Given the already high energy and utility costs, leaders should be thinking about ways to make their skilled labor force more attractive to potential new employers, not less attractive.

From the Caribbean News:

"Federal Reserve sees pitfalls from minimum wage in PR

The Federal Reserve has pointed to evidence that the minimum wage in Puerto Rico may be a net negative on an island grappling unemployment topping 15 percent and a labor participation rate hovering in the dismal 40 percent range. That position was echoed in a Bloomberg News editorial last week that called for the federal government to ease the minimum wage and other policies in Puerto Rico.

When the minimum wage in Puerto Rico achieved parity with the U.S. level in 1983, 44 percent of the workforce on the island was paid at or near the minimum. As of 2010, roughly one-third of workers in Puerto Rico earned the minimum wage, compared with just 16 percent for the U.S. mainland.

"Thus, the minimum wage affects a large share of workers in Puerto Rico and may be an important contributor to unemployment, especially for the young and less educated," the Federal Reserve Bank of New York said in its latest report on Puerto Rico's economy.

The "Report on the Competitiveness of Puerto Rico's Economy" released in July 2012 noted that the federal minimum wage applies in Puerto Rico even though the U.S. level is quite high relative to the wages the average worker could expect to earn on the island.

To put the level of the minimum wage in perspective, the annual salary of a full-time minimum wage worker is around $15,000 - roughly equivalent to Puerto Rico's income per capita in 2010, and similar to the median household's total income of about $19,000.

Overall, workers in Puerto Rico tend to earn about half as much as workers on the U.S. mainland and the median household income is 60 percent lower.

"Given this disparity, the level of the minimum wage is on a different scale in Puerto Rico than on the U.S. mainland," the Fed said.

Further, the minimum wage is high relative to average worker productivity. According to a 2012 World Bank study, Puerto Rico ranked 160th out of 186 countries when judged by the ratio of the minimum wage to value added per worker. Puerto Rico's ratio was nearly double the ratio for the Bahamas and Jamaica, about three times that of the U.S. mainland, and roughly six times that of Mexico.

"High unemployment and low labor force participation remain perhaps the biggest challenges to the Puerto Rico economy," New York Federal Reserve President William C. Dudley said when presenting the report to the Puerto Rico Chamber of Commerce in summer 2012.

The report recommended focusing on policies that address problems related to the island's relatively high minimum wage, including the creation of a young-worker subminimum wage to entice more islanders under the age of 25 to participate in the labor force while lowering the risk for businesses to hire the inexperienced workers.

Obama says that raising the minimum wage and tying future increases to inflation will boost the incomes of millions living in poverty and spur job growth by pouring more money into the economy. But business groups are not so sure.

They complain that increasing the federal rate from $7.25 an hour would discourage employers from hiring new workers, hurting the very people Obama aims to help.

Economists have long disputed the broader impact of setting a minimum wage. A major 1994 study by labor economists David Card and Alan Krueger found that a rise in New Jersey's minimum wage did not reduce employment levels in the fast-food industry.

Yet that study has come under fire from other economists, who argue that comparing different states over time shows that raising the minimum wage hurts job growth.

The Federal Reserve's report on Puerto Rico, meanwhile, said "most economists agree that a binding minimum wage reduces employment relative to levels that would exist in the absence of such a constraint."

The federal government first set a minimum wage during the Great Depression in 1938. It has been raised 22 times since then - the last increase went into effect in 2009 - but the value has eroded over time due to inflation."

On Feb 10, Governor Padilla spoke about the recent Moody's downgrade and his plans to revive the PR economy.

In a nutshell, his team is making great strides to balance the budget and will present a balanced budget in 2015. Improving the rate of tax collections is one leg of the plan and to that end Padilla hinted at a VAT tax as opposed to the existing Sales Tax. A value added tax collects taxes at each stage of the sales process; think baker buys wheat from farmer and pays tax, grocery store buys loaf of bread from baker and pays tax, consumer buys loaf of bread from grocery store and pays tax. The tax paid at each stage is reduced by the amount paid at the prior stage. This mechanism makes tax avoidance very difficult as compared to a sales taxes that is charged to the end user only. A spokesperson for the economic team will likely clarify the Governor's comments so that they are not construed incorrectly or negatively.

