06-22-2017, 09:53 PM
*** 23-Jun-17 World View -- Financial crisis becomes critical in Illinois and Puerto Rico
This morning's key headlines from GenerationalDynamics.com
****
**** Voting for statehood will not save Puerto Rico from financial crisis
****
![[Image: g170622b.jpg]](http://Media.GenerationalDynamics.com/ww2010/g170622b.jpg)
Governor Ricardo Rosselló and Congresswoman representing Puerto Rico Jennifer Gonzalez celebrate the results of the statehood referendum (AP)
On June 11, the citizens of Puerto Rico passed a non-binding
referendum calling for Puerto Rico to be the 51st state of the United
States. The vote was overwhelming -- 97% voted "yes" on the
referendum.
Puerto Rico's governor Ricardo Rosselló said that he will create a
commission to demand statehood from the U.S. Congress, which has to
approve any changes to the island's political status. Standing in
front of a cheering crowd of supporters carrying U.S. flags and
dancing to a tropical jingle that promoted statehood, Rosselló yelled:
> [indent]<QUOTE>"The United States of America will have to obey the
> will of our people!"<END QUOTE>[/indent]
Whether Rosselló actually believes that non-sequitur, or
whether he actually believes his fantasy claim that Puerto Rico's
financial crisis would now be solved by an influx of dollars from
statehood, is not known. What is known with certainty is that Puerto
Rico is not about to become a statement.
The referendum was about as phony as a Russian presidential election.
Only 23% of the electorate voted, because the vote was almost 100%
boycotted by all opposition groups, including the majority of Puerto
Ricans who consider their identity and their culture to be uniquely
theirs and do not want to be an American state for any reason. The
pro-statehood party, on the other hand, spent millions of dollars on a
campaign, telling people that if they did not vote for statehood they
would be deprived of their U.S. citizenship and promising millions in
federal money if it became the 51st state.
For Puerto Rico to achieve statehood, Congress would have to approve.
The population are overwhelmingly Democrats, so a Republican congress
will not be too interested. And statehood would mean that Puerto Rico
would get five seats in the House of Representative, which means that
five other states would lose one seat. It's just not going to happen.
ABC News (12-Jun) and The Atlantic and The Hill and CNBC (9-June)
****
**** Puerto Rico plunges into contentious bankruptcy proceedings
****
Puerto Rico owes $70 billion in bond debt and an additional $49
billion pension obligation to government employees. There's is
absolutely no possibility that those debts will ever be repaid.
Puerto Rico's bonds have been tax exempt since 1917. Many people have
invested in Puerto Rico bonds because they pay 10% interest (yields)
and because under federal law they're "triple-tax free." This means
that you could invest in Puerto Rico's bonds and earn 10% interest
every year, and not have to pay federal, state or municipal tax on the
interest you collect. There were other major tax benefits granted
exclusively to those investing in Puerto Rico.
The money that investors paid for these bonds has been essentially
"free money" to Puerto Rico, since nobody there apparently believed
that it would ever have to be paid back. As a result, Puerto Rico has
felt free to spend huge amounts of money on social programs, with
bills that are only now coming due.
The unemployment rate is 13.7%. Only 700,000 of the 3.5 million
people, or 20%, work in the private sector. The other 80% either are
on welfare, or they receive unemployment or other aid, or they work
for the government. Year after year, Puerto Rico sold more and more
bonds, and investors ate them up because of the high tax-free yields.
Through various financial tricks, Puerto Rico has managed to avoid
bankruptcy until now, but bankruptcy proceedings finally began in May
of this year.
A Puerto Rican default is likely to affect millions of Americans.
Here's an example of how mainland U.S. residents are affected: More
than 40 percent of the Rochester Maryland Municipal Bond Fund and the
Rochester Virginia Municipal Fund are invested in Puerto Rican bonds.
Funds from Oppenheimer Funds and Franklin Templeton are heavily
invested in Puerto Rico. If these funds collapse, public sector
retirees and employees from states that invested in them will suffer.
The triple-tax free 10% interest deal has drawn massive amounts of
money from 401k's and other ordinary investment funds. These funds
will all lose significant principal in a Puerto Rico default, which
means that a lot of ordinary Americans will lose part or all of their
savings. Daily Caller and NBC News (5-June) and The Nation (24-May)
Related Articles
****
**** Illinois bond rating expected to be cut to junk status
****
When Illinois' government missed an important deadline on June 1,
rating agencies downgraded Illinois bonds to one step above junk
status, and warned that unless the political impasse is resolved by
July 1, it's likely that they'll be downgraded again, to junk status.
