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First Amendment Rights: Good News from the IRS on Donor Privacy

In this era of increased harassment and persecution of people on the basis of political viewpoints and First Amendment expression, there’s actually good news to report.

In fact, that positive development comes from none other than the Internal Revenue Service (IRS), which few people typically consider a font of good news.

Specifically, the IRS just announced a proposed rule to stop requiring nonprofit organizations to file what’s known as a Form 990 Schedule B, which exposes sensitive donor information not only to the federal government and potential rogues like former IRS official Lois Lerner, but also people who seek to access and use that information to target people on the basis of political belief.

As we at CFIF have long asserted, this welcome move will help protect the…[more]

September 12, 2019 • 11:07 am

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Congress’s Role in Puerto Rico’s Debt Crisis Print
By CFIF Staff
Tuesday, May 03 2016
Congress does have a responsibility to help set Puerto Rico on a course to fiscal sustainability – but it must do so in a way that adheres to the rule of law and respects the rights protected by the U.S. and Puerto Rico Constitutions, which is where PROMESA fails.

The Center for Individual Freedom (CFIF) has been a vocal opponent of H.R. 4900, the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA. Our opposition to the legislation, which is broadly shared by state governors, Members of Congress, policy experts and other prominent conservative organizations, is not arbitrary.  It has been and continues to be based on principle, including fidelity to the rule of law and property rights, and is leveled against specific provisions of PROMESA which undermine those principles.

Yet, as CFIF has engaged in a comprehensive education effort, including television and radio ads in recent weeks, to highlight specific deficiencies in PROMESA, members of the media and some proponents of the legislation, including certain Members of Congress, have either misunderstood our opposition or have willingly mischaracterized it.

This is our position:

PUERTO RICO IS FACING A FINANCIAL CRISIS AND CONGRESS DOES HAVE A ROLE TO PLAY

With a debt approaching $73 billion, a debt-to-GDP ratio at a staggering 70 percent, an economy stuck in recession, a shrinking tax base and an unemployment rate more than twice that of the mainland United States, Puerto Rico is indeed facing a fiscal crisis.

That crisis is due in large part to years of unsustainable progressive policies and prolific borrowing and spending by the government of Puerto Rico. Instead of working to rein in its profligate spending as the situation has grown worse in recent years, Puerto Rico’s government doubled down and broke the bank by tapping new, creative and, many have argued, extra-legal ways to borrow money  in some cases debt instruments specifically designed to shield itself from litigation and circumvent its constitutional balanced budget requirement and debt limit

But while the economic policies and unchecked borrowing by Puerto Rico’s government are largely to blame for the Commonwealth’s fiscal woes, policies imposed on Puerto Rico by the U.S. Congress also have hampered its economy’s ability to grow.  Specifically, Congress’s phase-out a decade ago of tax incentives for manufacturers operating in Puerto Rico, Jones Act restrictions, which severely limit Puerto Rico’s access to U.S. energy markets and effectively prohibit the Commonwealth from trading freely with the mainland U.S., and the inability of Puerto Rico to be flexible in setting its own minimum wage are just a few examples.

Because Puerto Rico is a territory of the United States and its 3.5 million residents are U.S. citizens, and because the government of Puerto Rico has demonstrated an inability or unwillingness to right its own fiscal ship, Congress does have a responsibility to help set Puerto Rico on a course to fiscal sustainability  but it must do so in a way that adheres to the rule of law and respects the rights protected by the U.S. and Puerto Rico Constitutions, which is where PROMESA fails.

PROMESA (H.R. 4900) IS A BAILOUT ON THE BACKS OF SAVERS AND SENIORS

Contrary to accusations by the media and certain Members of Congress, CFIF has never said in any of its television or radio advertisements that the PROMESA “bailout” would be funded directly by American taxpayers, even though, unless Puerto Rico is forced to get its financial house in order and keep it there, the specter of such a bailout in the future is a strong probability. 