There were no surprises to the Moody's downgrade of PR Commonwealth paper to Ba2; citing access to liquidity and economic growth as their main concerns. Unlike SP and Fitch which did not downgrade the Cofina debt, Moody's downgraded Cofina Sr paper from A2 to Baa1. Moody's methodology CAPS the rating differential between GOs and special tax bonds usually to two notches but in this case to four notches. We do not agree with their methodology. Simply, what if the Cofina revenues were ten times more than the debt service, does it make sense to cap the Cofina rating at Baa1 when most securities with these coverage ratios are rated AAA?

The specifics of a new deal will be announced at the Feb 18 investor conference call. We are hearing that it will be up to 3.5 billion in size, have maturities of 15 to 20 years and average lives of 10 to 15 years.

Many clients have asked about the timing of a new deal from Puerto Rico. PR officials and underwriters have been very quiet which may indicate that they are contemplating a GO deal as opposed to a COFINA deal as previously publicized.

Here is what we know:

1) PR finance officials met with rating agencies on Monday and Tuesday of this week (1/27 and 1/28). PR cannot issue debt with the threat of an immediate downgrade after issuance.

a) If a Cofina 3rd lien is issued and the GO is subsequently downgraded how will the rating of Cofina be affected. This will need to be clarified.

b) If a GO is issued, then the rating agencies will have to either downgrade before the new issue or wait until the Fall. Downgrading soon after a new issue is not acceptable.

2) HB 1591 was signed into law on 1/24 and goes into effect on 2/1. This law directs 6% (instead of 5.5%) of the sales taxes to Cofina. The additional revenues will be used to support a 3rd lien. The new revenue projections will likely support approximately 1 billion new debt. We believe this is enough to keep the rating agencies happy, but the rope will be short.

3) On 1/24, SP put the GO and GDB debt on creditwatch negative and said they would resolve this in "several weeks". If they mean what they say, then they have given PR until 2/21 to come to market. If this is the case, then we will likely have details of the new issue no later than the week of 2/10.

4) There does appear to be significant non traditional muni interest in a GO deal. These investors would likely want a bigger deal to insure that PR has enough capital to carry out their economic initiatives and get the economy back on track. These investors would want some certainty that the ratings would remain stable at least until the Fall. Frankly, the yields of the GO debt are similar to C rated paper so I am not sure these buyer are rating sensitive.

Given the above, we are not certain if the new issue will be Cofina or GO. Our guess is that if there is significant hedge fund interest to support a larger GO deal then this is what the rating agencies would prefer and the additional liquidity would allow them to postpone any rating actions until the Fall. If not, then a smaller Cofina deal will come to market and the GO will remain under close rating agency scrutiny. There is a possibility that the rating agencies could act now, before a new deal is issued. If this is the case, I am not sure PR will choose to come to market.

We are seeing very strong price action in the municipal market. As we noted earlier, the "January Effect" is a result of low amounts of new issue supply and large amounts of reinvestment cash from maturing bonds and paid coupons. In addition, for the first time in 34 weeks, municipal fund flows turned positive. The jury is still out as to whether this is a knee jerk reaction to lower treasury yields or if it is a sign that retail is no longer bearish on duration and now believe that munis offer good value....

"For the period ending 01/22/2014, combined weekly and monthly reporting municipal bond funds indicated $117mn in net inflows. This is the first period of inflows in 34 weeks, dating to 5/22/2013. Among the larger fund sub-categories, Long Term funds indicated $48mn in net investment, Intermediatefunds experienced $100mn in net inflows, andHigh Yield funds saw $185mn in net new cash this period.

Weekly reporting municipal bond funds registered $85mn in inflows this period, their second consecutive week of inflows. Among the weekly reporting fund sub-categories, Long Term funds registered $25mn in net new investment, Intermediate funds received $93mn in inflows, and High Yield funds took in $160mn in net new cash.

California specific municipal funds saw $17mn in inflows, while New York specific funds indicated $25mn in net outflows.

For the period, Tax-exempt money market funds saw $351mn in net withdrawals, while Taxable money market funds saw inflows of $12.6bn.

Taxable Fixed Income funds saw $3.1bn in inflows, and Equity funds (US & Global) indicated $3.8bn in inflows."....Source Peter Degroot at Barclays Capital