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The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) is a 2016 US federal law that established an oversight board, a process for restructuring debt, and expedited procedures for approving critical infrastructure projects in order to combat the Puerto Rican government-debt crisis.[1][2][3] Through PROMESA, the US Congress established an unelected Fiscal Control Board (FCB) to oversee the debt restructuring.[4][1][2][3] With this protection the then-governor of Puerto Rico, Alejandro García Padilla, suspended payments due on July 1, 2016.[2] The FCB's approved fiscal austerity plan for 2017-2026, cut deeply into the Puerto Rican public service budget—included cuts to health care, pensions, and education—in order to repay creditors.[4] By May 2017, with a debt of $123 billion debt owed by the Puerto Rican government and its corporations, the FCR requested the "immediate" nomination of a federal judge to "decide how to deal with" the "largest bankruptcy case in the history of the American public bond market."[5]

Puerto Rico Oversight, Management, and Economic Stability Act
Great Seal of the United States
Other short titles PROMESA
Long title To establish an Oversight Board to assist the Government of Puerto Rico, including instrumentalities, in managing its public finances, and for other purposes.
Enacted by the 114th United States Congress
Citations
Public law 114-187
Legislative history

Contents

BackgroundEdit

The United States invaded Puerto Rico, then an autonomous colony of Spain, during the Spanish-American War. Puerto Rico was ceded by Spain to the at the end of the conflict in accordance of the Treaty of Paris of 1898. The Foraker Act of 1900 made Puerto Rico subject to applicable U.S. Federal laws with the exception of the Internal Revenue codes and established a civil government with the governor and executive council appointed by the U.S. President. The law also established a judicial system and a bicameral legislature with a house of representatives elected by the citizens of Puerto Rico. This act prohibited the public indebtedness of both the civil and various municipal governments in excess of seven percent of their aggregate tax value. The currency of Puerto Rico was also converted to the US Dollar.[6]

Jones ActEdit

In 1917, the Jones Act also known as the Jones–Shafroth Act established a civil administration with new import and export taxes and regulations. Key to this legislation was the implementation of triple-tax exempt municipal bonds. This means that the interest on municipal bonds are not subject to federal, local or state taxes, causing the economically desperate government of Puerto Rico to buy bonds in order to finance public services.[7] The Jones Act also granted U.S. citizenship onto all Puerto Ricans, but did not give Puerto Ricans the right to vote in the U.S. presidential elections (see: Federal voting rights in Puerto Rico). In This institutionally implemented structural dependency is reinforced in 1952 when the Puerto Rican government constructs its own constitution, officially deeming the island the Estado Libre Asociado de Puerto Rico (literally "Associated Free State of Puerto Rico") also known as the Commonwealth of Puerto Rico. Unlike the "Free State" name may seem to suggest, this did not give Puerto Rico any significant political and socio-economic autonomy that stands apart from the U.S. powers that control the territory.[citation needed] The constitution contains language that limits fiscal 'misbehavior' by suggesting that the islands's public debt must be prioritized before other spending for basic public services occurs.[8]

