Puerto Rico Eyes Mass School Closures amid Economic Crisis

Francisco Oller Elementary School, once filled with children, is now for sale for US$1.8 million. It’s not a private school, but a state establishment, and has been closed since 2010: when it was shut down due to a lack of students, although it briefly reopened its doors in 2012 as part of a new government plan.+

Francisco Oller was a well-known Puerto Rican impressionist painter, and the school is located in a commuter city close to the capital, San Juan. It’s one of over 150 schools that have closed in the last five years due to the worsening economic crisis in the US territory, which has prompted thousands of Puerto Ricans to move to the United States.+

Emigration is leaving Puerto Rico without primary school students. (80grados.net)

The island’s Education Secretary Rafael Román justified the school closures earlier in May, saying that 45,000 of his fellow citizens have left the island for the US mainland, and that birth rates are falling.+

But it’s not only the lack of children that’s behind the closure of public schools: massive budget cuts are also taking place, meaning that thousands of children are now having to travel dozens of kilometers to attend classes.+

Furthermore, the surroundings of schools that have closed are suffering an additional impact to that already caused by recession. Neighbors of Francisco Oller, for example, report that the school has been vandalized, become a center for drug sales, and that insecurity has increased in the area. Its windows have been broken and its walls are covered with graffiti.+

According to the Puerto Rican government (which faces technical closure at the beginning of 2016 if it can’t secure funding to sustain itself), 600 of the island’s schools may have to close within the next five years, generating savings of US$249 million. School matriculation has fallen by 42 percent since 1985, and an additional decrease of 22 percent is expected within the next five years, according to a report by the Boston Consulting Group, contracted by the Puerto Rican government to reconstruct the island’s education system.+

The bleak outlook for Puerto Rican education is completed by the contracting of hundreds to thousands of the island’s educators by employers on the US mainland, who prize their bilingual abilities, according to Puerto Rico teachers unions.+

No offers have yet been made for Francisco Oller, despite advertisements by the administering property agency highlighting its potential as a shopping or medical center.

Class Enrollment Plummets as Educators Head to US Mainland

Puerto Rico Eyes Mass School Closures amid Economic Crisis

Puerto Rico markets itself as low-tax, Spanish-speaking U.S. territory

To potential investors from Latin America and Spain, Puerto Rico played its trump card Monday by marketing itself as a territory regulated by United States legislation and judiciary rulings, but almost tax-free and where business is done in Spanish.

"Whoever invests in Puerto Rico knows that he's doing so on United States territory, regulated by its federal laws and protected by its judicial system, but with the advantage of enormous tax exemptions," Economic Development Secretary Alberto Baco told Efe on Monday.

Baco was in charge of welcoming business owners and executives from Latin America and Spain who are meeting this week in San Juan at the Puerto Rico Investment Summit, organized by the island's government to attract the foreign capital it needs to emerge from the recession it has suffered for almost a decade.

However, the word "recession" was never mentioned in the addresses, nor was the threat of a possible government shut-down in three months if it doesn't round up new sources of revenue or postpone the payment of liabilities brought on by the debt.

"It's not something we have to mention. The investors meeting here are aware of it and many have suffered the same fiscal problems in their own countries. They're more interested in learning about our tax breaks and the opportunities we offer as a point of entry into the U.S. and Latin American markets," Baco told Efe.

Much was said in the presentations about the high educational level of the Puerto Rican population and about how it is bilingual and bicultural.

"American companies sign up our engineers before they finish their studies," Baco said, but without mentioning the problem caused by so many university graduates and professionals moving to the United States.

What was most discussed, on the other hand, were the aggressive tax incentives offered by the island to attract capital, which are decidedly bearing fruit, including among Chinese investors, the director of the Tourism Company, Ingrid Rivera, told Efe.

"Soon we will have the first EB-5 (immigrant investor) hotel," she said with regard to the Four Seasons being planned thanks to an investment obtained through that program, which awards residency permits in the United States and Puerto Rico to those who invest the required minimum amount in job creation.

She said that a group of Chinese investors, "many of them interesting in bringing their kids to study in the United States," has already committed to investing $35 million.

"In Puerto Rico the two Americas (United States and Latin America) meet. Here we know how to eliminate many of the roadblocks that companies run into when they try to start up in one or the other," said Gov. Alejandro Garcia Padilla, who also addressed those attending the Puerto Rico Investment Summit. EFE

By Mar Gonzalo

Puerto Rico markets itself as low-tax, Spanish-speaking U.S. territory

The federal government must act now to save Puerto Rico’s healthcare system | TheHill

There is a healthcare crisis facing over 3.5 million Americans, and you probably haven’t heard anything about it. Why? Because these 3.5 million Americans live on the small island of Puerto Rico, and sadly, Washington doesn’t seem to care.

Puerto Ricans are U.S. citizens, but although we pay the same Medicare and Social Security tax as mainland residents, we get dramatically less federal funding for healthcare. This chronic underfunding is causing the Island’s healthcare system to collapse, jeopardizing care for millions of U.S. citizens. And because the healthcare industry represents 20 percent of Puerto Rico’s GDP, this collapse will have a catastrophic effect on Puerto Rico’s already fragile economy.

Sixty percent of the Island’s population - over 2 million patients -– receives their care through Medicare, Medicare Advantage or Medicaid. The inequity in federal funding for these programs is startling. Puerto Rico’s Medicaid reimbursement rate is 70 percent lower than any other mainland state. The Medicare Advantage (MA) program is paid just 60 percent of the average rate in the states, despite having the highest enrollment percentage in the U.S.

As if the situation wasn’t dire enough, this funding gap is due to get even worse when the Center for Medicaid and Medicare Services (CMS) implements an 11 percent cut to Puerto Rico’s MA premiums next month. If you doubt that discrimination isn’t at play, consider this: while CMS approved these drastic cuts for Puerto Ricans, it increased rates to the 50 mainland states by three percent.

Crisis is not too strong a word for the situation facing the Island. Puerto Rico’s Medicare Advantage program will no longer be viable next year if funding to insurers isn’t restored by June 1 - less than three weeks from now.  If Washington refuses to act, Puerto Rico will suffer the immediate loss of half a billion dollars to the healthcare system: hospitals will lose $150 million, doctors will lose $115 million, pharmaceutical companies will lose $65 million and Mi Salud, the Island’s Medicaid program, will suffer a loss of $400-800 million. But these aren’t just numbers, these cuts will result in a loss of services and access to care, ultimately putting real people – mothers, fathers and children - who need help at further risk. That’s bad for our Island and it’s bad for America.

What’s worse is that this is just the first domino, as the consequences of grossly inadequate federal funding isn’t confined to the MA plans. Mi Salud’s disastrously low reimbursement rates are being temporarily supplemented by a federal grant that will soon expire. This program is already experiencing severe cash flow problems and, without intervention, the government of Puerto Rico will have to come up with $1.8 billion in 2018 or dramatically reduce eligibility and services, putting healthcare out of reach for hundreds of thousands of families. This is utterly unacceptable and must be fixed.

It’s time to put an end to this blatant discrimination. Puerto Ricans are not asking for special treatment, we are asking for equal treatment. We pay the same Medicare and Social Security taxes as those on the mainland. Access to quality healthcare is not a privilege; it is a right for every American -- no matter where you live. We are asking to be treated with the fairness and dignity that all U.S. citizens deserve.

Rivera is a nationally recognized healthcare leader and serves as the chairman of the Puerto Rico Healthcare Crisis Coalition.

By Dennis Rivera

The federal government must act now to save Puerto Rico’s healthcare system

Puerto Rico's Debt Woes Play Into Statehood Debate

Puerto Rico is racing against the clock to resolve a massive debt crisis that has left its government in a lurch. As leaders scrape for a way out, the island is at an economic and political crossroads that also looks to intensify the familiar, heated debate over its political status and intermittent push for U.S. statehood.

Puerto Rico’s finance officials warned in April the government could run out of funding and face a shutdown in three months unless it secures a financing deal. Atop outstanding debt of $73 billion -- $9 billion of which is owed by the government utility company -- the island is grappling with a public-pension shortfall and a 13 percent unemployment rate. And last month, the Standard & Poor’s credit-rating agency downgraded its bond rating to CCC+ from B. Gov. Alejandro Garcia Padilla has attempted to push through unpopular tax reforms, while the U.S. Congress is weighing options it hopes will help the commonwealth stave off default.

Some statehood supporters have tied the island’s dire economic straits to its murky political status as a commonwealth of the U.S. Puerto Rican municipalities and public agencies don’t have access to the same protections similar entities in the states are provided under Chapter 9 of the U.S. Bankruptcy Code, which has struck a sour note among statehood proponents who already decry Puerto Rico’s lack of representation in the U.S. Pedro Pierluisi, Puerto Rico’s nonvoting representative in Congress, introduced a bill this year to authorize some government-owned companies on the island to restructure their debts under Chapter 9 -- in addition to reintroducing another bill for Puerto Rican statehood.

In a letter to the New Yorker last week, Pierluisi said Puerto Rico’s political status was the “root cause” of the economic problems that have compounded over the past decade. “Each year, Puerto Rico loses out on billions of dollars in federal spending and tax credits that Congress sends to the states. To compensate for the shortfall in federal funding, Puerto Rico’s government has borrowed heavily in the bond market,” he wrote.

Jose Aponte-Hernandez, former speaker of Puerto Rico’s House of Representatives, penned an op-ed in the Hill newspaper in March that linked the economic situation with a call for statehood. “Because of the uncertainty of what would happen to our island and the restriction placed upon her by what can only be described as a ‘colonial government,’ Puerto Rico has not been able to promote itself, to use its resources to better the quality of life of its residents,” he wrote.

