On June 30, 2016, President Obama signed into law H.R. 5278, known as the "Puerto Rico Oversight, Management, and Economic Stability Act" or "PROMESA." PROMESA responds to Puerto Rico's fiscal crisis, which has resulted in the government's inability to make payments on public debt estimated to be over $72 billion, adequately fund the public pension systems and meet other basic financial obligations. The law creates a seven-member fiscal control board that will control Puerto Rico's budget, laws and regulations and will be vested with the power to force the Commonwealth to balance its budget and restructure existing debt with bondholders, among other broad powers.

Appointment of economic growth task force

According to PROMESA, the sense of the US Congress is that "any durable solution for Puerto Rico's fiscal and economic crisis should include permanent, pro-growth fiscal reforms that feature, among other elements, a free flow of capital between possessions of the United States and the rest of the United States."

In context of PROMESA's mandate on economic growth for Puerto Rico, the statute calls for the establishment of a Congressional Task Force on Economic Growth, appointed to address economic development alternatives for Puerto Rico. The task force will issue a status update during the first half of September 2016 and a full report by December 31, 2016. On August 4, 2016, shortly after its members were appointed, the task force issued the following statement:

As we work in a bipartisan manner to identify what reforms are needed to grow the Puerto Rican economy and promote prosperity on the island, we are interested in stakeholder input. Information and insights, from both the public and private sectors in Puerto Rico, will be useful to the Task Force as it analyzes impediments to growth on the island stemming from Federal law and programs and arrives at recommendations to remove current barriers to growth.

Input submissions due September 2, 2016

Comments may be sent to the task force's mailbox at prtaskforce@mail.house.gov. The deadline to respond is September 2, 2016. According to the statement, all submissions will be considered part of the public record and should be clear and concise, directed at the issues that the task force is charged to consider, and provided in the form of an attachment to the email.

Implications

PROMESA represents a new chapter in the decade long period of economic recession that Puerto Rico has faced. Although there is precedent at the US federal level for the use of a fiscal control board, such as the District of Columbia Financial Responsibility and Management Assistance Authority, the unique geopolitical factors affecting the Commonwealth warrant special attention from all stakeholders.

The notion that the US Congress will seek permanent, pro-growth fiscal reforms between Puerto Rico and the rest of the United States could bring forth an era of opportunity to what has been a period marked by mass migration and a negative economic outlook. Companies doing business in Puerto Rico need to be aware that, once the fiscal control board is appointed, tax changes may be coming. Moreover, although the Governor of Puerto Rico is required to submit to the fiscal control board documentation on all discretionary tax abatement or tax relief agreements, such disclosure does not limit the power of the "territorial instrumentality" to execute, modify, or enforce compliance with the terms and conditions of such agreements.

For those entities and individuals already in Puerto Rico, as well as those considering entering the market, with interest in tax relief agreements, such as industrial tax incentive decrees, it should come as good news that the Commonwealth will continue to have authority to enter into those agreements. At the same time, the fiscal control board's oversight over tax relief agreements means that companies will need to impress on the board the importance of these agreements.

In the short-term, the joint statement issued by the task force on economic growth represents a valuable opportunity to share input related to impediments to economic growth in Puerto Rico and recommended changes. Companies with interests in Puerto Rico that could be affected by PROMESA are encouraged to consider preparing a submission.

We will continue to issue updates as news related to PROMESA and its economic task force continue to surface.

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