FBI Is Probing Puerto Rico"s $300 Million Power Contract With Whitefish Energy

Just a day after Puerto Rico"s cash-strapped power authority on Sunday canceled its controversial $300 million contract with Whitefish Energy, a small Montana company tasked with rebuilding the island"s power grid after it was completely destroyed by Hurricanes Maria and Irma, the WSJ is reporting that the FBI is looking into the circumstances surrounding the contract.

The contract was canceled on orders from Puerto Rico Gov. Ricardo Rossello, who pointed to the burgeoning controversy surrounding the company - including its relationship with Secretary of the Interior Ryan Zinke, who is from the same small Montana town where Whitefish is based.

Zinke issued a statement last week denying any involvement in the deal. Zinke is reportedly friends with Whitefish CEO Andy Techmanski.

The company has been criticized for moving too slowly in its efforts to restore power to the island. To date, only 30% of power customers on the island have had electricity restored, more than a month after Maria first made landfall along the island"s southeastern coast.

As WSJ explains, the firm had more than 350 workers and 2,500 tons of heavy equipment on the ground for rebuilding electrical lines destroyed in Hurricane Maria. But the firm’s small size and limited track record, as well as the terms of the contract, ignited concerns around Puerto Rico’s management of the flow of federal disaster-relief dollars to the island.

The Federal Emergency Management Agency, multiple congressional committees and local auditors also have raised concerns and begun requesting documents about the deal. Ricardo Ramos, the executive director of Prepa, had defended the selection of Whitefish and said the contracting process was done according to the utility’s regulations for handling emergency situations.

“We Can’t Wait for Government.” Pop Star Daddy Yankee Saves Puerto Rican Food Bank and Delivers Aid

Via The Daily Bell

Puerto Rican authorities are blaming the White House for not properly responding to the disaster caused by Hurricane Maria. Trump, in turn, tweeted that about the poor leadership within Puerto Rico and claimed the politicians were just trying to score political points.

There have been unverified reports that officials in Puerto Rico were, in fact, holding back supplies unless there were accompanying photo opportunities.

And among all the pointing fingers and he said she said, the people of Puerto Rico are getting at least some aid.

That is because while governments fight, obstruct, and grandstand to advance their political careers, real people help.

Puerto Rican native and pop star Daddy Yankee delivered what FEMA, and the government of Puerto Rico could not. He gave $100,000 in assistance to feed the people whose homes were destroyed, who were left without power or water after the hurricane struck over a week ago.

The money provided food to roughly 9,000 families in Toa Baja, an impoverished town of 80,000 people near Puerto Rico’s capital, San Juan…

Each family on Saturday received 59 pounds of food, not including rations of water too. The box of food included rice, pasta, tuna, beans, beef and milk. Food Bank officials say it’s enough to feed a family of four for a week.

But the pop-star didn’t stop there. While he was touring the food bank, the director mentioned how she was desperate for diesel fuel to run the generators. She had only enough to provide electricity to the building for two more hours. Without power, 25,000 pounds of food stored in the freezers of food bank would have been at risk of going to waste.

So Daddy Yankee’s entourage made some phone calls and delivered 200 gallons of fuel, enough diesel to run the generators for another week.

“We got the diesel! We got the diesel!” the pop star proclaimed at the Food Bank. “We can’t wait for the government.”

Maybe it was the bureaucracy of government, or maybe it was their political positioning. Maybe it was government’s typical incompetence and lack of preparations. But the government failed to deliver help to the people they claim to keep safe. Disasters like these are government’s time to shine. This is why the government is so vital, they tell us.

And yet reports run rampant of corruption of local officials, and the refusal of local police to protect people from looters and robbers.

The governments of Puerto Rico, San Juan, and the United States all proved ineffective in delivering the most basic necessities to the people affected by the disaster. And time after time we see that people who put their trust in government, people who depend on authorities as their backup plan, are let down.

In this instance, people were simply lucky that someone rich enough cared enough to do something to save them.

But the best advice is still to be prepared yourself for the most likely disasters. Do a little prepping for unfortunate circumstances which might befall you and your family. Cash, protection, and of course food and water should be on hand to last you at least a week, or significantly longer if properly rationed.

3 Ways To Help Puerto Rico Right Now

There is a lot to learn from the slow and painful post-hurricane recovery that is going on in Puerto Rico right now.

One of Puerto Rico"s biggest problems is that it is by far, one of poorest areas of the United States. The median household income in Puerto Rico is approximately $18,600. The median household income in the United States, by contrast, is around $57,000.

As we"ve recently discussed here at mises.org (see here and here) it is generally far more difficult for low-income areas to weather storms, than it is for high income areas. The amount of capital at hand for repair and recovery is less in poor areas, as is the wealth available for constructing high-quality infrastructure. 

