal government’s debt is not an oppressive fiscal constraint on the U.S. states and taxpayers. 

Nor does it make Puerto Rico’s debt load magically affordable. 

It is similarly inappropriate to contend Puerto Rico’s debt burden is artificially inflated in comparison to the states because it includes all debt issued for underlying 

municipalities and schools, whereas Illinois’ total debt does not. This is also a spurious argument because debt issued and guaranteed by Puerto Rico’s general government and the GDB is their responsibility and supported by their revenues. In 

contrast, all Illinois taxpayers are not responsible for debt issued by every underlying school district or county. 

When the affordability of Puerto Rico’s debt burden is debated, some claim that 

the Commonwealth doesn’t fully capture all economic activity and their debt, and 

pensions would be affordable if only they boosted tax compliance. While we agree 

that Puerto Rico does a poor job of tax compliance and collection, we’re not convinced that improvements in this area alone will suffice. 

To illustrate this, in Exhibit 5 we compare Puerto Rico to three of the U.S. 

mainland’s lowest-rated states: Pennsylvania, New Jersey and Illinois. 

As Exhibit 5 shows, Puerto Rico’s debt and pension leverage is much greater than 

any of the lowest-rated mainland states, particularly in the context of each government’s economic output and resident income. Simply increasing tax compliance will 

27 

not reduce this over-leverage. Puerto Rico’s real problem is indebtedness, not tax 

compliance. 

This certainly does not mean that governmental reforms, expenditure cuts, improved tax compliance and collections, employee layoffs and government downsizing 

are not needed. Puerto Rico’s budget projections will improve with greater austerity 

and fiscal discipline, but we still believe the magnitude of fixed costs outweighs the 

savings that can be achieved through cuts and efficiency improvements. 

Moreover, with an outsized portion of Puerto Rico’s employment derived from 

Commonwealth and local government employment (23.9% in Puerto Rico versus 

13.5% for the mainland U.S.), extensive austerity will likely exacerbate the 

Commonwealth’s economic contraction. We expect most creditors will continue to object to Governor Garcı ́a Padilla’s plans to restructure Puerto Rico’s debts, but our 

analysis continues to show that the territory’s debts are unsustainable and require 

adjustment. 

Finally, it is unclear whether a framework for the adjustment of state obligations 

through the federal court system would pass constitutional muster. Unlike Puerto 

Rico—a U.S. territory subject to the direct oversight of, and potential intervention 

by, Congress—states are sovereign entities with certain protections from federal 

interference specifically spelled out in the U.S. Constitution. 

While legal opinions are mixed on this subject, many argue a federal bankruptcy 

regime for states wouldn’t pass legal and constitutional muster because: 

• Such a federal regime would violate principles of both state sovereignty and 

federalism. 

• States opting to enter into any such hypothetical framework would 

necessarily be acting in direct violation of their own constitutions and/or 

contract laws. 

Moreover, the sole instance of which we are aware of the U.S. government discharging state debt (according to a Fall 2011 American Bankruptcy Law Journal 

article) followed the civil war when the federal government nullified the debt issued 

by the former confederate states. This nullification occurred via a constitutional 

amendment specifically targeted to debt raised for the purposes of insurrection or 

rebellion against the United States. This implies there was no path to discharging 

the debt of U.S. states available through the balance of the U.S. Constitution. 

In short, Puerto Rico accessing a Congressionally-approved restructuring regime 

is not a precursor to U.S. states following suit because: 

• U.S. states, as sovereign entities, are likely constitutionally ineligible for 

federally supervised restructuring. 

• U.S. states are significantly financially healthier than Puerto Rico and have 

far greater revenue flexibility, both in terms of rate headroom and the wealth 

and scope of their economies. 

• Aside from not needing a federal restructuring regime, U.S. states have 

shown no inclination to ask for any such legislation and would likely oppose 

it. 

Swift Action Will Help Build Confidence 

We believe the best outcome is for the Puerto Rico situation to be resolved as 

quickly as possible. The faster the Puerto Rican government is forced to implement 

much needed structural reform and fiscal discipline, the earlier traditional institutional investors will view Puerto Rico as a defensible investment. Puerto Rico must 

show it can achieve and maintain financial discipline and an affordable debt 

structure to regain access to affordable and sustainable lending for infrastructure 

investment. 

As a U.S. territory, Puerto Rico is not a true sovereign. It may be state-like, and 

there are good arguments for the Commonwealth to receive federal funding on parity with other states. However, as a territory it does not enjoy the same responsibilities and advantages as states. Puerto Rico is a sub-sovereign entity over which the 

U.S. Congress has oversight. When warranted, Congress should act to resolve various financial, economic and/or humanitarian crises within the territories. 

Years of litigation and inter-creditor disputes will only stifle economic growth and 

accelerate out-migration, further diminishing the tax base available to pay off creditors. At present, too many unknowns prevent investors from reaching a reasonable 

degree of confidence in the territory or any particular security pledge. This lack of 

certainty will keep Puerto Rico locked out of the market until a path to sustainability and economic growth emerges. We believe this will not happen until 

28 

Congress enters the void and brings with them a sense of order and path forward 

for Puerto Rico. 

The CHAIRMAN. Thank you. You are supposed to end with, ‘‘It’s 

a good bill.’’ I got it. OK. 

Mr. Kent. 

STATEMENT OF ANDREW KENT, PROFESSOR OF LAW, 

FORDHAM UNIVERSITY SCHOOL OF LAW, NEW YORK, 

NEW YORK 

Mr. KENT. Thank you, Chairman Bishop, Ranking Member 

Grijalva, and distinguished members of the committee. I appreciate 

the invitation to testify today. 

As you noted, I am a Professor of Law at Fordham University 

School of Law, and I teach constitutional law and other topics. I 

will comment briefly on the constitutional power of Congress to 

enact the proposed legislation. 

As might be expected, almost all legislation coming from the 

Congress that deals with insolvency, restructuring, bankruptcy, 

and like topics is enacted under the bankruptcy clause of Article 

I. That clause provides that Congress shall have the power to establish uniform laws on the subject of bankruptcies throughout the 

United States. 

The uniformity that this requires has been called by the 

Supreme Court ‘‘geographic uniformity,’’ but, nevertheless, the 

Supreme Court has also indicated that the uniformity requirement 

is not a straitjacket, and it has in many different cases found that 

differences in the law and the way it applies to different classes of 

debtors and creditors are not violations of the uniformity 

requirement. 

Congress may address geographically isolated problems under 

the bankruptcy clause without violating the uniformity requirement. And, as I said, Congress may treat different classes of debtors and creditors differently without violating the uniformity 

requirement. 

Because this is a territory-specific law that deals with an entire 

class of debtors and is dealing with a geographically isolated problem, I think there are strong arguments that Congress could, if it 

wanted to, enact this under the bankruptcy clause without violating uniformity requirements. 

But there would be some risks if that were the only basis under 

which Congress could act. Thankfully, it is not. There is another 

basis on which Congress can enact this legislation, and that is the 

so-called territorial clause of Article IV of the Constitution, the 

clause that is referenced in the new draft legislation in section 101. 

That clause empowers the Congress to make, ‘‘all needful rules and 

regulations respecting the territory or other property belonging to 

the United States.’’ 

Congress’ power to use this clause to legislate for the territories 

has been called an absolute and undisputed power by Chief Justice 

John Marshall. Congress has well established and very long exercised power under this clause to treat territories differently from 

each other and to treat territories differently than it treats the 

29 

states of the Union. And, in my judgment, this clause serves as an 

independent and sufficient basis with which Congress could enact 

the contemplated legislation. 

The power of Congress under the territorial clause is vastly different than the power it has when it is legislating for states of the 

Union. Congress’ power is limited when legislating for the states to 

certain enumerated or implied topics of national concern, but when 

legislating for the territories, Congress is given additional power by 

this clause—broad, general legislative powers that the Supreme 

Court has repeatedly analogized to those powers held by a state 

legislature. 

So Congress, in fact, possesses two types of powers under this 

territorial clause. As the Supreme Court has said, the Nation possesses the sovereign powers of the general government, and it 

added to that when it is legislating in the territories, it also has 

the powers of a local or state government. 

The Supreme Court has called this power ‘‘broad,’’ ‘‘plenary,’’ and 

even ‘‘practically unlimited.’’ And the Supreme Court has numerous 

times emphasized that the interpretation of Congress’ power to legislate for the territories must be flexible to allow Congress the 

flexibility that is needed to legislate in a practical and workable 

manner for the different situations of the different territories. 

And, in fact, the history of congressional regulation of the territories has been one of tailoring legislation to the specific historical, 

geographic, economic, legal, and political conditions of the different 

territories. The history has also shown that Congress repeatedly 

uses the territorial clause to enact a wide array of legislation that 

it could not have enacted if it were legislating for the states under 

its Article I powers. My written testimony gives many examples of 

this. 

There are actually three identically worded uniformity clauses in 

the Constitution. In addition to the bankruptcy uniformity clause, 

there is a requirement that imposts and excise taxes be uniform. 

The Supreme Court held as long ago as 1901 that that uniformity 

requirement—again, identically worded to the one in the bankruptcy clause—does not apply to Puerto Rico. 

There is also a requirement of naturalization uniformity, again, 

with the exact same language as in the bankruptcy clause. The 

Supreme Court has not ruled on that, but the Courts of Appeals 

have held that naturalization uniformity does not apply in the unincorporated territories, such as Puerto Rico, and there is a very 

long history of congressional naturalization legislation that is 

disuniform, that treats the residents of territories very differently, 

without constitutional infirmity in that being found. 

So, in a general matter, Congress only needs one constitutional 

basis upon which to enact legislation, and since I believe the territorial clause is sufficient for that, uniformity issues under the 

bankruptcy clause need not be raised. 

Thank you very much. 

[The prepared statement of Mr. Kent follows:] 

PREPARED STATEMENT OF ANDREW KENT, PROFESSOR OF LAW, FORDHAM UNIVERSITY

SCHOOL OF LAW, NEW YORK, NEW YORK

Chairman Bishop, Ranking Member Grijalva, and distinguished members of the 

committee, thank you for inviting me to testify today. I am a professor of law at 

30 

Fordham University School of Law, where I teach constitutional law and other 

topics. 

As I understand the new draft legislation just released publicly, Title I creates 

a Financial Oversight and Management Board for Puerto Rico, and gives the legislatures of other U.S. territories the option to choose to have such an oversight board 

created for them. Title II sets out the responsibilities of any oversight board created 

under Title I. Title III, section 302, allows a U.S. territory or territorial instrumentality to be a debtor and follow specified debt adjustment procedures if it is subject 

to an oversight board created under Title I, that board has allowed the territory or 

territorial instrumentality to enter into a debt adjustment process, and the territory 

‘‘desires to effect a plan to adjust its debts.’’ 

I. THE UNIFORMITY REQUIREMENT OF THE CONSTITUTION’S BANKRUPTCY CLAUSE

The Constitution’s Bankruptcy Clause provides that ‘‘The Congress shall have 

power to . . . establish . . . uniform laws on the subject of bankruptcies throughout 

the United States.’’ U.S. Const., art. I, § 8, cl. 4. Case law about this uniformity 

requirement establishes that, although it requires what the Supreme Court calls geographic uniformity, the clause nevertheless grants Congress great leeway. ‘‘The 

uniformity requirement is not a straitjacket . . . .’’ Railway Labor Executives’ Ass’n 

v. Gibbons, 455 U.S. 457, 469 (1982). Congress may treat different classes of debtors 

differently; may incorporate state law in ways that will lead to different results in 

different states; and may address geographically isolated problems as long as the 

law operates uniformly on a given class of debtors and creditors. See id. at 465– 

69; Blanchette v. Connecticut General Ins. Corp., 419 U.S. 102, 156–61 (1974); 

Schultz v. United States, 529 F.3d 343, 350–52 (6th Cir. 2008). The Supreme Court 

has struck down a law as non-uniform, however, where it applied to only a single 

debtor, one named railroad company. See Railway Labor Executives’ Ass’n, 455 U.S. 

at 465–69. 

In light of this case law, a question might be raised about whether the draft legislation could be subject to challenge for non-uniformity. The fact that legislation concerns debt adjustment for certain classes of debtors only—territories and territorial 

instrumentalities—is unlikely to be deemed objectionable under the Bankruptcy 

Clause uniformity provision. The Supreme Court has held that Congress may treat 

different classes of debtors differently. But to the extent that the legislation singles 

out Puerto Rico (and its instrumentalities), because only Puerto Rico has an oversight board created for it by the bill, uniformity questions might be raised. 

Nevertheless, my view is that these constitutional concerns can be avoided in this 

case, because Congress may enact debt adjustment legislation for Puerto Rico under 

a different clause of the Constitution, a clause that does not require uniformity. 

That clause is the Territories or Territorial Clause of Article IV, as referenced in 

§ 101(b)(3) of the new draft of the bill (setting out the ‘‘Constitutional Basis’’). 

II. THE TERRITORIES CLAUSE ALLOWS NON-UNIFORM LEGISLATION

The Constitution empowers Congress to ‘‘make all needful rules and regulations 

respecting the territory or other property belonging to the United States.’’ U.S. 

Const., art. IV, § 3. Congress’ power to use this clause to make rules for the territories has been called an ‘‘absolute and undisputed power,’’ by Chief Justice John 

Marshall. Sere v. Pitot, 10 U.S. 332, 336–37 (1810). 

Congress has well-established and long-exercised power under this clause to treat 

territories differently from each other, and to treat territories differently than it 

treats U.S. states. In my judgment, this clause serves as an independent and sufficient basis on which Congress may enact the contemplated legislation. The remainder of my testimony will concern the Territorial Clause and the non-uniformity that 

it allows. 

The power of Congress over the territories is vastly different than its power over 

the States of the Union. Congress’ power is limited in legislating for the states to 

certain enumerated or implied topics of national concern. But when legislating for 

the territories, Congress is given additional power by the Territorial Clause—broad, 

general legislative power that the Supreme Court analogizes to that of a state legislature. See, e.g., First Nat. Bank v. Yankton Cty., 101 U.S. 129, 133 (1879); Benner 

v. Porter, 50 U.S. 235, 242 (1850). Over a territory or dependency ‘‘the nation possesses the sovereign powers of the general government plus the powers of a local 

or a state government in all cases where legislation is possible.’’ Cincinnati Soap 

Co. v. United States, 301 U.S. 308, 317 (1937). Thus, ‘‘[t]he powers vested in 

Congress by’’ the Territorial Clause ‘‘to govern Territories are broad,’’ Examining 

Bd. of Engineers, Architects, & Surveyors v. Flores de Otero, 426 U.S. 572, 586 n.16 

31 

1See also Cincinnati Soap Co., 301 U.S. at 319 (holding that Congress’ legislative power over 

the Philippines under the Territorial Clause had not changed as a result of ‘‘the adoption and 

approval of a constitution for the Commonwealth of the Philippine Islands’’). 

(1976), ‘‘plenary,’’ Binns v. United States, 194 U.S. 486, 491 (1904), and even 

‘‘practically unlimited,’’ Cincinnati Soap Co., 301 U.S. at 317. 

The Supreme Court has many times emphasized that interpretation of Congress’ 

ability to legislate for the territories under the Constitution must be marked by 

‘‘flexibility,’’ Cincinnati Soap Co., 301 U.S. at 318, and concern for Congress’s practical ability to govern, see Torres v. Commonwealth of Puerto Rico, 442 U.S. 465, 

470 (1979). 

Puerto Rico, though it is now formally a commonwealth, is still a territory of the 

United States within the meaning of the Territorial Clause. See Torres, 442 U.S. at 

468–70; Da ́vila-Pe ́rez v. Lockheed Martin Corp., 202 F.3d 464, 468–69 (1st Cir. 

2000); Americana of Puerto Rico, Inc. v. Kaplus, 368 F.2d 431, 435 (3d Cir. 1966). 

In other words, Congress may still today legislate for Puerto Rico pursuant to it plenary power over territorial legislation.1

The history of congressional regulation of the territories has been one of tailoring 

legislation to the specific historical, geographic, economic, legal, and political conditions of each particular territory. The history has also shown Congress using the 

Territorial Clause to enact a wide array of legislation that it could not enact for the 

states under its Article I powers. 

Congress’ first territorial legislation—enacted in 1787 by the Confederation 

Congress, and re-enacted in 1789 by the first Congress organized under the new 

Constitution—shows this pattern. See Act of Aug. 7, 1789, ch. 8, 1 Stat. 50. This 

law, the famous Northwest Ordinance, announced many rules that would apply only 

in the Northwest Territory. For example, it announced rules concerning intestate 

succession and conveyance of real estate, but then also provided that ‘‘the French 

and Canadian inhabitants’’ of the territory could continue to be governed by their 

own ‘‘laws and customs now in force among them.’’ An Ordinance for the Government of the Territory of the United States Northwest of the River Ohio § 2 (July 

13, 1787). 

Many other examples could be given of congressional legislation that (1) could not 

have been enacted under Article I to apply in the states and (2) applied to one territory only and provided specifically tailored rules for that territory. After the 

Louisiana Purchase, Congress’ legislation under the Territorial Clause provided special rules for that territory concerning the port of New Orleans. See Act of Feb. 24, 

1804, ch. 13, §§ 6 & 8, 2 Stat. 251, 253. After the United States acquired Florida 

from Spain, Congress enacted specific rules regarding revenue collection for Spanish 

vessels trading with Florida. See Act of March 3, 1821, ch. 39, § 2, 3 Stat. 637, 639. 

When Congress organized the Territory of Oklahoma, it provided that certain specified chapters of the laws of the state of Nebraska would apply there, concerning 

mortgages, corporations, railroads, real estate, and other topics. See Act of May 2, 

1890, ch. 182, § 11, 26 Stat. 81, 87. After the United States annexed Hawaii, 

Congress imposed caps on the amount of real estate that corporations could purchase in that territory only. See Act of April 30, 1900, ch. 339, § 55, 31 Stat. 141, 

150. After the Philippines became a U.S. territory through the 1898 Treaty of Paris, 

Congress enacted a detailed set of provisions to govern mining and mining claims 

in that territory only. See Act of July 1, 1902, ch. 1369, §§ 20–50, 31 Stat. 691, 697– 

704. 

Early on Congress recognized the utility of extending many general laws of the 

United States over the territories, but also recognized that not all laws applicable 

in the states would work well in some or all territories. As a result, Congress developed a practice of providing in the organic acts for territories that ‘‘all laws of the 

United States which are not locally inapplicable’’ shall apply in the territory. Act 

of Sept. 9, 1850, ch. 49, § 17, 9 Stat. 446, 452 (Territory of New Mexico). See also 

Act of March 3, 1863, ch. 117, § 13, 12 Stat. 808, 813 (Territory of Idaho); Act of 

May 26, 1864, ch. 95, § 13, 13 Stat. 85, 91 (Territory of Montana). This statutory 

provision was, in effect, a delegation from Congress to the courts to tailor the legislation of the United States to the specific local requirements of each organized territory. The ubiquity of these provisions, and the lack of successful constitutional 

challenges to them, evidences Congress’ plenary authority to tailor legislation to the 

needs and circumstances of an individual territory. 

The Supreme Court took up Congress’ direction to determine which general laws 

were locally applicable or inapplicable in specific territories. When Congress specified in a statute that it would apply to ‘‘territories’’ as well as states, the Supreme 

Court examined ‘‘the character and aim of the act’’ to determine if a particular territory was covered. People of Puerto Rico v. Shell Co., 302 U.S. 253, 258 (1937). 

32 

2Today 48 U.S.C. § 734 provides: ‘‘The statutory laws of the United States not locally inapplicable, except as hereinbefore or hereinafter otherwise provided, shall have the same force and 

effect in Puerto Rico as in the United States, except the internal revenue laws other than those 

contained in the Philippine Trade Act of 1946 [22 U.S.C.A. § 1251 et seq.] or the Philippine 

Trade Agreement Revision Act of 1955 [22 U.S.C.A. § 1371 et seq.]: Provided, however, That 

after May 1, 1946, all taxes collected under the internal revenue laws of the United States on 

articles produced in Puerto Rico and transported to the United States, or consumed in the island 

shall be covered into the Treasury of Puerto Rico.’’ 3This statute provides: ‘‘The Constitution and all laws of the United States which are not 

locally inapplicable shall have the same force and effect within all the organized Territories, and 

in every Territory hereafter organized as elsewhere within the United States.’’ 4 Hooven & Allison was overruled in part on other grounds in Limbach v. Hooven & Allison 

Co., 466 U.S. 353 (1984). 

5See U.S. Const., art. I, § 8, cl. 1 (‘‘The Congress shall have power to lay and collect taxes, 

duties, imposts and excises, to pay the debts and provide for the common defense and general 

welfare of the United States; but all duties, imposts and excises shall be uniform throughout 

the United States.’’); id. § 8, cl. 4 (‘‘The Congress shall have power to . . . establish a uniform 

rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United 

States.’’). 

The Foraker Act, the organic act for Puerto Rico passed in 1900, contained this 

same ‘‘not locally inapplicable’’ tailoring provision, and specified also that Congress’ 

internal revenue laws would not apply. See Act of April 12, 1900, ch. 191, § 14, 31 

Stat. 77, 80.2 Congress further tailored legislation specifically for Puerto Rico by 

also specifying in the Foraker Act that preexisting laws from the period of Spanish 

rule would continue in force unless they were repealed by the United States, in conflict with U.S. statutes, or determined to be ‘‘locally inapplicable.’’ Id. § 8. 

Congress enacted the ‘‘not locally inapplicable’’ provision only for so-called organized territories, see Revised Statutes § 1891 (1878),3 in which Congress had created 

a local territorial government. Thus, Congress allowed even greater dis-uniformity 

in unorganized territories, where general rules of the United States were not extended by any such provision. Even within organized territories, Congress drew distinctions. When Congress organized a government for the Philippines, it provided 

that § 1891 did not apply, see Act of July 1, 1902, ch. 1369, § 1, 31 Stat. 691, 692, 

indicating an intent that generally applicable U.S. laws would not automatically extend to the Philippines. 

In the Insular Cases, the Supreme Court held that the Constitution does not 

apply in full in so-called unincorporated territories, among which the Court included 

Puerto Rico and the Philippines. There are ‘‘inherent practical difficulties’’ with 

‘‘enforcing all constitutional provisions ‘always and everywhere.’ ’’ Boumediene v. 

Bush, 553 U.S. 723, 759 (2008). Thus under the Insular Cases, not all structural 

limitations on congressional power apply to territorial legislation, see Torres, 442 

U.S. at 468–69, and ‘‘[o]nly ‘fundamental’ constitutional rights are guaranteed to inhabitants of those [unincorporated] territories,’’ United States v. Verdugo-Urquidez, 494 U.S. 259, 268 (1990). Congressional legislation for an ‘‘unincorporated territory’’ 

like Puerto Rico is ‘‘not subject to all the provisions of the Constitution.’’ Torres, 442 

U.S. at 469. ‘‘In exercising this power [under the Territories Clause], Congress is 

not subject to the same constitutional limitations as when it is legislating for the 

United States.’’ Hooven & Allison Co. v. Evatt, 324 U.S. 652, 674 (1945).4

In contrast to its allowance of flexibility and heterogeneity with territorial legislation, the Constitution prescribes a certain amount of uniformity when Congress is 

legislating for the States of the Union. Territorial legislation has sometimes been 

challenged on the grounds that it is dis-uniform and hence unconstitutional, but 

these challenges have not succeeded. 

The Constitution specifies that three kinds of legislation should be ‘‘uniform’’ 

‘‘throughout the United States’’: naturalization legislation, bankruptcy legislation, 

and certain taxes (‘‘duties, imposts and excises’’).5 Notwithstanding these clauses, it 

is well-established that naturalization and tax legislation for the territories need not 

be uniform—either with respect to legislation for States of the Union or with respect 

to legislation for other territories. It stands to reason that the Bankruptcy Clause, 

employing identical language about uniformity, also does not bind Congress when 

it legislates for the territories. 

Tax uniformity not required for the territories: The Supreme Court held, in 

the Insular Cases, that Congress was not bound by the uniformity provision with 

regard to taxation when it enacted special revenue laws applying only to Puerto 

Rico. As the Court later summarized the rule: 

‘‘In Downes v. Bidwell, 182 U.S. 244 (1901), we held that Congress could 

establish a special tariff on goods imported from Puerto Rico to the United 

States, and that the requirement that all taxes and duties imposed by 

33 

Congress be uniform throughout the United States, Art. I, § 8, cl. 1, was not 

applicable to the island.’’ Torres, 442 U.S. at 468–69. 

As Torres indicates, Downes is still good law on this point. 

The tax uniformity requirement has also been held inapplicable with regard to incorporated territories. In organizing and incorporating the Alaska Territory, 

Congress ‘‘created no legislative body’’ for the territory and so ‘‘established a revenue system of its own, applicable alone to that territory.’’ Binns, 194 U.S. at 492. 

The Supreme Court rejected a claim that these Alaska-specific license and excise 

taxes enacted by Congress were required to be ‘‘uniform’’ with those ‘‘throughout the 

United States.’’ Id. at 487, 494–96. As the Court noted: 

‘‘It must be remembered that Congress, in the government of the territories 

. . . has plenary power, save as controlled by the provisions of the 

Constitution; that the form of government it shall establish is not prescribed, and may not necessarily be the same in all the territories.’’ Id. at 

491. 

Naturalization uniformity not required for the territories: The Supreme 

Court has held that under the Territorial Clause or the clause allowing Congress 

to admit new states into the union Congress can accomplish the naturalization of 

aliens located in certain territories and adjust their status to that of U.S. citizens. 

See Boyd v. Nebraska ex rel. Thayer, 143 U.S. 135, 164–66, 168–70 (1892). The 

Court quoted with approval a lower court decision that ‘‘denied that the only constitutional mode of becoming a citizen of the United States is naturalization by compliance with the uniform rules established by Congress.’’ Id. at 165–66. The ‘‘plenary 

power of Congress over the territories’’ can be used to collectively naturalize specific 

groups of people on the terms that Congress determines. Id. at 169. 

Congress has long exercised plenary authority to determine whether residents of 

insular territories should be made citizens or not, and has made distinctions between different territories. Hawaii, Puerto Rico, Guam, and the Philippines were all 

acquired by the United States in 1898, but Congress treated residents of the territories very differently for citizenship purposes. In 1900, citizenship was granted to 

essentially all Hawaiians. See Act of April 30, 1900, ch. 339, § 4, 31 Stat. 141, 141. 

