DRHIN G. HATCH, UTAH. CHAIRMAN CHUCK GRASSLEY. IOWA RON WYDEN. OREGON MIKE CRAPO. IDAHO CHARLES E. SCHUMER. NEW YORK PAT ROBERTS. KANSAS DEBBIE srAaENow. MICHIGAN MICHAEL S. ENZI. WYOMING MARIA CANTWELL. WASHINGTON JOHN CORNYN. TEXAS SILL NELSON. FLORIDA JOHN THUNE. SOUTH DAKOTA RORERT MENENDEZ, NEW JERSEY (Jl? RICHARD BURH, NORTH CAROLINA THOMAS R. CARPER. DELAWARE JOHNNY ISAKSON. GEORGIA BENJAMIN L. CARDIN, MARYLAND ROB PORTMAN, OHIO SHERROD BROWN. OHIO PATRICK J. TODMEY. MICHAEL F. BENNET. COLORADO DANIEL COATS, INDIANA ROBERT P. CASEY.JR., COMMIWEE ON FINANCE DEAN HELLER, NEVADA MARK R. WARNER. VIRGINIA TIM SCOTT. SOUTH CAROLINA WASHINGTON, DC 20510-6200 CAMPBELL, STAFF DIRECTOR JOSHUA SHEINKMAN, DEMOCRATIC STAFF DIRECTOR July 17,20l5 The Honorable Jacob J. Lew Secretary Department of the Treasury 1500 Avenue, NW Washington, DC 20220 Dear Secretary Lew: Puerto Rico?s outstanding debt ofmore than $70 billion?greater than IOO percent of its gross national product ?not payable,? according to Puerto Rico Governor Alejandro Garcia Padilla, raising prOSpects of default. By some measures, de?cits are around five percent in Puerto Rico which, when coupled with nominal growth ofjust around one percent, help explain lack of debt sustainability and suggest that Puerto Rico?s debts may indeed not be payable. Much ofthe debt issued by the Commonwealth of Puerto Rico, its political subdivisions, and public corporations is exempt from federal, state, and local taxes in the United States. Few other municipal bonds in the U.S. are similarly triple-lax-exempt in all states. Many municipal bond mutual funds, retirement funds,'hedge funds, and distressed debt investors hold debt issued by Puerto Rico and its public corporations, such as the water and sewerage utility (PRASA), state electricity company (PREPA), and highway authority (HTA). Given Puerto Rico?s dire fiscal situation. including limited liquidity and sluggish economy, rating agencies have downgraded debt issued by Puerto Rico, including debt issued by its public corporations. The central government of Puerto Rico effectively includes PRASA, PREAP. all aspects ofthe public sector except the municipalities, and retirement funds. The recent so-called "Krueger Report," a study commissioned by the Governor of Puerto Rico and authored by former officials ofthe International Monetary Fund and the World Bank, identi?es the dire need for pro-growth reforms in Puerto Rico.1 According to the report, reforms are needed in Puerto Rico?s: fiscal policies, including debt reduction and expenditure control; labor-market policies (the unemployment rate has persistently been in double digits); ?the welfare system [that] makes employment unattractive for workers whose productivity is not much above the minimum wage,? policies that impact energy and transport costs; and ?local laws and regulations [which] restrict domestic competition and raise the costs ofdoing business and uncertainty." Unfortunately for residents ofPuerto Rico, the Commonwealth has made unsustainable government benefit promises that have been papered over for far too long with debt-fueled expenditures which fail to align benefits with underlying economic fundamentals such as productivity, leading to the ultimate prospect ofdebt default. Tragically. unsound ?nancial decisions of government officials have led to a sharp rise in outmigration. Anne 0. Krueger, Ranjit Teja, and Andrew Wolf, ?Puerto Rico?s Growth and Macroeconomic Situation and Prospects,? Government Development Bank for Puerto Rico, June 29, 20 5, available at . See, also, Anne 0. Kreuger, Ranjit Teja, and Andrew Wolf, ?Puerto Rico A Way Forward,? available also at . I believe that the Obama administration may be in agreement with two reasonable principles to apply to the debt dif?culties facing Puerto Rico: 1) there shall not be a federal bailout; and 2) orderly resolution of debt defaults are preferred to chaotic resolutions. 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. To that end, I ask that you provide the following information: 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 delays of scheduled minimum wage increases for American Samoa and for the Northern Mariana Islands), where the President acknowledges that a one?size-?ts-all federal minimum wage can be costly to residents in areas where productivity and living costs are well below the national averages? 5. According to press reports, in June, Puerto Rico hired a retired federal judge who oversaw Detroit?s bankruptcy case, as an advisor. 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 ?United States Treasury of?cials. . .have been advising the island?s government in recent months amid the worsening ?scal situation.?2 What advice have Treasury of?cials been offering to Puerto Rico? Have Treasury of?cials pledged any federal resources to Puerto Rico in conjunction with the advice, including expediting fund ?ows from the General Fund of the US. Treasury to Puerto Rico? 6. What actions are of?cials from Treasury?s recently formed Of?ce of State and Local Finance taking with respect to Puerto Rico?s assertion that its debts are not payable? The Of?ce of State and Local Finance at Treasury was formed, according to a Treasury spokesperson, to ?serve as Treasury?s liaison to state and municipal of?cials and associations, monitor developments in municipal bond markets, support policies to improve the management of public pensions and other liabilities, and develop potential federal policy responses to issues that emerge in municipal ?nancing markets.? Statements by of?cials of Puerto Rico that Puerto Rico?s debts are not payable certainly quali?es as an emerging issue in the municipal ?nancing markets. What ?potential federal policy responses? have the Of?ce of State and Local Finance at Treasury developed? 7. Does the administration intend to appoint an of?cial to manage any federal aid packages to Puerto Rico, as was the case when former administration of?cial Don Graves was appointed to manage aid given to Detroit following its ?ling for bankruptcy? 8. Do you, as Chair of the Financial Stability Oversight Council (FSOC), still agree with the assessment in latest annual report that ?Despite problems exhibited by Puerto Rico, there has been little 2 New York Times, June 29, 2015, available at r=0. ll. spillover thus far to the broader municipal bond market"?3 Do you also still agree with the FSOC annual report that notable municipal defaults in recent years, though ?severe events,? "appear to be and not representative ofa broader trend in municipal credit?? Are there any anticipated executive actions under discussion among administration of?cials 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 ?ow oftransfers from the General Fund ofthe Treasury to Puerto Rico? . Does the administration intend for its proposed 19 percent minimum tax on foreign income to be applied to Controlled Foreign Corporation (CFC) operating in Puerto Rico in the same way it would apply to CFCs operating elsewhere? For over four years, pursuant to Treasury Notice 201 1?2, a Puerto Rican excise tax has received treatment from the Internal Revenue Service (IRS) as though it was eligible for the Foreign Tax Credit. The Notice stated that the excise tax presents new concerns and that "determination ofthe creditability of the Excise Tax requires the resolution ofa number ol?legal and factual issues.? Until such a resolutionnot challenging claims as to the creditability ofthe excise tax. Furthermore, the Notice states that ifthe 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 ofthe excise tax? b. Are there other examples ofTreasury, currently 01' 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? Please respond to the questions raised above by July 31, 20 I 5. Sincerely, Orrin . Hatch Chairman Senate Committee on Finance 3 2015 Annual Report, Financial Stability Oversight Council, available at .