Everything You Need to Know About the Proposed Federal Control Board for Puerto Rico

Puerto Rico’s increasingly sensitive fiscal situation is nothing new. For the previous few months, international media has covered the matter closely. Nevertheless, outside of financial news sources little has been said about the recently proposed federal control board for Puerto Rico. Below is a guide for readers interested in catching up on the matter.

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What’s going on?

A number of Republican lawmakers last December formally proposed the creation of a federal control board which would oversee Puerto Rico’s finances. Last month, House Republicans released a revised draft of the proposal. The board’s members would be nominated by the President. It would be composed of five non-elected individuals. Only two members would be Puerto Ricans.

This proposed board would have sweeping powers over Puerto Rico’s fiscal policies. The body would have the power to veto laws, revise the island’s budget, lower the minimum wage, review all government contracts, impose taxes, make cuts as it pleases and fine or arrest Puerto Rican government officials that do not comply with its directives.

Is this legal?

Yes, it is. As a U.S. territory, Puerto Rico is subject to the planetary powers of Congress. The District of Columbia, another U.S. territory, was also given a federal control board in 1995.

How did we get here?

During the previous months, Puerto Rico’s debt had peaked at $73 billion. Recently, government officials announced that said balance had dropped down to $69 billion due to payments made by the current administration. Nevertheless, when factoring in unfunded pensions and other debts, those levels can total up to $146 billion.

The local economy has been contracting since 2006 and citizens are moving to the U.S. at record numbers. In 2009, Puerto Rico 30,000 more people left the island than moved there. In 2012, it was 54,000. Between June 2014 and June 2015, Puerto Rico’s population dropped by 74,000.

This makes for a tough situation for public administrators, finding it harder and harder to meet revenue collection estimates. The results are budget shortfalls, deficits and cash flow deficiencies. To confront the situation, the government has held back on owed bonuses for public employees, delayed income tax returns to citizens and contracted out services such as special education therapy. Last September, Governor Alejandro García Padilla signed an executive order redirecting tax revenue meant for sales tax-backed bonds to pay for general obligation bonds. Despite all this, Puerto Rico defaulted on its January debt payments.

Are there any other alternatives?

A number of alternatives have been proposed. Governor García Padilla and Resident Commissioner Pedro Pierluisi (Puerto Rico’s non-voting Resident Commissioner to Congress) have pushed the later’s H.R. 870 to include Puerto Rico in the U.S. Bankruptcy Code Chapter 9, much like each of the 50 states. This would allow Puerto Rico’s public corporations to restructure their share of the debt, in total holding 73% of the island’s total debt. Puerto Rico was once included, but mysteriously disappeared from the Code after a series of 1984 amendments, with no debate or discussion.

Despite this, govtrack.us gives the bill a 0% chance of passage. Investors and hedge funds have pumped hundreds of thousands of dollars in lobbying, and some have even propped up organizations such as the 60 Plus Association and Mainstreet Bond Holders to carry out an aggressive media campaign in the hopes of swaying public opinion in their favor. The campaign has been successful enough to sway some, including Jenniffer González, Puerto Rico’s House minority leader, to oppose the bill, even though González is an advocate for statehood.

Legislators from the ruling Popular Democratic Party as well as the New Progressive Party’s Pierluisi have also proposed the exemption of Puerto Rico from colony-era shipping laws that require products shipped to and from the U.S. to be done so under U.S.-flagged, manned and built ships. Considering the Puerto Rico is an island and must import almost the totality of the goods that it consumes, it is estimated that said requirements drain up to a $1.3 billion from the pockets of local consumers. Nevertheless, shipping interests and lobbies have also pumped in money to prevent this from happening.

Other proposals have arrived, such as Nancy Pelosi’s (D-CA) H.R. 4290, a bill that would put a short-term freeze on certain debt-related lawsuits while Puerto Rico and Congress figure things out. Senator Bob Menéndez (D-NJ) also filed S.R. 2675 and 2676, which propose health-care funding, tax incentives, territory-wide restructuring and its own version of the federal control board. Being that said proposals are presented by Democrats with little to no bipartisan support, there is very little chance for approval. Senate President pro tempore Orrin Hatch (R-UT) rejected the proposal, responded by stating this: “Senate Democrats appear to want to move the goal posts on broad debt restructuring to favor public pensions and pair it with tens of billions of federal funds for Puerto Rico without any sense of where the funds come from.”