Not until 1917 did Congress confer U.S. citizenship on many residents of Puerto 

Rico. See Act of March 2, 1917, ch. 145, § 5, 39 Stat. 951, 953. Congress waited until 

1940 to comprehensively grant citizenship to residents of Puerto Rico. See Nationality Act of 1940, ch. 876, § 202, 54 Stat. 1137, 1139. Not until 1950 did Congress 

extend citizenship to Guamanians. See Act of Aug. 1, 1950, ch. 512, § 4(a), 64 Stat. 

384, 384. And Congress never granted citizenship to residents of the Philippines en 

masse, see Valmonte v. INS, 136 F.3d 914, 916–17 (2d Cir. 1998), though they were 

eligible for naturalization if they came within the terms of generally applicable statutes, see, e.g., Balzac v. Porto Rico, 258 U.S. 298, 308 (1922). Samoa, which was 

acquired by the United States in 1900, has also seen its residents excluded from 

automatic U.S. citizenship. See Tuaua v. United States, 788 F.3d 300, 302 (D.C. Cir. 

2015). 

Recently the Ninth Circuit confirmed that the uniformity provision of the 

Naturalization Clause cannot be invoked by residents of unincorporated territories 

to challenge non-uniform congressional rules. See Eche v. Holder, 694 F.3d 1026, 

1031 (9th Cir. 2012). 

Other uniformity cases: When litigants from the territories have used individual rights provisions of the Constitution to challenge congressional legislation 

under the Territorial Clause for lack of uniformity, the Supreme Court has rejected 

these claims. For instance, when individual rights challenges have been raised to 

social benefits legislation that treated residents of Puerto Rico differently than residents of the states, the Supreme Court has held that Congress ‘‘may treat Puerto 

Rico differently from states so long as there is a rational basis for its actions.’’ 

Harris v. Rosario, 446 U.S. 651, 651-52 (1980) (AFDC program, Fifth Amendment 

Due Process Clause challenge); see also Califano v. Torres, 435 U.S. 1, (1978) (per 

curiam) (SSI program) (holding that Congress could treat Puerto Rico differently 

without violating the constitutional right to travel ‘‘[s]o long as its judgments are 

rational, and not invidious’’). This kind of rational basis review is exceedingly deferential to the government. See, e.g., FCC v. Beach Commc’ns, Inc., 508 U.S. 307, 

314–15 (1993). 

34 

III. CONCLUSIONS

As a general matter, Congress needs only one constitutional grant of power upon 

which to enact legislation. And if the legislation meets the requirements of one 

grant, it does not matter if other possibly applicable grants do not support the legislation. See, e.g., United States v. Morrison, 529 U.S. 598, 607, 619 (2000). 

It is true that the Supreme Court has held that, although general principles governing the reach of the Commerce Clause would allow Congress to enact bankruptcy 

legislation on that basis, Congress should not be allowed to use the Commerce 

Clause ‘‘to enact nonuniform bankruptcy laws,’’ because that ‘‘would eradicate from 

the Constitution a limitation on the power of Congress to enact bankruptcy laws.’’ 

Railway Labor Executives’ Ass’n, 455 U.S. at 468–69. 

The Supreme Court was not addressing and did not consider legislation governing 

the territories when it made that statement, and the case law and legal principles 

discussed above suggest that the Court’s concerns about an end run around limitations on congressional power should not apply to the situation at hand, where 

Congress could act under the Territorial Clause. 

The Territorial Clause is not an end run around anything. It is a specially crafted 

constitutional power designed to allow Congress to flexibly address the myriad practical problems of governing the territories, and to tailor its legislation to the unique 

circumstances of each territory. In many ways, the entire point of the Territorial 

Clause is to allow Congress to do things that it cannot otherwise do under Article 

I. That is how the clause has been consistently used by Congress and interpreted 

by the Supreme Court over the centuries. 

In my judgment, the newly released draft legislation is within Congress’s power 

under the Territorial Clause, which is not limited by the uniformity requirement of 

the Bankruptcy Clause. 

That conclusion is supported by the recent decision in Franklin California TaxFree Trust v. Puerto Rico, 805 F.3d 322 (1st Cir. 2015), in which two judges of the 

First Circuit opined that Congress could enact debt adjustment legislation specifically for Puerto Rico under its plenary power under the Territorial Clause. See id. 

at 337. One judge disagreed with this conclusion, however. See id. at 346–48 

(Torruella, J., concurring in judgment). The Supreme Court has granted cert in this 

case, see Acosta-Febo v. Franklin California Tax-Free Trust, 136 S. Ct. 582 (2015), 

but it is not generally thought that the Court’s decision is likely to address 

Bankruptcy Clause uniformity issues. 

Thank you again for the opportunity to testify about this bill. 

***** 

Supplementary Testimony from Mr. Kent 

FORDHAM UNIVERSITY SCHOOL OF LAW

NEW YORK, NEW YORK

April 20, 2016 

Hon. ROB BISHOP, Chairman, 

House Committee on Natural Resources, 

1324 Longworth House Office Building, 

Washington, DC 20515. 

Re: H.R. 4900, the Puerto Rico Oversight, Management, and Economic Stability Act 

(PROMESA) 

DEAR CHAIRMAN BISHOP AND MEMBERS OF THE COMMITTEE: 

Thank you for inviting me to testify on April 13, 2016 on the constitutionality of 

the new draft of the Puerto Rico Oversight, Management, and Economic Stability 

Act (PROMESA). As you know, current federal bankruptcy law does not provide 

either a voluntary or involuntary debt adjustment process for U.S. states or territories. PROMESA would create such a process for territories. At the hearing, questions were asked about whether a debt adjustment bill similar to PROMESA could 

be enacted for U.S. state governments. I was asked to submit a letter amplifying 

my testimony about that topic, in particular focusing on the Contracts Clause of the 

U.S. Constitution. 

35 

As I understood the thrust of several questions, there might be concern about 

whether a debt adjustment law for territories, such as the current draft of 

PROMESA, could create a precedent for a bankruptcy bill for states. The constitutional considerations regarding congressionally-authorized debt adjustment for territories, like Puerto Rico, and debt adjustment for U.S. states are starkly different. 

So different that, in my view, PROMESA would not create constitutional precedent 

for a debt adjustment statute for states. 

Territories and states are fundamentally distinct in our constitutional system. 

‘‘[U]nder our federal system, the States possess sovereignty concurrent with that of 

the Federal Government, subject only to limitations imposed by the Supremacy 

Clause.’’ Gregory v. Ashcroft, 501 U.S. 452, 457 (1991) (quotation marks omitted). 

‘‘[T]he preservation of the States, and the maintenance of their governments, are as 

much within the design and care of the Constitution as the preservation of the 

Union and the maintenance of the National government. The Constitution, in all its 

provisions, looks to an indestructible Union, composed of indestructible States.’’ Id. (quoting Texas v. White, 7 Wall. 700, 725 (1869)). 

State sovereignty limits Federal power in a variety of important ways. See, e.g., U.S. Const., art. X (‘‘The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or 

to the people.’’); id. art. XI (‘‘The judicial power of the United States shall not be 

construed to extend to any suit in law or equity, commenced or prosecuted against 

one of the United States by citizens of another state, or by citizens or subjects of 

any foreign state.’’). Congressional power, when legislating for the states of the 

union, is limited to certain enumerated and implied topics of national concern. 

By contrast, the Constitution empowers Congress to ‘‘make all needful rules and 

regulations respecting the territory or other property belonging to the United 

States.’’ U.S. Const., art. IV, § 3. Unlike U.S. states, territories are not constitutional 

sovereigns whose existence, structure, and powers are protected from Federal 

infringement by the Constitution. Over a territory or dependency ‘‘the Nation possesses the sovereign powers of the general government plus the powers of a local 

or a state government in all cases where legislation is possible.’’ Cincinnati Soap 

Co. v. United States, 301 U.S. 308, 317 (1937). Thus, ‘‘[t]he powers vested in 

Congress by’’ the Territorial Clause ‘‘to govern Territories are broad,’’ Examining 

Bd. of Engineers, Architects, & Surveyors v. Flores de Otero, 426 U.S. 572, 586 n.16 

(1976), ‘‘plenary,’’ Binns v. United States, 194 U.S. 486, 491 (1904), and even 

‘‘practically unlimited,’’ Cincinnati Soap Co., 301 U.S. at 317. 

As my written testimony for the April 13, 2016 hearing indicates, I believe that 

Congress has authority under Territorial Clause of Article IV to enact the 

PROMESA bill. But if Congress acting under Article I powers were to amend the 

bankruptcy code to allow either voluntary or involuntary debt adjustment for U.S. 

states, very serious questions would be raised about constitutionality. I cannot say 

definitively that such a statutory scheme would be found unconstitutional—extant 

Supreme Court case law does not allow that kind of precision, and the membership 

of the Court will likely be changing in the next year or so—but there is certainly 

a great risk of unconstitutionality. 

The first question would be whether Congress has enumerated or implied power 

to enact bankruptcy legislation for state governments. The Constitution’s 

Bankruptcy Clause provides that ‘‘The Congress shall have power to . . . establish 

. . . uniform laws on the subject of bankruptcies throughout the United States.’’ 

U.S. Const., art. I, § 8, cl. 4. The Supreme Court has never been squarely confronted 

with the question whether this power allows bankruptcy legislation for state governments. Certainly we can say, though, that the members of the Founding generation 

who drafted and voted to adopt this language did not contemplate that Congress 

would be legislating with regard to state governments. See Emily D. Johnson & 

Ernest A. Young, The Constitutional Law of State Debt, 7 Duke J. Const. L. & Pub. 

Pol’y 117, 155–56 (2012); Thomas Moers Mayer, State Sovereignty, State 

Bankruptcy, and a Reconsideration of Chapter 9, 85 Am. Bankr. L.J. 363, 367 

(2011). But even if the Bankruptcy Clause could not support such legislation, 

Congress arguably would find sufficient power under the Interstate Commerce and 

Necessary and Proper Clauses of Article I of the Constitution. But cf. Railway Labor 

Executives’ Ass’n v. Gibbons, 455 U.S. 457 (1982) (holding that Congress cannot do 

an end run around the uniformity requirement of the Bankruptcy Clause by legislating under the Commerce Clause). 

A second question is whether state bankruptcy legislation would violate the Tenth 

Amendment and related principles protecting state sovereignty. In the 1930s, the 

Supreme Court held that a 1934 Federal bankruptcy law for municipalities that allowed bankruptcy courts to impair the control of state governments over the fiscal 

affairs of their municipal subdivisions was not constitutional, see Ashton v. Cameron 

36 

1Federal bankruptcy for states without state consent might also be unconstitutional under the 

Eleventh Amendment and principles of state sovereign immunity. The Supreme Court has not 

directly answered this question, and its case law has given inconsistent signals. Compare 

Seminole Tribe v. Florida, 517 U.S. 44 (1996) (holding that Congress may not abrogate state 

sovereign immunity under Article I powers) and Central Virginia Community College v. Katz, 

546 U.S. 356 (2006) (holding that state sovereign immunity did not bar a bankruptcy court from 

voiding a preferential transfer from a private debtor to a state instrumentality). See generally 

Johnson & Young, supra, at 159–60; Mayer, supra, at 368. 

County Water Improvement Dist. No. 1, 298 U.S. 513, 528–29 (1936); id. at 539 

(Cardozo, J., dissenting), while the 1937 amendment that both required state consent and sufficiently protected state sovereignty was constitutional, see United 

States v. Bekins, 304 U.S. 27, 49–51 (1938). 

These two decisions are widely understood to have suggested that, to pass constitutional muster, any Federal bankruptcy regime that would apply to states would 

need to meet two requirements: states would need to consent (the process would 

need to be entirely voluntary), and the statute would need to prevent Federal bankruptcy courts from undermining state autonomy and sovereignty over taxing, spending, and other core sovereign matters. See, e.g., Michael E. McConnell, Extending 

Bankruptcy Law to States, in WHEN STATES GO BROKE: THE ORIGINS, CONTEXT, AND

SOLUTIONS FOR THE AMERICAN STATES IN FISCAL CRISIS 229, 230 (Peter ContiBrown & David A. Skeel, Jr., eds., Cambridge Univ. Press 2012); Mayer, supra, at 

374–75.1

Ashton and Bekins thus suggest that a mandatory oversight authority for states— 

akin to that found in PROMESA—could be subject to fatal constitutional objections. 

See David A. Skeel, Jr., States of Bankruptcy, 79 U. Chi. L. Rev. 677, 731 (2012). 

But even a purely voluntary bankruptcy process that attempted to respect state sovereignty could run into constitutional problems under the Tenth Amendment and 

principles of state sovereignty articulated in Ashton and Bekins. First, ‘‘viewed realistically, state bankruptcy would cut deeply into the inherently sovereign powers of 

the statute over taxation and expenditure,’’ transferring at least some control over 

those matters to a bankruptcy court. See McConnell, supra, at 233–34. In other 

words, it would be hard to design a process that in fact avoided all interference with 

a state’s core fiscal functions. 

Second, more recent Supreme Court case law raises questions about whether state 

consent could cure Tenth Amendment concerns about Federal impairments of state 

sovereignty via a bankruptcy regime. The ‘‘anti-commandeering’’ case law bars 

Congress from ‘‘require[ing] the states to govern according to Congress’ instructions,’’ New York v. United States, 505 U.S. 144, 162 (1992), even if the state 

consents, see id. at 180–82. Federal legislation that commands state legislatures to 

regulate according to Federal instructions disrupts the accountability of local officials to their local electorates and hence undermines the constitutional plan. See id. 

at 168–69. The Supreme Court has also reiterated that constitutional limits on 

Federal action arising from federalism concerns and the Tenth Amendment protect 

structural interests and individual liberty, not just state sovereignty, see, e.g., id. 

at 181–82; Bond v. United States, 131 S. Ct. 2355, 2364 (2011), casting further 

doubt on whether state consent could cure an otherwise unwarranted invasion of 

state sovereignty. See McConnell, supra, at 234–35. If state consent is not effective, 

it is possible that even purely voluntary state bankruptcy would be unconstitutional, 

to the extent that it impaired the sovereignty and autonomy of state governments. 

A third and final question is whether the Constitution would prohibit the impairment of state government contracts—for example, with bondholders—through a 

Federal debt adjustment process overseen by a bankruptcy court. The Contracts 

Clause provides that ‘‘No State shall . . . pass any . . . law impairing the obligation 

of contracts.’’ U.S. Const., art. I, § 10, cl. 1. It might be said that no Contracts 

Clause problem would be posed by a congressional statute authorizing state bankruptcy, see Steven L. Schwarcz, A Minimalist Approach to State ‘‘Bankruptcy,’’ 59 

U.C.L.A. L. Rev. 322, 337 (2011), because the Federal Government is not covered 

by the Contracts Clause, which expressly applies to ‘‘State[s]’’ only, see Hanover 

Nat’l Bank v. Moyses, 186 U.S. 181, 188 (1902). But if Tenth Amendment concerns, 

discussed above, require that the state consent to the Federal bankruptcy process 

and to any court orders stemming from it, then it would not only be Congress but 

arguably the state also that would be choosing and authorizing actions that impaired state contracts. Thus the Contracts Clause could come into play. 

The Supreme Court’s 1930s cases about municipal bankruptcy and state 

sovereignty do not answer all questions about the Contracts Clause as applied to 

a hypothetical statute authorizing state bankruptcy. The Ashton decision, about the 

1934 law, suggested that states would violate the Contracts Clause by consenting 

37 

to a congressional bankruptcy scheme that impaired state contractual obligations. 

See 298 U.S. at 531. But Bekins, the subsequent decision about a very similar statute, the 1937 amendment, did not discuss any Contracts Clause issues, perhaps suggesting that the Supreme Court had sub silentio reversed itself on the issue. 

Under modern Contracts Clause jurisprudence, ‘‘impairment of a state’s own 

contracts would face more stringent examination . . . than would laws regulating 

contractual relationships between private parties.’’ Allied Structural Steel Co. v. 

Spannaus, 438 U.S. 234, 244 n.15 (1978). State laws regulating existing contractual 

relations must have ‘‘a legitimate public purpose. A state could not adopt as its policy the repudiation of debts. . . .’’ United States Trust Co. of New York v. New 

Jersey, 431 U.S. 1, 22 (1977) (quotation marks omitted). The courts must guard 

against ‘‘the state’s self-interest’’ leading it to abuse contracting partners. Id. at 26. 

Impairments of contract rights must be ‘‘reasonable and necessary to serve an important public purpose.’’ Id. at 25. The greater and more permanent the impairment 

to contract rights, the less likely it is to be constitutional. See, e.g., Home Building 

& Loan Ass’n v. Blaisdell, 290 U.S. 398, 425, 430, 433, 441 (1934). Similarly, if contract rights were more theoretical than real to begin with, a subsequent impairment 

by the state is less likely to be proscribed by the Constitution. See Faitoute Iron & 

Steel Co. v. city of Asbury Park, 316 U.S. 502, 510–13 (1942) (holding that bondholders’ ability to sue defaulting municipalities under preexisting law was an empty 

‘‘right to pursue a sterile litigation’’ and the challenged state law allowing municipal 

debt restructuring did not violate the Contracts Clause). 

It cannot be predicted with certainty how voluntary state bankruptcy allowed by 

a congressional statute would be treated under the Contracts Clause by the 

Supreme Court applying the doctrines described above. A lot could depend on details—for instance, did the bankruptcy process impose significant ‘‘haircuts’’ on the 

principal owed to bondholders, or did it merely extend the payment period by a reasonably short amount of time. The former would be more likely unconstitutional 

than the latter. 

The Supreme Court’s case law under the Fifth Amendment also protects against 

impairment of contract rights. ‘‘The Supreme Court has made clear that retroactive 

legislation that affects valid property interests raises problems under both’’ the 

Takings Clause and the Due Process Clause of the Fifth Amendment. Johnson & 

Young, supra, at 144 (discussing Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)). 

As with the Contracts Clause, it is uncertain how a hypothetical congressional statute for state bankruptcy would fare under the Fifth Amendment, and the outcome 

of judicial review would depend significantly on the particular details of the legislation and any challenged court orders issued pursuant to it. 

In sum, a congressional statute allowing state government bankruptcy would 

raise a number of serious constitutional issues, implicating unsettled areas of 

Supreme Court doctrine. In my judgment, there is a real risk that either the legislation itself or particular applications of it by bankruptcy courts would be found unconstitutional. By contrast, as my April 13 testimony indicated, I believe that 

PROMESA rests on a firm constitutional foundation. 

Sincerely, 

ANDREW KENT, PROFESSOR OF LAW

Fordham University School of Law. 

The CHAIRMAN. Thank you. 

Next, Mr. Kirpalani. 

STATEMENT OF SUSHEEL KIRPALANI, PARTNER, QUINN 

EMANUEL URQUAHART & SULLIVAN, NEW YORK, NEW YORK 

Mr. KIRPALANI. Thank you, Chairman Bishop, Ranking Member 

Grijalva, and members of the committee, as well as your dedicated 

staff, who have worked many nights and weekends to get us to this 

place. Thank you for having me participate in this important issue 

for our country. It is truly an honor to be here. 

My name is Susheel Kirpalani. I am a partner at Quinn 

Emanuel in New York, and I am a creditors’ rights lawyer. I am 

here to testify about fair restructuring laws and principles and 

38 

whether the bill for Puerto Rico has the hallmarks of fairness and 

upholding the rule of law consistent with U.S. precedent. 

I have been practicing creditors’ advocacy for over 20 years. I 

represented creditors in the two largest municipal bankruptcy 

cases in the United States—Jefferson County, Alabama, and 

Detroit, Michigan. I have also represented the largest statutory 

creditors committees in Chapter 11 cases in the Lehman and Enron 

bankruptcies. I also served as a court-appointed mediator trying to 

solve myriad disputes among stakeholders in a multi-billion-dollar 

case. 

Here, I represent COFINA creditors. COFINA is the largest bond 

issuer in Puerto Rico. When you think about Puerto Rico and you 

hear numbers like $70 billion of borrowed-money debt and 

$40 billion of pension debt, out of the $70 billion, COFINA is $17 

billion. If you take out the utilities, you are left with $40 billion 

of borrowed-money debt apart from the utilities, the electric power, 

and the water system. So, $17 billion out of $40 billion is COFINA. 

It is the largest issuer of bonds in Puerto Rico, and they are secured creditors protected by property rights under both the U.S. 

Constitution and the Puerto Rico Constitution. 

My clients include individuals who are retired or semi-retired as 

well as asset managers that invested in these safest, most secure 

bonds. This is how we are different from other bondholders: we are 

backed by the sales taxes of Puerto Rico. So, although creditors like 

the ones I represent certainly want to see their debts repaid, our 

interests are aligned with the people of Puerto Rico, because if they 

cannot afford to go out every day and buy things they need for 

their families, we can never get repaid. And if they leave home and 

move to the mainland states, we can never get repaid. So, our interests are truly aligned. 

There are universal principles of any fair restructuring law: stay 

litigation, uphold creditor expectations, uphold the rule of law, and 

protect property rights as determined by the local law. If we want 

to stabilize Puerto Rico under U.S. principles, you need to respect 

U.S. traditions. This is not Greece. We have our own rules based 

on 100 years of Supreme Court jurisprudence. 

My wife loves a show called ‘‘MythBusters.’’ I don’t know if anybody has seen that, but there are two myths that I would like to 

dispel today. The first, which I have seen on television—I am sure 

some of you have seen that or your families have seen that—that 

this is a bailout. This is not a bailout. This involves no U.S. 

taxpayer money, this bill. The second one is that this is ‘‘Super 

Chapter 9.’’ I have a lot of experience with Chapter 9. This is no 

Chapter 9. 

The problem with Chapter 9 is the law allows the local 

government to retain absolute control over its finances, its revenues, and its decisionmaking on which debts to pay and which 

debts not to pay. So, if you think about it, a local government is 

usually going to try to respect its electorate and the local interests, 

which is harmful to the municipal bond market. The difference 

here, of course, is the control board, and that difference is quite significant and makes it absolutely immune from being confused with 

Chapter 9. 

39 

1See, e.g., Janney Fixed Income Strategy, June 29, 2010, available at http://www.janney.com/ 

file%20library/muni%20sector%20scorecard/cofina%206-29-10.pdf (‘‘COFINA is the strongest 

Puerto Rico issuer from a credit standpoint. The sales tax revenue bonds have a secure foundation, based on a broad based sales tax and a strong legal framework’’). 2Puerto Rico Closes Government Offices, Schools Amid Fiscal Crisis, USA Today, May 1, 

2006, available at http://usatoday30.usatoday.com/news/nation/2006-05-01-puertorico_x.htm. 3Standard & Poor’s, Puerto Rico Sales Tax Fin. Corp.; Sales Tax, May 18, 2009, at 2–3. 

This bill is the right framework for debt-restructuring laws 

under U.S. traditions and, critically, it will actually encourage voluntary agreements by creditors. We have gone on record publicly 

supporting Chairman Bishop’s efforts, as well as the efforts of 

House leadership. Other creditors have not. 

We actually have no problems with other creditors, whether they 

are general obligations creditors or the lowest tier of unsecured 

bondholders of the Commonwealth, but some of those creditors 

have regrettably engaged in negative advertising just to obstruct 

you from trying to do this very difficult job. 

We think this is the right bill, and we appreciate the opportunity 

to answer any questions that you might have. 

Thank you. 

[The prepared statement of Susheel Kirpalani follows:] 

PREPARED STATEMENT OF SUSHEEL KIRPALANI, PARTNER, QUINN EMANUEL

URQUAHART & SULLIVAN, NEW YORK, NEW YORK

Thank you for inviting me to testify on the bill proposed by Chairman Bishop for 

bespoke legislation needed to address Puerto Rico’s financial crisis. I am honored 

to be here. 

BACKGROUND

My name is Susheel Kirpalani. I am the Chairperson of the Bankruptcy and 

Restructuring Group at the law firm Quinn Emanuel Urquhart & Sullivan, LLP. 

For more than 20 years, I have practiced exclusively in the area of creditors’ rights. 

Beginning in the late 1990s, I have primarily represented creditors in debt 

restructurings driven by unanticipated financial collapse, typically as a result of 

questionable accounting practices, lack of transparency in financial reporting, and 

over-leveraged balance sheets. These restructurings include: Enron Corporation; 

Refco Inc.; and Lehman Brothers. In each matter, I represented the statutory committee of unsecured creditors—a fiduciary body appointed by the bankruptcy division of the U.S. Department of Justice to protect creditor rights and priorities. In 

2012, I was appointed to serve as the examiner and mediator for stakeholders of 

Dynegy Holdings, the Houston-based energy company that once tried to save Enron, 

and which filed for Chapter 11 with a ‘‘pre-arranged plan’’ that subverted creditor 

priorities. 

I also have relevant experience from the two largest Chapter 9 bankruptcy cases 

in history—Jefferson County, Alabama and Detroit, Michigan. In Jefferson County, 

I spent over 3 years working with the largest insurer of sewer system bonds to successfully restructure and reduce the system’s overblown debt load to match the ability of the citizens of Jefferson County to repay ballooning debts incurred by corrupt 

public officials. 

With respect to Puerto Rico’s financial crisis, for the past 10 months, I have been 

representing a coalition of creditors made up of retirees and individual investors as 

well as asset managers GoldenTree Asset Management LP, Merced Capital LP, 

Tilden Park Capital Management, Whitebox Advisors LLC, and others. These creditors invested primarily, if not exclusively, in the safest and most secure senior bond 

investment Puerto Rico offered known as COFINA.1 COFINA is a Spanish-language 

acronym for the Puerto Rico Sales Tax Financing Corporation created at the outset 

of Puerto Rico’s fiscal crisis in 2006, in the wake of the Commonwealth government’s shutdown for 2 weeks, which left 500,000 school children without a place to 

study and over 100,000 public employees without pay.2 COFINA was created to insulate creditors from the lack of transparency and political and credit risk relating 

to the Commonwealth’s general fund.3 Similar to other public and private bonds, 

COFINA is a form of securitization, in which a specific revenue stream is transferred or pledged to support bond issues by a separate legal entity. Securitizations 

40 

4Puerto Rico Const., Art. VI, § 8. 