Repeating this fact to Puerto Ricans, however, does them little good in the short term. So we must explore ways that Puerto Rico could be helped right now in gaining greater access to badly needed goods and services. 

One: Repeal the Jones Act 

Unbeknownst to many Americans, shipping in the United States exists under the shadow of highly protectionist and archaic regulations passed as part of the Jones Act. The Jones Act was originally passed in 1920 as part of an effort to increase the number of merchant marine vessels produced by the United States. It restricts trade between American ports to vessels built and owned by Americans, and to vessels whose crew is at least three-quarters American. Unfortunately, as Gary Galles notes, the Act "works against its stated goals, and does so at a steep cost." 

The Jones Act drives up the cost of goods and services by restricting shipping options for merchants. As Galles explains, this can be especially damaging in times of natural disasters: 

In the aftermath of Hurricanes Katrina and Sandy, Jones Act restrictions were suspended because they hindered emergency responses. In 2014, New Jersey was not allowed to use a foreign ship to bring rock salt from Maine in time to respond to a snowstorm.

A Jones Act-eligible ship required far more time and added $700,000 to the cost. And such problems extend beyond emergencies. Maryland imports rock salt from Chile rather than Louisiana, because shipping it all the way from Chile is three times cheaper than Jones Act domestic transportation.

These issues can be especially damaging to places like Puerto Rico and Hawaii. Galles continues: 

In 2014, shipping a forty-foot container from Los Angeles to Honolulu reportedly cost more than ten times shipping it to Singapore. Dependent on Jones Act shipped petroleum for three-quarters of its electricity generation, Hawaii’s electricity prices are almost double the next most expensive state.

A 2012 report found that sending a container of household goods from the east coast to Puerto Rico cost more than double that to nearby Santo Domingo. A GAO study found that some Puerto Rico companies had shifted sourcing from America to Canada, due to cost savings from escaping Jones Act restrictions.

The Jones Act"s effects on cutting resources for places like Puerto Rico are so undeniable that the Act was suspended early in September to allow for Puerto Rico to stock up on fuel and other necessities in preparation for the storm. The waiver expired after September 22, however, greatly diminishing the supply of fuel coming into the island. 

Even John McCain, rarely quoted as one of the good guys in these pages, has urged the total repeal of the Jones Act, calling it an "archaic and burdensome act." McCain is right. 

Only after substantial pressure did the Trump administration finally relent, and it granted a new waiver on Wednesday. 

Total repeal should be next on the agenda, as it"s absurd to wait for a highly destructive hurricane before allowing Puerto Ricans to access goods and services at lower cost. 

Two: Declare Puerto Rico a Free Trade Zone 

Why stop with just a repeal of the one protectionist measure that is the Jones Act? 

Puerto Rico is subject to American customs and trade laws, and thus importing goods and services into the island is limited by tariffs, quotas, and other protectionist measures — thus driving up the costs of goods and services. 

Given Puerto Rico"s desperate need for supplies in the wake of Maria, the humane thing to do would be to grant trade autonomy to Puerto Rico allowing it to engage in total unilateral free trade in order to attract merchants from all over the world.

Unilateral free trade, of course, is beneficial always and everywhere. But in the short term, Congress and the administration can begin small and simply declare Puerto Rico to be an open port in which all goods can be imported duty-free. This would end the need to restrict trade and collect tariffs in Puerto Rico to remain in accordance with US law. A look at US customs policies reveal restrictions fall on a variety of highly-useful products in times of emergency including ethyl alcohol, dried milk, and peanuts. 

Other disastrous trade restrictions include the Trump administration"s new tariff slapped on lumber earlier this year. The end effect will be to drive up the cost of construction for everyone, but this will be most felt in hurricane-devastated areas.  

Needless to say, this policy of open trade would be most effective if both national and territorial officials allow merchants and importers to charge prices without fear of any restrictions on so-called price-gouging. Such restrictions would act to reduce the total amount of goods and services being brought to the island. 

Three: Remove Restrictions on Physical Cash

In times of emergency, when the electricity is out, access to physical cash becomes extremely important in facilitating a functional economy. In the wake of Hurricane Maria, ATMs ceased to function and armored car services had difficulty reaching banks. "Demand for cash [in Puerto Rico] is extraordinarily high right now," a Federal Reserve spokesman noted on Wednesday. 

While it is a good thing that the Fed believes it can soon ensure a working amount of cash in the region, the problem would have been largely avoidable were United States banking regulations not so geared toward restricting the use of physical cash. 