Finally, realizing that Puerto Rico is excluded from Chapter 9, in 2014 the island’s legislature approved a local bankruptcy law with the hopes of providing an ordered mechanism to restructure debt. However, federal courts recently ruled in favor of hedge funds such as Franklin Advisers and Oppenheimer and said the measure was invalid, citing a Chapter 9 prohibition on state laws of this type. The Puerto Rican government argues that if Chapter 9 does not apply to Puerto Rico, then the states should also fall into the same category as the island. This case is currently being reviewed by the United States Supreme Court.

Where the idea for the board come from?

Though the District of Columbia had its own federal control board during the 1990s, talk of a board in Puerto Rico first surfaced in 2014 during a heated legal battle between the Puerto Rican government and the local Doral Bank. Congresspeople affiliated with Doral proposed the federal control board as a response to the Puerto Rican government’s refusal to pay up $230 million in alleged tax returns. Said tax returns were the product of negotiations and an agreement signed between the previous administration of Governor Luis Fortuño and Doral Bank. The García Padilla administration screamed foul, citing the number to be inflated and finding that the Fortuño officials who signed the agreement were later offered positions and hired by Doral. Though the case dragged on, Doral eventually collapsed and disappeared amid scandals of fraud and federal arrests.

Who’s pushing it now?

Two separate proposals were filed last December. The first, H.R. 4199, was by Rep. Sean Duffy (R-WI) and a second, S. 2381, by Sens. Hatch, Chuck Grassley (R-IA) and Lisa Murkowski (R-AK). These bills were part of Republican attempts to broker a budget deal last year with Democrats. But after the omnibus budget was approved without the need of including debt restructuring tools for Puerto Rico, House Speaker Paul Ryan (R-WI) promised that he would tend to the matter by March, and assigned Reps. Rob Bishop (R-UT) and Jim Sensenbrenner (R-WI) to the task of drafting a new proposal. The current draft is the product of Bishop’s House Natural Resources Committee.

Who is really pushing it?

Behind the above-mentioned legislators, there is a monolithic alliance of hedge funds, lobbyists and super PACs, (Franklin Advisers, Goldman Sachs, Paulson & Co., Oppenheimer Fund, Venable LLP and Koch Industries PAC) pumping money into these campaigns. These types of donations are a sweet deal for candidates, who accept money to draft legislation that has little to no negative political impact on their home districts.

So what’s next?

House leaders have already announced that the project will go through some changes and will ultimately be filed and voted on. Some local ruling party and opposition legislators on the island have attempted to negotiate some sort of benefit —such as restructuring tools or economic development in exchange for accepting the board. Duffy’s proposal, for example, included access to Chapter 9 while the Senate’s $3 billion dollars to assure cash flow for debt repayment. Nevertheless, said proposals were ignored, with the latest proposal includes nothing for Puerto Rico.

The bill will ultimately need Democratic votes to pass. This might or might not be possible depending on how substantial the changes are to the final version. Considering the Obama’s administration acceptance of a supervisory board, this could be a possibility. Democrat language in recent weeks has had to do less with preventing the board, and more with amending or conditioning it. Nevertheless, the debate will surely be colorful and in all honesty, anything can happen.

The pending Supreme Court decision on Puerto Rico’s local bankruptcy law could possibly toss the island a lifeline. With the passing of Justice Antonin Scalia and the inhibition of Justice Samuel Alito, the Supreme Court might squeeze out enough votes to provide for a local restructuring plan that does not involve the board.

And what’s supposed to happen after that?

Even if House Republicans are able to negotiate enough with island leaders and Democrats to have a passable bill, the federal control board complicates the relationship between the U.S. and Puerto Rico. Pierluisi’s H.R. 727 bill —meant to resolve the island’s status issue— is dormant, and according to govwatch.org, has only a 26% chance of passage. Results from Puerto Rico’s last referendum help little, with half a million blank protest ballots casted, resulting in no clear winner. Popular Party leaders who previously defended tooth and nail the current political status have come to the conclusion that the island is in fact a colony. García Padilla already stated that if the current proposal is passed into law, he would take the case to the United Nations.

At the end of the day, the board proposal and the ensuing fight over how or if it will be ultimately implemented represents quite possibly the most important crossroads in Puerto Rico’s history.

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Luis Gallardo is a municipal legislator from Puerto Rico. He has an MPA from Valdosta State University and a JD from the University of Puerto Rico. You can connect with him at @LuisGallardoPR.

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