Last week three major publications (New York Times, Wall Street Journal and Financial Times) ran articles highlighting some of the fiscal issues facing the Commonwealth of Puerto Rico. This is a topic that we have written about many times, and although we are not surprised by these headlines, we believe it is an important topic to highlight for our clients. The Commonwealth is one of the largest issuers in the $3.7 trillion municipal market and is also a popular choice of mutual fund managers (even for state-specific funds) because of the tax exemption, not only from federal income taxes but also from all state and local income taxes. The FT article highlights that more than 70 muni-bond funds in its system have 10% or more invested in debt issued by the Commonwealth. While yields on the debt are high, hitting a three year high last week at nearly 2.5% more than the highest quality munis, there is a reason. Puerto Rico’s pension plan sports an abysmal 6.8% funding ratio versus the usual poster child for poor pension funding, Illinois’ 43% funding ratio. While the outgoing governor had made progress in cutting budget deficits to $933 million through FY12 (ending June 2013), down from $3.3 billion in 2009, the Commonwealth has relied on borrowing to fund operations for years. Altogether, bonded debt plus unfunded pension and OPEB liabilities runs to $97.4 billion, which is 152% of the Commonwealth’s gross domestic product. We continue to avoid this debt for our clients, and will continue to monitor market conditions. If a downgrade or possible default creates volatility in the market for other unrelated credits, that would be a buying opportunity.