STUMP » Articles » Catch-Up Week: Puerto Rico on the Brink (again) » 30 April 2017, 11:27

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Catch-Up Week: Puerto Rico on the Brink (again)  


30 April 2017, 11:27

I have a huge backlog (been ill lately), so I’m going to be dropping a bunch of related links within posts.

But first, let me thank my referrers:

Thanks, y’all!


I think. There have been so many “drop dead” lines.

Anyway, here we go:

Puerto Rican governor: ‘False narrative that Monday, the world ends’

SAN JUAN — Puerto Rican Gov. Ricardo Rossello decried claims that the U.S. territory would immediately fall into a state of collapse if the government fails to reach a debt-repayment agreement with bond collectors by Monday.

“There is what I think is a false narrative that Monday, the world ends,” Rossello told the Washington Examiner during an interview at the governor’s mansion on Saturday.

“If you could get agreements with different creditors, then you could do this without going to bankruptcy,” Rossello added.

The almost five-month-old Rossello administration has proposed a new fiscal plan to address the island’s $70 billion of debt — a large amount compared to its $10 billion annual budget. The governor’s plan includes structural reforms to the island’s finances and would work to create a sustainable path to long-term debt recovery — a challenge governors have been unable to solve for the past 17 years.

Rossello threw away the original debt-restructuring plan that had been recommended by a board created to oversee the process. Instead, the 38-year-old second-generation governor submitted a new plan that would wind down Puerto Rico’s Government Development Bank’s operations over the next decade.

On the first day as a gubernatorial candidate, Rossello announced his intention to streamline the territory’s 131 agencies to 35. Since taking office, he has followed through on his promise to shrink the government of nonessential employees and departments.

Okay, maybe not.

The issue with bondholders is that you’ve already got their cash. Puerto Rico has no claim on further cash from them, and so it’s not like the deadline means that Puerto Rico doesn’t get cashflow it needs. It already grabbed that stuff.

So Puerto Rico owes, and Puerto Rico really doesn’t have the werewithal to repay these debts. And it knows it. And it would rather those debts don’t exist at all.


Cate Long (@cate_long) has been the person who has informed me the most about the Puerto Rican finance situation. Partly because I don’t understand Spanish (and it seems she does).

Let’s grab some of her recent tweets:

Oh, public employee unions gumming up the works of trying to get a bankrupt entity on its feet? Say it ain’t so!

Speaking of public employee unions:

Oh right, tomorrow is May Day. I guess I should have my eyes peeled in Hartford tomorrow for the poor-put-upon state employees marching tomorrow or something. I didn’t see anything for the UConn adjuncts, but we’re fake state employees. Except you can totally find out how much I’ve been paid as an adjunct, if you want to. I’m not sure what my supposed fringe benefits are.

Back to Cate Long:


I see the last time I wrote a PR-dedicated post was in July 2016. Let’s do a little catching up, shall we?

I will go in chrono order.

8 July 2016: Puerto Rico: An island’s exodus:

With its manufacturing base depleted and its economy shrinking, people are leaving in droves

The brain drain is acute and is having a severe effect on every aspect of Puerto Rican life. The island has lost paediatric doctors, and the island’s only air ambulance stopped services this year. Schoolteachers outside San Juan, the capital, have had to turn off the lights in the rain — a result of outdated and damaged fuseboxes.

Puerto Rico has admitted defeat in its battle to stay current on its debts and is preparing for restructuring talks with creditors. But none of the proposals by the US commonwealth or its lenders, including slashing its debts or an interest rate holiday, are likely to kick-start growth. Advisers to both sides concede that without being able to halt the economic rot — output has been in near-constant decline since 2007 — they could be back in negotiations within the next decade.

And that is before policymakers consider rapidly depleting federal funding for healthcare and the prospect of the end of a business tax that has provided roughly a fifth of the island’s revenue.

Subsidy blow

The fiscal crisis has its roots in the end of a package of US tax incentives in 2006 that had made Puerto Rico attractive for manufacturers. Introduced in 1976, the incentive brought a wave of US multinationals to the island, including Eli Lilly, Merck, Pfizer and Johnson & Johnson.

By the early 1990s more than a tenth of the jobs on the island had a direct connection to the subsidy, according to the US Government Accountability Office. But its phase-out prompted companies to slash jobs — increasing the effects of the global financial crisis.

Puerto Rico borrowed to keep services running and to try to stimulate growth. More than $28bn was added to its debt load between 2006 and 2014.

September 2016: BlackRock Says Bond Market Views Puerto Rico Board as Positive

Sean Carney calls members ‘modestly friendly’ to investors
Puerto Rico GOs trading at highest price in five weeks

The bond market is viewing a new federal control board charged with overseeing Puerto Rico’s finances as a positive for investors, according to BlackRock Inc.’s Sean Carney.
“Some of the better-secured bonds had a bit of a relief rally after the board was named,” Carney, head of municipal strategy, said Wednesday after a media presentation at the company’s headquarters in Manhattan. BlackRock manages about $124 billion of municipal debt, including Puerto Rico bonds.
President Barack Obama last week appointed seven members to the board from lists submitted by congressional leaders of both parties. The panel must curb the island’s recurring budget shortfalls, oversee any restructuring of its $70 billion of debt and address a $43 billion unfunded pension liability.
“The names that were put on the board seem to be modestly friendly for bondholders, but it’s going to be a very long and drawn out process,” Carney said. “We don’t know what questions they’re going to have to answer or what hurdles they’ll have to clear. So there’s still a lot of unknown, but I think the market appreciated a little bit of certainty in an uncertain environment.”

How’s that working out for ya, bondholders?

October 2016: Fiscal Board Imposes New Rules on Puerto Rico Amid Crisis

A new federal control board overseeing Puerto Rico’s finances amid a dire economic crisis voted on Friday to expand its powers and require indebted public agencies to be more accountable as members grilled the island’s governor for the first time about the U.S. territory’s economy.

