Puerto Rico took a step closer to resolving the country’s worst municipal-debt default when creditors owing $11.7 billion came together to form a settlement, garnering the greatest Wall Street backing for a restructuring of the territory’s primary public debts yet.
Creditors agreed to reduce $18.8 billion in general obligation debt to $7.4 billion, betting that rising market demand for risky municipal debt will help them make money while easing Puerto Rico’s exit from bankruptcy.
What is the status of Puerto Rico bonds?
MIAMI, Florida On Tuesday, a federal judge approved Puerto Rico’s exit from bankruptcy under the largest public-sector debt restructuring plan in US history, nearly five years after the financially beleaguered territory claimed it couldn’t pay its creditors.
Hurricanes Irma and Maria, a series of earthquakes, and the coronavirus epidemic have only exacerbated Puerto Rico’s economic woes since it declared bankruptcy.
The restructuring proposal will cut the government of Puerto Rico’s debt, which totals $33 billion, by nearly 80%, to $7.4 billion. In addition, the agreement will save the government approximately $50 billion in debt payments.
Puerto Rico will also begin repaying creditors, albeit at a reduced rate, something it has not done in years. In 2015, the government announced that it would be unable to repay its debts.
When did the bonds of Puerto Rico default?
Puerto Rico first defaulted on its general obligation bonds in July 2016, when it failed to pay creditors about $1 billion, and it hasn’t made any payments since.
“It is a very positive development for Puerto Rico that a cross section of large bondholders has worked with the Oversight Board to develop a consensual restructuring agreement that will expedite the Commonwealth’s exit from bankruptcy, respect the lawful priority of valid public debt, and help restore capital markets access,” said Susheel Kirpalani, an attorney from Quinn Emanuel Urquhart & Sullivan who represents bondholders in the Lawful Constitutional Deficit Resolution.
According to public disclosures, hedge funds GoldenTree Asset Management, Monarch Alternative Capital, Whitebox Advisors, and Taconic Capital possess nearly $1.4 billion in constitutionally backed debt.
According to a person familiar with the settlement agreement, the proposal, which took about three months to negotiate, is expected to be lodged with the court within 30 days, with bondholders anticipating final approval by early 2020.
The Puerto Rican government issued a statement rejecting the agreement, citing the administration’s strong opposition to pension changes, which are included in the updated budgetary plan on which the restructuring agreement is based.
In a statement, Christian Sobrino Vega, the CEO and president of the Puerto Rico Fiscal Agency and Financial Advisory Authority, said, “Not one word of the PSA (Plan Support Agreement) is considered acceptable to AAFAF.” The Spanish acronym for the agency’s name is AAFAF.
“And we can firmly state that no legislation, executive action, or other administrative approval required from the Puerto Rico government will be taken to implement an agreement that directly or indirectly supports a Plan of Adjustment that decreases payments to our retirees,” Sobrino Vega said.
After being appointed in 2017 to monitor the $73 billion reorganization, which is the largest in the history of the US municipal bond market, the island’s oversight board has made some progress in 2019.
U.S. District Judge Laura Taylor Swain, who is supervising the unprecedented bankruptcy-like proceedings, authorized a plan in February to restructure approximately $17 billion in sales tax-backed bonds, dubbed COFINA for its Spanish name. Senior bondholders received 93 percent of their money back, while junior bondholders received 53 percent.
In addition, the court granted a debt restructure for the Government Development Bank worth roughly $4 billion.
A tentative arrangement for around $8 billion in debt issued by the island’s troubled electric power authority has also been reached. The monitoring board also announced a tentative agreement on Wednesday to restructure more than $50 billion in unfunded pension liabilities.
What is Puerto Rico’s debt to the United States?
The public debt of Puerto Rico could be lowered from $70 billion to $34 billion, with debt from the Public Buildings Authority and general obligations bonds cut from $18.8 billion to $7.4 billion.
How did Puerto Rico end itself in such a debt situation?
