To the Honorable Orrin Hatch, Chairman and the members of the Joint Congressional Committee on Puerto Rico

THE CITIZENS’ MEMORANDUM – PART I
“The worst disease in the world today is corruption,,and there is a cure: TRANSPARENCY.”- Bono THE CITIZENS’

MEMORANDUM – PART I

BACKGROUND INFORMATION

Puerto Rico’s governors were forewarned about this impending economic crisis. Forty one years ago, Nobel Economic Prize winner Dr. James Tobin warned Governor Rafael Hernández Colón (PDP 1973-1976 1984-1992) that Puerto Rico was in a precarious economic situation. On December 11, 1973 Tobin released The Tobin Report, a comprehensive study on Puerto Rico’s economic development, fiscal and budget policies.

The report expressed that “The trends of government spending, the deficits of the government agencies, public debt and the production cost cannot be sustained even if the external economic conditions are favorable.” The report strongly recommended “a serious austerity program and a long list of substantive measures cutting governmental operations and costs”. It forecasted with extraordinary precision that if the recommendations were not implanted “the government of Puerto Rico will face the hard realities of running for desperate solutions.”

The Tobin Report predicted in December 1973, forty three years ago, that Puerto Rico would face serious financials and economic consequences if no measures to cut cost and implement an austerity programs were implemented. All of this was ignored after the report was made public by the Hernández Colón gubernatorial administration which instead chose the path of borrowing and spending. Subsequent colonial governments followed the same policy.

Subsequently, in 1979, under President Jimmy Carter’s Administration, a comprehensive study was ordered by the White House and chaired by U.S. Department of Commerce Secretary, Juanita Kreps. The Kreps Report reaffirmed and reiterated Tobin”s recommendations. Both studies were totally ignored by ALL governors from 1975 through 2016. On the contrary they continued with a fiscal policy of spending and borrowing. Please see the graphic below.

ECONOMIC OUTLOOK

A significant portion of our financial activities and credit exposure is concentrated in Puerto Rico, which entered into recession in the second quarter of 2006. Puerto Rico’s gross national product contracted in real terms in every year between fiscal year 2007 and fiscal year 2011 (inclusive), grew by 0.5% in fiscal year 2012 and decreased by 0.2% and 0.9% in fiscal years 2013 and 2014, respectively. The changes in the gross national product in fiscal years 2012, 2013 and 2014 also have to be analyzed in light of the large amount of governmental stimulus and deficit spending in those fiscal years.

According to the Puerto Rico Planning Board’s baseline scenario projections, for fiscal years 2015 and 2016, gross national product is projected to further contract by 0.9% and 1.2%, respectively. The latest Government Development Bank for Puerto Rico (“GDB”) Economic Activity Index, which is an indicator of general economic activity and not a direct measurement of gross national product, reflected a 1.8% reduction in the average for fiscal year 2015 (July 2014 to June 2015), compared to the prior fiscal year. For the first nine months of fiscal year 2016, the Economic Activity Index decreased approximately 1.3%, compared to the same period of the prior fiscal year.

The Commonwealth of Puerto Rico (the “Commonwealth”) is experiencing a severe fiscal crisis resulting from persistent and significant budget deficits, a high debt burden, the continuing economic contraction and lack of access to the capital markets, among other factors. Budget deficits were historically covered with bond financings, loans roll overs from GDB and extraordinary one-time revenue measures. GDB has traditionally served as the principal depositary of public funds and lender to the Commonwealth, its public corporations and municipalities. Today 70 of 78 municipal government are under serious economic hardship and insolvency. As a result of multiple downgrades of the Commonwealth and its agencies obligations to below investment grade ratings since February 2014 and ongoing liquidity constraints at the Commonwealth central government and GDB, the Commonwealth’s ability to finance future budget deficits is expected to be very limited, if any.

The Government’s most recent estimate of the budget deficit for fiscal year 2015 is approximately $703 million. For fiscal year 2016, the Government approved a $9.8 billion budget, which is $235 million higher than the approved budget for fiscal year 2015 due primarily to a significant increase in debt service payments and special pension contributions. In December 2015, however, the Government revised its revenue estimate for fiscal year 2016 downward by $508 million, to approximately $9.3 billion.