5For a quick thumbnail on the reasons for Puerto Rico’s fiscal crisis, see Michelle Kaske and 

Martin Z. Braun, Puerto Rico’s Slide, April 6, 2016, available at http://www.bloombergview.com/ 

quicktake/puerto-ricos-slide. 

significantly reduce costs of borrowing money by separating a revenue stream from 

an entity’s credit profile. Today, COFINA is the largest debt issuer in Puerto Rico, 

with approximately $17 billion of secured bonds outstanding, including more than 

$7 billion of senior bonds and more than $9 billion of subordinated bonds. 

COFINA bonds—held by many U.S. retail investors and pension recipients—are 

supported by a dedicated sales and use tax protected under both the U.S. and 

Puerto Rico constitutions. Given that the revenues for COFINA are dependent on 

sales activity on island, COFINA bondholders want to help craft a solution to Puerto 

Rico’s fiscal crisis that helps drive on-island commerce, empowers Puerto Rico’s 

economy, and stops the population flight to the states. 

THE NEED FOR FEDERAL LEGISLATION

Puerto Rico simply cannot pay all of its debts. The crippling debt service Puerto 

Rico heaped upon itself is suffocating the economy now a decade into recession. 

Young Puerto Ricans have figured out how to escape the debt burden, and are now 

migrating to the mainland United States in large numbers, accelerating the shrinkage of Puerto Rico’s economy, and further concentrating the debt burden on the citizens and businesses that remain on the island. This is now forcing Puerto Rico to 

take ad hoc and extraordinary actions that abuse creditors’ rights. Puerto Rico recently enacted a debt moratorium law that grants its governor absolute power to 

choose to pay or not pay any public debts. One of the three challenges made to the 

constitutionality of Puerto Rico’s ability to enact restructuring legislation is currently before the U.S. Supreme Court. It can be anticipated that there will also be 

constitutional challenges to the debt moratorium law. I previously believed that the 

need for Congress to intervene was already evident, but it has become urgent if 

there is to be any hope of an orderly process that respects property rights and the 

rule of law, stems out-migration, restores Puerto Rico to health, and avoids the risk 

of a taxpayer-funded bailout down the road. 

FAIR DEBT ADJUSTMENT LAWS

Title III of PROMESA is entitled ‘‘Adjustment of Debts.’’ This title designs a set 

of rules that would apply to any impairment of rights of a creditor of Puerto Rico 

or any of its instrumentalities. Although not a part of Title 11 of the United States 

Code (the ‘‘Bankruptcy Code’’), Title III of PROMESA borrows some battle-tested 

rules contained in the Bankruptcy Code, which were shaped by over 100 years of 

U.S. jurisprudence on the constitutional limits of Federal power over private rights. 

As such, these rules form the core of American creditor expectations in the event 

a borrower becomes unable to repay its debts. 

The first step of understanding any restructuring regime is to ask which creditor 

claims will potentially be subject to adjustment. In recognition of the reality that 

most of the near-term strain on Puerto Rico is at the general fund level, Puerto 

Rico’s own recently passed debt moratorium law applies to all issuers of public debt, 

including the Commonwealth itself. Moreover, Puerto Rico’s general obligations or 

‘‘GO’’ bondholders assert a superior right to be paid from resources available to the 

treasurer of Puerto Rico and maintained in the general fund of Puerto Rico before 

other public debts of the Commonwealth can be paid.4 The extent of this priority 

has never been examined by the Supreme Court of Puerto Rico and resolution of 

that issue by agreement or adjudication will figure prominently in any adjustment 

of debts of the Commonwealth. Due to the competing claims of creditors from the 

same ultimate source of repayment—Puerto Rican taxpayers—any restructuring of 

Puerto Rico is a zero-sum game because the population’s resources are limited and 

will be further limited if out-migration continues or economic growth does not resume.5 In my experience representing creditors’ committees in the largest Chapter 

11 cases in history, and having served as a court-appointed mediator, I believe the 

only way to build a global consensual compromise free from challenge is for every 

stakeholder group to roll up their sleeves and participate in good-faith negotiations 

and, failing a voluntary agreement among all groups, to resolve the priority of competing creditor rights in a judicial proceeding. Artificially excluding significant 

creditor groups from a restructuring regime will lead to protracted litigation, constitutional challenges, and delays to finding a solution, which would only serve to 

destroy economic value on the whole, and exacerbate creditor losses. 

41 

6 In the aftermath of Dubai’s real estate crisis, in 2009, I was retained by the quasi-sovereign 

entity, Dubai World, to participate in the drafting of Dubai’s first-ever restructuring law. 

Hopeful to restore confidence and credibility, it was the consensus among all involved that 

United States laws in this area achieved the best outcomes for creditors and, as a result, reestablishment of creditor confidence and market re-entry. Several features of U.S. law were borrowed in the enactment of Decree 57 of Dubai, which paved the way to achieve billions of dollars 

of relief through voluntary agreements with the backstop of a judicial system, only if needed. 

Fundamental to U.S. creditors’ rights law is the provision of a ‘‘breathing spell’’ 

for the debtor that cannot pay—in the form of an automatic stay of creditor enforcement actions—followed by a ‘‘discharge’’ or ‘‘fresh start’’ while respecting creditor 

priorities and ensuring property rights are not taken for the greater good without 

just compensation. In reality, this stay of creditor rights actually may enhance creditor recoveries by (1) removing the ability to race to the courthouse and obtain 

preferential treatment, which would otherwise favor well-heeled sophisticated institutions to the detriment of individuals and other creditors at large, and (2) allowing 

the beleaguered borrower to stabilize and rehabilitate its financial condition and future prospects without the resource drain and distraction of a rash of lawsuits. And 

if the debtor abuses the stay by, for example, failing to negotiate in good faith, creditors can seek to have the stay lifted. 

The goals of any fair and effective restructuring regime should be to protect creditor expectations to the greatest extent practicable and to ensure any necessary taking of private property for public purposes is in exchange for just compensation. The 

means of achieving these goals are as follows: (1) restructure balance sheets and set 

budgets on a debtor-by-debtor basis; (2) establish classes of creditors in a fair and 

common-sense manner—in other words, insist that only ‘‘substantially similar’’ 

claims with similar legal and contractual rights against the same borrower are 

grouped together, fully recognizing the secured and priority status of some creditors; 

(3) solicit the votes of creditors in a fair way, consistent with due process of law 

including by providing adequate information to make a decision about any proposed 

adjustment; (4) treat each class of creditors according to its members’ legal and contractual priorities, as determined by the local law governing the borrower and its 

relationship with creditors; and (5) ensure that a restructuring is in the ‘‘best 

interests of creditors’’ by mandating that creditors receive at least as much as they 

would have received in the absence of Federal intervention. Although the 

Bankruptcy Code has not always accomplished these strict goals, particularly in the 

context of municipal bankruptcy where the locality retains plenary and exclusive 

control over its finances and proposing a debt adjustment plan, the provisions of the 

Bankruptcy Code contain state-of-the-art rules that are the envy of much of the 

world’s less-developed financial markets and legal systems.6

COLLECTIVE ACTION AND THE ABILITY TO BIND HOLDOUTS

It is a given that if unanimous consent by all stakeholders were required to confirm a debt adjustment plan, it would be impossible to ever achieve a voluntary 

compromise. For example, different people have different risk tolerance, a greater 

or lesser penchant for litigation, and some may prefer an expedient solution that 

minimizes cost but delivers recovery in the shortest amount of time. Accordingly, 

even the most ‘‘voluntary’’ of collective action rules recognize the need to bind holdouts who may otherwise seek to extract additional value for themselves even if it 

means risking value for all. So, it has been a constant feature of restructuring laws 

in the United States to permit the restructuring of an entire class of debt as long 

as a majority in number and two-thirds in dollar amount support the deal. This is 

not ‘‘cramdown,’’ and is simply the American style of ‘‘collective action’’ within each 

specific class. PROMESA has this feature. 

But the question occasionally arises when an entire class of creditors seeks to hold 

out for more than its members are legally entitled, and those creditors’ unwillingness to accept their fair share prevents all other classes of creditors from moving 

forward. This rare scenario is when the ‘‘cramdown’’ rule found in section 1129(b) 

of the Bankruptcy Code must be invoked. I believe the ability to bind holdouts is 

a reasonable and necessary component of any effective restructuring authority. In 

my view, having the ability to bind holdouts if they engage in brinkmanship is the 

only way to get everyone to the table and have any hope of a voluntary agreement. 

It also promotes predictable outcomes, which is of paramount importance to creditors. Omitting this critical feature, which protects all other classes of creditors who 

do wish to voluntarily restructure their debts, would lead to unpredictable behavior 

and discourage consensual arrangements. It is tantamount, in other words, to handing a gun to junior creditors with which they can hold up senior creditors for value 

in excess of their legal rights or that which they could hope to achieve under current 

42 

7 Comments on the Discussion Draft of an Act Entitled ‘‘Puerto Rico Oversight, Management, 

and Economic Stability Act,’’ available at http://newnbc.wpengine.com/wp-content/uploads/2015/ 

07/2016-April-8-NBC-Statement-on-PROMESA.pdf (emphasis added). 8See Recent Municipal Bankruptcies Provide Greater Clarity on Outcomes for Investors, 

Moody’s Investor Services, Sector-In-Depth, Feb. 25, 2016 (‘‘Given the choice between cutting retiree liabilities (pensions and OPEBs) and [bond] debt, local governments may choose to impair 

debt more severely than pensions and OPEBs.’’). 9See Ashton v. Cameron County, 298 U.S. 513, 536 (1936) (‘‘If obligations of states or their 

political subdivisions may be subjected to the interference here attempted, they are no longer 

free to manage their own affairs; the will of Congress prevails over them . . . And really the 

sovereignty of the state, so often declared necessary to the Federal system, does not exist.) 

(citing McCulloch v. Maryland, 4 Wheat. 316, 430). 

law. Cramdown is a term of art for ensuring that creditor treatment complies with 

the ‘‘absolute priority’’ rule, a legal concept that has been a critical part of U.S. 

restructuring jurisprudence since at least the 1898 Bankruptcy Act. When used 

properly and in accordance with strict Congressional mandates, cramdown ensures 

the fairness of the restructuring process. 

The National Bankruptcy Conference, a non-partisan organization of 60 of the 

Nation’s leading bankruptcy scholars, recently had this to say about the ‘‘Discussion 

Draft’’ of PROMESA: 

The Conference believes that granting a Title III debtor the power to confirm a plan of adjustment over the rejection of the plan by an impaired 

class of creditors-including one comprising holders of bond debt-is critical 

to the success of a Title III case. Without cramdown, Title III would provide 

a dissenting class with absolute veto power over a plan of adjustment. The 

various protections afforded nonconsenting classes such as the prohibition 

against unfair discrimination as well as the incorporation of the absolute 

priority rule in sections 1129(b)(2)(A) and 1129(b)(2)(B), level the negotiation playing field, and should serve to encourage both sides to reach 

agreement, which is a stated goal of the House Committee on Natural 

Resources.7

THE PERILS OF CHAPTER 9 AND THE MYTH OF ‘‘SUPER CHAPTER 9’’ 

Select bond investors have lobbied hard against PROMESA, including through the 

placement of targeted advertisements in members’ districts, suggesting it is some 

form of ‘‘Super Chapter 9’’ because it incorporates provisions of the Bankruptcy 

Code. This is misleading and misguided. PROMESA is not an amendment to the 

Bankruptcy Code, and in fact implements significant changes from Chapter 9 that 

are specifically designed to ensure Federal oversight and the fair treatment of creditors. Nor could PROMESA’s territory-specific provisions ever be ‘‘contagious’’ to the 

states. The reason is the Tenth Amendment of the U.S. Constitution. The Tenth 

Amendment is a recognition of our dual sovereign form of government—that it is 

the various states that created the Federal Government. By contrast, under the 

Territories Clause of the U.S. Constitution, the Federal Government has plenary authority to enact needful rules and regulations respecting the unincorporated 

territories. 

Chapter 9 has led to failed creditor expectations because local, elected officials remain in control and can lawfully use the stay to prevent creditor enforcement while 

retaining discretion as to which debts to honor during the bankruptcy case. Moreover, the elected officials have exclusive authority to formulate a plan and could use 

that authority to favor local interests.8 By the time the plan is presented to creditors, bondholders may have no choice but to cry uncle because they have no ability 

to force repayment and no recourse to an impartial decisionmaking body. All they 

can do at that late stage is object to the plan, vote against it, and hope the bankruptcy judge forces the debtor to go back to the drawing board. The inherent unfairness in that process is the necessary byproduct of balancing state sovereignty with 

the desire for Federal legislation to restructure a municipality’s debts. The initial 

version of bankruptcy law designed by Congress for state municipalities in 1934 was 

held unconstitutional 2 years later as violating the Tenth Amendment.9 The ‘‘sweeping character of the holding of the Supreme Court’’ called for a far lighter touch— 

one that offers debt adjustment tools to a municipality upon election by the state 

but on the condition that the state retained full control over all its municipality’s 

political or governmental powers, and the Federal court was unable to interfere with 

43 

10See United States v. Bekins, 304 U.S. 27, 51 (1938) (‘‘The [revised] statute is carefully drawn 

so as not to impinge upon the sovereignty of the state. The state retains control of its fiscal 

affairs.’’). 11David Skeel, Fixing Puerto Rico’s Debt Mess, The Wall St. Journal, Jan. 5, 2016 (‘‘[T]he 

rule of law took a beating in the Detroit bankruptcy . . . Steven Rhodes, the Federal bankruptcy judge in the Detroit case, instead concluded that the requirement was met as long as 

the plan satisfied his conscience’’). 12 Id. 

a municipality’s property and revenues. The revised statute was upheld by the 

Supreme Court 10 and is the predecessor to modern-day Chapter 9. 

In stark contrast, PROMESA does not leave unfettered control over fiscal matters 

to the Governor and Legislative Assembly in Puerto Rico. Unconstrained by the 

Tenth Amendment because Puerto Rico is not a state, pursuant to the Territories 

Clause, PROMESA would install a non-political oversight board—which Congress 

will play a significant role in selecting—to ensure that local interests are not favored over long-distance creditors, and that decisions on issues of greatest concern 

to creditors are overseen and approved by a dispassionate, disinterested board. 

Significantly, only the oversight board would be able to propose a plan of adjustment for creditor vote and judicial approval. This is a profound difference with 

Chapter 9, in which it is the debtor that determines when to file. 

Moreover, while Chapter 9 led to failed creditor expectations in the case of 

Detroit, commentators have correctly observed that the fault was not with the rules 

of the Bankruptcy Code as much as with the bankruptcy judge who generously interpreted its flexibility.11 If applied correctly, the Bankruptcy Code ‘‘removes the 

risk that a debtor will pick and choose which obligations to pay, and it ensures that 

creditors’ priorities will be honored.’’ 12 The practicalities of Chapter 9—including 

the sovereignty point just discussed—make it inappropriate for Puerto Rico, particularly given the heavy interest of distant, state-side investors in Puerto Rican debt. 

It is unclear whether PROMESA utilizes the Federal Bankruptcy Court system. 

There is a reference in section 306 of the bill to 28 U.S.C. § 157, which permits the 

District Courts to refer matters to bankruptcy judges, and in section 309 to 28 

U.S.C. § 158(a), which governs appeals from Bankruptcy Courts. Bankruptcy judges 

serve for 14-year terms and derive their power from Article I of the Constitution. 

As such, they do not have life tenure and cannot without consent of the parties exercise the judicial power of the United States, except for certain ‘‘core bankruptcy’’ 

areas. Congress may want to consider whether an event as significant as a territorial restructuring, pursuant to the Territories Clause, should be heard by the 

Federal District Courts which exercise the judicial power of the United States pursuant to Article III of the Constitution. There may be issues that arise in a territorial restructuring that some creditors may challenge the Bankruptcy Court’s 

power to hear and determine. Requiring that cases under Title III of PROMESA be 

heard in the District Court would further distinguish the regime from Chapter 9. 

Unlike Chapter 9, the oversight board has authority to move the venue to a 

district outside the affected region if necessary. 

PROVISIONS TO FURTHER PROTECT CREDITOR EXPECTATIONS AND RESPECT

TERRITORIAL LAW

The rules for classifying only ‘‘substantially similar’’ claims together and ensuring 

a plan treats creditors ‘‘fairly and equitably’’ and does not ‘‘discriminate unfairly’’ 

are bedrock principles of American law. Given the potential for creative interpretation of those phrases, however, Congress should consider giving stricter definitional 

certainty to protect creditor expectations that the laws and agreements governing 

their claims will be respected and not tossed aside based on one judge’s views of 

what is fair at the time. Imposing stricter definitional certainty would, with respect 

to Puerto Rico, make it impossible to classify GO bonds with inferior unsecured 

claims, such as pension claims or bonds that are subject to clawback, or to lump 

COFINA senior bonds together with contractually subordinate bonds. By setting the 

classification rules properly, only creditors with the same rights against the same 

issuer can be counted together and receive the same treatment. Further, especially 

given the lesson of Detroit, judicial restraint can be imposed by further defining the 

concepts of ‘‘fair and equitable’’ and whether discrimination is ‘‘unfair’’ based on 

creditor priorities found in the law or by agreement, not in the personal views of 

the jurist. 

Another ‘‘must have’’ feature of any Federal law that prevents or otherwise impairs creditor rights is to ensure that—when all is said and done—every creditor 

fares no worse than they would have under current law, had the Federal case never 

44 

13See Faitoute Iron & Steel Co. v. city of Asbury Park, 316 U.S. 502, 515–16 (1942). 14 Butner v. United States, 440 U.S. 48 (1979) (‘‘Uniform treatment of property interests by 

both state and Federal courts within a state serves to reduce uncertainty, to discourage forum 

shopping, and to prevent a party from receiving ‘a windfall merely by reason of the happenstance of bankruptcy.’ ’’) (citation omitted). 15Manuel Del Valle, Puerto Rico Before The United States Supreme Court, 19 Rev. Juridica 

U. Inter. P.R. 13 (1984) (‘‘In the case of Puerto Rico, its economic, social and cultural development has been intimately associated with its legal development and ability to exercise insular 

sovereignty over matters of local concern.’’) (collecting SCOTUS cases that reversed the First 

Circuit Court of Appeals in deference to the Supreme Court of Puerto Rico on issues of Puerto 

Rican law). 16See Collective Action Clauses No Panacea for Sovereign Debt Restructurings, available at 

https: // www.pimco.com/ insights / viewpoints/ viewpoints/ collective-action-clauses-no-panacea-forsovereign-debt-restructurings (‘‘German Chancellor Angela Merkel and French President Nicolas 

Sarkozy, meeting in the French seaside resort of Deauville amid the escalating eurozone debt 

crisis in 2010, agreed to make them de rigeuer for sovereign bonds European countries issue 

under U.K. law from 2013.’’). 

been commenced or were it to be dismissed. This is known as the ‘‘best interests 

of creditors’’ test and is one of the requirements to confirm a plan of adjustment 

under PROMESA. The ‘‘best interests’’ test also comes out of bankruptcy case law, 

and specifically ensures that the Federal Government will not be liable in eminent 

domain for ‘‘taking’’ property without just compensation because the creditor’s recovery must be, by definition, at least as much as the creditor would have received had 

Federal legislation never intervened.13 Greater definitional certainty could be included in PROMESA, again to make it more protective of individual creditors and 

to prevent courts from merely rubber stamping a proposed plan just because it is 

supported by the requisite majorities. 

Finally, Federal courts overseeing bankruptcy cases are routinely called upon to 

address issues of state or territorial law, because it is those laws, not Federal, that 

defines property interests.14 The uncertain determination of key issues affecting 

creditor recoveries is often a cause for concern among participants in a bankruptcy 

case. Any doubt over whether the Federal judge retains discretion to attempt to divine issues of first impression of Puerto Rican law bearing on constitutional or property interests of creditors should be removed under PROMESA. The law should 

require direct certification of such issues to the territorial high court, namely, the 

Supreme Court of Puerto Rico. This feature would not only promote and protect 

creditor expectations, which were set by local law, but would reduce the risk of 

undue Federal interference with insular territorial law and is consistent with U.S. 

Supreme Court jurisprudence.15 The bill in its current form does not have any type 

of Federal court abstention, not even the type contained in 28 U.S.C. § 1334, which 

applies to bankruptcy cases. The original ‘‘discussion draft’’ contained an appropriate provision to require expedited determination by the territorial high court of 

issues of first impression under the territory’s laws. 

COLLECTIVE ACTION CLAUSES

I have been analyzing whether ‘‘Collective Action Clauses’’ or ‘‘CACs’’ could work 

for Puerto Rico. To be clear, CACs would retroactively change individual creditor 

rights, without judicial supervision and accepted notions of due process of law, so 

this raises many of the same constitutional concerns as bankruptcy without any 

precedent on which to rely. Special care must be taken to ensure any proposed 

modification is consistent with contractual and property rights among the competing 

creditors. While these types of provisions have been introduced in the Euro-Zone, 

they have never been a part of the fabric of American creditors’ rights and they 

were not developed from the ‘‘takings’’ jurisprudence of the United States.16 Title 

VI of the bill contains a mechanism for retroactively changing contract rights of 

bondholders through votes by two-thirds in amount of bonds in a given ‘‘pool.’’ The 

bill thoughtfully includes careful classification rules and also ensures any modification meets the ‘‘best interests of creditors’’ test, both of which are critical. To be 

clear, these features are the minimum floor of creditors’ rights, and additional features to protect against unfair results or improper motivations of creditors in overlapping pools may be appropriate. The CAC concept in Title VI, moreover, is only 

applicable to bond debt, which raises questions about overall fairness if only bonds 

will be subjected to compromise, and not other liabilities of Puerto Rico. 

The CHAIRMAN. Thank you. 

Mr. Johnson. 

45 

STATEMENT OF SIMON JOHNSON, PROFESSOR OF GLOBAL 

ECONOMICS AND MANAGEMENT, MIT SLOAN SCHOOL OF 

MANAGEMENT, CAMBRIDGE, MASSACHUSETTS 

Dr. JOHNSON. Thank you, Mr. Chairman. 

I would like to make three points. The first is on the nature of 

the debt crisis and the potentially severe consequences of not dealing with it. 

I was previously Chief Economist at the International Monetary 

Fund. I have worked on crises around the world for 30 years. There 

are, sadly, many similarities between the situation in Puerto Rico 

and some of the difficult situations we have experienced elsewhere 

in the world. But one feature that is absolutely unique is that this 

is 3.5 million American citizens and they can leave Puerto Rico and 

move to the 50 states, and they will leave Puerto Rico and move 

to the 50 states in increasing numbers unless and until the situation is dealt with. 

So your tax base, as was just mentioned, is going to walk out the 

door. And if there is an excessive imposition of austerity, well, 

there is a much better deal waiting for these American citizens in 

Florida, or Texas, or Pennsylvania, including access to the minimum-wage laws, including access to the earned-income tax credit, 

including access to fully funded or better-funded Medicare and 

Medicaid. 

The second point I would like to make is with regard to the oversight board. I think that part of the bill is very good, Mr. Bishop. 

I think, to Mr. Pierluisi’s question, which is directly at the point, 

you have worked very hard and, I think, found a balance between 

effective oversight and maintaining sufficient sovereignty for the 

elected officials, the Governor, and the legislature of Puerto Rico. 

I do have one reservation or concern, if I may express it. I know 

that there are a lot of compromises already that have been made, 

but you did make reference, Mr. Chairman, to U.S. precedents for 

this kind of situation. I thought that in the case of the District of 

Columbia, the control board members had been selected by the 

President of the United States in consultation with the leadership 

of the relevant committees. The structure that you have is a different one, and I worry about the potential for difficulties in appointment, for deadlock in decisionmaking, and, of course, for some 

difficult moments with regard to the venue of jurisdiction and, as 

Mr. Weiss said, some key moments in the restructuring process. 

My third point is about the restructuring authority. And here, I 

am afraid—well, I am not afraid—I completely agree with Mr. 

Weiss and the Treasury Department, I think that this is not yet 

a sufficiently streamlined process. I think, as I think most of the 

panel would agree, that you want a process which encourages voluntary renegotiation. It also prevents holdouts, a significant number of creditors refusing to negotiate in good faith. 

And those safeguards for the majority of the creditors as well as 

for the people of Puerto Rico, those safeguards have to be present 

in the process it leads up to, a court-run adjudication, when the 

matter is before the courts themselves, and when the restructuring 

has ended, when you exit from what we are not calling bankruptcy, 

but what is obviously inspired by some of the better parts of U.S. 

bankruptcy process. 

46 

1 Also a member of the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory 

Committee, the Office of Financial Research’s Financial Research Advisory Committee, and the 

independent Systemic Risk Council (created by Sheila Bair). All the views expressed here are 

mine alone. An electronic version of this document can be found at http://BaselineScenario.com. 

For important disclosures, see http://baselinescenario.com/about/. 

I understand very well that the House is also considering and 

thinking about financial distress and potential bankruptcy for systemically important financial institutions, a completely different 

matter. But the parallel, Mr. Chairman, is this: that I think the 

Republican caucus has rightly considered the importance of making 

sure that everyone, every individual, every company, and every 

legal entity in the United States can go bankrupt or can go through 

the equivalent of a bankruptcy process with appropriate safeguards, with protections for creditors, and recognizing the traditions of the United States, but also not allowing deadlock, impasse, 

and debt restructuring to get stuck. 

So, I really encourage you to work further on Title III and the 

subsequent titles to move that restructuring authority in that 

direction. I am confident, Mr. Bishop, that you can and will 

ultimately get to a good bill. 

Thank you. 

[The prepared statement of Dr. Johnson follows:] 

PREPARED STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF

ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF MANAGEMENT; SENIOR FELLOW, 

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS; AND CO-FOUNDER OF HTTP:// 

BASELINESCENARIO.COM 1

A. OVERVIEW

1. Puerto Rico is in the midst of a serious crisis. The economy is in decline, public health is threatened, and residents are moving to the 50 states. Unless 

there is a significant improvement in living conditions and job prospects, outmigration will likely pick up speed in the months and years ahead. 

2. Making promised debt payments has—as a result of much broader stress on 

public finances—become difficult and, by some measures, Puerto Rico is 

already in default. 