The board said no Puerto Rico government agency can proceed with any non-routine transaction without its permission, such as issuing debt.

Massive Blackout Strikes Puerto Rico, Millions Without Power

It also demanded that six public agencies including the Government Development Bank, the island’s largest public university and its utility companies submit their own fiscal plans for the first time.

The measures drew ire from protesters who interrupted the Friday meeting in New York with yells of “Shame on you!” and “Long live a free Puerto Rico!” The gathering was streamed online.

The federal control board was created in late June after U.S. President Barack Obama signed a rescue package that in part aims to restructure some of the island’s nearly $70 billion public debt and temporarily protect it from creditor lawsuits seeking to recover millions of dollars invested in local government bonds.

Those creditors have since sued to recover their money and a judge is mulling over the case.

November 2016: List of lawsuits against Puerto Rico government related to debt moratorium.

UBS to pay close to $1 million in another Puerto Rico claim

The wirehouse is facing a raft of customer complaints tied to its sales of the commonwealth’s municipal bond funds

UBS Financial Services Inc. has been ordered to pay an arbitration award of close to $1 million to an investor who sued the firm over losses stemming from investments in UBS Puerto Rico closed-end bond funds.

The three-person arbitration panel at the Financial Industry Regulatory Authority Inc.‘s Office of Dispute Resolution awarded the investor, Ana Elisa Ciordia-Robles, $751,000 in compensatory damages, plus interest, and $206,000 in attorneys’ fees and costs, according to the arbitration award announced on Friday.

Ms. Ciordia-Robles claimed breach of fiduciary duty, negligent supervision and other allegations in the matter, according to the award.

UBS Wealth Management Americas is facing a raft of customer complaints tied to its sales of Puerto Rico municipal bond funds. Last year, it agreed to pay a combined $34 million to settle allegations from U.S. regulators tied to its supervision of sales of the funds and a former broker’s alleged fraud.

The payment was tied to charges from the Securities and Exchange Commission and the Finra. In both cases, the firm did not admit or deny charges. In 2014, UBS said claims tied to UBS Wealth Management Americas’ Puerto Rico closed-end municipal bond funds have risen to nearly $1 billion.

Mutual funds are buyer beware, doncha know.

Why Puerto Rico’s Debt Crisis Could Get Even Worse

Toa Baja, a mid-sized city in Puerto Rico, shut down last Monday after failing to pay municipal employees for several weeks. All public services have been suspended indefinitely. Could this be the future for other cities across Puerto Rico and on the U.S. mainland?

Toa Baja, with a population of about 80,000 people, reported more than $175 million in long-term debt in its fiscal year 2015 financial statements. This excludes $5.7 million in “Matured Bonds,” which were evidently in default. Meanwhile, the city’s general fund — essentially its checking account — ended the fiscal year with a negative balance of $14 million.

The shutdown is not a surprise for many of us in Puerto Rico, as Toa Baja’s finances have been deteriorating for some time. Unfortunately for Puerto Rico, there are the many other cases like that of Toa Baja going unnoticed.

Let’s begin with Ponce, the Island’s fourth largest city. According a financial index constructed by our Center for Integrity in Public Policy (CIPP), Ponce has consistently among the most financially distressed municipalities since 2010. The city has over $324 million in long-term debt and a negative general fund balance of $38 million. One might think that a city like this would change its ways, but Ponce general fund expenditures in 2015 exceeded revenues by $14 million, representing a 15 percent budget deficit for the year. Sadly, the people of Ponce were not as proactive as the people of Toa Baja: The incumbent mayor, Mayita Melendez, was just reelected with 50 percent of the vote, almost the same percentage she received in 2012.

The town of Maunabo is another good example, as it also has one of worst fiscal scores on our index. Maunabo Mayor Jorge Luis Márquez has been at the helm since 2001 and was also reelected with 50 percent of the vote in this past election. Although Maunabo’s long-term debt of $18 million might not seem like much, it is substantial relative to its small population of 11,335 people.

This is part of the problem in Puerto Rico: There are 33 municipalities with a population of less than 30,000 people. One might ask how these small municipalities finance their operations given Puerto Rico’s ongoing recession. This is where the Commonwealth government has stepped in — providing 77 percent of Maunabo’s general fund revenue in 2015. The municipality spends most of this aid on payroll. This includes the mayor’s salary of $54,000 a year, a hefty number considering that the median household income in Maunabo is only $17,866.

Municipal financial reform may not be possible within Puerto Rico’s political system. Mayors make change through the Puerto Rico Legislature very difficult. Recently, a lame duck legislator offered a bill to consolidate municipalities, but the bill did not even receive a public hearing. Although we are happy that Toa Baja got a new mayor, most cities in poor financial health were not as lucky.

Sadly, the new mayor in Toa Baja will probably not be able to save his city: It is too deeply in debt. Barring intervention from the new financial oversight board, it is likely that other cities in Puerto Rico will be closing their doors in the months and years ahead.

Arnaldo Cruz is co-founder of the Center for Integrity and Public Policy (CIPP), a think tank in Puerto Rico that recently published a Financial Health Index comparing Puerto Rico’s 78 municipalities.

Financial Health Index is here:

December 2016: Puerto Rico Ten-Year Deficit Forecast Raised to $68 Billion

(Bloomberg) — Puerto Rico is facing a budget shortfall of $67.5 billion over the next decade, almost $10 billion more than previously projected by Governor Alejandro Garcia Padilla, underscoring the need for the island to cut its debts and turn around the faltering economy.
The forecast was released Tuesday by the U.S. board that was installed after the territory’s worsening fiscal crisis led it to default on a growing share of its $70 billion debt. The seven-member panel said it plans to restart negotiations with creditors this week, seeking to secure a voluntary agreement with bondholders instead of imposing losses on them in court.
“We are doing everything we can to be correct with the creditor community,” Jose Carrion, the chair of the board, said during a press call on Tuesday. “We’re moving in that direction.”