Prior to a looming natural disaster, of course, it would be wise to take out a significant amount of cash to make sure one can purchase goods and services even when power is out, and banks are closed. 

In the US, however, removing even a few thousand dollars from one"s accounts is likely to raise eyebrows and trigger greater surveillance from banking regulators. Technically, it is legal to withdraw cash amounts up to $10,000, but doing so can trigger government charges of "structuring" in which it is actually illegal to withdraw cash amounts under $10,000 total. In other words, its unclear as to how much cash one can actually withdraw without asking for trouble from federal banking regulators. Nor is this an especially huge amount, especially when power is expected to be out for months in some areas.

Both banks and their customers, however, are repeatedly discouraged from engaging in sizable cash transactions by federal regulators. 

A more reasonable government would seek to facilitate the use of physical cash in large amounts, especially in the lead up to natural disasters, so as to ensure residents need not resort to barter and other types of highly-inefficient transactions. 

Moreover, in a post-disaster situation, where communities have become more isolated, and access to resources on the mainland becomes limited, residents will become more dependent on short-terms loans, micro loans, and informal loans during the process of rebuilding. In many cases, these loans will be risky. Policymakers could help ensure that cash and capital reaches those who need it most by reducing banking restrictions and regulations on so-called usury, same-day lending, and other types of short-term and emergency loans.

It"s at times like these that the effects of government interventions, intrusions, and regulations come to be felt most. As resources become scarce, and established institutions may not be present or reliable, it becomes all the more important to facilitate a nimble and inventive marketplace in which solutions can be pursued quickly and in an unrestricted manner. 

As with all Americans nationwide, Puerto Ricans are subject to trade restrictions, taxes, and other regulations that cripple markets and impact their standard of living. Much of the time, these effects can be better tolerated because an abundance of goods continues to be available — even if made unnecessarily expensive. In the wake of a natural disaster, however, accessing goods and services becomes much more difficult, and it is at times like these that economic freedom is needed most.

"What Are We Going To Do?" Puerto Rico In Chaos As Cash Runs Out

Most Puerto Ricans haven’t had access to electricity, cell service or financial services for nearly two weeks now. And as we reported yesterday, residents who didn’t stockpile enough cash have been struggling after Hurricane Maria essentially knocked the island’s economy into the 1950s, forcing some to forgo essential supplies - or worse - resort to looting. For those who do have access to working ATMs and banks, long lines have sapped cash reserves as the country has effectively reverted to a "cash only" economy.

Those whose access to cash has been limited - or cut off entirely - are becoming desperate as they start to wonder how they will begin the process of rebuilding their trashed homes - or even where their next meal will come from. As Reuters reports, cash has become just one of many scarce resources on the island (food, medical supplies and gas are also in incredibly short supply).

With electricity and internet down in Yauco, southwestern Puerto Rico, Nancy and Caesar Nieve said they could not access paychecks directly deposited into their bank accounts.

“What are we going to do when we don’t have any cash? The little cash we have, we have to save for gas,” said Nancy.

Cash demand spiked in the first few days after the hurricane as merchants were unable to accept other modes of payment. First BanCorp, one of the island’s largest banks, said that nearly two-thirds of its 48 branches remained closed, and that electronic transactions had resumed at only 25% of its ATMs.

Apparently, word of these privations made its way back to the New York Fed, which has assured the world via the Wall Street Journal that the central bank has plenty of physical cash to keep banks on the island stocked for the forseeable future - lowering the likelihood that anybody will suffer for lack of access to cash. Notably, the WSJ didn"t explain where that money was being held, how long supplies are expected to last or how it got there in the first place.  Indeed, the central bank said only that it"s "prepared to meet elevated currency demand following the natural disaster." Reuters noted that the central bank ships cash to a depot on the island, and that before the storm it increased the size of its shipments.

As WSJ explains, Puerto Rico is in the New York Fed’s district despite its location in the Caribbean. In times of economic stress or a natural disaster, Fed regional banks plan ahead to make sure area banks have enough cash.

Of course, none of this matters if you can"t get to a bank or an ATM. But at least, if they somehow manage to find an open bank branch or working ATM, Puerto Ricans can rest assured that it will be freshly stocked with cash.

But Puerto Ricans might want to hold off before thanking Bill Dudley for his foresight. It’s worth asking exactly how long the island’s cash inventories will last. After all, the storm tore up roads and leveled buildings, potentially complicating deliveries of cash. And with authorities still focusing on search-and-rescue missions and other aspects of the preliminary response, it could take for some areas of the island to return to some semblance of normalcy.  

Furthermore, looting has become increasingly common across the island, increasing the danger that deliveries of cash could be intercepted by bands of robbers.

