Mar 31, 2017
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
Executive Producers: Ralph and Carol Lynn Rivera, Brandon K.
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Sound Clip Sources
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
- 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
- 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,
- 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: 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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