Summary: Mr. Ravitch and liberal members of Congress apparently see no difference between a U.S. municipality seeking protection in federal court and a U.S. state or possession doing the same. Congress approved the Commonwealth’s Constitution after residents ratified it in 1952. Puerto Rico has a unilateral right under current law to become the 51st state. A default on the singular direct debt of the Commonwealth, a direct violation of its Constitution, would damage the foundation of U.S. public finance and financially neuter the Commonwealth. COFINA is the tsetse (large blood sucking) fly in the ointment to cure the Commonwealth’s massive circumnavigation of its Constitutional debt limit.

That position is a blatant appeal to better the bargaining position of institutional investors at the expense individual investors who largely hold Commonwealth GO's, not bonds issued by the various corporations created by the Commonwealth.

Richard Ravitch is a former NYS LT Governor, Chairman of its MTA and prominent Wall Street advisor during the NYC financial crises of the early 1980's. He oversaw one of the MTA's largest improvement projects. It was funded with MTA service contract bonds sold in the billions. One of the many forerunners to the original appropriation/optional pay bonds next described.

He thinks a Commonwealth GO bond default is part of the solution, and compares it to NYC's GO note default in the mid-1970s and investor's acceptance, as payment in lieu of cash, of bonds maturing over eight years.

The NYS Municipal Assistance Corporation for the City of New York was created to issue those bonds, aka MAC bonds. In spite of the window dressing like sales taxes or income taxes, those bonds and the more recent NYS Income Tax bonds are optional pay appropriation bonds. Just read the first page of their official statements. Many states have followed suit.

Mr. Ravitch and liberal members of Congress apparently see no difference between a U.S. municipality seeking protection from creditors in federal court and a U.S. state or possession doing the same.

First, a municipality or state corporation cannot seek protection in bankruptcy without the applicable state's approval. Some states allow it, others do not.

Under the U.S. Constitution, states are sovereigns but have no power to print money; state law takes a back seat to federal law and the federal constitution when in conflict.

This sounds an awful lot like Puerto Rico. Congress approved the Commonwealth's Constitution after residents ratified it in 1952. Puerto Rico has a unilateral right under current law to become the 51st state, subject only to a majority vote of residents who are U.S. citizens by birthright.

States and nation states do not get protection from creditors in courts. There is no U.S. or World Bankruptcy Court for states or nation. Certainly they can and do default, but not in the U.S. municipal bond market.

The U.S. government bond market is the envy of the World, readily accepting not only federal bonds but also bonds issued by states and their municipalities, which can secure protection in federal court whereas states cannot.

A default on the singular direct debt of the Commonwealth, a direct violation of its Constitution, would damage the foundation of U.S. public finance and financially neuter the Commonwealth for at least a decade.

To be sure, if there was not a limit on GO bond issuance, and there were instead COFINA and appropriation bonds outstanding in the same amounts, the Commonwealth would have no choice but to default because debt service to operating revenue of 30% or 36% is untenable for general purpose government entities (states, counties, cities, towns).

A few South American nations and Greece have defaulted on their GO bonds due to over-issuance and resulting untenable debt payment requirements. They work it out and suffer the consequences.

A GO default is totally unnecessary by the numbers (below) and, given the nature of the central government's other debts, inconsistent with U.S. law concerning payment of general obligations of governmental entities, which have never as a class had the option to seek protection from creditors in any court.

Nonetheless, defaulting on GO's is part of the government's announced debt reorganization plan - pay all bond holders some money with no class of investor getting all that is owed. It has not changed since the inability to pay their debts was announced last summer

This ill-conceived policy will eventually feel the slap of U.S. law, more specifically the contract clause of the Constitution. It need not happen but it looks like it will.

The salvation of its Constitution also happens to be in the best interest of its residents in the short and long term. Whether or not it becomes the 51st. Puerto Rico needs the ability to borrow in its own name. Not as a bankrupt ward of the Federal Government

By the numbers. As disclosed in the most recent recovery plan, the Government says it can afford annual bond P&I of no more than of 15% of general fund revenue which is currently running at a rate of approximately $10 billion per year. I agree. That is a good number for an Island entity.

