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Puerto Rico Bankruptcy

By Paul J. Carroll, CFP®May 3, 2017December 3rd, 2023Videos

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Good afternoon. Today, Puerto Rico essentially filed for bankruptcy. A lot of people have Puerto Rico municipal bonds in their portfolio, they’ve been driving yields. Now those bonds are probably going to be completely wiped out in value. Do you have Puerto Rico municipal bonds in your portfolio?

Hello, my name is Paul Carroll.  I’m the CEO and founder of Efficient Wealth Management, a boutique wealth management firm based here in The Woodlands and Austin, Texas. $72 billion of Puerto Rico bonds are in essence going to be, if not completely wiped out, significantly devalued.  In what’s known as Title III of the PROMESA law, Puerto Rico has filed a de facto bankruptcy. This law was actually just passed last year by Congress in anticipation of this event. It will be the largest restructuring in the United States, state or local government history.

Many, many of these bonds are built into managed municipal bond funds, closed-end municipal bond funds. Why? They drive the yields up. They’ve been great sources of income, but it’s been a deal with the devil. These bonds are probably going to become worthless.

We’ve learned some lessons from this experience, or we will be learning lessons. First, risk —though not inappropriate in a portfolio — belongs in equities, not in bonds. Second, fixed income things, like bonds, are for safety, not for income. Why do I say that? Because when you force or try to squeeze extra income from bonds, how do you do it? You do it by sacrificing safety, which kind of brings us to the last point. And that is, true income from a portfolio needs to come from total returns, or what we sometimes call homemade dividends. We actually have a program called The Disbursement Maximizer, which you’re welcome to ask for, that talks about how you use homemade dividends from total returns to maximize portfolio income, in a way that doesn’t sacrifice safety.

Sadly, not only are Puerto Rico’s bonds about to be wiped out but also the state pension plans, and this is significant for Americans for a totally different reason. The Ponzi scheme that is the Puerto Rican pension plans is the same type of Ponzi scheme that is used in many of the states, which are in some cases close to liquidation, such as in Illinois, New York, and Florida. Texas pension plans for teachers are not in great shape either. In fact, pension plans throughout the United States are in such bad shape that the average 25 year old teacher will probably pay more into these pension plans than she or he will ever get out of them. This is made even more tragic by the fact that in Puerto Rico, just as in many communities in Texas, the local community, in concert with the teachers’ unions, actually elected to not take Social Security. Their view was, we will save our members’ contributions to Social Security; they don’t need it, they’ve got a pension. Now they will lose their pensions and they will not get Social Security in retirement. It’s the worst of all worlds, and in my opinion it is why some time in the next 10 to 15 years, we will have an income tax in Texas.

Check your portfolios. Make sure you don’t have these Puerto Rico bonds. If you’re with Efficient Wealth Management, I’m pretty confident that you don’t. We wish you the best of investing success. Thank you.