Treasury's Hiteshew: Economic Growth Key for Puerto Rico
WASHINGTON – While Congress and the Treasury Department have put a framework in place for Puerto Rico's recovery, the key challenge ahead is whether they will be able to work together on health care and tax initiatives to spur economic growth in the commonwealth, said Kent Hiteshew, director of the Treasury's Office of State and Local Finance.
In an interview with The Bond Buyer, Hiteshew, the director of the office since it was created in 2014, described its role as a nonpartisan source of information in working with Congress on Puerto Rico. He also talked about his background, his future, and the other public finance issues his office has been working on such as infrastructure and public pensions.
The unraveling of Puerto Rico's financial situation has claimed the vast majority of his office's attention since about mid-2015. Puerto Rico is currently dealing with a wide-ranging fiscal crisis and has roughly $70 billion in public debt as well as at least $46 billion in unfunded pension liabilities.
A major achievement for the office and, more broadly, the federal government came earlier this summer in the form of the PROMESA law. PROMESA paired fiscal oversight with restructuring by creating a seven-member oversight board for Puerto Rico that is already examining the commonwealth's fiscal plan. The board can file debt restructuring petitions on behalf of the island and its entities in federal district court if voluntary negotiations with creditors fail.
Hiteshew, who along with other individuals in his five-member office worked extensively on PROMESA, said the legislation successfully creates a "framework" for addressing Puerto Rico's fiscal problems and that the pairing of fiscal oversight and debt restructuring tools was essential as neither was possible without the other.
PROMESA "very much tried to thread the needle between those who were concerned with a federal takeover of Puerto Rico's fiscal independence and those who believed that Puerto Rico could not put its fiscal house in order without a strong, independent control board," Hiteshew said.
"PROMESA … lays out the guidelines that the government and oversight board must agree to in terms of a long-term fiscal plan and annual budgets that promote fiscal balance, economic growth and sustainable debt," he said. "As long as Puerto Rico's governor and legislature follow through on that path, then the oversight board's job will be limited to a monitoring role."
PROMESA creates guardrails that require the board to step in if the commonwealth's government strays from its certified plan, he added.
Despite the successful framework, Hiteshew noted that Treasury "got two out of the four proposals" it made for PROMESA. "Congress ultimately will have to address Puerto Rico's inequitable treatment under Medicaid and its need for economic growth incentives," he said.
Treasury's proposal for the commonwealth, first released in October 2015, suggested Congress address those issues by creating Medicaid parity between Puerto Rico and the states. It also proposed extending certain tax credits to the commonwealth.
Medicaid funding for Puerto Rico will be a critical issue in the near future because the $1.5 billion a year the commonwealth gets in funding from the Affordable Care Act is due to run out near the end of 2017, creating what is called a "Medicaid cliff."
If that money is not renewed, Puerto Rico's government, which spends about $2.4 billion on healthcare annually, will either have to raise revenues and find ways to cut expenses while providing consistent levels of care or drastically cut the healthcare benefits that people living on the island currently receive.
Unlike the states, Puerto Rico's Medicaid funding is capped at approximately $400 million. If it were eligible for Medicaid matching funds like states, it would be reimbursed for its health care expenses at a rate of 73%, the same as Mississippi, or approximately $1.8 billion, Hiteshew said.
Commonwealth residents also are not currently eligible for the Earned Income Tax Credit and are limited in their eligibility for the Child Tax Credit. However, as part of its legislative package last year, Treasury proposed the idea of a federal block grant that would allow Puerto Rico to create its own Earned Income Tax Credit ("EITC") program. This would allow lower income working families to be eligible for a tax credit against Puerto Rico's own income tax and help improve Puerto Rico's very low labor participation rate. Congress did not include these proposals in PROMESA.
But Hiteshew said they are critical to growing the commonwealth's economy. "The sooner we start putting Puerto Rico on an economic growth path, the better," he said.