After politically establishing Puerto Rico as an official colony[citation needed] and dominating the economic infrastructure with the neoliberal process of industrialization,[citation needed] the U.S. helps to create Puerto Rico's debt problem[citation needed] by allowing for continuous economic stagnation.[citation needed] After the Operation Bootstrap of 1945, where the agricultural economy was transformed by the processes of industrialization, The Great Emigration of the 1950s in Puerto Rico becomes part of a larger pattern of migration where workers from the colonized or 'underdeveloped' parts of the world move to the metropolitan countries looking for better socio-economic opportunities.[citation needed] Realizing that Puerto Rico's economy was dwindling in public debt and a lack of growth, congress passed Sec 936 of 1976,[citation needed] giving major tax breaks to the export sector in Puerto Rico. This was thought of as a central tool for economic growth on the island, because investors, mainly that of pharmaceutical and other manufacturing companies, incentivized by the tax breaks, were bringing revenue to the island and generating jobs. (Davis 2015)[citation not found] Yet many[who?] critiqued the use of tax breaks on the island, deeming it an unfar advantage that leads to the perpetuation of corporate monopolies.[citation needed] In 1996, President Clinton signed legislation that would phase out Section 936 over a ten-year period, and by 2006, it was completely repealed.[9] This repeal sends Puerto Rico into a Ten-Year Recession[citation needed] (coupled with the beginnings of the U.S. 2008 Recession) where over half of the manufacturing jobs are lost, the GDP drops 13%, and municipal bonds become an addiction for the Puerto Rican government.[citation needed] This is because companies, disincentivized by the lack of tax breaks, either closed or moved locations, causing people to either lose their jobs or have to move with them.[citation needed] The government was forced[citation needed] to rely on borrowed money with interest rates around 785%-1000%[citation needed] that wouldn't have to be paid back until decades later. What's worse is when the "Vulture Hedge Funds" or investment fund organizations (companies, countries or individuals) invest in debt that is 'weak' or already in default by selling and trading the bonds in the secondary market.[citation needed] These hedge funds take advantage and make profit off of a debt situation by buying 'weak' bonds for a cheap price, and gaining a larger amount by forcing the full repayment of the purchasing value. (Davis 2015)[citation not found] As the public debt in Puerto Rico accrues, the situation becomes a human rights issue:[citation needed] the extremities in the loss of basic government services has led to extreme poverty, food insecurity and a lack of access to healthcare and education services.[citation needed]

According to Nelson Denis, in response to this socio-economic situation, many native Puerto Ricans continued to leave the island in hopes of a better future; emigration rates were estimated to be at about 50,000 a year.[10] As a result,[citation needed] Act 20 and Act 22 were passed in 2012 to repeal obligations on personal income tax to new Puerto Rican residents (those non-natives who choose to move to Puerto Rico from the U.S.) and to repeal obligations for capital investors (mainly that of industrial or manufacturing sectors[citation needed]) to pay capital gains taxes. This made Puerto Rico a tax haven for U.S. mainland citizens[citation needed] who are looking to invest in the manufacturing industry,[citation needed] but continues to ignore the problem of structural dependency[which?] and economic stagnation that has led to such a large amount of unpayable debt.

OverviewEdit

PROMESA enables the island's government to enter a bankruptcy-like restructuring process and halt litigation in case of default. Specifically, the establishment of the Financial Oversight and Management Board of Puerto Rico[11] known colloquially as "La Junta" (a short form of "La Junta de Control Fiscal"), operates as an automatic stay of creditor actions to enforce claims against the government of Puerto Rico.[12] The oversight board is to facilitate negotiations, or, if these fail, bring about a court-supervised process akin to a bankruptcy. The board is also responsible for overseeing and monitoring sustainable budgets.[2] The President appointed all seven members of the board, six of whom were chosen from a list of individuals recommended by Congressional leaders and had previous ties to profitable industries in Puerto Rico.[13] The Governor of Puerto Rico (or a designee) serves ex officio as an eighth member without voting rights.[3] PROMESA authorizes the oversight board to designate a territory or territorial instrumentality as a "covered entity."[14] Once designated, the covered entity is subject to the terms of PROMESA.[14] On September 30, 2016, the oversight board designated the Commonwealth of Puerto Rico and certain other territorial instrumentalities as covered entities under PROMESA.[15] As a covered entity, Puerto Rico is required to submit a fiscal plan.[16] A fiscal plan must provide a method to achieve fiscal responsibility and access to the capital markets, and:

  • provide for estimates of revenues and expenditures in conformance with agreed accounting standards and be based on--
  • applicable laws; or
  • specific bills that require enactment in order to reasonably achieve the projections of the Fiscal Plan;
    • ensure the funding of essential public services;
    • provide adequate funding for public pension systems;
    • provide for the elimination of structural deficits;
    • for fiscal years covered by a Fiscal Plan in which a stay under subchapters III or IV is not effective, provide for a debt burden that is sustainable;
    • improve fiscal governance, accountability, and internal controls;
    • enable the achievement of fiscal targets;
    • create independent forecasts of revenue for the period covered by the Fiscal Plan;
    • include a debt sustainability analysis;
    • provide for capital expenditures and investments necessary to promote economic growth;
    • adopt appropriate recommendations submitted by the Oversight Board under section 2145(a) of this title;
    • include such additional information as the Oversight Board deems necessary;
    • ensure that assets, funds, or resources of a territorial instrumentality are not loaned to, transferred to, or otherwise used for the benefit of a covered territory or another covered territorial instrumentality of a covered territory, unless permitted by the constitution of the territory, an approved plan of adjustment under subchapter III, or a Qualifying Modification approved under subchapter VI; and
    • respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to June 30, 2016.[16]

On October 14, 2016, Puerto Rico submitted a proposed fiscal plan to the oversight board.[17] On November 23, 2016, the oversight board released its initial assessment of the fiscal plan submitted by Puerto Rico.[18] The oversight board requested that the fiscal plan be amended to incorporate the following:

  1. Define and incorporate key aspirational goals, benchmarks and metrics for a ten-year vision for Puerto Rico. This aspirational vision should drive Puerto Rico to stabilize its current economic, social, demographic and financial situation, increase the economy's resilience, shore up public finances, support long-term, durable growth, address basic needs and restore opportunity for the people of Puerto Rico;
  2. Exclude any funding from an extension of Affordable Care Act as well as revenues from an extension of Act 154 revenues in light of their expiration (unless the assumption is accompanied by a specific bill). The Board supports efforts to extend Affordable Care Act funds and Medicaid parity for Puerto Rico, but consistent with the PROMESA Act the Board has to insure that the Fiscal Plan is based on existing law or a specific bill.
  3. Incorporate a revised baseline forecast to reflect pay-go funding for pension benefits and segregation of current employee contributions beginning no later than 2018; and
  4. Include a debt restructuring proposal and also a debt sustainability analysis.[18]

On November 29, 2016, the Governor of Puerto Rico responded to the oversight board's assessment of the Commonwealth's proposed fiscal plan.[19]

With basic services risking privatization, and funding for pensions, education and healthcare already scarce, PROMESA strives to reallocate more public funding to restructure the $72 billion in debt. In late January 2017, the board created under PROMESA gave the government of Puerto Rico until February 28 to present a fiscal plan (including negotiations with creditors) to solve the problems. It is essential for the Commonwealth to reach restructuring deals to avoid a bankruptcy-like process under PROMESA.[20] A moratorium on lawsuits by debtors was extended to May 31.[21]

Recently elected Governor Ricardo Rosselló hired investment expert Rothschild & Co in January 2017 to assist in convincing creditors to take deeper losses than they had expected on Puerto Rico's debts. The company was also exploring the possibility of convincing insurers that had guaranteed some of the bonds against default, to contribute more to the restructuring, according to reliable sources. The governor also planned to negotiate restructuring of about $9 billion of electric utility debt, a plan that could result "in a showdown with insurers." Political observers suggest that his negotiation of the electrical utility debt indicated Rosselló's intention to take a harder line with creditors. Puerto Rico has received authority from the federal government to reduce its debt with legal action and this may make creditors more willing to negotiate instead of becoming embroiled in a long and costly legal battle.

Composition of the Fiscal Control BoardEdit

On August 31, 2016, President Obama appointed the seven members of the board.[22][23]

  Democrat    Republican

Name

Date appointed Affiliation
Andrew Biggs August 31, 2016 Republican
José Carrión August 31, 2016 Democrat
Carlos García August 31, 2016 Republican
Arthur Gonzalez August 31, 2016 Democrat
José González August 31, 2016 Democrat
Ana Matosantos August 31, 2016 Democrat
David Skeel August 31, 2016 Republican
Officers
Name Position
José Carrión Chair
Natalie Jaresko Executive Director
Jaime El Koury Legal Counsel
Noel Zamot Revitalization Coordinator
Christian Sobrino Vega Representative of the government of Puerto Rico

In March 2017, Natalie Jaresko, former Minister of Finance in Ukraine, was appointed as the board's executive director.[24]