The debt issue in Puerto Rico has numerous causes. Investors in Puerto Rican municipal bonds, in particular, have benefited from preferential tax treatment for many years. This perk was taken advantage of by bond investors from all 50 states who purchased Puerto Rican bonds. When a government issues bonds, it is essentially lending money to bondholders with interest. Puerto Rico issued too much bond debt, owing in part to the tax benefit, and began relying on borrowed cash from bond issues to balance its budget.
Is it true that Puerto Rico has voted for independence?
The Puerto Rican independence movement refers to efforts by residents throughout the island’s history to gain full political independence, first from the Spanish Empire from 1493 to 1898, and then from the United States since 1898. Over the years, a number of groups, movements, political parties, and organizations have fought for Puerto Rico’s independence.
On the island, there are a variety of pro-autonomy, pro-nationalism, and pro-independence views and political groups. Organizations fighting for independence in Puerto Rico have tried both peaceful political measures and violent revolutionary activities to attain their goals since the early nineteenth century. The independence movement has not received widespread support from the Puerto Rican public since the second half of the twentieth century, failing to gain traction in both plebiscites and elections. In a 2012 referendum on the status of the country, 5.5 percent voted for independence, while 61.1 percent opted for statehood. In the status referendums in 1967, 1993, and 1998, independence garnered the least support, with less than 4.5 percent of the vote.
In 2012, a fourth referendum was held, with 54 percent of voters choosing to change Puerto Rico’s status, but the federal government did nothing. On June 11, 2017, the fifth plebiscite was held. It had the lowest voter turnout of any status referendum held in Puerto Rico, with only 23% of eligible voters voting. In the referendum, the option of independence won only 1.5 percent of the vote.
The Puerto Rican Independence Party won 13.6 percent of the vote in the 2020 general election, a considerable gain in support from the 2016 general election, when it received only 2.1 percent of the vote. In the 2020 elections, the anti-colonial Movimiento Victoria Ciudadana received an additional 14 percent of the vote.
What is the state of Puerto Rico’s economy?
The World Bank classifies Puerto Rico’s economy as a high-income country, while the World Economic Forum ranks it as Latin America’s most competitive economy. Manufacturing, particularly pharmaceuticals, textiles, petrochemicals, and electronics, are the main drivers of Puerto Rico’s economy, followed by the service industry, particularly finance, insurance, real estate, and tourism. Puerto Rico’s geography and political status are both determining factors in its economic prosperity, owing to its small size as an island; its lack of natural resources used to produce raw materials, and thus its reliance on imports; and its relationship with the US federal government, which controls its foreign policies while imposing trade restrictions, particularly in the shipping industry.
On a macroeconomic level, Puerto Rico has been in a state of economic depression for 16 years, beginning in 2006 after a series of negative cash flows and the expiration of the US Internal Revenue Code’s section 936, which applied to Puerto Rico. This section was critical for the island’s economy because it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send earnings to the parent corporation at any time without having to pay federal tax on corporate income. Puerto Rico, on the other hand, has remarkably managed to keep inflation low during the last decade. Academically, the majority of Puerto Rico’s economic woes stem from federal regulations that have expired, been repealed, or no longer apply to the island; its inability to become self-sufficient and self-sustaining throughout history; its highly politicized public policy, which tends to change whenever a political party gains power; and its highly inefficient local government, which has amassed a public debt equal to 66 percent of its gross domestic product.
Puerto Rico has a lower poverty rate than the poorest state in the US, with 45 percent of the population living below the poverty line. When compared to the rest of Latin America, Puerto Rico has the highest GDP per capita. The Commonwealth has a tremendous bond debt that it can’t service, totaling $70 billion in early 2017, or $12,000 per capita, at a time when its unemployment rate (8.0 percent in October 2018) is more than double that of the mainland. During a decade-long recession, the debt had been rising. To avoid a bankruptcy-like procedure under PROMESA, Puerto Rico must establish restructuring agreements with creditors. More specifically, since 2016, Puerto Rico has been in an unusual situation: its economy has been overseen by a federal board that is handling finances and assisting in regaining access to capital markets.
