I own $200,000 of the last issue of Commonwealth GO’s. I expected the Commonwealth to default on some debt because the amount of principal and interest, about 30% of general fund revenues, is far too high for a state or commonwealth government to survive.

What surprised me was the Commonwealth’s default on GO’s bonds and at the same time making payments on extra-constitutional bonds and notes, or appropriation backed debt.

This triggered the formation of the CBIC group which I sponsored on my private municipal bond credit rating website benchmarkbondratings.com.

Let us presume GO investors are made whole, what happens to COFINA investors and others who bought extra constitution bonds and notes issued by the other Commonwealth corporations? This the essence of why creditor groups disagree.

The numbers tell a story that cannot be changed.

COFINA debt service is 8% of general fund revenue and rising. Extra-constitutional debt service takes another 5%, plus 4% to redeem optional pay notes. Constitutional debt service is 13.5% of general fund revenue and stable. All together these P&I payments take about 26% of revenues, 31% including the GDB notes.

Public employee pensions must be funded with about $400 million annually, another 4% of revenue. Together, the numbers do not leave much money for COFINA investor settlements and little to nothing for extra-constitutional bond investors.

If GO bonds are written down, settlements on COFINA bonds could be higher, but in any scenario, there will likely be challenges to the validity of using a part of a broad-based retail sales tax to secure revenue bonds on Commonwealth constitutional grounds.

The simple fact is the Commonwealth’s Constitution, which is very much the same among the 50 States, permits the issuance GO debt only and within the proscribed limit. Many states do not have a limit, instead issuance requires voter approval.

GO bonds are secured by general fund revenues. It goes without saying that a corporation of a state or commonwealth cannot assert a legal claim and diversion of any part of general fund revenue derived from universally imposed general taxation.

The best outcome for COFINA investors happens when use of an all-inclusive retail sales tax to secure the bonds is held unconstitutional. Being relieved of this large fixed debt burden is in the best interests of all residents and the central government

The liability settlements paid to investors by the underwriters and attorneys involved in underwriting and distributing COFINA bonds would be extra-ordinarily large. Especially given the reckless actions of all involved in bringing the securities to market.

Investors can expect much larger recoveries than if COFINA bonds had simply defaulted and were then written down to some percent of principal.

I think claims will be settled quickly with an expected recovery of at least 40%. As precedent, in the early 1980’s, Washington State Public Power System revenue bonds in the amount of $2.3 billion were invalidated. The issuer was 100% off the hook. It is the only precedence in modern times for debt invalidation.

This would allow the government room to cut the sales tax by 1.25% to 9.75%. The remaining 1.25% earmarked and equal to $400 million for pension funding, but it is in the Commonwealths interest to get it down to 8%.

The Commonwealth has the authority to levy an Island wide property tax for the sole purpose of paying debt service on constitutional debt. Property taxes levied by municipalities and the Commonwealth very low with assed values based on 1957 construction costs.

The Commonwealth levies a property tax that provides only $100 million for GO debt service. Puerto Rico could raise the tax to cover all or, for example, 50% of GO debt service or about $650 million annually from a full market value estimated by the government to approximate $80 billion.

That increased but still modest property tax can provide the offset necessary to bring the sales tax rate down to 8% and provide $200 million for other priorities.

Puerto Rico’s financial overhaul has to result in reasonable prospects for the Island to survive and prosper not just a band aid or temporary fix. Taking GO’s off the table forces the big fix. The mere filing of the action, mentioned above, impact all proceeding, but none to the detriment of GO bondholders.

While the Commonwealth is a Territory of the U.S., it has a status that is unique. It has both the right of self-determination and a Constitution that was approved by Congress.

The ability to borrow in one’s own name determines whether you are a dependent or independent entity. Because constitutional debt payments at 13.5% of general fund revenue are manageable, it is the best and most obvious vehicle to preserve for regaining access to the bond market.

Other Commonwealth corporations have issued bonds that are secured by special taxes, fees and public college tuition. These are all legitimate obligations and by law should be held apart from any harm involving any general fund revenue claims or disputes.

I have communicated these points as a stakeholder to the Federal Oversight Board for Puerto Rico.