Puerto Rico Finances Worsen and the Government Appears to be Runing Out of Options

Representing Investors Nationwide

Puerto Rico doesn't’t look as if it’s on the verge of economic disaster. Tourists are still flocking to its beach resorts. Malls, anchored by department stores like Macy’s and JCPenney, are full of shoppers. At rush hour, roads are clogged with late-model luxury SUVs. But after years of borrowing to prop up the island’s stagnant economy, the Puerto Rican government faces $720 million in debt payments over the next two months and could run out of cash as early as next month.

Puerto Rican officials say meeting those obligations could make paying other current payables impossible.  The government still needs additional cash to cover payroll, pay retirement benefits, and upcoming Christmas bonuses. Governor Alejandro García Padilla has considered cutting hours for public workers to keep essential functions running. He has already shuttered some schools, delayed tax rebates, and suspended payments to some of the government's vendors.

The U.S. government has been reluctant to get involved. However, the Obama administration offered a way out on October 21 when the U.S. Treasury Department proposed an assistance package that would sustain the island’s medical system by increasing reimbursement rates for Medicaid, the public-health program for the poor. Those programs serve approximately 46 percent of Puerto Ricans and is paid at rates 70 percent lower than in any state on the mainland.

The proposed plan would also offer some bankruptcy protections to help the government restructure more than $70 billion in debt. In return, Congress would gain more say over the island’s finances. The White House categorizes the situation as critical. So far, the U.S. Congress, which would have to approve any of these proposed changes, hasn't’t responded.

 Congressional Republicans won’t approve assistance to Puerto Rico unless its government provides audited financial statements thereby providing a complete picture of the island's finances. Puerto Rico, a self- governing U.S. territory, missed a self-imposed Oct. 31 deadline for submitting statements from fiscal year 2014 and hasn't’t yet prepared documents for its 2015 fiscal year, which ended on June 30.

Democrats say hedge funds, which hold as much as a third of Puerto Rico’s debt, have discouraged action that would make it harder for them to get paid.  Investors and hedge funds holding bonds from the Puerto Rico Electric Power Authority, or Prepa, agreed on Nov. 5 to a restructuring plan that would require them to take losses of up to 15 percent.

Much of the municipal debt is also held in closed-end bond funds marketed sold by UBS, Popular Securities, Santander Securities and others.  The funds were marketed to island residents only and their price declines have only served to worsen an already critical situation.

Puerto Rico’s economy has shrunk about 15 percent since 2006, when Congress ended tax breaks for manufacturers there. The unemployment rate stands at 11.4 percent, more than twice the national average. Forty-five percent of families live below the poverty line. Last year the island lost an average of 1,200 people each week to the mainland, the most since the U.S. Census Bureau began tracking departures a decade ago. There has been a classic "brain drain" where the most educated professionals have left the island in search of better opportunities on the mainland. 

It appears the situation may get worse before it get's better.

The experienced securities litigation attorneys at Colling Gilbert Wright & Carter, along with local Puerto Rico counsel are aggressively investigating and filing claims on behalf of Puerto Rican residents who purchased and lost money in UBS, as well as other (Santander Securities, Banco Popular Securities) closed-end municipal bond funds.  If you have lost money investing in Puerto Rican bonds and closed-end bond funds, please contact our office today for a free consultation

 

 

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