3. As a territory of the United States, Puerto Rico does not have access to the 

standard debt restructuring mechanisms available to the 50 states. 

4. Compared with the situation for states and municipal borrowers within 

states, the U.S. Congress has much broader ultimate authority over all aspects of public finance in Puerto Rico. Some powers can be, have been, and 

should be delegated to Puerto Rico. But Congress must now decide on what 

broad strategy is adopted for dealing with the crisis in Puerto Rico. 

5. Insisting on full repayment of all debts would be counterproductive. Most 

residents of Puerto Rico are also U.S. citizens. By moving to the 50 states, 

these people automatically can participate fully in more vibrant economies, 

while also changing their relationship to public finances—specifically, 

becoming eligible for the earned income tax credit. 

6. It is no surprise that current net out-migration is around 60,000 per year 

and the population has declined by nearly 500,000 over 15 years. 

7. Attempting to repay all of Puerto Rico’s debts would involve either large further tax increases or significant cuts in public services or both. Either way, 

the incentive to leave the island will be stronger—and the tax base (people 

who earn income) will literally fly away. The odds of full repayment in that 

scenario are almost zero. And the social costs—in terms of lower living 

standards for those who remain—would be dramatic. 

47 

8. The best way forward includes agreeing on a mechanism for restructuring 

Puerto Rico’s debts, with the goal of making a voluntary negotiation easier 

and more effective. The restructured debt should include some standard debt 

commitments, but with lower principal as well as reduced cash-flow commitment in the near term. At the same time, it would be very helpful if creditors 

could be persuaded to accept bonds with a contingent payoff—so that lenders 

get paid more if the economy does better. 

9. At the same time, it is necessary to change the organization of public finance 

in Puerto Rico. The ability of the governor and the legislature to do this by 

themselves has proven to be limited. Establishing an oversight board would 

help build credibility. 

10. At the same time, long experience—including with International Monetary 

Fund program lending—suggests that imposing institutional arrangements 

or even specific polices on countries does not usually lead to good outcomes. 

11. The proposed legislation has some strong points in terms of creating an oversight board that would bring meaningful changes to governance, without 

being overly intrusive. However, I am concerned that the way in which board 

members are picked may slow the debt restructuring process. More on this 

is in Section B below. 

12. In terms of the debt restructuring mechanism, the current draft of the bill 

is a great improvement over previous versions. However, there are a number 

of significant dimensions that require further clarification—including the extent to which debt principal can be reduced, whether all debt issued by 

Puerto Rico government entities can be readily included in any restructuring, 

and the mechanism through which a debt restructuring agreement is 

concluded. I expand on these points in Section C. 

13. In addition, I am concerned about opening the door to reducing the minimum 

wage in Puerto Rico. Again, it is not in the interest of creditors to encourage 

taxpayers to leave the island. 

B. OVERSIGHT BOARD

The proposed legislation does a good job of balancing the need for greater 

oversight for public finance in Puerto Rico along with the important priority of 

maintaining sovereignty. 

We should keep in mind one very important lesson from economic and political 

history—an oversight board that is too strong would be counterproductive. Unless 

there is sufficient local ownership of any reform program, that program fails to deliver sustained growth (and better outcomes for creditors). 

There are seven main elements in the proposed structure under discussion today: 

• The proposed law specifies what must be in the 5-year fiscal plan. 

• This plan is approved by the oversight board (or not). 

• The governor draws up this plan and can adjust it in the process of discussion 

with the board. 

• The governor is also responsible for the annual budget. 

• This budget can be revised by the legislature, as long as it remains consistent 

with the 5-year fiscal plan. 

• The board watches out for variances from the fiscal plan and makes 

recommendations for course corrections. 

• If the government fails to correct these variances, after repeated opportunities 

have been missed, then the board can do more. 

It is important to note that in the current draft, the board cannot issue regulations or other rules over the objection of the government of Puerto Rico. 

The board will terminate after 4 years of balanced budgets. This seems entirely 

appropriate—and consistent with what was required for the District of Columbia. 

There are also strong ethics and conflict of interest rules for the oversight board. 

These are important both in terms of perceived legitimacy and to ensure the board 

remains effective throughout its duration. 

However, I am concerned with how members of the oversight board would be selected. In the case of DC, board members were picked by the President, in consultation with the leadership of the relevant congressional committees. In the current 

draft for Puerto Rico, the structure is more cumbersome and perhaps would lead 

to unintended outcomes. 

48 

For example, if the Speaker of the House proposed a list with only two names 

on it, would the President have to accept those names—or could he (or she) request 

a new list? How long would this process take? 

C. DEBT RESTRUCTURING

With regard to the ability of the government of Puerto Rico to restructure its 

debts, I understand these provisions were controversial and the subject of much discussion. I also recognize that key details in this draft may shift as the legislation 

moves through Congress, so let me emphasize that the points made here apply to 

this particular wording—and even minor shifts in language could be sufficient reason to change my opinion. 

Title III represents a great improvement over previous attempts to address the 

restructuring issue. However, the current language (also in Title VI) suggests that 

the process could be streamlined further in ways that would be helpful. 

In particular, I would flag four issues which, at the very least, would benefit from 

greater clarity. 

First, any and all forms of Puerto Rico official sector debt should be eligible for 

a reduction in principal as a result of the debt restructuring process. The bill’s language could usefully be clarified in this regard. 

Second, it should not be possible for creditors to prevent or delay a particular 

class of debt from being restructured. The current draft seems to create the possibility of a very slow process, for example for COFINA bonds. 

Third, there needs to be a clear and workable mechanism through which a debt 

restructuring is concluded. At present there may be potential for relatively few 

creditors to delay or even prevent a final agreement. It is important not to allow 

any kind of hold out in this situation. 

Fourth, while the goal is a voluntary comprehensive renegotiation of Puerto Rico’s 

debt, the legislation could also recognize more explicitly that—under some 

circumstances—it may be necessary for a judge to impose a deal. 

The CHAIRMAN. Thank you. We appreciate that. 

We will now turn to our committee. Under Rule 3(d), questions 

are limited to 5 minutes for members of the committee. We will 

now recognize members for the questions they wish to ask. 

Mr. Lamborn, are you ready to go first? 

Mr. LAMBORN. Certainly, Mr. Chairman. And I want to thank the 

staff and you, Mr. Chairman. No one has worked harder on this 

than you have. 

And I am still gathering information about this very complicated 

issue. I am looking with an open mind at the bill. I have questions 

and concerns though, and I hope that my questions will clarify, at 

least for me, some of what these are. 

Thank you all for being here today. 

We are all concerned about the future of Puerto Rico. We want 

it to be a successful, thriving economy. We want this crisis to end, 

and end in such a way where it will not happen again. And we 

want everyone to be treated fairly—creditors, pensioners, everyday 

citizens, and so on. 

I am going to ask a question about the oversight board. I will use 

that phrase because that is what the bill calls it. The oversight 

board—I am a little unclear as to whether or not it has the final 

say in what a plan is that it thinks is necessary to get out of the 

crisis for the future. And I see some conflicting things in the bill. 

So if someone could sort of distill for me the essence of what the 

power of the oversight board is. Is it really something that is going 

to make a difference, or will it be over-ridden if the Governor or 

legislature do not like its recommendations? To me, this is a 

critical issue. 

49 

Who would like to take a crack at that? 

Mr. WEISS. I can start. Thank you, Congressman. 

The oversight board does respect, in fact, the principles that the 

Administration laid out at the beginning of this process, which is 

that it preserves the Commonwealth’s self-governance, while putting in place safeguards that ensure that the plans that are agreed 

and that the budgets that are agreed will be carried out. 

And I think as other witnesses have testified, it is also the case 

uniquely in this bill that access to restructuring authorities or, indeed, access to a collective-action clause under the voluntary path 

can only be obtained through a process which is certified and put 

forward by the oversight board. 

So, the oversight board respects the self-governance but is a gateway to further the voluntary negotiations that have a chance of 

success or restructuring authorities. 

Mr. LAMBORN. What if the board and the Governor and/or 

legislature are at loggerheads on what the way forward is on an 

important part of the economy of Puerto Rico? 

Mr. WEISS. The Governor and the legislature are to put forward 

a long-term fiscal plan and an annual budget. These are to be approved by the legislature, as is the case presently. In the event that 

subsequent budgets deviate from the initial fiscal plan, which is revised annually as well, or performance falls short, there is an 

iterative process back and forth with the oversight board to correct 

those shortfalls, and, ultimately, there is assurance that the plans 

will be carried out as initially forecast. 

Mr. LAMBORN. OK. Thank you very much. That, to me, is critical. 

Another critical item—there are so many here, but in my remaining short time—is the rights of creditors who feel like they are not 

getting a good deal, the holdout creditors, let’s say. 

And, sir, you have been intimately involved with this in the past. 

What about holdout creditors, even if they are in the minority, how 

will they be treated? 

Mr. KIRPALANI. Sure. Thank you, Congressman Lamborn. 

There are two types of holdouts. And the first type to think about 

is the dissenting minority when the majority of a pool or a class 

wants to go along with the deal and get a voluntary restructuring. 

You may have people who just do not want to participate. They 

don’t want to even open their mail. They don’t want to be involved 

in any kind of restructuring discussion or they are not sophisticated or they don’t want to hire professionals to focus on their 

rights. So they may vote against or they may not vote at all. 

The bill allows in the debt-restructuring section that the majority—it is majority in number, so more than 50 percent in number 

of people voting—and more than two-thirds in dollar amount of the 

particular class voting should be able to bind everyone in that class 

of similarly situated creditors. 

So, the most important thing to take away, you have to make 

sure the bill protects similarly situated creditors to work together 

and not lump people with different contract rights, different 

property rights together. 

The one issue I have with collective-action clauses is—— 

The CHAIRMAN. You have 3 seconds to say your issue. 

50 

Mr. KIRPALANI [continuing]. It is a eurozone concept. It has no 

classification rules. Just be careful. 

The CHAIRMAN. OK. Thank you. 

Mr. LAMBORN. Thank you. 

The CHAIRMAN. Mr. Grijalva. 

Mr. GRIJALVA. Thank you, Mr. Chairman. 

Mr. Weiss, we know who loses if something pragmatic and 

humanitarian is not done in terms of legislation from this 

Congress. We know who loses. But if something is not done, who 

wins? 

Mr. WEISS. Congressman, my answer is simple: no one wins, 

everyone loses. The people of Puerto Rico lose. The creditors ultimately lose. As has been noted, the moratorium, which has been 

enacted in Puerto Rico to preserve essential services, has led credit 

prices to deteriorate. And the mainland loses, in the sense that the 

alternative to this legislation, which is not a bailout, will, in fact, 

become a bailout over time. 

And, as has been stated by many Members of Congress in both 

parties, this legislation costs taxpayers nothing. In fact, what it 

does is it precludes the likelihood that over time taxpayers would 

have to step in, as they always do when the safety and economic 

prosperity of Americans are at stake. 

Mr. GRIJALVA. Thank you. 

Professor Johnson, categorize for me the level of austerity that 

has been imposed on the people of Puerto Rico, specifically how 

much money has been cut from annual spending since, let’s say, 

2006, 2008. 

Dr. JOHNSON. I do not have that precise number, but it is a significant amount of austerity. This is not of the levels that we have 

seen in Greece, but it is certainly the level that we have seen, for 

example, in Portugal in the eurozone. So a 10- to 20-percent cut in 

effective social services. 

And, of course, you see a lot of this in the availability of doctors 

who have left. You see it in the hospital services. You see it in the 

hospitals laying off. The length of lines have increased for these essential services. So, it is not all in the monetary numbers, 

Congressman, it is also in the quality of services and the availability of those services. 

Mr. GRIJALVA. In rough-number estimations, if that is the range, 20 percent—I think Governor Padilla said that, as well, about $500 

billion—if that is the range, how much of Puerto Rico debt do 

hedge funds own at this point? 

Dr. JOHNSON. I think you should ask the creditors’ representatives for more precise numbers on their existing holdings. I think 

Mr. Kirpalani said that the mutual funds are holding 50 percent 

now, or no more than 50 percent of the debt. Presumably some is 

held by individuals, but the hedge funds are a significant portion 

of the remainder. 

Mr. GRIJALVA. Mr. Weiss, do you have an estimate on how much 

of that debt is hedge fund? 

Mr. WEISS. I think estimates vary from a third on up. 

I should mention that this debt continues to trade hands every 

day and is trading today, as well, and so this number, by most estimates, is accumulating. 

51 

Mr. GRIJALVA. Just to review, the point that I think is important 

to note is that if hedge funds bought risky Puerto Rican bonds as 

an investment strategy, they structure the investments to absorb 

a hit in the event some of those investments do not go well. They 

have spent heavily to prevent the debt from being restructured in 

the courts. They have spent heavily to try to prevent restructuring 

here in Congress. I think this is the kind of strategy that makes 

people really angry in Washington. And it is an investment 

strategy by the hedge funders in this particular instance. 

Unfortunately, as I asked in the earlier question, nobody wins. 

It is at the expense of the quality of life for the people of Puerto 

Rico. 

I think that somebody holding that significant number and being 

not only the holdouts but also effectively attempting to campaign 

against any movement on this issue legislatively, I think, speaks 

for itself in terms of what greed has caused in terms of us being 

able to find a solution to this. 

With that, Mr. Chairman, I yield back. 

The CHAIRMAN. Thank you. 

Mr. Wittman. 

Mr. WITTMAN. Thank you, Mr. Chairman. 

I would like to thank the witnesses for joining us today. 

Professor Kent, I want to start with you. You laid out the constitutional authorities—Article I, where Congress can act on the 

issues of bankruptcy; Article IV that empowers it to act on issues 

involving territories. 

My question is this. As you look at other provisions there under 

Article III for the courts to adjudicate bankruptcies, do you believe 

that there is a priority that is set in the Constitution that says the 

Congress must act, and counter to the courts, where the courts 

could act to adjudicate a bankruptcy such as this? 

Mr. KENT. Well, the power to adjudicate bankruptcy has to be 

given by the Congress, and the courts cannot act unless that authority is given. So a bill, such as the one being contemplated now 

by the committee, would be the first thing that would need to happen before we would have any questions about power of courts. 

Mr. WITTMAN. But the courts could act, in this case, to adjudicate 

this? 

Mr. KENT. Were they granted authority by the Congress, yes. 

Mr. WITTMAN. But in absence of a congressional action, the 

courts can act to adjudicate this. The creditors can file and say, ‘‘we 

wish that our claims be made before the court,’’ and they can argue 

their claims before the court. 

Mr. KENT. I am not a bankruptcy law expert. I am a constitutional person, but my understanding is that, currently, Puerto Rico 

and its instrumentalities are not—that bankruptcy is not available 

to them through the current statute. 

Mr. WITTMAN. Mr. Weiss, a question to you. When we talk about 

how this should be laid out and Congress acting versus what I believe can take place through the courts, why wouldn’t it be a desire 

for voluntary agreements to be worked out between Puerto Rico, 

the bondholders, through a mechanism in the courts versus one 

that is set by Congress? And does Congress’ action actually itself 

set priorities for creditors’ claims versus where it could be worked 

52 

out in the courts with voluntary agreements and back and forth 

between the judiciary and the government of Puerto Rico? 

Mr. WEISS. Congressman, the litigation has already begun in 

courts. At the time that the Governor was forced to claw back certain revenues in order to pay other debts in December, there was 

immediate litigation filed. 

Mr. WITTMAN. So there is current litigation? They are trying to 

adjudicate their claims? 

Mr. WEISS. There is current litigation, and none of this is reaching resolution. It is not resulting in a constructive environment for 

negotiations to take place. To the contrary, as these claims are individually pursued, both against the Commonwealth and amongst 

the different creditors, there are 24 creditor classes and counting. 

What we fear is that if we are left without any framework, as has 

been established by the committee under leadership of the 

Chairman, that Puerto Rico faces a lost decade as these various 

claims are contested. 

Mr. WITTMAN. Why would the contestment take place any differently with back and forth between the bondholders and the 

courts versus the government of Puerto Rico bondholders and the 

United States Congress? 

Mr. WEISS. Two reasons. First, this legislation puts in place a 

strict and independent oversight board in order to look across all 

of the different claims and the fiscal plan and budgeting process 

and to try to bring all of that into alignment through the course 

of a restructuring. 

And second, in the tools that have been outlined by the draft, 

there is an opportunity to pursue a voluntary pathway and to 

achieve agreement across a particular class of creditors as there is 

an opportunity to pursue an orderly restructuring mechanism in 

the event that the voluntary process fails. 

Mr. WITTMAN. Does this potential legislation, though, reprioritize 

what would otherwise be the claims of the bondholders here? In 

other words, does Congress supersede or put its imprint over who 

it believes should take precedence in that versus an adjudicatory 

hearing where the courts would determine priority of the 

bondholders? 

Mr. WEISS. There is language in the bill, which I will not cite exactly because it is relatively fresh, which does talk about the preexisting priorities of claims, but what is to be pointed out is that 

without the centralized review of an oversight board and without 

the restructuring authorities and voluntary mechanism, there will 

be endless litigation as to claims. 

We have heard from secured creditors on this panel. There are 

other creditors who are actually of a different point of view as to 

who is most senior, and so, in order to bring this to an orderly resolution, it requires this kind of mechanism. Without it, we fear 

economic chaos. 

Mr. WITTMAN. Thank you, Mr. Chairman. 

I yield back. 

The CHAIRMAN. Thank you. 

Ms. Bordallo. 

Ms. BORDALLO. Thank you, Mr. Chairman. I truly appreciate 

your leadership and being true to your word to craft a bill to assist 

53 

Puerto Rico, and I, as a representative from a territory, am also 

very concerned. 

I appreciate the language that clarifies the other territories covered by this provision must opt in to the control through a vote of 

the legislature and with concurrence of our governors. While I can 

empathize with the policy decision to try to keep the bill clean, 

unfortunately, the problems of this fiscal crisis are crossjurisdictional. The debt crisis will not be resolved through debt 

restructuring alone but, rather, will need additional fixes. 

Guam and the other territories, while we are nowhere near the 

crisis that Puerto Rico is in, could very well be headed down that 

road should these fixes not be addressed. So, thus, I remain disappointed that the bill does not address issues such as Medicaid, 

the EITC, and government pensions. I, and the other delegates 

from the territory, sent a letter to the committee last week reiterating our support for these fixes. 

The Administration’s proposal includes the other territories in removing the caps on the Medicaid program, readjusting our FMAPs, 

as well as providing a cover over to the nearer Tax Code jurisdiction on providing EITC. 

I simply do not believe that the proposals that we are looking at 

now will resolve Puerto Rico’s problems. So we are doing all that 

we can to be proactive in ensuring that what is happening to 

Puerto Rico does not happen to the rest of us. 

So, Mr. Weiss, I have a question for you. This bill authorizes an 

oversight board and debt restructuring for Puerto Rico which will 

address their debt crisis. However, will this legislation fix their 

cash-flow issue or help with the other issues I have mentioned, 

such as Medicaid or EITC? Wouldn’t it be helpful for this to be included and for the territories to be considered in this fix as well? 

And, if you could make your answer brief, because I have very 

little time. 

Mr. WEISS. Yes, our initial proposal did include those two components, as you are well aware. However, it does alleviate the financial stress on the Commonwealth through the stay and through the 

process, which would allow the Commonwealth to have a sustainable level of debt, which is our ultimate goal. 

Ms. BORDALLO. Thank you very much. 

Professor Johnson, you are an advocate for an investment-led 

recovery for Puerto Rico, and I understand that you have also cautioned that reducing the minimum wage would induce more Puerto 

Ricans to leave. So I ask: Does keeping the minimum wage at $4.25 

an hour increase the likelihood of (1) more Puerto Ricans having 

to rely on government assistance and/or (2) more Puerto Ricans 

having to leave the island for better economic opportunity? 

How would this minimum wage provision impact the long-term 

economic outlook for Puerto Rico? 

Dr. JOHNSON. I believe the Governor would have to choose to opt 

in to this minimum wage provision, as I read the bill. If that were 

the case, then I would be very worried about the consequences, 

Congresswoman, for exactly the reasons that you just articulated. 

Ms. BORDALLO. Thank you. 

And, Mr. Weiss, I have my third question and last question. The 

bill clearly prohibits elected officials from Puerto Rico from serving 

54 

on the control board. Now, I understand that, while not explicit, 

there is a conflict-of-interest provision that would also prevent representatives with ties to bondholders from serving. Is this provision 

sufficient to prevent any potential conflicts of interest? 

Mr. WEISS. We continue to work with the committee to refine 

this provision. We agree with the principle that this committee 

should be fully independent of the political process and free of any 

conflict of interest, whether financial or otherwise. 

Ms. BORDALLO. Thank you very much. 

Mr. Chairman, I yield back. 

The CHAIRMAN. Thank you. 

Mr. Gohmert. 

Mr. GOHMERT. Thank you, Mr. Chair. 

I appreciate your testimony today. 

I understood that, previously, there had been mention of a 10 to 

20 percent cut in social programs being proposed in Puerto Rico, 

and I am curious: Does anybody know if there are proposals of cutting the government workers by 10 to 20 percent, or is it just social 

benefits? Anyone know? 

Dr. JOHNSON. Well, we were discussing, Congressman, a moment 

ago the cuts that have already been made since 2006, so that was 

a retrospective assessment. And, of course, the government payroll 

has also been cut over that same period as part of that. 

Mr. GOHMERT. This same cut, 10 to 20 percent? 

Dr. JOHNSON. Again, I do not have those exact numbers with me, 

but we can look them up very easily. 

Mr. GOHMERT. Yes. 

Dr. JOHNSON. It is certainly above 10 percent. One of the concerns is the way in which those layoffs have impacted services, who 

has been laid off, and so on. But, again, that is a retrospective 

statement. 

Mr. GOHMERT. I have seen one projection that 20 percent of all 

income in Puerto Rico came from Federal welfare benefits from 

those paying Federal taxes in the 50 states and, unfortunately, for 

the District of Columbia, for DC, too, so I am curious, of the reforms that you refer to as retrospective, that were 10 to 20 percent 

of social benefit cuts, were those cuts that Puerto Rico is making 

to Puerto Ricans, because my understanding is that it certainly 

was not cuts to social benefits from the Federal Treasury? 

Dr. JOHNSON. No. I think what we were discussing, because of 

the nature of fiscal autonomy in Puerto Rico, is they have a different basis for their revenue. There are people who receive 

Medicare benefits and the people who pay into and receive Social 

Security. 

Mr. GOHMERT. Right. 

Dr. JOHNSON. But they are not paying favorable income tax, as 

you know, and it is the collapse in local revenue, including the 

sales tax, that has had a significant impact on revenue. 

Mr. GOHMERT. One of the remarkable things, Puerto Rico ought 

to be the model for how free markets could work. It could be the 

United States’ Hong Kong, because there is no Federal income tax. 

All it would need is to streamline and not have such a bloated government where, I have seen the numbers—one community of 1,800 

or so, 45-plus percent work for the government, and then the list 

55 

goes on down. A community of 35,000, 40 percent of those work for 

the government. Another community, 27,000, 39 percent work for 

the government. 

If it were not for all the government workers in Puerto Rico, 

there would be no need to have a 4-percent higher corporate tax 

than the United States itself has. We have the highest corporate 

tax of any advanced nation in the world, 35 percent. Yet, Puerto 

Rico has more than that at 39 percent. I would think that with no 

Federal income tax, if you get it down to around 12 percent, business would be flocking, but nobody wants to come to a place where 

45 percent of the community works for the government. That does 

not wreak of free markets, growing businesses. 

And then it seems one of the real tragedies—on the one hand, 

we are told if we will allow an exception for Puerto Rico to lower 

the minimum wage, then that will create more jobs and that will 

get more Puerto Ricans working, because we did provide an exception when the Democrats had the majority for one of our territories, but that was not Puerto Rico. 

But then when I see a projection that a family of three, the takehome pay for doing a minimum wage job at the current level would 

be less than $1,200, but with the U.S. Federal welfare, AFDC welfare, food stamps, the take-home is more like $1,800. Then if we 

lower the minimum wage, then there is even less take-home for 

those who might be tempted to work for about two-thirds of what 

they get if they do not work. 

My time is expiring, but I would welcome anything in writing 

from any of our witnesses that would tell us how to balance that 

problem. Thank you. 

I yield back. 

The CHAIRMAN. OK. You have your assignment. 

Ms. Tsongas. 

Mr. TSONGAS. Thank you, Mr. Chairman. 

And I appreciate all of you being here with us today. As we are 

talking about Puerto Rico, I just want to reiterate the way in which 

it makes it back to our districts. 

The economic viability and success of Puerto Rico is an issue that 

is really important to many of my constituents in my district in 

Massachusetts. One in five of my constituents identify as Hispanic 

or Latino, and 40 percent of them are from Puerto Rico. So many 

of them have friends and family who still live there. They have 

seen firsthand the devastating effects that the 10-year recession 

and debt crisis have had on the island, and they are watching carefully as we work to address it. They are well aware of what the 

3.5 million American citizens are struggling with. 

Puerto Rico’s electricity prices are higher than any state in the 

country. The unemployment rate is 12.2 percent, more than double 

that across the United States, and its poverty rate is a staggering 

45 percent. And we are hearing today about the alarming decline 

in some essential services. 

We, in Congress, have a responsibility to address the crisis facing 

Puerto Rico, and I think the discussion draft and the bipartisan effort behind it is a step toward that goal. All stakeholders stand to 

lose in the face of the continued deterioration on the island is its 

economic and financial condition. 

56 

I appreciate the debate we are having about the different elements of the legislation, but as the Ranking Member of the Federal 

Lands Subcommittee, a committee that is tasked with the protection of our shared historical, cultural, and national heritage, I just 

want to express my deep concern about the bill’s provision to transfer public land at the Vieques National Wildlife Refuge. This refuge 

is one of the crown jewels of our National Wildlife Refuge System, 

and the transfer language is an unnecessary addition that will do 

absolutely nothing to address the fiscal crisis in Puerto Rico. 

With that, I would like to yield the balance of my time to Mr. 

Pierluisi. 

Mr. PIERLUISI. Thank you, Ms. Tsongas. 

Actually, I will use this time to clarify a couple of points, and the 

witnesses can correct me if I am wrong. 

