Congressional Research Service Lists Possible Actions for Puerto Rico

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The U.S. Congressional Research Service presented lawmakers with possible options to address Puerto Rico's fiscal crisis that range from backstopping its debt to authorizing Chapter 9 bankruptcy to installing a financial control board.

The service provides nonpartisan research and reports to Congress, usually responding to requests from representatives or senators. A spokesman for the service said information on who, if anyone, requested this report, "Puerto Rico's Current Fiscal Challenges," is confidential.

The report notes that the Obama administration has indicated it isn't considering a bailout for the territory, which is poised to restructure $72 billion of public debt that the governor said in June is unpayable unless the economy improves.

"In some other fiscal systems, a central government's willingness to cover shortfalls by state governments has been seen as having led to less prudent fiscal behavior," D. Andrew Austin, the CRS analyst in economic policy, said in the report.

"The federal government has generally been reluctant to offer direct financial assistance to individual states in fiscal distress, although Congress at times has adjusted technical parameters of federal programs to provide direct or indirect support for states," he wrote. "The independence of state governments to set their own fiscal paths has been linked to an expectation that those governments take responsibility for the consequences of their fiscal decisions."

Austin wrote that Congress could amend Chapter 9 bankruptcy law to allow access to Puerto Rico's public corporations and municipalities. Bills to do that have stalled in committee as the Republican leadership in Congress argued that structural economic problems need to be addressed first.

Pedro Pierluisi, Puerto Rico's resident commissioner in the U.S. Congress said he was "pleased" by the report's attention to Chapter 9 legislation.

"It also highlights the various bills I have introduced to date to mitigate or eliminate the unequal treatment that Puerto Rico receives under the range of federal health care programs," he added. "These inequities are contributing to the financial stress felt by the government of Puerto Rico."

Puerto Rico's federal matching rate for Medicaid is capped at 55%, according to the report. It could get as much as 83% if the cap was lifted. Along with increasing Medicaid funding, Congress could modify reimbursement rules or enrollment standards for Medicare, Austin wrote.

Among other measures Austin said that Congress could take is backstopping Puerto Rico's debt to lower its borrowing costs. This has been done in the U.S. and elsewhere, usually contingent on budgetary or structural reform requirements, he said.

Austin noted that the U.S. government guaranteed Mexico's government debt in 1994-1995. In the 1930s through 1950s it also provided indirect credit support for some state government agencies through the Reconstruction Finance Corp.

"For instance, the RFC acted as an intermediary to roll over $136 billion in debt for the State of Arkansas." Arkansas had defaulted on its debt in 1933.

Congress could waive the Jones Act for Puerto Rico. The act requires ships operating between U.S. ports to be owned by U.S. citizens or companies, have been constructed in the U.S., and be operated by U.S. citizens. Many have said the Jones Act has raised the cost of imported goods in Puerto Rico. Austin noted that the U.S. Virgin Islands is not bound by the Jones Act.

Finally, Austin noted that Representative Jeff Duncan called in June for a control board to oversee Puerto Rico's finances. The board should be along the lines that Congress set up to oversee Washington, D.C.'s government in 1995, Duncan said.

The federal government has been reluctant to provide assistance to states in difficult fiscal situations. However, Austin noted that the government does routinely provide federal disaster assistance. He pointed out that the federal government provided both direct and indirect support for New York City in its fiscal crisis in 1975.

The CRS releases its reports to Congress and not to the public. It first made a version of this report available to Congress on June 30, Pierluisi said. The CRS has since updated this report twice, most recently on Aug.18.

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