Padilla opposes statehood, and he has said before it would turn the island into a “Latin American ghetto.” As the territory hurtles toward a $630 million bond-payment deadline in July, Padilla’s been focused on pushing through an overhaul of the tax system -- and facing plenty of resistance from the territory’s House of Representatives, including some in his own party.

But the long-standing stalemate between supporters of the status quo and supporters of statehood isn’t about to shift anytime soon, said Amilcar Antonio Barreto, an associate professor of political science at Northeastern University who has specialized in Puerto Rican politics. The current debt crisis will only dim the prospects for the pro-statehood camp, he said.

“An economic crisis of this magnitude makes it a lot easier for those who oppose statehood to just wash their hands of the whole thing,” he said, noting that Congress hasn’t engaged the statehood idea seriously for decades. “For better or worse, Puerto Rico is going to muddle along as a commonwealth with no consensus and no change in status, and Congress can breathe a sigh of relief.”

Statehood supporters have long championed the cause as a matter of civil rights, saying that Puerto Ricans deserve the same representation in the U.S. political system and the same access to federal programs that states do. Opponents say the financial burden of statehood -- including billions of dollars in federal taxes -- would be a serious economic blow to the island.

In 2012, Puerto Rico held a referendum on its political status, with 54 percent of respondents showing support for some change from its existing commonwealth status. But it drew a polarized response, as critics said the secondary question of what alternative status respondents would favor didn’t include any options for an “enhanced commonwealth,” which politicians such as Padilla favor. About 24 percent of respondents left their ballots blank for that question, leaving an inconclusive result on where the island stands on statehood. Last year, the federal government granted Puerto Rico $2.5 million to hold another plebiscite on the issue, which Padilla said could happen by 2016.

Meanwhile, the political calculus could shift in a different way as thousands of Puerto Ricans have migrated from the island in recent years and continue to do so. The Pew Research Center projects the population of Puerto Rico will decline from its current 3.7 million to about 3 million by 2050, with Florida -- frequently a key swing state in U.S. presidential elections -- as the top destination for those who depart. While Puerto Ricans can’t vote for president from the island, they are perfectly able to do so once they establish residency in a U.S. state, and their swelling presence in Florida is drawing some predictions that the Puerto Ricans’ influence in the state could rival that of Cubans.

It’s unclear whether the mainland migration will shift the statehood debate as it draws closer to Washington’s ears. But the presidential candidates are keeping an eye on Puerto Ricans’ growing clout in Florida. Former Florida Gov. Jeb Bush, who hasn’t yet officially announced his candidacy for president, gave a speech in Puerto Rico in April that he employed to tout his long-standing support for statehood. “I think statehood is the best path, personally,” he said. “To get the full benefits and responsibilities of citizenship, being a state is the only way to make that happen.”

A man waves a Puerto Rico flag in San Juan May 13, 2015, as demonstrators protest austerity measures imposed because of the U.S. territory's debt crisis. Reuters/Alvin Baez

By Brianna Lee

Puerto Rico's Debt Woes Play Into Statehood Debate

Puerto Rico's Massive Anti-Austerity Protests Ignored By U.S. Mainland Media

Students in Puerto Rico launched mass protests this week against the governor's attempt to slash some $166 million from the University of Puerto Rico’s budget. That's about one-fifth of the funding for the island's main public university system.

College students and their supporters flooded the streets in the capitol of San Juan on Wednesday, where they were met by a police presence that included a SWAT team. A video posted to Facebook by one of the activists appeared to show a police officer striking a protester with a baton.

The head of Puerto Rico’s police force, Superintendent José Caldero López, defended his department’s handling of the situation.

“We established a perimeter where we always do during protests,” Caldero told reporters Thursday, adding, “We have a plan of action and we’re prepared to protect everyone.”

Tensions flared even higher on Wednesday after reports that an explosive had detonated near the governor’s mansion, La Fortaleza. No one was hurt by it, and police later described it as a small, improvised “chemical bomb” made of a soda bottle filled with acid and a piece of aluminum, according to Puerto Rican daily El Nuevo Día. Police said they did not know whether the explosion was directly related to the protests.

Student leader Chris Torres Lugo, who attended the protest, balked at the possibility that the explosion was linked to the students. “We don’t have much information concerning the ‘explosive’ and it comes directly from the police, which makes us doubtful of its accuracy,” he told The Huffington Post.

Whoever was responsible, the widely read Latino Rebels blog questioned why the explosion hadn’t received more attention in the English-language media.

“There were no injuries, but we do think that if a bomb-like device had gone off near where an elected official on the mainland was, it would be on a 24/7 constant loop coverage,” Latino Rebels wrote Thursday.

The proposed university cuts were part of a package of $1.5 billion in government spending cuts, proposed by Gov. Alejandro García Padilla amid budget shortfalls and a growing debt crisis -- not to mention the mounting tensions with the public.

On Thursday, the García Padilla administration managed to cobble together an agreement with legislators to stave off some cuts by raising the island’s sales tax from 7 percent to 11.5 percent and adding a value-added tax of 4 percent on services currently exempted from taxation. García Padilla did not announce which specific services would fall under the new tax, but said the health and education sectors would remain exempt, according to The Associated Press.

The new proposal would boost revenue by $1.2 billion, the governor said, though the tentative agreement still contains some $500 million in spending cuts. Puerto Rico’s legislature will vote on the plan Monday. While the governor’s Popular Democratic Party, which is traditionally aligned with mainland Democrats, holds a majority in both houses, the question of whether to impose the value-added tax has divided the party in recent months.

By Friday, the student protests had generally calmed, though many were still unhappy with the latest budget plan. Students at the University of Puerto Rico campus in Rio Piedras called a 48-hour student strike starting on Thursday, while the Mayagüez campus planned a similar strike on Friday.

Puerto Rico has spent eight years struggling through a crippling recession. The island’s unemployment rate stands at 13.7 percent, more than double the U.S. average of 5.4 percent. It's also on the hook for $72 billion in public debt, most of which is held by U.S. investors.

Along with years of financial mismanagement, many point to an initial round of austerity measures in 2009 by then-Gov. Luis Fortuño as a tipping point. To avoid a looming government shutdown and further downgrades from credit agencies, Fortuño took an ax to the public sector. His administration laid off 17,000 public employees and passed legislation allowing the government to suspend union contracts and collective bargaining rights. The pro-statehood Republican also lowered corporate tax rates to attract private investment, with mixed results.

Now García Padilla, a staunch critic of Fortuño’s policy moves, faces strong political and public opposition to his proposed tax increases. The governor’s plan to attract private investment through tax incentives for the wealthy has yet to turn the island’s economy around.

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Puerto Rico's Massive Anti-Austerity Protests Ignored By U.S. Mainland Media

Yields on Puerto Rico bonds fall slightly

May 15 Yields on Puerto Rico general obligation bonds maturing in 2035 with an 8 percent coupon fell slightly in early secondary trading on Friday, to 10.387 percent in $5 million trades from where the bonds closed the day before at 10.512 percent.

Late on Thursday, Puerto Rico's governing body reached a tentative agreement on new tax measures, potentially avoiding a government shut down and paving the way for a bond deal to raise as much as $2.95 billion. (Reporting by Megan Davies)

Yields on Puerto Rico bonds fall slightly

Liquidity at Puerto Rico's government bank edges lower in April

May 15 Liquidity at Puerto Rico's Government Development Bank (GDB)edged lower to $1.02 billion as of April 30 compared to $1.12 billion at the end of March, the GDB said on Friday.                

The bank, which acts as the financing arm of the U.S. territory, publishes its liquidity position every month as a condition of a financing deal with commercial lenders. (Reporting by Edward Krudy; Editing by Ted Botha)

Liquidity at Puerto Rico's government bank edges lower in April

Puerto Rico Crisis Seen Muddying MBIA’s Bond-Insurance Comeback

The risk of losses tied to Puerto Rico is clouding MBIA Inc.’s comeback in the resurgent business of guaranteeing state and municipal debt.

After years of healing from the financial crisis that wiped out insurers’ AAA ratings, MBIA’s National Public Finance Guarantee Corp. has been starting to win new business. National backed two deals in 2014 and eight more this year, mounting a challenge to Assured Guaranty Ltd., the biggest guarantor in the $3.6 trillion municipal market.

A worse-than-expected outcome in the Caribbean commonwealth could derail MBIA Chief Executive Officer Jay Brown’s progress. The bond insurer has almost double Assured’s exposure to Puerto Rico’s troubled power authority -- known as Prepa -- which is on the brink of an unprecedented $9 billion municipal restructuring. The cost of debt insurance on MBIA has been climbing relative to Assured, and researcher CreditSights Inc. cut its recommendation this week on MBIA’s obligations to “underperform.”

‘Severe Scenarios’

“Assured Guaranty is a company that can withstand some pretty severe Puerto Rico outcomes without discussions of whether it can still pay dividends up to the holding company,” said Josh Esterov, an insurance analyst at CreditSights in New York. “That question becomes murkier for National in some of the more severe scenarios.”

Assuming an immediate default on all Puerto Rico bonds, a recovery rate of 50 percent would just about wipe out all of National’s statutory capital, according to the CreditSights report from May 13. Such a loss would require 40 percent of Assured’s funds.

CreditSights maintained its “outperform” recommendation on Assured in a May 10 report.

National and Assured will be able to absorb losses from Puerto Rico, said Mark Palmer, an analyst at BTIG LLC in New York. For National, however, the cost will become clearer sooner, he said.

“MBIA is more levered to the outcome at Prepa,” he said. “July 1 is a very important date for Prepa because that’s when the next meaningful maturity occurs.”

Kevin Brown, a spokesman at Armonk, New York-based MBIA, declined to comment on the CreditSights recommendation. CreditSights previously ranked the company “outperform.”

