CD147: Controlling Puerto Rico

What is Puerto Rico? Many Americans – if not most – are unaware that Puerto Rico is a part of the United States. In this episode, learn the history of our scandalous treatment of the US citizens living in Puerto Rico and explore how Puerto Rico’s past foreshadowed the United States’ present… and possibly our future.


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References


Sound Clip Sources

Hearing: Oversight Hearing on The Status of the Puerto Rico Electric Power Authority (PREPA) Restructuring Support Agreement, Subcommittee on Indian, Insular and Alaska Native Affairs, March 22, 2017.

Witnesses

Panel I

The Honorable Ricardo Rossello, Governor of Puerto Rico

Mr. Gerardo Portela-Franco, Executive Director – Puerto Rico Fiscal Agency and Financial Advisory Authority

Panel 2

Mr. Jose B. Carrion III, Chairman – Financial Oversight and Management Board of Puerto Rico

Mr. Luis Benitez Hernandez, Chairman – PREPA Governing Board

Mr. Stephen Spencer, Managing Director – Houlihan Lokey

Mr. Adam Bergonzi, Managing Director & Chief Risk Officer – National Public Finance Guarantee Corporation

Mr. Rob Bryngelson, President & CEO – Excelerate Energy

Ms. Ana J. Matosantos, Member of Financial Oversight and Management Board of Puerto Rico

Interview: Interview with Luis M. Balzac, March 7, 2017.

