Weekly Update – April 23, 2018

Welcome to your weekly Title III update for April 23, 2018. Once again, not much happened in the cases but outside matters have really burgeoned.

Last week, the Board had two days of meetings to discuss the fiscal plans it was going to certify; but before I start explaining what transpired, there is a recurring theme that I must mention. During the hearings of the 19th, during the comment period, there was this important exchange on the questions swirling around Ana Matosantos’s ethics, which garnered an interesting response from the Board’s general counsel, Jamie El Koury:

 “This issue has come up at least three times now. It came up before my time, when Ana was vetted for her appointment at the board, both by the Treasury and the White House. They found that she was complying with the requirements of PROMESA and therefore that the President should go ahead with the appointment. This was in August in 2016. Again, this was reviewed in the summer of 2017 when the issue again came up. We at the board, both the ethics advisor, myself [and] our outside council reviewed the financial disclosures by Ms. Matosantos and we reviewed the conflict of interest requirements under PROMESA, which refer you to federal law section 208—the basis of which is financial interest. Again, the determination was made that there was no conflict of interest and that the financial disclosures had been complied with. Again, the issue came up one more time in March of this year. Again the ethics advisor, myself as general counsel and [the] outside council reviewed the situation and [the] determination was the same. That the disclosures were made, that the conflict of interest rules were complied with, and that therefore there was no impediment for Ms. Matosantos to engage in the proceedings. The fourth time came up recently with letters that were sent by two groups—one was an open letter sent to the Attorney General Sessions and the other was sent to chairman Bishop and to Speaker Ryan. Again, outside council, ethics advisor and myself looked at this situation and made the same determination that the financial disclosures [were complied with] and that no conflict of interest had risen. Just to make [it] clear, of course, whenever pieces of information such as this come up, I hope it’s by now established that we take them seriously, that we do have procedures at the board to take a look, [to] consider those matters and that a full consideration is made of those concerns. Thank you.”

The problem with this exchange is that it leaves many questions unanswered. When Andrew Scurria of The Wall Street Journal commented on Twitter on El Koury’s statement, I mentioned that his statement was a bit perfunctory and Andrew answered, He offered no substantive explanation of his determination.”  If each time there was an ethics complaint, Mr. Koury, General Counsel for the Board, and Andrea Bonime-Blanc, the Board’s Ethics Advisor carefully reviewed each and rejected them, they each had to write a report with lots of references to statutes and case law. Where are these reports? Where the reports sent to the United States Office of Government Ethics? Where they sent to the Department of Justice, to Congress, to the Oval office?

Recently, the National Legal and Policy Center sent a complaint on Matonsantos’s alleged conflicts of interest to the Justice Department, which declined to comment. If there is no validity to these ethical challenges, why are the internal Board reports not made public? After all, the People of Puerto Rico are paying for these reports. As Justice Louis D. Brandeis once said: Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” There are other questions that will become clearer as the saga of the fiscal plans unfolds.

Continuing with the drama, the Board released its own fiscal plans on April 18th, and early on the 19th, Governor Rosselló said he would not execute those parts of the fiscal plan with which he did not agree. The meetings business started with Gerardo Portela from AAAFAF presenting the Commonwealth’s fiscal plan. During his presentation he said three times Puerto Rico was undergoing a “humanitarian crisis.” I had to look twice to make sure it was Gerardo Portela speaking and not Alejandro García Padilla or Antonio Weiss. During his presentation, it was obvious the Board members were not paying attention and Portela made clear that the Commonwealth would execute that which was in their fiscal plan but not that with which it did not agree or thought the Board was invading public policy. After the presentation, Board members asked questions of the AAFAF staff, which looked ill at ease when asked what where their projections on economic growth after the federal relief funds were spent. After oohing and awing, the confessed to a .5% to 1% yearly growth, truly anemic in my opinion. Another interesting question was how does AAFAF believe it will reduce payroll and the answer was by providing incentives for retirement? When asked what happened if the employees do not retire, AAFAF had no answer.

After the questions to AAFAF, Ms. Jaresko spoke as to the Board’s fiscal plan and she was questioned by the Board. There was a period of public questions and the Archbishop of San Juan, who insisted that bondholder claims be cut, but not pensions or employees. This same character has closed Catholic schools, fired hundreds of employees and suspended payment of the teachers’ pension plan. Total hypocrisy.