What we have said is that H.R. 4900 is a bailout directly on the backs of individual investors and retirees in Puerto Rico and across the United States who own Puerto Rican bonds in mutual funds or other investment accounts.  A large majority of Puerto Rico’s public debt is held by such investors who will pay dearly for legislation that does not respect their legal rights.

PROMESA empowers an unelected federal oversight board made up of seven politically connected people to force a restructuring of Puerto Rico’s debt, including its general obligation bonds, which are backed by the “full faith and credit” of Puerto Rico’s government and prioritized by Puerto Rico’s Constitution.  This is “Super Chapter 9”  a concept supported by the Obama Administration  and it would extend much further than current bankruptcy law, which does not permit states themselves to declare bankruptcy, but only municipalities and public corporations (if their respective states allow it). 

Those who declare that PROMESA does not constitute “Super Chapter 9” should be asked to explain the dozens of sections in PROMESA that are incorporated directly from  or even surpass  Chapter 9 of the United States Code (Bankruptcy Code), which would be directly applied to Puerto Rico itself through the oversight board.

In addition to taking issue with Congress granting such extraordinary power to retroactively change the rules and undermine the rights of bondholders protected by Puerto Rico’s own Constitution, CFIF has joined others in warning about the contagion effect of such a “Super Chapter 9” bailout, which could impact U.S. taxpayers in the form of higher borrowing costs for states. 

William Isaac, former Chairman of the Federal Deposit Insurance Corporation (FDIC), recently testified before the Subcommittee on Oversight and Investigations of the U.S. House of Representatives Committee on Financial Services:

"I am very concerned by proposals coming from the Treasury Department which propose so-called ‘Super Chapter 9 bankruptcy’ or a ‘Super Control Board’ that would provide for the restructuring of all of Puerto Rico’s debt, even its Constitutional debt. Currently, no state has the ability to restructure its own general obligation or ‘full faith and credit’ debt. Granting this power to Puerto Rico, or to a ‘Super Control Board’ created by Congress, would be unprecedented and would have far-reaching implications, including raising the costs of borrowing for the fifty states." 

Similar concerns regarding "Super Chapter 9" are shared by Governors Douglas Ducey of Arizona, Paul LePage of Maine, Pete Ricketts of Nebraska, Susana Martinez of New Mexico and Dennis Daugaard of South Dakota.  In a letter dated February 24, 2016, to Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell, those governors wrote: 

"Significantly, the proposed policy measures create a moral hazard for states and territories.  It disincentivizes states from guarding against the risks and consequences of profligate spending.  Of most concern to us as governors, granting Puerto Rico such unprecedented bankruptcy authority would likely raise the borrowing costs of our states, reducing our ability to invest in vital services and eroding investor confidence in the whole notion of full faith and credit debt.  Indeed, the National Governors Association has already warned against this in 2011, noting that states should not be given the right to declare bankruptcy themselves because the resultant market volatility would raise the cost of state bankruptcy precipitously." 

Furthermore, CFIF has warned and continues to warn about the negative precedent such a “Super Chapter 9” debt restructuring regime would set.  Indeed, if Congress expands bankruptcy rules to enable Puerto Rico itself to renege on its "full faith and credit" bonds, Congress would, at some point, be pressed to do the same for high-spending, financially troubled states like Illinois, New York and California.

Syndicated columnist George Will recently wrote:

"Puerto Rico’s debts should not be restructured in a way that sets a precedent allowing Illinois to dodge both debts and reforms, particularly reforms pertaining to government employee unions that have contributed to the territory’s dysfunction. The more Puerto Rico is allowed to evade existing legal processes and the need to negotiate with creditors, the more leeway it will have to resist reforms." 

More fundamentally, as noted by J.W. Verret, a senior scholar at George Mason University’s Mercatus Center, "Property rights were the foundation of the Constitution and the republic it created. When government suddenly decides that a creditor's rights are void, without warning, we live in a banana republic."

PROMESA is a bailout on the backs of savers and seniors.  There is no other way to say it, and those who insist that there will be no "bailout" are simply trying to divert attention away from reality. 

