WASHINGTON — Puerto Rico will not be getting any federal bailout in the wake of Standard & Poor's downgrading its general obligation bonds to junk, a Treasury Department official and member of Congress said on Wednesday.
The island will get guidance from the administration on how to maximize the resources available to it, but no more than that, said a Treasury spokesperson.
"Puerto Rico's challenges didn't develop overnight and they will not be solved overnight," the spokesperson said. "There is more work to be done and we want the commonwealth to succeed in its effort to address its fiscal issues. There is no federal financial assistance being contemplated."
The Puerto Rico Resident Commissioner Pedro Pierluisi, a member of the U.S. Congress, said no one is talking about a bailout and the commonwealth is not asking for one. He said Puerto Rico will likely need tough austerity measures to get into position to access the market.
Standard and Poor's cut Puerto Rico's GO rating one notch to BB-plus from the lowest investment grade rung of BBB-minus Tuesday, an action many observers had expected but which still generated dismay from those who hoped Puerto Rico might be able to demonstrate enough of a turnaround to avoid it.
The downgrade likely means that Puerto Rico will struggle even more to access the bond market, paying even higher interest rates for money it has come to rely on.
"It is a very negative scenario, which I would have liked to avoid," said Pierluisi. "It's a new reality for Puerto Rico. We have to transform our government and our economy to meet the upcoming challenges we'll have in the financial markets. This is as simple as somebody who's been told his or her credit card has been canceled, that there's no more financing in the bank for him."
Pierluisi likened future tapping of the bond market by the cash-strapped island as being similar to borrowing from a loan shark because of the high rates involved. He said the commonwealth needs to buckle down with a disciplined spending approach, including dramatic reductions in internal tourism advertising and a freeze in government hiring. "We will not be able to continue to use the market to finance deficits," Pierluisi said.
Recently, some observers have questioned whether Puerto Rico is already receiving a "back door bailout" from the U.S. in the form of a 4% corporate excise tax which accounts for some 20% of the commonwealth's general fund revenue. Multinational manufacturers operating in Puerto Rico are considered under federal law to be "foreign corporations" whose income is not taxable. Under special multi-year agreements with the Puerto Rican government, some of these corporations pay corporate income tax rates far below the commonwealth's maximum rate of 39%, and pay the special excise tax in lieu of the income tax they are not paying. The excise tax, which has been in place since Jan. 1 2011, has come under scrutiny as possibly unconstitutional. The Internal Revenue Service has been scrutinizing it for the past year, but has not reached a determination on whether the tax is legitimate or not.
"Treasury and the IRS continue to evaluate the legal and factual issues which will inform the determination of whether the excise tax is a creditable tax," said the Treasury spokesperson. "Any change in the foreign tax credit treatment of the excise tax after resolution of the pending issues will be prospective and will not apply to prior excise tax paid or accrued before the date that further guidance is issued."
Pierluisi said the entire tax system in Puerto Rico needs an overhaul so that the island is not relying on a controversial and novel tax just to stay afloat. He sent a four-page letter last month to Senate Finance Committee chairman Max Baucus, D-Mont. and ranking Republican Orrin Hatch, R-Utah, asking them not to continue treating territorial corporate operations as foreign, or at least not apply a higher minimum tax rate to Puerto Rico until after the agreements with the corporations expire. Pierluisi, a fierce supporter of statehood for the island, said Puerto Rico's problems would not exist if it got equal access to federal money as states. He blamed the debt problem in part on Puerto Rico's need to make up for the federal money states get. Treasury said the island will get guidance from the administration on how to maximize the resources available to it, but no more than that.
