Puerto Rico’s May Day

When a ship is in danger of capsizing and drowning its passengers, the Captain yells, May Day! May Day!

Puerto Rico’s new governor, Dr. Ricardo Rossello, is facing a May Day call as the island is drowning in debt.

Many political balls are in the air right now. It appears that the Trump administration has no interest in bailing out the island and the congressionally mandated federal oversight board appointed to forge a restructuring agreement of the Island’s $70 plus billion debt is nowhere near getting a deal done.

Last Wednesday, Puerto Rico essentially filed for bankruptcy under a new federal law that allows the island commonwealth to shield itself from its creditors. On Friday, U.S. Supreme Court Chief Justice John Roberts picked U.S. District Judge Laura Taylor Swain to oversee the historic restructuring.

Puerto Rico’s bloated government bureaucracy will be called into question during the bankruptcy, which will take years before a final outcome. “Puerto Rico’s government workforce has dropped by more than 7,000 to 227,000 in the past three years, but the commonwealth still employs about one in four non-farm workers on the island,” according to a report by Bloomberg’s Steven Church and Rebecca Spalding from Monday. “In Connecticut, with a similar population, about 14 percent of workers are on government payrolls, while the average for a U.S. state is about 17 percent, according to the U.S. Bureau of Labor Statistics.”

“Rossello, the island’s 38-year-old governor, has sworn to tame its legendary bureaucracy,” Bloomberg reported. “As of April, his government had over 80 agencies, a number he has promised to cull. The public university has 11 campuses, more than the University of California, which serves a state population 10 times bigger. Puerto Rico also has 78 towns and cities, complete with their own governments.”

Federal law gives judges broad discretion over debt-cutting plans. “A congressionally mandated federal oversight board is in charge of submitting Puerto Rico’s debt-adjustment plan to Swain, much as Detroit’s workout was presented by an emergency financial manager,” according to Bloomberg. “After creditors and other interested groups weigh in, Swain will decide whether to approve the proposal, balancing the demands of politicians, public workers and private citizens against those of mutual funds and distressed-debt investors.”

Lost in the chaos are the Mom and Pop investors who own Puerto Rico bonds and closed-end bond funds. Unfortunately, Puerto Rico bond investors are staring at a future of financial pain and turmoil.

Rossello, is shouting May Day. Let’s hope Judge Swain hears him.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.