Thursday, September 17, 2015. The San Juan Daily Star

2 Thursday, September 17, 2015 The San Juan Daily Star

GOOD MORNING The San Juan Daily Star, the only paper with 3 September 17, 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. Gov t Shutdown May Be Needed to Avert Default Local Mainland Business Interna onal Viewpoint Cinema Movies INDEX 3 12 16 19 24 25 28 No cias en Español Legal No ces Sports Games Horoscope Cartoons 29 34 41 45 46 47 By EVA LLORENS VELEZ llorenseva4@gmail.com Sergio Marxuach The Puerto Rico government will have to decide in favor of a partial government shutdown or go into default on its general obligations due in January if the projections of a report by financial advisers materialize. If Conway MacKenzie s forecast materializes, then there is a significant risk of at least a partial government shutdown before the end of 2015, Center for the New Economy (CNE) Public Policy Director Sergio Marxuach said. The report of the advisory firm Conway MacKenzie states that the government may have a bank cash deficit of $29.8 million in November and a peak cash deficit of $511.6 million in June. However, it states the commonwealth Treasury single account will have a deficit of $612 million or $1.788 billion, the last number in the event of all risks occurring. The base case scenario [the $511.6 million] implies Puerto Rico will not have enough cash to pay its obligations as they become due early November, Marxuach said. The issue then is political: who gets paid, what and when. The government has other payments coming up, including one from the Government Development Bank (GDB) due in December, which is around $354 million. Marxuach said that obtaining liquidity will be very expensive and liquidity constraints weaken the island s negotiation strategy with bondholders. All of the government s options have high political and economic costs. Failing to make general obligation payments is the nuclear option because the government could face litigation, but shutting down the government could cost the governor the elections, the CNE official said. Marxuach said there is a high probability that political tensions and social turbulence will increase. In its report, Conway MacKenzie makes several assumptions that include: (1) paying debt obligations approved within the Fiscal Year 2016 Budget as they become due, (2) payment of vendor obligations on a similar run-rate as fiscal year 2015 and (3) making payments to the GDB based on negotiated debt schedules with the Office of Management and Budget, so as not to jeopardize the GDB s liquidity position. Conway MacKenzie has also identified potential risk in revenue that will affect cash flow primarily during May 2016 and June 2016.

4 Thursday, September 17, 2015 The San Juan Daily Star Cuts in Gov t Fiscal Plan Could Force Towns to Shut Down By EVA LLORENS VELEZ llorenseva4@gmail.com Guaynabo Mayor Héctor O Neill said Wednesday that although officials did not discuss the island government s fiscal adjustment plan at a meeting with the president of the Association of Mayors, Rolando Ortiz and Acting Governor David Bernier, the proposed cuts to municipalities in the plan could lead to the shutdown of at least 48 towns. Forty-eight municipalities will disappear and will not have the economic alternatives to keep operating, and many of the economic difficulties faced by medium-sized municipalities will get Héctor O Neill and David Bernier worse, O Neill said. Cayey Mayor Ortiz, on the other hand, described the meeting with La Fortaleza as positive, noting that there was discussion on issues that affect towns and that the executive branch is willing to listen to them. He said both sides agreed on a settlement to avoid a potential lawsuit on the central government s plans to take away the contribution in lieu of taxes agreement with the Puerto Rico Electric Power Authority, among other topics. The meeting produced positive results, Ortiz said. Puerto Rico officials are proposing a huge raft of changes to address the island s $72 billion debt burden, including installing new accounting and financial systems, consolidating schools and decreasing tax evasion while increasing the revenue capture rate. The long-awaited fiscal adjustment plan was released a week ago. It was developed by Puerto Rico s Working Group and delivered Tuesday to Gov. Alejandro García Padilla, who established the panel shortly after he declared on June 29 that the island s debt was not payable. Among other things, the plan identifies a gap of about $28 billion between the U.S. territory s revenues and expenses over the next five years absent corrective measures. Even with all recommendations implemented, there would still be a gap of about $14 billion that will need to be closed through debt negotiations, according to the fiscal adjustment plan. And beyond that, even if the group is able to negotiate deals with a majority of the creditors, it is expected that Puerto Rico will still need to seek federal support to give the island a way to restructure the bonds through Chapter 9 bankruptcy laws. Puerto Rico will also seek equitable Medicare and Medicaid treatment and funding from the U.S. government. Meanwhile, analysts are beginning to publicly question the proposals in the fiscal adjustment plan and even the financial assumptions on which they are based (see story on page 10). Rolando Ortiz