Sources have pointed to the eight-member Congressional Task Force on Economic Growth in Puerto Rico that PROMESA created as a possible avenue for the legislative changes to healthcare and tax policy. The task force has been soliciting comments on federal impediments to Puerto Rico's economic growth since the summer and is tasked with writing a report on its findings by the end of the year. Sources have said the task force members may attach smaller items that could help address the commonwealth's economy to a continuing resolution while waiting to address larger issues like healthcare and tax policy until after that continuing resolution is expected to expire.
Hiteshew said Treasury will remain a nonpartisan resource for those considering legislation.
If those issues are addressed, it will largely be made possible by the foundation Hiteshew, Treasury, and Congress helped to lay through PROMESA.
Hiteshew's work as a key figure in the PROMESA process was made possible and influenced by his varied career with municipal securities, including 30 years in public finance on Wall Street. He also worked for New York City from 1981 to 1983 when the city was just coming out of its control board era as well as the U.S. Department of Housing and Urban Development from 1978 to 1980.
Those who worked with him at Treasury, both on Puerto Rico and other state and local issues, complimented him as a "straight-shooter" and someone that grew to be a friend. People in the muni market said they appreciated his desire to reach out to different firms and participants periodically to make sure he is staying informed about what others are seeing and experiencing.
Mary Miller, the former undersecretary for domestic finance with Treasury who was instrumental in bringing Hiteshew into his current job, said he was "ideal" for his Treasury position.
"Some people get into jobs like that and they just break a lot of glass and throw their weight around. That is not Kent at all," Miller said. "He is very careful, he is extremely attentive to the different constituencies and he understands the political, financial, and economic development issues."
Miller added that Hiteshew really understood the raw materials of the municipal marketplace and the specifics in Puerto Rico. He also has the ability to engage with parties that have varying interests in an issue, she said.
Hiteshew joined Treasury in May 2014. He said Treasury had already been monitoring the Puerto Rico situation when he arrived, but by late 2014 he realized the problem was more severe than previously thought. From that point until late June 2015, when Puerto Rico Gov. Alejandro García Padilla announced that the commonwealth's debt was unpayable, Hiteshew said he transitioned to devoting about 75% of his time to the situation. That included the period when he led the team that developed the administration's legislative package that was sent to Congress last fall.
At the end of 2015, a failed attempt to include legislation addressing Puerto Rico in the year-end omnibus bill led House Speaker Paul Ryan, R-Wis., to promise he would ask his committees to take a look at Puerto Rico and report back by March 31. For the approximately six months between the announcement in December 2015 and PROMESA's signing, Hiteshew said his time was "very intense, 100% Puerto Rico."
One Democratic aide who did not want to be identified characterized Treasury as "the intellectual firepower" during those months that helped to provide key knowledge to Republican and Democratic staffers, the large majority of which were not well-versed in the muni market or debt restructuring.
"So many things needed to happen in order for PROMESA to pass and I can actually go back and say if that staffer hadn't been here or that person hadn't been here, the whole thing would have collapsed," the aide said. "It was on the verge of collapsing many times but everything kind of worked out in an almost magical way that in retrospect you almost can't believe."
Hiteshew said his office and Treasury took on the role of providing technical assistance to those legislators who formulated and voted on the bill.
"I think one of the reasons PROMESA was successful last spring was that we were viewed … by both Republicans and Democrats, as a neutral, technical resource for information," Hiteshew said about his office and the Treasury Department. He added that the team he worked with during the bill process had energy levels that were "incredible."
"People were spending very late nights," he said. "There was a lot of 24/7 physically, mentally, and emotionally around this legislation and it wasn't just me."
Emiliano Trigo, who works in the Puerto Rico governor's office and was in effect the delegate between the commonwealth and the Obama administration during the PROMESA process, characterized Hiteshew as a "workaholic."
"I've been on calls with Kent and in meetings where we are working past midnight," Trigo said. "We talk over the weekend all the time. He's always available and when the drafting of PROMESA was moving at full speed, he was working non-stop."
Trigo added that Hiteshew and Treasury served as a key impartial arbiter during the process whose absence would have made it impossible to get the restructuring legislation enacted.
Hiteshew said that while Treasury's work on Puerto Rico has been less intense since PROMESA's passage, the department still plans to make sure that both the oversight board and government of Puerto Rico have all the assistance that it is authorized to provide them.