  • Luis: Puerto Ricans in Puerto Rico, contrary to common opinion, we do pay some federal taxes. What we don’t pay is federal income tax. Jen: Okay. Luis: So we don’t pay federal income tax. However, Puerto Ricans pay Medicare at the same rate that you pay in San Francisco/California. Jen: Do Puerto Ricans get the same benefits that I get in San Francisco? Luis: No, we do not get the same benefits that you get in San Francisco. Jen: Oh. Luis: So, for example, there are states like California, New York, and other states that I believe get about an 83 percent federal subsidy for Medicare expenses. There are other states—and I realize I’m being recorded, but don’t quote me on it. This you can check, also, very easily— Jen: Sure. Luis: Other states—I think it’s Tennessee— Jen: And you don’t have to give me exact numbers. Just go ahead and, like, big picture, tell me the situation. Luis: Got it. Jen: Yeah. Luis: Even better. So, there are states like California and New York that get about 80-some percent of reimbursement on their major expenses from the federal government. There are other states that get less. I think Tennessee gets less; I think Tennessee gets, like, 50-some percent. Puerto Rico, I think it gets about 23 percent. Jen: Oh, god. Luis: It’s important to understand that, where does the other—if we use 23 percent as an example for Medicare—where does the other 77 percent come from? State funding. Jen: Okay. Luis: So, please understand that if you move to Puerto Rico as a U.S. citizen, and you, for any reason, need Medicare, and you go to the hospital, those hospitals that you go to have to comply with MCS, which is part of HHS—Health and Human Services. And you have to comply with all the regulations and requirements of a hospital to be reimbursed and enjoy federal dollars. However, that institution/Puerto Rico is only getting cents on the dollar compared to other states, but someone needs to make up for that short fall. Jen: Yeah. Luis: The state does. Jen: Well— Luis: That lack of equality translates to Puerto Rico’s budget.
  • Luis: I’m a proud American, and I will defend our country wherever I go. Jen: Mm-hmm. Luis: But I’m also a realist. I cannot expect Congress to give the people in Puerto Rico a fair share of the pie when we don’t have a delegation sitting at the table when the pie is divided.
  • Luis: When I ran the office of the governor of Puerto Rico in New York, and we were lobbying to be included into the Affordable Care Act, my biggest argument, when I met with members of the Senate or the House, in states that had a large Puerto Rican population—Connecticut, New York, New Jersey, by way of example—my point to these members of Congress was, I need your help; I need you to be a voice to Puerto Rico to be included in the Affordable Care Act. And the staff would be like, are you kidding me, Luis? That is none of our business. And I will be like, well, let me—give me an opportunity to maybe convince you that it is your business. The problem is— Jen: Yeah, because you’ll pay for them when they come here. Luis: —you will pay for it. And by the way, we don’t even have a way to qualify because guess what, a lot of them are coming in, getting services, and going back to Puerto Rico once they’re done. Some are staying— Jen: Yeah, that’s what I would do. Luis: Some are staying, but others are just coming here, and you have no way of qualifying and quantifying it because they’re United States citizens. You can’t stop it. Jen: Yeah— Luis: And how could you blame them? How could you blame them if Puerto Rico does not have the facilities to treat a cancer or SSI or any other initiative and my mother is risking her life? I’m going to take her to Orlando— Jen: Mm-hmm. Luis: —without a doubt. Jen: Yeah.
  • Luis: I will say that Puerto Rico, even though we have all the issues that you and I have been talking about, we are still part of the United States, and it’s somewhat similar to the changes that we see here, stateside, in the contiguous 48 states, where I would say that from coast to coast, from Florida to California, I think the middle class in the United States has been shrinking. Jen: Mm-hmm. Luis: Likewise in Puerto Rico. Jen: Okay. Luis: But I would say that it is more like the United States, and we are not like Latin America and other third-world jurisdictions. We have a decent-size middle class because we don’t have the IRS because we are not paying federal income tax. There is in Puerto Rico a large underground economy where people work on the side, get paid in cash, and don’t report their earnings to the—there’s no IRS—or to the local version of the IRS which is the Treasury Department. So, what you have in Puerto Rico is that you see somewhat of a thriving economy. So those people that are in commercial real estate and they’re doing business with big national chains like Macy’s and JCPenney and all that stuff, you will see in Puerto Rico sales records being broken and people spending a lot of money in the island. So, it’s not like the Dominican Republic. Even people in the projects that are subsidized by state and federal dollars, you can see that they have a/c in the walls, the projects are made out of cement, and you will be able to see all that when you go there in person. So, when you drive around Puerto Rico, all over the island, it is nothing like the Dominican Republic. We are way better, and— Jen: Well, I’ve never been there, either, so a comparison doesn’t really… Luis: Yeah. We are way better—and I realize that I’m about to contradict myself, okay?—we are way better, and it is thanks to the United States. So even though inequality has got all these problems and it’s affected the debt and all that stuff and we are looking now at serious issues, Puerto Rico is still better than—I will never move to Cuba because I think Cuba is better than Puerto Rico, so I get it— Puerto Rico is United States, and we’re doing better than most.
