DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220

July 29, 2016

The Honorable Senator Orrin Hatch

Chairman
Committee on Finance
United States Senate
Washington, D.C. 20510
Dear Senator Hatch,

I write in response to your recent letter regarding the Treasury Departments efforts to assist
Puerto Rico through its financial crisis. As you know, ensuring that Puerto Ricos financial
challenges are resolved in a comprehensive and sustainable way is one of the Departments
highest priorities. We are appreciative that Congress responded to the Administrations call for
action by passing the Puerto Rico Oversight, Management and Economic Stability Act
(PROMESA) into law last month.

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PROMESAs passage culminated over a year of efforts by the Administration working closely
with Republicans and Democrats in Congress to help stem the tide of Puerto Ricos financial
crisis. As a result, Puerto Rico now has access to a restructuring process to adjust its debts to a
sustainable level, with no carve-outs for powerful financial interests, together with an
independent oversight board that will restore fiscal stability. We believe this is an important first
step in the right direction for Puerto Rico, though more work remains.
Your letter asks about Treasurys work to help resolve Puerto Ricos financial challenges.
Below I describe some of the background that led to PROMESA, including the work of Treasury
and others. I also describe the tools PROMESA provides Puerto Rico, as well as the work that
lies ahead to promote Puerto Ricos long-term success.
I.

Overview of the Recent Financial Situation in Puerto Rico.

Puerto Rico has faced economic decline and expanding fiscal deficits for more than a decade.
Important efforts to increase revenues and reduce outlays proved insufficient to reverse the trend.
As a result, Puerto Rico was experiencing a prolonged, downward spiral in economic
performance, investment, employment and income flows, which was intensified by a sharp
cutback in business and consumer lending.
In the months after June 2015, when the Governor declared Puerto Ricos debt unpayable, a
series of defaults ensued among its various bond issuers. The pension system was virtually
unfunded. Projections anticipated a $28 billion gap between spending and revenue over the next

five years. And the FY2014 audited financials disclosed that as many as 10 local agencies,
including the Commonwealth government itself, might not continue as going concerns.
The crisis sparked the largest wave of outmigration from Puerto Rico since the 1950s. The
population has dropped by 10 percent in the past decade and 2.5 percent last year alone as
young, working age Puerto Ricans leave the Island with their children in search of economic
opportunity. This outmigration includes 36 percent of all doctors. The situation was
unsustainable.
II.

The Administrations Efforts to Assist Puerto Rico.

Treasury had been monitoring Puerto Ricos financial health and the response to its financial
challenges. As those challenges deepened, Treasury convened a dedicated team of experts to
evaluate Puerto Ricos financial outlook more closely. It spent months reviewing Puerto Ricos
finances, evaluating liquidity conditions, and meeting frequently with stakeholders both on and
off the Island.

The Treasury team concluded Puerto Ricos prospects were bleak, and an Administration-wide
effort was developed to respond to the situation. Since January, eight members of the
Presidents Cabinet have visited Puerto Rico and hundreds of millions of dollars in incremental
federal funding have been released. Secretary Lew traveled to Puerto Rico twice as part of
Treasurys continued engagement, meeting with elected officials, labor and community leaders,
and the local business community.

III.

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As a narrow part of our work, Puerto Rico agreed to share with Treasury certain non-public
information about certain aspects of its financial condition, subject to important limitations on its
dissemination. This is a typical arrangement, and it helped us better understand Puerto Ricos
financial condition. Your staff previously requested copies of the agreements we entered into
with Puerto Rico or Puerto Ricos entities, which we provided several months ago. Your letter
reiterates that request, and we have enclosed those agreements again with this response.
Creating a Path to Recovery: Roadmap for Congressional Action.

In addition to working across the Administration to respond to the situation in Puerto Rico, we
provided regular updates to Congress starting in 2014. We provided briefings for, and worked
closely with, staff in your office and other Congressional offices to develop a solution that would
halt Puerto Ricos economic decline and put it on a path towards recovery. In October 2015, the
Administration released a plan for how to address the crisis in Puerto Rico.1 This legislative
1

Addressing Puerto Ricos Economic and Fiscal Crisis and Creating a Path to Recovery: Roadmap for
Congressional Action, dated October 21, 2015, available at:
https://www.whitehouse.gov/sites/default/files/roadmap_for_congressional_action___puerto_rico_final.pdf; see also
Puerto Ricos Economic and Fiscal Crisis, dated October 21, 2015, available at:
https://www.treasury.gov/connect/blog/Documents/Puerto_Ricos_fiscal_challenges.pdf; see also The
Administrations Roadmap for Puerto Rico: Diverse Voices Supporting a Balanced Proposal, dated November 3,
2015, available at: https://www.treasury.gov/connect/blog/Pages/The-Administration%E2%80%99s-Roadmap-forPuerto-Rico-Diverse-Voices-Supporting-a-Balanced-Proposal.aspx.

roadmap offered a comprehensive set of specific policies the Administration believed were
essential to stem Puerto Ricos crisis and restore economic growth. These policies included the
ability for Puerto Rico to comprehensively restructure its financial liabilities; the implementation
of strong, independent fiscal governance and oversight; the provision of a long-term solution to
Puerto Ricos inadequate Medicaid treatment; and measures to boost economic growth.
Separately, in the Consolidated Appropriations Act for Fiscal Year 2016, Congress provided
Treasury with new technical assistance authority to assist Puerto Rico. Efforts resulting from
that authority have been productive. Contrary to the suggestions in some of the articles cited in
your letter, Treasurys exclusive focus has been on improving the lives of the 3.5 million
Americans in Puerto Rico. To the extent this is an area of interest, we would welcome the
opportunity to brief you or your staff and describe our work in this area.
IV.