It also happens to be the same as the Constitutional limit on the maximum amount of GO & Guaranteed bond P&I permitted in any year i.e., the Commonwealth's debt limit. This is the only form of debt the Constitution of Puerto Rico permits.

Most readers on this topic probably do not know that GO and guaranteed bond P&I totals $1.2 billion per annum or 12% of current general fund revenue, well within the affordable range.

This figure includes less than $100 million in P&I paid to cover short falls under the constitutionally authorized bond guarantee supporting some of the Public Building Authority's debt. (The $1.1 billion in GO P&I is an exact figure taken from the official statement for the 2014 issue of GO bonds).

So how did debt service end up being the 36% of revenues asserted by the Government? It is actually about 30% using GASB accounting rules for state and local governments. That is still twice what is affordable.

So what is the problem? The aforementioned position of the government - pay everybody some but no one all. Who is everybody? More than 90% of non-GO principal is held by investors in COFINA bonds or in one of the many corporations that issue appropriation "optional pay" bonds. Currently the P&I on these bonds totals about $1.2 billion annually

COFINA P&I is $600 million, an exact number. It should not matter what optional pay P&I is - $600 million or $1 billion, that debt is unenforceable against the Commonwealth.

Why does the government continue to posit that holders of these issues will get something when they are entitled to nothing under the law? That is readily apparent to anyone who reads the cover page of the offering statement for any appropriation bond issue.

Optional pay appropriation debt does not exist in any other country's public or private sector bond market. Who would lend money without an enforceable obligation to pay?

It is premised on the belief that a U.S. state or territory would not fail to make the annual and optional appropriation for P&I because it would hurt their credit standing and close off further issuance of non-voter approved bonds for capital, pension and other funding purposes.

Could it be the power and influence of the institutional investors who hold these riskiest of risks?

Any agreement to pay any amount on Commonwealth optional pay bonds will trigger GO bond investor lawsuits to nullify any such payment in light of the Government's stated intention to default on its GO Bonds.

The same can be said for any agreement with COFINA bondholders but for a different reason. The constitutionality of the act that created COFINA, Act 91, and the resulting diversion of general fund sales tax revenue to pay P&I needs to be established in a court of law ASAP because a decision will save a lot of time

COFINA is the tsetse (large blood sucking) fly in the ointment to cure the Commonwealth's massive circumnavigation of its Constitutional debt limit.

Most COFINA bonds were issued as forty year zero coupon bonds to fund the Commonwealth's accumulated operating deficit. Annual P&I ascends to $1 billion in a few years. The issuance of the bonds has necessitated an 11% sales tax rate.

One of the risks stated in COFINA sales documents is as follows:

"…the opinions of Bond Counsel and Underwriters' Counsel described above are not a prediction of what a particular court (including any appellate court) that reached the issue on the merits would hold, but, instead, are the opinions of Bond Counsel and Underwriters' Counsel as to the proper result to be reached by a court applying existing legal rules to the facts properly found after appropriate briefing and argument and, in addition, are not a guarantee, warranty or representation, but rather reflect the informed professional judgment of Bond Counsel and Underwriters' Counsel as to specific questions of law."

"To the extent that a court determines that the Pledged Sales Tax constitutes "available resources" for purposes of the Constitutional Debt Priority Provisions, the Pledged Sales Tax may have to be applied to the payment of principal and interest on the Commonwealth's public debt before being used to pay principal of and interest on the Bonds, including the Senior Series 2011 Bonds. Should such application be required, the ratings on the Bonds may be adversely affected."

Supplement To Certain Official Statements of Puerto Rico Sales Tax Financing Corporation dated December 7, 2011.

Nullification of COFINA bonds is not without president. More than $2 billion of The Washington State Public Power System bonds where nullified by the State's highest court. No recovery for the borrowers, a total loss.

Why is the Commonwealth so intent on falling on its sword? In the end, I have bet the courts will not permit it.