The San Juan Daily Star Thursday, September 17, 2015 5 Treasury Forging IVU-Collection Pacts with Towns; Trujillo Alto, Caguas Are First By EVA LLORENS VELEZ llorenseva4@gmail.com Treasury Secretary Juan Zaragoza said he is negotiating collaborative agreements with the island s 78 towns to oversee sales and use tax (IVU by its Spanish acronym) collections and has already signed with the municipalities of Trujillo Alto and Caguas. Zaragoza also dismissed a lawsuit filed by a group of lawyers to demand payment of tax reimbursements. Treasury has said it will pay the reimbursements as it receives money and expects to have completed payments by Feb. 16. Zaragoza said the law does not require the Treasury to make payments in a certain way or by a certain time. Juan Zaragoza The payments are being made according to resources, he said. Regarding the municipalities, Zaragoza said he is in the process of completing agreements with some 50 other towns in the hope that by Oct. 15 he can begin training seminars and establish work schedules. Zaragoza said he is convinced he will be able to increase IVU collections through the proposed changes. He made his remarks following a meeting between La Fortaleza and the mayors. These are monthly meetings, and I listen and participate, Zaragoza said. There are some agreements on the oversight of the IVU. I am working on agreements with 50 more. When I have 20 or 25 agreements, I will hold the seminars. The mayors and La Fortaleza met to discuss strategies for towns in the event of proposed cuts under a fiscal adjustment plan. Puerto Rico officials proposed cuts to teacher pensions, a new financial control board and restructuring $18 billion of debt due in the coming five years, as part of a long-anticipated plan unveiled last week to pull the island out of a fiscal crisis. The financial overhaul plan, drawn up by a task force created in June by Gov. Alejandro García Padilla, anticipates the island running out of money by November. The plan also proposes overhauling the Treasury Department to increase tax collections.

6 Thursday, September 17, 2015 The San Juan Daily Star Arrests Imminent in Police Dept. Corruption Probe, Superintendent Says By MARIA MIRANDA SIERRA mirandasanjuanstar@gmail.com Police Superintendent José Caldero confirmed Wednesday that federal authorities are preparing an investigation of police officers linked to drug trafficking on the island, and that arrests are imminent. The vast majority of the police are honest people, people committed to the people of Puerto Rico, and they are police officers by vocation, Caldero said in a radio interview. Nevertheless, as in every organization, we have investigations that are developing, that there will be arrests in corruption cases. There is no doubt about that. News reports on Wednesday indicated that the Federal Bureau of Investigations (FBI) is investigating a number of police agents for allegedly collaborating in the trafficking of controlled substances while also protecting drug traffickers. Some agents have even been singled out for allegedly stealing the incomes of the drug points. The top cop said the probe is targeting a small or minimal group of corrupt agents, and that the entire police force should not be stigmatized as being corrupt. I have always classified them as criminals. At some point, they used the honorable uniform of the Puerto Rico Police Department [PRPD], but we have been cleaning house and we will continue to clean house, Caldero said. We have our investigations and we will be cooperating with federal authorities. He who comes to commit a crime in the PRPD will be arrested and will be taken to court. Let there be no doubt about that, he added. This is a job of vocation, and this is a very serious job. The people expect a lot from their police, and we must behave as such. Caldero also said the persons of interest who have been identified for the murder of police officer Miguel Pérez last week at a gas station in San Juan are not members of the police force. as has been rumored. He said he investigation is moving quickly and they are very close to [arresting] the killers. Meanwhile, Police United Front (FUPO by its Spanish acronym) spokesman Diego Figueroa said that the corruption probe is very serious and may involve as many as 50 arrests. This will obviously affect the police in one way or another it weakens and creates a gap within the agency, Figueroa said in a separate interview. I handled it myself last night and I communicated with the person who has direct knowledge of this situation, and it was confirmed to me that there are ongoing investigations into the matter. We hope that it s not so many, for the Police Department s well being. Cocaine Found Abandoned Off PR s East Coast By The STAR Staff U.S. Customs and Border Protection (CBP) Office of Air and Marine Agents recovered 114 pounds (51.7 kilos) of cocaine inside four backpacks that were ditched by smugglers off the east coast of Puerto Rico this past weekend, according to online reports. The estimated value of the seized contraband is $1.4 million. CBP units near Ceiba found 30 individually wrapped bricks of cocaine inside two pieces of luggage. Our marine units patrol work with law enforcement partners to detect and intercept criminal organizations that seek to introduce illegal narcotics, stated Johnny Morales, director of air operations for CBP s Caribbean Air and Marine Branch (CAMB). This seizure is evidence that our persistence is fruitful. The Puerto Rico Police Department s (PRPD) Specialized Joint Forces for Rapid Action (FURA by its Spanish acronym) contacted the CBP Fajardo Marine station requesting assistance late Friday night, after a Puerto Rico National Guard helicopter detected a wooden yola type vessel traveling between Culebra and Fajardo, with no navigational lights. In reaction to the helicopter, the vessel s occupants tossed four packages into the water. After a thorough search of the area off Ceiba, CBP units found two black and blue pieces of luggage containing a total of 30 individually wrapped bricks consistent with packaged cocaine. A FURA vessel joined the search and discovered a black duffle bag with 18 bricks. The bricks field-tested positive for the properties of cocaine. Later the next day, FURA agents discovered a 20-foot wooden vessel, which a K9 unit alerted for the presence of cocaine. CBP agents seized the vessel pursuant to federal law.