In a statement, the New York Fed said armored-car services are able to reach banks with cash, and automated teller machines are “once again active.”

With any luck, the recovery effort will soon kick into high gear after President Donald Trump on Thursday suspended the Jones Act, which will allow more ships to assist in the international relief effort. It’s unclear why the administration hesitated to waive the law.

But is the Fed really doing all it can to alleviate the crisis in Puerto Rico? With the bankrupt island nation facing a $30 billion cleanup effort – and potentially more if it’s entire power grid needs to be upgraded – maybe the central bank could help monetize some of these expenditures.

Oh wait…
 

Trump Will Visit Puerto Rico To "Survey Damage" As Locals Plead For Aid: "We Are Americans Too"

President Trump announced on Tuesday morning that he will travel to Puerto Rico next week to survey damage from Hurricane Maria, however he said that next Tuesday is the earliest he is able to travel to the island due to the damage. Trump said the island is "literally destroyed" but expressed confidence "they"ll be back." He said the people of Puerto Rico "are important to all of us."

.@POTUS: “Puerto Rico is very important to me…These are great people and we have to help them.” pic.twitter.com/bnBjyILJQr

— Fox News (@FoxNews) September 26, 2017

And while Trump added that federal authorities are landing relief supplies "on an hourly basis", Trump"s act may come as too little, too late for some of the locals, who felt the urge to remind the White House they are also Americans. That’s just what Governor Ricardo Rossello and the commonwealth’s government have done, over and over, in the wake of Hurricane Maria. “There needs to be unprecedented relief for Puerto Rico so that we can start the immediate effort right now,” Rossello said Tuesday on MSNBC.

As Bloomberg writes, Puerto Rico, an island of 3.4 million American citizens without a vote in Congress, is lobbying Washington for what could be billions in funding to rebuild its infrastructure, including its decimated energy grid. And it’s doing so amid an already costly hurricane season.

The island was crawling with 10,000 federal relief workers who were conducting search-and-rescue missions, helping bring electricity to hospitals, and providing aid packages, baby food and more. But with the Washington visitors on hand, Rossello’s team missed no opportunity to remind them of why Puerto Rico -- mired in bankruptcy and ill-equipped financially to go it alone -- shouldn’t become an afterthought.

Capsized boats on land in San Juan, Puerto Rico on Sept. 25

At the San Juan airport Tuesday, there were signs of exodus. People waiting for standby flights have been camped out for days. One mother with two infants in car-seat carriers broke into tears, while desperate tourists took out smartphones to film video and demand answers on why there wasn’t water and other provisions, outside of the expensive airport shops.

Yamira Feliciano Ribera, 40, was there with a group of six relatives and friends, including two children, ages 1 and 3. She said they’d slept on the hard floor using luggage for pillows.

“We want to get out of Puerto Rico for a better situation,” she said, doling out Cheerios to the children. “We’re without water, without AC, without cash.”

Additionally, over the weekend, some Puerto Ricans took offense when Trump went on a Twitter rant about professional athletes and their views on race relations, but omitted any comment on Puerto Rico, which was by that time falling deeper into crisis. When he did tweet Monday night, the president drew a comparison between the aftermath of Hurricanes Harvey and Irma with that of Maria: “Texas & Florida are doing great but Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble.”

Noting that “much of the Island was destroyed” and that it still owes Wall Street billions of dollars, he added: “Food, water and medical are top priorities - and doing well. #FEMA”

The tweets came after criticism from some corners of Congress, with Representative Adam Smith, the ranking Democrat on the House’s Armed Services Committee, blasting the administration’s response as “wholly inadequate.”

Still, the island’s leaders have been effusive. The visitors Monday were “a clear indication that the administration is committed” to Puerto Rico, Rossello said.

There was still plenty to do, though.

Rossello said he requested a temporary waiver on the cost-sharing between FEMA and the commonwealth. Normally Puerto Rico would commit 25 percent of the recovery funds, but it was already in fiscal straits and had filed for a form of bankruptcy protection before the disaster. After a disastrous debt binge, enabled by tax breaks that for decades had investors clamoring for its securities, Puerto Rico owes $74 billion. Rubio said Puerto Rico should have access to low-interest loans, and Rossello later said that could be through the Fed or Treasury Department.

It doesn"t look like Puerto Rico will get all its requested fulfilled, however. Jenniffer Gonzalez, Puerto Rico’s nonvoting congressional representative, said in an interview Monday that Puerto Rico sought an extended waiver on the Jones Act, a century-old set of rules that many say make imports more costly by requiring most good to be brought in by U.S. ships. But as the AP reported, the Trump administration doesn’t plan to waive the act.