In order to confront its liquidity constraints and this decrease in revenues, while continuing to provide essential services, the Government has been forced to implement certain extraordinary measures. All of these measures, however, have been insufficient to address the current fiscal crisis and the Commonwealth has indicated that it will not have sufficient liquidity before the end of this fiscal year (ending on June 30, 2016) to meet all of its debt service obligations while continuing to provide essential services to the residents of Puerto Rico.

In response to the continued fiscal and economic challenges, the Government of Puerto Rico engaged a group of former IMF economists to analyze the Commonwealth’s economic and financial stability and growth prospects. The group’s final report, commonly known as the “Krueger Report,” was delivered to the Governor of Puerto Rico on June 28, 2015 and states that Puerto Rico faces an acute crisis in the face of faltering economic activity, faltering fiscal solvency and debt sustainability, and faltering institutional credibility. Some of the report’s principal conclusions are as follows:

(i) the economic problems of Puerto Rico are structural, not cyclical, and are not going away without substantial structural reforms,

(ii) fiscal deficits are much larger than assumed and are set to deteriorate,

(iii) the central government deficits (as measured in the report) over the coming years imply an unsustainable trajectory of large financing gaps, and
(iv) Puerto Rico’s public debt cannot be made sustainable without growth, nor can growth occur in the face of structural obstacles and doubts about debt sustainability.

The report concludes that, even after factoring in a substantial fiscal effort, a large residual financing gap persists into the next decade, implying a need for debt relief. To close the financing gap, the government would need to seek relief from a significant but progressively declining proportion of principal and interest due during fiscal years 2016 to 2024. The report acknowledges that any debt restructuring would be challenging as there is no precedent of this scale and scope, but concludes that, from an economic perspective, the fact remains that the central government faces large financing gaps even with substantial adjustment efforts (as there are limits to how much expenditures can be cut or taxes raised).

1-In the last two natural years of 2014 and 2015 more than 240,000 American citizens from Puerto Rico have departed the island and moved to the United States mostly to Florida, Texas, North Carolina, Georgia and Virginia. This massive population exodus is the largest in the history of Puerto Rico costing the Island’s economy $ 4.6 BILLIONS less in the economic stream. The unstable economic and corrupt political environment is fueling further the massive population exodus. The present political conditions is a factor for the demise. The Federal Fiscal Board must be conscious of any public statement that may project and end of Puerto Rico’s relationship with the United States. Such a statement will further promote massive population exodus. If you want to, confirm the different polls that revealed that 92% of the population will migrate from Puerto Rico to the United States if independence or free association is granted you may do so with a poll with the Gallup organization in Princeton, New Jersey, to confirm them.

2- Local elected officials have ignored the massive structural negative effects of the massive population exodus. It has a direct effect in ALL components of the economic eco system. Tax revenues have fallen, sales and job losses; housing foreclosures have reach biblical proportion with 25% of the housing stock empty; bankruptcies have increase and it has hit the collective morale of the People of Puerto Rico with an attitude of “all is lost.” According to the 2010 U.S. Census there were 262,000 empty housing dwellings on the Island. The crisis has expanded dramatically housing foreclosure. In 2015 4,200 units were foreclosed and more than 20,000 units with 90 days or more in arrears of mortgage payments. There is also an appalling deflation affecting the values of the Puerto Rican family most important savings account, their homes. There is a consensus that real estate properties lost at least 50% of values.

3- As the population exodus intensifies the territorial government continues with a public policy of resolving budgets deficits with more taxation, public debt loans refinancing and expansion and increasing public utilities (own by the territorial government). The high cost of living and tax rates makes it impossible to attract investments much less population. The government of Puerto Rico is not the only one responsible for the public debt mess. Wall Street bankers and bond traders knew of the weak economic situation of Puerto Rico and continue to lend and sell bonds moved by the extraordinary fees of each transaction and to roll over under the rug the perils and pass it to future decision makers.

Puerto Rico has today according to the New York Times the highest consumer tax in the Nation not to say the highest cost of living as well. It also has the lowest per capita income of any jurisdiction of the United States, $ 19,200.00 Besides that, Puerto Rico has the second highest energy cost and the highest cost of drinkable water. All of this makes extremely difficult to create good and high paying jobs in the archipelago.

