Promesa: What It Does and What It Does Not Do

PROMESA: WHAT IT DOES AND WHAT IT DOES NOT DO.

Sec. 104(a) “The purpose of the Oversight Board is to provide a method for a covered territory to achieve fiscal responsibility and access to the capital markets.”

PROMESA has no economic development measures. Title V, which some say is about economic development is only to fast track some projects which are considered critical. Question, of course, is where the money for the projects will come from.

You are probably wondering about the Task Force, it was about economic development right? Not really. Sec. 409(g) states “Not later than December 31, 2016, the Task Force shall issue a report of its findings to the House and Senate regarding—

(1) impediments in current Federal law and programs to economic growth in Puerto Rico including equitable access to Federal health care programs;

(2) recommended changes to Federal law and programs that, if adopted, would serve to spur sustainable long-term economic growth, job creation, reduce child poverty, and attractinvestment in Puerto Rico;

(3) the economic effect of Administrative Order No. 346 of the Department of Health of the Commonwealth of Puerto Rico (relating to natural products, natural supplements, anddietary supplements) or any successor or substantially similar order, rule, or guidance of the Commonwealth of Puerto Rico; and

(4) additional information the Task Force deems appropriate.

As you can see, there is nothing there about economic development. PROMESA is about putting the House in order financially, and restructuring. For these two functions PROMESA has several tools but we can divide them in two: 1) the Board’s control over the Fiscal Plan and budgets and 2) Title VI voluntary restructuring and Title III actual bankruptcy.

Let’s go to the Fiscal Plan: Section 201(a) of PROMESA states:

As soon as practicable after all of the members and the Chair have been appointed to the Oversight Board in accordance with section 101(e) in the fiscal year in which the Oversight Board is established, and in each fiscal year thereafter during which the Oversight Board is in operation, the Oversight Board shall deliver a notice to the Governor providing a schedule for the process of development, submission, approval, and certification of Fiscal Plans.

The Fiscal plan sec. 201(b)(1) has to include the following:

A Fiscal Plan developed under this section shall, with respect to the territorial government or covered territorial instrumentality, provide a method to achieve fiscal responsibility and access to the capital markets, and—

(A) provide for estimates of revenues and expenditures

in conformance with agreed accounting standards and be

based on—

(i) applicable laws; or

(ii) specific bills that require enactment in order

to reasonably achieve the projections of the Fiscal Plan;

(B) ensure the funding of essential public services;

(D) provide for the elimination of structural deficits;

(E) for fiscal years covered by a Fiscal Plan in which

a stay under titles III or IV is not effective, provide for

a debt burden that is sustainable;

(F) improve fiscal governance, accountability, and

internal controls;

(G) enable the achievement of fiscal targets;

(H) create independent forecasts of revenue for the

period covered by the Fiscal Plan;

(I) include a debt sustainability analysis;

(J) provide for capital expenditures and investments

necessary to promote economic growth;

(K) adopt appropriate recommendations submitted by

the Oversight Board under section 205(a);

(L) include such additional information as the Oversight

Board deems necessary;

(M) ensure that assets, funds, or resources of a territorial

instrumentality are not loaned to, transferred to,

or otherwise used for the benefit of a covered territory

or another covered territorial instrumentality of a covered

territory, unless permitted by the constitution of the territory,

an approved plan of adjustment under title III, or

a Qualifying Modification approved under title VI; and

(N) respect the relative lawful priorities or lawful liens,

as may be applicable, in the constitution, other laws, or

agreements of a covered territory or covered territorial

instrumentality in effect prior to the date of enactment

of this Act.

As you can see, this is a mayor document. Allegedly, the Governor, with the assistance of the US Treasury has the document almost completed and will present it soon. This is not the way the law states it must be done and also, I believe that Treasury has only one thing in mind, funding the retirement funds. Laudable as this is, that is not what PROMESA says. The House Natural Resources Committee’s Report on PROMESA states at page 45 the following:

“The Committee acknowledges the concern as to the ambiguity ofthe language regarding the funding of public pension systems. Toclarify, Section 201(b)(1)(C) tasks the Oversight Board with ensuring fiscal plans ‘‘provide adequate funding for public pension systems.’’ This language should not be interpreted to reprioritize pension liabilities ahead of the lawful priorities or liens of bondholders as established under the territory’s constitution, laws, or otheragreements. While this language seeks to provide an adequate levelof funding for pension systems, it does not allow for pensions to beunduly favored over other indebtedness in a restructuring.” There you have it. In my view, first the GO’s are paid, then the public debt (which excludes public corporations) and then retirees based on the doctrine of Bayron Toro which states that those who receive retirement funds have a constitutional right to be paid.

The other very important tool for fiscal responsibility is the approval of the budgets and this may include the recently approved budget since it can be argued and actually it is argued in some of the law-suits filed by bondholders, that it illegally changes the constitutional payment priorities by not including payment for the General Obligation bonds. We will know more about this during the next few weeks.