Rating Increase

Standard & Poor’s raised National’s financial strength rating in March 2014 to AA-, the fourth-highest rank, giving the insurer an opening to back debt from weaker localities. The rating is one step lower than Assured’s municipal-insurance units and competitor Build America Mutual Assurance Co.

S&P analyst David Veno estimated in a July 2014 report that National could withstand $450 million of losses from Puerto Rico beyond the credit rater’s expectations before its grade would be at risk. That figure is probably higher now, he said in a telephone interview Thursday.

By comparison, Veno’s report predicted Assured had a capital cushion of about $1.55 billion.

MBIA shares climbed 4.9 percent to $9.94 at 2 p.m. in New York, the biggest jump since March. Assured stock rose 2.1 percent to $28.73. Puerto Rico’s governor and lawmakers reached an agreement late Thursday on a plan to raise the sales tax on the island, which may help it sell debt and ease a cash crunch.

Of National’s $4.54 billion in Puerto Rico exposure, the largest portion of gross par outstanding rests with Prepa, which municipal analysts expect to be the first of the island’s agencies to restructure its obligations. The insurer backed $1.42 billion of the utility’s debt through March 31, compared with $773 million for Assured, company filings show.

Prepa Deadline

As Prepa gets closer to a creditor-imposed deadline in June to restructure and a $416 million bond payment on July 1, the cost is increasing to own insurance on MBIA’s obligations.

Credit-default swaps tied to MBIA have widened to 520 basis points from 489 basis points at the start of 2015, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.

The cost of protection is 200 basis points more than swaps tied to Assured, up from 107.5 basis points in December, the data show.

Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“In the insured portfolio, the uncertainty over Puerto Rico commands a lot of attention,” MBIA Co-President Bill Fallon said in a May 12 call to discuss first-quarter results with analysts and investors. Prepa “is the immediate focus,” he said.

by Brian Chappatta

Puerto Rico Crisis Seen Muddying MBIA’s Bond-Insurance Comeback

Former Puerto Rico Governor: No Federal Aid Coming

Federal aid for Puerto Rico and its cash-strapped issuing authorities is not going to happen, former governor Luis Fortuño told municipal analysts Thursday.

by Kyle Glazier

Former Puerto Rico Governor: No Federal Aid Coming

Fixing Puerto Rico

Puerto Rico is in a financial bind. The Commonwealth, along with its public utilities and various municipalities, collectively owes more than it can realistically repay.

NEWSCOM

The island’s government would like the option to do something similar to what Michigan did to help Detroit: give its municipal corporations the ability to restructure their debts under Chapter 9 of the federal bankruptcy code, bring its creditors into a negotiation, and craft a viable reorganization plan that gives the island’s economy some breathing room and politicians some authority to undertake further economic reforms.

The only problem is that Puerto Rico—unlike the 50 states—cannot use Chapter 9, for historical reasons that no one remembers and that don’t make good financial sense. The island tried to get around that obstacle by passing legislation that would have accomplished nearly the same thing as a Chapter 9 restructuring, but a federal judge in Puerto Rico struck down the new law. Puerto Rico also has asked Congress to amend the bankruptcy code to treat it like the 50 states, and the House Judiciary Committee recently held a hearing on the issue.

This effort has fomented opposition among some Tea Party groups, who argue that such an action would be tantamount to a federal government bailout of the island’s economy. This opposition apparently worries some Republican congressmen, who fear any accusations of profligacy.

However, the notion that it would cost the federal government money if Puerto Rico’s municipal corporations were permitted to restructure their debts under Chapter 9 woefully misconstrues both Puerto Rico’s current situation as well as how a Chapter 9 proceeding actually works. Absent some sort of restructuring under Chapter 9, Puerto Rico’s situation may keep deteriorating until a federal role—along with a potential federal bailout—becomes necessary.

By IKE BRANNON

Fixing Puerto Rico

Protesters reject Puerto Rico University budget cuts

A massive demonstration protesting budget cuts to Puerto Rico's state university filled a Capitol plaza in San Juan.



Thousands of people enrolled or employed at Puerto Rico University (UPR) met at the Capitol building and marched to the home of the U.S. commonwealth's chief executive Wednesday. The government has threatened a 20 percent budget cut to the university.

Julio Muriente, leader of the pro-independence Hostosian National Independence Movement, attended the demonstration, saying, "We want people to know the importance of the university for the country, the value of the UPR, and this event is proof of what the institution is."

Puerto Rico has $73 billion in outstanding public debt and an economy slowed by the phase-out of tax incentives to bring U.S. industry to the island. Last week Gov. Alejandro Garcia Padilla warned it could run out of money by September unless other funding was found.





By Ed Adamczyk





Protesters reject Puerto Rico University budget cuts

Puerto Rico Bankruptcy Temptation

Regarding Mary Anastasia O’Grady’s “Puerto Rico’s Debt Relief Gambit” (Americas, May 4): The fact that the proposed amendment to the U.S. bankruptcy code would operate retroactively to bondholders of Puerto Rico state-owned entities is neither unfair nor unusual. In fact, the retroactive application of U.S. bankruptcy laws to existing debts has been the historical practice since the U.S. was founded.

Separately, bondholders and other creditors of the Puerto Rico Electric Power Authority (Prepa) should be wary of the ancient and untested receivership provisions in Prepa’s Organic Act. The statutory regime adopted in 1941 requires the naming of a receiver under the supervision of a court in Puerto Rico. Given the large amounts at issue by nonresident bondholders, the island’s U.S. federal district court may have jurisdiction to appoint and supervise the receiver and hold the proceedings in English. But it is not entirely clear that this federal court would also have jurisdiction of other claims by resident bondholders and other creditors. The result could be multiple additional proceedings in local courts conducted in Spanish. The risk of confusion and inconsistent results between the different forums seems likely and evident. Finally, Prepa’s Organic Act expressly forbids the sale, mortgage and other disposition of Prepa’s assets to satisfy bondholder claims.

These issues could be largely avoided if creditors are forced to file their claims in a U.S. bankruptcy court that would consolidate all proceedings and conduct them in English.

So to those vying to block Puerto Rico from using the U.S. bankruptcy code to restructure its state-owned entities, I say: Be careful what you wish for.

David R. Martin

Creditors of the Puerto Rico Electric Power Authority should be wary of the untested receivership provisions in Prepa’s Organic Act.

Puerto Rico Bankruptcy Temptation

Puerto Rico closes dozens of schools as economic woes deepen

Francisco Oller Elementary School once bustled with kids, but now birds nest in classrooms strewn with leaves and glass from shattered fluorescent lights. Long-discarded homework assignments paper the ground. Graffiti covers the walls.

Located in a city just outside San Juan, the school is among more than 150 shuttered in the last five years as a worsening economic crisis has prompted hundreds of thousands of people to move to the U.S. mainland over the past decade.

Driven by a combination of budget cuts and declining enrollment, the loss of so many schools is having a profound impact on communities in the U.S. island territory, forcing many children to commute to new campuses and creating a blight in places already hard-hit by recession.

The government says the situation could get much worse. It warned just days ago that by early 2016 it may run out of money to pay its bills, and over the next five years it may have to close nearly 600of the 1,460 public schools that once existed to save $249 million a year. Currently, there are 1,387 schools across the island.

The trend "speaks volumes about how we're losing population, about how we're not being efficient in building the island's future, about how we're losing opportunities to create citizens," said San Juan Mayor Carmen Yulin Cruz. "I'm extremely concerned this will increase the hopelessness and mistrust that the island has in itself and lead people to think that the only option to succeed and support their families is to leave the island."

Puerto Rico has seen school enrollment drop 42 percent in the past three decades, and an additional 22 percent drop is expected over the next five years, according to a report by the Boston Consulting Group, which signed a multimillion-dollar deal with the government to help restructure the island's education system. Much of the drop is the result of parents moving to the mainland U.S. in search of better opportunities, including many teachers being recruited from the island for their bilingual skills.

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This May 1, 2015 photo shows a sign that reads in Spanish “Caution children crossing” outside the Ro …

Among the tens of thousands of people who left last year was 27-year-old Devis Gonzalez, who moved his family to Orlando, Florida, after finding a job as a truck driver.

"The reason was plain and simple: work," he said. "Like everyone else, we were looking for a better quality of life."

His young son attended a school in a rural area of Puerto Rico's central mountain range that teachers say is among dozens expected to close permanently this summer, raising concerns that some children might have to travel a half-hour by bus to the nearest school.

Nina Craig, a biologist from Ontario, Canada, who lives in the north coastal municipality of Arecibo and whose son attends school there, said the countryside is being stripped of services.

"I think it's inappropriate to be closing schools in the country just because they have a smaller population," said Craig, who owns a farm in Arecibo, her husband's hometown. "We can't just all of us move to the city or all of us be commuting to the city."

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This May 7, 2015 photo shows an empty patio at the closed Francisco Oller Elementary School in Bayam …

The closures have also hit urban areas. The Francisco Oller school, named after a Puerto Rican impressionist painter, closed in 2010, reopened its doors for part of 2012 to receive children from another school that was being remodeled, then was abandoned for good. People in an adjacent working-class neighborhood complain that the empty school has been vandalized and is now being used as a shelter by drug addicts, a scene repeated around the island.

Many criticize the government's handling of the closures, including Sen. Mari Tere Gonzalez, president of the Senate's education commission.

She said officials did not take transportation logistics and special education needs into account. The Boston Consulting Group noted that 30 percent of Puerto Rico students receive specialized education, twice the average in the U.S. mainland.

"We have to condemn the way in which it was done," Gonzalez said. "Our duty is to make sure that the rights of students aren't being affected when it comes to services."