  • Jen: So that brings me to the control board, because now we have Puerto Ricans saying on paper, no doubt, we want to become a state, and yet Congress just did this thing where your government, your state government, or closest thing—what do you call it? Territorial government? Luis: Yeah. Jen: Is that the proper phrase? Luis: Territory. Jen: Okay. Luis: Yeah. Jen: So your territorial government was, basically just taken over by this weird board that has some dictatorial powers. Is there any one in Puerto Rico that’s happy about this? Is there something I’m not seeing? Luis: Yeah. Okay, so, I’m going to compare that. First of all, let’s be fair, and we’re not the first jurisdiction that, let’s say, enjoys the benefit of a control board, because D.C., New York City, have both had it in different jurisdiction relationships, but they did, and it helped. Okay? Jen: O-kay. Luis: The difference between New York City is the following: you have a city that imposed a board by the state. So people in the city of New York, even though they had a control board years back, they had a control board what was decided by politicians who they elected. Jen: Yeah. Luis: Okay? Jen: Mm-hmm. Luis: So, that makes it—but it’s still the same in that you have a higher jurisdiction imposing a control board for fiscal reasons over a lower jurisdiction. Correct? Jen: Yes. Luis: And then you have D.C. They also had a control board, and the list goes on and use the federal government, if I’m not mistaken. So there you have a jurisdiction of a federal imposing in D.C., which is not independent. Now, let me tell you where emotions can go a little crazy here. And remember I’m a stakeholder; I’m pro American. Jen: Yeah. Luis: However, we did not invite the United States of America, back a hundred-and-some years ago; we were invaded. Jen: Yeah. Luis: So, we are invaded, we are treated unequally, that inequality causes financial chaos. We are told by the Supreme Court that our constitution is not really a constitution—you should research that; that was recent—an opinion by the Supreme Court. So, really, our constitution, that we thought we had a constitution, is not worth anything on paper because Congress has complete control of that jurisdiction. Jen: Mm-hmm. Luis: So, what we have is, back to your question about a board, is a federal government imposing a board on people who did not vote for those that imposed that board. Jen: Yeah. And I know that in Congress Puerto Rico has a representative at the time that this was created—I think it was Pedro Pierluisi—but he didn’t have a vote, so— Luis: No. Jen: And even on the board, the governor gets to sit at the table, but the governor of Puerto Rico doesn’t get a vote of the board. Luis: No. And there’s a slight correction to what you said about Pierluisi in your podcast: the resident commissioner does have a vote in Congress—not on committees, on subcommittees. Okay? Jen: Okay, so he has a vote on a subcommittee but not— Luis: No. Jen: —in the committee or the main House. Luis: Correct. Now, are you ready for the kicker? Jen: Yes. Luis: If the vote on a subcommittee comes to a point where the resident commissioner becomes the deciding vote, it doesn’t go. You’ve got to vote again. Jen: No! Luis: Yeah. Jen: So, that’s— Luis: Can I give you an— Jen: —kind of not really having a vote. I mean— Luis: No. Jen: —he does— Luis: No, I know.
  • Luis: Let’s talk for a second about the pharmaceutical industry, okay? Jen: Yeah, because— Luis: Not to be confused— Jen: —just so that I’m on the same page as you, you worked for Pfizer for a while, too, right? Luis: I directed governor affairs for Pfizer, and that included jurisdictions of New York City and Puerto Rico. Jen: Okay— Luis: And San Francisco. Jen: —and when did you do that? Luis: I did that in 20—I took a year off of the government and I went to Pfizer, did not like it, then went back to Puerto Rico government. So that was 2011. Jen: So was that before the Clinton administration took away the tax credits or after? Luis: Oh, no, after. Oh, yes. Jen: Okay, okay. Luis: 2011, before I became a deputy secretary of the United States. Jen: Okay, got you. Luis: Okay. Jen: So this is after all the tax benefits were gone, and was Pfizer still—when did the pharmaceutical industry, like, leave Puerto Rico? When did they leave? Luis: No way. Why are you saying that? Jen: Because that’s what I read. Luis: That’s wrong. Jen: Is that not what happened? Luis: No! That’s wrong. I’m about to clarify that. Jen: Okay. Luis: All right. So, if you look at the pharmaceutical industry, if you search, let’s say, BIO, I believe BIO is still the pharmaceutical, big pharma association, the industry association, trade association, okay? If you look at that, you will see that in Puerto Rico BIO had a membership of a huge number of pharmaceuticals. And then you may look at BIO now, and the Puerto Rico chapter, which has another name, has way less pharmaceuticals. So the normal person that doesn’t understand how things work will say, well, everyone left. Well, let’s slow down and look at what are the names that are missing. Well, some of those names don’t exist anymore because the industry has completely merged and consolidated their resources. By way of example, I will tell you that in Puerto Rico alone, Pfizer bought Wyeth. Jen: Pfizer what? Luis: Pfizer bought Wyeth. Jen: Oh, okay. So, okay. Luis: Okay? Jen: Gotcha. So Pfizer got bigger by eating a smaller company. Luis: Correct. And there’s nothing wrong with that. So what happened was that I believe at that time when that happened, Pfizer had three operations in Puerto Rico, Wyeth had three operations in Puerto Rico, okay? So now when they merge, they have six plants in Puerto Rico. So what do they do? They are able to— economies of scale and to do streamline, and they are able to close two and stay with four. And now Wyeth is not in Puerto Rico— Jen: But the effect— Luis: —and people think Wyeth— Jen: Is the effect of that, of the people of Puerto Rico, that the people that worked in