Welcome to your weekly Title III update for April 10, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.
The purported clash of titans between the Board and PR continues. The Senate, in a Tarzan-like chest pounding, unanimously passed a resolution instructing the PR Treasury Department not to send money to the Board. The Governor was understandably hesitant to support this and sent out a press release essentially saying he had to comply with section 107(b) of PROMESA, which empowers the Board to use its control over the PR budget to assure itself of the necessary funds. Also, no funds to the Board means no funds for Title III. Populistic posturing by the PR legislature.
In any event, on April 5, 2018, the Governor sent the Board the Fiscal Plans for the Commonwealth, PREPA, PRASA, UPR and HTS, without any adjustment of pensions and many of the other requirements. The Board has said it hopes to certify the plans by April 20. More likely than not, the Board will certify its own fiscal plan which will include the pension reduction and other measures anathema to the Governor, who has vowed not to implement them. If he does not, the Board will file motions with the Court pursuant to section 104(k) of PROMESA and again Judge Swain will have a clash of Board v. Commonwealth.
I will briefly discuss the Commonwealth and PREPA fiscal plans, which are the most pressing since these are the main Title III debtors. The Commonwealth fiscal plan was expanded by 80 pages adding more information and complying with some, but not all of the Board’s requirements. At page 50, you can see a surplus of billions if debt is not paid and deficit if debt is paid. The message is clear, PR cannot pay debt service, but can pay $2.25 billion in pensions. There is an increase in government payroll (page 53) although there is population decrease (page 65-66) and a $6.33 billion surplus by 2023 (page 54 and 69), all without debt payment. Moreover, the Title III litigation is expected to cost $1.46 billion by 2023 (page 54 and 185).
The Commonwealth Fiscal Plan predicts PR growing from 2019 on, although there is a projected population decrease (page 66). Page 71 is equivalent to page 55 of the March 2018 Fiscal Plan and the surplus is increased as well as other numbers changed. Makes one wonder what actually changed in 13 days?
Also, although the Governor said further labor reform was withdrawn, the plan states that it will “[i]ncrease productivity and competitiveness by revamping labor laws.” (page 130) The plan includes the rightsizing of the Department of Education continues (page 82) as well as the Health Department (page 94), but whether that means actual firings we do not know. Tax reform starts at page 133 but frankly, I can’t see how you can decrease taxes as dramatically as the fiscal plan calls for and get an increase in revenue. It can work in the US but not here in PR where tax evasion is a way of life.
During the Governor’s address to PR as to PREPA on January 22, 2018, we were told that the process would take 18 months to complete. Now, the fiscal plan states at page 142:
“The transformation process is expected to formally run from the date of certification of PREPA’s revised fiscal plan until confirmation of a plan of adjustment and completion of the necessary concession and sale transactions (Transformation Period). The Transformation Period is expected to last 12-18 months, during which:
A new, independent regulator for the energy sector will be established through legislation). The New Regulator may be the Energy Bureau within the Public Service Commission (PSC).
5 energy commissioners who serve staggered terms to remain insulated from political interference
Advisory and advocacy staff and functions strictly separated for fairness and due process reasons
A ratepayer advocate exists separately from the regulator
Appointments made from a list of persons with specified technical credentials identified through an externally led process.
Supported by expert utility staff.
Decisions will comply with traditional administrative procedures”
Now the Transformation Period will be longer and the Regulator, contrary to what the Board wants, will be part of the Public Service Commission. So much for a politician’s promises.
Finally, the fiscal plan of the Commonwealth is overly optimistic in its estimates and the possibility of using technology. Take the Property Registry of PR for example. Ever since the Acevedo Vilá Administration, the PR government has come with one scheme after another to modernize the process of registering property rights in the island and all have failed with millions of dollars wasted. Why are we to believe it will be any different this time?
The PREPA fiscal plan, contrary to the Commonwealth’s, shrank from 139 pages to 104. Although Governor Rosselló ordered the PREPA Board of Directors to justify Mr. Higgins, the new Executive Director, salary, it seems that he is here to stay since at page 11 the fiscal plans mentions him and his experience. Again, politicians.
Page 14-15 details the PREPA transformation plan of 18 months, which the Commonwealth fiscal plan mentions and is quite ambitious. As the Commonwealth Fiscal Plan, PREPA’s states that it cannot pay debt service except by increasing the cost of kilowatt/hour by 5 cents (pages 25, 27, 46-47, 83). To be expected from the Government that claimed it would pay bondholders and that Title III was not necessary. Again, politicians.
Page 26 explains that the PREPA pension fund is only 28% funded and is $3.6 billion underfunded. Big problem. The Plan includes reduction of overtime payment from 2x to 1.5x, reduction of contribution to the medical plan and pension “reform” (page 36 and 68-69). I am sure PREPA’s unions will accept it without any complaint. Continuing with the issue of employees, the Plan states that “[a]pproximately 10% of PREPA workforce has submitted paperwork to retire with the Retirement System. If all ~600 retire and are not replaced, PREPA will realize employee costs savings of ~$45 million.” But on pages 23 and 65 of the plan, PREPA complains that since 2012 it has lost 30% of its workforce and that has constrained its ability to respond to challenges. But again at page 44 it mentions rightsizing. Totally contradictory but at page 66 it makes clear that there will be recruiting for skilled workers. Question is, if you are going to hire employees, what about the 600 not replaced workers and the $45 million in savings. Totally contradictory.
