波多黎各公共債務：積累與重組

Contents

Introduction1

TheLongBuild-UptoPuertoRico'sDebtQisis3

PostwarDevelopmentStrategyMadePuertoRicoaModel3

The2006BudgetaryCrisis3

Tax-BackedCOFINABondsProvidedStop-GapFinancing4

ExperienceswithPensionObligationBonds5

2013-2015:FiscalPressuresIntensify7

LastGOBondsSoldDirectlytoHedgeFundsinMarch20148

FederalCourtsStrikeDownLocalBankruptcyLaw9

GovernorGarciaPadillaCallsDebt“Unpayable,“DeclaresFiscalEmergency10

PredefaultStructureofPuertoRico'sPublicDebts10

GovernmentDevelopmentBankasFiscalAgentandFinancialAdvisor11

CategoriesofPublicDebt11

PublicDebtandthePuertoRicoConstitution13

PROMESAEnactedin2016toAddresstheGisis14

OversightBoardAppointmentsandOrganization15

PROMESAEstablishedTwoPathstoRestructureDebt15

RestructuringCOFINAandGOBonds17

NewGovernorInauguratedinJanuary201718

OversightBoardFilesPROMESATitleIIIPetitionsinMay201719

HurricanesIrmaandMariaHitPuertoRicoinSeptember201720

SettlingtheCOFINA/GODispute20

OversightBoard,TitleIIICourtMovetoWrapUpCOFINARestructuring23

CourtApprovesRestructuringandBondExchangeinFebruary201924

ConcernsoverCOFINASettlementandEthicalConflicts24

BoardPivotsGORestructuringin201925

2020:OversightBoard,HedgeFundsNegotiateOverGOBonds26

AccusationsofInsiderTradingintheGORestructuringProcess27

CallsforInvestigationsofAllegedInsiderTrading27

RestructuringonHoldin202028

OversightBoardAnnouncesRevisedGOPSAinFebruary202129

MarketPerspectivesonDebtRestructuring31

WhatCanPuertoRicoAffordtoPay?33

PuertoRico'sEconomyExpectedtoShrink34

RevenueGrowthandTaxPolicy37

ComparisonwithHeavilyIndebtedStates38

IssuesforCongress38

FederalismandMunicipalDebtMarkets38

FederalPoliciesandMunicipalDebtStructures40

Ultra-Long-TermandExoticDebt41

BankruptcyProcedures,Disclosure,andPotentialConflictsofInterest42

AnAuditofPuertoRico'sPublicDebt44

ConstitutionalRestraintsMayBeanIneffectiveSubstituteforPrudentBudgeting45

Figures

Figure1.PgtoRico'sPublicDebt,1960-20174

Figure2.PuoloRico'sPublicDebtasofJuly31,2016,in$Billions12

Figure3.COFINAHoldingsofSeniorCOFINABondholdersCoalition22

Figure4.PriceTrendsforSelectedPuertoRicoBonds32

Figure5.ProjectedPuertoRicanandU.S.EconomicGrowthRates,2020-202535

FigureB-l.Trading\blumesforCOFINABonds,2016-201949

FigureB-2.PriceTrendsandTrading\blumesforSelectedGOBonds,2018-202151

FigureB-3.SelectedPuertoRicoBuildingAuthorityBondPriceTrendsandTrading

\6lumes,2018-202052

Tables

Table1.ComparisonofFebruary2021PSAandOctober2020BoardProposal30

TableA-l.PuertoRico'sPublicDebtAsofJuly31,2016,in$Millions46

TableB-l.No-TradePeriodsAccordingtoSculptorCapital50

TableC-l.SelectedChronologyofPuertoRico'sDebtRestructuring53

TableD-l.PuertoRicoTableofCommonAcronyms56

Appendixes

AppendixA.DetailsofPuertoRico'sPublicDebt46

AppendixB.PriceTrendsandTrading\blumesforSelectedBonds48

AppendixC.ChronologyofSelectedEvents53

AppendixD.TableofCommonAcronyms56

Contacts

AuthorInformation57

Introduction

PuertoRico'spublicdebts,whichtotaledjustover$70billionwhenthePuertoRicoOversight,

Management,andEconomicStabilityAct(P.L.114-187;PROMESA)becamelawonJune30,

2016,arenowinthemidstofoneofthelargestrestructuringsofpublicdebtinU.S.history.