Mr. Lamborn, the way the bill currently reads, the Federal oversight board does have the power to approve the fiscal plan of the 

government of Puerto Rico. It also has the power to approve the 

budgets, approved in turn by the legislature and signed by the 

Governor, so the board does have ultimate authority. 

The bill defers to the government of Puerto Rico in the right way 

because it allows the Governor to elaborate the plan and submit it 

to the board, and the board can bring it back and send it back with 

its comments and recommendations. So, it will be a back and forth 

until the board is satisfied that the fiscal plan makes sense. OK. 

On the budgets, the process is similar. The Governor will submit 

the budget to the board for review. The board will comment. Once 

the board blesses the budget at that level, then it goes to the legislature of Puerto Rico. The legislature will do its job. But before it 

is finally approved by the legislature, the board will take a look at 

it, and the board can say that the board is not satisfied with the 

budget as approved by the legislature. So, the board will have the 

final say in a way. 

What I expect to happen here is—just assume that the Governor 

and the legislature of Puerto Rico will do the right thing. They will 

just have this board overseeing them in this process. The same applies on variances. Let’s assume that there is overspending, meaning that the spending is excessive, given the budget that is applied. 

What the legislation does, it requires quarterly reports to the 

board, and the board can say, when they see overspending: Explain 

to us the variance. And if the explanation is reasonable, nothing 

happens. If, after multiple tries, the government of Puerto Rico 

cannot satisfy the board’s concerns, then the board can step in. 

So that is why this is a reasonable model, given that you do have 

elected officials in Puerto Rico, a Governor and legislators, so it 

does give the board the final say. 

On the minimum wage, let me say this. The way the bill is drafted, the Governor of Puerto Rico is the one that can opt to pay less 

than the minimum wage to employees 25 years or younger. I personally do not like that bill provision, and I will tell you why: it 

will promote migration out of Puerto Rico, because these are U.S. 

citizens, and if not, they will not work, and they will simply rely 

on welfare and the informal economy. 

The CHAIRMAN. Thank you. 

Mr. Fleming. 

57 

Dr. FLEMING. Thank you, Mr. Chairman. 

Mr. Weiss, does this legislation contain mandatory debt 

restructuring ability for the control board? 

Mr. WEISS. At the end of the process, this ensures that the debts 

will be restructured to a level that is sustainable relative to the 

size of the economist—— 

Dr. FLEMING. So the answer is yes. 

Mr. WEISS. At the end of the process. 

Dr. FLEMING. OK. So what this does is create a control board, 

which then goes to the creditors and asks them to come up with 

or to go along with some sort of voluntary negotiated prioritization 

of the creditors. If they disagree, then you go to the next step, the 

step you are referring to, which some call a cramdown, where then 

they will be forced to restructure. Am I correct on that? 

Mr. WEISS. It organizes both the voluntary discussion, which you 

are describing, and the restructuring mechanism in the event that 

the voluntary restructuring does not succeed. It also incentivizes 

the voluntary restructuring with tools which are not in place today. 

Dr. FLEMING. So the answer is yes, it does have the power to 

force restructuring. 

So does that mean that it is possible for holders of full faith and 

credit debt to be put at a lower priority for repayment than unions 

or pensions? 

Mr. WEISS. We are not here to pick winners and losers among 

creditors. 

Dr. FLEMING. But that can happen. Is that correct? 

Mr. WEISS. The oversight board is invested with enormous 

responsibility in putting forth, as the Congressman has described. 

Dr. FLEMING. But don’t dodge the question. Can that happen? 

Mr. WEISS. It can only happen if all other measures have been 

exhausted and it is the judgment of the oversight group—— 

Dr. FLEMING. But it can happen, correct? 

Mr. WEISS. These creditors today are holding 67 cents on the 

dollar. They know it is being restructured, sir. 

Dr. FLEMING. Let me ask you this. They say that this is not 

bankruptcy or reorganization bankruptcy, but it looks like reorganization bankruptcy, so how is this, other than just the technical 

features of it, overall, how is it different than a bankruptcy? 

Mr. WEISS. It is radically different from bankruptcy. 

Dr. FLEMING. Let me hear from you. 

Mr. KIRPALANI. Yes, I would just like to try to answer the 

Congressman’s very important question. The way this bill is drafted, it protects priorities. It does not disturb local law. We could 

tighten that. In fact, our view is it should be tightened. 

Dr. FLEMING. But, in a sense, that bankruptcy could force, 

cramdown, if you will, require a certain priority of creditors, isn’t 

that also true of this bill as well? 

Mr. KIRPALANI. Only if the dissenting class has no good reason 

to hold up because they are getting the best interest, the same that 

we get under law—— 

Dr. FLEMING. In other words, if they do not agree, this control 

board can force them to reprioritize, correct? 

Mr. KIRPALANI. No. They would have their ability to explain to 

the court, to your colleagues on your left, that this is an unfair 

58 

plan; it discriminates unfairly to me. The laws can be drafted even 

more tightly and clearly, and we would support that, but if the intent of the bill is absolutely to protect the—— 

Dr. FLEMING. If the board did not agree with them, then they 

would be forced. 

Mr. KIRPALANI. But that is no different than in the absence of 

legislation. 

Dr. FLEMING. Again, that looks a lot like bankruptcy restructuring, so I would just have to say—now, it is also said that this 

is not a bailout. 

But we understand, now, how did we get here to begin with? It 

is the progressive socialist policies, economic policies that got 

Puerto Rico at this point, the same kind of policies that got Greece 

where it is today. Greece has gone through two restructurings with 

bailouts, as I recall, and they are going to have to go through another one. 

From my perspective, I look at this, and I am told: this is no bailout. Well, technically, that is true, but there are still going to be 

cash-flow problems. How are we going to solve the cash-flow 

problems? 

Mr. KIRPALANI. I think that there are a lot of things that 

Congress can do under the territories clause to create better 

growth, better initiatives. What this is doing, it is the first step; it 

is a necessary step to stabilize the economy to keep people in place. 

Dr. FLEMING. Exactly, that is my point. It is the first step, and 

what is the next step? What is the other shoe to drop? 

Mr. KIRPALANI. I don’t know that there will be. 

Dr. FLEMING. There will have to be a cash bailout. That is the 

only way that is going to be solved under this bill. 

Mr. KIRPALANI. Without this bill, there will be a cash bailout. 

Dr. FLEMING. I would suggest to you that this is a framework of 

a bankruptcy, whatever you want to call it, and it will ultimately 

require a bailout. 

I yield back. 

Mr. KIRPALANI. But it will respect priorities, though. 

The CHAIRMAN. Mr. Pierluisi. 

Mr. PIERLUISI. Thank you, Chairman. 

Mr. Weiss, I would like you to expand, elaborate on your concerns with the collective action clause, the way it is currently drafted. As I understand it, your concern is that it is too cumbersome, 

or it is not streamlined enough. You want this to work, but can you 

expand? What is wrong with the collective action clause process 

that this bill provides for? 

Mr. WEISS. Congressman, we believe that the intent is for this 

to work, that there are important drafting items which we need to 

review with the committee, and we will begin to do so immediately 

following this hearing, but the intent is to provide for a voluntary 

path with incentives to reach agreement and, in the event that this 

fails, a restructuring mechanism to allow the Commonwealth to 

emerge with a sustainable debt load. 

If these principles are respected in the drafting, we believe we 

can work with the committee to get there. 

Mr. PIERLUISI. OK. Now, Mr. Miller, as I understood your testimony, you are saying that, in general terms, the markets are 

59 

welcoming this bill. The markets are looking forward to a restructuring, and in your view, it is better to have an orderly restructuring process as opposed to litigation all over the place. That is 

how I read what you said. 

As I see it, when we talk about collective action clause—these 

terms get in the way, but let me explain them, and then you correct me—and cramdown, what we are talking about is, any time 

you want to restructure debt, you want to reach all the creditors 

of the entity in question. If you don’t reach them all, then the deal 

will mean so much, and when you need to restructure, again, you 

try to reach them all. 

So collective action is another way of saying: If you have twothirds majority of the creditors supporting the deal, then you can 

go to court to enforce the deal on all, and the same pretty much 

applies on the cramdown concept. 

What is happening in Puerto Rico is that we can negotiate with 

the creditors of PREPA, the power company, and we can negotiate 

with the creditors of the water and sewer company, but we cannot 

reach them all. We do not have a structure. 

Would you comment, Mr. Miller? 

Mr. MILLER. Sure. Thank you very much for the question, 

Congressman. The reasons why I did allude to the fact that I think 

the marketplace is prepared and more welcoming in this bill is for 

the following reasons: The independence of the board, getting fresh 

audits, getting transparency over what the fiscal situation actually 

is; those are all positives to the marketplace, as a whole. The determination of the level of debt that the Commonwealth of Puerto Rico 

can actually handle longer term and grow the economy and be a 

stable credit, that is positive. 

I think versus alternatives—the litigation is building, the defaults are coming regardless, and I think the marketplace, you can 

see in the pricing, the marketplace knows that is going to happen 

anyway. The 67 percent figure that you are alluding to, that is, in 

part, this is a large and very diverse widely held set of bonds and 

set of indentures, and in such a circumstance, you will never get 

to 100 percent. It is impossible. 

Mr. PIERLUISI. Thank you. Let me quickly address you, Mr. 

Kirpalani, and the audience. This is not Chapter 9. I have a 

Chapter 9 bill. Mr. Duffy had a Chapter 9 bill. This is not super 

Chapter 9. Why not? Because there is a Federal oversight board 

acting as the gatekeeper here, making sure there is no abuse of the 

Chapter 9 process, of the bankruptcy rules. 

There is nothing wrong with the bankruptcy rules. Congress enacted them, but we want them to be applied fairly, and that is why 

you have this board being created to oversee this. Do you agree, 

Mr. Kirpalani? 

Mr. KIRPALANI. Thank you, Congressman. 

I 100 percent agree with that statement, and I would also say 

that our laws, our bankruptcy laws and restructuring laws from 

100 years, they are the envy of the world. They are the hallmark 

of an efficient financial system, and I was hired several years ago 

by Dubai to pass legislation and help them draft it. They never 

even had to use it because every creditor organized itself and 

60 

voluntarily agreed because they understood the rules, and the same 

thing can happen for Puerto Rico. 

Mr. PIERLUISI. Thank you. 

The CHAIRMAN. Thank you. 

Mr. McClintock. 

Mr. MCCLINTOCK. Thank you, Mr. Chairman. 

First of all, let me ask the question. Does Congress have the authority to change bankruptcy law or to take portions of bankruptcy 

law and apply it in this case? 

Mr. KENT. Yes, it does. Under the territories clause, I believe it 

does. 

Mr. MCCLINTOCK. OK. And does it also have the authority to 

alter bankruptcy law as it applies to states? 

Mr. KENT. As it applies to state governments? 

Mr. MCCLINTOCK. Yes. 

Mr. KENT. That raises some very hard issues. The Supreme 

Court addressed this in the 1930s and had very serious constitutional concerns about the impact on state sovereignty. I would say 

pretty definitively that something like the oversight board that is 

contemplated here as kind of the quid pro quo for having access to 

restructuring would be—— 

Mr. MCCLINTOCK. But the oversight board, though, I think is irrelevant to the principal point that we are altering the laws under 

which these loans were made to creditors. We are rewriting these 

laws for Puerto Rico, and if it can rewrite these laws for Puerto 

Rico, the concern arises, why wouldn’t it then also rewrite them for 

states? 

My concern is that every lender to every state in this country is 

no longer going to trust the terms of their own loans, and if those 

terms are not stable and reliable, interest rates will rise for every 

state in this country, and taxpayers are going to end up shouldering that burden through paying much higher interest costs. 

These are the concerns that are being expressed by a number of 

state governors with respect to the ramifications of this bill. 

The argument I hear is: this is apples and oranges. Puerto Rico 

is a territory subject to congressional oversight, and states are not. 

But the applicability of bankruptcy law can affect states, and 

Congress can rewrite bankruptcy law, whether for territories or for 

states, and this introduces a very, very dangerous precedent into 

a public borrowing. 

It seems to me that, under the status quo, both sides have an 

incentive to negotiate mutually agreeable terms. If we were to simply honor the rule of law and maintain the terms in which these 

loans were originally made, first, I think it would be a very powerful signal to bond markets that the United States stands by its 

promises, even when it is inconvenient. Until the prospect of this 

congressional action arose, my understanding is Puerto Rico was 

negotiating terms of debt restructuring with the mutual consent of 

their creditors, and under current law, it is in the interest of both 

sides, the debtor and the creditor, to work out the terms with 

which both can live to restructure and repay this debt. 

And I think it is also within the interests of the people of Puerto 

Rico to hold accountable the elected officials that got them into this 

mess, not an unelected and unaccountable oversight board. 

61 

Mr. WEISS. Congressman, with respect to the constitutionality, 

there is a clear pathway under Article IV of the Constitution for 

this to be enacted for territories. The 10th Amendment provides no 

such assurance. 

Current negotiations, in our judgment, cannot succeed without 

the additional tools which have been effectively offered by this committee to support both voluntary negotiations and restructuring, if 

it is needed. The witness from Nuveen could speak to the efficacy 

of this with respect to state borrowing costs, but the pathway is between a disorderly default and something structured. 

Mr. MCCLINTOCK. My time is very limited. I think the structure 

on that oversight board, it seems to me that it violates, indeed it 

renounces the most basic architecture of American constitutional 

government where the Founders meticulously divided and separated the powers of government. This board recombines them. And 

where the American Founders meticulously established a system 

where their government was accountable and with the consent of 

the people, this establishes an oversight board that is not accountable to the people of Puerto Rico. 

And I think the great tragedy is this: Puerto Rico is an island 

paradise. It is a cruise ship destination. It is ideally located for 

both North and South Atlantic shipping. It has an ideal climate for 

agriculture. It is part of the United States. It has all of the protections of property rights and the rule of law and due process. The 

only thing that it lacks is wise public policy. 

It seems to me that the direction we should be taking is relieving 

Puerto Rico of the burdens of the Jones Act, a panoply of regulatory burdens that are crushing the economy and providing the 

option for Puerto Rican companies to be taxed territorially. These 

reforms could turn Puerto Rico into the Hong Kong of the 

Caribbean, and that is the direction we ought to be taking: maintain the rule of law and restore free markets to Puerto Rico. 

The CHAIRMAN. Mrs. Torres, you are next. 

Mrs. TORRES. Thank you, Mr. Chairman. Good morning. My 

questions are around the board, and in the specific bill, I think that 

we are pretty prescriptive as to who appoints the seven-member 

board. However, it lacks the same type of prescriptive way of who 

actually can be appointed. 

While the bill states that individuals must have knowledge and 

expertise in finance, municipal bond markets, management, law, or 

organization, or operation of business or government, seven board 

members could come from any one of those subgroups, but not all, 

correct? 

Mr. Weiss, I apologize if I put you on the spot there. 

Mr. WEISS. Not at all, I think that this is an area we continue 

to develop with the committee. I think that the principles for the 

composition have been established that it must be a deeply experienced board, an independent board, free of all conflict of interest 

and broadly representative of the stakeholders who are affected by 

the restructuring. 

Mrs. TORRES. I understand the conflict of interest. However, my 

concern is still that all seven members could come from any one of 

those specific backgrounds, and I think that the board should be 

a diverse board that represents the interests that are being 

62 

proposed here or talked about here, not just with financial interest 

but also that look like the people of Puerto Rico. 

Mr. WEISS. We agree with you. 

Mrs. TORRES. In the early 1980s, as a young 16-year-old, I start- ed my first job earning minimum wage. Back then, it was $3.35. 

Fast forward 35 years, we are asking 25-year-olds and under in 

Puerto Rico to live within about 90 cents higher than the minimum 

wage of early 1980s. How is that not going to negatively impact the 

workforce of Puerto Rico? And is this going to create a two-class 

type of employee where the older employees may be the first ones 

to be laid off or fired under this restructuring of wages? 

Mr. WEISS. Professor Johnson addressed this issue before eloquently. The perhaps single biggest crisis in Puerto Rico is outmigration. In the 12 months ending October 31, 2.5 percent of 

Puerto Ricans left for the mainland. That is roughly double the 

rate that were leaving 2 years ago, and this is why the comparison 

between Puerto Rico and Greece breaks—we are talking about 

Americans. 

And it is true that Puerto Rico can be an island paradise. It is 

not a paradise for the American citizens who live there today. 

There is 58 percent childhood poverty; 45 percent of homes live in 

poverty. Government payrolls have been shrunk by more than 25 

percent, and the policy of austerity, coupled with the suffocating 

amount of debt, has left the economy at a dead end. These are the 

tools which will allow Puerto Rico to emerge—and I repeat—at no 

cost to the Federal taxpayer. 

Mrs. TORRES. These are the two issues that I am very concerned 

about, and I don’t believe that today I have heard an answer that 

has satisfied my concern. 

Thank you, and I yield back my time. 

The CHAIRMAN. Mr. Benishek. 

Dr. BENISHEK. Thank you, Mr. Chairman. 

Thank you all for being here today. I am learning a lot. I guess 

I have a couple of basic questions here, and that is, what if we 

don’t do anything, what is going to happen? Maybe, Mr. Kirpalani, 

you have some experience. 

Mr. KIRPALANI. Thank you, Congressman Benishek. Yes, and we 

have seen what happens. If Congress does not do anything, then 

the local legislature does, in the cover of night, pass a debt moratorium law that denies due process and contravenes U.S. law. I think 

that is going to be met with constitutional challenges. 

I am not blaming local legislators from doing what they need to 

do to protect the citizens living in their home jurisdiction, but it 

certainly does not uphold the rule of law. This Congress can do 

that, and so we hope that you do. 

Dr. BENISHEK. Mr. Miller, what is going to happen to the bond 

markets, not only for Puerto Rico but around the country in general, if nothing happens here? What is the story with that? 

Mr. MILLER. We think that Puerto Rican bonds generally have 

been moving more into distressed territory and investors have reallocated, generally. That does not mean there could not be further 

downside. I think there is more collateral damage potentially on 

Puerto Rican security specifically in the absence of congressional 

action, and possibly some additional damage on the municipal bond 

63 

market. Although, again, I would emphasize that this has moved 

heavily into distressed debt territory and therefore has moved 

heavily into hedge fund territory, and individual investors and 

mutual funds have dramatically reduced their exposure, and the 

municipal bond market is relatively healthy. 

I would add that state borrowing costs actually continue to fall, 

and the risk premium on state borrowing costs above a pure AAA, 

those risk premiums have continued to narrow, meaning people are 

comfortable that states do not want Chapter 9. I know of no state 

that wants to go into Chapter 9, that needs to go into Chapter 9, 

or that would want a control board. 

So, I think that I would continue to highlight the territorial specific nature, not just from a legal perspective, which is true, but 

also from the perspective that no state is in the same fiscal and 

economic situation that Puerto Rico is in. So, there are some very 

significant differences. 

Dr. BENISHEK. Thank you. 

I don’t know who can answer this question, but I have some of 

the same concerns that Dr. Fleming had. If we do this, how is this 

going to fix all these problems? How is this going to fix the 

immediate cash-flow difficulties? 

Mr. Weiss, can you comment on that? 

Mr. WEISS. This, in our judgment, properly completed, will stabilize the crisis. The stay, coupled with the tools to incentivize voluntary negotiations and the restructuring mechanism, backed by 

an independent and strong fiscal oversight board, in our judgment, 

will create a period of stability, but we do agree that there needs 

to be additional tools over the long run to incentivize growth. Those 

do not need to come necessarily in the form—— 

Dr. BENISHEK. Well, give me an example of that. 

Mr. WEISS. Our initial plan pointed to two. We believe in the 

earned income tax credit as a very effective way of—a bipartisan 

way of incentivizing work, bringing more Americans in Puerto Rico 

into the formal workforce, which has a tendency to expand the taxable base, and it also puts money into the pocket of those most 

likely to spend it. 

Dr. BENISHEK. I appreciate that answer. I have heard in previous 

hearings about the potential for privatizing much of the industry 

that is currently owned by the government. But, how is this board 

going to make that happen or facilitate something happening that 

they change the way they do business there? 

Mr. WEISS. In our discussions with business, it is clear that there 

is significant appetite to invest in Puerto Rico, both to modernize 

the electricity grid, to provide alternative forms of power generation, to invest in infrastructure. No one will invest in the face of 

an economic crisis. The crisis needs to be stabilized, and then the 

significant interest in investing in Puerto Rico will materialize. 

Dr. BENISHEK. What kind of a timeline are we talking about for 

all this to happen? Say this bill passed tomorrow through the 

House and all that, what is the timeline you are talking about? 

Mr. WEISS. For it to be done responsibly, for there to be an ample 

opportunity for creditors to negotiate in the voluntary process in 

order for the oversight board to implement its work in a thoughtful 

64 

way and to provide the transparency of financials that we all seek, 

it will not happen overnight. 

Dr. BENISHEK. You are wasting time here because my time is up 

now. I did not get an answer to my question. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Just tell him ‘‘now.’’ Just say ‘‘now.’’ 

Mr. WEISS. A year and a half, 2 years. 

The CHAIRMAN. All right, Mr. Cartwright, you are recognized. 

Mr. CARTWRIGHT. Thank you, Mr. Chairman. 

And thank you to our witnesses for coming today to discuss a 

crisis that will shape Puerto Rico for decades to come and could 

have ripple effects across our entire Nation. 

We all know the situation in Puerto Rico is dire. Congress has 

to act quickly to address this growing humanitarian crisis, but I do 

have grave concerns that some of the proposals concerning this crisis either have little to do with addressing the actual issue at hand 

or potentially could exacerbate problems for Puerto Rico in the long 

run. 

Under current Federal law, if an employee is less than 20 years 

old and is in his or her first 90 days of working with a particular 

employer, Federal minimum wage laws allow the employer to pay 

them a sub-minimum wage of $4.25 an hour, and the justification, 

of course, is that they are apprentices and they are learning the 

trade of the job. 

The draft of the bill we are considering tomorrow changes that. 

It allows the Governor of Puerto Rico to lower the minimum wage 

in Puerto Rico to $4.25 for anybody who is under 25 and is in their 

first 5 years on the job, not just 90 days. 

Yet, there are professions that require 5 years of on-the-job 

training, some medical professions, plumbers or electricians, for example, but workers in these industries are generally rewarded with 

much higher salaries than minimum wage after their training is 

complete to help justify lower salaries, which are generally well 

above $4.25 anyway, while training. 

Professor Johnson, I want to ask you, do you know of any 

minimum wage jobs that require 5 years of on-the-job training? 

Dr. JOHNSON. I cannot readily bring to mind any such jobs, 

Congressman. 

Mr. CARTWRIGHT. Me neither. 

How about you, Mr. Weiss? Do you know of any such jobs, 

minimum wage jobs that require 5 years of on-the-job training? 

Mr. WEISS. No, sir. 

Mr. CARTWRIGHT. OK. Another issue I have a concern about is 

emigration. One of the drivers of the economic crisis in Puerto Rico 

is the roughly 100,000 people per year who are moving to the mainland for better economic opportunity. I am concerned that drastic 

measures, such the proposal surrounding minimum wage, could accelerate and exacerbate this emigration and deepen Puerto Rico’s 

crisis in the long run. 

According to the CDC, the average age for a new mom on the 

island is 24.1 years old, so a huge percentage of new moms in 

Puerto Rico would have to raise their child on potentially $4.25 an 

hour. I wouldn’t stick around for that if I didn’t have to. 

65 

Professor Johnson and Mr. Weiss, what does it mean for the 

economic recovery if young families leave the island? 

Professor Johnson? 

Dr. JOHNSON. That is your tax base walking out the door or getting on the plane and flying to the mainland. And the more people 

that leave, of course, Congressman, the more relatives you already 

have, the more connections you have, the easier it is to get a job, 

so it is a self-reinforcing process that is already accelerating, as you 

said and as Mr. Weiss has said. 

Mr. CARTWRIGHT. And young families are crucial to anchoring 

the economic recovery, aren’t they, Professor Johnson? 

Dr. JOHNSON. Yes, of course. We need young people throughout 

the U.S. economy, including in Puerto Rico. 

Mr. CARTWRIGHT. Do you agree with that? 

Mr. WEISS. Fully agree. 

Mr. CARTWRIGHT. OK. 

Now, Professor Johnson, do you think at the end of 5 years of 

paying a worker a sub-minimum wage to the employee, companies 

will be more likely to value the training their employees will have 

accumulated and be happy then to pay the $7.25 an hour, or will 

this minimum wage provide an incentive to let these employees go 

and start a new clock with a new sub-minimum wage 20-year-old 

worker? 

Dr. JOHNSON. I think that point was already made by Mrs. 

Torres. I think it is a very legitimate fear to consider, and I absolutely share it. 

Mr. CARTWRIGHT. All right. So if that is the case and young 

workers put this together, they put two and two together, and they 

realize that this is going to happen, what is that going to do to the 

incentives to take this work and to stay on the island? Professor? 

Dr. JOHNSON. I think that any young person who has the ability 

to leave will leave, and they will find a good job at a higher wage 

and better opportunities in the 50 states. 

Mr. CARTWRIGHT. So, it is an even bet that this is a proposal that 

will exacerbate the crisis because of increasing emigration from the 

island, isn’t it? 

Dr. JOHNSON. If the Governor opts into it. You do have the safeguard that the Governor would have to own this. I don’t know why 

any governor of Puerto Rico would opt into it, frankly. 

Mr. CARTWRIGHT. All right. 

Now, Professor Johnson and Mr. Weiss, aside from encouraging 

young people to leave, what are the other effects that such a low 

minimum wage on the island would have? What impact might it 

have on the long-term recovery prospects on the island and its economic stability? Mr. Weiss? 

Mr. WEISS. The minimum wage aspect would have to be elected 

by the Governor. I think the arguments have been clearly stated 

both by you, Congressman, and by Professor Johnson. The bill in 

its totality has enormous benefits, though, which in our judgment 

should stem out-migration if properly implemented. 

Mr. CARTWRIGHT. Professor Johnson? 

Dr. JOHNSON. I agree with Mr. Weiss. 

Mr. CARTWRIGHT. OK. Thank you. 

I yield back. 

66 

Mr. LAMBORN [presiding]. Thank you. 

Representative Duncan. 

Mr. DUNCAN. Thank you, Mr. Chairman. 

