1 2 Thursday, October 1, 2015 The San Juan Daily Star
2 GOOD MORNING The San Juan Daily Star, the only paper with 3 October 1, 2015 News Service in English in Puerto Rico, publishes 7 days a week, with a Monday, Tuesday, Wednesday and Thursday edi on, along with a Weekend Edi on to cover Friday, Saturday and Sunday. Report Highlights Pervasiveness of Corruption Across PR Sectors Local Mainland Business Interna onal Viewpoint Cinema Movies INDEX No cias en Español Legal No ces Sports Games Horoscope Cartoons By EVA LLORENS VELEZ Corruption has become so widespread and commonplace that there are thousands of people in Puerto Rico engaged in corrupt acts, according to a Civil Rights Commission report. Corruption is closely related to civil rights because it is anchored to a number of activities that affect government coffers and services to the people, according to the report titled Human Rights and Corruption that was entrusted to attorney Víctor Rivera Hernández, former representative Víctor García San Inocencio and the late former Police Superintendent Pedro Toledo, who died several years ago. Since the study began in 2009, Puerto Rico has been shaken by acts of corruption including the case of former Sen. Jorge de Castro Font and revelations about schemes involving the private sector, federal arrests of officials who use the U.S. mail to facilitate the entry of weapons and drugs, the arrests of some 100 police officers for protecting drug traffickers, the arrests of more than 500 residents in Lares for committing insurance fraud, as well as allegations of corruption against mayors, public officials and government contractors. The repeatability, frequency, variety and amount of corruption-generating news is only one side in approaching this phenomenon, the report by the Civil Rights Commission says. Some of these practices come not only from public officials, but also from citizens. Here are two shocking statistics: Almost half of the money collected for the sales and use tax is not remitted by businesses to the Treasury Department. More than 200,000 consumers do not pay their water bills because their water meters are buried or illegally connected. The report describes corruption as a dysfunctional activity that affects the individual and the people as a whole. Despite all efforts, strategies, policies and legislation against corruption, the problem has not diminished in Puerto Rico. That is why there is a public perception of corruption as one of the most serious problems facing the commonwealth and its institutions. Among the findings contained in the report were the following: 1. There is a lack of knowledge in much of the population on human rights. 2. There are repeated instances of corruption that also involve the commission of crimes involving hundreds of thousands of people. 3. Those working in public service do not understand the relationship between human rights and corruption. 4. There is a stagnation or inaction of governmental bodies responsible for governmental programs to prevent corruption. 5. There is a climate of indifference and everyday acceptance of the phenomenon of corruption. 6. The entities in charge of dealing with corruption lack a structural unit and operate independently. Víctor García San Inocencio 7. The remarkable growth of government over the past three decades may have affected the supervisory activity of the bodies responsible for handling corruption. 8. The operation of two legal systems and two administrative systems within the governmental framework complicates the problem. 9. The expansion of agencies and programs that increased the size of government in the past half century also increased the areas of opportunity for corrupt individuals. 10. The unrestricted increase in the number of governmental-private projects and their budgets have created large areas of opportunity for corruption. 11. There is a growing and established practice of political investment. 12. Current law has opened the doors for businesses to participate in elections through political action committees. 13. The rising cost of political campaigns, together with their unrestricted length, contributes to the problem. 14. Citizen participation in democratic governance is extremely weak in our current governmental organization. 15. The audit of the operation, management of public resources, and effectiveness of and compliance with governmental programs lacks citizen participation to monitor the problem. 16. The operation of supervisory bodies lacks integration and innovation. 17. Public corporations have become entities subject to the sway of partisan politics. 18. Government ethics is not a guiding reality in government. 19. In an effort to improve the control and combat the scourge of corruption in government, a refined sensibility that would strengthen the instruments without infringing on human rights is necessary. 20. The government must establish preventive measures necessary to effectively deal with corruption. Continues on page 4 S