Education Secretary Rafael Roman did not respond to requests for an interview. He has said the exodus of nearly 45,000 Puerto Ricans a year and the island's low birth rate will keep driving down enrollment. The island has seen its population dwindle to 3.5 million people, with nearly 411,000 students attending public schools. Roman's department has not said which schools it will close next, angering parents and school officials who note that enrollment for the upcoming school year ended in March.

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This May 7, 2015 photo shows a third-grade essay about immigration on the floor of a classroom at th …

"All of us parents are in limbo," said Rafael Feliciano, a former teachers union president who now leads a group fighting the closures. "They are taking these measures behind our backs ... It's a disgrace."

In the meantime, the government is putting some of the closed schools up for sale on a real estate website. The listing for the Francisco Oller school says it would be a good location for commercial businesses, medical offices or even a new school.

City officials say the asking price is $1.8 million.

So far, there are no takers.

___

Danica Coto on Twitter: www.twitter.com/danicacoto

By DANICA COTO

Puerto Rico closes dozens of schools as economic woes deepen

UBS must pay $200,000 to Puerto Rico fund investor

Securities arbitrators on Wednesday ordered UBS AG to pay an investor $200,000 for losses incurred by its Puerto Rico closed-end bond funds, marking one of the first rulings in a flood of cases involving the risky securities.

A Financial Industry Regulatory Authority (FINRA) arbitration panel in Washington found two UBS units liable in the case, which alleged securities fraud, misrepresentation and other misdeeds, according to the ruling.

Many of the Puerto Rico funds sold by UBS were highly concentrated in the debt of Caribbean island's government and related entities. UBS is defending against hundreds of arbitration claims filed with FINRA, collectively seeking more than $900 million in damages.

Some of the funds lost half to nearly two-thirds of their value between March 2011 and October 2013, amid fears about the size of Puerto Rico's debt burden and the weakness of its economy. They have failed since to recover.



"UBS is disappointed with the decision to award any damages, with which we respectfully disagree," a spokesman said. He added the decision was not indicative of how other cases might play out, since it was based on the investor's specific case.

Over 20 years, the funds provided excellent returns, he said.

The investor, Yolanda Bauza, had sought between $357,000 and $625,000 for her losses when filing the claim in 2013, according to the ruling. UBS had pegged the losses at about $8,000 because of investment income she had received before the funds soured in 2013.



Bauza had invested money she received in a settlement from an auto accident, said her attorney, W. Scott Greco in McLean, Virginia. She moved from Puerto Rico to Washington in 2011, Greco said.

"The case is significant because it will make UBS reevaluate how they value these cases for settlement," said Jeffrey Sonn, a lawyer in Fort Lauderdale, Florida who was not involved in the arbitration, but who represents other investors in cases against UBS. "It puts UBS on notice they are at risk for significant awards in favor or Puerto Rico investors."



The arbitrators, as is typical, did not provide reasons for their decision. They also denied UBS' request to remove details about the case from the public records of two UBS Puerto Rico brokers who were involved in advising Bauza.

Another arbitrator, in a separate ruling on Tuesday, denied an investor's $8,000 claim against UBS. The investor did not have a lawyer, according to the ruling.



(Reporting by Suzanne Barlyn)

By Suzanne Barlyn

UBS must pay $200,000 to Puerto Rico fund investor

Puerto Rico passes sales tax

Puerto Rico’s Senate approved a bill, with amendments, that increases the cash-strapped island’s sales tax, potentially raising revenue that will help balance the fiscal 2016 budget.The Senate passed the measure Monday in a 14-12 vote, with an amendment to exempt certain foods. The bill would raise the levy to 11.5 percent from 7 percent through March, after which it would transition into a value-added tax.Lawmakers need to pass a balanced budget by June 30 and the commonwealth is on the hook for a $630 million payment to bondholders July 1. - See more at:

Puerto Rico passes sales tax

UBS must pay $200,000 to Puerto Rico fund investor

Securities arbitrators on Wednesday ordered UBS AG to pay an investor $200,000 for losses incurred by its Puerto Rico closed-end bond funds, marking one of the first rulings in a flood of cases involving the risky securities.

A Financial Industry Regulatory Authority (FINRA) arbitration panel in Washington found two UBS units liable in the case, which alleged securities fraud, misrepresentation and other misdeeds, according to the ruling.

Many of the Puerto Rico funds sold by UBS were highly concentrated in the debt of Caribbean island's government and related entities. UBS is defending against hundreds of arbitration claims filed with FINRA, collectively seeking more than $900 million in damages.

Some of the funds lost half to nearly two-thirds of their value between March 2011 and October 2013, amid fears about the size of Puerto Rico's debt burden and the weakness of its economy. They have failed since to recover.



"UBS is disappointed with the decision to award any damages, with which we respectfully disagree," a spokesman said. He added the decision was not indicative of how other cases might play out, since it was based on the investor's specific case.

Over 20 years, the funds provided excellent returns, he said.

The investor, Yolanda Bauza, had sought between $357,000 and $625,000 for her losses when filing the claim in 2013, according to the ruling. UBS had pegged the losses at about $8,000 because of investment income she had received before the funds soured in 2013.



Bauza had invested money she received in a settlement from an auto accident, said her attorney, W. Scott Greco in McLean, Virginia. She moved from Puerto Rico to Washington in 2011, Greco said.

"The case is significant because it will make UBS reevaluate how they value these cases for settlement," said Jeffrey Sonn, a lawyer in Fort Lauderdale, Florida who was not involved in the arbitration, but who represents other investors in cases against UBS. "It puts UBS on notice they are at risk for significant awards in favor or Puerto Rico investors."



The arbitrators, as is typical, did not provide reasons for their decision. They also denied UBS' request to remove details about the case from the public records of two UBS Puerto Rico brokers who were involved in advising Bauza.

Another arbitrator, in a separate ruling on Tuesday, denied an investor's $8,000 claim against UBS. The investor did not have a lawyer, according to the ruling.

By Suzanne Barlyn

UBS must pay $200,000 to Puerto Rico fund investor

Spanish firms to explore Puerto Rico with an eye to invest | Fox News Latino

Five Spanish companies from widely differing sectors including culinary training and organic solvent recovery presently are looking for investment opportunities in Puerto Rico.

"We've decided. We want to open a Mediterranean gastronomy school here for foreign students who want to get their training in Spanish and learn about this subject," Angel Eduardo, the head of international development for the Centro de Superior de Hosteleria Mediterranea.

His company decided to open a higher education institute in Puerto Rico in 2016 and now he is seeking a site for the school in the area of Santurce, the nerve center of San Juan, which this businessman already knows well, given that he lived in the island's capital for a number of years.

He is the representative of one of the five firms that has sent top officers to Puerto Rico as part of a trade mission organized by the Economic and Trade Office of the Spanish Consulate in San Juan, the Spanish Institute for Foreign Trade and the Puerto Rico Department of Economic Development.

The mission is also being sponsored by the Spanish Development Financing Company, a public corporation that finances investment projects abroad.

Coming to the island along with Eduardo are Oscar and Carlos Mayoral, both with Quimica de Recuperacion, a company specializing in handling and recyling inorganic solvent waste, and Luis Prous, with Sofos, a renewable energy firm.

Also along on the trade mission is Juncaret, a firm specializing in managing gasoline stations and seeking to conclude agreements with companies in that sector to offer its services on the island, as its representative, Carmelo Toledo, said at a meeting with Puerto Rico's economic development secretary, Alberto Baco.

At the all-day meeting the prospective Spanish investors received information about the island's business advantages and the significant fiscal incentives it provides.

"Puerto Rico is a port of entry for the U.S. and ... Latin America, and that's something that some Spanish companies have already seen, like Banco Santander or the Mapfre insurance firm," Baco told the business executives.

He spoke to them about the "bilingualism and bicultural nature" of the island's labor force and about the U.S. legislation that is relevant within a U.S. commonwealth "where you practically don't have to pay taxes."

Along those lines, his team emphasized that while a company does have to pay taxes amounting to about 56 percent of the profits it obtains in the continental United States when those funds are repatriated, in Puerto Rico the rate is only 4 percent. EFE

By Mar Gonzalo

Spanish firms to explore Puerto Rico with an eye to invest

Puerto Rico governor revives value-added tax proposal

Puerto Rico's governor is reviving his push for a value-added tax despite previous opposition from legislators as concerns grow about the U.S. territory's economic crisis and the government's ability to fix it.

Gov. Alejandro Garcia Padilla told reporters Tuesday that legislators from his party are debating a 13.25 percent value-added tax as one option. If that proposal is approved, it would be accompanied by $300 million in budget cuts, he said. But if a lower tax is approved, cuts will increase to $500 million, said Garcia.

"We have reached the point where we have to solve this problem," he said. "Those who are worried about the crisis have reason to be concerned."

Garcia, whose party controls the legislature, said he will meet with additional lawmakers and government officials Thursday to craft a final bill that he believes will be approved. He said that if a value-added tax is approved, it would be implemented in stages.

"I am not offering magical solutions," he said. "This is going to require sacrifices from the people."

Garcia also said officials waited too long to issue nearly $2.9 billion in bonds as planned earlier to help generate additional revenue, and that such action now is dependent on efforts to present a balanced budget.

Legislators previously rejected Garcia's call for a 16 percent value-added tax, and the island's House of Representatives later voted against an amended version that called for a 14 percent value-added tax following weeks of negotiations.

Critics have said the island's economy cannot handle a new tax despite Garcia warning it is needed to stave off a possible government shutdown. The U.S. territory of 3.5 million people is in its eighth year of recession and struggling with $72 billion in public debt, along with an 11.8 percent unemployment rate, higher than in any U.S. state.