We still have not seen audited financial statements for Puerto 

Rico, and I think in order to make good decisions here in Congress, 

we need to see that and understand the ability or inability of 

Puerto Rico to actually pay. 

The Ranking Member used a term earlier, ‘‘greedy bond 

markets,’’ but nobody forced Puerto Rico to borrow this money. Investors took a risk with their hard-earned dollars. It was their 

money they invested in Puerto Rico. That is not greed, in my opinion. They invested based on a bond that was priced for the risk. 

So, let’s use terms that are adequate. The Governor of Puerto 

Rico, I believe, has calculated access to bankruptcy protections far 

before we started discussing this here in Congress. Are you gentlemen familiar with the Argentina situation? 

Argentina has bonds. The Kirchner regime did not want to pay 

those bonds. They were almost in default. Now we see the Macri 

government actually come to Wall Street, come to the bondholders, 

the hedge funds, and actually start renegotiating that debt, and the 

optimism in Buenos Aires, Argentina, is so strong, you can taste 

it. Optimism for solvency, access to capital markets for future investment, infrastructure investments, that is the proper way to do 

it—approach it in a sound, fiscally-responsible manner and renegotiate the debt to come up with a plan. 

Mr. WEISS. Congressman. 

Mr. DUNCAN. Now, Mr. Miller, Chicago’s school system. Your 

firm invested, last month, $725 million in bonds with an 

8.5 percent yield. Does Chicago’s school system have access to 

Chapter 9 bankruptcy courts? 

Mr. MILLER. They do not at this time. 

Mr. DUNCAN. They do not. And I think that actually reflected on 

the yield that your investors were looking for. I have trouble comparing the Chicago situation where they do not have access to any 

bankruptcy protections or whatnot, and the Puerto Rico situation 

where they do not have access to bankruptcy, but this bill would 

actually give them some access to some bankruptcy provisions, 

section 1129 cramdown provisions concern me greatly. 

I believe that we are going down a slippery slope here, because 

states do not have access to bankruptcy protection to this point and 

under Chapter 9, but I believe that there are many in Congress 

that would love to see states do that. 

I come—my accent may give it away—I come from a southern 

state. We generally are fiscally responsible in southern states. We 

do not saddle our citizens with unsustainable entitlement obligations. We do not take on debt. In fact, South Carolina has a balanced budget requirement in our Constitution. We cannot borrow 

money like that. And if we do borrow money, we have to be able 

to pay that back. We cannot incur debt after debt. 

But what you see in Illinois, California, and New York, they all 

adopt absurd governing principles of spend, spend, spend, and they 

pass the political responsibility to another authority. So, I do not 

want to allow states to be able to access bankruptcy. 

67 

Municipal government and other government entities, they are 

different than private entities. They do not have to fork over capital or hard assets to their creditors when they file Chapter 9. 

So, let me just end with this. It is time somebody takes some fiscal responsibility here. I have trouble sitting in the halls of the 

U.S. Congress when our Nation is $19 trillion in debt on balance 

sheet, $100 trillion–$150 trillion in debt in off-balance sheet liabilities that the American taxpayers are going to be responsible for, 

and we are discussing how to tell Puerto Rico how to manage their 

debt and their fiscal affairs. I really have trouble with that. 

Mr. Chairman, I don’t really have any questions for the 

witnesses, and I will yield back. 

Mr. LAMBORN. Mr. Weiss, did you have a comment? 

Mr. WEISS. Congressman, just with respect to Argentina, two 

comments. One, it has taken 15 years to resolve, and throughout 

that period of time, Argentina has been sidelined from markets. 

Two, Puerto Rico is not Argentina. It is part of the United States. 

We have a choice today between a disorderly process, which will 

ultimately result in a direct transfer of taxpayer funds in the form 

of a bailout and this is the—— 

Mr. DUNCAN. Reclaiming my time, I don’t have an objection to 

a control board or an oversight board that will hold Puerto Rico accountable and can renegotiate the debt, not cramdown the debt, not 

seek bankruptcy type protections. 

I think we could do a lot better than what we have done with 

this bill, but I yield back. 

Mr. LAMBORN. OK. Thank you. 

Representative Polis. 

Mr. POLIS. Thank you, Mr. Chairman. 

I appreciate the committee moving forward on legislation to address the devastating debt crisis in one of our territories, Puerto 

Rico, which serves to remind me how the territory status is neither 

in the interest of our country nor Puerto Ricans. It is my distinct 

hope that Puerto Ricans will decide to apply for statehood soon and 

that we give that application favorable consideration promptly, 

should that be what the Puerto Rican people choose. Otherwise, we 

will be back here again in the Natural Resources Committee, 

where we would never be if this was a state, talking about something that we would never talk about if it was a state, and I think 

that we should have the same treatment that we would have for 

any other state in our country for Puerto Rico. 

Rather than talk about working out the debt, I want to talk 

about economic growth and how we can get there. I think the only 

real way out of this, regardless of what we do and whether 

Congress tinkers or whether the courts tinker, is we need a higher 

rate of economic growth in Puerto Rico. 

There have been some ideas bandied about here. I think it is no 

coincidence that with the expiration of section 936 tax credit is 

when the recession began in Puerto Rico. It may very well not be 

that instrument. I have a number of ideas, as many other 

colleagues do, about what we need to do to get a higher rate of 

economic growth in Puerto Rico. I don’t think the answer is lowering the minimum wage with labor and mobility. I cannot imagine, you have a young person who is 20 years old, and they can 

68 

either earn $4.50 or we have places going the other way on minimum wage, $12, $15. So, you cannot have that kind of delta and 

expect it to contribute to increased employment when you have 

labor mobility. The last thing we want to do is lure the best and 

brightest off the island, especially with the cost of the U.S. 

Treasury of picking up additional health care, dual-eligible 

Medicare/Medicaid beneficiaries, all of this cost. 

We want a vibrant Puerto Rican economy, and I think we need 

to look at the way we can do that with all the weapons in our arsenal, including tax credits, including manufacturing, looking at the 

manufacturing economy. My question for Mayor Williams is, can 

you speak to the need for economic growth as a component to help 

Puerto Rico work through the issues of debt and financial responsibility, regardless of what comes out of this Chamber? 

Mr. WILLIAMS. I think the control board was a powerful inducement for us to rationalize our balance sheet, establish settled expectations, and, on that basis, begin an economic growth program 

based on looking at our balance sheet. How do we increase our 

sales tax by increasing retail, increase growth in the downtown? 

How do we increase our income tax by bringing new residents to 

the district? I think very powerfully here, as a matter of compromise, I would prefer a stronger control board, because we had 

a really strong control board in DC, but I recognize that compromises have to be made. And I think, that said, not letting 

perfect be the enemy of the good, the oversight board here has powerful tools to influence the right strategy toward growth. 

I will say one final thing. One of the things that happened in the 

District was once we had done some severe cost cutting, rationalization of our balance sheet, established faith and credit, particularly with the Congress, we were able to get, similar to other 

states, a Medicaid match that worked better for us. I would hope 

that in this instance, as I alluded to in my oral testimony, that 

part of this rationalization process, establishing expectations process, Puerto Rico will be able to enjoy the same Medicaid relationship with the Federal Government that other states have. 

Mr. POLIS. Thank you. 

I yield to my colleague, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you for yielding, and I just want to say 

for the record that I want to thank Chairman Bishop, Ranking 

Member Grijalva, and the Resident Commissioner for their leadership, as well as Speaker Ryan and our leader, Nancy Pelosi. 

In some areas, we are in a much better place than we were 2 

weeks ago when the initial draft was made public. The oversight 

board has improved, but it still needs further improvement. So the 

ultimate return for Puerto Rico’s economy—it is one thing to have 

the board approve peaceful plans on—but on a whole different matter to have the board approve. It is not working. 

But it is a whole different matter to have the board approve 

laws, regulation, and contracts. This is a degree of micromanagement, and I will put this plainly. It is insulting to the island, which has a long memory of the U.S. military takeover in 

1898. The same is true about the fact that today we don’t have 

among the witnesses any representatives from the government of 

69 

Puerto Rico, and here we are discussing important legislation that 

will impact the lives of the people of Puerto Rico. 

What we are demonstrating today as a body, the House of 

Representatives, is that we have absolute power over the people of 

Puerto Rico. 

So, plainly, we have a colony in the Caribbean. No longer do we 

use the argument that we can showcase Puerto Rico as a democracy that we use when we needed to get in the face of the Cuban 

Government. 

I yield back. 

Mr. LAMBORN. Thank you. 

Representative Labrador. 

Mr. LABRADOR. Thank you, Mr. Chairman. 

Thank you, witnesses, for being here today. 

As a person born in Puerto Rico, this has hit close to home. I am 

now the Representative from Idaho, which is very far away from 

Puerto Rico, but, obviously, I have many memories. I left the island 

when I was 13. I have many friends and family members, and I 

am concerned about the crisis that is happening in Puerto Rico, unfortunately, a crisis that is self-imposed. This is not a crisis of the 

Government of the United States imposing bad policies on the people of Puerto Rico. This is a crisis of the people of Puerto Rico making unfortunate decisions that have led us to this point that we are 

dealing with it in Natural Resources, and I wish we were not here 

to deal with this issue. 

I just have a few questions, and I am hopeful that this oversight 

board will take seriously the opportunity to provide Congress and 

the President with recommendations on what additional steps we 

can take on economic policy, because the board by itself and restructuring by itself is not sufficient. There are many other things 

that we need to do to make sure that the people of Puerto Rico can 

use the best tools. 

And as a conservative Republican, I hope those tools are promarket tools, because we have seen some anti-market tools being 

used in Puerto Rico for a long time that have led to this crisis. 

Mayor Williams, I thank you for being here again. I have always 

enjoyed your testimony. How does this bill’s oversight board differ 

from the financial control board that was put in place for DC, and 

how is it similar? 

Mr. WILLIAMS. As I have read the bill and understand the architecture and design of the bill, the board here is intended to be 

much more principally a convener and a facilitator to use its authority as a gateway to debt negotiation and restructuring; to use 

its authority to approve a budget to drive the right reorganization, 

the right rationalization of the balance sheet, and the right performance measures in the government. And I think it is a wise balance, given all of the conflicting views. 

All that said, the authority in the District was more direct. The 

board had the authority in the first instance. It would offer the 

District the opportunity to do a budget, but after the first instance, 

we had a 1996 budget called ‘‘the 1996 budget on second look,’’ and 

it was really the 1996 budget you don’t want to look at, because 

it was pretty bad. So, the board ended up doing it itself, so—— 

70 

Mr. LABRADOR. You mentioned that you would actually prefer a 

stronger control board. Do you think we could make this a stronger 

control board? 

Mr. WILLIAMS. I recognize that this is a process of compromise 

and what I am saying is: I think that this bill works to achieve its 

intended purpose. I mean, yes, in an ideal world, I would prefer a 

stronger authority. For example, I mentioned a CFO. I think it 

would be great for the island to have a very strong CFO, going forward, who is autonomous and can provide an autonomous revenue 

estimate for the country. 

Mr. LABRADOR. OK. Thank you. 

Mr. Miller, a lot has been said over the past few weeks that this 

bill will have a disastrous impact on the municipal bond market. 

Are those predictions accurate, and why or why not? 

Mr. MILLER. I don’t think those predictions are accurate. These 

concepts have actually been floating around for several months. In 

addition, the draft itself has been out for a couple of weeks and the 

municipal bond market has really been recovering ever since 2013. 

Excluding Puerto Rico, the risk premiums across munis over and 

above AAA, they continue to narrow ever since 2013, and in addition, the consistency of investor inflows into muni bond mutual 

funds, particularly those with less Puerto Rican exposure, the consistency of those inflows has been striking since 2013, with over 

$60 billion put in. 

Mr. LABRADOR. If we pass this bill, will the municipalities in my 

state, in Idaho, will they have a more difficult time issuing bonds 

than they have in the past? 

Mr. MILLER. No, I don’t think so. 

Mr. LABRADOR. Will the state of Idaho or any other state have 

a more difficult time issuing bonds? 

Mr. MILLER. No. 

Mr. LABRADOR. No. Thank you. 

Professor Kent, does this bill set a precedent that will allow 

states to declare bankruptcy? 

Mr. KENT. I don’t think it does. There would be very, very serious constitutional difficulties, probably insurmountable, with something that looks like this bill here as applied to the states. There 

would be problems with the 10th Amendment. There would be 

problems with sovereign immunity. There would be problems with 

the so-called contracts clause of the Constitution. No is the short 

answer. 

Mr. LABRADOR. Is this bill constitutional that we are discussing 

today? 

Mr. KENT. I do think it is, yes. 

Mr. LABRADOR. OK. 

And, Mr. Kirpalani, when we are talking about this debt, there 

have been some groups that have been calling this Super Chapter 

9. Why is this not, or why is it Super Chapter 9? Why isn’t it Super 

Chapter 9? 

Mr. KIRPALANI. Right. Thank you, Congressman. The big 

problem with Super Chapter 9 or Chapter 9 is who controls the restructuring process. If the elected officials are controlling the 

restructuring process, there is a potential for problem and disappointed results. Here, it is the board that controls it, the board 

71 

that formulates the plan, and the board that negotiates with the 

creditors. That is the critical difference. 

Mr. LABRADOR. Thank you. 

I yield back. 

Mr. LAMBORN. Representative Costa. 

Mr. COSTA. Thank you very much, Mr. Chairman, members of 

the committee. 

It seems to me that we are engaged in a process here in which 

there is some precedent when we look at Detroit and we look at 

New York and we look at other examples over the years in which 

similar entities have found themselves in this situation for whatever reasons. So I would like to ask questions to Mr. Weiss and Mr. 

Miller as it relates to the timeline. 

But it seems to me, before we get there, in terms of this process, 

this legislation we are trying to put together, there are three areas 

that are still being worked on: one is the jurisdiction of this oversight board; two, is the makeup of the board; and, three, is a host 

of miscellaneous items that have been mentioned, whether it be 

minimum wage, overtime, the ultimate impacts on the Island of 

Vieques, which I have been to there. And that is going to be, I believe, at some point in time, the subject of a negotiation, as this 

legislation already has become. 

But let me go to the former mayor here, because you have your 

own experience and multiple hats that you have worn. Under the 

category of lessons learned, what would you suggest to us as this 

legislation is being formed, realizing that, at the end of the day, we 

are not going to all be satisfied with all of the aspects, but do you 

think it finds the sort of necessary compromise to get the job done 

on behalf of the people of Puerto Rico? 

Mr. WILLIAMS. Well, in Washington, DC, I think we had our first 

access to the credit markets for short-term debt in 1996. And I 

came in in the fall of 1995. There was downsizing that had taken 

place. We had taken control, under the oversight board, of the financial operations of the District, so I was able to establish credit. 

It seemed harsh and it seemed severe, but we established faith and 

credit. We were able to access the markets. 

One lesson I think is, in my humble opinion, I don’t think you 

are really helping anyone by trying to be, ‘‘too nice.’’ I think it is 

better to provide the medicine, provide the therapy, and get underway as quickly as possible to establish the expectations, get the 

economic growth program underway, get access to the markets underway. That is one lesson. 

The second lesson that I think is very important and should not 

be underestimated is, when people talk about budgets, they often 

talk about conception of the budget, formulation of the budget. But 

as we have seen in many different levels of government from this 

level on down, budget execution is crucially important. So, the execution of a budget and a financial plan is just as important as its 

conception, and I would pay attention to that in the program here. 

Mr. COSTA. All right. I want to get to my other questions. But 

think more about that, and I think if you provided that in the form 

of a letter to the committee, that would be helpful. By your comments, I assume that the 14-year example in Argentina is not an 

option in terms of how we go forward. 

72 

Mr. Weiss, the legislation has changed. There are modifications 

that have been made. What additional changes would you like to 

see in either the jurisdiction of the oversight board or the makeup 

of the board, all these miscellaneous issues, and please be quick? 

Mr. WEISS. We are getting close to a point where there is a 

potential for a bipartisan solution. 

Mr. COSTA. Well, there has to be. Without a bipartisan 

agreement, there is no agreement. 

Mr. WEISS. And without an agreement, there is a collapse in 

Puerto Rico. 

Mr. COSTA. So, for the timelines for that purpose, how quickly do 

you think we need to get there on this bipartisan agreement? 

Mr. WEISS. As soon as this hearing ends, we are going to sit with 

the Chairman and his staff. We will work through all of our technical edits on this draft, the substantive issues I enumerated in my 

testimony, and we have to get this done. 

Mr. COSTA. We have passed one deadline on April 6. Isn’t that 

correct? Then we have another deadline approaching on May 1, on 

the $2 billion payment. Then is July 1. So we have several deadlines that are looming. 

Mr. WEISS. The time to act is now. We are past every deadline. 

Mr. COSTA. OK. 

And, Mr. Miller, do you care to confirm, aye or nay. 

Mr. MILLER. I agree. The May 1 payment is significant and the 

July 1 payment is even more significant. 

Mr. COSTA. So are those the three buckets, roughly, that we have 

to find this consensus here sooner rather than later? 

Mr. WEISS. Technical items, restructuring workability, and the 

other items you mentioned. We can get there if there is a will. 

Mr. COSTA. Clearly. And without a bipartisan agreement, we 

have no bill. 

Mr. WEISS. Yes. 

Mr. COSTA. So it seems like we know where the challenges are 

as it relates to the jurisdiction, as it relates to the makeup. There 

are a host of miscellaneous issues that the Representative from 

Puerto Rico has outlined, and I think we have to come to an agreement sooner than later. We are not going to get everything we 

want. 

Thank you. My time has expired. 

Mr. GRAVES [presiding]. The gentleman from California, Mr. 

LaMalfa, is recognized for 5 minutes. 

Mr. LAMALFA. Thank you, Chairman Graves. 

Mr. Kirpalani, your clients, my understanding, are GoldenTree 

Asset Management, Merced Capital, Tilden Park Capital Management, and the Whitebox Advisors. Is that correct? 

Mr. KIRPALANI. That is correct, Congressman, in addition to 

some individuals, yes, sir. 

Mr. LAMALFA. When did your clients buy most of their COFINA 

bonds? Was it before or after 2014? 

Mr. KIRPALANI. Congressman, unfortunately, I don’t know when 

they acquired debt. We have represented original owners of 

COFINA debt, and we continue to do so. And we represent some 

that have acquired them in the secondary market from people who 

could not afford to hold onto them. 

73 

Mr. LAMALFA. So it is fair to say most of those bonds were 

bought after it was well known that Puerto Rico was distressed 

and bought them for less than original investors had paid for 

them? 

Mr. KIRPALANI. I honestly cannot comment as to when exactly 

they bought them. I would assume that it is a mix: it is probably 

some who bought initially; some who bought when the debt was at 

90, 80, 70. I honestly don’t know. 

Mr. LAMALFA. So you think it is a mixture. Not all recent 

purchases—— 

Mr. KIRPALANI. That is correct. Absolutely right. 

Mr. LAMALFA. OK. So these are hedge funds. They regularly 

seek out situations where, especially post-2014, they are looking to 

invest in a situation where there is trouble? 

Mr. KIRPALANI. These particular clients that I am representing 

I have actually not seen very active in the hedge fund space. I have 

never represented them before. There are certain hedge funds, 

some who have bought up GO bonds in particular, who are looking 

to try to have an event-driven strategy to capitalize on returns. 

Your colleague earlier talked about Argentina. Argentina was 

held up for 15 years, and the hedge funds that bought Argentine 

debt actually made 38 percent return for over an 8-year period of 

time. And some of those funds are actively campaigning now here 

so that Congress does not act, and they are just hoping that there 

is no progress, and they will use their litigation tools to try to 

achieve a result like that. 

My clients actually are supportive of responsible legislation. We 

think that the key point here is that there is a good control board 

in place and that it respects the rule of law. If we could change 

anything, we would actually give greater deference to the judicial 

system in Puerto Rico. For issues of property rights and constitutional rights, to Ms. Velazquez’ point earlier, we should defer to the 

autonomy and sovereignty of Puerto Rico and uphold their laws 

too. 

Mr. LAMALFA. OK. That sounds good. 

Now, some of these bonds are not due for quite a few years, a 

decade or maybe even two decades. But my understanding is that 

you have been asking the Commonwealth of Puerto Rico to start 

repaying sooner than they would have under the original agreement. So, with Puerto Rico being in such a cash-stressed situation, 

why would these particular investments, especially the more latearriving investments, go to the head of the line for repayment with 

that much stress? 

Mr. KIRPALANI. That is a terrific question, Congressman. Let me 

try to explain in a very short period of time here. Investors who 

bought COFINA senior bonds, this was the original safe bond that 

was introduced when the economy actually collapsed in 2006 in 

Puerto Rico. There were long-term investors, as you said, for 40 

years, 30-something or 40 years, and the protection they had was 

if there is a default, they would get paid ahead of any bonds that 

came later. So there is a big swath of subordinated bonds, contractually junior bonds, somewhat called junkier bonds, that came 

later. So, the only thing that we were saying is: We will reduce the 

overall payment requirements. We will give back $19.5 billion over 

74 

the next 35 years to the people of Puerto Rico, and the only thing 

we ask is respect our contract rights—that is all—and that we get 

paid before the juniors. But some of them actually will get paid 

later than maturity, absolutely. 

Mr. LAMALFA. For those that would go ahead of their contracted 

time, though, isn’t that kind of stepping out of line? Wouldn’t that 

be kind of a windfall for those? 

Mr. KIRPALANI. No, sir, because contractually upon a default, 

everything is accelerated and it is due immediately. So what we 

would do is actually forbear, take no payments at all for a year, 

and then have payments for the next 5 years and slowly inch back 

up to what the government of Puerto Rico has said they could actually afford. So the only issue, really, between us and the Commonwealth of Puerto Rico are the holdup creditors, who are the junior 

bondholders who will not go along. That is the problem. 

Mr. LAMALFA. OK. Thank you for your answers. I will yield back, 

Mr. Chairman. 

Mr. GRAVES. Mr. Clay is recognized for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. 

Professor Johnson, one of the areas of concern for me is: How do 

we best protect pensioners and retirees who, no fault of their own, 

stand to be hurt by severe reductions in pension benefits? Have you 

given that much consideration? 

Dr. JOHNSON. It is a very difficult issue, Congressman. So, as you 

know, people who live in Puerto Rico pay payroll taxes, and they 

do receive Social Security. So there is a Federal dimension. But 

there are also government people who work for the government 

who receive government pensions. And those pensions are, without 

question, under pressure. And the pension fund, I believe, is out of 

cash or very nearly out of cash. 

I think that what you say in legislation is that there has to be 

a sustainable fiscal plan. To Ms. Velazquez’ point, I believe that 

what you have here is a governor with the right to design a plan 

making decisions, including about what happens to pensions. That 

plan has to be consistent with what the board regards to be sustainable, but that level of decision, I believe, if you were to pass 

this legislation, would still reside with the Governor and the legislature of Puerto Rico. 

I don’t have an easy answer. There are no easy answers. But 

that is a decision that will be made by the elected officials of 

Puerto Rico. 

Mr. CLAY. Thank you. 

Mr. Weiss, the proposed legislation does a delicate dance with 

the creditors of the island nation. In its current form, will this provide the solution, or is there more work to do there? 

Mr. WEISS. Congressman, we believe that we can get there if the 

good spirit of cooperation on technical items which need to be remedied remains in place and we work quickly and diligently, we believe that we can get to a workable solution. I highlighted three 

elements in my oral testimony where I think substantial work 

needs to be done first. There will be a host of other technical 

issues. But as Congresswoman Velazquez pointed out, we have 

made a lot of progress. 

75 

This is the mayor’s term. This is a wise balance. It is tough for 

the people of Puerto Rico. It is tough for their creditors, some of 

them. But in the aggregate, it is going to produce the best overall 

results in our judgment, properly constructed for the people and for 

the investors. 

Mr. CLAY. Thank you. 

Mr. Chairman, at this time, I will yield to my friend and 

colleague from New York, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you. 

I thank the gentleman for yielding. 

Mr. Johnson, members here are concerned and troubled by the 

fact that, yes, in Puerto Rico, they have made bad decisions fiscally. They have spent too much. But I would like to ask you— 

workers in Puerto Rico pay the same payroll taxes as those living 

in the mainland, yet they receive fewer benefits than those who 

live in the United States. Do you think that is fair? 

Dr. JOHNSON. No, Congresswoman, I don’t think it is fair. In a 

previous hearing, I testified that my recommendation would be to 

move Puerto Rico toward the same fiscal relationship with the 

Federal Government that the 50 states have. I think that would be 

fair. That would be reasonable. You could separate it from the 

issue of statehood, although, obviously, it comes up in the context 

of statehood. 

And, specifically, I wish that you were addressing the earned income tax credit in this legislation because that is one salient point 

that actually people on the right and the left generally agree on is 

a sensible program, and Puerto Rico, people who live and work in 

Puerto Rico do not have access to that, as you know. 

Ms. VELAZQUEZ. Well, the fact of the matter is that this legislation that we have before us lacks any economic growth policy. And 

yes, that will be one area that will benefit greatly the people of 

Puerto Rico. 

Mr. Weiss, in your testimony, you stated, and I quote, ‘‘The 

process for entering restructuring should not require a supermajority vote of the board. A minority of the board should not have 

veto power at the critical juncture when all other options have been 

exhausted.’’ 

Given your comments, is it your view that requiring five board 

members to vote affirmatively to approve Puerto Rico’s entrance to 

judicial restructuring is an insurmountable hurdle, in fact, denying 

Puerto Rico restructuring authority? 

Mr. WEISS. Congresswoman, it is one of the three elements I 

highlighted in my oral testimony. I absolutely stand behind the 

words that I used. But I also expect that it will be among the 

issues where we can make progress with the committee and with 

the Chairman and his staff. 

Ms. VELAZQUEZ. OK. 

Thank you, Mr. Chairman. I yield back. 

Mr. GRAVES. Mr. Westerman is recognized for 5 minutes. 

Mr. WESTERMAN. Thank you, Mr. Chairman. 

And thank you to the panel for being here today. 

As unpleasant and as unfortunate as this debt issue is in Puerto 

Rico, I am actually glad that we are here in Congress talking about 

debt, and I hope that we will have more serious discussions about 

76 

debt. I say that based on the fact that if you look at the debt per 

capita in Puerto Rico, $115 billion over roughly 3.5 million people, 

that is just under $33,000 per person. If you look at the debt here 

in United States, $19.2 trillion over 323 million people, that is over 

$59,000 per person. 