The board also said that the government needs to cut spending because the deficit is so large that even wiping out all of its debt — an option that’s not legally available — wouldn’t be enough to balance the budget.
“This reality requires the government of Puerto Rico to step up to the plate and propose the initiatives and measures necessary for Puerto Rico to meet the enormous fiscal challenge it faces,” José Ramón González, a member of the Financial Oversight and Management Board for Puerto Rico, said in a statement.

Puerto Rico is veering toward the largest restructuring ever in the U.S. municipal-bond market after borrowing for years to pay its bills as the economy contracted. Garcia Padilla, who will leave office next month, has been defaulting on bonds to avoid deep cuts to services on an island where nearly half of the 3.5 million residents live below the poverty line.

The resolution will now largely be up to the oversight board. Members plan to work with the Governor-elect Ricardo Rossello to approve a turnaround plan by the end of January.

The revised financial projections exclude additional health-care funding from Washington and don’t assume any revenue from an excise tax on multinational businesses that’s set to expire. The levy, which U.S. corporations can take as a credit on their federal income taxes, made up 28 percent of revenue in the first five months of the 2017 fiscal year, according to the island’s Treasury Department.

Congressional Puerto Rico task force releases final recommendations

A bipartisan Congressional task force heavily influenced by Florida’s U.S. Sens. Bill Nelson and Marco Rubio released its final report Tuesday on dealing with Puerto Rico’s economic collapse offering scores of recommendations for helping the U.S. territory, its economy and it’s people.

Authorized last summer by the Puerto Rico Oversight, Management, and Economic Stability Act, or “PROMESA,” the task force has been working for six months to prepare a blueprint for the official federal agency created in that same law that will oversee the territory’s economic governance for the near future, the Puerto Rico Financial Oversight and Management Board.

Most of the recommendations could be passed by Congress and signed by the president, pushing reforms independent of the management board. Some are recommendations for the island’s commonwealth government to tackle. Others fall more in line with hopes for changes.

The congressional report is 125 pages long.

Among the task force’s recommendations:

  • Repeal an exemption in a 1940 law that otherwise provides some investment protection to companies.

  • Congress needs to enact an equitable and sustainable legislative solution to the financing of Puerto Rico’s Medicaid program early in 2017.

  • Changes also should be made to how Medicare is administered on the island, possibly changing the opt-in requirement for Puerto Ricans who want Medicare Part B.

  • Congress should expand the federal child tax credit in Puerto Rico so families there with one or two children can claim it just as families in the states do.

  • Congress also should consider other tax reforms to bring Puerto Rico’s tax laws more in line with the states.

  • Increase the amount of excise tax on Puerto Rico and Virgin Islands rum, and imported rum, that is paid back to the island’s government.

  • Congress should extend the tax deductions available in the states for qualified film, television, or live theatrical productions to Puerto Rico.

  • The government of Puerto Rico should fully reform the Puerto Rico Electric Power Authority, which the task force said “does not inspire confidence” with its high-priced and unreliable electrical production and grid.


  • And, regarding future status – statehood, independence, continuance as a U.S. Territory, the Task Force simply stated Congress should take it seriously: “If the government of Puerto Rico conducts a plebiscite authorized and funded by Public Law 113-76, the Task Force recommends that Congress analyze the result of this plebiscite with care and seriousness of purpose, and take any appropriate legislative action,” the task force concluded.

The report is here.

Puerto Rico Oversight Board Moves Forward on Debt Restructuring

WASHINGTON – Puerto Rico’s “control” board sent a letter to current Governor Alejandro García Padilla and incoming Governor Ricardo Rossello stating areas for fiscal plan review and that debt restructuring talks are moving forward. The Financial Oversight and Management Board of Puerto Rico begins conversations with creditors this week.

“It’s critical the board is moving forward with the process to restructure Puerto Rico’s debt,” said Jubilee USA Executive Director Eric LeCompte. LeCompte testified to the board in November and suggested the debt be reduced by as much as 60 percent. “I’m encouraged by statements from board members that a deep reduction of Puerto Rico’s debt is needed.”

The oversight board and debt restructuring process for the US territory are products of Congressional action this past summer. The Puerto Rico Oversight, Management and Economic Stability Act also temporarily prevents debt collection lawsuits against the heavily indebted island. Unless a formal debt restructuring process moves forward by February, the moratorium on lawsuits will expire.‎

“If talks between creditors and Puerto Rico fail to achieve a deep cut in the debt, the oversight board needs to authorize the formal court arbitrated restructuring process,” noted LeCompte. “Solving this crisis starts with restructuring the debt. Creating economic conditions for growth depends on a deep cut of the island’s debt.”

Here is the letter.

Here is the testimony.

Are U.S. Territories Now Junk? Puerto Rico Creates Ratings Rift:

The U.S. effort to help pull Puerto Rico from a fiscal crisis has two major rating agencies at odds over another U.S. territory’s debt.

Fitch Ratings cut Guam’s business-tax revenue bonds to junk last week, arguing that Puerto Rico’s rescue law, known as Promesa, “fundamentally” alters the premise used to rate debt issued by territorial governments. Even though the act doesn’t apply to the Pacific island 9,300 miles (15,080 kilometers) from Puerto Rico, analysts say it has set a precedent that could let other territories escape from obligations to bondholders.
S&P Global Ratings disagrees. It holds an A rating on the securities, reflecting the island’s ability to pay investors.

Promesa “currently only applies to Puerto Rico. The idea that it already applies to Guam, in our view, is not correct,” said Paul Dyson, an analyst with S&P. “We have no indication that Guam is going to do something similar to Promesa.”

Unlike its Caribbean counterpart, Guam’s economic outlook is stable, according to S&P. The territory, home to American Air Force and Navy bases, stands to benefit from U.S. plans to expand its military operations on the island, which is the closest U.S. territory to potential hot spots in Asia. Representatives for Donald Trump’s transition team did not respond to requests for comment on whether the president-elect will reconsider the military buildup on the island.

