©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission.
Munis: Chicago, Detroit,
Puerto Rico and More
Puerto Rico-An Economy Held Hostage by Politics
September 2015
Michael Comes, CFA
Portfolio Manager
& Vice President Research
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 2
Source: BLS
Private Sector Employment has Stabilized
Private Sector Employment
250
270
290
310
330
350
370
390
350
450
550
650
750
850
950
Total Private - State (000s) Government - State (000s)
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 3
Service Sector
Source: BLS
Service Sector has Recovered since the Recession
70
90
110
130
150
170
190
210
350
400
450
500
550
600
650
700
750
Private Service-Providing - State (000s) lhs Manufacturing - State (000s) rhs
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission.
Housing Market Remains Strong
4
$95,000
$100,000
$105,000
$110,000
$115,000
$120,000
$125,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Median Value Owner Occupied HomeSource: Census Bureau
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 5
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
85+
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-5
Men
Women
Source: Cumberland Advisors, Census Bureau
Population Pyramid
Population Pyramid resembles those of Japan and Western Europe
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 6
Adjusted Debt-GDP
Adjusted Debt-GDP Tells A Different Story
Centralized Government compared to U.S. States
Source: National Public Finance Guarantee
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 7
Liquidity: Low, but Improving
0
20
40
60
80
100
120
2009 2010 2011 2012 2013
Days Cash on Hand
Puerto Rico U.S State Median
Source: Puerto Rico Annual Disclosures, Investortools, Inc.
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 8
Annual Financing Gap: Puerto Rico
Annual
June 30, 2011
Annual
June 30, 2011
Annual
June 30, 2011
Sales Tax Revenue 1,129,006 1,144,659 1,170,748
Personal Income Tax Revenue
Corporate Income Tax Revenue
Fuel Tax Revenue
Total Tax Revenue 8,279,118 8,028,704 8,244,567
Total Revenue 15,307,468 15,244,255 15,773,369
Total Expense 19,278,137 21,108,141 21,513,373
Revenue Over Expense (3,970,669) (5,863,886) (5,740,004)
Capital Grants and Contributions 457,725 152,591 110,249
Net Government Transfers 230,551 219,794 246,908
Total Change in Net Assets (3,282,393) (5,491,501) (5,382,847)
CA Financing Gap (1,210,471) (3,239,556) (2,953,470)
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission.
Path to Fiscal Stability
Gray economy estimated at 25% of total output
• Puerto Rico collects only 56% of the sales taxes due on all taxable
transactions.
– At current tax rates, 100% collection would increase revenues by
approximately $1 billion annually, 1/3 of amount needed to plug annual
financing gap
• By instituting reforms, Puerto Rico could stabilize its fiscal condition
without impairments to general government creditors.
9 Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission.
Chapter 9: Not a Solution
Chapter 9 for sake of Political Expediency is not a solution
• Not a ‘get-out-of-jail free card’
• Passage of Chapter 9 and determining if insolvency standard has been
met could take years
– Think Harrisburg bankruptcy or San Bernardino
• Chapter 9 Restructuring
– Hurts Commonwealth’s credibility with investors
– Restricts market access for decades
10 Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 11
Government Dysfunction
• Puerto Rico is not so much problem as is the dysfunction of government
• Been a recent shift in support by Governor for honoring Puerto Rico
debt
• Has resulted in credibility crisis
– Commonwealth unable to sell $750 million in PRASA debt in late August
– Governor has stated publicly that government debt is “not payable.”
Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 12
Spreads Remain Elevated
Barron’s
Puerto Rico
Article
Published
S&P
Downgrade to
Junk
Initial
Restructuring
Legislation
Passed
Puerto Rico governor
states debts “not
payable”
Source: Municipal Market Analytics, Bloomberg
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 13
Closing Thoughts
Health of economy better than headlines suggest
Liquidity and debt crisis on governmental level can be solved
Chapter 9 not a solution
Recent about-face from governor on debt repayment
Investors still trading bonds flat based on expected impairments
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission.
Disclosure
All material presented is compiled from sources believed to be reliable. However, accuracy
cannot be guaranteed. Past performance is no guarantee of future results. All investments
involve risk including loss of principal. Fixed income investments are subject to interest rate
and credit risk.
14