Hedge funds want Puerto Rico to close schools

Puerto Rico defaults on its debt
Puerto Rico defaults on its debt

Hedge funds have a message for Puerto Rico: school is out.

Puerto Rico went into default Monday for the first time in its history. The island's governor, Alejandro Garcia Padilla, has announced a "working group" to figure out a plan by the end of the summer.

But a group of 34 hedge funds, led by Fir Tree Partners, already have a recommendation. They funded a report by three economists that calls for Puerto Rico to close some schools, reduce university subsidies and fire teachers so it can pay back its debt.

It might sound cruel, but the hedge funds have a point. One of the central criticisms of Puerto Rico's debt crisis has been the government's tendency to spend and borrow way beyond its limits.

Related: Puerto Rico's crisis...in 2 minutes

Consider this: Puerto Rico's student population has declined 25% -- or almost 200,000 students -- between 2004 and 2013. But government spending on schools rose 39% -- or $1.4 billion -- during that time, according to the report sponsored by the hedge funds and authored by three former International Monetary Fund economists.

That math doesn't work out. Neither does this: between 2004 and 2013, the island's population declined by 212,000 people. But total government spending jumped up 29% over the same time, according to the report.

Related: Puerto Rico's other crisis: its running out of water

Puerto Rico's economy is shrinking while unemployment is very high. The island's debt is becoming harder to pay off since thousands of Puerto Ricans -- the government's tax base -- are moving to Florida or Texas in search of better jobs.

Puerto Rico defaulted on a $58 million bond payment due Monday. That money was owed mostly to ordinary Puerto Ricans, not Wall Street hedge funds, who own the bonds through credit unions called "cooperativas."

The 34 hedge funds who commissioned the report by are calling themselves the "Ad Hoc Group of Puerto Rico." They own about $5.2 billion of the island's $70 billion in outstanding debt.

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