She’s also spoken with House Speaker Paul Ryan about having the Federal Emergency Management Agency temporarily cover the full cost of the damage, instead of the typical 75 percent, although it was unclear if the request will be granted.

Rossello reminded his visitors Monday of the role Puerto Rico played as an aid hub after Irma, when the U.S. Virgin Islands were badly hit. And he sent his visitors home with a message for the rest of Washington: “Let them know that we’re committed U.S. citizens, proud U.S. citizens, who helped others when they were going through difficult times, not more than 10 days ago,” he said. “Now it’s time to help Puerto Rico back.”

Puerto Rico Votes For Statehood In Referendum Marred By Record Low Turnout

A little over a month after the island effectively filed for bankruptcy protection, Puerto Ricans have voted overwhelmingly for statehood in a nonbinding referendum that was marred by low voter turnout.

Nearly half a million votes were cast for statehood, more than 7,600 for free association/independence and nearly 6,700 for independence, according to preliminary results. The participation rate was just 23 percent with roughly 2.26 million registered voters, prompting opponents to question the validity of a vote that several parties had boycotted, Fox News reported.

Rec

It was the lowest level of participation in any election in Puerto Rico since 1967, according to Carlos Vargas Ramos, an associate with the Center for Puerto Rican Studies at Hunter College in New York. He also said that even among voters who supported statehood, turnout was lower this year compared with the last referendum in 2012.

"Supporters of statehood did not seem enthusiastic about this plebiscite as they were five years ago," he said.

The vote is nonbinding: The US Congress has the final say on Puerto Rio’s status, and there’s little support for taking on the economically-troubled island as a full member of the union.

That reality was apparently lost on Gov. Ricardo Rossello, the island’s governor, who accused Washington DC of hypocrisy in not honoring the will of the Puerto Rican people as expressed through a democratic vote.  

"From today going forward, the federal government will no longer be able to ignore the voice of the majority of the American citizens in Puerto Rico," Rossello said. "It would be highly contradictory for Washington to demand democracy in other parts of the world, and not respond to the legitimate right to self-determination that was exercised today in the American territory of Puerto Rico," according to the Associated Press.

Some see statehood as the best way to pull Puerto Rico out of its economic crisis; others blame the U.S. for the malaise and would rather seek independence after five centuries of what they call colonial rule, according to CNBC.

Puerto Rico"s main opposition party rejected the pro-statehood result.

"The scant participation ... sends a clear message," Anibal Jose Torres, a party member, told Fox. "The people rejected it by boycotting an inconsequential event."

Puerto Rico previously voted in favor of becoming a state in 2012 during a vote that was also distorted by low turnout, the Hill reported.

Puerto Rico"s governor requested bankruptcy protection for a portion of the island"s $73 billion in debt back in May, setting up a showdown with Wall Street firms owed billions of dollars, in what will be the largest-ever U.S. municipal debt restructuring.

The island’s finances are presently under the control of a federal oversight board.

Wrong Way! Why Would Puerto Rico Want to Become a State?

Via The Daily Bell

Secession has been a hot topic lately from Brexit, to Catalonia, to California; so why is Puerto Rico voting on statehood tomorrow?

It is a non-binding referendum which asks Puerto Ricans if they would rather the territory remain as it is now, become an American state, or go entirely independent. But some say the election has been rigged for the pro-statehood group.

And indeed, they seem to have the most power right now. The big fish in a small pond are seeking to form a delegation of two “Senators” and five “Representatives” in order to lobby Congress to admit Puerto Rico as the 51st American State. Puerto Rico already has a Congresswoman who goes to DC, though she is not a voting member. Go figure she supports statehood, as someone who has the most to gain from it.

But the real reason many Puerto Ricans see statehood as appealing: the territory is bankrupt. Somehow it only took $73 billion in debt (about $20,000 per capita) to bankrupt Puerto Rico, as opposed to close to $20 trillion in debt (over $60,000 per capita) the U.S.A. holds. (Puerto Rico cannot simply print more money to pay their debts in inflated currency as the U.S. does–a back door tax.)

Yet becoming a state would give Puerto Rico access to federal cash, since the federal government hands out funds to states in order to manipulate their policies, and gain allegiance.And why shouldn’t a government with triple the debt per citizen help out Puerto Rico? America has a magic protective shield around its finances; America’s chickens will never come home to roost. Totally makes sense to bring more bankrupt states into the fold, why the hell not?

And why shouldn’t a government with triple the debt per citizen help out Puerto Rico? America has a magic protective shield around its finances; America’s chickens will never come home to roost. Totally makes sense to bring more bankrupt states into the fold, why the hell not?

