Prepared Statement of Senator Chuck Grassley of Iowa
U.S. Senate Committee on Finance
Hearing on
“Financial and Economic Challenges in Puerto Rico”
Tuesday, September 29, 2015
Thank you, Mr. Chairman. I want to take a moment to say just a few things and then maybe ask some questions if there’s time.
Puerto Rico’s debt crisis didn’t happen overnight. It’s been years in the making. Puerto Rico now has one of the largest deficits of all municipal governments in the United States. The Krueger Report explained that the root cause of this problem is decades of stimulus spending and economic stagnation. Instead of making difficult decisions to cut spending and balance its budget, the government kept borrowing to finance its operations, using tax-exempt bonds to roll over debt coming due. Finally, the game is up as the Governor has said the “debt is not payable” and must be restructured.
Now Congress is asked to step in and address Puerto Rico’s debt situation. No doubt a comprehensive approach is needed to restore fiscal balance and economic growth. Puerto Rico’s debt isn’t sustainable without growth, and growth isn’t possible without local and federal structural reforms. The government’s Fiscal and Economic Growth Plan aims to provide a road map that achieves these goals.
The Plan asks Congress for meaningful help to restore economic development. One proposal is to extend Chapter 9 bankruptcy to Puerto Rico so that its municipalities can restructure its debts. Chapter 9, though, would only affect certain debt, as it’s not applicable to the sovereign, constitutionally protected general obligation bonds.
As with any single proposal, Chapter 9 alone won’t solve Puerto Rico’s financial problems. Therefore, if we agree with the experts that structural reforms are critical to growth, then Congress should work to help Puerto Rico help itself.
We should consider exempting Puerto Rico from the Jones Act, which limits competition and raises the cost of living for Island residents. Congress could also exempt Puerto Rico from the federal minimum wage, which New York Times columnist Paul Krugman has stated is too high for Puerto Rico. Full-time employment at the minimum wage is equivalent to 77 percent of per capita income, versus 28 percent on the mainland. Thus, eliminating the federal minimum wage mandate would help to grow Puerto Rico’s economy.
However, congressional help without meaningful reform by the Puerto Rican government won’t work. Puerto Rico needs to tackle difficult problems as part of any serious pro-growth policy reform. Critics, however, of the government’s plan argue the proposals don’t go far enough. There’s no mechanism to ensure the proposals are ever implemented. And a local control board, if ever created, will be ineffective due to local politics and pressure.
Perhaps, then, a federal financial control board should be part of a comprehensive approach to remove obstacles to serious fiscal reform, like the fact that the government employs almost 25 percent of Puerto Rico’s workers. Historically, these oversight and control boards created by higher levels of government, for example in New York City and the District of Columbia, have shown success.
At the end of the day, it’s likely that neither Congress nor Puerto Rico alone can solve this crisis. But now is the time for Puerto Rico to have the will and courage needed to make difficult decisions, so that this vicious debt cycle is never again repeated or otherwise anything Congress might do would be to little avail if things don’t change where the problem was created.
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