Puerto Rico Hangs Itself

"Puerto Rico’s financial condition is far worse than any U.S. state’s, and a default – though unlikely in the immediate future – is a possibility over the next few years."

"Puerto Rico is unique in its extensive use of public corporations to deliver public services. It directly and indirectly manages 48 public benefit corporations. This governance structure has tended to limit transparency and fiscal accountability in its public sector."

"The Puerto Rican economy entered recession in late 2006, and it has yet to emerge."

"...(M)edian household incomes in Puerto Rico remain at $15,000, and only 35% of Puerto Ricans are employed."

"Poor financial management has contributed to the length and depth of Puerto Rico’s recession. The Commonwealth is burdened by large annual deficits, a high debt burden, opaque financial practices, and severely underfunded pension plans, among other problems."

"Unlike healthy municipal issuers, the Commonwealth requires market access to meet payroll and other obligations."

"Annual deficit financing has caused the island’s debt-to-GDP ratio to rise. It is now 90%, compared to 57% in 2001. In fiscal years 2011 and 2012, the Commonwealth’s debt load grew while the economy contracted."

"Puerto Rico’s debt structure is less flexible than other municipal issuers’. The Commonwealth repays only 21% of its debt within 10 years."

"Puerto Rico consistently adopts aggressive economic and financial forecasts. The Government Development Bank has missed economic growth forecasts for three consecutive years. Politicians continue to tout progress on relatively weak financial and economic data."

"The Commonwealth’s major public corporations have significant and opaque financial relationships to each other and to the Commonwealth. These intra-governmental capital flows represent a significant portion of the island’s financial activities, and they are beginning to impact the island’s larger issuers. Last year, almost 28% of PREPA’s (Puerto Rico Electric Power Authority’s) unpaid bills were owed by delinquent public sector organizations."

"The Commonwealth’s vital Government Development Bank (GDB) is under stress. Roughly 35% of the GDB’s assets comprise loans to the Commonwealth and its public entities, and most of these loans are paid late. While the bank’s liquidity is ostensibly strong, it is weakly monitored. The GDB is unregulated by the Federal Reserve or Federal Deposit Insurance Corporation."

"The GDB’s loan book has become a bit politicized. In recent years, the GDB has entered into “fiscal oversight agreements” with several of the island’s large public corporations. These agreements require the public corporations to implement expense reductions, rate hikes, or submit to increased oversight to ensure the GDB is repaid. The bank’s intervention into areas traditionally reserved for policymakers increases its repayment risk."

"Puerto Rico’s public pension funds were 14% funded in FY 2010, and a staggering 22% of the funds’ assets include loans to members of the fund. The Employees’ Retirement System may deplete its net assets by FY 2014 despite recent reforms. The Commonwealth’s pension funding shortfall is far worse than any U.S. state."

"Conclusion: Although the threat is not imminent and the risk remains slim, Breckinridge believes the possibility of a default by Puerto Rico is sufficient to warrant the attention of municipal investors."

"We end with a graph that illustrates just how different Puerto Rico is compared a distressed U.S. state: Illinois. Illinois compares very favorably even though it faces several years of large structural deficits and large pension and retiree healthcare liabilities."

Taken from the Breckinridge White Paper, "Puerto Rico's Challenge," published in March on this year. All emphasis Mine.

The bad news is all Ours.



The Jenius Has Spoken.


Note: Due to a website change, the URLs for the images used had to be reloaded; 16 Sep 2012.