```

[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

 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
       
       
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                     COMMITTEE ON NATURAL RESOURCES

                        ROB BISHOP, UT, Chairman
            RAUL M. GRIJALVA, AZ, Ranking Democratic Member

Don Young, AK                        Grace F. Napolitano, CA
Louie Gohmert, TX                    Madeleine Z. Bordallo, GU
Doug Lamborn, CO                     Jim Costa, CA
Robert J. Wittman, VA                Gregorio Kilili Camacho Sablan, 
John Fleming, LA                         CNMI
Tom McClintock, CA                   Niki Tsongas, MA
Glenn Thompson, PA                   Pedro R. Pierluisi, PR
Cynthia M. Lummis, WY                Jared Huffman, CA
Dan Benishek, MI                     Raul Ruiz, CA
Jeff Duncan, SC                      Alan S. Lowenthal, CA
Paul A. Gosar, AZ                    Matt Cartwright, PA
Raul R. Labrador, ID                 Donald S. Beyer, Jr., VA
Doug LaMalfa, CA                     Norma J. Torres, CA
Jeff Denham, CA                      Debbie Dingell, MI
Paul Cook, CA                        Ruben Gallego, AZ
Bruce Westerman, AR                  Lois Capps, CA
Garret Graves, LA                    Jared Polis, CO
Dan Newhouse, WA                     Wm. Lacy Clay, MO
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

                       Jason Knox, Chief of Staff
                      Lisa Pittman, Chief Counsel
                David Watkins, Democratic Staff Director
                  Sarah Lim, Democratic Chief Counsel
                              
                              
                              ----------                                

                                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. Raul 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
                                     

 
  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 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 over-regulation. 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 
creditor-to-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:]
   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 state-run 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. RAUL 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 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 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. Raul 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.
    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 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 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 conflict-of-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 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 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 Co-
Head of Fixed Income, Nuveen Asset Management, from Chicago.
    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 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.
    [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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
    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 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 well-
conceived initiatives that are both tangible and attainable from the 
Commonwealth'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 well-conceived 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 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.
    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 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 non-payment 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 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%. Out-migration threatens to 
permanently erode Puerto Rico's economic base and ultimately the 
government's ability to structurally balance the budget.
    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 Garcia 
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 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 self-governance 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 out-migration, 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.
    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 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.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    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.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    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.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    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.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

  	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 long-term 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 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.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

 	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 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 Garcia 
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 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 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 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, 
Sec. 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 
Sec. 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, Sec. 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 (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; Davila-Perez 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\
---------------------------------------------------------------------------
    \1\ See 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'').
---------------------------------------------------------------------------
    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 Sec. 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, Sec. Sec. 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, Sec. 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, Sec. 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, Sec. 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, Sec. Sec. 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, Sec. 17, 9 Stat. 446, 452 
(Territory of New Mexico). See also Act of March 3, 1863, ch. 117, 
Sec. 13, 12 Stat. 808, 813 (Territory of Idaho); Act of May 26, 1864, 
ch. 95, Sec. 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).
    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, Sec. 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. Sec. 8.
---------------------------------------------------------------------------
    \2\ Today 48 U.S.C. Sec. 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. Sec. 1251 et seq.] or the Philippine Trade Agreement Revision 
Act of 1955 [22 U.S.C.A. Sec. 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.''
---------------------------------------------------------------------------
    Congress enacted the ``not locally inapplicable'' provision only 
for so-called organized territories, see Revised Statutes Sec. 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 Sec. 1891 did not apply, see Act of 
July 1, 1902, ch. 1369, Sec. 1, 31 Stat. 691, 692, indicating an intent 
that generally applicable U.S. laws would not automatically extend to 
the Philippines.
---------------------------------------------------------------------------
    \3\ This 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.''
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \4\ Hooven & Allison was overruled in part on other grounds in 
Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \5\ See U.S. Const., art. I, Sec. 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. Sec. 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.'').

    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 Congress be uniform 
        throughout the United States, Art. I, Sec. 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, 
Sec. 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, Sec. 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, Sec. 202, 54 Stat. 1137, 1139. Not 
until 1950 did Congress extend citizenship to Guamanians. See Act of 
Aug. 1, 1950, ch. 512, Sec. 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).
                            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 Tax-Free 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.
