In my November 2013 Forbes.com column I shouted at the top of my lungs that the rating agencies are all derelict in their duties of honest and forthright analyses related to Puerto Rico, Chicago and Illinois. Well, nothing has changed for the better. Indeed, the news from Puerto Rico continues to get worse.
The deficit cutting measures by the Puerto Rican government are but a flea on an elephant’s behind. The island nation still has $70 billion of debt, huge unfunded pension liabilities, weakening liquidity, 14% unemployment and declining economic activity. Bottom line: There’s no profitable way off of the island if you own Puerto Rico’s debt.
Adding a dash of insult to injury, the rating agencies huff and puff and threaten to downgrade Puerto Rico municipals to junk (where they belong). But they are clearly too frightened of the seismic fissures such a downgrade might cause in the $3.7 trillion muni market. Shame on the rating agencies.
Their false ratings continue to give the do-it-yourself investor a feeling that things are kind of okay and the island nation may be able to work things out. They cannot unless the U.S. government throws them a life preserver in the form of a bailout. Loans won’t help—that’s debt upon debt and they are sinking in existing debt as it is.
In the U.S. there are the trillions of dollars of unfunded pension liabilities. The rating agencies should be tackling that in a big way but aren’t.
According to the State Budget Solutions, a conservative think tank, there’s a $4.1 trillion unfunded pension liability in the U.S. state pension systems. Across the nation we’ve seen flawed and I think, criminal funding practices. Promises are made and cents on the dollar are put away to fund these egregious promises. Estimates show that soon, very soon, more and more of the state, city and municipality general funds will go towards those promises made. This leaves less money to pay for roads, education and general services.
The regulatory agencies that profess to look out for the little guy should demand the rating agencies include their unfunded pension liabilities and Other Post Employment Benefits (OPEB) liabilities on every Official Statement and each current financial statement presented by the municipal issuers. Further, the regulators should demand the rating agencies stop sitting in abeyance with hollow threats of downgrades.
Stay out of high yielding municipal bond funds with large allocations to Puerto Rico munis. It’s easy for those bond managers to go on television and tout their yields and profess that Puerto Rico munis are fine. They have no skin in the game. But you do.
Buy all the essential service municipal bonds that scream safety: Water and power, irrigation, toll bridges and tunnels, seaports and airports. Names like the Port Authority of New York and New Jersey, Bay Area Rapid Transit, senior lien airport revenue bonds, personal income tax bonds (PIT).
Stay away from: Pension obligation bonds, parking, stadium, coliseum or museum bonds. Buy the individual municipal bonds and take control of your investment portfolio.
In other words, keep it clean, keep it simple.
Marilyn Cohen, Envision Capital, www.envisioncap.com, 800-400-0989, January 31, 2014