PROMESA'S STAY ON LITIGATION FURTHER STRIPS BONDHOLDERS OF THEIR RIGHTS, AND LIMITS INCENTIVE FOR PUERTO RICO TO NEGOTIATE IN GOOD FAITH WITH ITS CREDITORS

In addition to granting an oversight board the extraordinary power to reprioritize, restructure and "cram down" debts protected by Puerto Rico’s Constitution, PROMESA further imposes an unprecedented and retroactive stay on bondholder litigation through February 2017 (the Obama Administration and other proponents of the legislation are working to extend the stay to 18 months, or even longer).  

Such a moratorium on litigation not only undermines the principle of due process by stripping bondholders of their rights to legal recourse to protect their private property, it also would remove a major incentive for Puerto Rico to negotiate in good faith with its creditors to reach voluntary resolutions.  In fact, the stay on litigation, coupled with the forced restructuring powers, provided for in PROMESA would enable Puerto Rico’s government to willingly divert funds away from and default on its constitutionally protected debt obligations without any immediate consequence, further exacerbating the crisis.

Rachel Greszler, a senior policy analyst specializing in economics and entitlements at The Heritage Foundation, wrote recently:

“Under the current draft proposal, Puerto Rico would receive an unprecedented stay on litigation, lasting up to 18-months while a fiscal control board is put into place. By locking creditors out of their rights to access the courts, a stay could free up as much as $7 billion in bond payments that would otherwise come due, opening the door for one last spending spree by Puerto Rico’s profligate and corrupt government.

“Moreover, with little incentive for the government to negotiate deals with creditors, most would presumably be thrown — unwillingly — into a Super Chapter 9 restructuring process. This would allow Puerto Rico to restructure all its debts — even constitutionally protected ones — in ways that might strip creditors of guarantees and benefit some creditors at the expense of other, less politically favored debtholders.

“If Congress gives Puerto Rico such leeway to renege on contracts and avoid its financial obligations, U.S. states and cities would expect no less. This could severely rattle the municipal bond market, changing the value of existing bonds and raising the cost of borrowing for states and localities across the country.”

Congress should refrain from doing anything that undermines the rights of bondholders and discourages voluntary, good-faith negotiations between Puerto Rico and its creditors.  PROMESA’s stay on litigation fails in both regards.

CONCLUSION

As stated above, CFIF recognizes the very real fiscal crisis that is plaguing Puerto Rico.  And despite claims to the contrary, we have never advocated that Congress turn a blind eye to the crisis by doing nothing.  Since Puerto Rico is a U.S. territory and the 3.5 million people residing in Puerto Rico are U.S. citizens, Congress does have a responsibility to act.  But also as stated above, any resolution Congress pursues must adhere to the rule of law and respect all rights protected by the U.S. and Puerto Rico Constitutions, which is where PROMESA fails.

CFIF is on record supporting concrete policy proposals that would help to spark growth in Puerto Rico’s economy.  Exempting Puerto Rico from the stranglehold of The Jones Act (Senator John McCain has sought to repeal The Jones Act outright), providing the Commonwealth flexibility with regard to the minimum wage, and even implementing some targeted tax incentives to help the island attract and retain good-paying jobs are just a few examples. 

Given the government of Puerto Rico’s inability to curb its profligate spending and lack of political will to implement pro-growth policies that will help the Commonwealth’s economy grow, CFIF has joined with others in advocating, and we continue to support, a federal financial control board with the power to force Puerto Rico to get its fiscal house in order.  But such a control board must not be empowered to undermine the rule of law and property rights, as PROMESA’s “Super Chapter 9” restructuring provisions and stay on litigation most certainly do.

Congress can and should act to help ensure that Puerto Rico’s 3.5 million American citizens enjoy a brighter future by taking positive significant steps to help promote sustainable fiscal policy, economic growth and good governance in the Commonwealth, while also regaining Puerto Rico’s credibility in the markets and respecting the rights of bondholders, many of whom call Puerto Rico home.

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