The Moment of Truth

(English translation from the original spanish version published today in this page)
With survey week and it’s musical chairs completed, we must look as a country to what is right around the corner: a government that the US government itself acknowledges will run out of money in a matter of days. According to the most recent report from the Government Development Bank, as we suspected, the measures taken to raise revenues and liquidity have had the opposite effect and have affected the economy and the confidence of the consumers. By way of example: first, seizing tax refunds has had the effect that the salaried taxpayers have lowered their retention rates, affecting the revenues and, second, the increase in the (sales tax) IVU (IVA) has held back the consumer, who is buying less, also diminishing the revenues (if it had been raise to 16% imagine what would be happening).

At the same time, there is no sign that the United States Congress will act on any of the proposals from the Obama administration and it appears that the day when the Governor will have to chose between limiting the work week of thousands of public employees or not paying the bonds that expire between November and January is fast approaching. Not to mention the possibility of increases in the water and power rates, which according to press reports, has not been discarded.

Given this scenario, the answer cannot be continue to add more burden to people’s pocket, because experience has shown that the more the consumer’s pocket is affected, the projected revenues of the government are not met because the economy in general is affected. Nor can we stand idly by waiting for a miracle.

It is for these reasons that I have thought of three simultaneous steps, in three levels and three different scenarios, which I explain below.

1. Increase the pressure on President Obama.
Saying that the Republican Congress is the only one who can act is false, the federal executive branch has the power to act. The study by professor and economist Arturo Estrella, commissioned by the Carvajal Foundation and published recently, establishes that the Federal Reserve Bank (which has made statements but has taken no action on the subject of Puerto Rico and its fiscal crisis), together with the Treasury Department can take immediate actions without the need of authorization from Congress. (Estrella, Arturo, Puerto Rico Government Debt and the U.S. Federal Government, Fundación Francisco Carvajal, 1915,ón-Carvajal.pdf).
According to this study,
• Under section 14(2) of the Federal Reserve Act, the Federal Reserve Bank can buy out Puerto Rico debt with a maturity of six months. That would solve the problem of short-term liquidity, would allow the payment of the debt, avoid a partial closure or the reduction of the public employees working day.
• Under that same section and treating Puerto Rico as a foreign jurisdiction –which we already are for purposes of the federal internal revenue code and also under certain regulations of the Reserve Bank- it may buy out the Puerto Rico debt regardless of the maturity date. This would give us immediate access to capital markets at much more reasonable interest rates.
• Under section 13(3) of that law, some public corporations like the Government Developmental Bank, the Puerto Rico Electric Power Authority and the Highway Authority, could benefit from credits from the Federal Reserve. This would alleviate the fiscal situation of these entities without the need to reach further into the pockets of our people.

Achieving action from President Obama will require strong pressure from all sectors of our country speaking with one voice. The diaspora, which has risen with solidarity and a strong voice, has to pressure Congress and Obama. It is not easy, but it’s not impossible. What is easy, but unacceptable, is to free Obama of his responsibility and put all responsibility upon Congress, which certainly represents the worst-case scenario. If what Obama wants is for the Republican Congress to pay the political price, which would represent for him a political gain (then act unilaterally like he did in the case of immigration reform), my thought is that in our situation, time is our worst enemy and there is no time for maneuvering.

2. Pay by any means vs. continuing to affect the economy.
If the debt cannot be paid, as the Treasury Department has indicated, then I think it’s time to face this scenario. Postponing that moment with saving or efficiency measures that don’t affect the economy and/or the pockets of the people is the way to go as long as it’s viable. But the question is how far can we stretch the sheet. If in order to make a payment to bondholders we must reduce thousands of public employees to part-time with a significant cut in their salaries, there is a high risk that we will end up in a worst situation.

When speaking of reduced working hours for public employees, we’re not clear on whether it is for a month or two in order to make payment immediately, while we find a more permanent solution; or if we’re talking about reduced working hours until the end of the fiscal year or indefinitely, in order to pay all the obligations with the bondholders, with which be falling into the same mistakes of recent years and the side effects of the medicine will be worse than the disease. Thousands of public employees whose salaries will be reduced by 30 or 40 percent is equivalent to thousands of mortgages at risk, thousands of cars that will be delivered to banks for non-payments, thousands of families that will lose their health plans, a sharp increase of clients in the already broken government health plan, in short, it would create a ripple effect of such magnitude that the deterioration of the economy will increase, there will be an even greater reduction in the area of collections and in the end, we will still not be able to pay the bondholders.