Guam, however, shares some of Puerto Rico’s fiscal challenges, such as unbalanced budgets, rising pension liabilities and swelling debt. It has $3.2 billion in obligations and a population of about 165,700, according to data compiled by Bloomberg.

The possibility that other territories will be given legal recourse to cut their debts — an idea that Guam officials have repeatedly rejected — has prompted some investors to reduce their positions. Daniel Solender, head of municipals at Lord Abbett & Co., which manages $20 billion of state and local securities, said he’s sold some of the island’s debt after Promesa was enacted on June 30 and doesn’t own any of its business-tax bonds, in part because of Promesa.

February 2017: Rossell- Says Oversight Board’s Austerity Risks Breaking the Law

Puerto Rico Gov. Ricardo Rosselló suggested Tuesday that the federal Oversight Board’s plans for austerity may be against federal law.

In a statement sent from the governor’s office, Rosselló’s chief of staff William Villafañe said that “The Fiscal Supervision Board officials cannot act outside of the law that created the body. If the board were to force the implementation of a fiscal plan that affects people’s essential services, it would be acting contrary to the PROMESA law.”

The complaints mark an escalation of tensions between the island government and the federal board appointed last year to oversee fiscal and economic policies as Puerto Rico tries to restructure nearly $70 billion of bonds.

“The board is warned that it must act in conformance with the law,” Villafañe continued.

“The commitment of Governor Ricardo Rosselló is to achieve economies that allow government efficiency, doing more with fewer expenses, without affecting essential services to the people and without laying off public employees,” Villafañe said.

Villafañe also criticized a statement by the board’s new interim executive director, Ramón Ruiz Comas. According to the El Vocero news web site, Ruiz Comas told WKAQ 580AM on Tuesday morning that if Rosselló didn’t present an acceptable fiscal plan by the end of February, the board would provide its own and the plan would be considered the legally valid plan.

March 2017: Puerto Rico Board Approves Plan Paying 26% of Debt Due:

The Puerto Rico Oversight Board approved a 10-year fiscal plan that will allow the payment of 26.2% of debt due.

The board’s action in New York on Monday offers less for debt payment than Gov. Ricardo Rosselló’s first proposed fiscal plan, which allocated money sufficient to pay as much as 35% of debt service.

The board is allotting $7.87 billion from the present through the end of fiscal year 2026, according to the plan. This would be 26.2% of the debt due from Puerto Rico and its public corporations and authorities covered by the plan.

Rosselló’s plan, submitted on Feb. 28, had projected the payment of $10.5 billion for debt service and possibly past due bills in the next nine years.

According to the board’s approved fiscal plan, the government has $1.3 billion in past due bills, quite apart from its defaulted-on debt. The board’s plan sets aside money for the repayment of these bills from a different pool of money to be used for debt payments.

The approval of a fiscal plan “is certainly not the end of this process,” said board member José González. “It is not, to paraphrase a famous phrase from a statesman in the 1940s, even the beginning of the end of the process. It is barely the end of the beginning of a long process to get Puerto Rico on the road to economic growth again.”

After approving the measure unanimously, the board directed Gov. Ricardo Rosselló to submit by April 30 a detailed implementation plan, a proposed fiscal 2018 budget, and a revised Puerto Rico liquidity plan, including measures to generate a $200 million reserve by June 30 above the balance found in the certified fiscal plan.

The approved plan increased the cuts to pension spending to 10% while it is expected to be structured not to push people below the poverty line.

Puerto Rico debt falls on low recovery rate, rising creditor legal battle

NEW YORK, March 20 (Reuters) – Puerto Rico’s benchmark government debt slumped on Monday after competing groups of bondholders stepped up their legal battle over who should be paid first out of a smaller-than-expected pool of cash.

The U.S. commonwealth is in the midst of trying to pull itself out of a financial quagmire that leaves it with $70 billion in debt it cannot pay without a massive restructuring.

It is also fighting a 45 percent poverty rate and islanders fleeing for the mainland in search of a better life.

Benchmark Puerto Rico general obligation (GO) debt maturing in 2035 and carrying an 8 percent coupon, traded down 1.75 points in price to 64.75 on Monday, according to Thomson Reuters data..

The debt, which has been in default since last year when the U.S. Congress passed a rescue law known as PROMESA that suspended debt payments, has dropped 8 full points in price since a new fiscal rescue plan was accepted on March 13. Defaulted debt trades more like an equity and is not typically quoted with a yield.

Investor sentiment turned more negative when so-called COFINA bondholders, whose debt is backed by sales tax revenue, asked a federal judge in San Juan on Sunday to deny the GO bondholder group’s effort to stop the island’s government from making payments on COFINA debt.

GO debt traditionally is considered senior to all other debt obligations as it is backed by the good faith and credit of a municipality.

The Financial Oversight and Management Board for Puerto Rico, established by the PROMESA law, certified a revised fiscal turnaround plan on March 13 that set aside less money for servicing debt payments than originally planned.

Puerto Rico governor, bondholders divided on PREPA deal

A congressional subcommittee on Tuesday urged Puerto Rico Governor Ricardo Rossello to finalize an $8.9 billion debt restructuring at the island’s power utility, PREPA, before a deadline to close the deal expires on Friday.

The agreement has been pending since December, 2015. In a letter to Rossello, California Republican Doug LaMalfa, who chairs the U.S. House Subcommittee on Indian, Insular and Alaska Native Affairs, said its expiration would “rattle the municipal bond market on the mainland.”

Rossello, who took office in January, has called for new terms to the deal to extract more concessions from creditors.

This has worried some investors who expected Rossello to rubber-stamp the deal after a 2016 campaign in which he stressed the need to compromise with creditors.

PREPA is seen as a bellwether for the new governor’s broader approach to restructuring $70 billion in public debt that is pushing Puerto Rico’s economy toward collapse. The island has a 45 percent poverty rate and near-insolvent public health and pension systems.

Under the current PREPA deal, bondholders would accept 15 percent reductions in repayment in exchange for higher-rated bonds backed by a new charge on customer bills.

