WASHINGTON – Resident Commissioner Pedro Pierluisi, D-P.R. and others testifying at a Senate committee hearing on Puerto Rico on Thursday said that it’s possible that some of territory’s debt may be unconstitutional and, if that is the case, it should not be paid.
Presidential candidate Sen. Bernie Sanders, I-Vt., a member of the Senate Energy and Natural Resources Committee, told Pierluisi and Gov, Alejandro Garcia Padilla, who both testified at a hearing held by the panel, that he understood some of the debt may have been incurred in an unconstitutional manner. He asked them if this is true. Garcia Padilla said, “Yes ... if that is the possibility, the answer is yes.”
Pierluisi said there is an attorney general opinion that provides support for the interpretation that some of the debt could have been issued outside the territory’s Constitution. “It is a legal issue and it’s something that should be studied, but you may be right,” he told Sanders.
Sanders asked if debt that was incurred unconstitutionally should be repaid. Both Pierluisi and Sergio Marxuach, policy director at the San Juan-based Center for a New Economy, said no, it should not be repaid. Garcia Padilla did not respond to that question.
Marxuach said Puerto Rico’s Constitution specifies that debt should not be issued to balance the budget, that instead taxes should be raised. But he said that was disclosed in official statements for the debt.
Pierluisi, a non-voting member of Congress, said, however, that Puerto Rico should fully pay holders of the $18 billion of debt that is guaranteed by the territory’s Constitution, suggesting that debt would be outside of any bankruptcy proceedings, if access to Chapter 9 is granted.
Garcia Padilla stunned some observers by saying that the territory’s financial disclosures have always been “a historical problem,” in part because of previous efforts to “hide information from the market” to attract more investors to buy the debt.
Garcia Padilla was pressed by the panel’s chair Sen. Lisa Murkowski, R-Alaska, over the territory’s finances and when its audited financial statements for fiscal 2014 will be released. The governor said “weeks or months” and that he cannot be more specific because the firm doing the financials continues to have questions and need more information.
Antonio Weiss, counselor to Treasury Secretary Jack Lew, led off the witnesses by describing the administration’s four-part, principles-based plan to help Puerto Rico, which urges Congress to give the territory and its authorities and municipalities access to Chapter 9 bankruptcy protection. Treasury also wants Congress to authorize funding and federal government assistance to bring Puerto Rico’s accounting and financial disclosure reporting into the 21st Century.
Murkowski pressed Weiss for estimates as to what the administration’s initiatives would cost. “You and I both know that it’s going to cost money,” she told Weiss. “There doesn’t appear to be an estimate of cost of the overall proposal.”
Referring to the costs of building out the territory’s accounting and financial disclosure systems, Weiss said, “The cost is low but the benefits are great.”
He added, “The investment needs to be made, it cannot be an excuse for a failure to act.”
Later, Murkowski referred to Height Securities’ estimate that the administration’s initiatives could cost up to $5 billion. “If in fact we are in that ballpark, you need to understand that it’s going to take Congress awhile to work through these proposals,” she told Weiss, Garcia Padilla and the other witnesses.
Weiss responded that Chapter 9 access would not cost the federal government anything, that it would just bring creditors to the table to achieve an orderly restructuring of the debt. The other initiatives are “principles-based” and the administration would work with Congress on those,” he said.
All of the witnesses except Steven Fetter, founder and president of the energy advisory firm, Regulation Unfettered, supported the administration’s expanded Chapter 9 initiative for Puerto Rico.
Sanders said there is a “human tragedy” in Puerto Rico and that “Wall Street should not be believing that it can get blood from a stone.” Both Sanders and Sen. Elizabeth Warren, D-Mass., decried the actions of hedge firms, which they called “vulture firms,” to dive in and buy Puerto Rico debt at a discount and to then demand that the territory slash spending in a way that would hurt residents to make sure the debt is paid off.
They both pressed Treasury to work more directly with Puerto Rico.
“I’ll push Congress to pass these bills,” said Warren, referring to the Chapter 9 bill pending in the Senate, which is a companion bill to one pending in the House that is sponsored by Pierluisi. “But I think Treasury needs to step up and provide more leadership.”
She said Treasury took a more active role and helped broker deals between banks during the fiscal crisis in the U.S. and said it should do the same in Puerto Rico.
Weiss responded, “Treasury and the broader administration will apply all of its efforts … to the resolution of this financial crisis and will leave no stone unturned.”