those two plants are now out of a job? Luis: But it has nothing to do with 936. Jen: Remind me. I did that episode, like, eight months ago. 936 was the tax credits disappearing? Was that…? Luis: That’s exactly—they disappeared with a coin toss, you said. Jen: Okay, okay. Thank you. Luis: So, so, that consolidation, that example that I’m sharing with you, I believe all happened after 936 stopped, but the reason why Pfizer and Wyeth consolidated was for reasons that had nothing to do with 936. Jen: Yeah. Luis: It had a lot to do with being more productive and being able to share assembly lines and being able to share resources and the same CEO and all that stuff. And so, to the untrained eye, to the Puerto Rican, what they think or see is, oh, Wyeth left. No, they didn’t leave; it was absorbed by a larger pharmaceutical. Jen: So, is the pharmaceutical industry still a major employer in Puerto Rico? Luis: Yes, it is. And I will tell something else: Pfizer and many pharmaceuticals, for many years, are enjoying tax benefits on—there’s something called CFC—controlled foreign corporations—and they are able to enjoy benefits that are comparable to 936. It’s just a different name; a different loophole, you want to call it—I don’t want to call it a loophole—it’s a different tax advantage.
  • Luis: Remember, the pharmaceutical industry, way back when—and we’re talking about right after Puerto Rico changed from an agricultural economy to a manufacturing economy, okay? Jen: Mm-hmm. Luis: I really need you to follow me on this. Puerto Rico used to be sugarcane industry. Jen: Yeah. Luis: And we changed. Take my great uncle. He was the governor of Puerto Rico for the other party, the commonwealth party, and him and Governor Luis Munoz Marin came up with this tax incentive with the federal government and 936 were invented, and Puerto Rico changed—completely—and became a manufacturing economy. Jen: Okay. Luis: No more sugar cane; now we’re manufacturing. And when that happened, pharma came to Puerto Rico. What we have to remember is manufacturing industry also included, probably, the largest textile industry. Textile was huge in Puerto Rico. Now— Jen: Is it still there? Luis: No! Why—now, you’re smart. Why do you think textile is gone in Puerto Rico? Where is textile nowadays? Jen: Probably China, India. Luis: Yes, yes! So, in this case, it left to other jurisdictions for minimum wage and for a bunch of other reasons. 936? Yes! It was not great when it left, but the industry changed. Textile goes wherever you have the cheapest labor. And Puerto Rico— Jen: So— Luis: —cannot compete with India, China, Dominican Republic, where people get paid a dollar an hour. Forget it. You can’t compete with that. Jen: And it sounds like the same problem we’re having in California, in Texas, and Massachusetts, and everywhere. Luis: Yeah, yes.
  • Jen: What would you like to see happen on the island? What do you think could help? Luis: Becoming a state. Jen: So that’s the goal. Luis: Yes, without a shadow of a doubt, because if we become a state, we are able now to have the congressional mitigation to help us, and we’re able to fight for equal funding so that the state does not need to subsidize such huge percentages. And now we have an equal playing field. Now if I get in debt— Jen: Okay. Luis: Now if I get in debt, go ahead and criticize me all you want. Jen: Well, then you have bankruptcy protection if you go into debt. Luis: Also.
  • Luis: So, you understand the reason why people are going to Puerto Rico is because of Law 20 and 22, right? Jen: Um, I don’t know. No. Luis: So, I’m going to share with you the Law 20 and Law 22. Both laws were passed by Governor Luis Fortuno, which is a governor that I worked for. Jen: Okay. Luis: And those two laws were used, pushed, and promoted big time by the previous governor, Alejandro Garcia Padilla. You can do a quick Google, and you will see how most people went nuts over those two laws, and those two laws is the sole reason why people in stateside, mainland U.S., are fleeing to Puerto Rico to enjoy those tax benefits. Jen: Well, what are those benefits? Luis: I’m going to tell you. Jen: Okay. Luis: So, first, you have Law 20. Law 20 is better known as Export Services law, meaning you and I can open a corporation in Puerto Rico that exports services outside of Puerto Rico. Services, not manufacturing. So you and I can open a consulting firm that consults on any issue, and if our clients are not in Puerto Rico, if our clients are in Europe or New York or California, when that company in Puerto Rico bills those accounts, that corporation will only pay local four percent tax and no sales tax. Wow! Jen: Okay. That’s crazy. Luis: Okay? So that means that you and I can have an existing company and have a law firm in New York, and you and I are the partners, and we’ll make—and let’s say that half of our clients are not in Puerto Rico, so why don’t we just open an office in Puerto Rico and do all the billing out of Puerto Rico and serve those clients from Puerto Rico—by the way, you and I can hire attorneys in Puerto Rico that are bilingual; graduated from Harvard, Yale, all those popular universities; pay even a fraction of what you and I would pay a lawyer in New York, and we bill them to the clients that are outside Puerto Rico, and we only pay four percent tax. That’s Law 20. It’s beautiful. Jen: Wow. Okay. Luis: All right. So, now, Law 20 was supplemented, complemented, by Law 22. Law 22 is called the Investor Act. So, now, you and I are the partners of that law firm, and we’ve moved operations and the corporation is only paying four percent tax, local tax, okay? Jen: Okay. Luis: Got it. You and I have not lived in Puerto Rico for the last 15 years. Jen: Okay. Luis: So we, you and I, have our attorneys will review Law 20, and what Law 20 says is you and I can move to Puerto Rico personally, and when we’re in Puerto Rico, our Puerto Rico-sourced income will be tax free. Jen: So the income—so, it’s the