Congress Can Save—or Destroy—Voteless Puerto Rico

Updated on
  • Hurricane Maria upended the island’s delicate financial plan
  • Issues land with lawmakers distracted by chaotic tax politics

San Juan, Puerto Rico's capital and a center of island culture dating to the 16th century, is on the cusp of the high tourism season with crippled power and boarded-up businesses.

Photographer: Ricardo Arduengo/AFP via Getty Images

Congress can’t get Puerto Rico off its hands.

Last year, lawmakers crafted Promesa, a bipartisan law that established a fiscal-control board and bankruptcy-like process to deal with the U.S. commonwealth’s unpayable $74 billion debt. Then came Hurricane Maria, which brought a fresh cascade of dilemmas that will shape the island for generations.

Now, lawmakers must decide on disaster aid that -- if the island had its way -- would total $94 billion. Legal opposition from Governor Ricardo Rossello reined in the oversight board, and only Congress can expand its powers. And, as Republicans rewrite tax laws, they must decide how to treat the jurisdiction and its faltering economy, which occupies a vague space between foreign and domestic.

“The long-term issues, the fiscal situation, the decision about taxes, it’s everything -- it’s all on the same plate that’s in front of Congress,” said Jenniffer Gonzalez, Puerto Rico’s nonvoting representative in the House of Representatives. “Congress has power over everything in Puerto Rico.”

The island’s requests and needs arise in one of the most consequential legislative periods in years. Puerto Rico’s leaders will compete for the attention of lawmakers who have been deeply focused on the fast-moving GOP tax proposals and on the need to pass a federal spending plan by Dec. 8 to avoid a government shutdown.  

Here are the thorny problems that Washington could solve for San Juan:

Hurricane Aid

Hurricane Maria, which took scores of lives, leveled homes and destroyed the power grid, ground the economy to a halt and so far has sent an estimated 100,000 residents fleeing the island. The amount of aid Congress sends could determine whether the economy remains large enough to generate sufficient cash to pay creditors.

“There is no question that there’s need for support, because Puerto Rico has no resources at this point,” said Jose Villamil, an economist and chief executive officer at Estudios Tecnicos Inc., an advisory firm on the island.

Puerto Rico’s $94 billion wish list would allocate $31 billion to rebuild homes and another $18 billion for the electric utility, among other expenses, according to a letter the governor sent to President Donald Trump, which was released Nov. 13. The White House instead proposed $44 billion, with the bulk of that money meant to cover storm damage in Florida and Texas.

Extracting the full request from Congress is going to be “difficult” and “as a lump sum, doubtful,” said Representative Raul Grijalva, an Arizona Democrat, who was among a bipartisan group of lawmakers -- including John Cornyn, the No. 2 Senate Republican -- who excoriated the administration’s proposal.

The administration said more aid will depend on a damage assessment. But Grijalva has questioned why it’s taking so long, given the urgency.

“We fully expect a follow-on package, which will mean an opportunity for further assistance,” said Representative Nydia Velazquez, a Democrat from New York, according to a statement from her office.

Board’s Powers

Puerto Rico, treated like U.S. states, didn’t have access to bankruptcy courts until Congress last year passed the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa. One provision was the installation of the Financial Oversight and Management Board for Puerto Rico to keep an eye on the books.

The board is so new that its powers remain largely untested.

Shortly after the storm, the board attempted to install a so-called chief transformation officer for the Puerto Rico Electric Power Authority.

The board moved at a time of weakness for the utility known as Prepa, with its credibility battered by disclosures about the lucrative contract it handed to Whitefish Energy Holdings, a two-man Montana operation without experience carrying out jobs of that magnitude.

At a Nov. 7 hearing before the House Committee on Natural Resources, Chairman Rob Bishop welcomed the move as a way of increasing accountability. The Utah Republican said lawmakers should ensure the oversight board “has the tools they need” to set Prepa and the island on the right path.

But the matter landed in court, and a week later, a judge vetoed the transformation officer. She found that the law didn’t give the board the right to impose a new executive on Rossello’s administration.

Rossello installed a new boss with a long history at the agency. Now, Congress must revisit the Promesa law if it wants to give the oversight board a start fresh.

At a committee hearing, Bishop told Rossello that he was disappointed by the court battle. He said Rossello should learn to get along with the board if he expected the kind of aid he was asking for.

“There’s got to be an increase in that cooperation for the sake of Puerto Rico,” Bishop said, wagging his finger.

“It can’t be at the expense of Democratic rights, though, sir,” retorted Rossello.

How Puerto Rico Managed to Dig a Deep Financial Hole: QuickTake

Whatever the mechanism, the investor community -- which wants to recoup money it loaned while pursuing attractive yields and generous tax advantages -- is keen to see increased accountability.

James Spiotto, managing director at Chicago-based Chapman Strategic Advisors LLC, whose firm advises on municipal restructurings, said lawmakers could force a leadership change at Prepa by tying such an arrangement to an aid package.

“If it doesn’t get addressed, Congress might have to,” he said.

On Monday, the island government agreed to give the Federal Emergency Management Agency unprecedented power to oversee disaster-relief spending, in a move apparently meant to assure Washington that the money would be well spent. In the eyes of the governor, increased FEMA oversight may be seen as the lesser of two evils: It allows him to make the argument that there’s no need to give the fiscal oversight board more power.

Tax Trouble

Just as Puerto Rico is seeking federal help, Washington lawmakers are considering new approaches to taxing the foreign subsidiaries of U.S. companies as part of a sweeping rewrite of the nation’s fiscal system. A House-passed bill includes a possible 20 percent excise tax on certain payments made by U.S. units to overseas affiliates. A Senate version, which will be debated this week, includes other provisions aimed at preventing companies from shifting earnings to subsidiaries in low-tax jurisdictions.

Puerto Rico is a major producer of medical devices and pharmaceuticals, as well as some electronics, and manufacturing accounts for 32 percent of its gross domestic product. At the hearing, Rossello, who is aligned with Democrats who oppose the measures, expressed scorn for lawmakers who failed to yet take the island into consideration.

Removing tax advantages that lured businesses there “will be a huge blow for the local economy,” said Gonzalez, the Republican non-voting representative.

Senate Finance Committee Chairman Orrin Hatch of Utah is soliciting input on approaches to the island’s tax issues, according to spokeswoman Julia Lawless. “Discussions with the administration, PR officials and other stakeholders regarding appropriate relief for the island are ongoing.”

— With assistance by Ezra Fieser, Rebecca Spalding, and Billy House

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