PuertoRico'sfiscaltroublesfellundernationalscrutinyduringsummer2013,aftertheCityof

Detroit'sbankruptcyfilingremindedinvestorsthatmunicipalbondsarenotriskfree,andafterthe

financialpressnotedtheprecariousstateofPuertoRico'spublicfinances.1Beyondthe

consequencesfortheisland,likelytolastdecades,therestructuringofPuertoRico'spublicdebts

couldinformfuturefederalresponsestofiscalstrainsfacedbysomestateandlocal

governments.23

PROMESA,amongotherprovisions,createdtwopathsfordebtrestmcturing:onethatdrawson

theBankruptcyCodeandanotherthatissimilartosomesovereigndebtprocedures.Italso

establishedaFinancialOversightandManagementBoard(FOMB;OversightBoard)and

empoweredittorepresentthePuertoRicangovernmentinthosedebtrestructuringprocesses.

ThoseprocesseshaveincludedextensivelitigationandnegotiationswiththePuertoRican

government,hedgefunds,bondinsurers,andothercreditors.DestructioncausedbyHurricanes

IrmaandMariainSeptember2017,gubernatorialturnover,andthecomplexityoflitigationhave

delayeddebtrestructuring.

PROMESAconditionstheOversightBoard'sterminationonPuertoRico'sabilitytoaccess

“short-termandlong-termcreditmarketsatreasonableinterestrates.,，3Completingtheprocessof

restructuringtheisland'sdebtsintoafiscallysustainableformisalikelyprerequisitetothat

access.

TheCityofDetroit,bywayofcomparison,hadabout$18billionindebtwhenitentered

bankruptcyin2013.4PuertoRico'spublicdebts,whichtotaledover$70billionbeforeincluding

unfundedpensionliabilities,areaboutfourtimeslargerthanthatsum.PuertoRicocouldalso

becomeoneofthemostexpensiverestructuringsever,withprofessionalfeesthatmightexceed

$1.4bUlion.5

Disputesovertherelativepriorityofgeneralobligation(GO)debtclaimsandclaimsofsales-and-

use-tax-backeddebtwereacentralpointofcontentioninthedebtrestructuringprocess.The

OversightBoarddecidedtofirstrestructurethesalestax-backedbonds—knownasCOFINA

bondsaftertheirSpanishacronym.6InAugust2018,theBoardreachedanagreementwith

COFINAbondholdersonasplitofsalestaxrevenuesbetweenCOFINAdebtserviceandPuerto

AndrewBary,“TroublingWinds:PuertoRico5sHugeDebtCouldOverwhelmAttemptstoReviveitsEconomy,M

Barron,s.August26,2013.

2Forinstance,onebankruptcylawyerstatedthatPuertoRico'sdebtrestructuringprocesswould44almostcertainly

shapefuturemunicipalrestructurings.^^DavidR.Doyle,tkThePuertoRico€Bankruptcy5:aCheatSheet,MAmerican

BankruptcyInstitute,https://u^/feed-item/the-puerto-rico-%E2%80%9Cbankruptcy%E2%80%9D-a-cheat-

sheet.

3PROMESA§209alsorequiresimplementationofmodifiedaccrualaccountingstandardsandbalancedbudgets.

4RoniA.Elias,“ALessonFromDetroit:WaystoMakeMunicipalBankruptcyMoreRareandLessPainful,“Federal

L^myer,May2017,p.70,/wp-content/uploads/2017/05/bankruptcy_elias-pdf-l.pdf.

5ChristianRamosSegarraandRosarioFajardo1,44$832MillioninAttorneyFeesforPuertoRicoBankruptcyProcess/*

WeeklyJoumal/ElVocero,January27,2021,https:〃/business/832-million-in-aitorney-

fees-for-puerto-rico-bankruptcy-process/article_e6b6a3f4-6027-lIeb-af4c-e796e78d7a4c.html.

6COFINAistheCorporaciondelFondodeInteresApremiantedePuertoRico.AppendixDlistscommonlyused

abbreviationsandacronyms.