Expiration of the deal would open the agency up to lawsuits from creditors, and cast doubt on its ability to afford supply contracts and a $455 million debt payment due on July 1.

April 2017: Puerto Rico seen sliding toward bankruptcy as deadline nears

Bankruptcy for Puerto Rico is looking ever more likely as the clock ticks down toward a May 1 deadline to restructure $70 billion in debt, ramping up uncertainty for anyone betting on returns from the island’s widely held U.S. municipal bonds.

When U.S. Congress last year passed the Puerto Rico rescue law dubbed PROMESA, it froze creditor lawsuits against the island so its federally appointed oversight board and creditors could negotiate out of court on the biggest debt restructuring in U.S. municipal history.

The freeze expires on May 1, however, and an extension by Congress is “not going to happen,” said a Republican aide to the House Committee on Natural Resources, which is in charge of territory matters.

A round of mediated talks is scheduled to begin on Thursday. But absent an agreement soon, a growing number of analysts say Puerto Rico will seek protection from creditors under PROMESA’s court-sanctioned restructuring process, akin to U.S. bankruptcy.

Forbearance deals could let negotiations continue past May 1, but a source directly involved in the talks said avoiding an eventual bankruptcy is “impossible.”

The source, who declined to be named because the talks are private, said parties have grown further apart since Governor Ricardo Rossello took office in January.

The negotiating tactics of Rossello and the board have jarred investors who expected more creditor-friendly approaches from both. The board is pushing debt repayment cuts more than double those proposed by former Governor Alejandro Garcia Padilla, a populist whose policies had already alienated creditors.

Disparate stakeholders have united to question the legality of a fiscal turnaround blueprint approved by the board, and to resist mediation efforts.

Bankruptcy is now “the most likely outcome,” said Height Securities analyst Ed Groshans, who increased loss projections for bond insurers like MBIA Inc and Assured Guaranty Ltd in an April 3 note.

Elias Sanchez, Rossello’s liaison to the board, said the government holds out hope for at least partial compromise. “We feel very confident we can strike some deals by May 1, maybe not all of them,” Sanchez said.

Puerto Rico is trying to escape a crisis marked by a 45 percent poverty rate and rampant emigration.

Since bankruptcy gives debtors the ability to impose payment cuts over creditor objections, it is seen as a negative for bond markets, Jacoby said.

Trading prices of Puerto Rico’s benchmark 2035 general obligation bonds have reflected that concern, falling precipitously in recent weeks.

But risk cuts both ways and Sanchez said the government wants to avoid bankruptcy as much as creditors.

Putting Puerto Rico’s fate in the unpredictable hands of a judge “could go really bad for the government too,” he said.

Commentary Turning point in Puerto Rico’s debt crisis bears close watching for mainland America:

When Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) last summer, it created a roadmap to address the island’s $70 billion debt crisis and revitalize its economy. The impact of the law, which was intensely debated among policymakers inside the Beltway and the financial community on Wall Street, now bears watching for millions of Americans living in debt-ridden municipalities and states across the country.

The reality is that aging populations, mounting healthcare costs and significant pension obligations are placing many state and local officials in unenviable positions. Similar to the dichotomy that plagued Puerto Rican leaders for a decade, the need to cut expenses and limit indebtedness runs counter to mainland policymakers’ desires to keep taxes low and maintain popular entitlements.

In the case of Puerto Rico, PROMESA provides a blueprint to navigate an orderly restructuring. The bill put into place a temporary freeze on creditor lawsuits and required Governor Ricardo Roselló to submit a fiscal plan to the bi-partisan federal oversight board that was formed in the fall. It also established a process to convene voluntary negotiations amongst creditors before proceeding to a court-supervised restructuring phase provided for under Title III of the law.

Puerto Rico’s largest debt issuance, known by the Spanish acronym COFINA, is a secured bond with a constitutionally-protected lien on a dedicated portion of the island’s sales tax. COFINA was the original “rescue bond” created through a bi-partisan act of the Puerto Rico Legislative Assembly in 2006. The island used this tax-backed secured borrowing solution to avert its last fiscal crisis—and it continues to work today even as unsecured debts have entered payment default and related claims have mounted.

Over the next month, Puerto Rico will traverse a critical stretch on its road to recovery as willing creditor groups conclude mediation and voluntary negotiations. Although I hope the discussions ultimately spur constructive outcomes, the Rosello Administration and Oversight Board need to act decisively if talks do not spur immediate deals.

A raft of aggressive creditor lawsuits is set to occur when PROMESA’s litigation freeze ends on May 1. Absent an orderly Title III restructuring at that time, the Governor and Oversight Board will be rolling the dice on disruptions that may compound the island’s economic and social challenges.

Title III of PROMESA, which is modeled after Chapter 9 of the Bankruptcy Code and nearly a century of legal precedent, provides a framework for protecting Puerto Rico’s citizens while also respecting the legitimate rights and priorities of creditors. For example, the recent Chapter 9 restructuring in Detroit sought reasonable accommodations for vulnerable pensioners and respected secured creditors’ rights.

Preserving the sanctity of secured debt is established and sound public policy. It remains the best vehicle for efficient underwriting and low-cost municipal borrowing. Most importantly, securitizations are particularly beneficial for stressed municipalities that need to rely on statutory liens and debt issuances secured by collateral to provide bondholders confidence of repayment.

Matt Rodrigue
Matt Rodrigue is a Managing Director of Miller Buckfire & Company, which serves as financial advisor to a coalition of asset managers and retail investors holding more than $2.5 billion of COFINA senior bonds.

Puerto Rico Emerges as Sticking Point in Government Funding Showdown

President Trump’s tweets on the U.S. territory fan GOP divisions as bankruptcy looms

President Donald Trump’s criticism of a “bailout” for Puerto Rico is disrupting a bipartisan consensus on Capitol Hill to send the struggling U.S. territory more federal Medicaid dollars, according to people familiar with the matter.