3 4 Thursday, October 1, 2015 The San Juan Daily Star From page It is necessary to strengthen and reinforce the investigation of government corruption. 22. Authorities must seek the cooperation of accomplices in corruption cases. 23. Reporting corrupt acts carries risk. Officials should strengthen the protective measures for whistleblowers. 24. Impunity is a breeding ground for illicit activity. Measures should be taken to destroy the notion that the system favors or is indifferent to corruption. 25. The government should rely on education to help promote public integrity. 26. Public policy regarding the prevention and fight against the phenomenon of corruption should be reviewed continuously. The 300-page report devotes three quarters of its pages to a list of recommendations that include creating an entity to deal with the problem, a mechanism to reward people who denounce corrupt acts and special courtrooms to deal with cases of corruption. Report Warns Against Uniform Application of Federal Tax Rules Across Territories By EVA LLORENS VELEZ A report prepared by the Senate Joint Committee on Taxation warns against applying federal tax rules uniformly across the territories or to reflect the principle that the territories are like states. The report was prepared for the Senate Finance Committee ahead of Tuesday s hearings to evaluate Puerto Rico s fiscal challenges. The report, Federal Tax Laws and Issues related to the Commonwealth of Puerto Rico, a copy of which was obtained by the STAR, tried to answer questions related to the federal tax rules application to Puerto Rico and the other territories, in particular whether the application should be uniform across the territories and whether the application should be based on a single principle such as state treatment or foreign country treatment. The report also discussed whether U.S. bilateral income treaties should in any cases include the territories in their scope. Statehood advocate Gregorio Igartua, meanwhile, wrote to the Senate Committee to inform Chairman Orrin Hatch that Puerto Rico has been so incorporated, and/or so assimilated, to the U.S. since 1898 that it is practically like a state. We pay more than $3.5 billion dollars annually to the U.S. Treasury, Igartua said. Congressional withholding of the Statehood Gregorio Igartua Act [from] Puerto Rico has deprived us of federal grants in an amount between 10 and 15 billion dollars annually, that amounts to 150 to 200 billion dollars since the year The report says U.S. tax rules applicable to the territories could be modified so that the rules as a whole reflect the principle that the territories are like states, or the principle that the territories are like foreign countries. It is not clear, however, whether either of those principles or another principle would be an improvement over present law, the report says. Territories are much poorer than states, and their economies are different from the economies of states. These observations may argue against an overarching principle of treating the territories as states. They do not, however, necessarily favor the principle of treating the territories as foreign countries. The economies of the territories differ from the economies of both the states and some foreign countries. The federal government has an interest in the welfare of territory residents that contrasts with the federal government s stance toward residents of other countries, the report points out. Given these considerations, and given the unique histories of the U.S. territories relationships with the United States, it is understandable that neither foreign country treatment nor U.S. state treatment -- nor any other single principle -- underlies the U.S. federal tax regime for the territories, the committee said. Income tax arrangements between the United States and the U.S. territories are broadly divided into mirror Code and non-mirror Code systems. Federal law requires Guam, the Northern Mariana Islands, and the U.S. Virgin Islands to have mirror Code tax systems under which the income tax laws in force in the United States also are in force in Guam, the Northern Mariana Islands, and the U.S. Virgin Islands. These mirror Code systems include certain single filing requirements under which, for example, bona fide residents of those three territories generally file income tax returns with the territory. By contrast, federal law does not require that the income tax laws in force in the United States also be in force in American Samoa and Puerto Rico. Consequently, American Samoa and Puerto Rico have their own tax systems. In contrast with a bona fide resident of Guam, the Northern Mariana Islands or the U.S. Virgin Islands, a bona fide resident of American Samoa or Puerto Rico is not automatically entitled to file an income tax return only with the American Samoa or Puerto Rico government. American Samoa-source income of a bona fide American Samoa resident and Puerto Ricosource income of a bona fide Puerto Rico resident, however, is generally exempt from U.S. income tax. The variation might be viewed as appropriately reflecting different historical, economic, legal, and political considerations among the territories, the report says. As a recent example, it might be argued that the expiration of the possession tax credit, which had been allowed for activities in any possession, would have disproportionately affected economic activity in American Samoa and Puerto Rico had the special temporary rules described above not been enacted for those territories. The mirror and non-mirror Code arrangements between the United States and the territories represent resolutions of a particular issue in the historical relationships of the territories and U.S. governments and are part of an overall legal structure for the territories. Moreover, the economies of the territories differ greatly from one another, and these differences could be considered to justify differences in taxation, the report says. On the other hand, States of the United States differ from one another in their economic, historical, and political circumstances, but the U.S. federal tax rules for the most part do not explicitly distinguish among the states. Moreover, uniform treatment of the territories might be expected to reduce aggregate administrative and compliance costs. This result, though, might depend on the particular sort of uniformity adopted. The report does not support extending U.S. income tax treaties to the territories.