Some claim that Puerto Rico becoming a state would make it a better place to invest, as Americans wouldn’t see it as scary and foreign. They are wrong. Puerto Rico becoming fully subject to the taxes and regulations of the U.S.A. would absolutely make it less appealing than it is currently. Puerto Rico currently has a 4% income tax rate, and most investment income gets a full exemption from taxation.

If the Puerto Rican people were smart, they would vote for independence. Why would you subject yourself to a higher tax rate, which would only hurt the already touchy economy? Why would you scare away investors and businesses, and submit yourself to an even more debt-riddled government, with more restrictions on the freedom to live, work, and earn how you choose?

At a time when territories are rightfully asserting their independence from larger imperialist governments in order to have more control over the local issues which affect them, voting for statehood is a step backward for Puerto Rico.

Puerto Rico's Population Drain Since 2013 Equivalent To US Losing 20 Million People

Puerto Rico’s economic decline and, now bankruptcy, has triggered an astonishing exodus as thousands flee the commonwealth in search of economic opportunity in the Continental US, Bloomberg reported.

The population has been declining rapidly. The island has lost 2 percent of its people in each of the past three years, a comparable departure in the 50 states would mean 18 million people moving out since 2013. About 400,000 fewer Puerto Ricans live on an island of 3.4 million today compared with a decade ago, when its economy began contracting, Bloomberg reports.

“I had to choose for my family,’’ said Aledie Amariah Navas Nazario, 39, a pediatric pulmonologist, told Bloomberg. She left behind young asthma patients when she, her husband and two small daughters moved to Orlando, Florida.
Reasons for leaving were compelling enough for Navas Nazario, who treated asthma on an island where it’s more prevalent than anywhere else in the U.S.

Puerto Rico’s economy had taken yet another leg down, and she was worried about her future income because of uncertainty about health insurance.

“I’m sad about not being able to take care of those kids anymore,’’ said Navas Nazario, who keeps in touch with former patients on Facebook. “You have to make a hard decision to leave relationships with friends and family just to get out, just because you need a better life.’’

Departures like Navas Nazario’s have trapped the commonwealth’s economy in a downward spiral, Bloomberg reports.

Joblessness at 11.5 percent, and a $74 billion mountain of debt that pushed the island to insolvency have made collecting taxes key to an economic rebound, Bloomberg said. At the same time, more Puerto Ricans from all walks of life are moving away to better their lives, meaning government revenue is dwindling.

The island’s debt has grown 87% since 2006, and one easy way to avoid paying any of the debt is for Puerto Ricans to leave the island. But one telling sign for anyone who owns Puerto Rican debt: The government’s official turnaround plan – a path to sustainability approved by a US oversight board – assumes the population will shrink by just 0.2% each year for the next decade.

The government is using this number as the basis for its projections of tax receipts and economic growth. Expect it to fall far short on both measures.

“Most people believe that those forecasts in the fiscal plan are really, really optimistic and probably would have to be revised at some point,’’ said Sergio Marxuach, public policy director at the Center for the New Economy in San Juan, told Bloomberg.

And professionals aren’t the only ones leaving: The exodus includes blue-collar construction workers and taxi drivers. Research by the New York Fed found that college graduates make up roughly the same proportion of emigres as they do the broader population, suggesting, as Bloomberg reports, that the departures have touched “every corner” of the commonwealth.

The reason for leaving is obvious: The earnings disparity between PR and the mainland can be wide. John Starkey, a principal of the Lafayette International Community High School in upstate Buffalo, New York, told Bloomberg he traveled to the island to recruit teachers after it started shutting down schools to save money. On the mainland, Starkey said, educators find they can double or triple their earnings, even if it means trading a balmy Caribbean island for the frigid shores of Lake Erie.

“Many of the candidates wanted to stay on the island to help their community,’’ Starkey said. “Our pitch was: come up to Buffalo and you’ll be able to better provide for your family, but you’ll also be able to help your community here.’’

The commonwealth applied for Title III protection from its creditors last month in what will be the largest-ever US municipal debt restructuring, further complicating the territory’s efforts to pull itself out of a financial crisis.

The Puerto Rico restructuring would be far larger than Detroit’s record-setting bankruptcy, with little to no details how long a court proceeding would last or what cuts would are imposed on bondholders. The island’s financial recovery plan covers less than a quarter of the debt payments due over the next decade.

The island has been a U.S. possession since American troops invaded in the Spanish-American War, and Puerto Ricans have been U.S. citizens since 1917. That means there’s little to prevent them from seeking better prospects on the mainland, something they’ve always done, just not to this extent.