4- You will find that all gubernatorial administrations since 1973 have been plagued with rampant corruption and that the “big fish” enjoys total impunity while the sardines are incarcerated. This has caused the taxpayers of Puerto Rico more than 27 thousands of millions in the last 41 years. The Puerto Rico’s Office of the Comptroller (an Inspector General type of agency) has issued for decades statements indicating the the Government of Puerto Rico loses at least 10% of the combine Federal and territorial budgets in corruption and government waste.

Billions were wasted during the past four decades in multi millions dollars contracts to friends and lawyers, consultants and failed pharaonic mega projects in public transactions marred by corruption. This practice continues even during the present crisis. Above all has created the lowest approval rating and confidence in governmental institution in our modern history. The Federal Fiscal Board must provide the U.S. Department of Justice with the human and financial resources to prosecute those responsible for this massive heist of government public funds. This includes governors, mayors and legislators and their associates who enter public service with small assets and leave multi millionaires. If the Fiscal Board don’t invest some of their time and resources in investigating and prosecuting those responsible for the crisis then the people will simply continue to lose their little trust that they hold for the local government.

5- The construction and mortgage banking industries are literally non existent. Puerto Rico largest bank, Banco Popular (BPPR) has been forced to settle legal suits for selling preferred stocks. It is said that it was based on fraudulent financial statements and projections. The same bank was forced to settle and pay a fine of $ 21.3 millions for money laundering. Currently the institution under investigation for their leading role in the sale of $ 3.5 billions dollars of public debt in 2014 and two of the bank’s senior executives were responsible for the legal opinions that certified that the issue complied with territorial and Federal laws and regulations.

The SEC and U.S. Department of Treasury, among other, are investigating the last bond sale for the role played by BPPR and for being instrumental in the placement and selling of $3.5 billions in public bonds

Two former governors, Mrs. Sila Calderon has a son & Mr. Luis Fortuno has a brother, (direct family members) who were in investment banking which benefitted from refinancing and new bonds issues. The Press has informed that in spite of the serious conflict of interests, Gov Calderon issued $10.22 billions in refinancing and bond transactions and Gov Fortuno issued $16.55 billions.

6- The Federal Fiscal Board will find a political sub-culture of elected officials who have made the political status respective ideologies “a perfect business form.” They use their causes to obtain financial gains and once in power it is shelved in an obscure drawer until they need it again. This is a subculture who have created one of the largest per capital governmental bureaucracy since the creation of the Soviet Union. This overwhelming government bureaucracy is responsible for delaying key permits for the development of projects and simply has prevented investment coming to the archipelago.

7- The Department of Education is the most ineffective and perfect dysfunctional agency of the territorial government. With a multi-billion dollars budget is a pool full with corruption and government waste. It has failed in providing an acceptable level of education and is losing tens of thousands of student that are migrating with their parents to the mainland. This loss will reduce Federal funding to the Department of Education.

8- The Health Department is another runner up for corruption, government waste and inefficiency. The government universal health plan has expanded its operational cost and in a period of two years has used the totality of the Federal funding under the Obama Care program. It is already insolvent.

9- The legislature has a reputation to be a den of thieves, extortionists and corrupt politicians. Both houses cost to operate more than $ 50,000,000.00 a year not including the cost of their waste and corrupt actions. It should be substantially reformed and reduced in size. The U.S. Department of Justice needs additional human resources and funding to clean not only the legislature but as well the executive branch and municipal governments.

10- The same happens with the 78 municipal governments of Puerto Rico. It is said that hundreds of millions of dollars have enriched many mayors and most of the municipalities, at least 70, are heavily in debt. Puerto Rico may need reducing municipal government from 78 to 8.

11-Term limitation should be considered as one alternative to assist in the fight against corruption and government waste. The Federal Fiscal Control Board should considered limiting terms for all elected positions to two.

PRIORITIES AND RECOMMENDATIONS

1- Board needs to order audits of Puerto Rico’s financial conditions for the fiscal years 2015 and 2016.