We have a debt per capita 81 percent higher than the territory 

of Puerto Rico. This may be the classic example of worrying more 

about the plank in our own eye than the speck in our neighbor’s 

eye. That said, I think we can learn from history. Any of us who 

have made an investment have probably read the small print that 

says: Past performance is not an indicator of future performance. 

My state of Arkansas has a statistic that I am not very proud 

of. We were the last state to default on our debt. It happened in 

1933. It happened after the state had invested heavily in bonds for 

infrastructure, a couple of natural disasters, crash of the stock 

market, and the state found itself in a very precarious situation. 

When we talk about bankruptcy, I think to the common person, our 

state was bankrupt, but we did not have Chapter 9 bankruptcy 

protection. 

One historian wrote that we were flat broke. The State Treasurer 

said at one point in time the balance in the state budget was $4.92. 

Arkansas suffered through that. They took a substantial hit to 

their bond rating. It was actually 1949 before the state ever issued 

another bond. But through that, we also put better fiscal policies 

in place. We had a balanced budget act that was passed. I was 

serving in my state legislature in 2011 when many states were 

having fiscal issues. Our state was actually cutting taxes and had 

a surplus budget because of the pain that we had suffered many 

years ago and the reforms that we had put in place. 

Mr. Weiss, other than the fact that Puerto Rico has not fixed 

their problem, what is the emphasis for the Federal Government 

to interject itself into the Puerto Rican debt issue? And I remind 

you that it is the Federal Government that is 81 percent per capita 

more in debt than the government that we are trying to help. 

Mr. WEISS. The Federal Government borrows on a 10-year basis 

at 1.75 percent. Puerto Rico is borrowing in excess of 12 percent. 

In fact, it is not borrowing at all right now because it is shut out. 

We have three interests: Number one, we believe that the safety 

and economic well-being of the 3.5 million Americans in Puerto 

Rico is at stake. Essential services today are being curtailed. 

Hospitals are being shut and out-migration has accelerated to the 

extent that 2.5 percent of the Americans in Puerto Rico are now 

coming into the mainland every year. 

We are inextricably bound to Puerto Rico. How they got there is 

not a topic of today’s discussion. There is a long history of mismanagement that extends back decades. But the complexity and 

extent of this debt crisis is such that it falls on Congress to act in 

order to set Puerto Rico back on the right path. 

Mr. WESTERMAN. Mr. Kent, even if a future Congress tried to use 

this legislation to establish precedent for a Chapter 9 protection for 

states and potentially violate the Constitution in doing so, would 

that Congress still not have to pass legislation? And is there not 

precedent that establishes no Chapter 9 protection allowed for 

77 

sovereign states? That question has been asked many ways. It is 

another attempt. 

Mr. KENT. Certainly, Congress would have to authorize it. And 

as I said before, I think the constitutional difficulties are so severe 

that it is hard for me to imagine how it could possibly be constitutional with regard to the states. There is contracts clause, there are 

sovereign immunity issues, and then there are also issues with 

10th Amendment and state sovereignty being invaded. So, I just 

don’t see how it could happen. 

Mr. WESTERMAN. Mr. Miller, I may have time to get this question out there. Would this legislation cause a ripple effect in the 

bond market? 

Mr. MILLER. No, I think the opposite. I think it would be a 

calming effect on the bond market. 

Mr. WESTERMAN. And the opposite of that, if nothing is done, 

would it cause a ripple in the bond market? 

Mr. MILLER. The risk is higher if nothing gets done. 

Mr. WESTERMAN. OK. 

Thank you, Mr. Chairman. 

Mr. GRAVES. Thank you. 

I recognize myself for 5 minutes. 

Mr. Kirpalani, I heard folks talking earlier about ads that are 

being run in various districts. Could you give your opinion on what 

you think the outcome of those who are funding those ads is, what 

their objective is? 

Mr. KIRPALANI. Sure. Thank you, sir. 

To be perfectly honest, just to start with, this is my first experience with Washington and with this whole political process. I didn’t 

even know—— 

Mr. GRAVES. I would urge you to leave. 

Mr. KIRPALANI. I didn’t even know that you could do that kind 

of thing, place ads in the newspapers in Members’ home districts 

when they are at home on recess with their families. I think it is 

really horrible. 

I think that the real goal here is, if you really dissect, which I 

have been doing over the last 10 months or so, what the motivations are, the folks that are putting the ads, they bought New 

York-governed GO bonds issued by Puerto Rico. So just take a step 

back and think about that. The sovereign of Puerto Rico, territorially sovereign of Puerto Rico, issues bonds, but the creditors insisted—and these are creditors who insisted that the minimum 

entry to participate in that offering is $100,000 a pop. This is not 

your individual retail customer. OK. These are sophisticated, wellheeled institutions. And they said: We know how to make gambles. 

Our gamble is this Congress in a bipartisan way will never act. So, 

therefore, let’s put New York law to govern the Puerto Rico general 

obligation bonds so that when Puerto Rico collapses, which it has 

done, and Puerto Rico issues a debt moratorium law, which it has 

done, we will ride free. So the only way that that debt could also 

participate in an overall restructuring process is if the U.S. 

Congress acts. They are just hoping that does not happen. 

Mr. GRAVES. Do you think that they would also prefer some type 

of bailout from Congress or from the Federal taxpayers? 

78 

Mr. KIRPALANI. They are just spinning absolute fiction. That is 

what they are doing. There is no bailout concept here. There is 

nothing in the bill that suggests a bailout. It is, frankly, just the 

opposite. It is the only way to rationalize the resources that are 

available to repay creditors in a timely way. I am also representing 

a couple of individuals: Barry, from Minnesota, who is a retiree 

from New York City, a former public worker; as well as Pepin from 

San Juan, who is also retired but, unfortunately, now has to 

restart working at a dry cleaning business. 

These folks want to hold on to their investments. They cannot afford to sell them at the depressed prices. They just need to get repaid, and they are worried very, very much about their financial 

future. And this type of responsible legislation gives them encouragement. 

Mr. GRAVES. Thank you. 

Mr. Weiss, thank you for returning. Your testimony in both instances has been very educational. I know you have been asked 

this question in some form previously, but could you explain what 

you view as being the alternatives right now that Congress has in 

order to address the crisis in Puerto Rico right now? 

Mr. WEISS. Thank you, Congressman. 

On the one hand, it is a cascading series of defaults, mounting 

litigation. The constitutionally-protected debt that is due in July 

cannot be paid. The moratorium which has been enacted in Puerto 

Rico will apply in each subsequent repayment instance. In our 

judgment, chaos will ensue, and the economy will face another lost 

decade with accelerated out-migration. 

Our alternative to that, which involves pain for all sides, but, 

again, is this wise balance, is to put in place independent fiscal 

oversight and a restructuring set of tools, both incentives for voluntary negotiations and a fallback in the event that those fail. This 

is, by far, the best outcome for the people of Puerto Rico, for markets as a whole, as a colleague has attested, and, ultimately, will 

provide the best recovery for creditors taken as a whole. 

Mr. GRAVES. Mr. Weiss, would you see no action by the Congress 

as increasing the chances of liability for taxpayers or decreasing? 

Mr. WEISS. There is an element of inevitability around that question. This is the alternative to a bailout. 

Mr. GRAVES. Thank you. 

One last point I want to make and I know time is about to run 

out. Look, I don’t want to get into a political or partisan battle in 

this hearing. I appreciate the cooperation everyone has had. There 

has been a bit of a focus on minimum wage, and I just want to 

make note that, in 2013, there was unanimous action by this 

Congress to ensure or to prevent the increase in minimum wage in 

territories in the United States, again, unanimously passed, signed 

by this President. I understand that there are challenging 

conditions, but I have concerns with imposing the minimum wage 

standard for the most developed country in the world upon some 

territories that may not have similar conditions. I just want to 

make note, and I am looking forward to continuing to work with 

all of you on establishing the best policy. 

I will now recognize Mr. Hice for 5 minutes. 

Mr. HICE. Thank you, Mr. Chairman. 

79 

Professor Kent, you made the comment earlier, and I just want 

to clarify, that in your opinion this bill is constitutional, correct? 

Mr. KENT. Yes, I think Congress has power under the territorial 

clause. 

Mr. HICE. Is there any constitutional precedent where this has, 

or something similar has, taken place in the past with another 

territory? 

Mr. KENT. I am not aware of one, but there are, as I said, 

identical clauses. The problem here would be if the bankruptcy 

clause is said to apply and require uniformity. But like I said, there 

is precedent that the other uniformity clauses in the Constitution 

do not apply to Puerto Rico and similarly situated territories. So, 

I don’t think there will be that problem. Congress could act in a 

way that either territory, across all the territories or specific to 

Puerto Rico, I think, without a constitutional problem here. 

Mr. HICE. OK. We are also being told, just to carry this line of 

thought a little further, that what is happening and what is being 

proposed here, constitutionally, with Puerto Rico does not set a 

precedent for states or cities. Out of curiosity, does anyone know, 

of the other U.S. territories, are any of them in any financial 

problem? 

Mr. MILLER. The territory that probably has the best reception 

and the narrowest risk premium in the marketplace is Guam, and 

the balanced budget and most stable economy. Some concerns 

about Virgin Islands, some delayed audits, but not anywhere near 

this kind of magnitude. 

Mr. HICE. OK. But there is potential that we could be facing this 

with some other territories at some point? 

Mr. WEISS. Puerto Rico is multiples more stressed than any 

other territory. 

Mr. HICE. I understand that. But my question is, are we going 

to be running down this path? Once we set a precedent here in 

Puerto Rico, are we going to be running down this at some point 

elsewhere? 

Mr. WEISS. The U.S. Virgin Islands ran a referendum as to the 

viability of a CFO, not even a control board. And by memory—and 

I ask to verify this with you afterwards—I believe two-thirds or 

three-quarters of the citizens voted against in that referendum. 

Mr. HICE. OK. Let me go on a little bit further, and, Professor 

Kent, I will stay with you, I think, for this question. Municipal 

bondholders who have a particular interest in Puerto Rico probably 

are in every district represented in this committee and in Congress, 

for that matter, and probably senior citizens are most affected by 

that. This bill clearly has Congress changing the rules after they 

have purchased an investment. Is it your belief, is it your testimony, that Congress has the constitutional authority to change the 

rules after the fact on municipal bondholders or anyone else? 

Mr. KENT. Yes, the Constitution protects contracts against states 

changing them, but it does not have a similar protection for the 

Federal Government. That is because the Federal Government has 

the power over bankruptcies. But as I said here, with regard to territories, Congress has an alternate basis, and it could enact bankruptcy legislation under the territorial clause. 

80 

Mr. HICE. I understand that case here. But you are saying 

constitutionally Congress has the authorization to come in after the 

fact and change the rules of the game of investors? 

Mr. KENT. Well, as I understand the process, that is what 

happens with bankruptcy. 

Mr. HICE. I understand the process. I am asking constitutionally. 

Mr. KENT. Yes. 

Mr. HICE. I would like an answer from you in writing, if you can, 

where in the Constitution that would be found. 

Let he hit my final thought here. Yes or no, Mr. Weiss. Let me 

just ask you this: Is it problematic at all that the oversight board 

has no one representing the bond market on the oversight? 

Mr. WEISS. The composition of the oversight board has not been 

determined. 

And with respect to your other question, the 2014 prospectus 

that Mr. Kirpalani described expressly provided that there could be 

a change in law—— 

Mr. HICE. OK. Last question. Thank you. 

Mayor, you have had experience with this, both on the board in 

DC and as mayor. The tax incentives, there have been changes recently. All have resulted in declining jobs. What tax incentives 

need to take place? And I would really like to hear from Mr. 

Johnson as well on this, your suggestion as to what tax incentives 

need to be in place. 

Mr. WILLIAMS. Again, I think the board can help rationalize the 

financial performance plan on which you can build economic incentives. I don’t know particularly which. But by assuring the markets 

that there is execution in the government and settled expectations 

on the performance of the government, you can then begin to build 

economic investment. 

Mr. HICE. Could I get your answer in writing here, Mr. Johnson, 

if you would, please? If I could have that, I would appreciate it. 

Thank you. I yield back. 

Mr. GRAVES. Mrs. Radewagen is recognized for 5 minutes. 

Mrs. RADEWAGEN. Thank you, Mr. Chairman. 

While Congress and certainly this committee understand the 

need for this legislation, I do believe that it might not go far 

enough in providing the tools Puerto Rico needs to recover from 

their current fiscal crisis. 

There are many good measures in the bill that will do a great 

deal to resolve the issue, but there are also other things that can 

be done—and some may have mentioned this already, but I wanted 

to go on record—such as putting the territories on the same footing 

as the states when it comes to the earned income tax credit, the 

child tax credit, and removing the caps on Medicaid. 

Just quickly, anybody on the panel, can any of you explain to me 

why these proposals should not be part of this bill? 

Dr. JOHNSON. Well, Congresswoman, I had previously testified in 

a hearing of a subcommittee of this committee exactly in favor of 

those changes. I can send you that testimony if you don’t have it 

readily available. 

I do recognize that this is a political process here, and I recognize 

that not everything that everybody wants can be in this particular 

piece of legislation, but I think the Congress will have to come back 

81 

to these issues or the closer related issues in the near future because encouraging and stimulating growth in Puerto Rico is going 

to remain an important priority. This bill is a first step, can become a first step, but I think you are going to have to do more. 

Mrs. RADEWAGEN. Thank you. 

Mr. WILLIAMS. I would agree with that, for the record. 

Mrs. RADEWAGEN. Thank you. 

And, last, I notice that in the final draft, the name of the board 

has been changed from the Puerto Rico Oversight Board to the 

Territorial Oversight Board. That actually makes Americans far 

more nervous. While this may seem trivial, I am concerned with 

this renaming and its implications as well as some of the language 

in sections 303 and 401, which essentially gives Congress carte 

blanche power over the territories. 

In your opinion, would the language contained in this bill grant 

Congress unlimited powers with regard to the other territories? 

Mr. WEISS. With respect to the other territories, there is an optin feature such that the other territories would have to choose 

through their own democratic process to elect the powers which 

were described in the article to which you refer. 

Mrs. RADEWAGEN. Thank you, Mr. Chairman. I yield back. 

Mr. GRAVES. I am going to recognize Mr. Pierluisi for a brief 

closure. 

Mr. PIERLUISI. Thank you, Chairman. 

I would like to clarify a couple of things for the record. Part of 

this overspending is definitely the result of mismanagement. I 

admit it. And it is embarrassing. But part of it is lack of adequate 

Federal funding in key areas such as the health of the American 

citizens living in Puerto Rico. 

Let me just give you an example. Under the Medicaid program, 

Puerto Rico is entitled to get about $350 million a year. With 

ObamaCare in place, the additional funding given by the Affordable Care Act, Puerto Rico is getting about $1.2 billion a year from 

the Federal Government to take care of the medically indigent in 

Puerto Rico, American citizens. 

Oregon, which has a similar population to Puerto Rico, gets $5 

billion a year. You don’t need to be an economist or a CPA to know 

the huge difference between $1.2 billion a year and $5 billion a 

year. Wouldn’t that help Puerto Rico’s fiscal condition? That is just 

an example. 

My other comment has to do with growth. We are all about 

growth. Puerto Rico is not going to grow when its government is 

failing, when its government has become an impediment to growth, 

when its government owes contractors from the private sector over 

$2 billion. 

We need to stabilize the government so that Puerto Rico grows. 

And talking about growth, I have to remind everybody here that 

the last two territories that became states, Hawaii and Alaska, 

within 10 years each doubled their economy. So if we want growth, 

let’s change Puerto Rico’s status. 

Thank you, Mr. Chairman. 

Mr. GRAVES. Ranking Member. 

Mr. GRIJALVA. Thank you, Mr. Chairman. 

82 

I want to thank the witnesses. I appreciate very much the testimony. We are getting down to the point that if a true bipartisan 

legislation is to appear, it needs to appear immediately. 

I echo Mr. Weiss’ points on areas I think need to be worked on 

for the sake of a bipartisan agreement. 

I also want to say that this is an alternative to a bailout, and 

I really appreciated the question. People said, ‘‘Oh, this is a bailout; 

this is unconstitutional; this skirts bankruptcy laws,’’ and all that, 

which through this testimony has proven not to be the case. 

Having said that, though, this is an alternative to a bailout because, in the short term, if Congress truly understands both its fiduciary and, indeed, its moral responsibility to our fellow citizens 

in Puerto Rico, we have to do something, because something will 

be done, and the humanitarian crisis spurred by this economic and 

fiscal crisis cannot be tolerated. 

I hope, for all the stakeholders in this, that a very important effort is done to satisfy a bipartisan piece of legislation and that the 

narrow interests in this question are ignored and the majority interest is taken care of, and that is the people of Puerto Rico. 

I want to thank you, Mr. Chairman, for the hearing, and I look 

forward to a product that we can all comfortably support on the 

Floor. 

With that, I yield back, and thank you. 

Mr. GRAVES. I thank the witnesses for their valued testimony 

and the Members for their questions. 

The members of the committee may have some additional questions for the witnesses, and I will ask that you would respond to 

those in writing. Under Committee Rule 4(h), the hearing record 

will be open for 10 days for these responses. 

If there is no further business, without objection, the committee 

stands adjourned. 

[Whereupon, at 12:51 p.m., the committee was adjourned.] 

[ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD]

PREPARED STATEMENT OF THE HON. STACEY E. PLASKETT, A DELEGATE IN CONGRESS

FROM THE U.S. VIRGIN ISLANDS

Thank you Chairman Bishop and Ranking Member Grijalva for holding this 

hearing to consider H.R. 4900, an act to establish an Oversight Board to assist the 

Government of Puerto Rico, including instrumentalities for managing its public finances, and for other purposes. 

The people of the United States Virgin Islands and the other territories are aware 

of the fact that for over a year now, there have been discussions in Washington 

around the concerns facing Puerto Rico and their continuing debt crisis. 

While I am generally supportive of Congress acting to resolve an issue affecting 

one of the territories, I am concerned that a large number of the discussions, thus 

far, have been focused solely around the fear of the collapse of Puerto Rican bonds, 

instead of the underlying issues that led to the debt crisis. 

83 

In October 2015, the White House issued a roadmap to recovery for not only 

Puerto Rico, but for the other insular territories that were also in need. In that proposed roadmap, the White House requested that Congress address several areas 

other than bankruptcy, including: 

• Expanding and lifting the overall cap on Medicaid; 

• Increasing tax relief for residents through the Earned Income Tax Credit and 

Child Tax Credit; 

• And increasing access to credit opportunities. 

These were all areas of focus not just for Puerto Rico but for Guam, American 

Samoa, Northern Mariana, and the Virgin Islands. 

The Governor of the U.S. Virgin Islands, my fellow Democratic House Members, 

leaders in Puerto Rico, and myself all agreed that these options were an important 

start to helping us create real economic growth for our territory. 

After several months of pushing for a package to help all territories create economic opportunity, it became evident that the relief coming out of this Congress 

would be focused solely on bankruptcy protection. 

I believe this is a mistake. I believe this Congress and this legislation should focus 

on putting in place the mechanisms needed to ensure that our economies could actually grow. 

H.R. 4900 mentions nothing about Medicaid, or any other tax relief, nor does it 

provide any other recommended economic growth options. It will review Puerto 

Rico’s pension system and deals primarily with the mechanism for Puerto Rico’s restructuring of its debt. 

This bill does so by creating an Oversight Board, a Board with very broad powers 

over the Puerto Rican government. Rather, it allows a stay on payments, while the 

Board reviews the Puerto Rican finances, and that Board will ultimately determine 

if Puerto Rico can restructure. 

However, what is more alarming, is the fact that PROMESA also contains a provision, which states that the other territories may also have oversight boards, if the 

local Legislature and Governor request it from Congress. 

I cannot support this bill creates a Territory Financial and Oversight Management. Any language that implies Federal oversight, as to how we govern ourselves, 

even if it implies that local support is required, is not acceptable. 

I am concerned not only about over-reach by the Federal Government, but by the 

chilling message this may send to our own creditors and investors countering the 

confidence that our Governor and legislature have created over a number of years 

of hard work. 

I believe the Territorial Financial Oversight and Management Board provision in 

H.R. 4900 to be detrimental to the advancement of our local government. It provides a tool for financial restructuring instead of providing resources for the other 

territories to avoid a debt crisis and economic growth for all territories. The territories did not ask for an oversight board. Therefore, the passage of this bill should 

not hinge on the inclusion of the other territories. 

I will also continue to press for the development and creation of true economic 

growth opportunities, like those I referenced earlier. 

Thank You. 

THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA, 

PUERTO RICO CHAPTER,

SAN JUAN, PUERTO RICO

April 11, 2016 

Hon. ROB BISHOP, Chairman, 

House Committee on Natural Resources, 

1324 Longworth House Office Building, 

Washington, DC 20515. 

Re: Puerto Rico Oversight, Management and Economic Stability Act (‘‘PROMESA’’) 

Dear Chairman Bishop: 

The Puerto Rico Chapter of the Washington, D.C. based Association of General 

Contractors of America (‘‘AGC-PR’’) wishes to thank you, members of the Committee 

and staff for the work and effort related to Puerto Rico, its current crisis and the 

potential solutions. In connection therewith, we hereby formally express particular 

84 

1The discussion draft released by the House Committee on Natural Resources on March 29, 

2016. 2The power generation fleet of the Puerto Rico Electric Power Authority is very aged and 

inefficient (median generating plant age is 44 years vs. an industry average of 18 years). 3Potable water reservoir capacity around most of the island is severely impaired given a lack 

of maintenance; water and sewer treatment and distribution facilities require significant capital 

investments (for federal environmental compliance, efficiency and related factors) for which the 

Puerto Rico Aqueduct and Sewer Authority does not have the funds or even the current ability 

to access the capital markets. 4 As recent as March 2016, EPA informed that 20 of the 27 landfills in operation on the Island 

are not in compliance with local or federal regulations that protect human health and the environment—and as such, pose a direct threat to surface and ground-waters (potential or actual 

drinking water sources), soils and air, in and around communities near these noncompliant 

facilities. 5The Puerto Rico Highway & Transportation Authority lacks the funds for the construction 

of 1new roads and/or bridges or their adequate maintenance. 6 [_______] 

7The Kruger Report states: 26. A lot can be done to lighten the burden of doing 

business, which is particularly important when reforms are aiming to move the 

economy in new directions. To date, the term business-friendly in Puerto Rico has referred 

to efforts to offset high input costs with tax breaks and subsidies. As input costs are brought 

down, the focus should shift to ensuring a level playing field and greater ease of doing business, 

including permits for new businesses. This is always an on-going task but a start could be made 

by addressing the three weakest areas identified by the World Bank: the difficulty in registering 

property, in paying taxes, and in obtaining construction permits . . . (Emphasis ours). See 

Puerto Rico—A Way Forward, Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, June 29, 2015, 

http://www.bgfpr.com/documents/puertoricoawayforward.pdf; See Page 27 of the Puerto Rico 

Fiscal and Economic Growth Plan prepared by the Working Group for the Fiscal and Economic 

Recovery of Puerto Rico Pursuant to Executive Order 2015–022, September 9, 2015; http:// 

www.bgfpr.com/documents/PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf. 

support for a fiscal control board for Puerto Rico to address the current fiscal and 

economic crisis. We also express our strong support for Title V of PROMESA 1 (as 

it relates to infrastructure investment and economic development), which undeniably is at the center of the current crisis and the key to any sustainable solution. 

Any federal structure that may be legislated to help Puerto Rico address the current crisis must not only address the issue of debt but—at the same time and 

possibly with greater emphasis and priority—must ensure sustainable economic 

growth, development and certainty. This includes contractual certainty (rule of law) 

to enable small, medium and large investors and business concerns to invest, perform and receive payments therefor. Without this, any debt or fiscal restructuring 

will only postpone the inevitable, to the detriment of all U.S. citizens still residing 

on the Island as well as those who have invested in Puerto Rico instruments. 

It is widely known that our infrastructure, whether energy,2 water and sewer,3

solid waste management,4 roads and bridges 5 and low income housing,6 is in need 

of replacement, modernization or new construction. The Committee is well aware 

that Puerto Rico’s permitting process poses significant challenges for the Island’s 

general competitiveness—resulting in long and inefficient practices that generate 

uncertainty and discourage investment. Permitting reform is needed and should also 

contemplate government restructuring in order to achieve sustainable efficiencies 

and government transparency. Recent studies commissioned by the current administration expressly recognize the need to address permitting issues in order to improve and achieve sustainable economic growth.7 Puerto Rico has the necessary 

statutory and regulatory structure to reform permitting. Any final version of 

PROMESA (Title V) should ensure that Puerto Rico immediately undertakes (implements and maintains) the permitting reforms needed to ensure economic growth, investment, jobs and infrastructure capable of providing citizens quality services as 

well as protecting the environment and human health. 

The AGC-PR represents 80% of the overall economic activity in construction and 

has 300 members with diverse professional backgrounds and experience covering 

construction industry areas that include but are not limited to energy, roads, water 

and sewer, housing, tourism, and facilities for the manufacture of pharmaceutical 

and other products as well as technology and research and development. 

Our historic role and impact on the local economy was very significant as 

compared with today. 

85 

8 It was unofficially stated (by the Secretary of Treasury) last week that the total debt due 

to Government service providers has reached the amount of over $2.2 Billion. With respect to 

PR-AGC members, as of March 2016 the Puerto Rico Aqueduct and Sewer Authority alone owes 

multiple members over $160 Million, with no near term capacity to pay these amounts. 

Following are some telling data points: 

Area Historic Current 

Jobs .......................................................................................................... 90,000 20,000 

Gross National Product ............................................................................ 10% 3% 

Investment ............................................................................................... $6B $2B 

The local construction industry’s situation is evidently aggravated by the current 

fiscal crisis, as by the Administration’s delay in paying government contractors for 

services rendered.8 Furthermore, very recent government actions like the highly 

controversial enactment of Act 21–2016 (Moratorium Act) last week and ongoing discussions by local government officials about bankruptcy, defaults and the ability to 

expropriate private property and services without proper procedures has only added 

to the general uncertainty of citizens and the business community—confirming the 

investing community’s perception that Puerto Rico, a U.S. Commonwealth, is a high 

risk investment jurisdiction. 