4 The San Juan Daily Star Thursday, October 1, Economic Census Data Indicates Higher IVU Capture Rate By The STAR Staff The island sales and use tax s level of capture is about 83 percent, when considering both exempt sectors and government procurements, the Census Information Center (CIC) at the Institute for Interdisciplinary Research of the University of Puerto Rico in Cayey has reported. The percentage is based on 2012 Economic Census data on retail sales published this week. The finding indicates that the sales and use tax (IVU by its Spanish acronym) collection rate is not as low as the 58 percent alleged by certain sectors, or as high when considering exempt sectors and procurements. A survey that overestimated the level of retail sales to calculate IVU evasion was being used, said José Caraballo Cueto, director of the only CIC in Puerto Rico, according to Inter News. He said the advantage of the Economic Census is that, like any census, it has a much lower error margin than any survey. This again highlights the importance of improving Puerto Rico s statistics, Caraballo Cueto said. Some efforts have already been made but many more are needed. José Caraballo Cueto Caraballo Cueto said that if the estimate of the retail sales report is used, and the IVU-exempt sectors are not excluded, such as medicine in pharmacies, gasoline and government purchases, IVU evasion would be at around 42 percent, representing a 58 percent capture rate. However, the CIC director said that using the new Economic Census data, and considering the exempt sectors, such as gasoline and medicine, evasion is much lower, at around 17 percent. Thus the capture rate would rise to 83 percent. This means that Treasury did not receive the charged IVU of 18 cents on each dollar sold by merchants. This is equivalent to evasion, or loss in revenue, for Treasury of about $245 million in 2012, the CIC director said. Although this represents a much lower figure than the previously estimate of about $819 million. Caraballo Cueto added that a control mechanism that could be functional would be to assist merchants in being able to charge with electronic cards, since cash transactions are difficult to monitor.
5 6 Thursday, October 1, 2015 The San Juan Daily Star Aponte Sets Sights on Serving Again as House Speaker By MARIA MIRANDA SIERRA New Progressive Party (NPP) Rep. José Aponte, who was appointed by party president Pedro Pierluisi at the beginning of 2014 to be the NPP secretary general, aspires to be the House speaker once again in 2017, a post he held from 2005 to 2009, during the administration of then-gov. Aníbal Acevedo Vilá. Acevedo Vilá s four-year term was a difficult one for all politicians in leadership posts due to the differences in political affiliation defining the government. That is when the island s economic recession set in and Puerto Rico elected a shared government, with Acevedo Vilá from the Popular Democratic Party, then-resident Commissioner Luis Fortuño from the NPP and NPP majorities in the House and Senate. Aponte, who fully supports Pierluisi s aspirations to be the NPP candidate for governor, told the STAR that when Pierluisi, who also is serving his second term as resident commissioner, asked him to take on the task of secretary general, he informed the party president that when we win the 2016 general elections I intend to once again become the House Speaker. When he [Pierluisi] asked me to be secretary general, I said I had no problem with running the party s processes and that when the time came I would be aspiring for re-election as a representative and would eventually vie for the House speaker seat, Aponte told the STAR. Aponte said he opted to make his intentions public now, because the filing period for candidacies is getting close. But still, we have to win the primary elections next summer, and then the general elections next November. After the general elections, I vow to become House speaker again with Pedro Pierluisi as the next elected governor, he added. He said that if Pierluisi wins the NPP primary against gubernatorial hopeful Ricardo Rosselló Nevares and then the general elections against Gov. Alejandro García Padilla, who is running for reelection, one of the first steps he will take as House speaker is making sure the government continues operating with the same budget inherited from the previous fiscal year. He said he intends to continue running government operations under that same budget for the four-year term or longer, it all depends if and when the island s economic recovery gets underway. That is what we did under the Aníbal Acevedo Vilá administration, we approved the same budget inherited from the previous Sila Calderón administration, Aponte said. Because the fiscal situation back then, although not as bad as now, was still a dire one, so we passed the same budget from the previous administration and that is what we will do again in the next four-year term. He said that even though they passed the same budget back in 2005 through 2009, during difficult fiscal and economic times, the House staff worked under better conditions, with salary hikes, higher Christmas bonus checks and better working conditions, all without affecting public funds. We have the experience to address difficult situations -- having run the ship under a shared government -- and taking into account how the next administration will be under an even worse fiscal economic situation than the current one is in, Aponte said. We have the capacity to work with all of this and will begin to address legislation together with the Senate to begin eliminating and or reducing taxes imposed by the García Padilla administration. In addition, he said he will work together with Pierluisi on the NPP president s number one priority, which is the status issue and getting the status admission process started in the U.S. Congress. Aponte added that as House speaker he will not pressure, sanction, threaten, or take away committees or budgets from lawmakers who don t agree with 100 percent of the NPP proposals or legislation, but instead will give them their space and freedom to think differently. What this administration has done to its own members, to its own lawmakers, defies description, he said. Everyone has the right to a difference of opinion, and for that they should not be sanctioned, or have committees taken from them, or have their budgets reduced, all of the things that they [the PDP leaders] have done to those lawmakers who think differently and vote differently. That is something I would never do. As for reducing taxes and/or eliminating as many as possible of the tax hikes imposed by the García Padilla administration, Aponte said the NPP priority is lowering the 11.5 percent sales and use tax (IVU by its Spanish acronym), but no promises can be made on anything as of yet, because we don t know if all these taxes are committed or not to pay off some debt. The first tax we want to lower is the IVU, but we have to wait to be in power and evaluate everything with caution and thoroughness to then be able to take action as quickly as possible, Aponte said. But the truth is that there are so many taxes that we don t know if they are committed or not, and we can t make promises until we are in office and able to evaluate everything and then be able to figure out what can be done.
6 The San Juan Daily Star Thursday, October 1,
7 8 Thursday, October 1, 2015 The San Juan Daily Star Lack of Reliable, Timely Fiscal Data Seen as Recurring Theme for PR Gov t By MARIA MIRANDA SIERRA Daniel Hanson Height Securities analyst Daniel Hanson said Wednesday that the Senate Finance Committee hearing held earlier this week highlighted how the lack of available and reliable data was a key sticking point as Puerto Rican officials look to make their case to U.S. lawmakers for help in addressing the island s debt woes. While Congress may be prepared to assist Puerto Rico, the prospects for aid rest on timely disclosure of material financial data, which the commonwealth cannot and has not provided, said Hanson, an analyst at Height Securities, a Washington, D.C.-based investment firm that advises clients with financial interests in Puerto Rico. The deficit of data hurts Puerto Rico s credibility and may raise the calls for a control board from Washington. Furthermore, Puerto Rico may be in violation of relevant municipal guidance with respect to its disclosure requirements, Hanson noted. We also note the governor s conspicuous absence from yesterday s hearing and highlight a Government Development Bank (GDB) call for municipalities to fulfill lawful financial obligations, he said. Finally, a request for support from the federal government from Resident Commissioner Pedro Pierluisi may have fallen on deaf ears. Senate Republicans signaled on Tuesday that they may be willing to work with Puerto Rico on a number of initiatives that could theoretically boost growth prospects or relieve fiscal tensions, but their signals came with admonitions. Most importantly, Hanson said, is the fact that Sen. Orrin Hatch (R- Utah) repeatedly requested audited, comprehensive, easy-to-read disclosures about budget performance and economic viability. Leaning heavily on the criticisms of former Congressional Budget Office (CBO) Director Douglas Holtz Eaken, Hatch asked GDB President Melba Acosta at least eight questions regarding financial disclosure, and these questions were met with responses regarding the (unaudited) quarterly reports, the last of which was published in May (with a supplement in June), and the Conway Mackenzie liquidity analysis. As a reminder, the commonwealth has yet to release audited financial statements for FY 2014, which ended 15 months ago, Hanson said. The commonwealth has an obligation to release reliable financial data in accordance with the Municipal Securities Rulemaking Board (MSRB) rules and on a timely basis; congressional assistance to Puerto Rico may be dependent on the territory s ability to generate acceptable financial reports. Hanson noted that Puerto Rico is actively investing in infrastructure to produce better financial data and real-time control of budget operations. Having solicited bids from software venders and IT firms, the commonwealth has moved ahead with some purchases of new equipment for the Treasury Department and the GDB, according to the Comptroller s Office. The systems will take some time to get online, however, and the commonwealth is still working on buying the new accounting systems they need to modernize their budget practices, Hanson said. Increased