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8 Thursday, September 17, 2015 The San Juan Daily Star Pierliusi Filing Bills to Extend Refundable Federal Tax Credits to PR By MARIA MIRANDA SIERRA mirandasanjuanstar@gmail.com Puerto Rico Resident Commissioner Pedro Pierluisi will be introducing two bills in Congress this week, the first to include Puerto Rico in the federal child tax credit (CTC) program, and the second to include the island in the federal earned income tax credit (EITC) program, he announced Wednesday. Pierluisi said Puerto Rico s unequal treatment under these two programs, both of which encourage low-income individuals to obtain employment, is one of the main reasons why poverty levels on the island are higher and the labor participation rate is lower in Puerto Rico than they are in every state and the District of Columbia. Puerto Rico s poverty rate is nearly 45 percent, compared to a national average of about 16 percent, Pierluisi said. The U.S. territory s labor participation rate -- which measures the share of adults in a jurisdiction who are working or seeking work -- is about 40 percent, compared to a national average of over 62 percent. The latest estimates indicate that some 70,000 Puerto Rico residents are now relocating to the states each year in search of better economic opportunities, jobs and a better education for their children, among other factors such as cheaper housing and electricity costs. The legislative bills that will be introduced this week are called the Child Tax Credit Equity for Puerto Rico Act of 2015 and the Earned Income Tax Credit Equity for Puerto Rico Act of 2015. The CTC bill could potentially benefit an additional 300,000 families in Puerto Rico, while the EITC bill could provide over $400 million a year in tax refunds to eligible Puerto Rico households. Puerto Rico is mired in an economic and fiscal crisis. The crisis has multiple causes, but inequitable, inconsistent and often incoherent federal policy toward the territory is the single largest contributing factor, Pierluisi said. Puerto Rico is treated unequally under a range of critical federal programs, including under federal tax credit programs like the CTC and the EITC that are available to millions of households in the states that owe no federal income taxes. If Congress wants to take concrete action to assist the 3.5 million American citizens that reside in Puerto Rico, providing equitable treatment under these two tax credit programs would be an effective way to do so. There are two types of tax credits -- non-refundable and refundable. A non-refundable credit can only reduce a taxpayer s tax liability to zero, whereas a refundable tax credit can exceed a taxpayer s tax liability, resulting in a cash payment from the federal government to low-income households that owe little or no income tax. Both the CTC and the EITC are refundable credits. In 2013, nearly 20 million taxpayers claimed over $26 billion in refunds under the CTC, while over 28 million taxpayers claimed nearly $60 billion in refunds under the EITC. Pierluisi noted that the CTC was established in 1997 to ease the financial burden that families incur when they have children. In the 50 states and Washington, D.C., eligible families can reduce their federal income tax liability by up to $1,000 per child. Families may receive the CTC as a reduction in tax liability (the non-refundable portion of the credit), a refundable credit, or a combination of both. For example, Pierluisi said, a family with two children and a tax liability of $1,500 may receive the $2,000 CTC -- that is, $1,000 per child -- as a $1,500 reduction in their tax liability and $500 refund. Naturally, taxpayers with little or no federal income tax liability will be eligible for little if any of the non-refundable portion of the CTC, but will be eligible to receive the refundable portion of the credit, often called the additional child tax credit, or ACTC, he said. The amount of the refundable CTC is generally calculated using the earned income formula. Under this formula, the total amount of the refund is calculated as 15 percent of a family s earnings that exceed $3,000. Thus, a family with two children that earns $15,000 a year would receive a credit of $1,800. The refundable portion of the CTC -- the ACTC -- currently applies in Puerto Rico, but only in limited and unequal fashion. More specifically, families with one child or two children are not eligible for the ACTC at all. Families with three or more children are eligible for the ACTC, but an alternative formula -- which is generally less generous than the earned income formula -- is used to calculate the amount of the payment. This payment is based on the amount of federal payroll taxes that the family pays. In 2013, more than 275,000 U.S. federal individual income tax returns were filed by residents of Puerto Rico. Of those returns, more than 142,000 received a refund of their individual income taxes, totaling over $228 million in refunds. In most cases, these refunds likely were a result of Puerto Rico residents being eligible for the refundable