"The government keeps making the same grave mistake with a fiscal policy that is based more on taxes than cost reduction," Puerto Rican economist Gustavo Velez said in a phone interview.

Puerto Rico's government faces a $1.5 billion shortfall as Garcia's administration prepares to submit a proposed budget for the upcoming fiscal year. Senate President Eduardo Bhatia said the government already has taken difficult decisions in the past two years to help boost the economy, including overhauling public pension systems and seeking protection from a law that would allow for public agencies to restructure their debt or declare bankruptcy.

"We now find that is not enough," he said. "We have become aware of the magnitude of the problem."

By DANICA COTO

Puerto Rico governor revives value-added tax proposal

Puerto Rico Cut to Caa2 by Moody's

Moody's Investors Service has downgraded the Government Development Bank for Puerto Rico's notes to Ca from Caa1, the Commonwealth of Puerto Rico's general obligation and guaranteed bonds to Caa2 from Caa1, and other affiliated credits by two notches in most cases. In all, about $54.8 billion was affected by these actions.

Included in the total debt affected are $15.2 billion of Sales Tax Financing Corporation (or COFINA) bonds. COFINA's senior debt was downgraded to Caa2 from B3, and its subordinate-lien obligations were lowered to Caa3 from Caa1. The outlook for all affected securities remains negative.

SUMMARY RATING RATIONALE

According to recent disclosures, cash resources at the GDB may be fully depleted by the end of August in the absence of market access or emergency actions to preserve cash. GDB faces a 53% debt-service surge in the fiscal year starting July 1, and deposit withdrawals by the Puerto Rico Electric Power Authority (Caa3 negative) and the Puerto Rico Housing Administration in coming weeks will accelerate GDB's liquidity erosion. We believe that the commonwealth will not be able to complete its planned financing (which was to replenish cash at the GDB) before the end of the fiscal year, and that Puerto Rico and the GDB will be forced to pursue cash-conservation measures such as seeking to defer principal repayment to holders of bonds that are not protected by the strongest revenue pledges or constitutional provisions, such as GDB notes and the government's subject-to-appropriation debt. As a consequence, ratings on Puerto Rico's unprotected securities have dropped to levels consistent with substantial expected losses.

The legally protected securities - notably, the government's general obligation and Sales Tax Financing Corp. (COFINA) bonds - are also affected by rising default risk, given that they account for a significant majority of the commonwealth's tax-supported debt burden. The higher ratings assigned to the GO and COFINA credits incorporate their legal protections and the government's incentive to avoid litigation with bondholders.

OUTLOOK

The outlook for Puerto Rico and its related debt remains negative, because of trends such as weakening liquidity and economic deterioration, which we believe may further heighten default probabilities and further reduce bondholder recovery prospects in coming months.

WHAT COULD MAKE THE RATING GO UP

• Restoration of sufficient liquidity position to prevent defaults
• Enactment of sustainable fiscal plan that moves toward structural balance while meeting financial obligations

WHAT COULD MAKE THE RATING GO DOWN

• For legally protected securities (primarily GO and COFINA), indications of growing default risk
• Rising loss-given-default expectations on lower-rated securities

OBLIGOR PROFILE

Puerto Rico is a territory of the United States, with a population of 3.5 million (and an estimated population decline of 1.4% in 2014). The island has a high unemployment rate of 11.8%, high debt and pension metrics, and a declining economy.

LEGAL SECURITY

This action affects many of the commonwealth's securities, including the GO debt, which is a full faith and credit obligation of the commonwealth.

RATINGS AFFECTED

Downgraded to Caa2:
COFINA Senior (from B3)
Puerto Rico Industrial Development Company (from B3)
Commonwealth general obligation and guaranteed (from Caa1)
Aqueduct and Sewer Authority (from Caa1)

Downgraded to Caa3:
Municipal Finance Agency (from Caa1)
University of Puerto Rico -- System Revenue Bonds (from Caa2)

Downgraded to Ca:
University of Puerto Rico -- Educational Facilities Revenue Bonds (from Caa3)
Commonwealth's appropriation-backed debt (from Caa2)
Government Development Bank debt (from Caa1)
Highways and Transportation Authority (from Caa2)
Infrastructure Financing Authority -- rum tax bonds (from Caa2)
Pension Funding Bonds (from Caa2)
Convention Center District Authority (from Caa2)

Approximately $54.8 billiion in debt affected as Moody's downgrades Puerto Rico Government Development Bank notes to Ca from Caa1 and General Obligation bonds to Caa2 from Caa1. The outlook is negative, says Moody's.

Puerto Rico Cut to Caa2 by Moody's

Puerto Rico gov't files $9.8B budget with $674M in spending cuts

During a roundtable with the press Thursday, Chief of Staff Víctor Suárez and Office of Management & Budget (OMB) Director Luis Cruz explained that the submitted bill contemplates a consolidated budget of $28.8 billion, $9.8 billion of which would correspond to the commonwealth's General Fund. It is about $235 million higher than the current fiscal year's budget.

The bill, which proposes $674 million in government spending cuts, also allocates about $1.54 billion toward servicing the commonwealth's debt, an increase of $400 million over the previous year's budget. The operational spending will be $6.3 billion.

The budget proposal also includes clauses that tie it to the tax bill being considered in the House, which calls for increasing the 7% sales & use tax (IVU by its Spanish acronym) to 11.5%. Government officials have estimated the new tax plan would pump about $1.2 billion in extra revenue for the commonwealth, pushing recurring revenue from $8.6 billion to $9.8 billion.

"In virtue of this law, the [IVU] will be increased until March 31, 2015 as a transitional measure toward the new Subtitle DD about the value-added tax [VAT, or IVA by its Spanish acronym], which will come into effect April 1, 2016," the bill reads.

Suárez said Puerto Rico will seek to access the markets for tax-revenue anticipation notes (TRANs) at the beginning of fiscal 2016, or July 1, to provide the commonwealth with much-needed liquidity to address cash flow issues during the first few months of the fiscal year. He also warned about the need to approve both the new tax bill and the budget plan “to provide certainty to financial markets.”

Absent TRANs funds, the chief of staff said other measures, such as furloughing public employees, would be discussed; “the budget and the cash flow are two different things,” he said.

“Once the budget gets approved, we will go to the markets to try to obtain TRANs, which would provide the government with the cash flow to operate in July and the first few months of the year,” he said.

The government officials also said General Fund contributions to the Government Development Bank and retirement systems will be less than originally projected. The bill states that the government has refinanced debts it holds with the bank that would allow to reduce estimated payments during the next fiscal year by $327 million. As for retirement systems, contributions will decrease by $58 million, according to the budget bill. Operational spending and payroll would be reduced by $131 million, and other budgetary cuts would account for $100 million.

The proposed budget eliminated cutbacks that were previously considered for the Puerto Rico Police Department, the Department of Agriculture and the University of Puerto Rico (UPR). Agriculture would receive the $77.7 million it received under the current budget, while the UPR would get $834 million.

Suárez said all government agencies stand to face cuts in their operational budgets for the next fiscal year, with about 20 of them to be consolidated. The consolidation of agencies would account for about $8.2 million, according to government officials.

The plan also calls for closing 95 public schools under the Education Department, which would be one of the most affected agencies by the budget reductions, which include cuts in professional and purchased services, as well as about $22 million in special assignments. Political parties will lose the $600,000 each receives every electoral year, while legislative donations, mostly to nonprofit organizations, will be reduced by $55 million, according to the bill.

The legislative branch will receive about $16 million less in special assignments from the general fund, while the judicial branch stands to lose $7 million.

The Integrated Transportation Authority (ATI by its Spanish acronym) budget would be reduced by $40 million. Suárez said the Metropolitan Bus Authority (AMA by its Spanish acronym) will be overhauled to reduce spending, which calls for a revision of the routes it services.

Both chambers are expected to hold public hearings before voting on the budget bill, which has to be approved by the end of the current fiscal year, June 30.

The Puerto Rico government submitted to the Legislature a $9.8 billion budget proposal Wednesday that calls for $674 million in spending cuts amid the island's fiscal crisis.

Puerto Rico gov't files $9.8B budget with $674M in spending cuts

What happened when Puerto Rico raised its minimum wage

Over the past few years, demands for a minimum-wage increase have jumped from around $9 an hour -- which seemed ambitious at the time -- to $15 an hour. Change has been rapid: The $15 minimum will eventually be law in a couple of cities, and it's headed for the ballot box in a few more. And on the federal level, legislators have bumped their proposal from the White House's initial bid of $10.10 an hour to $12 an hour nationwide.

That might work fine in places like New York City, where labor costs tend to be higher and consumers have a greater willingness to pay. But what about the lower-wage places, where the Senate Democrats' plan would mean a hike of 65 percent? Couldn't that hurt minimum-wage workers, if the higher cost of labor prompts firms to hire fewer people, or drives firms out of business?

Possibly. Certainly there is some wage level above which companies have to cut payrolls, and there's lots of research on both sides to fuel arguments about how much. But evidence from one historical example -- Puerto Rico -- suggests the effects might not be as bad as one might expect.

Here's the scenario. Back in 1977, Congress required Puerto Rico to increase its minimum wages -- which had been set industry by industry at levels below the federal floor -- to match the mainland, over a period of several years. In 1976, the minimum was $2.03 in Puerto Rico and $2.30 in the United States. By 1987, it had reached $3.35 in both places, making Puerto Rico's minimum wage a much higher percentage of its average wage than it was in the U.S. proper.

Several years later, Alida Castillo-Freeman of the National Bureau of Economic Research and Richard Freeman of Harvard University took a look at what happened during that time. The results were clear: Wages had risen and clustered around the new $3.35 minimum. Employment had dropped by about 9 percent, compared to what it would have been if Puerto Rico's minimum wage-to-average wage ratio had stayed the same as it was on the mainland. Most of those jobs came from low-paying manufacturing companies that might have been on the margin anyway.

