Conflicting Governance & Oversight: How Much Does It Cost to Recover from Quasi Municipal Bankruptcy?

January 8, 2019

Good Morning! In this morning’s eBlog, we report on fiscal and governing challenges for the U.S. territory of Puerto Rico confronts as it seeks to exit from the oversight of both a federal judge and a Congressionally-imposed oversight board.

UnGoverning. Puerto Rico Gov. Ricardo Rosselló signed into law several bills which seek to make the U.S. territory’s central government and municipalities or municipios more efficient, as well as generate revenue, with the signing coming as the new Congress starts the year, and as Democrats are picking up an unresolved fight: investigating the Trump administration’s response to Hurricanes Irma and Maria in Puerto Rico. Yesterday, Sen. Senator Kirsten Gillibrand  (D-N.Y.) announced she was re-introducing legislation to establish a “9/11-style” independent commission “to investigate exactly how and why the federal government abandoned its responsibilities and turned its back on Puerto Rico,” noting: “We need to get to the bottom of exactly what went so terribly wrong…I am proud to fight for Puerto Rico in the Senate, and I urge my colleagues to support this legislation just as they would if a natural disaster hit their own states.” Her proposal, co-sponsored by Sens. Elizabeth Warren (D-Mass.), Edward Markey (D-Mass.), Sen. Minority Leader Chuck Schumer (D-N.Y.), Kamala Harris (D-Ca.), and Richard Blumenthal (D-Conn.), would analyze how a questionable methodology to account for hurricane fatalities, a lack of disaster preparedness, and an inadequate telecommunications systems adversely affected Puerto Rico’s emergency response: the goal is to make sure there is no repeat of such a discriminatory response, or, as Sen. Warren put it: “It’s been well over a year since Hurricanes Irma and Maria devastated Puerto Rico, and we still don’t know why the federal government’s preparedness and response were so flawed…the Commission established by our bill would give us a full accounting of what happened and help provide the U.S. citizens in Puerto Rico, in Massachusetts, and across the country with the answers they deserve.” Rep. Nydia Velázquez (D-N.Y.) noted: “As we move into the 116th Congress, I will continue calling for accountability for how Donald Trump and his administration failed 3.4 million American citizens after Maria struck…It is clear now, from multiple analyses, that thousands needlessly lost their lives because of the federal government’s feeble response to these hurricanes and their aftermath, as she vowed she wants Congress to “be certain this never happens again.”

Meanwhile, in Puerto Rico, Gov. Ricardo Rosselló signed into law House Bill 1256, which was authored by Rep. José González Mercado to reduce bureaucracy by eliminating extra documentation required of bidders: the legislation allows bidders who have received a bidding eligibility certificate by the General Services Administration to participate in municipal offers without the need for additional documentation. In his release, Gov. Rosselló said that the GSA’s inspection and accreditation process is sufficiently thorough, allowing for a “Single Bidder Registry,” noting: “It is unnecessary for a person or company to have to be certified in each municipio that might need its permits. This is a measure for efficiency and agility in government efforts, which shows that Puerto Rico is open for business.” The Governor’s efforts might be complimented by House Bill 839, authored by the Rep. Joel Franqui Atiles, which is aimed at making it possible for the GSA to reach agreements with private companies for the sale of advertising space on certain government vehicles: half of the funds raised by the initiative would be used to maintain the Department of Public Security’s fleet, which includes Police, Fire, Forensic Sciences and Medical Emergency department vehicles—as the Governor put it: “At a time of great fiscal challenges, this initiative allows us to raise additional funds by allowing businesses to advertise on certain government vehicles.” The Governor also announced that he signed Senate Bill 940, which was authored by Sen. Miguel Romero: it is a bill intended to facilitate and clarify the process for the reconstruction of the Santurce and Río Piedras urban areas by allowing citizens to acquire abandoned real estate “directly,” with the objective of fostering their restoration and development.

Quien Es Encargado? (Who is in charge?) Unlike a chapter 9 municipal bankruptcy (in the states where chapter 9 is permitted by state statute), the PROMESA law passed by Congress created a more complicated process, which includes a U.S. court and the PROMESA oversight Board, both complicating and vastly increasing costs as Puerto Rico’s subjugation enters its third full year of this hybrid chapter 9 municipal bankruptcy. The greatest challenge appears to be investors/bondholders’ efforts to cash in on more than $70 billion of debt, or, as Puerto Rico attorney John Mudd noted last summer, he expects “another titanic struggle will arise between the Board and the government on pensions” when the PROMESA Board will insist on a 10% cut to funding for government pensions—a cut which would come amid apprehensions that Puerto Rico’s economy will contract in the first quarter of 2019, adding further stress as the Governor has made clear repeatedly that he will not cut workers’ pensions. That is, municipal bondholders, many of whom purchased Puerto Rico’s municipal bonds to benefit from the tax-exemption and high interest rates, have greater interest in preserving the high, tax-free bond payments than Puerto Rico’s fiscal and physical recovery. But the pace of that recovery appears to have been slowed down  by what Advantage Business Consulting President Vicente Feliciano described as: “The most important subjects going into 2019 are the slowdown in the Puerto Rico economy at the tail end of 2018 and the slow pace of the federal disaster recovery transfers,” transfers which appear to be occurring more slowly than the PROMESA Oversight Board had projected, he noted, adding: “Therefore, expect the economy to contract over the first quarter of 2019…As to the rest of 2019, the economy should stabilize as federal transfers for permanent work begin to flow….any growth in the Puerto Rico economy beyond 2019 would have to rely on structural reforms such as the privatization of PREPA. This is critical in terms of Puerto Rico’s debt capacity.”

Evercore Director of Municipal Bond Research Howard Cure has also raised apprehension with regard to shifts in Congressional opinion. Among the new House of Representatives Democratic leadership, he notes: “Questions have arisen about whether austerity measures exacerbate Puerto Rico’s economic malaise,” suggesting the new leadership of the U.S. House Natural Resources Committee could have hearing on the issue, albeit at a time when the federal government itself is shut down, and where, to the administration, providing more than $5 billion to build a wall is a much greater priority than the Commonwealth of Puerto Rico. Nevertheless, in the wake of nearly two years after the PROMESA Board filed for Title III bankruptcy for the central Puerto Rican government, the legal process for many of the Puerto Rican debts is either nearing conclusion, nearing a beginning, or approaching decisive turning points; indeed, rulings are expected in the next few months for two cases that could upend the bankruptcy process. Investment firm Aurelius is arguing that the steps by which the U.S. Congress and President selected the Oversight Board members violate the U.S. Constitution. While Title III Judge Laura Taylor Swain ruled against the firm, Aurelius has appealed the decision to the U.S. Court of Appeals, which heard arguments in December, and could release a decision as early as this month—and, should Aurelius prevail, that could simply lead to a delay in the bankruptcies, or it could mean the undoing of all the Board’s actions, including the apparently settled Government Development Bank restructuring and nearly settled Puerto Rico Sales Tax Financing Corp. (COFINA) restructuring.

In addition, Hedge fund Altair has filed a claim in the U.S. Court of Federal Claims that the federal government is responsible for reimbursing investors for any cuts to the municipal bond values resulting from the Puerto Rico Oversight, Management, and Economic Stability (PROMESA) Act, adding further delays, costs, and uncertainties—with the issues coming as Judge Swain is scheduled to hold a hearing on the COFINA plan of adjustment a week from tomorrow. The federal government had filed a statement of its intention to file an objection but requested more time. The PROMESA Board has said it may file bankruptcies for the Puerto Rico Aqueduct and Sewer Authority and University of Puerto Rico this summer.

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