Illinois' debt has been exploding. In May 2016, the state had $5.03
billion in unpaid bills. That has almost tripled in one year with
spending obligations exceeding receipts by about $600 million per
month. As of June 1 of this year, it owes a record $14.5 billion in
unpaid bills. On top of that, unfunded pension liability has been
exploding as well. The state has more than 660 government pension
funds. The unfunded pension liability for the state's five major
plans is $251 billion, up 25% in the last year.
Pundits are claiming that Illinois' situation isn't as bad as Puerto
Rico's, because Illinois is a wealthier state and can impose higher
taxes. In one sense, the two are the same: There is no hope of ever
paying off these debts.
Illinois hasn't passed a budget for the past two years. The
Democrat-controlled legislature and Republican governor Bruce Rauner
can't agree about anything. It's this political chaos that caused the
June 1 deadline to be missed, and the same chaos makes it likely that
a July 1 deadline will also be missed, which will trigger the bond
downgrade to junk status.
The downgrade to junk status will not immediately force the state into
default, but it will raise interest rates significantly, caused the
debt death spiral (or, as S&P calls it, the "negative credit spiral")
to accelerate. Anticipation of junk status is already affecting
interest rates. Chicago public schools, which used to pay 4.64%
interest on its bonds, are now paying an exorbitant 9%.
Other states are also facing serious debt spirals. According to a
2016 study by the Mercatus Center at George Mason University:
The rankings were based on cash solvency, budget solvency, long-run
solvency, service-level solvency and trust fund solvency. Investors.com and Zero Hedge and Bloomberg (1-June) and Barrons and Mercatus Center at George Mason University (2016)
Related Articles
KEYS: Generational Dynamics, Puerto Rico, Ricardo Rosselló,
Rochester Maryland Municipal Bond Fund,
Rochester Virginia Municipal Fund,
Oppenheimer Funds, Franklin Templeton,
Illinois, Bruce Rauner, Mercatus Center
Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal
John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
This morning's key headlines from GenerationalDynamics.com
- Voting for statehood will not save Puerto Rico from financial crisis
- Puerto Rico plunges into contentious bankruptcy proceedings
- Illinois bond rating expected to be cut to junk status
****
**** Voting for statehood will not save Puerto Rico from financial crisis
****
Governor Ricardo Rosselló and Congresswoman representing Puerto Rico Jennifer Gonzalez celebrate the results of the statehood referendum (AP)
On June 11, the citizens of Puerto Rico passed a non-binding
referendum calling for Puerto Rico to be the 51st state of the United
States. The vote was overwhelming -- 97% voted "yes" on the
referendum.
Puerto Rico's governor Ricardo Rosselló said that he will create a
commission to demand statehood from the U.S. Congress, which has to
approve any changes to the island's political status. Standing in
front of a cheering crowd of supporters carrying U.S. flags and
dancing to a tropical jingle that promoted statehood, Rosselló yelled:
> [indent]<QUOTE>"The United States of America will have to obey the
> will of our people!"<END QUOTE>[/indent]
Whether Rosselló actually believes that non-sequitur, or
whether he actually believes his fantasy claim that Puerto Rico's
financial crisis would now be solved by an influx of dollars from
statehood, is not known. What is known with certainty is that Puerto
Rico is not about to become a statement.
The referendum was about as phony as a Russian presidential election.
Only 23% of the electorate voted, because the vote was almost 100%
boycotted by all opposition groups, including the majority of Puerto
Ricans who consider their identity and their culture to be uniquely
theirs and do not want to be an American state for any reason. The
pro-statehood party, on the other hand, spent millions of dollars on a
campaign, telling people that if they did not vote for statehood they
would be deprived of their U.S. citizenship and promising millions in
federal money if it became the 51st state.
For Puerto Rico to achieve statehood, Congress would have to approve.
The population are overwhelmingly Democrats, so a Republican congress
will not be too interested. And statehood would mean that Puerto Rico
would get five seats in the House of Representative, which means that
five other states would lose one seat. It's just not going to happen.
ABC News (12-Jun) and The Atlantic and The Hill and CNBC (9-June)
****
**** Puerto Rico plunges into contentious bankruptcy proceedings
****
Puerto Rico owes $70 billion in bond debt and an additional $49
billion pension obligation to government employees. There's is
absolutely no possibility that those debts will ever be repaid.