CriticismEdit

Critics indicate that the law continues to treat the island as an anomaly, neither as a state nor a municipality, fails to provide a way to statehood or independence, and does not deal with underlying economic problems such as high unemployment, lack of opportunities, welfare issues, and brain drain.[25] The oversight board will have broad sovereign powers to effectively overrule decisions by Puerto Rico's legislature, governor, and other public authorities, under the federal government's constitutional power to "make all needful rules and regulations" regarding U.S. territories. For this reason, the board has been criticized as colonial and anti-democratic in nature.[26] According to Nelson Denis, the political and economic activities of the United States in Puerto Rico have created structural dependency, economic stagnation, and a growing debt problem that led to the creation of this fiscal plan.[10]

Many critics bring up the fact that meetings are not conducted to discuss the legitimacy of the lending-scheme debt, but instead look to use to capitalist economic frameworks to return Puerto Rico to a state of economic growth.[27]

Various unions, environmental organizations, and new political parties (e.g. the Working People's Party of Puerto Rico) have criticized the PROMESA control board's effects on the socio-economic and political infrastructure of Puerto Rico.[10] Whether they peacefully strike, gather in front of corporate media outlets to oppose propaganda-ridden journalism on PROMESA, or disruptively create a blockade in front of the entrance to the first PROMESA board meeting, protesters are being met with pepper spray, arrests and blatant militarism.[28] This militant treatment of social activists in Puerto Rico that oppose U.S. colonialism has been occurring from the moment the colony was established, and has only taken on new sophisticated forms over the ages.[29]

In 2017, after the Federal Oversight Board presented its plan, Joseph E. Stiglitz and Martin Guzman indicated that PROMESA "is bringing more problems than solutions" and that the appointed Board lacks "any understanding of basic economics and democratic accountability".[30] As the Board's plan predicts a 16.2% decline in GNP for the next fiscal year with a further decline to follow and prioritizes payment to creditors, "a social (and) economic catastrophe" is "all but guarantee(d)".[30] Stieglitz and Guzman proposed instead that steps to enhance economic growth and not repayments should be at center of a viable plan to solve the crisis.

Because of the United States' grip on the political economy of Puerto Rico and the subsequent enforcement of neoliberal economic frameworks, many critics argue that PROMESA uses the instability of Puerto Rico's economy as a means of gaining more control of the socio-economic and political autonomy of the local government in Puerto Rico.[31]

In 2017, Barry Sheppard wrote in Green Left Weekly that by 2014 when "the island's debt to US financial lenders hit US$73 billion," vulture capitalists bought the debt cheaply, demanded it be paid in full and that this law "created an un-elected seven-person financial board with sweeping powers over the island's economy" which was reaffirmed by the US Supreme Court with Sonia Sotomayor dissenting.[32]