The president has criticized efforts to funnel additional Medicaid dollars to Puerto Rico, saying in a Wednesday evening Twitter post that congressional Democrats “are trying to bail out insurance companies from disastrous #Obamacare, and Puerto Rico with your tax dollars.”

Securing additional Medicaid dollars from Washington has been a priority for Puerto Rico as it sits on the verge of an unprecedented court-supervised bankruptcy. Mr. Trump weighed in after Democratic and GOP leadership reached an agreement to provide incremental assistance to Puerto Rico ahead of an impending health-care funding cliff on the island, according to people familiar with the matter.

Puerto Rico is projected to exhaust a $6.4 billion Medicaid grant before the end of the year and has been struggling without replacement funding in place to complete annual renewals of its contracts with managed-care organizations, according to the Department of Health and Human Services. Almost half of Puerto Rico residents are covered by its Medicaid program, which Washington funds on a different formula than U.S. states.
HHS this week estimated that Puerto Rico needs $900 million to fund its Medicaid program through mid-2018. But Gov. Ricardo Rossello’s lobbying for federal subsidies on Capitol Hill has drawn the ire of Puerto Rico creditors who are being asked in debt restructuring negotiations to take large write-downs on $70 billion in municipal bonds.

While Congress negotiates the continuing resolution and omnibus spending package behind closed doors, Puerto Rico’s creditors are up against their own deadline. A legal shield protecting the territory from lawsuits over debt defaults is set to expire on Monday, and key creditor groups haven’t yet signed forbearance agreements to postpone litigation so confidential talks can continue, according to people familiar with the matter.

Without standstill agreements in place, the federal board overseeing Puerto Rico’s finances has the authority starting Tuesday to invoke a quasi-bankruptcy proceeding known as Title III. That process includes mechanisms to bind creditors to unfavorable repayment terms.

Dissatisfaction with the board has grown among Republican lawmakers, several of whom have questioned its 10-year fiscal blueprint, which earmarks $800 million a year to pay creditors, or roughly a quarter of what they are owed under existing debt contracts.

With Monday’s bankruptcy deadline looming and the board slated to meet on Friday in New York, Mr. Bhatia said creditors are making a last-ditch lobbying push to delay or restrict the board’s power to invoke Title III as a condition of the Medicaid assistance.

One idea gaining traction in the Freedom Caucus is to require Government Accountability Office approval for any bankruptcy petition, according to people familiar with the matter. Backers of Title III say it was carefully negotiated when Congress passed a federal rescue law for Puerto Rico last year and shouldn’t be revised now.

“The governor should come out strongly and say, no way,” Mr. Bhatia said. “I’m making sure that whoever is behind this, we expose them.”

Oh right. Trump tweeted this:

Back to the stories:

Trump: Dems want to shut down the government to bail out Puerto Rico

President Donald Trump accused Democrats Thursday morning of wanting to shutdown the government in order to bail out Puerto Rico and “give billions” to insurance companies for Obamacare.

“The Democrats want to shut government if we don’t bail out Puerto Rico and give billions to their insurance companies for OCare failure. NO!” Trump tweeted Thursday.

His early morning tweet follows a similar post from Wednesday night in which the president also tried to link bailing out insurance companies and Puerto Rico with taxpayer money.

“Democrats are trying to bail out insurance companies from disastrous #ObamaCare, and Puerto Rico with your tax dollars. Sad!” he wrote Wednesday night.

According to news reports, Democrats have been pushing to help Puerto Rico cover a Medicaid shortfall. The U.S. territory is currently facing a multi-billion dollar debt crisis.

House Republicans Wednesday night released a one-week stopgap spending bill that would give lawmakers another week to hash out a budget deal and avoid a shutdown.

So that’s all the debt stories…


But wait – I mainly elided over the pension situation in Puerto Rico. The biggest problem is that the PR pensions are essentially pay-as-you-go.

When you’ve got a de facto bankrupt sponsor of one’s pay-as-you-go pensions, well, it’s a very tough place to be. At least the Detroit retirees had a pension fund to support most of their pensions. The PR pensioners have essentially nothing.

Again, in chrono order:

July 2016: Detroit, D.C. offer clues to the future of Puerto Rico’s public pension funds:

The fiscal oversight board created by the Puerto Rico Oversight, Management and Economic Stability Act signed by President Barack Obama on June 30 will have exclusive authority to enact and enforce fiscal reforms to reverse a decade of budget deficits and unmanageable debt, with the ultimate goal being better access to capital markets. The board was needed, Mr. Obama said, to avoid “an escalating series of lawsuits between creditors and against Puerto Rico,” and an even deeper economic and humanitarian crisis.

That crisis is already there for the 163,000 current retirees and 167,000 workers — nearly 20% of the commonwealth’s total workforce — who without access to Social Security are depending on their government pensions. “Puerto Rico’s pension systems are at serious risk,” the U.S. Treasury Department warned in October.

The new law calls for the control board to address “adequate funding” for pensions, but the first order of business is conducting an independent analysis of a pension system criticized for unrealistically generous benefits and plagued by conflicting or missing financial information.

The latest financial statement, released in 2016 by KPMG for the Puerto Rico Employees’ Retirement System, Hato Rey, showed assets of $3.4 billion and a funded ratio of 0.27%, as of June 30, 2014. Under Governmental Accounting Standards Board rules for underfunded plans that require more conservative discount rates, that meant a net pension liability of $30 billion. Adding in the pension funds for teachers and the judiciary bumps the net pension liability up to $33.7 billion.

After nearly a decade of missed contributions, the stressed pension system is now using investment income for operating cash, while employer contributions are being used to pay debt service on some bonds that were supposed to help address years of missed contributions. According to the U.S. Treasury, pension administrators “are being forced to sell pension assets to pay current benefits,” and once those assets are depleted, payments will have to come from the commonwealth’s already overtaxed general fund, which faces a $28 billion fiscal shortfall over the next five years. “It is unclear how the commonwealth will find the resources to deliver promised pension benefits, make full payment on its debt, and operate essential public services,” the Treasury Department said.