Puerto Rico's bonds have been tax exempt since 1917. Many people have
invested in Puerto Rico bonds because they pay 10% interest (yields)
and because under federal law they're "triple-tax free." This means
that you could invest in Puerto Rico's bonds and earn 10% interest
every year, and not have to pay federal, state or municipal tax on the
interest you collect. There were other major tax benefits granted
exclusively to those investing in Puerto Rico.
The money that investors paid for these bonds has been essentially
"free money" to Puerto Rico, since nobody there apparently believed
that it would ever have to be paid back. As a result, Puerto Rico has
felt free to spend huge amounts of money on social programs, with
bills that are only now coming due.
The unemployment rate is 13.7%. Only 700,000 of the 3.5 million
people, or 20%, work in the private sector. The other 80% either are
on welfare, or they receive unemployment or other aid, or they work
for the government. Year after year, Puerto Rico sold more and more
bonds, and investors ate them up because of the high tax-free yields.
Through various financial tricks, Puerto Rico has managed to avoid
bankruptcy until now, but bankruptcy proceedings finally began in May
of this year.
A Puerto Rican default is likely to affect millions of Americans.
Here's an example of how mainland U.S. residents are affected: More
than 40 percent of the Rochester Maryland Municipal Bond Fund and the
Rochester Virginia Municipal Fund are invested in Puerto Rican bonds.
Funds from Oppenheimer Funds and Franklin Templeton are heavily
invested in Puerto Rico. If these funds collapse, public sector
retirees and employees from states that invested in them will suffer.
The triple-tax free 10% interest deal has drawn massive amounts of
money from 401k's and other ordinary investment funds. These funds
will all lose significant principal in a Puerto Rico default, which
means that a lot of ordinary Americans will lose part or all of their
savings. Daily Caller and NBC News (5-June) and The Nation (24-May)
Related Articles
- Zimbabwe, Venezuela, Puerto Rico - three amigos in Marxist economic destruction (01-Jul-2016)
- Puerto Rico headed for new financial default on May 1 (27-Apr-2016)
- Puerto Rico's governor says the island's debts are 'not payable' (29-Jun-2015)
****
**** Illinois bond rating expected to be cut to junk status
****
When Illinois' government missed an important deadline on June 1,
rating agencies downgraded Illinois bonds to one step above junk
status, and warned that unless the political impasse is resolved by
July 1, it's likely that they'll be downgraded again, to junk status.
Illinois' debt has been exploding. In May 2016, the state had $5.03
billion in unpaid bills. That has almost tripled in one year with
spending obligations exceeding receipts by about $600 million per
month. As of June 1 of this year, it owes a record $14.5 billion in
unpaid bills. On top of that, unfunded pension liability has been
exploding as well. The state has more than 660 government pension
funds. The unfunded pension liability for the state's five major
plans is $251 billion, up 25% in the last year.
Pundits are claiming that Illinois' situation isn't as bad as Puerto
Rico's, because Illinois is a wealthier state and can impose higher
taxes. In one sense, the two are the same: There is no hope of ever
paying off these debts.
Illinois hasn't passed a budget for the past two years. The
Democrat-controlled legislature and Republican governor Bruce Rauner
can't agree about anything. It's this political chaos that caused the
June 1 deadline to be missed, and the same chaos makes it likely that
a July 1 deadline will also be missed, which will trigger the bond
downgrade to junk status.
The downgrade to junk status will not immediately force the state into
default, but it will raise interest rates significantly, caused the
debt death spiral (or, as S&P calls it, the "negative credit spiral")
to accelerate. Anticipation of junk status is already affecting
interest rates. Chicago public schools, which used to pay 4.64%
interest on its bonds, are now paying an exorbitant 9%.
Other states are also facing serious debt spirals. According to a
2016 study by the Mercatus Center at George Mason University:
- The best five states with regard to fiscal solvency are
Alaska, Nebraska, Wyoming, North Dakota, and South Dakota.
- The worst five states are: Kentucky, Illinois, New Jersey,
Massachusetts, and Connecticut.
The rankings were based on cash solvency, budget solvency, long-run
solvency, service-level solvency and trust fund solvency. Investors.com and Zero Hedge and Bloomberg (1-June) and Barrons and Mercatus Center at George Mason University (2016)
Related Articles
- Illinois' budget problems are worse than California's (16-Jul-2010)
- Illinois starts paying IOUs instead of lottery winnings (25-Oct-2015)
KEYS: Generational Dynamics, Puerto Rico, Ricardo Rosselló,
Rochester Maryland Municipal Bond Fund,
Rochester Virginia Municipal Fund,
Oppenheimer Funds, Franklin Templeton,
Illinois, Bruce Rauner, Mercatus Center
Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal
John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