oversight of the accounting process is constrained in two key ways. First, the Puerto Rico budget process prohibits the Office of Management and Budget (OMB) from controlling or auditing independently chartered government components (any government entity with a supervisory board) on anything more frequent than a quarterly basis, even if the agency is in violation of budget rules. Secondly, Hanson said, the Puerto Rico government suffers from a scarcity of qualified and competent managers of financial systems, accounting operations, or IT platforms. Hiring more auditors, technicians, and controllers must be a feature of any modernization effort, he said. We note in passing that a growing public backlash against corruption in the Puerto Rico government is likely to be bolstered by the release of a report today that details more than 200 instances of corruption in the government since 2011, Hanson said. In the context of creating badly needed better accounting systems, we recall that the chief Puerto Rico lobbyist for Oracle, the company in line to receive tens of millions of dollars in business from the modernization effort, is Antonio García Padilla, brother to the woebegone governor. Hanson said the Puerto Rican government probably cannot generate the data requested by the Senate Finance Committee in a timely fashion, much less provide regular updates to said data to help reinforce policy discussions. As a consequence, Puerto Rico will hurt its own credibility with the federal government in general -- and Congressional Republicans specifically -- and make it less likely that politically positive federal intervention protects regular Puerto Ricans. Instead, we anticipate that Congress may become more disgruntled about the island s leadership, and this may augment the simmering discussions about a federally imposed Puerto Rico control board, Hanson said. If Puerto Rico s leaders are perceived as incompetent, given their inability to provide timely and transparent financial disclosure, congressional Republicans are likely to double down on their efforts to demand fiscal and government reform in exchange for aid. The Washington-based analyst noted that Puerto Rico s government officials would do well to remember that MSRB Rule 15c2-12 requires timely continuing disclosure around material events, annual financial information and operating data reports, and other material financial facts. While many municipal governments fail to file their Comprehensive Annual Financial Report (CAFRs) by the agreed-upon deadline, Puerto Rico is seriously delinquent in its disclosure of audited statements, and so-called quarterly reports -- issued slightly less frequently than once a quarter -- often contain some factual errors or inaccurate data. This could pose a serious risk to the island in legal proceedings, Hanson said. Hanson recalled that in the U.S. Securities and Exchange Commission s (SEC) so-called Harrisburg Order, the SEC said the following regarding Harrisburg s misleading or outdated disclosures: Municipal issuers have an obligation to make sure that information that is released to the public that is reasonably expected to reach investors and the trading markets, even if not specifically published for that purpose, does not violate the antifraud provisions. In its 1994 Interpretive Guidance, the Commission reminds issuers that without a mechanism for disseminating information about the municipal issuer to the market as a whole investors purchasing municipal securities in the secondary market risk doing so on the basis of incomplete and outdated information. Since access by market participants to current and reliable information is uneven and inefficient, municipal issuers presently face a risk of misleading investors through public statements that may not be intended to be the basis of investment decisions, but nevertheless may be reasonably expected to reach the securities markets, the SEC said in the 1994 document. Continues on page 10
8 The San Juan Daily Star Thursday, October 1,
9 10 Thursday, October 1, 2015 The San Juan Daily Star From page 8 Hanson said that Harrisburg failed to submit annual financial information, audited financial statements, notices of failure to provide required annual financial information and material event notices because statements are evaluated for anti-fraud purposes in light of the circumstances in which they are made, the lack of other disclosures by the municipal entity may increase the risk that municipal officials public statements may be misleading or may omit material information. We remind investors that Puerto Rico has missed three self-imposed deadlines for filing 2014 s CAFR and has indicated on several occasions that, while its liquidity position is dire, it does not fully understand exactly when its coffers will run dry, Hanson noted. Indeed, in testimony Tuesday, Melba Acosta seemed to indicate at separate points that the government was at risk of interrupting government operations because of liquidity problems in November, January, and June. Hanson said that adequate liquidity support is a material fact for investors, and without reliable disclosures, investors must rely on public statements from public officials. Currently, these statements are uneven and incomplete. In addition, Hanson