Rico'scentralgovernment,theCommonwealthofPuertoRico(CPR).Thatagreementbecamea

planthatafederaldistrictcourtjudgeconfirmedonFebruary4,2019,clearingthewaytoa

restructuringofPuertoRico'sCOFINAdebt,which,atthattime,representednearlyone-quarter

oftheisland'soutstandingpublicdebt.7Bondswithaparvalueof$17.6billionwerethen

exchangedfor$12billioninnewbonds.8

OnFebruary23,2021,theOversightBoardannouncedarevisedplanagreedtoby“certainbondholdeis"to

restructuretheisland'sGObondsandcertainothercentralgovemmentdebts.9Theplan,ifimplemented,

wouldreducetheCPR^debtsendeeobligationssubstantially,albeitbylessthanaplanputforthin

October2020.TheBoardfiledadisclosurestalementdescribingtheamendedplanwiththeTitleIIIcourt

onMarch8,2021.10OnMay4,2021,theTitle111courtscheduledahearingforJuly13,2021,onthe

adequacyofdisclosuresdescribingtheplan.11ConfirmationbytheTitleIIIcourtwouldberequiredto

implementthatplan,aswellasotherplanscurrentlybeingnegotiated.

ThisreportoutlinestheaccumulationofPuertoRico'sdebtandtherestructuringoftheisland's

publicdebtthroughprocessesestablishedbyPROMESAPuertoRico'spostwareconomic

developmentstrategyofindustrialization,asnotedbelow,falteredafterthe1973energycrisis.

Acutefiscalcrisesin2006-2007and2013-2016resultedindebtlevelsthatcouldneitherbe

sustainednoraddressedthroughtheBankruptcyCode,whichledtoPROMESA9senactment.

Thisreportfocusesonthelargestportionsoftheisland'spublicdebt.Forbrevity'ssake,itomits

discussionofpensionsandtherestructuringofpubliccorporations,suchasthePuertoRico

ElectricPowerAuthority(PREPA)12,theHighwaysandTransportationAuthority(HTA),and

smallerentities.Also,thePuertoRicoAqueductandSewerAuthority's(PRASA's)somewhat

strongerfinancialpositionhasenabledittoavoidtheneedtoseekarestructuringofitsbonds.13

Thereport'sAppendicesincludeasummaryofthestructureofPuertoRico'spre-restructuring

publicdebts,ananalysisoftheevolutionofpricesandtradingvolumesofselectedbondsduring

therestructuringprocess,achronologyofselectedevents,andaglossaryofabbreviationsin

EnglishandSpanish.

7LauraTaylorSwain,U.S.DistrictJudge,uMemorandumofOpinionandOrderApprovingSettlementBetween

CommonwealthofPuertoRicoandPuertoRicoSalesTaxFinancingCorporation,,,February4,2019,at

https:///puertorico/Home-DownloadPDF?idl=OTAzMDUx&id2=0.

8RobertSlavin,4tCOFINASwapsOutBondsinBiggestU.S.MuniRestructuring,MBondBuyer,February12,2019.

9OversightBoard,44OversightBoardReachesAgreementinPrincipleonDebt:CreditorsHoldingAbout$7Billionof

GeneralObligationandPublicBuildingAuthorityBondsCommitted;MedialionContinuestoGainSupportAcross

BroadSpectrumofCreditors/'pressrelease,February10,2021,https://drive.googlc.eom/file/d/

149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view.AlsoseeOversightBoard,“NewDebtAgreementOpensPathto

ExitFromBankruptcy,pressrelease,February23,2021.https://drive.google.eom/file/d/

1golHKPzYdtGFVFSfEotCgGDW7THhtn0j/view.

10Inre:CPR,OversightBoard,SecondAmendedTitleHIJointPlanOfAdjustmentoftheCommonwealthofPuerto

Rico,etal.,March8,2021,https://drive.google.eom/file/d/lIP-znS3911EFMcg35u6flHfcndndyxec/view.

11LauraTaylorSwain,U.S.DistrictJudge,"OrderSchedulingaHearingontheAdequacyofInformationContainedin

theDisclosureStatement,“May4,2021./puertorico/Home-DownloadPDF7idl=

MTAxMjI3OA==&id2=0.

12OnMay11,2021,theOversightBoardaffirmeditssupportforarestructuringplanforPREPA,whichhadbeen

delayedbecauseoftheCOVID-19pandemic,amongotherdisruptions.OversightBoard,StatusReport,May11,2021,

/puertorico/Home-DownloadPDF?idl=MTAxMzMxNg==&id2=0.

13ThefederalgovernmentagreedtoreducedebtserviceonCleanWaterStateRevolvingFundPrograms,theDrinking

WaterStateRevolvingFundPrograms,andtheU.S.DepartmentofAgriculture'sRuralDevelopment(RD)Program.

