How Congress could help Puerto Rico avoid another crisis

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The U.S. Government Accountability Office said Congress could stave off another Puerto Rico debt crisis by expanding investor protections for those living in the territory and by giving the Securities and Exchange Commission authority to impose penalties for nondisclosure.

GAO also said Congress should look at modifying Puerto Rico's triple tax-exempt status. In its report the office said it is “not making recommendations based on the federal actions identified because policymakers would need to consider challenges and tradeoffs related to implementation.”

In “Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them,” the GAO suggested that Puerto Rico bonds could retain their tax-exempt status with the federal government and lose it within the 50 states and their localities. This would put Puerto Rico’s bonds on equal footing to other municipal issuers.

The GAO suggested that the SEC be given the authority to impose penalties on municipal issuers for noncompliance with continuing disclosure agreements. In these agreements, issuers promise to publicly and continually disclose annual financial information, operating data, and notices of material events.

Puerto Rico has a history of releasing its audited financial statements late. On Monday the Puerto Rico Treasury released a statement from Treasury Secretary Raúl Maldonado Gautier saying that he planned to release the audited fiscal year 2015 Puerto Rico financial statement either at the end of May or early June. That would be nearly three years after the end of the period they covered.

While some have talked about giving the SEC the penalty authority over the years, there have been no concrete steps in that direction. The Government Finance Officers Association opposes the idea.

The GAO also suggested that the U.S. could extend the Investment Company Act of 1940, which currently applies to the 50 states, to Puerto Rico and its residents. This act requires companies to provide information to investors about what they are investing in and the risks of the investment vehicles. It also restricts firms from purchasing municipal securities underwritten by affiliated companies.

If this law were extended to the island, some of the problems island debtholders are currently struggling with would be unlikely to happen again in the future, the GAO suggested.

The GAO report said Puerto Rico debt was unsustainable debt because the government ran persistent annual deficits that it financed with the sale of bonds. Contributing to the persistent deficits were the government’s frequent overestimation of revenue it would collect and frequent overspending by agencies beyond budgeted amounts. The government also failed to fund pensions and suffered from declining revenues as the economy contracted over a long period.

In a separate letter in the report’s appendix, Puerto Rico’s government acknowledged local factors in bringing about the debt crisis, but said there is a danger in overlooking the role the federal government played.

The island’s territorial status “means that the government and people of Puerto Rico cannot count on the same amount of federal support that state governments and residents receive and are expected to perform economically in an uneven playing field,” wrote Carlos Mercader Pérez, executive director of the Puerto Rico Fiscal Affairs Administration.

Mercader Pérez said Puerto Rico opposes the federal government stripping its triple-tax exemption as this would increase the expense of future borrowing. He said the commonwealth needs congressional action on several fronts. It wants legislators to act on the recommendations of the Congressional Task Force on Economic Growth in Puerto Rico, which submitted its report in December 2016. He said that the recent imposition of the Global Intangible Low-Taxed Income Tax on Puerto Rico as if it were a foreign jurisdiction needs to be revoked. The island should be treated as a domestic jurisdiction.

Finally, Congress must act definitively to resolve Puerto Rico’s political status in the United States, Mercader Pérez said.

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