    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, 
Sec. 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, 
Sec. 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 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 Conti-Brown & David A. Skeel, Jr., eds., 
Cambridge Univ. Press 2012); Mayer, supra, at 374-75.\1\
---------------------------------------------------------------------------
    \1\ Federal 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.
---------------------------------------------------------------------------
    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, Sec. 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 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 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.
    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 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.
---------------------------------------------------------------------------
    \1\ See, 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'').
    \2\ Puerto 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.
    \3\ Standard & Poor's, Puerto Rico Sales Tax Fin. Corp.; Sales Tax, 
May 18, 2009, at 2-3.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \4\ Puerto Rico Const., Art. VI, Sec. 8.
    \5\ For 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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, re-establishment 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.
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           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 
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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
      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 
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.
---------------------------------------------------------------------------
    \8\ See 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.'').
    \9\ See 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).
    \10\ See 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.'').
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \11\ David 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.

    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. 
Sec. 157, which permits the District Courts to refer matters to 
bankruptcy judges, and in section 309 to 28 U.S.C. Sec. 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 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.
---------------------------------------------------------------------------
    \13\ See Faitoute Iron & Steel Co. v. city of Asbury Park, 316 U.S. 
502, 515-16 (1942).

    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. Sec. 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.
---------------------------------------------------------------------------
    \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).
    \15\ Manuel 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).
---------------------------------------------------------------------------
                       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.
---------------------------------------------------------------------------
    \16\ See Collective Action Clauses No Panacea for Sovereign Debt 
Restructurings, available at https: // www.pimco.com/ insights / 
viewpoints/ viewpoints/ collective-action-clauses-no-panacea-for-
sovereign-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.'').

---------------------------------------------------------------------------
                                 ______
                                 

    The Chairman. Thank you.
    Mr. Johnson.

 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.
    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\
---------------------------------------------------------------------------
    \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/.
---------------------------------------------------------------------------
                              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, out-
            migration 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.
   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.
    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.
    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.
    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.
    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 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 pre-existing 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 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 cross-jurisdictional. 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 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 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 take-home 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.
    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.
    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 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 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 
two-thirds 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 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.
    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 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 
started 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 
out-migration. 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 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 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.
    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.
    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.
    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 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 
micro-management, 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 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 
pro-market 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----
    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 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.
    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.
    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 late-arriving 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 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.
    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 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 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, well-heeled 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?
    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.
    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.
    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 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 opt-in 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.
    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.
    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 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.
---------------------------------------------------------------------------
    \1\ The discussion draft released by the House Committee on Natural 
Resources on March 29, 2016.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ The 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).
    \3\ Potable 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.
    \5\ The Puerto Rico Highway & Transportation Authority lacks the 
funds for the construction of 1new roads and/or bridges or their 
adequate maintenance.
    \6\ [_______]

    \7\ The 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.
---------------------------------------------------------------------------
    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.
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.

    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.
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. Raul 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 small-scale 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.

                                 ______
                                 

                  Puerto Rico Builder's Association

                                                     April 12, 2016

Hon. Rob Bishop, Chairman,
Hon. Raul 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 
federally-appointed Board that gives stability and certainty to Puerto 
Rico's fiscal scenario, a restructuring of the non-guaranteed debt and 
a strategic, coherent and federally-sponsored 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-Diaz, AIA, NCARB,
                                                         President.

                                 ______
                                 

                               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 Gonzalez 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 Martinez, 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
                                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                                 	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.
---------------------------------------------------------------------------
    \1\ Public Spending on Transportation and Water Infrastructure, 
1956 to 2014: Congressional Budget Office, 2015.
---------------------------------------------------------------------------
    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 
headline-grabbing, 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 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.
---------------------------------------------------------------------------
    \2\ Moody's Investor Service--U.S. Municipal Bond Defaults and 
Recoveries, 1970-2013, May 7, 2014.
    \3\ Municipal Market Analytics (MMA).
    \4\ Moody's Investor Service, https://www.moodys.com/research/
Moodys-Municipal-bond-defaults-remain-low-in-number-but-new_PR_298814.

---------------------------------------------------------------------------
    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

                                 ______
                                 

                       SIFMA Asset Management Group

                                                     April 21, 2016

Hon. Rob Bishop, Chairman,
Hon. Raul 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.
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.

                                 [all]
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