- Garcia Padilla blames Congress for ending tax incentives
- Debt payments could be halted as soon as May if no action
Puerto Rico Governor Alejandro Garcia Padilla reiterated that his government may stop making payments as soon as in May on $70 billion in debt if U.S. lawmakers fail to assist commonwealth’s efforts to restructure the island’s obligations.
"We have to solve this problem this year,” Garcia Padilla said during his State of the Commonwealth speech in San Juan. “If the Congress doesn’t act, in May bond payments will not be made. We would have to stop paying police officers, medical workers, and firemen. Under this situation, I will pay government workers.”
Congress is considering whether to inject the federal government into a more central role in a crisis that’s been steadily escalating since Garcia Padilla in June said the government can’t afford to pay its debt. Puerto Rico has already defaulted on some securities and has warned that it may declare a moratorium if it no solution is found. In addition to its bonds, its retirement system has $46 billion of liabilities and just about $2 billion of assets.
Treasury Counselor Antonio Weiss said in testimony last week before a House panel that lawmakers need to act quickly to give Puerto Rico the power to cut its debt along with greater federal oversight. He said the law should be tailored specifically for the U.S. territory, which would prevent it from undermining investors’ faith in the security of the $3.7 trillion municipal-bond market.
House Speaker Paul Ryan directed Republican committee chiefs to come up with a plan by the end of March to address Puerto Rico’s strains. Representative Rob Bishop, the chairman of the Natural Resources committee, said last week that such a bill will be introduced soon.
Democrats have insisted on giving Puerto Rico legal powers to cut its debt, a step that’s been met with skepticism by Republicans who control the House and the Senate. Weiss said a restructuring bill should allow the island to turn to the courts if it fails to persuade all of its investors to agree on terms for reducing its debt and be tailored to allow for different treatment of various creditors. Puerto Rico has asked for access to bankruptcy to reorganize its obligations.
Garcia Padilla said Congress shared in the blame for Puerto Rico’s fiscal woes, in part for eliminating tax incentives that had helped to sustain the economy. Section 936 of the Internal Revenue Code was a law that gave mainland companies a full tax exemption on profits earned in Puerto Rico.
“The current crisis did not come out of the blue,” the governor said. “The [U.S.] Congress’s choice to eliminate 936 started the beginning of the end of this crisis.”