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  1. Home
  2. ECONOMY
May 09, 2018 01:00 AM

GAO highlights Puerto Rico debt crisis causes, possible steps

Hazel Bradford
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    Bloomberg
    A protester holds a Puerto Rican flag during a demonstration in New York.

    Puerto Rico's debt crisis was caused by inadequate financial management and oversight, poor policy decisions including pension underfunding and high levels of debt issuance, and prolonged economic contraction, experts at the Government Accountability Office said in a report issued Wednesday.

    While the report did not make specific recommendations, it identified three potential federal actions to help address the factors covered in the report.

    Puerto Rico has been using debt to finance its deficits partly because of high demand for its bonds, which has more favorable tax treatment than other states. To that end, GAO experts suggested modifying the tax-exempt status by making interest income subject to state and local taxes. A second suggestion is to apply federal investor protections laws so there is greater disclosure of the risks with those bonds.

    A third suggestion is to modify the Securities and Exchange Commission's authority over municipal bond disclosure requirements to allow for timely disclosure of audited financial statements and other materials to help investors "make informed decisions," the report said.

    All three of those changes would require legislative action by congressional committees with oversight of the SEC and financial regulation, which so far has not been discussed, said an aide on the House Committee on Natural Resources, which oversaw the Puerto Rico Oversight, Management and Economic Stability Act that created an avenue for Puerto Rico to file for bankruptcy in May 2017 and the federal Financial Oversight and Management Board that is now pushing to enact a fiscal reform plan.

    Committee Chairman Rob Bishop, R-Utah, who plans to hold a hearing in the coming months, said in a statement that "the GAO report reiterates why Congress passed PROMESA two years ago. The island will recover as leaders take to heart the seriousness of these problems. Reform is possible as the governor and legislature work alongside the oversight board to achieve structural and financial reformation."

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