SeePRASA,2020FiscalPlan,June29,2020,pp.3-60,3-61.htlps://u//wp-content/uploads/2020-

Fiscal-Plan-for-PRASA-as-Certified-by-FOMB-on-June-29-2020.pdf.

TheLongBuild-UptoPuertoRico'sDebtCrisis

Overthepastfewdecades,PuertoRico'sgovernmenthasstmggledtocollectsufficientrevenues

tocoveroutlays,whichledtorisingpublicdebtlevelsandgrowingunfundedpensionliabilities.*14

PostwarDevelopmentStrategyMadePuertoRicoaModel

FromtheonsetofWorldWarIIin1939untilthe1973energycrisis,PuertoRicohadbeenput

forthasamodelforeconomicdevelopmentthroughindustrializationsupportedbygeneroustax

incentives.15Thatenergycrisis,alongwithbroaderchangesintheglobaleconomyincluding

heightenedtradecompetitionfrommiddle-incomecountries,broughtPuertoRico9spostwarera

ofrapideconomicprogresstoanend.16

Duringthe20thcentury,PuertoRicoclosedmuchofthegapwiththemainlandinpercapita

income,literacy,andhealthstatus.17Nonetheless,bythe1970sPuertoRicowasstillfarpoorer,in

termsofmedianhouseholdincome,thanthepoorestmainlandstate.Sincethen,thatincomegap

hasnarrowedmoreslowly.18Despitetheeconomicslowdowninthe1970s,publicdebtlevels

remainednearlysteadybeforeincreasinginthemid-1980s,asshowninFigure1.By2014,the

island'spublicdebtreachedalevelroughlyequivalenttoitsgrossnationalproduct(GNP).19

Publiccorporations,whichprovideelectricity,water,transportation,andotherpubliclyprovided

services,accountedformuchofthataccumulationofdebt.PuertoRico'scentralgovernment,

whosebudgetswereconsideredseparatefromitspubliccorporations,keptrevenuesandoutlays

roughlyinbalanceuntil2000,whenoutlaysbegantoconsistentlyoutpacerevenues.20

The2006BudgetaryCrisis

In2006,thePuertoRicanlegislatureandthen-GovernorAnibalAcevedoVilareachedanimpasse

onabudgetandhowtoaddressloomingfiscalchallenges.Bylate2006,aftercreditrating

agenciesdowngradedtheisland'sGObondsnearlytojunkstatus,islandofficiakandtheir

14Formoreinformation.seeCRSReportR44095,PuertoRico'sCurrentFiscalChallenges,byD.AndrewAustin.

“TerrenceFarrell,t4ArthurLewisandtheCaseforCaribbeanInduslrialisationZ，SocialandEconomicStudies,vol.29,

no.4(December1980),pp.52-75,htlp:〃/slable/27861908.Accordingtoonerecentanalysis,44real[gross

domesticproduct]GDPpercapitaincreasedatarateof5.3percentbetween1950and1974.“JohnDevereux,

“ArrestedDevelopment?PuertoRicoinanAmericanCenturyJournalofEconomicHistory^vol.79,no.3

(September2019),pp.708-735.

16SeeCRSReportR44095,PuertoRico'sCurrentFiscalChallenges,byD.AndrewAustin.Congressionalclientsmay

requestalongermemorandumversion.

17BrianMarcin,^EconomicDevelopmentinPuertoRicoafterUSAnnexation:AnthropometricEvidence/'Economics

&HumanBiology,vol.38,August2020.

lsThe1990CensusfoundPuertoRico'smedianhouseholdincomewas44%ofMississippi'sand30%oftheU.S.

estimate.The2014-2018AmericanCommunitySurveyfoundPuertoRico'smedianhouseholdincomewas46%of

Mississippi'sand33%oftheU.S.estimate.

19GovernmentDevelopmentBank(GDB),CommonwealthQuarterlyFinancialRepon,July17,2014,pp.41-42,

/documents/CommonwealthQuarterlyReport71714.pdf;andCommonwealthofPuertoRico,

ConsolidatedAnnuaIFinancialReportfarFY2013,note22,pp.230-231,http://www.hacienda.gobicrno.pr/downloads/

pdf/cafr/FINANC!AL_REPORT_2013.pdf.GNP,whichmeasurestheisland'stotalincome,istypicallyusedtomeasure

thePuertoRicaneconomybecausegrossdomesticproduct(GDP)isdistortedbythetaxavoidancestrategiesof

multinationalcorporationswithPuertoRicansubsidiaries.