Migration to the US mainland is by far the biggest driver of the island’s declining population, but a declining fertility rate isn’t helping either. The natural population increase -- excess births over deaths -- fell to 3,000 last year from 20,000 a decade ago, as families facing poorer economic prospects and the threat of the Zika virus put off having kids, Bloomberg reported. At the same time, younger generations of child-bearing age are more likely to take off for the mainland.
 

Puerto Rico Files For Bankruptcy Protection In Largest Ever US Municipal Debt Restructuring

Update: PUERTO RICO FEDERAL BOARD FILES BANKRUPTCY CASE IN U.S. COURT

* * *

As per our report last night that following the expiration of the litigation freeze, Puerto Rico"s creditors had filed a barrage of lawsuits against the insolvent Commonwealth a bankruptcy was imminent,  moments ago Puerto Rico"s governor announced the commonwealth will request bankruptcy protection of a portion of the island"s $70 billion in debt, setting up a showdown with Wall Street firms owed billions of dollars, in what will be the largest-ever U.S. municipal debt restructuring and further complicating the U.S. territory’s efforts to pull itself out of a financial crisis.

The Puerto Rico restructuring would be far larger than Detroit’s record-setting bankruptcy, with little to no details how long a court proceeding would last or what cuts would are imposed on bondholders. The island’s financial recovery plan covers less than a quarter of the debt payments due over the next decade.

Cited by AP, Gov. Ricardo Rossello said Wednesday that a federal control board overseeing the island"s finances has agreed with his request to put the debts before a court. He told reporters that he has requested that the U.S. territory"s federal financial oversight board commence a Title III proceeding under last year"s Puerto Rico rescue law known as PROMESA. Title III is an in-court debt restructuring process similar to U.S. Bankruptcy.

"We have reached this decision because it protects the best interests of the people of Puerto Rico," Rossello said.

“The board has agreed to submit Title III protection immediately and they will submit it.”

According to the WSJ, "the governor said he would petition Puerto Rico’s federal oversight board to invoke a quasi-bankruptcy law that puts its standoff with creditors before a judge. His decision marks the start to what could be a lengthy legal fight as Wall Street watches closely to see how other indebted municipal governments may fare in confrontations with investors."

As a reminder, Puerto Rico and its agencies owe $73 billion to creditors, dwarfing the roughly $18 billion owed by the city of Detroit when it entered what was previously the largest municipal bankruptcy in 2013.

Finally, Bloomberg notes that the financial collapse promises to impose deep losses on bondholders who for years snapped up Puerto Rico’s securities, even as the government contended with a shrinking economy and chronic budget shortfalls. U.S. states can’t file for bankruptcy, and investors bought the bonds assured that it wasn’t a legal option for Puerto Rico either.

BBG further adds that Rossello’s latest offers to creditors last week shows the commonwealth believes general obligations should receive a better recovery than its sales-tax bonds. The latest proposal offered as much as 90 cents on the dollar to general-obligation bondholders. One such bond due in 2035, was among the most actively traded at a price of 66, up from 64.7 on Tuesday.

As The Puerto Rico Lawsuits Begin "A Bankruptcy Is A When, Not An If"

Last July, Puerto Rico defaulted on hundreds of millions in debt, however under the PROMESA federal rescue law put together in the last minute, creditor litigation was put on hold - a kind of deferred debtor protection without the actual bankruptcy. The law was meant to encourage Puerto Rico and its federal financial oversight board to negotiate debt-cutting agreements with creditors. No deals were reached and on midnight of May 1 into Tuesday, the litigation freeze expired, opening the doors for creditors to take Puerto Rico to court, in hopes of blocking the next step in the Puerto Rico restructuring, namely Governor Ricardo Rossello"s plan to impose drastic repayment cuts. As a reminder, Puerto Rico defaulted on $1.3 billion of principal owed since the previous governor declared the $70 billion public debt load unpayable in June 2015.

And as expected, on Tuesday Puerto Rico and its federal financial oversight board were flooded with the first lawsuits from stakeholders, with more expected in the coming days, which could ultimately push the insolvent U.S. territory into bankruptcy.  The lawsuits, according to Reuters, include complaints from holders of Puerto Rican sales-tax-backed debt, from general obligation bondholders and from bond insurer Ambac Assurance Corp.

• The first group, those holding sales-tax backed debt known as the COFINA bondholders, allege that the island"s debt-cutting plans violate the U.S. Constitution.


• The second group, those holding general obligation debt which is guaranteed by the island"s constitution, are demanding payment on $242.5 million of debt defaulted upon since July, including damages and interest of more than $102 million.


• Finally, there is Ambac which insures $2.2 billion of Puerto Rican bonds, and which filed four lawsuits, including two against the island"s government and another against U.S. Treasury Secretary Steven Mnuchin, seeking a lien on Puerto Rican rum taxes collected by the U.S. Treasury Department.