In retrospect, Freeman says, the island lost nowhere near as many jobs as he expected. "What we found was that there were a couple industries that really got bopped -- places that were already going downhill," he says, reasoning that the lost jobs, while painful for the affected employees, might have been inevitable. "If you're so unproductive that you can't pay a little bit more, than maybe you don't belong in a modern economy."

Why weren't the employment effects greater? Earlier research, summarized in a paper by Alan Kreuger, had found that many firms responded by increasing their productivity and simply making less in what were already outsized profits, which allowed them to retain workers. In Puerto Rico's case, an unemployment crisis was averted as thousands of lower-skilled people emigrated to cities with greater opportunities, such as Miami and New York.

Based on that experience, Freeman thinks a few things might happen if the federal minimum goes up to $12. First, some companies might find ways to work around it, either by having their employees work off the clock or by turning them into independent contractors. That's not ideal, but it at least allows people to keep collecting some paycheck.

"There are many ways that firms and workers will make sure that people don't lose their jobs," Freeman says. "If you say that 90 percent of the people get higher wages, and that's what you want to have happen, and then 10 percent find ways to wiggle around so they keep their jobs, that's a pretty good outcome."

Second, if jobs do disappear, Freeman figures that people will move to areas of greater opportunity. "Minimum-wage workers tend to be young people, so they're reasonably mobile," he says. "Mississippi is the lowest-wage state in the country. If it tips you to move to Georgia, which has higher wages, that's a reasonable response."

Opponents of the minimum wage increase, like the restaurant industry-backed Employment Policies Institute, argue that higher minimum wages can adversely affect employment in cities too. An EPI report released in April found that some small businesses in Oakland, Calif., anticipated they might have to close, or at least lay people off, when the minimum wage there goes up to $12.25 per hour.

And in retrospect, although the island faces many different challenges, it doesn't appear that the higher minimum wage did Puerto Rico's economy much good. Productivity has lagged, and unemployment is still high, particularly among youth, leading the New York Fed to recommend in 2012 that a subminimum wage be instituted for people under the age of 25 -- and potentially for the whole population.

But overall, Freeman argues, the evidence from minimum wage hikes in other places -- such as Britain and Australia -- shows only moderate effects on employment, if any, because governments tend to give businesses time to adjust.

"Put a zero after your wage and mine, and we know that the employer's going to get rid of us," Freeman says. "But they never seem to push the minimum really into that dangerous territory. Twelve dollars in three years is not going to incredibly shake up Mississippi."

By Lydia DePillis

What happened when Puerto Rico raised its minimum wage

Volaris announces flights to Puerto Rico

Volaris, the ultra low cost Mexican airline with the most extensive route network servicing Mexico and the US, as part of their active expansion plan today announced the introduction of new international service from Cancun, Quintana Roo to the city of San Juan in Puerto Rico, effective July 2nd operating with two flights per week.

During a press conference, Volaris CEO, Enrique Beltranena, addressed the importance of including San Juan in the Volaris destination roster and informed the carrier is the only one to connect Mexico with this important Caribbean island in the last 15 years. "Today we are announcing expansion of our coverage to a total of 60 destinations. Sure enough, Puerto Rico is now closer than ever to Mexico! Plus, with Volaris' clean and clear fares, this a truly irresistible destination."

"Incorporating Puerto Rico into the Volaris route network responds to our expansion strategy for the region. It also underscores our commitment to Cancun, where we are currently servicing 18 destinations and operating 257 flights per week," Beltranena said.

He further explained this service opens doors to diversify the island's offering, "At Volaris we are committed to promoting air connectivity for the country's most important cities, which in turn fosters their economic development. This is why we are offering connections from Mexico City, Monterrey, and Tijuana, which helps our Customers avoid long layovers at other locations," he said.

Volaris continues to strengthen its positioning as the Mexican airline with the most extensive route network throughout Mexico and the US, totaling 139 routes to 60 destinations – 22 international and 38 domestic. Since its inauguration, Volaris has transported nearly 50 million passengers, 7 million of which have been for international travel.

"Volaris' arrival to Puerto Rico is part of concerted efforts by the Puerto Rico Tourism Company to extend access to our destination. With this flight, we are restoring direct connection from our Island to Mexico, which is the Latin American country sending the highest number of visitors to Puerto Rico," said Ingrid I. Rivera Rocafort, Executive Director of the Puerto Rico Tourism Company. "Now, arriving in San Juan will be much easier and affordable for tourists who visit us from Mexico," she added.

Agustin Arellano, Chief Development Officer at Aerostar Airport Holdings, the managing company of San Juan's Luis Munoz Marin International Airport said, "Today we are enthusiastically celebrating the arrival of Volaris to Boricua territory. We extend a warm welcome to this carrier, not only for opening a new route for us, but also because it enables us to reassert our commitment of projecting Puerto Rico as the ideal Caribbean destination before the eyes of the world." He expanded, "Volaris' incursion to the Caribbean as part of our operational offering positions us as the first cruise travel destination in the Caribbean. With two flights per week, it will clearly provide better options for the varied tourism offering generated in Puerto Rico."

Separately, Asur General Director, Adolfo Castro, said, "At ASUR we are delighted with the announcement of the new Cancun – San Juan route, not only are we talking about a new link between Mexico and Puerto Rico, something that hadn't happened in 15 years, but also, this brings our two airports together, with greater passenger traffic: San Juan and Cancun, serving 8.6 and 17.5 million passengers in 2014 respectively. Added to Volaris' successful formula, this looks to be quite a promising route, congratulations for that!"

For those interested in the new service, flight schedules, including dates and times of operation, are announced as follows:

Cancun, Quintana Roo – San Juan, Puerto Rico (Effective July 2. Thursdays and Sundays)

• Departing Cancun, Quintana Roo at 11:30 hrs., arriving San Juan, Puerto Rico at 15:50 hrs.
• Departing San Juan, Puerto Rico at 17:20 hrs., arriving Cancun, Quintana Roo at 19:40 hrs.

New direct connection between Puerto Rico and Mexico
Ingrid I. Rivera Rocafort also announced a new direct flight offered by Mexican airline Volaris from Cancun, Quintana Roo to San Juan, Puerto Rico and connecting with Mexico City. Volaris is the Mexican low-cost airline with more routes in Mexico and the United States. This route will begin operating on a weekly basis as of July 2, 2015, every Thursday and Sunday.

"With this agreement to restore a direct route to Mexico, we greatly extend the framework of opportunities to establish business relations with Latin America, which complements our efforts to once again approach these countries. We owe this achievement to the promotional efforts we have supported in the region and the work of commercial offices that allow us to move forward towards the internationalization of the economy of Puerto Rico,” said Department of Economic Development and Trade Secretary, Alberto Baco.

"The arrival of Volaris to Puerto Rico is part of PRTC’s efforts to expand air access to our destination. With this achievement, we restore the direct connection of our island to Mexico, which is the Latin American country that sends the most visitors to Puerto Rico. Visiting San Juan will now be easier and cheaper for tourists visiting us from this sister country," said Rivera Rocafort.

At a press conference, the Chief Commercial Officer (CCO) of Volaris, Holger Blankenstein, spoke about the importance of including San Juan within the airline’s portfolio of destinations, while emphasizing that Volaris is the only airline to connect Mexico with the Caribbean island.

"Today we expand our coverage to 60 destinations,” said Blankenstein. “Puerto Rico will now be closer than ever to Mexico! And not only that, the clean rates offered at Volaris make it an irresistible destination. Including Puerto Rico within the range of destinations offered at Volaris responds to our expansion strategy in the region. In addition, this reinforces our commitment to Cancun, a city where we have a range of 18 destinations and operate 257 weekly flights. Also, there will be connections from Mexico City, Monterrey and Tijuana, and that way our customers avoid long layovers in other destinations."

Volaris continues to strengthen its position as the Mexican airline with more routes in Mexico and the United States, offering 139 routes to 60 destinations, of which 22 are international and 38 national. In addition, the airline has transported nearly 50 million customers since its inception nine years ago, of which 7 million have been international.

"Today we celebrate with enthusiasm the announcement of the arrival of Volaris to Puerto Rican soil,” said Agustin Arellano, Chief Executive Officer (CEO) of Aerostar Airport Holdings, a management company of the Luis Munoz Marin International Airport. “We welcome the airline, not only because a new route is introduced, but because we can reaffirm our commitment to feature Puerto Rico as an ideal Caribbean destination in the eyes of the world. The inclusion of Volaris as part of operations, positions us as the leading destination for cruise travel in the Caribbean. With its twice a week operation, it undoubtedly offers the best options for the varied tourism generated in Puerto Rico."

Mexico City and Cancun, Quintana Roo - San Juan, Puerto Rico (As of July 2, on Thursdays and Sundays)

• Departing from Mexico City at 7:35 a.m., and arriving at Cancun, Quintana Roo at 9:55 a.m.; Departing to San Juan, Puerto Rico at 11:30 a.m. and arriving at 3:50 p.m.
• Departing from San Juan, Puerto Rico at 5:20 p.m., and arriving at Cancun, Quintana Roo at 7:40 p.m.; Departing to Mexico City at 9:45 p.m. and arriving at 12:10 a.m.

- See more at: http://www.traveldailynews.com/news/article/66056/volaris-announces-flights-to-puerto#sthash.wGf6NOCO.dpuf



Tatiana Rokou

Volaris announces flights to Puerto Rico

Puerto Rico's April tax collections total $1.33 bln

Puerto Rico's April tax haul totaled $1.33 billion, an increase of $151.7 million compared to the same month last year but still $97.4 million below official forecasts, according to a report from the U.S. territory's Treasury department on Monday.