Investment Act. So are you talking about, like— Luis: Yes. Jen: —instead of paying capital gains tax, they pay nothing. Luis: Nothing. Now, it needs to be Puerto Rico-sourced income. That means that if you and I own Apple shares, or Microsoft, and we move to Puerto Rico, that’s passive income. We’ll pay taxes because that income is generated outside of Puerto Rico. Jen: Okay. Luis: But if you and I go to Puerto Rico like Paltry and Paulson moved to Puerto Rico, and we invest in property, and we invest in the business of Puerto Rico, that Puerto Rico-sourced income will be tax free. Jen: Federally or are there any state taxes? Luis: Both. Jen: Wow. So the state— Luis: I don’t have the law— Jen: —doesn’t even get anything from that. Luis: Well, yeah, they do because think about all the jobs. You know it’s crazy how much money is generated by having those people in Puerto Rico. Of course it generates— Jen: Yeah. I guess that makes sense. Luis: It’s called economic development. Yes, it generates—I have a lot of people that have new accounts with those individuals all the way from real estate, legal fees, engineering. They’re all millions and millions and millions of dollars that were not moving around the economy until they moved there. Jen: And so, are these two laws something that you personally support? Are they a good idea? Luis: I think it’s a good idea. We somehow need to generate some federal activity. Jen: We do, but at the same time, your government is broke. So isn’t raising revenues, isn’t that a solution? Luis: Well, no. Well, you know what? It’s a little contradicting, so when I say I endorse it, but I just told you a little while ago that I want to be a state. And if I was a state, that would probably not be possible. Jen: Yeah. Luis: Those two laws would not be possible if we’re a state, but guess what—we’re not a state. Jen: Yeah. Luis: And what the heck are we supposed to do? Jen: Yeah. I guess that’s true. You’ve got to play the hand you’re dealt. Okay. Luis: I would rather not have those two laws and be a state. Jen: Okay. That’s fair.
  • Luis: Education. I think that your podcast touched on education about 100 schools being closed. Jen: Yeah. Luis: Yeah, but how many people have moved to Orlando? We do not have— Jen: So there’s not as many kids? Luis: No! No! Now, I’m going to defend, I’m going to defend this. With me, you may go crazy because I jump from side to side, so for one, one part of me says— Jen: I do that, too. I totally get it. Luis: One part of me says, the student body—I think the island student population went down from half a million to 400,000 students. That’s 25 percent. Jen: Okay. Luis: Okay. That means that I should be able to cut 25 percent of schools and 25 percent of my budget. Right? Well, let’s look at the other side. You and I, again, are married, right? Jen: Uh-huh. Luis: And you and I have a boat, and we have two kids, and the schools that we have our kids are three blocks away. Beautiful. Well, you and I bought a house because it was right next to the school. So now they’re going to close that school, and the next school is five miles away. Jen: Yeah. Luis: Are you and I pissed? Jen: Of course. Luis: I don’t give a crap that there’s less students. I’m going to picket, and I’m going to make a lot of noise, and I’m going to make it impossible for the government to close that school, which is what happens. You know what? Somebody else should sacrifice, not my wife and I. We have it good. I like to be able to walk three blocks and grab my children by the hand, have a beautiful conversation with them while we eat cookies, and we go to the school right next door. Well, guess what? The population is so much smaller now that somehow we cannot justify having the same number of schools open. I believe that happened in Chicago under new jurisdictions. We have to adjust. So guess who needs to deliver those bad news? The fiscal control board, because you cannot possibly justify having all those schools open. So who’s going to be the bad guy? Thank God there’s a fiscal control board, because if you leave, you allow the local elected official to make those decisions, it would be political suicide. And that transfers to any state. Ask any governor to close down 25 percent of schools, and they’re going to lose the election. Jen: Well, I mean, I think that’s just a part of the job. The problem— Luis: I know! Jen: —that I’m seeing as— Luis: No, but wait a second the problem is that the governor can’t do it because when you commit political suicide, and you need to support the legislature to do that, the elected officials in the legislative body would be the first ones that won’t back you up. They’ll say, you crazy? I’m not going to back you up; I want to get elected next time. That’s a huge problem. He says, I can’t do it without you. People are like let’s not do it; let’s let the other guy do it. And he’s like, no, we don’t have enough money. The students are leaving Orlando and New York. They moved away. We don’t need so many schools; we need to close. And the senators will be like, I’m not going to pass that law; are you kidding me? We’re all going to be out of a job. Jen: Well, I mean, and that’s the thing, like, maybe you’re not supposed to serve forever. Like, I just feel like those tough decisions are a part of a job of being elected, and one of my concerns of this control board is that those families, they can’t petition to this board. There is no voice for the Puerto Ricans where the governor doesn’t have a vote. I guess I’d feel more comfortable with it if I thought that those families could petition to their governor, and it would be one vote at the table that would have those political calculations in mind. But with these seven people that were selected by Congress, I mean, is there any concern that they’re going to prioritize the bankers over the Puerto Rican people? Luis: I think a lot of people are concerned about that.

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