The commonwealth has a modern infrastructure, a significant public sector, and an institutional framework governed by the regulations of US federal agencies, the majority of which are present and operating on the island. The United States, Ireland, and Japan are its key commercial partners, with the majority of its products coming from East Asia, primarily China, Hong Kong, and Taiwan. In 2016, new trading partners were added, with import trade with Puerto Rico beginning in Singapore, Switzerland, and South Korea. Puerto Rico’s global reliance on oil for transportation and electrical generation, as well as its reliance on food imports and raw materials, renders the island fragile and highly reactive to global economic and climate changes.
What is the size of Puerto Rico’s debt?
SAN JUAN, PRINCIPALITY OF PUERTO RICO Puerto Rico’s nearly five-year bankruptcy struggle has come to an end as a federal judge signed a deal on Tuesday that reduces the US territory’s public debt load as part of a restructuring and allows the government to begin repaying creditors.
The deal, which is the largest municipal debt restructuring in US history, was authorized after arduous bargaining, contentious hearings, and numerous delays while the island recovers from fatal hurricanes, earthquakes, and a pandemic that exacerbated its economic plight.
“There has never been a public restructuring like this anyplace in America or the world,” David Skeel, chairman of a federal control board formed to monitor Puerto Rico’s finances, said of the plan.
He pointed out that there are no bankruptcy provisions for countries or US states like the one handed to Puerto Rico.
“This was an astoundingly difficult, huge, and important bankruptcy,” Skeel said, noting that the island’s debt was three times that of Detroit.
The government of Puerto Rico claimed in 2015 that it could not afford to pay its $70 billion public debt, which had accrued over decades of mismanagement, corruption, and excessive borrowing. In addition, it owed more than $50 billion in public pension obligations. A year after the United States Congress established the financial monitoring and management board for Puerto Rico, it filed for the largest municipal bankruptcy in US history in 2017.
Are Puerto Ricans required to pay federal taxes?
We are all aware that every American citizen is required to pay taxes to the United States government on all money earned wherever in the globe. One would imagine that the same thing would happen to all Puerto Rican citizens. Here’s where you’ll need to pay close attention.
U.S. residents who spend the entire year on the island are excused from reporting taxes with the federal government of the United States if their entire income comes from Puerto Rican sources. You must, however, file a form with the federal government if you get money from anywhere else in the globe, including the United States, and/or if you work for any US government agency in Puerto Rico.
If you match either of the following criteria, you should not submit a tax return for the United States:
Caution: The restrictions for US government employees, including members of the US armed services, are different. For more information, please see the section below.
If you have income from sources outside of Puerto Rico, including from the United States, you must file a federal income tax return in the United States if the amount exceeds the U.S. filing threshold for your filing status.
If you’re a U.S. citizen who relocates from Puerto Rico to the United States and was a bona fide resident of Puerto Rico for at least two years prior to relocating, you can deduct any Puerto Rican source income from your U.S. income tax return for the time you were still residing in Puerto Rico during the year.
If you are a bona fide resident of Puerto Rico and are qualified to exclude income from Puerto Rico from your U.S. tax return, you must figure out the filing threshold provided in the U.S. tax return instructions. IRS Publication 1321 will assist you in determining how much income you have that requires you to submit a tax return in the United States.
In addition, IRS Publication 570 explains what it means to be a bona fide resident of a United States possession or territory. Certain tax benefits may be available to bona fide residents of American Samoa, Guam, the Northern Mariana Islands (CNMI), Puerto Rico, and the Virgin Islands.
Although bona fide inhabitants of Puerto Rico are exempt from paying federal income taxes on income earned in the territory, if you are self-employed, the situation is different. Even though you will not be required to file in the United States, you should utilize Form 1040-SS or Form 1040-PR because your income will be effectively connected with a trade or operation in Puerto Rico.
You must file a federal tax return if you are a U.S. citizen who is also a bona fide resident of Puerto Rico throughout the fiscal year and receive income as a U.S. government employee in Puerto Rico.
