One of the great lessons from the Puerto Rico bankruptcy was never to draw to an inside straight — in other words, state and local government politicians need to play the hand that is dealt.
The Governor of Puerto Rico was called to testify before the Senate Committee, whose chairperson asked "Who is in charge?" All the Governor needed to say was "You".
Instead, The Governor insisted the $120 bln. in federal funds be provided to him without any strings. Any conditions to the aid would violate Puerto Rico's sovereignty. He had $70 bln. in par value of defaulted bonds to prove it. He rang-up $30 bln. from Hurricane Maria. He had 15 bln. in unfunded pensions. Puerto Rico received $2 bln. in grant money and $3 bln. in federal loans for specific pre-approved projects.
Clearly, the temptation to "not waste an emergency" can result in politicians running up spending just when cutting costs and expenses are required.
Analysts and investors need to be aware of the political event risks when considering a municipal bond.