No negotiations

Bankruptcy-decided by the Board, certification, filing etc.

Finally, I want to talk the members of the Board. Carlos García was president of the GBD as was José Ramón González, but you may not know that they worked together in Santander Securities and my sources tell me they worked well together. We also have José Carrión who is a well-respected insurance executive. You may have already heard that these two are an extension of the Fortuño Administration but that is nothing more than empty rhetoric. There are 7 members, not two.

Little, however, has been said in the local press about the 4 US appointees, Ana J. Matosantos, Arthur González, Andrew Biggs and David Skeel. Ms. Matosantos, who is puertorrican but lives in California, was the budget director of Governors Schazzenager and Jerry Brown, an ultra conservative and an ultra liberal. What did Ms. Matosantos do? Cut the budget, cut the budget and then cut some more. She is the type of technocrat PR needs.

David Skeel is a U. of Pennsylvania professor specializing in corporations and bankruptcy. What the press does not tell you is that Mr. Skeel co-authored an article in 2016 entitled “Governance Reform and the Judicial Role in Municipal Bankruptcy”. In the article, Mr. Skeelsays “Failed budget policies do not ariseautonomously, disaggregated from the political environment in which they are devised. Rather, with the exception of cases in which municipalities face someexogenous shock, such as a crippling tort suit or natural disaster, or in whichlocal governments suffer from broad economic disruptions beyond theircontrol, local fiscal crises usually are caused by a governance structure thattolerates financial decisions in which the benefits and costs of publicexpenditures are misaligned. . . The financial distress of a substantial municipality nearly always signals that its politics are dysfunctional. The same entrenched political environment that exacerbates fiscal instability may also frustrate efforts to initiate reforms necessary to escape a cycle of financial irresponsibility. That entrenchment can be overcome only by the inducement or imposition of structural reforms from outside the municipality.” If that is not PR I don’t know what is.

Interestingly, Mr. Skeel also posits in the article:

“We contend that municipal bankruptcy can and should address governance failures where they contribute to financial failures. We argue that this conclusion follows from an appreciation of the similarities between municipal corporations and the for profit corporations that are reorganized in Chapter 11 of the Bankruptcy Code. Where governance failures contribute to corporate financial distress, no one would treat governance reform as irrelevant to the reorganization of a corporation. Carefully crafted governance rules were a central feature of the Chrysler bankruptcy, and governance rules figure prominently in most other substantial Chapter 11 cases as well. From a purely functional perspective, governance reform is even more essential to an effective Chapter 9 municipal bankruptcy than it is in Chapter 11, since at least some stakeholders in insolvent municipalities are more dependent on those entities than are stakeholders in insolvent firms.”

I hope you got the reference to the Chrysler bankruptcy because another of the Board members, Judge Arthur González, whom I had the pleasure of having in the Enron litigation, happened to be the Judge in the Chrysler bankruptcy. Coincidence? I don’t think so.

Finally, we have Mr. Andrew Biggs, resident Scholar of the American Enterprise Industry and an expert on pensions. He was one of the authors of “REPORT OF THE BLUE RIBBON PANEL ON PUBLIC PENSION PLAN FUNDING AN INDEPENDENT PANEL COMMISSIONED BY THE SOCIETY OF ACTUARIES FEBRUARY 2014” In addition, Mr. Biggs has published some of his opinions on PR in Forbes in March of 2016 and described the pension system as poorly run, giving as examples that “Puerto Rico’s public employee plan paid Christmas and summer bonuses and loaned public employees money to take overseas vacations, with the pension paying half of the interest on those loans. Puerto Rico’s pension funding level verges on zero, and about 20 percent of the retirement system’s remaining “assets” consists of mortgage, personal, and vacation loans made to the plan’s participants.”

What can we glimpse from this? There will be budgetary cuts that will clearly entail the firing of employees, the reduction of contracts and there will probably be bankruptcies, which will not necessarily mean deep bond cuts. First, let me explain a couple of things. The stay in PROMESA against suing PR for payment of Bonds until February 15, 2017 was enacted so the island could negotiate with its creditors. But I know that PR HAS NOT negotiated with its bondholders since June 20, 2016. The island has wasted two months of the stay doing what? I don’t know. Thing is that if there is no agreements with bondholders by that date or at the most May 1, 2017, then the Board may certify that a part of the Government go into Title III, which is a hybrid type of bankruptcy similar to Chap. 9. Sections 304 and 312 of PROMESA make clear that only the Board can file the bankruptcy petition and only the Board can file the Bankruptcy plan. Hence, the Board controls bankruptcy of any Government agency.

With that explanation, my point is that the Board, in order to push the needed reforms of the government, may allow bankruptcy with some restructure simply to have the bankruptcy court bless through the changes to governance through the plan. An example could be the consolidation of municipalities. Tough, but it can be done.

Now, questions?