Puerto Rico's Treasury said the monthly tax haul in April was the second best on record behind April 2011. The Treasury said a recent law that allowed a reduced rate on certain prepaid taxes had helped collections during the month.



Collections for the first ten months of the current fiscal year through the end of April reached $7.34 billion, $61.6 million higher than the same period last year but $250.6 million short of the government's forecast for the period.



Treasury Secretary Juan Zaragoza Gomez said in the Treasury's release that he expects the incentives and other unspecified administrative actions would help close the gap.



The Government Development Bank (GDB) said in quarterly report last week that it expects the government will close the fiscal year with a budget deficit of $191 million. The GDB said an estimated revenue shortfall of $651 million would be offset by other revenue measures.

Puerto Rico is struggling with about $72 billion in public debt and facing potentially painful budget cuts this year and next as it attempts to balance its budget. (Reporting by Edward Krudy; Editing by Meredith Mazzilli)

CORRECTED-UPDATE 1-Puerto Rico's April tax collections total $1.33 bln -Treasury

Eight Things We Think We Know About Puerto Rico

Summary

• Puerto Rico's borrowings represents an exceptionally complex set of credits in the (already arcane-enough) municipal bond market.
• The Legislature's recent rejection of the Governor's tax reform proposal leaves fewer options to balance the budget and raises liquidity concerns.
• This seems like a good time to examine what we think we know about the Island's economy and government finances.

Puerto Rico released its most recent quarterly financial report on May 7. The report's list of risk factors includes the possibility of the Commonwealth running out of cash and defaulting on debt payments as soon as September. As organizations go, state and local governments are hideously illiquid. Even in the best of times, their political constituents do not tolerate a government's building up meaningful cash reserves. Government revenues are generally uneven during the year (e.g., large income tax collections in April), while expenditures are more constant. Many governments rely on short term financing to bridge these gaps. RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes) have been a fixture of the short term municipal market for time immemorial. In times of fiscal stress, this reliance on short term cash flow financing leaves governments vulnerable to lack of access to capital markets.

As investors contemplate this situation, perhaps with a sense of panic, it might be worth asking one of Ken Fisher's "only three questions that matter": "What do I think I know that I don't". Following is a list of "facts" about Puerto Rico that have been repeated so often in the media, everyone knows they are true, followed by a little additional information that may help put things in perspective.

1. Puerto Rico's government debt is unsustainably high.

Reality: Puerto Rico's government debt as a percentage of its economy is significantly lower than for the mainland US.

By comparison to any state, Puerto Rico's government debt is high. The problem with this comparison is that residents of US states pay most of their taxes to the Federal government, and their government debt burden is also overwhelmingly at the Federal level. In contrast, Puerto Rico residents are exempt from the Federal income tax (they do pay social security and other payroll taxes). The Territory collects most of its residents' taxes, including an income tax that is much closer to Federal rates than to any state income tax rate. Puerto Rico's residents have historically paid $3.5 billion to $4.5 billion per year to the US Treasury compared to about $10.2 billion to the Commonwealth.

So what isthe right measure of Puerto Rico's government debt burden, and how should it be compared to the US mainland? The number for Puerto Rico's government debt that is repeated by every media outlet is "over $70 billion", so let's use that number for now. Puerto Rico's GDP is about $103 billion, so Puerto Rico's total public sector debt is 68% of its GDP. By comparison, Gross Public Debt for the US mainland is 121% of GDP for the average citizen and higher for residents of high debt states.

Many economists argue one should use GNP rather than GDP to measure Puerto Rico's economy. For an explanation of the difference between GDP and GNP and other information about Puerto Rico's economy, see this report by the NY Fed. Puerto Rico's GNP is about $70 billion or under 70% of its GDP; the US's GNP is about 88% of its GDP. Therefore, Puerto Rico's public sector debt is 100% of GNP; and US Gross Public Debt is 138% of GNP.

However, there is a deeper problem with these comparisons: the $70 billion number for government debt is not quite right. Page 56 of the Commonwealth's May 7th financial report details the various categories of public sector debt, and approximately $40 billion is payable from the government's general fund or directly from sales taxes. Using these numbers, Puerto Rico's government debt is 40% of GDP and 57% of GNP.

The other $30 billion of public sector debt includes debt of public corporations, which is not repaid from tax revenues. The two largest of these are the electric utility, Puerto Rico Electric Power Authority (PREPA) and the water utility, Puerto Rico Aqueduct and Sewer Authority (PRASA). If you wanted a fair comparison to government debt on the mainland, you would need to add the total capitalization (debt and equity) of all US water and electric utilities to the government debt numbers. A more detailed discussion of Puerto Rico's electric utility debt is provided under fact number 6, below.

Following is a table summarizing the comparisons of US and Puerto Rico's debt burdens:

Government Debt Burden for Puerto Rico and Mainland US

	Debt to GDP	Debt to GNP
US Mainland	121%	138%
Puerto Rico Public Sector Debt	68%	100%
Puerto Rico General Fund and Sales Tax-supported Debt	40%	57%

These comparisons and those immediately below are based on economic output not population, so they take into account the fact that Puerto Rico's residents have lower per capita income than residents of the US mainland.

2. Puerto Rico's citizens are over-taxed.

Reality: The total tax burden of Puerto Rico residents as a percentage of the Island's economy is substantially lower than for the US mainland.

Puerto Rico's total tax collections are about $10.2 billion per year, and Puerto Rico residents pay another $3.7 billion to the US Treasury. This total of $14 billion is 13.6% of GDP or 20% of GNP. By comparison, on the mainland, US tax revenues as a percentage of GDP are 33% (38% of GNP). In high-tax states these numbers for the mainland are even higher.

Compared to the rest of the United States, Puerto Rico is a low tax jurisdiction in aggregate. However, many of Puerto Rico's residents may well be over-taxed, specifically, those who comply with tax laws. Puerto Rico has a large underground economy, estimated to be as high as $20 billion. Various studies have estimated that the size of Puerto Rico's "legal" underground economy (excluding illegal activities like drug trafficking) is between 23% and 30% of the total economy compared to 6% to 8% for the US mainland. Moreover, this underground economy grew significantly from 2000 to 2009. The amount of tax revenue lost to the government as a result of this informal economy is estimated to have grown from under $600 million in 2000 to over $700 million in 2009.

In part as a result of the difficulty of collecting taxes from this large underground economy, Puerto Rico is more reliant on corporate and individual income taxes than OECD countries.

Percentage of Government Revenues from Various Taxes

Tax Category	OECD Countries	Puerto Rico
Individual Income Tax	24.8%	39.8%
Corporate Income Tax	10.7%	36.5%
Consumption Tax	31.5%	23.1%

The Governor's tax reform proposal, which was rejected by the legislature, sought to address this problem, by introducing a series of taxes that would be easier to collect. The Legislature's defeat of this proposal will require cuts in government spending and perhaps an increase in existing taxes such as the sales tax.

3. Investors want to see "Tax Reform" before extending more credit to the Commonwealth.

Reality: Investors just want to see a credible balanced budget based on recurring revenues and expenditures. They care much less how that is achieved.

The Governor's tax reform proposal was one of several ways to balance a budget. The Administration was seeking to deal with the problem of very high non-compliance with sales and income taxes in an economy with a high level of cash transactions. The House's rejection of the Administration's tax proposal leaves fewer options, but in some ways these options are more predictable. A new tax system would have introduced the risk that collections might be lower than anticipated. By contrast a one cent increase in the current sales tax can reliably produce a $250 million increase in annual general fund revenue.

4. Anyone with the resources to do so is emigrating, leaving behind a poorer, less educated population.

Reality: Those recently leaving Puerto Rico are less educated and poorer than those who are choosing to remain on the Island.

This article would have us believe that Puerto Rico's economic challenges combined with its new law exempting new residents from taxes on investment income is driving out the educated "young professional" and other members of the middle class and replacing them with millionaires. The reality is not as sensational.

According to a study by the Pew Research Center:

"Although more recent Puerto Rican migrants to the mainland are better educated than earlier waves, more recent migrants in the prime working ages (30-64 in 2011) are less educated than people who remain on the island, according to other research (Mora, Davila and Rodriguez, 2014). A Pew Research analysis of census data indicates that Puerto Ricans on the island are more likely than island-born Puerto Ricans living stateside to have at least a bachelor's degree (24% versus 15% in 2012). A lower share did not finish high school (27% to 32%).

"Recent migrants, especially men, compared with earlier migrants, also are more likely to hold blue-collar jobs in low-skilled industries such as construction, maintenance and agriculture, and less likely to hold professional jobs (Birson, 2014). On the island, the earnings payoff for those holding college degrees rose more from 2006 to 2011 than for those on the mainland, which means that less-skilled workers had more incentive than high-skilled ones to migrate (Mora, Davila and Rodriguez, 2014)."

5. Puerto Rico's private economy cannot produce jobs for its citizens.

Reality: Puerto Rico has historically been highly reliant on government employment, and the current fiscal challenges are causing severe losses in government employment, but private sector employment is growing.



Puerto Rico's economy is going through a painful transformation that will likely leave it less reliant on government intervention.

6. Puerto Rico's high electricity prices are a result of mismanagement and an over-indebted utility.

Reality: Puerto Rico's electric rates are lower than Hawaii's and the US Virgin Islands, and the utility's debt is similar to other governmentally-owned utilities.