Various reports prepared for U.S. and commonwealth officials have all three pension funds completely out of money by 2019 or sooner. According to a November 2015 commonwealth financial report, the system’s assets were exhausted by fiscal 2015.

Puerto Rico’s seven-member control board will be appointed by Mr. Obama by Sept. 15, with six members recommended by House and Senate majority and minority leaders. Once installed, the board will have the authority to promote voluntary restructuring agreements with investors holding an estimated $70 billion in as many as two dozen types of bonds, and can adjust debts “in the best interests of creditors.”

Lawsuits filed by those creditors are now on hold for six months.

Control board members will have their hands full sorting out creditor claims against all the different bond issuers. And with Puerto Rico’s July 1 default on $1 billion in general obligation bonds, “it makes it much harder to untangle,” said Greg Clark, head of municipal research for Debtwire Analytics in New York. “The revenue picture in Puerto Rico is harder to predict … and you have so many different parties. D.C. was a much easier situation for a control board to get its arms around,” said Mr. Clark, who adds that the control board’s success will depend on cooperation from the Puerto Rican government, which will change after November elections. “I would expect the control board to prevail, but (creditors) are still going to get a haircut,” he said.

February 2017: In Puerto Rico, pensions’ decline pits retirees against lenders

As Puerto Rico attempts to sort out its tangled financial web, retirees may face bigger cuts than those in past U.S. municipal insolvencies, due in part to an unconventional debt structure that pits pensioners against the very lenders whose money was supposed to sustain them.

The U.S. territory is doing all it can to present itself as a reliable place to invest, but resolving the pensions issue will require a careful balance.

Benefit structures are widely seen as unsustainable, but draconian cuts to pensioners could deepen the population’s reliance on government subsidies and compound rampant emigration.

“Many of our retirees are already under the poverty line,” Puerto Rico Governor Ricardo Rossello told Reuters in an interview this past week, saying any pension cuts would attempt to protect the poorest beneficiaries. “Impacting them would be to cast them out and challenge their livelihood.”

The tropical island, struggling with a 45 percent poverty rate and unemployment more than twice the U.S. national average, is working to restructure nearly $70 billion in debt. Public pensions, which owe $45 billion in benefits, are also virtually insolvent after generations of lawmakers ignored growing funding gaps or botched attempts to close them.

Now the pensions have almost no cash and a nearly 100 percent funding shortfall that is thought to be the largest ever for comparably-sized U.S. public pensions. Paying pension benefits out of the island’s general fund, on a pay-as-you-go basis, could cost Puerto Rico $1.5 billion a year.


But Puerto Rico’s pensioners will not take deep cuts to benefits lying down. They have formed a negotiating committee, advised by Robert Gordon, an attorney who advised retirees in Detroit’s landmark 2013 bankruptcy, and Hector Mayol, the former administrator of Puerto Rico’s pensions and also a lawyer.

But their prospects are dimmer than retirees in Detroit, whose benefit cuts were generally limited to a few percentage points, or the elimination of cost of living adjustments.

Puerto Rico’s “unusual circumstances mean that it will not conform exactly” to recent public bankruptcies, in which “judges reduced creditor claims far more than amounts owed to pensioners,” Moody’s Investors Service wrote earlier this month.

The sheer size of Puerto Rico’s pension gap is one such unusual circumstance, while the peculiar debt structure that pits some retirees against the pension’s own lenders is another.

Puerto Rico’s largest public pension, known as the Employee Retirement System (ERS), covers nearly 100,000 retirees and is slated to run out of cash this year. In addition to paying retiree benefits, ERS is on the hook for $3.1 billion to repay bonds it issued in 2008 – specifically to keep the pension afloat.

It’s More Important To Get Puerto Rican Pension Reform Right Than To Do It Fast

The drumbeat for an immediate and permanent solution to Puerto Rico’s pension crisis has been growing louder since Congress passed PROMESA last year, and it is underscored by recent developments on the island. Earlier this year, the Oversight Board put out a Request for Proposals for a “pension and retirement consultant,” the hiring process being run by former California Department of Finance chief Ana Matosantos and American Enterprise Institute pension expert Andrew Biggs. That consultant’s mandate is, among other things, to produce “a review of the existing benefits and their sustainability.”

That request came one day after Elias Sanchez, Puerto Rico Governor Ricky Rossello’s representative to the Oversight Board, announced a “major restructuring” of government spending that would allow his administration to continue to pay into pension systems, citing the need to provide for their 180,000 pensioners. Part of that restructuring appears to be already underway in the form of recently introduced “single employer” legislation on the island. The bill has been lauded by many as a step in the right direction, although there is a risk that it could push billions in pension liabilities of municipalities and public corporations to the Commonwealth’s already overburdened General Fund if not done properly.

However, while Puerto Rico’s pension system is a mess and needs major changes to make it solvent, we would all do well to slow down and take a breath. As we outlined in a previous piece, actuaries estimate that the system will be more or less cash flow neutral for the next few years, and there is enough money in the system, together with contemplated current year contributions, to keep pensions running on schedule for several more years. The government should take heed to avoid letting a crisis mentality force it to piece together a substandard reform plan in haste that fails to make structural reforms to its pension plan.

Governments with fiscal problems often resist making significant pension reform, since those affected complain quite loudly. For instance, despite a court ruling that cities could alter their pension obligations in Chapter 9 during Stockton, California’s protracted bankruptcy battle, several bankrupt California cities, including Stockton, Vallejo, and San Bernardino, ultimately chose to forego reform, fearing a ferocious and costly fight from the California Public Employees Retirement System. In his ruling approving Stockton’s eventual exit from bankruptcy protection, the same judge called CalPERS a “bully” with an “iron fist.”

Puerto Rico Oversight Board member David Skeel decried the Detroit approach in an op-ed he penned for the Wall Street Journal last year, writing that “the rule of law took a beating in the Detroit bankruptcy. Holders of the city’s general-obligation bonds, which had the same priority as pensions, got stiffed, receiving roughly 41% of what they were owed. Pensioners got at least 60%.”