ReferencesEdit

  1. ^ a b DeBonis, Mike (June 9, 2016). "House passes Puerto Rico fiscal rescue bill ahead of July cliff". The Washington Post. 
  2. ^ a b c d Brown, Nick (June 30, 2016). "Puerto Rico authorizes debt payment suspension; Obama signs rescue bill". Reuters. 
  3. ^ a b c Pub.L. 114–187
  4. ^ a b Lopez, Anamaria (September 12, 2017), "Puerto Rico Is Getting Squeezed, and It Will Cost All of Us", Institute for New Economic Thinking (INET), retrieved October 6, 2017 
  5. ^ González, Juan (May 9, 2017). "Puerto Rico's $123 Billion Bankruptcy Is the Cost of U.S. Colonialism". The Intercept. Retrieved October 6, 2017. 
  6. ^ "Foraker Act". Wikipedia. 2018-01-10. 
  7. ^ Walsh, Mary Williams (2017-05-05). "Puerto Rico: A Debt Problem That Kept Boiling Over". The New York Times. ISSN 0362-4331. Retrieved 2018-04-21. 
  8. ^ Article VI, Section 8 of the Constitution of Puerto Rico (1952)
  9. ^ Vélez-Vélez, Roberto (2011). "Anti-American Resistance in Latin America: An Issue of Sovereignty, Militarization, and Neoliberalism". Sociology Compass. 5: 696–711. 
  10. ^ a b c Denis, Nelson (2015). War Against All Puerto Ricans: Revolution and Terror in America's Colony. New York, NY: Nation Books. ISBN 1568585616. 
  11. ^ "Financial Oversight and Management Board for Puerto Rico". juntasupervision.pr.gov. Retrieved 2017-04-03. 
  12. ^ "Overview". PROMESACODEX.com. Retrieved 2016-11-18. 
  13. ^ "Who are the Members of the Puerto Rico Fiscal Control Board?". NBC News. Retrieved 2018-04-21. 
  14. ^ a b "48 U.S.C. § 2121". PROMESACODEX.com. Retrieved 2016-11-21. 
  15. ^ "Covered Entities". PROMESACODEX.com. Retrieved 2016-11-21. 
  16. ^ a b "48 U.S.C. § 2141". PROMESACODEX.com. Retrieved 2016-11-21. 
  17. ^ "Commonwealth of Puerto Rico - Fiscal Plans". PROMESACODEX.com. Retrieved 2016-11-21. 
  18. ^ a b "Oversight Board's Assessment of Commonwealth's Fiscal Plan" (PDF). PROMESACODEX.com. Retrieved 6 December 2016. 
  19. ^ "Governor's Response to Oversight Board's Assessment of Fiscal Plan" (PDF). PROMESACODEX.com. Retrieved 6 December 2016. 
  20. ^ Brown, Nick (January 18, 2017). "Puerto Rico oversight board favors more time for restructuring talks". The Fiscal Times. The bipartisan, seven-member oversight board was created under the federal Puerto Rico rescue law known as PROMESA, passed by the U.S. Congress last year. It is charged with helping the island manage its finances and navigate its way out of the economic jam, including by negotiating restructuring deals with creditors. 
  21. ^ Associated Press (January 29, 2017). "Puerto Rico gets more time to propose fiscal plan". Star Herald. Scottsbluff, ME. Retrieved February 16, 2017. 
  22. ^ "White House names seven to Puerto Rico oversight board". Washingtonpost.com. Retrieved 24 September 2016. 
  23. ^ "Puerto Rico oversight board appointed". Reuters.com. Retrieved 24 September 2016. 
  24. ^ "Fiscal board chairman: Extent of Puerto Rico crisis justifies new executive director's salary – Caribbean Business". caribbeanbusiness.com. Retrieved 2017-04-03. 
  25. ^ Gillian B. White (July 1, 2016). "Puerto Rico's Problems Go Way Beyond Its Debt". The Atlantic. Retrieved July 2, 2016. 
  26. ^ Jaime E. Picó (March 30, 2016). "La junta colonial". El Nuevo Día. Retrieved November 17, 2016. 
  27. ^ "Juan González on How Puerto Rico's Economic "Death Spiral" is Tied to Legacy of Colonialism PT.1" on YouTube
  28. ^ Protests Erupt in San Juan as Obama Forms Unelected Control Board to Run Puerto Rico on YouTube
  29. ^ Rezvani, D. A. (2007). "The Basis of Puerto Rico's Constitutional Status: Colony, Compact, or "Federacy"?". Political Science Quarterly. 122: 115–140. 
  30. ^ a b Joseph E. Stiglitz, Martin Guzman (February 28, 2017). "From Bad to Worse for Puerto Rico". Project Syndicate. Retrieved April 8, 2017. 
  31. ^ "Special Report: Voices from Puerto Rico's Students Leading an Anti-Austerity Movement | Democracy Now!". April 6, 2016. Archived from the original on 2016-04-07. 
  32. ^ Barry Sheppard, "[Puerto Rico devastation badly worsened by US treatment — before and after the hurricanes] (https://www.greenleft.org.au/content/puerto-rico-devastation-badly-worsened-us-treatment-%E2%80%94-and-after-hurricanes)," [Green Left Weekly], Oct. 5, 2017.

External linksEdit