Investor-owned utilities, such as Duke, Southern Company, Con Ed, Hawaiian Electric, fund capital with a combination of debt and equity (generally in a ratio of about 50/50). Government-owned utilities, such as Tennessee Valley Authority, Los Angeles Department of Water and Power, the New York Power Authority, Municipal Electric Authority of Georgia generally rely on debt and retained earnings to fund capital expenditures. Public power entities therefore always look more leveraged than their for-profit counterparts. However, since they do not have to generate equity returns to stockholders, the higher relative amount of debt they carry does not necessarily translate to higher electric rates, and may actually result in lower rates, since equity returns allowed by regulators are generally high (generally around 10%) compared to borrowing costs.

PREPA's power rates are high for several reasons:

As an island utility without an indigenous source of fossil fuel, PREPA has to import its fuel sources, and oil is easier to ship than coal or natural gas. PREPA's reliance on oil looks ridiculous until one considers the transportation costs of the fossil fuel alternatives.

The Jones Act requires shipments from the US mainland to Puerto Rico be carried on US-made vessels, which makes mainland-to-Puerto Rico shipping much more expensive than shipments from (say) Brazil. Consequently, it's not clear how much Puerto Rico could benefit from cheaper US natural gas, even if liquefaction were up and running in the US.

The Puerto Rico legislature has imposed a series of expensive mandates on PREPA, most notably a requirement that PREPA pay "Contributions in Lieu of Taxes" or CILTs to municipalities amounting to about $200 million per year and special subsidies to various industries. The CILTs are expressly subordinated to bond debt service, so in the event of a revenue shortfall, the CILTs should be curtailed or deferred before PREPA's bondholders are affected. However, in practice, PREPA has allowed the municipalities to offset their power bills by the amount of CILTs owed to them, which effectively puts CILTs ahead of bondholders in the cash flow "waterfall". What PREPA, should do (and what a court may well require PREPA to do) is defer payments to municipalities in favor of bondholders. Municipalities could presumably refuse to pay their electric bills, and a privately-owned utility would presumably respond by cutting off power. You can see why the current Administration would rather not to go there and may prefer to have a court decide the issue.

In any case, it is useful to put statements like "Puerto Rico's electric rates are crippling the economy" in context. The table below provides some interesting comparisons.

Average Retail Price of Electricity to Customers by Sector,
2015 for States, 2013 for PR and 2012 for USVI (Cents/kWh)
	Residential	Commercial	Industrial	All Sectors
Connecticut	21.00	16.79	13.20	18.44
Massachusetts	20.80	16.53	13.16	17.87
New Hampshire	19.15	15.75	12.83	16.87
New York	19.29	14.62	6.09	15.36
Alaska	19.35	17.26	14.44	17.51
Hawaii	33.34	31.07	26.68	30.04
US Virgin Island	NA	NA	NA	33.51
Puerto Rico	25.05	27.93	26.19	26.84
U.S. States	12.10	10.30	6.62	10.19

Puerto Rico's electric rates are high, but so are rates on other islands, and it is not clear how much a debt restructuring would reduce these rates. PREPA's highest annual bond debt service any future year is just under $656 million compared to annual revenues of $4.5 billion to $5.0 billion in recent years. Recalling that PREPA's entire external source of capital is debt issuance, this means that returns of and on PREPA's capital to investors is between 13.0% and 14.6% of its revenues.

So compare this disastrously over-leveraged, poorly-run utility to the Southern Company, an entity most investors would cite as financially conservative and well-managed. According to its most recent 10-K, Southern Company paid out approximately $4.3 billion in its last fiscal year for interest, dividends, debt retirement and share buybacks, which amounts to 23% of its $18.5 billion in revenues.

For an entity involved in something as capital intensive as the generation and distribution of electricity to pay less than 15% of its total revenues to its investors for return of and on their capital seems like an exceptionally good deal. To impose a (say) 50% loss on those investors in order to reduce its power rates by 7%, seems foolish, given the long term impact that move is likely to have on its future access to and cost of capital.

PREPA's historic reliance on oil, rather than coal or natural gas is more understandable when transportation costs and capital expenditures associated with conversion to other fossil fuels are considered, and it is possible that the best near term response to lower oil prices is to defer conversion to natural gas. For a more detailed discussion of the effect of lower oil prices on Puerto Rico's economy and PREPA see this article.

7. A restructuring of Puerto Rico's government debt is inevitable.

Puerto Rico's fiscal challenges are well within the capacity of the Island's economy to address.

Puerto Rico's economy is not particularly overburdened with government debt or excessive taxation. The increase in debt in recent years is a symptom, not a cause, of Puerto Rico's economic challenges.

Puerto Rico's industrial economy benefited for many years from an arcane set of subsidies in the US corporate tax code, including the Section 936 tax credit for certain corporations that located facilities on the Island. The elimination of these subsidies had a predictably negative impact on the economy, and the government was slow to adjust to the decline in economic activity, relying on deficit financing and hoping for a turnaround. The current administration has made major strides in dealing with the fiscal challenges of achieving a balanced budget, and the deficit has been steadily reduced. Governments often resemble slow, lumbering beasts, but they can sometimes move quickly in a crisis. The current financial crisis might be a catalyst for important reforms.

8. Puerto Rico needs a "road map" to resolve creditors' claims in the event of an default.

Reality: The US Constitution, Puerto Rico's constitution, the statutes authorizing government borrowing and the bond indentures that constitute valid, binding and constitutionally-protected contracts between borrowers and investors provide very clear and detailed road maps in the event of default for every single one of Puerto Rico's government borrowers.

To explain its decision to pass its own bankruptcy law, Puerto Rico claimed that it needed to have the same access to Chapter 9 that every other state currently has to provide a "road map" for its governmental borrowers in the event of a default. In fact, from a creditor's point of view, the Commonwealth's law was much more draconian than Chapter 9. For example, Chapter 9 generally protects bonds secured by a revenue pledge from a "stay", which allows the borrower to stop paying debt service. In contrast, Puerto Rico's law could potentially allow a borrower to suspend payments from revenues pledged to pay debt service.

The passage of this law eroded the Commonwealth's credibility with bond investors and has almost certainly contributed to its lack of access to the capital markets. The Puerto Rico Federal District court set the law aside, agreeing with creditors that only Congress has the right to pass bankruptcy laws, and Puerto Rico is appealing this decision.

Puerto Rico is also lobbying Congress to amend Chapter 9 to allow the Commonwealth to permit its subdivisions to file for bankruptcy protection, arguing that it needs this right afforded to US states. Now, I happen to believe that as a matter of fairness, Congress should amend Chapter 9 to treat US Territories as states. However, under Chapter 9 many governmental entities cannot file for bankruptcy protection. States do not have the right to file Chapter 9, and many states do not permit their subdivisions to file Chapter 9. Many governmental borrowers, over a long period of time, have resolved their fiscal challenges without resorting to bankruptcy protection. New York City, Cleveland, Bridgeport and host of other US cities, have turned around their finances without requiring bond holders to take a loss.

In any case, the media tends to ignore an important detail about all of these issues: neither the Commonwealth's bankruptcy law, nor Chapter 9 would apply to the Commonwealth's obligations. These laws would only apply to subdivisions, and the Administration seems to be focused on using them only for PREPA, PRASA and the Highway Authority.

Whether or not it is possible or advisable to use bankruptcy laws to impose a loss on bondholders, it is not quite accurate that there is no other road map.

Every bond indenture includes a detailed set of covenants by the borrower and a set of remedies available to bondholders in an event of default. For example, PREPA's most recent offering document contains the following promise:

"The Authority has covenanted in the Trust Agreement to fix, charge and collect reasonable rates and charges so that Revenues of the System will be sufficient to pay Current Expenses and to provide an amount at least equal to 120% of the aggregate Principal and Interest Requirements for the next fiscal year on account of all outstanding Power Revenue Bonds..."

Of course, PREPA's and the Administration's desire not to raise electric rates is understandable, but the long term cost to Puerto Rico's tax payers and rate payers may be much higher if PREPA defaults on its obligations than if the utility follows the road map laid out by existing laws and contracts. In any case, there are courts of competent jurisdiction available to interpret constitutional, statutory and contractual language without applying Chapter 9.

Conclusion

Puerto Rico has been compared to Greece, but this is an uniformed comparison. Comments (here and here) by Charles Blizter, a former IMF official and World Bank economist, provide more useful comparisons, including the following:

"Puerto Rico's debt situation is nowhere near as dire as generally believed. Puerto Rico is an economy of $100 billion GDP. And of the $70 billion of debt, a big chunk of that is not guaranteed by the taxpayers but is debt from government-owned corporations like PREPA. So 42 percent is tax-supported debt. Compared to emerging markets and below investment-grade companies, that's a low level of debt. Countries like Hungary have 80 percent, Serbia has 67 percent, Greece has 170 percent. And in Puerto Rico, because of the muni tax breaks, coupons are low and maturities are long. They don't have an underlying debt sustainability problem. They have a liquidity problem and a problem restoring market confidence and being able to access the markets at a reasonable rate. So they are in much better shape from a debt sustainability point of view than may be obvious.

"In terms of fiscal load, Puerto Rico is much more like a BB-rated country. I've never seen a country with this load of debt actually default. It's clear the Puerto Rico government needs to take a few steps to fix the situation. They need to be clear on exactly what the fiscal situation is and present data and projections about the fiscal situation in a way that's consistent to what investors around the world are used to seeing. They need to present an understandable view of what things are and how they are going to close the deficit. Puerto Rico doesn't need to go through the type of adjustment that Greece needs to go through." (emphasis added)

Puerto Rico has serious fiscal challenges, and the perception that they cannot be addressed can become a self-fulfilling prophecy (Perception is reality? Perhaps at least in the short term.) However, most investors will benefit from looking carefully at the long term underlying reality.

Source: Eight Things We Think We Know About Puerto Rico

Additional disclosure: The author is long bonds of the Commonwealth of Puerto Rico and various agencies and subdivisions

Daniel Irvin

Eight Things We Think We Know About Puerto Rico