Your military service pay will be sourced to Puerto Rico if you are a bona fide resident of Puerto Rico and a member of the US armed services, even if you work for the military in the US or another US colony. You will ascertain your residency as a member of the US military forces by looking at your home of record. Even though you are stationed in the United States, if your house of record is in Puerto Rico, you are still a bona fide resident of the island. In this situation, you’ll file a Puerto Rico return to show your worldwide income and a United States return to reflect your military pay. For taxes paid to Puerto Rico, a foreign tax credit is allowed on the US tax return.
Even though you are stationed in Puerto Rico, if your primary residence is in one of the fifty states, your income is originated there. You must file a Puerto Rico tax return for income earned in Puerto Rico, as well as a United States tax return for income earned anywhere in the world. Taxes paid to Puerto Rico on income that is not excluded on the US tax return are eligible for a foreign tax credit.
The Military Spouse Residency Relief Act imposes some restrictions on spouses of active duty military personnel (MSRRA). Civilian spouses may be able to choose the same domicile (tax residence) as their military spouse.
- Any wages, salaries, tips, or self-employment income earned by the civilian spouse is considered Puerto Rico source income if the civilian spouse continues to be a bona fide resident of Puerto Rico under the MSRRA while in any of the 50 United States or the District of Columbia. The civilian spouse reports and files taxes according to the above-mentioned rules for bona fide residents.
- If the civilian spouse continues to live in one of the 50 United States or the District of Columbia, and the civilian spouse’s main source of income is wages, salaries, tips, or self-employment, the civilian spouse will be taxed on worldwide income and will file only a federal and state tax return. If the civilian spouse has additional sources of income in Puerto Rico, the money may be required to be reported.
The MSRRA’s tax benefits for military spouses can save them hundreds of dollars in taxes and make the tax return filing process easier.
Residents and citizens of the United States must pay federal taxes for their job on the Island of Enchantment, so speak with a tax specialist about your individual circumstances to obtain the assistance you require.
Is Puerto Rico interested in becoming an American state?
The possibility of Puerto Rico becoming the United States’ 51st state has been discussed. In the time that Puerto Rico has been a colonial possession, five other territories have been annexed since 1898. In 2019, 5 percent of the lower legislature voted in favor of H.R.1965 Puerto Rico Admission Act. The bill was sent to the House Committee on Natural Resources for consideration.
A majority of voters, 54 percent, expressed unhappiness with the current political arrangement in a 2012 status referendum. In a separate poll, 61% of people said they backed statehood (excluding the 26 percent of voters who left this question blank). Puerto Rico’s legislature decided on December 11, 2012, to request that the President and the United States Congress act on the results, ending the present form of territorial status and initiating the process of admitting Puerto Rico to the Union as a state. Puerto Rico’s new representative in Congress introduced a bill on January 4, 2017 that would ratify statehood by 2025.
Another non-binding referendum was held on June 11, 2017, with 97.7% voting in favor of statehood. The turnout for this election was only 23%, which is historically low in Puerto Rico, where voter turnout generally hovers around 80%. A boycott headed by the pro-status quo PPD party was blamed for the poor participation.
The Puerto Rico Admission Act of 2018 (H.R. 6246) was introduced in the United States House of Representatives on June 27, 2018, with the goal of responding to and complying with the democratic will of United States citizens residing in Puerto Rico, as expressed in plebiscites held on November 6, 2012, and June 11, 2017, by laying out the terms for the territory’s admission as a State of the Union. In the United States House of Representatives, the admission act has 37 original cosponsors, including Republicans and Democrats.
On November 3, 2020, a nonbinding vote was held to determine if Puerto Rico should become a state. Statehood received 52.52 percent of the vote to 47.48 percent against.
What is the size of Puerto Rico’s debt?
In Puerto Rico, colonialism is still alive and thriving. Last Monday, a federal judge authorized a restructuring plan that decreases Puerto Rico’s $70 billion public debt by roughly $26 billion and reduces yearly debt payments to around $1.5 billion, down from $3.9 billion.