portion of the CTC. Pierluisi s CTC bill would amend Section 24 of the U.S. Internal Revenue Code to make Puerto Rico families with one child or two children eligible for the CTC. Based on U.S. Census data, this legislation could potentially benefit an additional 300,000 families in Puerto Rico. The bill would also authorize the amount of the CTC owed to Puerto Rico families -- regardless of the number of children they have -- to be calculated based on the earned income formula that is used in the 50 states and the District of Columbia. In March 2011, at Pierluisi s request, the President s Task Force on Puerto Rico recommended fully extending the refundable portion of the CTC to Puerto Rico, noting that it could help reduce poverty and strengthen the labor force in Puerto Rico, because the credit is conditional on labor earnings. In July 2011, the resident commissioner introduced H.R. 2454 to implement the Task Force s recommendation, and the bill obtained bipartisan support. Currently, presidential candidates from both political parties -- including Democrat presidential frontrunner pre-candidate Hillary Clinton and Sen. Marco Rubio -- have expressed support for providing Puerto Rico with more equitable treatment under the CTC. Pierluisi will also introduce the Earned Income Tax Credit Equity for Puerto Rico Act of 2015. The EITC is a tax credit available to workers with relatively low earnings. Because it is refundable, an EITC recipient doesn t need to owe federal income taxes to receive the benefit. The EITC creates a financial incentive for individuals to seek and retain employment because it increases the ability of workers in lowpaying jobs to support themselves and their families. Currently, the EITC is calculated based on a recipient s earned income, using one of eight different formulas, which vary depending on several factors, including the number of children a tax filer has and his or her marital status. Nearly all EITC dollars go to families with children. The maximum credit for a married couple with no children is $496; with one child is $3,305; with two children $5,460; and with three or more children is $6,143. The EITC, which was first enacted in 1975 and has become the nation s largest anti-poverty cash assistance program, has never been extended to Puerto Rico. In a recent, highly publicized report on Puerto Rico principally authored by former International Monetary Fund (IMF) economist Anne Krueger, it was noted that Puerto Rico s labor participation rate is only around 40 percent. The report asserted that many individuals in Puerto Rico are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields. The Krueger report then recommended, among other things, that Puerto Rico ask Congress to exempt the territory from the Continues on page 10

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10 Thursday, September 17, 2015 The San Juan Daily Star From page 8 $7.25 federal minimum wage, notwithstanding the fact that residents of Puerto Rico now pay the highest sales tax in the country -- 11.5 percent -- and the cost of many basic goods in Puerto Rico is far higher than in the mainland U.S. I do not entirely agree with the Krueger report s conclusion that welfare benefits in Puerto Rico are more generous than minimum wage employment, thus creating a disincentive to work. To support this assertion, the Krueger report cites an estimate supposedly showing that a household of three eligible for food stamps, AFDC, Medicaid and utilities subsidies could receive $1,743 per month as compared to a minimum wage earner s takehome earnings of $1,159, Pierluisi said. But Puerto Rico is treated in dramatically unequal fashion, compared to the states, under the federal Medicaid program, the federal nutrition assistance program, and the federal LIHEAP program, which helps lowincome households pay their electricity bills. He added that any notion that Puerto Rico is receiving generous treatment under these programs is incorrect. Moreover, the Aid to Families with Dependent Children program -- AFDC -- no longer exists. It ended nearly 20 years ago, in 1996, and was replaced with the Temporary Assistance for Needy Families -- TANF -- program, under which Puerto Rico is also treated unequally as well, Pierluisi said. But let s stipulate for the sake of the argument that this claim -- that monthly welfare benefits in Puerto Rico exceed the federal minimum wage, thereby discouraging work -- is true. If so, it makes no sense to recommend -- as the Krueger report, like an earlier report issued by the Federal Reserve Bank of New York, did -- that Puerto Rico should seek an exemption from the federal minimum wage so that island workers would earn less, the resident commissioner said. That policy proposal would exacerbate the alleged problem, not alleviate it. Both the Krueger report and the New York Fed report overlook the far more logical and appropriate course of action, which is for Congress to extend refundable federal tax credits to Puerto Rico. This would remove any disincentive to work and ensure that Puerto Rico workers in low-paying jobs, like their