At one point, I was able to ask about page 16 (23 of the PDF) of the Board’s fiscal plan. There is a detail of the surplus post measures SR/s which is detailed until 2023 and totals $6.697 billion. In the Commonwealth Fiscal Plan of April 5th, at page 50, the surplus post measures totals $6.333 billion. I asked if that was the money for debt service minus any discounts mentioned in the plans. Ms. Jaresko answered quite plainly and said that debt service would be negotiated with each creditor but that was the amount available for service. Ms. Jaresko also cautioned that these were economic estimates that could vary with time, etc. So it is likely that little less than $1 billion per year for debt service would be available, which is slightly higher than the $787 million allocated in the March 13, 2017 Fiscal Plan, but for less than the approximately $3.3 billion per year the Commonwealth owes. Problem with Ms. Jaresko’s qualification as to the economic estimates is that a Plan of Adjustment has to specify the treatment of each class of creditors and it cannot be a plus or minus, UNLESS, the Board will not commit to a specific amount but simply offer to exchange claims for growth bonds. That is something not likely to be accepted by creditors.

After the period of public comments, the Board went directly to the voting and Matosantos had a surprise statement, saying she would not vote for any of the fiscal plans and that the Board’s was too austere. This is the first time that publicly the Board members have had a non-unanimous vote on something. The only other non-unanimous vote was on the PREPA RSA, and we still don’t not know the composition of that vote. Could it be that the claims of conflict of interest have forced her to decide to do dissent? Since the workings of the Board anything but transparent, we can only speculate. After her statement and that of others, the Board’s finally tally was 6-1 in favor of certifying its own fiscal plan for the Commonwealth, which I predicted it would since the end of November of 2017.

Before getting into the differences of each fiscal plan, I must point out that both fiscal plans for the Commonwealth are 90% in agreement and Ms. Jaresko emphasized how collegiate had been the effort to prepare said plans. There are however, fundamental differences. The Commonwealth rejected the 10% reduction in pensions mandated by the Board, refuses to furlough or fire any public employees (even though its fiscal plan mentioned rightsizing the Department of Education and the Department of Health) or enacting the Labor Reform requested (although the Governor had originally filed the bill with the Legislature but withdrew it when the Board put conditions on an increase of the minimum wage and the elimination of the Christmas bonus). The certified fiscal plan requires the enactment of this Labor Reform that will apply to all employees by May 31, 2018, although the Legislature has already claimed it won’t obey this part of the fiscal plan.

There was a similar procedure with PRASA and again AAFAF said that the Commonwealth would not put into effect that which it did not agree with. This time the main bone of contention is the pensions, which again must be reduced by an average of 10%, which AAFAF refuses to undertake. These fiscal plans, different from the others, have very little differences, except the pension reduction and the assertion by Ms. Jaresko that PRASA would need an $80 million loan from the Commonwealth on or before September. Interestingly, Ms. Jaresko said it was probable that PRASA would get a consensual restricting from its creditors. Interesting, but based on the information I revealed last Tuesday, any CDL loan to a public corporation requires that it be in Title III. We will see that happens.

The last fiscal plan certified on the 19th was PREPA’s. Again, Mr. Portela objected to the possible reduction of pensions and that the Board should not lead in the Integrated Resources Plan (IRP) and did not agree with the Board as to keeping the rates below 20 cents per kilowatt-hour, operational directives or transactions requirements. Nor can the Board interfere with the Commonwealth’s public policy according to Portela.

During the public comments section, I asked about the N.Y. State Smart Grid Consortium announcement of a contract with PREPA to assist in the long-term grid planning efforts and Undersecretary Walker’s testimony. In essence, who is in charge of the IRP and the sale of PREPA. Ms. Jaresko was quick to say that PREPA was in charge of both and that the IRP had to be consistent with the fiscal plan. Also, Mr. Sobrino stated that the PREPA sale law would pass this week, something I find extremely unlikely. As with the Commonwealth Fiscal Plan, there are substantial agreements but again, the Board certified its own fiscal plan for PREPA.

The next day, the fiscal plans for HTA, GDB, COSSEC and UPR were presented. Again, Mr. Portela objected to the HTA pension reduction, 15% payroll reduction, as well as the toll increase required by the Board. Again, the Board certified its own fiscal plan with pension reductions and toll increases.

The GDB fiscal plan presented by the Commonwealth, with a likely Title VI qualified modification was certified by the Board, the only one not authored by the supervisory agency.

The President of the UPR Governing Board, Walter Alomar, objected to any pension reductions, further reduction of appropriations, the Board increase of cost per credit. He reiterated that the UPR Governing Board would deal with the pensions. During the discussions, Mr. Alomar explained the campus consolidation that entails that there will be a review of courses to see what will be kept and that there would be reduction in deans, and other personnel, but no reduction of the workforce. Sounds like business as usual to me. Again, the Board certified its own fiscal plan.