2- Board needs to order investigations of bond sales, & refinancing that led to debt crisis from 1975 to 2016

3- Board needs to order investigation of allocation of $ 1.2 billion dollars to the “Special Communities Perpetual Trust” ordered by Gov Sila Maria Calderón and under the management of her then husband Ramón Cantero Frau. The usage of these funds have been highly criticized for waste and corruption while weakening the Government Development Bank financial health.

4- Board should create, with the Federal Bureau of Investigation and the U.S. Department of Justice, a Joint Task Force for Governmental Corruption. The Federal Fiscal Control Board should have as a top priority to win the trust of the People of Puerto Rico by adopting a “zero tolerance to governmental corruption.” There have been hundreds of referrals of corrupt acts by elected officials to Federal authorities and because they don’t have the resources, human and financial, they have not been investigated. If transparency in the Federal Fiscal Board’s mandate is to achieve then this must be a priority.

5- The Judiciary System of the territory needs to be thoroughly investigated. People believe that Local judges have been lured by corruption in decisions against the government, as well as in the private sector and citizens. Some have been accused and found guilty.

6- Puerto Rico’s territorial government, legislature and municipalities’ policy of renting private property for government and public service operations have been seriously affected by corruption. As recent as in 2015 the Supreme Court was forced to cancel multiple private buildings leases for being onerous. This policy continues in the present administration.

7- Political intervention in the lending of public funds and approvals of tax exemptions to private businesses. The agencies involved are the Government Development Bank; The Government Small Business Development Bank; the Department of Economic Development and many others.

8- The Federal Fiscal Board should consider promoting the creation of the Office of the Inspector General of Puerto Rico to prevent corruption as an urgent measure. At the same tine it should consider creating “A Citizens Multi-Partisan Board” to award public bids of
projects and services.

9-The Federal Fiscal Board should order an audit of all professional services contracts awarded during the last 10 years. These contracts have financed in part local territorial parties campaigns.

10- The Governors of Puerto Rico live in a castle and the operation of the governor’s offices costs the tax payers more than $30 million dollars a year. The governor’s motorcade includes three SUVs and two police motorcycles, not to mention the first lady and others. Former Governors gets police security detail costing more than $3.6 million dollars a year in an island without any history of violence against governors or former governors since 1953. The “Palacio de Santa Catalina”, the governor’s mansion should be transformed into a museum.
Also, Puerto Rico’s territorial and municipal governments have spent tens of millions of public funds providing automobile and/or leasing fees to elected officials, including full time drivers, gasoline and maintenance. This practice continues.

11- The Government Development Bank works like a racketeering criminal organization (RICO) by procuring, marketing and selling bonds with inflated tax revenues projections, false and cooked financial statements. As recently as last Friday, the President of the Puerto Rico Senate said that “the fiscal team has failed and that it’s processes have been questionable and not pristine.” Puerto Rico is going to it’s third fiscal year without audited financial statements.

12- Puerto Rico has 172,000 former government employees and pensioners, including teachers. Their pension funds were raided by previous territorial government administrations since 1973 and has a structural deficit estimated by the Senate Finance Committee Chairman, Senator Orrin Hatch at $44 billions dollars. In two years, both funds will be insolvent. They cannot be left out of the debt and economic crisis solutions package. If they are left out this will create an economic chaos, with a weak banking platform of the territory.

Puerto Ricans should not be punished by the corrupt and wasteful acts of former governors who used their pension funds to finance government deficits. Congress must consider using ERISA, in a creative way, as a solution to avoid insolvency of the pension funds. The culprits responsible of this must be brought to justice.

As a result of indoctrination and forced loyalty, the Federal Fiscal Board will probably experience a strong, militant and focused labor movement.You should consider setting up with Homeland Security a working group with possible civil unrest and disorder.

If you need our assistance please do not hesitate to call us. We have experienced citizens who have being studying the territorial government for decades. We have presented on multiple occasions proposals to fight corruption and the results have been political persecution and even incarceration. You may reach us at 787-400-0124.

Thank you for your best efforts in assisting 3.5 millions American citizens still living under oppressive economic conditions in the territory of Puerto Rico.