Bad Party, Terrible Hangover

The good news?

I did not wake up this morning with a hangover.

The bad news?

The island did.

Whatever you think of the current governor, nobody can dispute that, on at least one point in the news conference yesterday, he was right: both the major parties that rule Puerto Rico got us into this mess. And that is? Yesterday, after years of waving red flags, Standard & Poor’s degraded our credit rating to junk status.

Terrible golpe al país shouts the The New Day’s headline in a special 15-page extra to today’s regular printed edition. Conscientious blogger that I am, I read all 15 pages, which told me basically what I knew, as well as some things I didn’t.

The gist of it is that for forty years, the public has allowed our political leaders to engage in politicking, instead of providing services, making fiscally responsible decisions, and running efficient governments. And how did they do that? By doing on a collective basis what many of us do on a personal level: living on credit.

There’s nothing too sexy about economics—nothing as sexy as building a great whacking (thanks, Franny!) stadium or investing a billion dollars in “special communities,” which today remain just as special as they were when the program began. (The program identified poor communities and tried to invest funds for improvements to infrastructure and social services…)

OK—so how bad is it? Some facts lifted from the special edition of today, as well as a New York Times article on the topic:

•       Our debt is almost 70 billion dollars
•       Each person—man woman and child—would have to pay $10, 635 dollars up front to clear this debt. That’s ten times the average per state
•       As a result of this decision, we’re going to have to pay about 940 million bucks, since we promised we would if our rating was sunk to junk status
•       We had been planning to go ask the market to buy bonds that would give us an additional 1 to 2 billion next month
•       Puerto Rico is the third largest issuer of municipal bonds, after California and New York
•       Many of these bonds are collected in mutual funds, which are attractive: you don’t have to pay taxes on the interest you collect on them. Therefore, a lot of mutual funds in the US hold Puerto Rico bonds. However, a lot of the bonds are held by the Puerto Rican middle and upper classes, especially retirees; some 1.5 billion dollars of Puerto Rico debt is held on the island

Now, how’s the economy doing?

•        In December of 2013, the rate of unemployment was (officially) 15.4%
•       Largest employer in Puerto Rico is…the government of Puerto Rico: 27.8% of the work force works for the government. Estimates for the average state public sector range from 10% to 15%
•       Manufacturing accounts for only 9% of the non-farming Gross National Product
•       25% of the commonwealth budget comes in federal funds
•       The population of Puerto Rico is 3.67 million: in 2013, the government estimated that 1.3 million people were working. That means that one in three Puerto Ricans is working

OK—so what was the response on the island? Well, the editorial in The New Day called for…unity. Now is not the time, it said, for finger pointing. The governor, as well, said that now is the time for all Puerto Ricans to come together and figure out what to do with this mess.

Though there were some who couldn’t resist, of course. The governor himself couldn’t resist suggesting that his government, though young, had acted like adults, but that it was time for the local Supreme Court to “put on the toga of adulthood.” Why the jab? Because the Supreme Court had put the reform of the teacher retirement system on hold until the lawsuit brought by the unions had been resolved.

And the President of the Senate came out and said that the current government had been firm and financially responsible; nowhere else in the states had a government acted as Puerto Rico had to correct their problems. Puerto Rico didn’t deserve this betrayal.

The teachers, too, pointed out that since we got degraded to junk status, it was clearly proof that a reform of the retirement system wasn’t needed in the first place.

Yes, you say, but beyond calls for unity—however successfully heeded—what does the government propose to do?

It would be premature, said the governor—donning the mantle of a serious and wise leader—to discuss any specific measure until they had been carefully and thoroughly scrutinized and examined in order to assure that the measures taken will have the maximal impact on the economy while minimizing any adverse effects on the private lives of the people of Puerto Rico, who working together, hand in hand, making ties that extend beyond petty politicking, can go forward confidently towards a better future.

All right—I made that up. That’s what I would have said. The governor doesn’t know what he’s gonna do—so he fell back on rhetoric.

