In a development that may affect Puerto Rico’s economy and its bonds’ tax status, the territory’s government is rushing to respond to the U.S. Department of Justice's rejection of status plebiscite language.

Puerto Rico Sen. Pres. Thomas Rivera Schatz (left) Gov.Ricardo Rosselló (center) and House Pres. Carlos “Johnny” Méndez (right) discussing a status plebiscite.
Puerto Rico Senate p Pres. Thomas Rivera Schatz (l), Gov. Ricardo Rossello (c), and House Pres. Carlos "Johnny" Mendez discussing the plebiscite on Monday.

U.S. Acting Deputy Attorney General Dana Boente sent a letter Thursday to Gov. Ricardo Rosselló saying that the Department of Justice wouldn’t notify Congress that it approved the ballot or suggest that Congress release funds to hold the plebiscite and educate voters on it .

The current ballot “is not drafted in a way that ensures that its result will accurately reflect the current popular will of the people of Puerto Rico,” Boente wrote. Boente said the department objects to the ballot only offering statehood and “free association/independence” as options. The ballot fails to offer Puerto Ricans the option of continuing in the current territorial status.

The department also said that the ballot’s statement that only statehood status “guarantees” U.S. citizenship by birth for Puerto Ricans is false, as the current territorial status does this, Boente said. The ballot language fails to make clear that a vote for Puerto Rico to have a “free association” with the United States would make Puerto Rico an independent country and strip Puerto Ricans of their U.S. citizenship, Boente said.

The U.S. government in 2014 authorized providing $2.5 million to Puerto Rico’s government to hold a plebiscite on its status in the United States and to provide education to voters. The U.S. didn’t place a limit on when the money would be used. Before the money was to be released, the U.S. Department of Justice was to notify Congress that the plebiscite ballot and educational materials were consistent with the laws, Constitution and policies of the United States.

Ricardo Rosselló and legislators from his party, the pro-statehood New Progressive Party, passed a measure authorizing a status plebiscite with the first vote to take place on June 11.

Rosselló responded to Boente Thursday by promising that his government would add remaining a territory as an option to the ballot.

Puerto Rico Senate Minority Leader Eduardo Bhatia, a member of the opposition Popular Democratic Party that supports a continuation of something similar to the current status, told Rosselló, “Repeal the plebiscite law and establish a route for Puerto Rico that is accurate, binding and above all, inclusive.”

In a letter to Boente on Friday Rosselló said the congressional authorization of the $2.5 million requires that the Department of Justice notify the U.S. Congress at least 45 days before the plebiscite. This would give the government until April 22 to authorize money for a June 11 plebiscite. The governor said Puerto Rico’s legislature would pass a revision to the ballot on Tuesday.

The outcome of the plebiscite could alter the tax-status of Puerto Rico’s future bonds, economy and federal aid levels.

As a territory Puerto Rico’s government and public corporations have been able to issue bonds exempt from local, state, and federal income taxes in the 50 U.S. states. This has aided its sale of the bonds. If it were to become a state, its ability to sell bonds exempt from local and state taxes in the 50 states would almost certainly end, as happened when Alaska and Hawaii became states. Precedent from Hawaii and Alaska suggest that Puerto Rico bonds sold before statehood would retain their triple-tax exemption.

Becoming a state would have an impact on federal aid. Puerto Rico currently gets less help for Medicare, Medicaid, Supplemental Security Income, and other programs than it would if it became a state, according to a U.S. General Accounting Office report. Advocates and opponents of statehood have made various arguments about whether becoming a state would aid or harm the island’s economy.

Becoming an independent country would probably cut federal aid to none or near none, among other effects on the economy. However, in November’s elections supporters of independence received only a sliver of the vote.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.