20CarlosA.ColondeArmas,“LaConslituci6ndePuertoRicoysuRequisitedeunPresupuestoBalanceado,“Revista

JuHdicaUniversidaddePuertoRico,vol.85,no.3(2016),pp.819-832,esp.Table2.

financialadvisorssooncametoviewbondsbackedbysalestaxrevenuesasonewaytomanage

fiscalchallenges.

Tax-BackedCOFINABondsProvidedStop-GapFinancing

Seekingtopayoffolddebtsincurredwithoutaclearmeansofrepayment,theisland'slegislature

andgovernorenactedmeasuresinthesecondhalfof2006thatsetupasecuritizationofanew5.5%

salesandusetax,whichreplacedanexcisetax.21Thetax-backedbondswereabletoobtainahigh

creditrating,andthuscouldbeissuedwithaloweryield,reducingdebtservicecoststothePuerto

Ricangovernment.

FigureI.PuertoRico'sPublicDebt,1960-2017

Inbillionsofconstant(FY2017)dollars

Source:StatisticalAppendix(ApendiceEstadistico),variousyears;availableat/web/

2016083I062749/http://www.jp.gobierno.pr/Portal_JP/Defaultaspx?tabid=l84.

Notes:DatarepresentgrosspublicdebtofPuertoRicoasofJune30ofeachyear,providedbytheGovernment

DevelopmentBankofPuertoRico.Figuresfor1989and2014werepreliminaryestimates.HTAandthe

Univers祀yofPuertoRicoareincludedintheCommonwealthGovernmentsubtotal.TheU.S.GDPpriceindexis

usedtoadjustlevelsforinflation.RecentApendicesEstadisticoomitdebtdata.

COFINAwasestablishedasapubliccorporationcontrolledbytheGovernmentDevelopment

Bank(GDB)toissuebondsbackedbyhalfoftheproceedsofthenewtax,whichweredivided

betweenseniorbondscarryingstrongerinvestorprotectionsandjunior(subordinate)bonds.22

COFINAprovidedfundstothePuertoRicangovernmentandhelpedserviceitsdebts,butits

proceedswerenottiedtoinfrastructureprojects.Instead,fundscoveredpastdebtsandcontinuing

operatingbudgetdeficits-aprocesstermed“scoopandtoss.9*23ThelegalstatusofCOFINAand

itsrelationtofiscalprovisionsinthePuertoRicanConstitutionlaterbecameacentralpointof

contentionindebtrestructuringlitigationandnegotiations,assubsequentsectionswilldiscuss.

AstheGreatRecessionof2007-2009strainedPuertoRico9seconomyandpublicfinances,more

COFINAbondswereissued.Thosebondswereviewedasamorefavorablefinancingoption

becausetheycarriedbettercreditratingsthanCPRGOdebtandthuscouldbeissuedwithalower

yield.ThelastCOFINAbondswereissuedin2011.24From2009through2011,formerOversight

BoardmemberCarlosGarciaheldseniorpostsinGDB,includingservingasitspresident.From

2001through2006,GarciaworkedatBancoSantander,whichhelpedplacePuertoRico'spension

bondsandwhichaccumulatedlargeholdingsofCOFINAbonds.25

ExperienceswithPensionObligationBonds

TheGreatRecessionandongoingbudgetarypressuresakoaffectedPuertoRico'sthreepublic

pensionsystems,whichhadbeenseverelyunderfunded.UnfundedobligationsofPuertoRico's

publicpensionsystemswereestimatedatover$40billionin2016.ManybeneficiariesofPuerto

Rico'spublicpensionswereineligibleforthefederalSocialSecurityprogram,leavingthem

dependentonsystemswithfewremainingassetsanduncertainfinancialprospects.

In2006,MerrillLynchadvisorssuggestedthatthePuertoRicoEmployeeRetirementSystem

(ERS)andMerrillLynchissueatleast$7billioninpensionobligationbonds(POBs).Merrill

Lynchwasunabletoplacethosebondswithinvestorsbecausethebondswereineligiblefora

federaltaxexemption.

