The Governor of Puerto Rico had a wee tiny thing to admit about his island’s municipal bond debts:
“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.
Muni bonds have (almost) always promised low returns for investors — but safe and free from federal taxes. And state taxes are owed only on income from munis bought out of state. No taxes help keep rates low, allowing your city or state to borrow and make improvements relatively cheaply. Almost every time you see local road improvements or a new school being built, they were finances with muni bonds.
But if that feeling of safety goes away, if buyers feel like their returns are quite so guaranteed, then rates must go up to keep buyers buying. That means fewer road improvement or new schools, or waiting longer for them.
Considering the state of our roads and a lot of our schools, that’s a bad deal for everybody — and it only takes a few bad actors in local governments as diverse as Stockton, CA, Detroit, MI, and Puerto Rico.