Nor does the average person know what this means: according to The New Day, even business people didn’t really understand what all this meant. The reality is that almost 90% of the students I have taught over the last 20 years have tuned out politics. And now that the crisis is here? Many people are confused.

And the worst of it? However bad the hangover, it was never a very good party anyway….   

Anybody Got 70 Billion Out There?

I know that I was reading it at 3:45, because that’s when I sent it off to myself in an email. Bloggers do that, since a large part of my day now is spent wondering what, if anything, there might be to write about. The problem? Much of what seems perfectly splendid in the middle of the night looks a bit different in the colder light of day.

And you don’t really want to know, do you, that Puerto Rico is on the brink of financial doom? Why? Because for decades, every governor of either party has followed essentially the same strategy: hire as many people as you can, pay them marginally, allow them to do as little as possible, and borrow money to pay for it all. So what happened?

Well, the chicken came home to roost, and the Washington Post reported yesterday we’re 70 billion bucks in debt. Cancel that—I just checked the headline, and it’s not even “70 billion,” it’s “at least 70 billion.” That makes us number three in the nation—behind California and New York. We do, however, easily trump little Detroit, who went bankrupt at a mere 18 billion. Pikers, obviously.

Nor is that the only problem for today—everybody is leaving the island; in the years from 2006 to now, we’ve lost 138,000 people, most of them to the mainland, and most of them professionals. And why not? Salaries are low, crime is high, and the quality of life? Well, the Post also reported that our murder rate is six times higher than the national average.

Right—so what’s the solution? Well, here’s what we can’t do—go bankrupt, since apparently cities can but states cannot. Nor can we simply say “screw you” to the investors that have bought all our bonds, since the constitution stipulates that investors get paid before retirees and public employees. So what to do? Here’s the Post on the subject:

The situation is being closely monitored by the White House, which recently named an advisory team to help Puerto Rican officials navigate the crisis.

How bad are things on the island? Worse, apparently, than I thought. Here’s Caribbean Business:

The GDB-EAI (Government Development Bank—Economic Activity Index) had returned to growth in December 2011 for the first time since Puerto Rico’s recession began in 2006. It showed small but consistent year-over-year gains for nearly a year before beginning to retreat again last October. Since then, it has been on a steadily steepening decline: falling 0.7 percent in November, 2012, 1.3 percent in December, 2012, 1.8 percent in January, 3.1 percent in February, 3.1 percent in March, 3.5 percent in April and 3.4 percent in May, 4.5 percent in June, 5 percent in July, and 5.4 percent in August.

So our projection for the local economy in 2014? Instead of the minute growth projected originally, it’s now predicted that we will shrink by .8% next year. And if that’s not gloomy enough, consider the statement made by somebody at Moody’s—one of the three credit rating firms that has us one step from junk status:

“Further weakening of economic growth could result from the additional corporate and sales taxes, as well as increased tax compliance and enforcement measures,” Moody’s said. “Despite the increase in much-needed recurring revenue for the commonwealth, weaker economic conditions would also increase negative pressure on the rating.”

A friend who was the press secretary to two governors told me a story, once, about the governor who charged his cabinet to go home, think long and hard about the situation on the island, and come back the next day with a plan of action. So they all did, and returned with in-depth analyses and ideas. At the end, only one man was left who hadn’t spoken.

“Governor,” he said, “I thought about it a lot, and I came to one conclusion….”

“And that is?” asked the governor.

“Estamos jodidos,” the advisor replied.

We’re screwed.

And that was in the good old days!

As our Governors Fiddled

Ouch—I’ll give it to you first in Spanish, and then in English:

“Esto es de lo peor que he visto”, comentó Zamansky, quien ha visto todo tipo de casos, incluyendo el sonado caso de Bernard Madoff.

“This is the worst I’ve ever seen,” Zamansky commented, who has seen all kinds of cases, including the famous case of Bernard Madoff.

And what is Jake Zamansky, a security and investment fraud attorney, talking about? Well, the case of the Puerto Rican branch of UBS, which has been selling Puerto Rican bonds to its clients for years now.

And what’s wrong with that? Aren’t bonds supposed to be a safe investment?