OtherjurisdictionshaveissuedPOBsinthehopethatreturnsoninvestmentsfundedbybond

proceedswouldcoverprincipalandinterestpaymentsplustheforgoneinvestmentearningsthat

couldhavebeenmadeusingcontributionspledgedtobackthebonds-anapproachknownasan

arbitragestrategy.26Thatstrategymightconceivablyreduceunfundedpensionliabilitieswere

investmentyieldssufficientlyhigh,iffeesandothercostswerelow,andifbondproceedswere

notdivertedtocoverotherliabilities.Lowyieldsorlosseswouldexpandpensionliabilities.

In2008,UBS(UnionBankofSwitzerland)——whichhadalsoadvisedislandofficialsonthe

structureofthebonds-underwrotethreeroundsofPOBs.UBS'sownproprietaryfunds—largely

22COFINA(CorjjoradondelFondodeInteresApremiante),knowninEnglishasthePuertoRicoSalesTaxFinancing

Corporation,wasestablishedbyAct91-2006,enactedMay13,2006,/lexlex/Ieyes2006/

lexl2006091.htm;Act117-2006,enactedJuly4,2006(establishedsalesandusetax);Act291-2006,enactedDecember

26,2006.Kobrc&KimLLP,FinalInvestigativeReport^August20,2018,/file/d/19-

lauVo3w9MPS03xYVe0SWhQin-Q6FEf/vicw.PartVIofthatreportpresentsananalysisofCOFINAdebt.GDB's

boardactedasCOFINA'sboard.Act56-2007(pp.3-4)grantedCOFINAthesamelegalprivilegesasGDB.

23MikeCherney,BorrowingManeuverCatchesFlak:，ScoopandToss,InvolvesSellingNewDebttoPayOff

ExistingBonds,"WallStreetJournal.December2,2013.

24Kobre&KimLLP,FinalInvestigativeReport,August20,2018,pp.179-188.

2'SantanderAssetManagement.44FirstPuertoRicoTaxExemptFund(ClassA),“March31,2016,

/^p-contcnt/uploads//2016/l27TE-lQ2016.pdf.

26SeeKobre&Kim,FinalInvestigativeReportsAugust20,2018,PartVII.

closed-endmutualfundsmarketedtoPuertoRicoresidents-bought41%ofthefirstPOBissue,

89%ofthesecondissue,and38%ofthethird.SantanderandBancoPopular,twoofthelargest

banksinPuertoRico,apparentlyboughtnearlyalloftheremainingbondsinthesecondissue.27

ThePuertoRicoPOBsincurredsubstantiallossesandraisedseriousquestionsregardingthe

judgementofERSboardmembers,theislandgovernment'sfinancialadvisors,andinvestment

banksinvolvedinimplementingthebondsales.A2010analysisoftheERSPOBs'issuanceby

financialanalysisfirmConwayMackenziewassharplycriticalofresponsibleofficiak.28The

underlyingbonds'poorperformanceandtheuseofleverageresultedinsubstantiallossesforretail

investorswhoheldthoseUBSmutualfunds.29APuertoRicosubsidiaryofUBSagreedtopay$34

milliontosettleclaimsregardingmarketingofitsclosed-endbondfundswiththeU.S.Securities

andExchangeCommission(SEC)andtheFinancialIndustryRegulatoryAuthority(FINRA)in

September2015.OneUBSfinancialadvisorpleadedguiltytocriminalfraudchargesin

November2018.30

BondsandMunicipalFinance

Stateandlocalgovernmentsborrowtofinanceschools,streets,sewers,andotherpublicinfrastructureprojects,

ortosupportcertainprivateprojects,aswellastocloseshort-termgapsbetweenpublicrevenuesandoutlays.

U.S.stateandlocalborrowingtotaledover$3trillioninmid-2020.31Municipalsecurities,suchasbondsandnotes,

aregenerallyexemptfromfederaltaxes.Moststatesexempttheirownsecuritiesfromtax,thoughfewerexempt

thoseofotherstates.BondsissuedbyPuertoRico,withsomeexceptions,offeratripleexemptionfromtaxes一

thatis,exemptfromfederal,state,andlocaltaxes—thatmadethemattractivetomunicipalmutualfundmanagers

andtohigh-incomehouseholds.3233

MunicipalsecuritiesofferedontheU.S.mainlandaresubjecttoSECregulation,thoughsecuritiesissuedby

investmentcompaniesbasedinU.S.territoriesarenotcoveredbytheI940InvestmentCompanyAct(ICA;P.L

76.768).33

27CraigMcCannandEdwardO'Neal,“UBSSuccumbedtoConflictsandPurchased$1.7BillionofEmployee

RetirementSystemBondsintoitsPuertoRicanMunicipalBondFundsin2008,“SecuritiesLitigation&Consulting

Groupblog,November6,2014,/2014/11Zubs-succumbed-to-conflicts-and.html.