I never advocated that we not pay for no reason. My proposal from, over a year ago was working with the federal government to guarantee or acquire our debt in exchange for some adjustments in our future claims of greater transfer of federal funds. That is the first point of the plan that I propose here; an active and effective participation from the federal government in the solution. I don’t know if the Puerto Rico government has different alternatives to meet their obligations that have not been discussed publically, but if what we are talking about is fewer services and less income for public employees, then its clear that we have reached the moment of truth.

I know it’s not easy for anyone, particularly for the Governor, but all the interested parties have been warned with enough time, including the federal government and the bondholders. And as the governor told the New York Times over the summer, the public debt us un payable and it is time to make some payments for which there is no money, the only alternative is to face reality: these payments cannot be made. And if anyway Puerto Rico has no access to the markets and the federal government continues to simply give advice, the total or partial non-payment under these circumstances will have legal consequences, but not necessarily immediately worsen the fiscal situation, perhaps total or partial non-payment will be the only action that will drive the bondholders and the United States government to action.

3. Sue the United States government.
If Puerto Rico falls into default, it is certain that the government of the Commonwealth will be sued and we must prepare for that. But there is no better defensive than a good offensive and so from now we should warn the United States government that if we are sued, Puerto Rico will bring the federal government as a co-defendant. A few months ago I wrote about the moral and legal responsibility of the United States on our public debt (see Yes, you should; Yes, you can; and by the way it’s also your debt, Today I reaffirm some elements under which I maintain that the United States is a co-debtor of those $73,000 million we owe.
• Our debt was sold in the municipal bond market in the United States under a federal law that grants bonds of the Commonwealth o Puerto Rico triple tax exemption. Without this federal law, in force since 1917, Puerto Rico would have never reached the levels of debts of today. Our bonds, under this exemption, paid the highest yields of all municipal markets. The bondholders did the calculations and did not worry too much about our ability to pay because the performance was so high and free of taxes throughout the United States, which for them was a windfall. But the reality is they loaned us more than what was reasonable. Take the example of the Electric Power Authority, which they came to loan $9 billion despite years of sales in decline and earnings that have been at almost zero or negative for more than 10 years.
• Our public corporations or government entities do not have access to a bankruptcy law because the United States Congress, on a whim, removed us from Chapter 9 of the federal bankruptcy code and the federal courts have concluded that Congress intended that we not have a mechanism for bankruptcy, not even one legislated locally. The consequence of this action is easy to understand: if we have had a bankruptcy law (federal or local) we would not be at the brink of default and therein lies part of their responsibility.
• Finally, and more importantly, there is a legal precedent that suggests that the debt of a territory is also the debt of the United States government. In the case of Limtiaco v. Camacho, 549 US 483 (2007), the Supreme Court faced a dispute about a proposed bond issue from the government of Guam and in the last paragraph of the legal opinion states the following in relation to the nature of a debt of a territory and the possible consequences of the insolvency of the territory:

“It may be true that we accord deference to territorial courts over matters of purely local concern. This case does not fit that model, however. The debt-limitation provision protects both Guamanians and the United States from the potential consequences of territorial insolvency. Thus, this case is not a matter of purely local concern.”
If “the potential consequences of territorial insolvency…are not a matter of purely local interest”, then what are they? Well, obviously, according to this case, the possible consequences of the insolvency of a territory are a matter of national interest of the United States, and if it is a matter of national interest, the reason is clear: the United States has a responsibility for the financial insolvency of their territories. If under the Territorial Clause of the US Constitution, Congress has plenary powers over the territories, then at the end of the day it also has plenary responsibility.
The federal government can not claim that Puerto Rico is still “being, as it is now subject to the Territorial Clause of the US Constitution” in order to deny Puerto Rico’s power and authority to solve our economic and social crisis, and then turn around and say they have no responsibility over our debt because the debt crisis is “a matter of purely local interest”. It is not about denying our responsibility. It is about asserting and reclaiming the legal responsibility of the United States. With plenary powers comes plenary responsibility.
In short, in this difficult moment, the moment of truth, our actions cannot be the traditional ones. Our economy and our people’s pockets are intimately tied and they cannot withstand more hits. Let us demand action from Obama now. If there is no money, we do not pay and when we get sued, let us have the courage to bring the US government to court. In this way and only this way, perhaps we can get the bondholders and the federal government to act in support of the people of Puerto Rico.