Congress Passes PROMESA, Giving Puerto Rico Critically Needed Tools.

Notwithstanding the technical assistance authorized by Congress in December 2015, the passage
of comprehensive federal legislation remained critical to Puerto Ricos future.2 Congress
eventually took further action, with the U.S. House of Representatives approving PROMESA by
a bipartisan vote of 297-127 on June 9. With your support, the U.S. Senate approved the
legislation without amendment by a vote of 68-30 on June 29. The President signed PROMESA
into law the next day.

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PROMESA addresses two of the most urgent requirements in our roadmap for legislative action:
debt restructuring and fiscal oversight. The law provides a mechanism to facilitate voluntary
restructurings and provides an immediate stay on litigation, giving Puerto Rico sufficient
breathing space to allow for voluntary negotiations. In addition, the legislation offers a
responsible process to ensure the retirement security of the 330,000 citizens in Puerto Rico that
depend on their pension benefits. And, the temporary fiscal oversight will help restore
credibility to Puerto Ricos budgeting and fiscal decision making processes.
The bill has other benefits as well. For instance, the legislation makes a majority of Puerto Rico
eligible for a Historically Underutilized Business Zones (HUBZone) certification, which should
create new job opportunities by increasing the percentage of federal contracting sourced in the
Commonwealth. The legislation also permits Puerto Ricos government and municipalities to
purchase many of their goods and services off the General Services Administrations (GSA)
purchasing schedules. This should enable Puerto Rico and its instrumentalities to procure
equipment, licenses, and services from GSA at affordable rates and provide better transparency
in the purchasing process. And, the legislation creates the Congressional Task Force on
Economic Growth in Puerto Rico, tasked with examining current federal law to identify
impediments to economic growth and healthcare coverage in Puerto Rico. As Chair of the Task

See Letter to Speaker Ryan, Leader Pelosi, Leader McConnell, and Leader Reid, dated January 15, 2016.
Available at: https://www.treasury.gov/connect/blog/Pages/Secretary-Lew-Sends-Letter-to-Congress-on-PuertoRico.aspx; see also Letter to Leader McConnell, Leader Reid, Speaker Ryan and Leader Pelosi, dated May 3, 2016,
available at: https://www.treasury.gov/connect/blog/Pages/Lew-Sends-Letter-to-Congress-on-Puerto-Rico.aspx.

Force, we offer you, your staff, and your colleagues our assistance as the Task Force carries out
its important work.
V.

More Work Remains to Promote Puerto Ricos Long-Term Success.

PROMESA is only the first step towards Puerto Ricos recovery. More work remains. For
example, as proposed in the Administrations roadmap, Congress must also address Puerto
Ricos healthcare inadequacies and provide incentives to reward work. We would ask the
Congressional Task Force to consider these recommendations as it carries out its work.

Specifically, the Medicaid programs in Puerto Rico and the other the U.S. territories are
fundamentally different from the Medicaid program in the States. Medicaid funding in the
territories is capped; beneficiaries are offered fewer benefits; and the federal government
contributes less on a per-capita basis than it does to the rest of the nation. Puerto Rico provides
health insurance coverage to more than 1.5 million Medicaid beneficiaries, representing nearly
half of Puerto Ricos total population. When one-time additional funds provided by the
Affordable Care Act are exhausted in Puerto Rico, as early as June 2017, up to 900,000
Americans living in Puerto Rico could lose their healthcare coverage. To avoid this calamity,
Congress still needs to reform Puerto Ricos Medicaid program to raise the standard of care and
prevent Medicaids unstable financing from exacerbating Puerto Ricos fiscal crisis.

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In addition to fixing Puerto Ricos inadequate healthcare treatment, Congress must also enact
some of the most proven, bipartisan tools for stimulating economic growth and rewarding work.
A large body of economic research, including Treasurys own analysis, has found the Earned
Income Tax Credit is one of the strongest, most powerful policy tools to meet those objectives.
We look forward to working with Congress on these important issues.
***

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Thank you for your support of PROMESA that will assist Puerto Rico through this challenging
time. Treasury firmly believes Puerto Rico can and will emerge from the current crisis and
return to growth. By working together, we can help put Puerto Rico on the best path to a
sustained recovery. If you need more information, please have your staff contact me or Glen
Sears, Office of Legislative Affairs, at (202) 622-1900.
Sincerely,

Thomas Patrick Maloney

Senior Advisor, Office of Legislative Affairs
Enclosure

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