28ConwayMackenzie,ReviewoftheEventsandDecisionsThatHaveLedtotheCurrentFinancialCrisisofthe

EmployeesRetirementSystemoftheGovenunentofPuertoRico,October2010,http:〃/pdf/blog/

13409.pdf.

29CraigMcCann,EdwardO'Neal,andSusanSong,44UBSandSantander'sRoleinUnderwritingEmployeeRetirement

SystemBonds,^^SecuritiesLitigation&ConsultingGroupblog.May16,2017,/2017/05/ubs-and-

santanders-role-in-undcruriting.html.SeealsoNickBrown,uPuertoRico,sOtherCrisis:ImpoverishedPensions/*

Reuters,April7,2016,/investigates/special-report/usa-puertorico-pensions/.AlsoseeDavid

Evans,4kHowUBSSpreadthePainofPuertoRico^DebtCrisistoClients,''Bloomberg,September22,2015,

https://wu//news/articles/20I5-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-clients.

3°U.S.DepartmentofJustice,44FormerRegisteredFinancialAdvisorPleadsGuiltytoBankFraud,“pressrelease,

November16,2019,httpsiZ//opji/pr/former-registered-financial-advisor-pleads-guilty-bank-fraud-role-

schenie-fraudulently-obtain.AlsoseeKateMcCormick,^FormerUBSInsiderSaysBanksFueledEconomicCrisisin

PuertoRico,“May1,2018,PBSFrontline^/wgbh/frontline/article/former-ubs-insider-says-lxinks-

fueled-economic-crisis-in-puerto-rico/.

31FederalReserveSystemBoardofGovernors,"StateandLocalGovernments;DebtSecuritiesandLoans;Liability,

Level[SLGSDODNS1,^^/series/SLGSDODNS.

32Theexemptionwasincludedinthe1917JonesAct(P.L.64-368)andiscodifiedas48U.S.C.§745.Employee

RetirementSystem(ERS)bonds,forexample,didnotqualifyforcertainmainlandlaxexemptions.SeeKobre&Kim

LLP,FinalInvestigativeReport,August20,2018,/file/cl/19-

lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view,p.338.

33P.L.115-174§506,enactedinMay2018,setathree-yearphaseoutperiodforthatexemption,whichtheSECcan

extendforanotherthreeyears.

Municipal-ormuni—securitiesmostlyfallintotwobroadcategories.Generalobligation(GO)bondsaretypically

backedbyagovernment'spledgeof**fullfaithandcredit,“backedbythepowertotax.Revenuebonds,oftenissued

bypublicutilities,publiccorporations,orsemi-independentauthorities,canbebackedbyspecificcashflowsfroma

projectorsource——suchassalesofwaterorelectricpower,sewercharges,orhighwaytolls-orbyabroadly

appliedtax.Revenuebonds,whiletiedtonarrowerincomestreamsthanGOdebt,canqualifyforcertaininvestor

protections.34

Defaultratesformunisecuritieshistoricallyhavebeenwellbelowratesforcorporatedebt,althoughmunicipal

defaultrateshaveriseninthepasttwodecades.ThecreditratingagencyMoody'sfoundthatovera10-year

period(2008-2017)almost10%ofcorporateissuancesdefaulted,butlessthan0.5%ofmunicipalissuancesdid.35

MajordefaultsinrecentdecadesincludeamismanagednuclearpowerprojectinWashingtonState,Orange

CountyinSouthernCalifornia,andtheCityofDetroit.36ArkansaswasindefaultintheI930s,andseveralstates

andtheTerritoryofFloridadefaultedorrepudiateddebtsinthe19thcentury.37

2013-2015:FiscalPressuresIntensify

Theisland'sfiscalconditionbegantoraisewidespreadconcernsinfinancialmarketsandamong

policymakersinmid-2013,afterDetroitfiledformunicipalbankruptcyandabusinessmagazine

criticizedPuertoRico'sfiscalcondition.38Then-GovernorAlejandroGarciaPadilla,whowas

inaugurated