Despite the unambiguous failure of Detroit to protect creditors’ rights and re-establish market access, a few concessions extracted from pensioners by Detroit warrant further scrutiny. The City obtained court approval for a small reduction in base benefits as well as modest reductions in system administered benefits, including cost-of-living-adjustments. And in yet another potential blueprint for Puerto Rico, active employees received a different deal than the then current retirees. However, the city continues to struggle financially because it punted on numerous other difficult decisions, leaving Detroit with the need to address its impending pension funding cliff.

In contrast, the Northern Mariana Islands, a U.S. Territory with a population of 55,000 afflicted with its own pension woes, developed more creative solutions that are worth examining. After unsuccessfully filing for Chapter 11, the pension system reached a class action settlement with the labor unions that shifted obligations into a VEBA-type structure at 75% of the current benefits, with benefits ratcheting up under certain fiscal conditions.

While Puerto Rico has access to a different restructuring regime through PROMESA and would not have to work within these exact frameworks, the lessons from California, Detroit and the Northern Mariana Islands should sow the sort of creative thinking that Gov. Rossello and the Board need to engage in if they hope to secure Puerto Rico’s financial future and keep its pensions solvent in the long run.

I don’t disagree that this needs to be done right — but saying they need to get creative like Detroit … that worked because Detroit had an art museum it could hold hostage to extract extra money out of private deep pockets. The Northern Marianas Islands situation is more apt — they essentially ran out of cash in the pension funds, so the VEBA solution was not necessarily a bad one.

March 2017: Board to Puerto Rico: Cut pension system, impose furloughs:

A federal control board on Monday said Puerto Rico’s government needs to cut its public pension system by 10 percent, furlough tens of thousands of its workers and eliminate Christmas bonuses if it cannot generate other types of savings amid a nearly decade-long recession.

The seven-member board created by Congress last year to oversee the U.S. territory’s finances voted unanimously to add those measures to a 10-year fiscal plan presented by the island’s governor that the panel approved Monday. The measures will be implemented if the government fails to find other ways to cut spending and increase revenue.

Board members said the spending cuts will be necessary so the government will have enough funds to pay for essential services such as education, health and public safety.

“Puerto Rico is about to capsize,” said board member David Skeel. “The island is overwhelmed by debt. Puerto Rico is in real danger of running out of money for even the most basic essential services.”

Skeel and other board members who met in New York said the plan calls for everyone on the U.S. territory of 3.4 million people to make sacrifices.

Gov. Ricardo Rossello, whose government is struggling with nearly $70 billion in public debt that it is seeking to restructure, had resisted some of the board’s cuts, arguing they would fall too heavily on many living in Puerto Rico. He told The Associated Press that he was pleased with the plan and is confident his administration will find ways to head off the furloughs and the elimination of Christmas bonuses.

“That’s my goal,” he said by phone. “We’re taking bold steps to making sure the economy gets jumpstarted. We’re very much well on our way.”

Elias Sanchez, the governor’s representative to the board, told the AP that the territory’s government hopes to avoid at least the first round of furloughs by proving it will have $200 million in cash reserves by June 30.

Sanchez praised the board’s approval, saying: “It’s a well thought-out plan that doesn’t hide the fact that we face great challenges.”

However, the board and Puerto Rico’s government still disagree about cuts to the island’s public pension system that would hit hundreds of thousands of government workers. The system faces $50 billion in liabilities and is expected to run out of money by year’s end. Board members said they will protect the most vulnerable retirees and ensure no one is pushed into poverty.

The board will make recommendations by next month on what kind of pension changes will be implemented, but it said that the system will switch to a pay-as-you-go funding method and that teachers and public safety workers will be enrolled in Social Security by 2020. Currently, teachers and police officers in Puerto Rico do not receive Social Security.

April 2017: Puerto Rico union sues to block pension cuts

One of Puerto Rico’s largest unions sued on Wednesday to block a federal control board’s austerity plan that would slash pensions and other spending by the U.S. territory.

The suit filed by the United Public Servants union said the plan violates a law protecting the pension system as well as constitutional guarantees involving contracts between the government and retirees. The union represents more than 10,000 government workers and 2,300 retired ones.

“(Puerto Rico’s) current and future retirees are not rich and will not become rich because of their pensions,” the lawsuit states. “To the contrary, many of them will suffer grievous harm from the cuts promised by the final fiscal plan.”

The union accused the board of creating what it called “an unauthorized, dangerous and uncertain path” for Puerto Rico’s future as the island struggles to emerge from a decade-long economic crisis.

A spokesman for the board overseeing Puerto Rico’s finances declined to comment.

The board recently approved an austerity plan that would cut benefits for retirees who receive more than $2,000 a month. If Puerto Rico’s government doesn’t meet several financial goals imposed by the board in upcoming months, the island’s public pension system could be cut by 10 percent. Economists have warned that thousands of retirees would be pushed below the federal poverty level if that measure is implemented.

The system is underfunded by more than $40 billion and is expected to run out of money this year.

“Clearly a 10 percent cut would be very painful,” Brenda Vargas, the union’s communication director, said in a phone interview. “The majority are still paying mortgages. They also pay a lot for their medications. And not all of them have Social Security.”

Teachers and police officers in Puerto Rico do not collect Social Security and depend solely on the island’s pension system.

Vargas said 75 percent of unionized retirees collect only $500 to $700 a month in pension, and that many collect even less than because they are still paying off loans.

Yes, being in debt one’s self, and having most of your money also coming from a huge debtor is not a recipe for financial stability.

It’s a tough lesson, but there ya go.

So I’m pretty much caught up with Puerto Rico for now. The ugliness is still being worked out, and I assume there’s going to be a lot of yelling tomorrow.

But what is actually new?

Compilation of Puerto Rico posts

The State of the States: a Compilation

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