"Puerto Rico is no longer shielded from creditors rushing to the courthouse to lay claim to its assets - that includes the beaches, pieces of art, historical furniture and any assets whether they are nailed down or not. The people of Puerto Rico have had enough. The governor and the board have a moral imperative to act immediately" said Rep. Nydia Velazquez, a New York Democrat, who is calling on a federal control board overseeing Puerto Rico"s finances to seek a court-supervised debt restructuring similar to Chapter 9.

So with the lawsuits now pouring in, and with $70 billion in debt, a 45% poverty rate and near-insolvent public health and pension systems, the torrent of litigation could force Puerto Rico into a so-called Title III proceeding - an in-court debt-cutting process similar to U.S. bankruptcy. In fact, various experts cited by Reuters, see Title III as inevitable, the only question is when.

"At some point, Puerto Rico might run up against an adverse court ruling it would rather not have," said Keefe Bruyette & Woods analyst Chas Tyson, who follows Puerto Rico.

"I continue to think (bankruptcy) is a when, not an if."

Yet while the creditors can finally pursue their contractual rights, they will hardly win many supporters in the court of public opinion, as most of them are hedge funds, and who may have accumulated PR debt at prices below prevailing. For example, the COFINA plaintiffs include such hedge funds like Aurelius, Cyrus Capital and Tilden Park, best known for its founder Josh Birnbaum who in 2010 defended Goldman in the infamous Carl "Shitty Deal" Levin hearing. In a lawsuit filed in federal court in Puerto Rico, they collectively accuse the U.S. commonwealth, Rossello and other officials of "angling to repurpose the tax revenue earmarked to pay COFINA debt, which they say violates the due process clause of the U.S. Constitution."

Further, they ask the court to block Rossello from implementing a blueprint for fiscal turnaround that was approved by the oversight board in March. According to that plan, the island is forecast to only have $800 million a year to pay debt, or less than a quarter of what it owes, implying draconian haircuts for all bondholders.

Among Ambac"s lawsuits, two lodged complaints against the PR government, adding as defendants the island"s oversight board and the board"s seven members.The bond insurer, which may be on the hook should the island default, also aims to block not only the fiscal blueprint, but the filing of any Title III bankruptcy based on that blueprint. The insurer said in one lawsuit that Puerto Rico"s oversight board exacerbated the island"s abuses by "giving its imprimatur to an ongoing scheme ... that can only be called theft.”

AP puts things into perspective as follows: Puerto Rico could announce a historic, court-supervised restructuring for a portion of its $70 billion debt. By comparison, the U.S. city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest U.S. municipal bankruptcy ever. In fact, Puerto Rico"s situation is more dire than Detroit"s because the city, in part, had a firm set of rules in bankruptcy court, an option that the U.S. territory doesn"t have, said Greg Clark, head of municipal research at Debtwire.

Ahead of the May 1 deadline, the government on Saturday offered to pay 50 cents on the dollar to holders of general obligation and sales-tax bonds backed by Puerto Rico"s constitution. Bondholders rejected the offer.

But the biggest wildcard is what happens not so much to the creditors - who will be fine no matter the outcome - but to the ordinary people of Puerto Rico if the island does go bankrupt.  Puerto Rican officials have already imposed austerity measures, including cuts to worker benefits and pensions, and have said debt cuts are needed to spare the island from even more severe cuts to quality of life.

Two years ago we (and German finmin Wolfgang Schauble) joked that Puerto Rico could be the American Greece. Now with a Puerto Rico bankruptcy "only a question of when", it is unfortunately no longer a joke.

Muni Massacre - Puerto Rico Bonds Plunge Near Record Lows

The last 5 days have seen the biggest crash in Puerto Rico muni bonds since June 2015 when the Governor declared debts "unpayable." As Bloomberg notes, investor speculation about the scale of the losses Puerto Rico will foist on bondholders caused the price of the island’s most active bond to continue to slide in the heaviest trading in nearly four months.

As Bloomberg detailed previously, the Puerto Rico fiscal recovery plan that was approved by the island’s federal overseers isn’t good news for investors holding its $70 billion of debt. The proposal, which was redrawn by Governor Ricardo Rossello to address concern that he was relying on overly optimistic forecasts, would leave less than $7 billion for debt-service costs from 2018 through 2026, according to figures included in the most recently released proposal.

That’s less than a quarter of what’s coming due and nearly $4 billion less than in Rossello’s initial proposal last month, which the board said didn’t do enough to steady the territory’s finances.

John Oliver explained the PR disaster a year ago...it"s only got worse.