Rumors of Puerto Rico’s Debt have been Greatly Exaggerated

Reports have recently detailed Puerto Rico’s debt with a great deal of exaggeration. While Puerto Rico did default on bonds for the first time this month, the island actually has a, “smaller debt burden than all other U.S. states after adjusting for its territory status.” In fact, once the island’s utility bonds are excluded and U.S. debt to each state based on population is calculated, it appears that Puerto Rico actually has a lower debt-to-income ratio per capita than Maryland or Virginia—states with top credit ratings.

Moody’s Investors Service gave Puerto Rico the third-worst credit rating and says its, “net tax supported debt per capita is the highest among U.S. states and 11 times greater than Virginia’s. Moody’s projects recovery rates from 35 to 80 percent of commonwealth bonds.” Meanwhile, the MBIA Inc., unit National Public Finance Guarantee Corp says otherwise. National has about $4.7 billion in Puerto Rico exposure and argues that the situation is far from dire, as portrayed by reports like Moody’s. The National report concludes by saying, “The individual debt burden for Puerto Ricans is not as dire as is often portrayed. The Caribbean commonwealth has to pay for public schools, utilities, and sewer systems, while states delegate those duties to localities, according to National. Most of its citizens also don’t pay federal income taxes, meaning they’re not responsible for repaying the U.S. federal debt of more than $18 trillion.”

National guarantees “$1.35 billion of Puerto Rico Electric Power Authority bonds and $985 million of GOs, along with smaller portions of other island issuers, according to its presentation.” Additionally, Puerto Rico’s Governor Alejandro Garcia Padilla released a plan on September 9th to repair the island’s finances. New money-saving initiatives include closing schools, reducing benefits for the poor, and potentially delaying pension payments.

While nobody would argue that Puerto Rico’s debt situation is good, perspective and comparative studies do illuminate how the debt-to-income ratio on the island is strikingly different than elsewhere in the United States. It’s important to appreciate not only facts and figures but also gain perspective to look at the “big picture.” If you have a question about the economy and your finances—from municipal markets to personal investment solutions—contact an expert at Apex Financial Advisors today to get the insight and answers you need for success.