October 2015 Geo Scores

November 2nd, 2015

This week we review our proprietary DIVER Geo Score, highlight the best and worst performing States as well as provide you a link to get the scores themselves.  We discuss Puerto Rico’s worsening disclosure practices and potential ramifications.

October 2015 Geo Scores

Earlier today, we released the most recent DIVER Geo Scores for States, counties and cities. The DIVER Geo Score represents a relative score of the economic health of a U.S. State, county or city. Based on a scale of 0-10, with 10 being the best, this data is updated monthly and is calculated from multiple economic and demographic factors related to three primary data categories—employment, income and housing.

The DIVER Geo Scores are available here.


Rhode Island and Michigan top the list of most improved States over the last year. Notable underperformers from the bottom ten are New Jersey, Pennsylvania, and Virginia.  Three notable States just outside of the bottom ten are Washington (#11), New York (#12), and Texas (#13).

185 Days Late and Counting…Is Puerto Rico Too Big to Audit?

The flow of news regarding Puerto Rico continues to be heavy.  Most recently, we’ve had a proposal from the U.S Treasury for resolving Puerto’s fiscal mess; PREPA officials dangling the prospect of a completed debt restructuring agreement with passage of corresponding legislative authorization; and the potential for the Commonwealth to run out of cash on November 15.

On Friday Puerto Rico announced it is still not able to provide Audited Financial Statements for Fiscal Year ‘14.  While on the surface, this is not as consequential as the other news developments, this continued failure does have ramifications for the resolution of Puerto Rico’s problems.  Given the Commonwealth’s poor track record on timely disclosure, we would sound naïve to call this latest announcement surprising, but it is remarkable nonetheless.

It is now 488 days since the close of Fiscal Year ‘14 and 183 days since the Commonwealth’s generous filing timing deadline passed (FYE plus 305 days).  On average, States filed 191 days after fiscal year end. New Mexico (360 days), Montana (336 days), and New Jersey (276 days) were the slowest.

As this scorecard shows, Puerto Rico’s performance on audit filings has been poor for the last three years.


Source: DIVER Underwriter

Last week’s Failure to File notice was the third for Fiscal Year ‘14.

Until now, each previous Failure to File notice has expressed good intentions for completing and releasing the audit.

4/30/14 “The Commonwealth believes that the finalization of the 2013 Financial Statements prior to the end of fiscal year 2014 will allow for a timely commencement of the financial close and audit processes for fiscal year 2014, unlike the case for fiscal year 2013, which should permit sufficient time to complete the financial statements for fiscal year 2014 in a timely manner.”

6/9/15   “Although the Commonwealth anticipates that its 2014 Financial Statements will be filed no later than July 31, 2015, a delay in the resolution of the previously described matters may further delay the issuance of the Commonwealth’s financial statements.”

7/31/15 “The Commonwealth expects to file with EMMA the 2014 Financial Statements on or before October 31,2015.”

10/30/15 “The Commonwealth cannot provide an estimate at this time of when it will be able to complete and file its audited financial statements.”

Demonstrating the spaghetti capital structure of the island, the notice attributes the most recent delay in filing of the Commonwealth’s audit to uncompleted audits at the retirement systems, PREPA, Puerto Rico Highway and the Government Development Bank.

PREPA is currently 215 days late on filing its most recent audit and previously filed 64 days late in ’12:


Source:  DIVER Underwriter

Puerto Rico Highway is 185 days late after filing on time for each of the last 5 years:


Source: DIVER Underwriter

GDB is also currently 185 days late and filed late in ’12 (51 days).


Source: DIVER Underwriter

Puerto Rico’s history of repeated failures and unrealized promises could make its recovery process more difficult.

Several Congressmen have expressed reluctance to even consider legislation regarding Puerto Rico until updated financial information is available.  This makes the long odds of Congressional approval of Treasury’s proposal even longer.

The poor disclosure history could also make the implementation of any restructurings more challenging.  As the Risk Factors section for the ’14 General Obligation bond sale pointed out, in future offerings underwriters may have a difficult time getting comfortable with Continuing Disclosure representations made by the Commonwealth:

“…the Commonwealth’s failure to comply with its continuing disclosure obligations on a timely basis could limit its access to the capital markets, because underwriters for the Commonwealth’s bonds must be able to reasonably determine that the Commonwealth will comply with its continuing disclosure obligations before underwriting any future offerings of Commonwealth debt.”

Since the time of that financing in March ’14, the SEC’s MCDC initiative has led to heightened diligence by underwriters on 15c2-12 compliance.

At a minimum, we suspect that more transparency regarding financial controls and audit process will be required before the Commonwealth can access the public debt markets again (we acknowledge that this is just one of many roadblocks).


Have a great week,

Michael Craft, CFA