It seems not—especially in the case of Puerto Rico, whose credit rating is one step above junk bond rating, and whose government is seriously broke. How seriously broke? Well, how serious is 70 billion bucks? Our pension program is 37.3 billion underfunded.

“Of course,” said my friend Tony, “that’s just a guess-timate. Because you know what? There’s no actuarial work or studies done on the plan….”

My years with Mr. Fernández have taught me about actuaries; they’re statisticians who predict how much money a plan will need based on the number of people in the plan, the age, expected life span, etc. And if you don’t have that info? You’re operating completely in the dark.

This caused the governor, last month, to scurry up to New York to tell Moody’s and the other credit rating houses that all was well on the island, and that he / they had raised taxes and had a solid, solid plan to deal with the mess.

Did they? Well, it’s true that they had raised taxes—but what had they not done? The one thing that would really bring howls: cut the size of the government.

They did, however, take on the retirement system, and high time, since one of the senators…well, let him speak for himself:

"No retirement system in the world is as broken as ours," Senate President Eduardo Bhatia said on Thursday, before the overhaul legislation was approved by both houses of the Caribbean island's legislature.

The overhaul was bitterly protested, and went to the local Supreme Court, which upheld it. So now the protests have died down, but it’s anybody’s guess when the money will run out….

Now then, into this gloomy picture—oh, and I have told you the unemployment rate is about 15% and the per capita household income is half that of the poorest state, haven’t I?—steps UBS, which is one of the three biggest brokerage houses on the island.

And because of a unique feature in the law, Puerto Rico bonds happen to be rather attractive, at least potentially. Why? Here’s Bloomberg—and who should know but they?—on the subject:

Interest on debt issued by Puerto Rican governments is typically tax-free across the U.S., and yields on some issues topped 10 percent in recent weeks amid doubt about whether investors will be repaid. The bonds’ high yields and tax-exempt status make them popular with retail investors, according to the statement.

Nice, hunh?

Not so nice, said the Commonwealth of Massachusetts Secretary William F. Gavin in the same Bloomberg article:

“Puerto Rico is currently on the verge of insolvency and many of its obligations are at or near junk rating,” according to the statement. “The risks associated with its municipal debt obligation are disproportionally high.”

‘Well,’ you are perhaps thinking, ‘let the rich suffer. I, for one, only have the shirt on my back, the roof over my head, and the rice and beans in my stomach. So, however bad the losses in the bond market may have been, it’s hardly my problem….’

Wish that were true. But first, you should know that the losses were 2.2 billion in the month of September alone. Nor is it just the wealthy affected.

In fact, here’s Zamansky again:

“He atendido por lo menos a 150 personas y escucho, esencialmente, lo mismo. Son retirados, personas que son inversionistas conservadores y que se le dijo que invirtieran todo o una gran parte de su dinero en estos fondos cerrados y en bonos de Puerto Rico”, sostuvo el abogado. “A más de la mitad de estas personas se les instó a que tomaran prestado”.

“I’ve taken care of at least 150 people and have heard, essentially, the same tyhing. They are retired, people who are conservative investors and were told to invest all or a great part of their money in these closed funds and bonds of Puerto Rico,” he stated. “And more than half of these people were told to take out a loan to do so.”

The problem? Was UBS informing these people of the risks of investing in Puerto Rico? No bond is guaranteed if the government goes broke. And the advisability of offering or urging a line of credit or a loan to investors?

The Government Will Decide Whether to Sue UBS—reads the headline in The New Day, our local paper.

In the meantime, Zamansky and other lawyers are sitting in hotels, interviewing hundreds of mostly middle class retirees, many of whom have suffered significant losses. How significant? Some people are so old that they’re in nursing homes, and now the families are having to take them out of them: there’s no money left.

The handwriting has been on the wall for a long time, of course. A few years back, a Reuter’s blog came out and said it bluntly: Puerto Rico is America’s Greece. If our folly and foolishness had hurt the rich, I might cheer. But the idea of hard-working, prudent, conservative people losing their life savings?

…heart breaking.