The form that his office's work on Puerto Rico takes and whether there will ultimately be a dedicated Puerto Rico team depends on the incoming Treasury secretary, he said. Hiteshew added that he will be staying in his position as the new administration takes over and expects the office to continue its work under president-elect Donald Trump.
Trigo said his personal desire would be to have Hiteshew and Treasury continue as a significant part of making sure the process outlined in PROMESA leads to a good resolution.
If many of the Treasury officials working on Puerto Rico are replaced under the new administration, it "will be a great loss of the department's institutional knowledge on the Puerto Rico debt crisis and could possibly have terrible consequences for the people of Puerto Rico," Trigo added.
David Chafey, chairman of Puerto Rico's government development bank from 2013 into 2015, also said that with post-election transitions in progress, both on the federal level and locally in Puerto Rico, it would be "a very good thing" for Puerto Rico to have as many Treasury staffers remain supporting the commonwealth and helping its officials.
But whatever help Treasury will be able to provide, Hiteshew said Puerto Rico's local leaders will also have to work diligently to tackle many areas of concern related to the commonwealth's fiscal situation.
Ricardo Rossell-, Puerto Rico's governor-elect will have a central role. The local administration will have to get a handle on its budget, figure out how to consolidate overlapping government services, and find what the right size of government is for the current population while delivering services in the most efficient way. In order to do this, it will also have to determine a sustainable level of debt that Puerto Rico can afford while enabling the economy to grow.
The incoming Rossell- administration probably will want to take a fresh look at the numbers in the commonwealth's current 10-year fiscal plan that García Padilla submitted in October and take that opportunity to include any additional input, according to Hiteshew.
"I think the challenges of the new governor will be very similar to the current ones," Hiteshew said, adding that they revolve around, "What is the formula for both trying to reign in the large structural deficits and unsustainable debt load that characterized the fiscal situation and at the same time create economic growth."
As the oversight board assumes responsibility for managing the Puerto Rico crisis, Hiteshew said the Office of State and Local Government will return to working on important areas impacting the municipal market, such as infrastructure.
About two months after he joined the new Treasury office, Hiteshew was one of the key people who staffed President Obama's Build America initiative and was the architect of the idea for qualified public infrastructure bonds (QIPBs). QIPBs would have given equal access to tax-exempt financing for both public-private partnerships and basic public offerings. He and his team released a Build America report in January 2015. But QPIBs and other infrastructure suggestions in the report never moved forward.
"There is certainly a lot of talk of infrastructure being high on the agenda" for the new president and Congress, Hiteshew said. "Maybe some of the initiatives, such as QPIBs, that we outlined in the Build America report may be adopted."
Pension plans are also an issue that Hiteshew's office has been working on. While the federal government does not have a designated role in state and local pension plans, his office can provide insight as part of the Treasury Department's broader retirement security policy work. His office is continuing to develop pension ideas and has largely focused on improving data and transparency about the country's roughly 4,000 state and local pension plans.
"[We are] still in the process of collecting ideas and developing information that we will certainly be in a position to raise in the new administration," he said.
Hiteshew's Treasury office was created roughly a year after Rep. Devin Nunes, R-Calif., in April 2013, reintroduced the Public Employee Pension Transparency Act (PEPTA), which would bar state and local governments from issuing tax-exempt bonds unless they filed annual pension plan reports with the Treasury Department. The bill, re-offered in March 2016, is virtually identical to one Nunes introduced in February 2011 and 2013.
On a broader level, the country has seen seven consecutive years of growth for state and local governments, but Hiteshew said his office is also concerned about how state and local governments will be able to sustain themselves and deliver services during the next economic downturn, whenever it comes.
One important answer to dealing with such issues is to be careful not to make sweeping statements about state and local governments, Hiteshew said.
"There is a vast difference and a variety of conditions among state and local governments. Our view is that you can't just look at averages [and] you can't take the Illinoises and New Jerseys and Connecticuts and assume that all of the others are like that," he said. "Each state has to look at these issues on its own and develop solutions tailored to their specific needs and political realities."