PROMESA will undoubtedly provide Puerto Rico with the necessary structure, 

and immediate credibility, to quickly begin addressing the most fundamental budgeting, cost-control, efficiency and transparency requirements of a fair and equitable 

government. Similarly, Title V will help implement and maintain the regulatory 

conditions necessary to facilitate critical infrastructure projects, related investments 

and economic and job growth. We trust and support that the final version of 

PROMESA and Title V be designed to ensure that Puerto Rico can retake the path 

of a supportive government while allowing the private sector to jumpstart economic 

development, create jobs and provide opportunity to thousands of citizen on the 

Island. We urgently need a climate of credibility, transparency and certainty that 

maximizes Puerto Rico’s ability to overcome the current crisis. 

Again, thank you and the Committee for its work and efforts related to Puerto 

Rico. We stand ready and available to assist in any way the Committee deems 

relevant and appropriate. 

Sincerely, 

ENG. NEYSSA VARELA, 

President. 

Hon. ROB BISHOP, Chairman, 

House Committee on Natural Resources, 

Washington, DC 20515. 

Dear Chairman Bishop: 

Respectfully request a personal interview with you in your Washington D.C. 

office, at some time between April 12–15, 2016. 

I am Jose Olmos, Republican and leader within the Veteran and Military community in Puerto Rico. After 27 yrs of service in the Army Reserve and Army National 

Guard, as a Citizen Soldier I retired as Lieutenant Colonel in 2011. For many years 

I have been active in Puerto Rico educating the political leadership on the 

importance of the contributions made by our citizens to national security. At present 

I am running for office to become the 1st State Representative in Puerto Rico political history that strongly and without limitation supports the Veteran/Military 

Community and the Caribbean Security of the United States. 

Under your leadership as Chairman of the House Natural Resources Committee 

you intend to present a bill whose objective is to ‘‘To establish an Oversight Board 

to assist the Government of Puerto Rico, including instrumentalities, in managing 

its public finances, and for other purposes.’’ This proposed bill has been in preparation by your committee for several months and has received input from many 

political, commercial and industrial leaders of Puerto Rico. 

86 

But one community that has not been heard is the Military Community of Puerto 

Rico, composed of 150,000 veterans and over 50,000 service members in all the military components of the nation. I am sure that you have not received any input or 

comments from the perspective of national security or considered the 117 years of 

loyal military service to the nation by the American Citizens of Puerto Rico. My 

intend is to move you to consider that any Bill to ‘‘assist the Government of Puerto 

Rico, in managing its public finances’’ is incomplete if you don’t consider the Blood, 

Sweat and Tears spilled by the American Citizens of Puerto Rico in the defense of 

the nation. 

The solution of Puerto Rico economic problems is not only a question of financial 

loss; it is also a question of facing the real challenge of giving equal political right 

to Puerto Rico. The Bill that you propose will only place a temporary bandage to 

the festering wound of a colonial relationship. 

Next July 25, we commemorate 118 years since the U.S. Armed forces INVADED 

Puerto Rico, following the orders of a REPUBLICAN President and supported by a 

REPUBLICAN Congress. Our ancestors received those troops as liberators and 

welcomed the American flag in 1898 because they believed it, and we still believe 

today that it is a symbol of democracy and justice. Since then we have struggled 

to be responsible, loyal and patriotic citizens. But today, although we enjoy great 

material wealth our political liberties are more restricted than when we were under 

the colonial rule of Spain. Why you may ask? Then as today our final destiny as 

Puerto Ricans is subject to the whims of a Central Government who is unwilling 

to make up its mind. The main difference is that the USA Congress created a facade 

to hide its control of the island. I think that the Spaniards were more truthful in 

their actions. 

I want to meet with you and hear from you, how will you explain to the thousands 

of Veterans and Military Personnel/Citizens from Puerto Rico that they are equal 

on the battlefield but not in the Voting Booth. How will you explain to the military 

widows and orphans that the sacrifice of their parents is worthless and diminished 

by the economic interest of Wall Street? How will you justify the continued inequality to thousands of parents who lost their sons in distant battlefields for the defense 

of an ungrateful nation? 

The economic crisis of Puerto Rico needs urgent attention but the Blood, Sweat 

and Tears of our soldiers has to be considered in the solution. Any solution can’t 

be at the expense of passing the final solution of the island political status to 

another generation. The time to act is now. 

Thank you for the opportunity and look forward to a sincere face-to-face 

conversation. 

Sincerely, 

JOSE O. OLMOS

P.S. Below are some facts related to the military contribution of the American 

Citizens of Puerto Rico. 

It is important for you to become aware that PUERTO RICO IS THE 

CARIBBEAN BORDER OF THE USA. The Caribbean border is as important as the 

Mexican Border and currently is wide open leaving 3.5 million American Citizens 

in the Island at risk of terrorism, narcotics and the enemies of our Great Nation 

that move their ships freely within the area. It is time that the Caribbean Border 

receives the attention it merits to be secured. 

1. Puerto Rico National Guard plus Reserves contribute more Citizens Soldiers to 

national Defense than 22 States. 

2. There are approximately 150,000 veterans in the island plus their family 

members. 

3. There are more than 50,000 Puerto Rican soldiers in Active Duty in all the 

branches of the armed forces. 

4. Puerto Ricans have carried the burden of defending the nation in equal terms 

with our continental brother in arms since 1899. 

5. WE ARE EQUAL IN THE BATTLEFIELD BUT NOT IN THE VOTING BOOTH. 

6. We don’t want to continue a relation with the USA as a colonial dependency. 

87 

7. WE HAVE FOUGHT IN EVERY WAR FOR 117 YRS. The liberty, security and 

prosperity that the USA enjoys today were paid in part with the BLOOD, SWEAT 

AND TEARS of disenfranchised citizen soldiers of Puerto Rico. 

8. The Puerto Rico National Guard and Reserve Components are the best-trained, 

lead and equipped force in the Caribbean. After 15 yrs actively contributing and mobilizing for the GWOT their combat and operational experience has no comparison 

within the military and security units of other Caribbean nations. The National 

Guard and Reserves should lead the efforts to secure the Caribbean Border by becoming the trainers and on site force that works with partner nations in the area. 

OUTDOOR ALLIANCE

April 12, 2016 

Hon. ROB BISHOP, Chairman, 

Hon. RAU ́ L GRIJALVA, Ranking Member, 

House Committee on Natural Resources, 

Longworth House Office Building, 

Washington, DC 20515. 

Re: Puerto Rico Oversight, Management and Economic Stability Act discussion 

draft 

Dear Chairman Bishop and Ranking Member Grijalva: 

We write to express our serious concerns with certain aspects of the ‘‘Puerto Rico 

Oversight, Management and Economic Stability Act’’ discussion draft, which the 

House Natural Resources Committee will consider this week. In particular, we are 

concerned by the proposed transfer of thousands of acres from the Vieques National 

Wildlife Refuge to the government of Puerto Rico, which we believe sets a dangerous 

precedent by facilitating the potential privatization of protected public lands. 

Outdoor Alliance is a coalition of seven member-based organizations representing 

the human powered outdoor recreation community. The coalition includes Access 

Fund, American Canoe Association, American Whitewater, International Mountain 

Bicycling Association, Winter Wildlands Alliance, the Mountaineers, and the 

American Alpine Club and represents the interests of the millions of Americans who 

climb, paddle, mountain bike, and backcountry ski and snowshoe on our nation’s 

public lands, waters, and snowscapes. Our members are deeply committed to the 

protection and responsible stewardship of our country’s public lands. 

Outdoor Alliance recognizes that targeted and limited land exchanges or smallscale transfers are an appropriate land management tool under certain circumstances. However, a proposal directed toward the privatization and development 

of protected public lands as part of a potential solution to a governmental entity’s 

financial problems is wrongheaded. Public lands—particularly those given additional protections for their ecological or recreational values—are a trust that should 

be retained in public ownership and managed for benefits in perpetuity, not in 

response to temporary financial exigencies. 

We ask that the Committee carefully consider the dangerous precedent set by this 

proposed transfer and demonstrate its commitment to America’s public lands by 

removing this problematic provision. 

Best regards, 

ADAM CRAMER, 

Executive Director. 

88 

PUERTO RICO BUILDER’S ASSOCIATION

April 12, 2016 

Hon. ROB BISHOP, Chairman, 

Hon. RAU ́ L GRIJALVA, Ranking Member, 

House Committee on Natural Resources, 

Longworth House Office Building, 

Washington, DC 20515. 

Dear Chairman Bishop and Ranking Member Grijalva: 

At this time, we bring to your attention, the Discussion Draft, submitted by the 

Committee you lead, to establish an ‘‘Oversight Board to assist the Government of 

Puerto Rico.’’ 

As you well know, through the National Association of Home Builders (NAHB), 

we represent the construction and housing industries across our Nation, which includes our Puerto Rico Chapter. As such, we are committed to give an informed 

input to your Committee on this subject, having discussed and studied this serious 

matter with our colleagues and fellow companies of our Puerto Rico Chapter. 

In light of this preliminary analysis, we provide the following conclusions or 

recommendations, on this matter: 

a. A federally-appointed Fiscal Control Board is an important and necessary step 

to tackle Puerto Rico deep fiscal crisis on the short-term. 

b. We believe a good-faith and upfront negotiation should be done between the 

Government of Puerto Rico, its creditors and any Fiscal Control Board 

established by Congress. 

c. This Fiscal Control Board should be established, in conjunction with a clearly 

defined mechanism for the restructuring of Puerto Rico’s non-guaranteed debt, 

that is to say, every portion of the debt owed by public corporations, not 

guaranteed as a general obligation under the local Constitution or any other 

guaranteed agreement or legislative act. 

d. This Fiscal Control Board must be complemented with a strong economic 

redevelopment plan, to stimulate the Puerto Rico economy. No fiscal control 

effort will make sense without an economic recovery. Included herein is a document outlining suggestions on actions needed to secure economic prosperity. 

e. Every federal piece of legislation, adopted to attain the aforementioned goals, 

should be approved with adequate instruments to secure complete accountability and transparency from the Government of Puerto Rico, including but 

not limited to a thorough disclosure of Puerto Rico’s updated financial state, 

current debt and assets. 

f. Legislation should include measures that improve the investment and 

economic climate of the Commonwealth of Puerto Rico. There will be no fiscal 

relief or assistance to the local government without an economic recovery. 

As you can conclude from the elements described above, the Association and our 

Puerto Rico local Chapter, have a business-oriented standpoint, geared toward a balanced and reasonable solution to Puerto Rico’s fiscal challenges, without any 

partisan consideration. 

Also, this balance can only be accomplished by a combination of a federallyappointed Board that gives stability and certainty to Puerto Rico’s fiscal scenario, 

a restructuring of the non-guaranteed debt and a strategic, coherent and federallysponsored economic redevelopment plan. 

Regarding this last component, we believe some short and medium-term economic 

measures should be enacted to stimulate the Real-Estate and Construction Sector 

of Puerto Rico’s economy. 

We will give the highest priority to the analysis of any other recommendation we 

deem appropriate to submit to your Committee concerning this matter. Finally, we 

thank you in advance for your consideration and analysis you can give to our 

statements and proposals. 

Best regards, 

ARCH. RICARDO ALVAREZ-D ́

IAZ, AIA, NCARB, 

President. 

89 

JUBILEE USA NETWORK, 

WASHINGTON, DC 

April 13, 2016 

Hon. ROB BISHOP, Chairman, 

House Committee on Natural Resources, 

1324 Longworth House Office Building, 

Washington, DC 20515. 

Dear Mr. Chairman: 

On behalf of Jubilee USA we want to thank you for your leadership, as well as 

that of Speaker Ryan and Representative Duffy to move forward a solution for the 

financial crisis affecting 3.5 million Americans. 

Jubilee USA’s founders and members include 550 Churches and Synagogues, and 

groups like the U.S. Conference of Catholic Bishops, The Episcopal Church, 

American Jewish World Service and Islamic Relief USA. Our religious coalition 

works closely with a coalition in Puerto Rico that represents 95% of the population 

and Catholic, Evangelical and Pentecostal religious groups. San Juan’s Catholic 

Archbishop, Methodist Bishop, Lutheran Bishop and head of the island’s Bible 

Society are calling for solutions that protect their people from further austerity 

policies. 

Mr. Chairman, on behalf of Jubilee USA we need to affirm that there can be no 

economic growth in Puerto Rico until the debt is brought back to sustainable levels. 

Congress must adopt a solution that promotes budget transparency, reduces child 

poverty and ensures strong provisions to restructure the debt in a manner that is 

timely, comprehensive and orderly. 

As you know, we’ve organized religious communities across our great nation and 

on the island of Puerto Rico to pray for you as you move legislation forward. As you 

begin your deliberations, I wanted to share the thoughts of the island’s religious 

leaders. 

Puerto Rico’s Catholic Archbishop, Roberto Octavio Gonza ́lez Nieves, O.F.M., encourages Congress to ‘‘work together to find a solution to the crisis that respects the 

rights and dignity of all sides. I invite the people of Puerto Rico and all people of 

faith around the world to join me and pray for the U.S. Congress as they consider 

action around Puerto Rico. We also must pray for Puerto Rico’s leaders and creditors 

to work together to find a solution to the crisis that protects the rights and dignity 

of all sides. We pray that any solution seeks to reduce child poverty on the island 

and invest in our people. We pray that solutions respect Puerto Rico’s democracy. 

Finally we pray that any solutions will ensure that the debt is brought to payable 

levels, without further sacrifice to our social services.’’ 

Reverend Heriberto Martı ́nez, the head of Puerto Rico’s Bible Society said, ‘‘It is 

urgent that leaders of our country and creditors can sit together at the table of dialogue and fellowship to find a responsible solution that does not sacrifice our people, 

already going to a very difficult situation. Our creditors should recognize that above 

any further consideration should be the well-being of human beings. The well-being 

of my brother and sister is and should be our main and highest priority.’’ 

We look forward to continuing to work with you throughout this legislative 

process. 

Gratefully, 

ERIC LECOMPTE, 

Executive Director. 

90 

1Public Spending on Transportation and Water Infrastructure, 1956 to 2014: Congressional 

Budget Office, 2015. 2Moody’s Investor Service—U.S. Municipal Bond Defaults and Recoveries, 1970–2013, May 7, 

2014. 

April 14, 2016 

Hon. PAUL RYAN, 

Hon. NANCY PELOSI, 

U.S. House of Representatives, 

Washington, DC 20515. 

Hon. MITCH MCCONNELL, 

Hon. HARRY REID, 

U.S. Senate, 

Washington, DC 20510. 

Dear Speaker Ryan, Majority Leader McConnell, Democratic Leader Pelosi and 

Minority Leader Reid: 

State and local governments have a keen interest in federal legislative efforts to 

bring fiscal reforms to Puerto Rico. For example, an essential component of any federal fiscal reform package to aid Puerto Rico must be that such a plan is specific 

to the territory and does not contain provisions that could be construed as having 

application to U.S. state and local governments. We will aggressively work to oppose 

federal legislation that contains such extraneous provisions, including the Public 

Employee Pension Transparency Act (PEPTA). Such legislative provisions would 

needlessly expand the scope beyond Puerto Rico, impose unnecessary and undue 

regulatory burdens on U.S. state and local governments and threaten the federal 

tax exemption on municipal bond interest. 

State and local governments of all sizes access the tax-exempt bond market to 

provide essential infrastructure. Through the tax-exemption, the federalist system 

of reciprocal immunity continues to provide critical support for the federal, state and 

local partnership to develop and maintain essential infrastructure. State and local 

governments provide three-quarters of the total investment in infrastructure in the 

United States,1 and tax-exempt bonds are the primary financing tool used by state 

and local governments and authorities nationwide to satisfy these infrastructure 

needs. State and local governments issue approximately 11,600 bonds a year totaling roughly $300 billion on average. This has allowed state and local governments 

to finance more than $3.5 trillion in infrastructure investment over the last decade 

through the capital markets. 

We support legislative efforts tailored specifically to Puerto Rico that will establish an orderly process to immediately initiate steps to restore fiscal order to the 

island and maintain critical services to the citizens of Puerto Rico. Such a process 

is preferable to a less orderly plan that pits Puerto Rico against its creditors in 

lengthy negotiations while government services to the citizens of Puerto Rico deteriorate and a humanitarian crisis ensues. The latter of which could expose U.S. 

state and local governments to unyielding and inaccurate speculation about the likelihood of their defaulting on their debt obligations, and drive news media and federal policy makers to draw false comparisons between Puerto Rico, which is a U.S. 

territory, and mainland state and local governments. 

This kind of conjecture ignores that fact that bankruptcy, while headlinegrabbing, is rare and is not an option for most localities. State and local governments recognize that the general obligation pledge is widely relied upon by 

municipal entities across the country to access the capital markets, and place significant value on upholding this pledge. Historically, municipal bonds have had a 

significantly lower average cumulative default rates than global corporates overall 

and by like rating category. 

For example, between 1970 and 2013, the average 10-year default rate for 

Moody’s Aaa-rated municipal bonds was zero compared to a 0.49 percent default 

rate for Moody’s Aaa-rate corporate bonds.2 Furthermore, over the last five years, 

during which state and local governments struggled to recover from the Great 

91 

3Municipal Market Analytics (MMA). 

4Moody’s Investor Service, https://www.moodys.com/research/Moodys-Municipal-bond-defaultsremain-low-in-number-but-new_PR_298814. 

Recession, rated state and local GO defaults were remarkably low at 0.005 percent.3

In the double-A rating category to which the majority of municipal ratings were assigned, average cumulative default rates are much lower for municipals than for 

corporates with the same double-A symbol.4 There has been only one state that has 

defaulted on its debt in the past century, and in that case bondholders ultimately 

were paid in full. 

Thank you for your consideration of these comments. 

Sincerely, 

Matthew D. Chase, Exec. Director, Clarence Anthony, Exec. Director, 

National Association of Counties National League of Cities 

Tom Cochran, CEO/Exec. Director, Jeffrey L. Esser, Exec. Director/CEO, 

U.S. Conference of Mayors Government Finance Officers 

Association 

Robert J. O’Neill, Executive Director, 

International City/County 

Management Association 

COUNCIL FOR CITIZENS AGAINST GOVERNMENT WASTE (CCAGW), 

WASHINGTON, DC 

April 19, 2016 

U.S. House of Representatives, 

Washington, DC 20515. 

Dear Representative: 

On behalf of the more than one million members and supporters of the Council 

for Citizens Against Government Waste (CCAGW), I strongly urge you to support 

H.R. 4900, the Puerto Rico Oversight, Management, and Economic Stability Act 

(PROMESA). This legislation creates an essential mechanism to thwart a taxpayer 

bailout of Puerto Rico’s fiscal failures. 

On April 12, 2016, Rep. Sean Duffy (R-Wis.) introduced PROMESA, which would 

establish an oversight board to assist the government of Puerto Rico, including 

instrumentalities, to manage public finances. The legislation provides reforms that 

will allow the territory to fulfill its debt obligations responsibly and efficiently. It 

will also help the citizens of Puerto Rico prosper from a growing economy. The bill 

is designed to address problems related solely to Puerto Rico and will neither have 

any impact on existing bankruptcy provisions that govern states or their 

municipalities. 

The structure of the oversight board is based on the precedent established in 

1996, when Congress set up a financial control board to oversee the fiscal affairs 

of the government of the District of Columbia as well as the control board set up 

for New York City in 1975. PROMESA is not a bailout, despite misleading advertisements to the contrary. Indeed, without the enactment of H.R. 4900, taxpayers 

will inevitably be forced to bailout Puerto Rico in the near future. 

I urge you to vote in favor of PROMESA in order to create a fiscal oversight board 

for Puerto Rico and ensure that taxpayers are not liable for any defaults on the 

territory’s debt obligations. All votes pertaining to PROMESA will be among those 

considered in CCAGW’s 2016 Congressional Ratings. 

Sincerely, 

TOM SCHATZ

92 

SIFMA ASSET MANAGEMENT GROUP

April 21, 2016 

Hon. ROB BISHOP, Chairman, 

Hon. RAU ́ L GRIJALVA, Ranking Member, 

House Committee on Natural Resources, 

1324 Longworth House Office Building, 

Washington, DC 20515. 

Re: Congressional Action to Address the Puerto Rico Municipal Market and 

Contagion 

Dear Chairman Bishop and Ranking Member Grijalva: 

On behalf of the Asset Management Group (‘‘AMG’’) of the Securities Industry and 

Financial Markets Association (‘‘SIFMA’’), I am writing to support Congress’ efforts 

to create a limited and targeted framework to address Puerto Rico’s fiscal crisis 

through H.R. 4900, the Puerto Rico Oversight, Management, and Economic 

Stability Act (‘‘PROMESA’’). 

SIFMA AMG is the voice for the buy-side within the securities industry and 

broader financial markets, which serves millions of individual and institutional investors as they save for retirement, education, emergencies, and other investment 

needs and goals. SIFMA AMG’s members represent U.S. asset management firms 

whose combined assets under management exceed $30 trillion. The clients of AMG 

member firms include, among others, registered investment companies, separate accounts, ERISA plans, and state and local government pension funds. Some SIFMA 

AMG members have more exposure to the debt of the Commonwealth of Puerto Rico 

and its instrumentalities than others, but all care deeply about ensuring that Puerto 

Rico’s financial situation is addressed appropriately, without negatively affecting the 

broader municipal bond market. 

Puerto Rico’s financial crisis is unique and complex, and it therefore requires a 

unique solution. We believe that the combination of the establishment of a federal 

oversight board and a restructuring framework that is based on the Territorial 

Clause of the U.S. Constitution, will create a comprehensive solution to aid Puerto 

Rico’s economic recovery, improve the island’s financial position, and prevent Puerto 

Rico’s situation from leading to higher permanent borrowing costs for other municipal issuers. 

In particular, SIFMA AMG supports the creation of a federal oversight board with 

broad powers to enforce and monitor fiscal discipline. We believe this is a practical 

way to address the current crisis in Puerto Rico. We support Congressional efforts 

to ensure that the oversight board will treat creditors fairly and protect valid and 

legal liens during the restructuring process. SIFMA AMG also supports the inclusion of a provision that allows creditors an opportunity to vote on any debt restructuring plans. 

While many details about this legislation remain in flux, we believe the municipal 

market would and should welcome appropriate Congressional action to address the 

financial crisis in Puerto Rico. We urge Congress to act quickly before the situation 

worsens. Thank you for your leadership on this issue. We look forward to partnering 

with Congress as it works toward final passage of this legislation. 

Sincerely, 

KENNETH E. BENTSEN, 

President and CEO. 

93 

PIMCO Blog 

Congress Needs to Act on Puerto Rico’s Debt Crisis, and 

‘PROMESA’ Could Work 

Authors: David Hammer, Sean McCarthy, and Libby Cantrill 

Published: April 26, 2016 

Diverse interests have emerged seeking to derail a bill aimed at a satisfactory 

resolution to Puerto Rico’s debt crisis. 

The U.S. House Natural Resources Committee (HNRC) is considering H.R. 4900, 

entitled the Puerto Rico Oversight, Management, and Economic Stability Act, or 

PROMESA, which means promise in Spanish. A critical component of the bill is creation of a federal oversight board with broad powers over Puerto Rico’s fiscal and 

budgetary affairs. The seven members of the oversight board would be appointed by 

the U.S. president, but chosen from lists of qualified candidates offered by various 

parties. 

Some critics have protested the potential infringement on Puerto Rico’s 

sovereignty, while others want assurances the island territory or investors will not 

get a ‘‘bailout.’’ (PIMCO currently manages more than $40 billion of municipal investments issued by U.S. cities, counties and states. PIMCO portfolios do not hold 

any exposure to bonds from the Commonwealth of Puerto Rico or its various governmental entities.) 

In our view, PROMESA represents a responsible framework for managing the 

unavoidable restructuring of Puerto Rico’s debt and other liabilities. We expect no 

contagion to the broader municipal market from PROMESA. More specifically, 

PROMESA will not trigger higher borrowing costs for states or municipalities. 

Some are worried the federal government might take over a state’s finances in 

a similar manner; yet there are no convincing arguments because the Constitution 

protects the sovereignty of the states. Again, this bill wouldn’t create such a precedent. PROMESA is possible because the Constitution explicitly allows Congress to 

set all laws on U.S. territories, which have fewer rights than states. 

In addition, it would be incorrect to classify PROMESA as a ‘‘bailout.’’ No incremental federal tax dollars are allocated to the Territory under the bill. In fact, if 

this legislation does not advance, the probability of future federal tax dollars flowing 

to the Territory or bondholders may actually increase. 

The failure of U.S. Congress to address the complex fiscal and debt crisis in 

Puerto Rico is a greater risk to the $3.5 trillion tax-exempt municipal market. It 

is essential to enact a stay on litigation to provide a fiscal control board with an 

appropriate amount of time to reach a sensible solution. Without a stay, creditor litigation on individual liens is likely to ensue. The outcomes of these decisions have 

the potential to set confusing precedents for not just holders of general obligation 

debt, but for other portions of the municipal market, including holders of essential 

service revenue bonds that constitute the majority of outstanding municipal debt. 

Time matters. At this point, it appears that the 1 May deadline to address the 

worsening situation in Puerto Rico will not be met, and Puerto Rican issuers will 

likely miss some of the $470 million debt service due on that date. Some hope that 

the missed payments will add pressure on policymakers to act, but given the disagreement between the parties (and within the Republican Party), it appears that 

the crisis will have to get worse before it is tackled by Congress. An even larger 

debt service payment looms on 1 July. 

Accordingly, we urge Congress to continue moving PROMESA forward. A successful resolution to the unique crisis in Puerto Rico can only be achieved with a strong 

federal oversight board empowered to both enforce fiscal discipline and adjust the 

Territory’s public debt in a fair and equitable manner designed to achieve debt sustainability. We believe PROMESA will achieve these objectives. 

[LIST OF DOCUMENTS SUBMITTED FOR THE RECORD RETAINED IN THE

COMMITTEE’S OFFICIAL FILES]

— Numerous letters from the Puerto Rico Citizen Coalition in favor 

of the Federal Fiscal Control Board. 

Æ