The transformation is not the only thing with a timetable. The Integrated Resource Plan (IRP) is being revised and should be completed by September 2018 (page 50). Given how much space is devoted to the IRP (pages 50-53) seems doubtful everything will be completed by September. It includes a differentiated rate system (want better service? You pay more, page 53) and this dozy: “Given the complexities of the IRP process and its range of regulatory approaches, it is not possible, nor credible at this juncture to quantitatively modify the current PREPA Fiscal Plan with the IRP objective function targets.”(page 53) Then why have the fiscal plan at all? Totally contradictory. Again, contrary to what politicians have said, the fiscal plan seems to include the selling of the PREPA monopoly, page 93. Seems PR politicians speak with a forked tongue.
Moreover, last week PR Treasury Secretary Raul Maldonado said that by summer PREPA and PRASA are expected to need a loan from the Commonwealth General Fund. Let’s take a moment to refresh ourselves with recent comments from Martin Bienenstock, legal representative of the Board, whom have filed several motions on PREPA’s liquidity:
“The undisputed evidence shows PREPA is running out of money and that without an injection of liquidity in the near term there will be insufficient cash to continue to provide power to Puerto Rico.”
“Even with $300 million of postpetition financing PREPA will only be able to continue operation in the ordinary course until late March 2018”
“As explained at the February 15, 2018 hearing, PREPA’s cash availability is at such a low level that PREPA’s operations are in jeopardy. After the hearing, PREPA began to implement plans to ramp down PREPA’s power production and shut down certain generating units in order to conserve its limited cash resources. This exacerbated the risk to an already fragile system and leaves it vulnerable to outages and resulting in brownouts on the island. Unless PREPA obtains access to additional liquidity by mid-next week, PREPA will be forced to further reduce its load and reduce personnel.”
“Movants anticipate submitting a further request for approval of a larger financing within two to four weeks because the instant proposed financing is projected to be consumed before the end of March 2018.”
However, in subsequent hearings and filings, Mr. Bienenstock changed his tune, saying that it was possible, not probable that PREPA would have to borrow money.
“PREPA’s budget reporting since the closing of the post petition facility has indicated materially better actual liquidity than originally forecasted. Barring unforeseen circumstances, PREPA does not currently anticipate a need for supplemental postpetition financing before May 15, 2018, and possibly not until several weeks after that. PREPA therefore expects any motion for approval of supplemental or replacement postpetition financing would be filed on or after April 23, 2018.”
This is nothing but a desperate attempt by the Board and the Commonwealth to spend money so the General Fund goes below $1.1 billion so they can attain the CDL from the Federal Government. The cash reports of the Commonwealth, however, show that it will be difficult for instead of being reduced, it has grown. Moreover, it will grow larger now that April 17, tax day, approaches.
Some municipalities, however, are going to receive CDL loans since the Treasury decided it can lend them individually and not through the Commonwealth. Twelve municipalities will receive a total of $53 million in loans with another 65 in the process of requesting them. Since the loan cannot exceed $5 million per municipality, the bulk of the $4.6 billion available to PR remain intact and will probably will never be received given the Commonwealth’s finances. That is what happens when you don’t pay debt service.
The issues of Matosantos’s financial disclosures continues to be subject of debate, including by myself. I was informed that her financial disclosure forms do no list her direct interest in Euro-Caribe. Initially, that did not appear to be a problem because she list her director role with Matosantos Commercial Corporation. However, a careful review of the corporate documents for Euro-Caribe show that Matosantos was a director as of April 16, 2017 and as of March 5, 2016, she wasn’t. This means that between these two dates she appears to have been appointed as a director. Matosantos was appointed to the Oversight Board on August 31, 2016. If Matosantos became a director at EuroCaribe between March 5, 2016 and August 22, 2016, it was not declared on her initial financial disclosure forms. If Matosantos became a director between August 23, 2016 and December 31, 2016; she took on the position during her tenure on the Oversight Board and should have disclosed it in her December 2016 disclosure. If Matosantos became a director between January 1, 2017 and April 16, 2017, she will have to disclose it in her next filing. It appears that Matosantos took on the director role at Euro-Caribe while she was on the Oversight Board, and further, it’s likely, based on this information that Matosantos signed these disclosures “as of” months beforehand. There appears to be possible backdating.
As I said from the beginning, adhering to federal conflicts of interests disclosures is required under PROMESA. The possibility that Ana Matosantos violated federal law is clear. This could have a far-reaching impact on current Title III proceedings, and I wouldn’t be surprised to see a complaint before Judge Swain in the near future.
Finally, later today, Judge Swain will have a summary judgment hearing on the COFINA-Commonwealth case, which will determine whether the SUT belongs to the Commonwealth or COFINA. Unfortunately, due to prior engagements in other cases, I will not be able to attend but in any event is its highly unlikely Judge Swain will rule today. There is another hearing at the end of April addressing additional COFINA issues. Right after the Aurelius constitutional challenge that was argued almost three months ago, the COFINA controversy is the most important controversy in case. I expect a decision sometime this year.
This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.