fellow American citizens in the 50 states, earn a livable wage that enables them to support their families. Puerto Rico s Debt Rescue Plan Called Into Question By MARY WILLIAMS WALSH A week after the governor of Puerto Rico laid out a plan for attacking the island s heavy debt, analysts are beginning to publicly question the proposals and even the financial assumptions on which they are based. The criticisms suggest that Gov. Alejandro García Padilla s strategy to persuade bondholders and other investors to voluntarily help the island restructure the debt and take losses on their investments as a result is a long shot. One credit analyst, Ryan Brady of Morgan Stanley, found that the planners appeared to have greatly overstated Puerto Rico s financial needs over the next five years. As a result, he said in a private presentation to clients, Puerto Rico was hoping to get $14 billion in concessions from its creditors, when it appeared likely to need only $5.7 billion. And Sergio M. Marxuach, public policy director for the Center for a New Economy, a research institute in San Juan, said on Wednesday that the five-year plan appeared to be tilted towards austerity rather than growth, which could undermine its key goal of reviving the island s economy. Mr. Marxuach also questioned whether the Puerto Rican government could carry out the plan, because it relies on an independent control board to enforce politically unpalatable austerity measures. Mr. Marxuach said it was not clear how the board would function. Puerto Rico s governor warned in June that its debt was unpayable, and the only hope was to reduce scheduled payments for a few years while reforming the island s deeply depressed economy. He assigned a team of government finance specialists to develop a plan, which was released to the public last week. The planners projected the total cost of providing government services on the island for the next five years, and found that it would be about $28 billion more than the recources available. They then devised a number of austerity measures and tax changes, which they said could whittle the projected five-year shortfall down to $14 billion. Over the same period, they said, the Puerto Rican government is scheduled to pay about $18 billion to a large group of creditors. The plan calls for withholding about $14 billion of those payments, and using that money to fill the gap. In a slide show that accompanied a client briefing last week, Mr. Brady said it appeared that the five-year shortfall would be much smaller, just $5.7 billion. That suggested Puerto Rico would not have to deal such large losses to bondholders. Mr. Brady s slides suggested that Puerto Rico s planners had made a number of errors in arriving at a five-year shortfall of $14 billion. For example, the working group appeared not to have properly accounted for a sharp recent increase in the sales taxes collected on the island. That led to a $5.3 billion understatement of governmental revenue over five years, Mr. Brady concluded. He found fault with several other estimates in the government s plan, involving various taxes, health care transfers and subsidies provided to the government s water and power utilities. Mr. Brady declined to comment on his presentation, a copy of which was reviewed by The New York Times. Disclaimers at the end of the report said it was a sales and trading commentary, prepared for institutional clients considering derivatives transactions with the bank. It said it did not necessarily reflect the opinions of Morgan Stanley s research department. At the Center for a New Economy, Mr. Marxuach said that he had turned to research on other debt crises by Carmen M. Reinhart and other economists. Their work showed that kick the can strategies that pushed debt payments farther into the future did not provide enough change in countries with very protracted sovereign debt crises, he said. Instead something more powerful was needed, such as the Brady bonds that ultimately resolved a decade-long debt crisis in the 1980s, which engulfed much of Latin America, and parts of Africa and Eastern Europe. That program was named after Nicholas F. Brady, the Treasury secretary who served under Presidents Ronald Reagan and George H.W. Bush. They allowed existing debt owed by Latin American countries to be converted into more stable United States-backed Treasury bonds. Puerto Rico s working group also relied on projections that Puerto Rico s treasury would exhaust its cash in November, despite taking extraordinary measures to conserve cash whenever possible. The island s Government Development Bank, which keeps the government liquid, is expected to exhaust all of its cash at the end of December. That will coincide with a large payment due on the island s general obligation bonds. The governor said in a recent speech that if Puerto Rico s creditors will not negotiate concessions, he will have to go forward without them. Thousands of public sector workers demonstrated on Friday against an austerity plan to help pull Puerto Rico out of a debt crisis, saying the private sector should take more of the pain.