said that noticeably absent at Tuesday s hearing was Gov. García Padilla, who was in Puerto Rico inaugurating a new bridge. Speaking out against his critics, the governor indicated that he had sent Acosta in his place because the hearing needed a technician to deliver remarks. The lack of gubernatorial presence at important financial and political events has been a constant feature of the García Padilla administration, and it has been reported widely in the island media, damaging the governor s credibility and standing, he said. Furthermore, discussions about reforms with congressional Republicans are hurt when the leader overseeing their implementation cannot speak directly to their progress. Separately, we note that the Puerto Rico government has filed a writ of mandamus to compel the Municipal Revenue Collections Center (CRIM) to make timely deposits of property tax revenue with the GDB, Hanson said. The CRIM has reportedly suspended such deposits since June 30, and the GDB is demanding that the CRIM deposit its funds in accordance with the law. The order highlights the disagreements over Puerto Rico liquidity management among senior politicians, who are resisting GDB oversight, he said. Coming out of Tuesday s hearing, we would highlight a request buried in Resident Commissioner Pedro Pierluisi s testimony, Hanson said. In his own words: Therefore, debt service on the $18.6 billion in bonds issued or guaranteed by the central government must be sacrosanct. Most of these bonds carry reasonable interest rates. The exception is a $3.5 billion bond emission from March 2014, which carried a coupon rate of 8.0 percent.the federal government should explore whether it can help the government of Puerto Rico refinance this bond issue on more affordable terms, as well as whether it can help the government of Puerto Rico obtain short-term bridge financing to meet immediate liquidity needs. Hanson noted that to his knowledge this is the first time Pierluisi has called for a renegotiation of the March 2014 GO bonds, and it marks the first time he has called on the federal government to help bridge liquidity needs. We highlight this comment because, while federal intervention to assist Puerto Rico in a bailoutstyle fashion is highly unlikely, we speculate that Congress may elect to provide some liquidity relief vehicle -- including a potential bond guarantee -- as part of a quid pro quo involved in the imposition of a fiscal control board, Hanson said. We have no knowledge of any such plans but will monitor for responses to this request. Isabela Landfill to Receive Upgrades Before 2020 Shutdown By The STAR Staff The Isabela Municipal Solid Waste Landfill will permanently shut down operations by June 2020 after reaching a legal agreement with the U.S. Environmental Protection Agency (EPA) resulting in an upgrade of the landfill. In addition, the Isabela municipality will be implementing a recycling and composting program, the EPA announced in a news release Wednesday. This legal agreement will improve the operation and ensure the proper closure of the Isabella landfill, and will make sure more material will be recycled and composted, EPA Regional Administrator Judith Enck said. It is important that every community in Puerto Rico step up its recycling and composting programs. As part of the agreement, the northwest coastal town of Isabela will establish an enhanced, comprehensive recycling program within 10 months to eliminate the landfilling of recyclable materials such as paper, metals, plastic and glass, as well as scrap tires and certain auto parts. The municipality will also establish a pilot composting program for the collection of compostable materials. Furthermore, as part of the initiative, the municipality will provide education and community outreach, targeting households, small businesses, government facilities and other establishments. The educational program will include community workshops to educate the public on the benefits of recycling and composting, as well as guidelines for complying with the recycling and composting requirements. The municipality of Isabela has also agreed to make improvements at its landfill, including covering exposed areas on a regular basis and reducing dust. In addition, the leveling of steep slopes at the site will decrease the chances of storm water runoff and landslides. The landfill is scheduled to be closed no later than June 30, At that point, the municipality will take significant steps to improve the landfill, including: installing a gas collection system for reducing methane and non-methane emissions from the landfill, capping the landfill to reduce the amount of rainwater filtering into it, and controlling stormwater. The Isabela Municipal Solid Waste Landfill has been receiving waste since The majority of the waste deposited in the landfill includes solid household waste, as well as commercial solid waste and construction and demolition debris. Following inspections, the EPA determined that the landfill lacked adequate stormwater controls and a groundwater monitoring system, among other things. Groundwater beneath the Isabela landfill can flow into the North Coast aquifer system, which serves as a public water supply source for municipalities along Puerto Rico s north coast.