As to COSSEC, the Government agency that regulates the credit unions (called Cooperativas in Puerto Rico) and guarantees deposits up to $250,000, the Board insists that it must be independent of any stakeholder. The COSSEC leaders explained that they were dealing with the Legislature as to this. They also explained the stress testing made and assured the Board that COSSEC can handle a run on the cooperativas of between 5%-25%. After some further discussion, Ms. Jaresko recommended that the fiscal plan approval be postponed until further testing can be done. Seems to me that Ms. Jaresko is not quite sure what was done was quite correct and mentioned some new help was coming in. Not very encouraging for depositors.

The Governor, then, had only 1 fiscal plan certified out of 6, for an anemic 17% batting average. But the Fiscal Plan certification was about control, not what is best for Puerto Rico or creditors.

The Commonwealth objects to the reduction of pensions and further reduction of employees as a violation of their right to make public policy. It also claims that pensions cannot be reduced since some have property rights over them. But the Commonwealth is wrong. I have mentioned that section 201 of PROMESA gives the Board power to certify fiscal plans that must include how to “improve fiscal governance, accountability, and internal controls“ and “enable the achievement of fiscal targets.” Moreover, Board certifications cannot be reviewed by Judge Swain, who has already ruled she lacks jurisdiction to review them. Also, anyone who has dealt with any aspect of fiscal policy knows that expenses are driven by what is the entities public policy. Hence, you cannot separate one from the other. As to any constitutional protection of pensions, those entities such as ERS, the Commonwealth and PREPA, I have no doubt may be impaired as was done in Detroit, where the Michigan constitution prohibited the impairment of pensions (in Puerto Rico pensioners are jurisprudentially protected). That, however, is not the case of PRASA and UPR, who are not in Title III. One would have to make the leap to believe that PROMESA endowed the Board with the power to ignore Puerto Rico’s laws and constitution outside Title III and Judge Swain’s ruling in the Zamot PREPA affair makes that unlikely. On the other hand, section 108(a) of PROMESA states the following:

“Neither the Governor nor the Legislature


(1) exercise any control, supervision, oversight, or review over the Oversight Board or its activities; or

(2) enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.” (emphasis added)

Does this mean that if the Legislature does not pass the Labor Reform, the Board may ask Judge Swain to declare Law 80 invalid and unenforceable? Possible, but the end result would be colonialism in the raw. In addition, although the Legislature and the Governor have both expressed willingness to go to jail in disobedience of the Board, that would hardly be necessary. The Board only has to ask Judge Swain for control over the Commonwealth’s accounts and an order to banks not to honor Government checks not issued by the Board.

Finally, although Mr. Portela insisted that the Board file the Plan of Adjustment forthwith, this difference in the fiscal plans will make that difficult. The Plan of Adjustment, as per section 314 of PROMESA, has to be consistent with the fiscal plan but if the Commonwealth will not comply as to pensions, tolls, payroll, etc., how can it be approved by creditors, much less by the Court?

In the legal arena, not much happened except that some of the Unions agreed to a protective order as to their request for Rule 2004 discovery with the Commonwealth. Sooner or later, this information will come out and we will know more about. In addition, on April 25th, Judge Swain will hold an Omnibus Hearing where the issue of certifying the COFINA issues before her to the Puerto Rico Supreme Court. Given that she already said no to a previous attempt by COFINA bondholders and that she held oral arguments on the Commonwealth v. COFINA adversary proceeding, it is unlikely she will grant it. I will be listening in (I am outside the jurisdictions of Puerto Rico and New York) and will report on what transpires.

In parting, I must mention something that transpired in Twitter between Mr. Andrew Biggs, Board member, and Andrew Scurria, from The Wall Street Journal. Mr. Biggs, who will engage anyone who treats him with respect, told Mr. Scurria that PROMESA did not require that the Board define essential services. Moreover, Mr. Carrión has said that the Board would not define them. Although that may be grammatically true, section 201(b)(1)(B) states that the fiscal plan must “ensure the funding of essential public services,” not government services. How can you fund essential services if you do not know what they are? To me, this is a major flaw in the Board’s endeavors since it has been allowing the Commonwealth to fund all the government, irrespective of what is essential. Are the State Elections Commission an essential service outside election year? Is WIPR, the Government radio and TV station an essential service? I can go on and on.

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.