U.S. Sen. Orrin Hatch (R-UT), chairman of the Senate Finance Committee, directed tough questions late last week toward the Obama administration regarding its plan to assist Puerto Rico in alleviating the territory’s current debt crisis.
In a letter submitted to U.S. Treasury Secretary Jack Lew, Hatch outlined his opposition to a proposed federal bailout for Puerto Rico and demanded information on the administration’s positions on Puerto Rico’s indebtedness, governance and economy.
Hatch said in the letter that the territory of Puerto Rico has outstanding debt of more than $70 billion — more than 100 percent of its gross national product (GNP) — and that the debt is “not payable,” Puerto Rico Governor Alejandro Garcia Padilla said.
“As chairman of the Senate Committee on Finance, I take great interest in this situation and seek additional information regarding the administration’s views and plans moving forward,” Hatch said.
To that end, Hatch asks Lew the following specific questions in the letter:
1. What is the administration’s position on stand-alone proposals to allow Puerto Rico’s government to be treated as a state under chapter 9, including retroactive application to already outstanding indebtedness?
2. Has the administration given consideration to appointing a special mediator or arbitrator to work with Puerto Rico and its creditors to establish an orderly resolution of a Puerto Rican default?
3. What is the administration’s position on exempting Puerto Rico from the Jones Act, as recommended in the so-called “Krueger report?”
4. What is the administration’s position on exempting Puerto Rico from federal minimum-wage law, or reducing the level of the federally imposed minimum wage as President Obama has done in other instances (e.g., delays of scheduled minimum-wage increases for American Samoa and for the Northern Mariana Islands), in which the president said a one-size-fits-all federal minimum wage can be costly to residents in areas where productivity and living costs are well below the national average?
5. Press reports said that in June, Puerto Rico hired a retired federal judge who oversaw Detroit’s bankruptcy case as an adviser. The government reportedly is “consulting with a group of bankers from Citigroup who advised Detroit on a $1.5 billion debt exchange with certain creditors” and that “United States Treasury officials…have been advising the island’s government in recent months amid the worsening fiscal situation.” What advice have Treasury officials been offering to Puerto Rico and have Treasury officials pledged any federal resources to Puerto Rico in conjunction with the advice, including expediting fund flows from the General Fund of the U.S. Treasury to Puerto Rico?
6. What actions are officials from Treasury’s recently formed Office of State and Local Finance taking with respect to Puerto Rico’s assertion that its debts are not payable, and what “potential federal policy responses” has the Office of State and Local Finance at Treasury developed?
7. Does the administration intend to appoint an official to manage any federal aid packages to Puerto Rico?
8. Do you, as chairman of the Financial Stability Oversight Council (FSOC), still agree with the assessment in FSOC’s latest annual report that “despite problems exhibited by Puerto Rico, there has been little spillover thus far to the broader municipal bond market,” and do you also still agree with the FSOC annual report that notable municipal defaults in recent years “appear to be idiosyncratic and not representative of a broader trend in municipal credit”?
9. Are there any anticipated executive actions under discussion among administration officials with respect to any changes in Treasury rules or regulations that may affect how the federal tax system impacts residents and businesses in Puerto Rico or the flow of transfers from the General Fund of the Treasury to Puerto Rico?
10. Does the administration intend for its proposed 19 percent minimum tax on foreign income to be applied to Controlled Foreign Corporations (CFCs) operating in Puerto Rico in the same way it would apply to CFCs operating elsewhere?
11. For over four years, pursuant to Treasury Notice 2011-2, a Puerto Rican excise tax has received treatment from the Internal Revenue Service (IRS) as though it were eligible for the Foreign Tax Credit. The notice said the excise tax presents new concerns and that “determination of the creditability of the Excise Tax requires the resolution of a number of legal and factual issues.” Until such a resolution, the IRS has not and is not challenging claims as to the creditability of the excise tax. Furthermore, the notice said that if the IRS eventually decides that the excise tax is not creditable, such a lack of creditability will only apply on a forward-going basis.
a. When will Treasury finish its review to determine the creditability of the excise tax?
b. Are there other examples of Treasury, currently or in the past, allowing a tax to be eligible for Foreign Tax Credit treatment while the tax is under examination?
c. Has Treasury ever announced that, if a tax was determined to not be eligible for the Foreign Tax credit, such a lack of eligibility would apply on a prospective basis?
Hatch said he expected a response to his questions by July 31.
Hatch has represented the state of Utah in the U.S. Senate since 1976. Born in Pittsburgh, Pennsylvania, in 1934, Hatch previously served as chairman of the Health, Education, Labor and Pensions Committee from 1981 to 1987. Hatch was educated at Brigham Young University and University of Pittsburgh Law School. He serves on the following committees: Committee on Finance (chairman); Committee on the Judiciary; Committee on Health, Education, Labor and Pensions; Special Committee on Aging; and the Joint Committee on Taxation.