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Florida Business, Whistleblower, & Securities Lawyers / Blog / Investments / Why Puerto Rico Municipal Bonds Have Lost Much of Their Value

Why Puerto Rico Municipal Bonds Have Lost Much of Their Value

Puerto Rico muni bonds have been favored by many municipal bond fund managers in recent years because of the tax exempt status of Puerto Rico municipal bonds and their higher-than-average yields. The willingness of U.S. municipal bond fund managers to buy Puerto Rico municipal bonds has allowed the island to rack up $70 billion of debt. Oppenheimer alone holds almost $5 billion of Puerto Rico debt. Franklin Templeton funds owns slightly less, at $4.8 million.

In 2012, Puerto Rico residents obtained over $21 billion in federal assistance from the U.S. government in the form of Social Security, Medicare, Medicaid, Head Start, Section 8 housing assistance, food stamps, disability, and other programs. Puerto Rico has a 41% labor force participation rate. For comparison, the mainland U.S. labor force participation rate is 63%. Over one-third of Puerto Rico’s residents received food stamps in 2012. In addition, Puerto Rico residents pay approximately double the average cost of electricity of U.S. state residents.

Puerto Rico’s debt-to-gross domestic product (“GDP”) ratio is 70%, excluding the commonwealth’s pension obligations. If Puerto Rico’s pension debt is included, it brings the debt-to-GDP ratio to a staggering 90%. Debt-to-GDP is calculated by dividing the commonwealth’s debt by the size of its economy. This ratio may be an indicator of whether Puerto Rico is fiscally sound or not. The lower the debt-to-GDP ratio, the healthier the country’s financial outlook.

Currently, each Puerto Rico resident carries $19,000 of government debt. Puerto Rico’s per-capita debt rate is almost quadruple the per capita debt held by Massachusetts residents ($5,077), the highest of the U.S. states. California has 10 times the number of residents of Puerto Rico, but only 1.4 times the amount of debt.

Puerto Rico was once a hub for pharmaceutical companies Teva, Merck, Bristol Myers Squibb, and Actavis, but with the repeal of favorable tax treatment for U.S. subsidiaries, and the imposition of a new 4% general excise tax on corporations, the companies have announced their exodus from Puerto Rico. The exit of these companies will significantly impact Puerto Rico’s already bleak financial outlook.

Puerto Rico’s attempts at fiscal reform are only a drop in the bucket. Puerto Rico recently passed a pension reform bill to reduce pension contributions by $600 million, implemented approximately $1 billion in tax increases, and restructured $575 million in bond debt. Of the proposed 2014 budget, approximately 20% would be used to service debt.

To read more about Puerto Rico municipal bonds, click here.

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