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Muni Week Review / Preview 6/14/2017

Wednesday, Jun 14, 2017

PUERTO RICO UPDATE

U.S. Senator Attacks Puerto Rico Federal Oversight Board And Fiscal Plan

       Republican Senator Tom Cotton (AR) blasted Puerto Rico’s Financial Oversight & Management Board and the island’s Fiscal Plan for allegedly failing to respect the lawful priorities and liens of bondholders, jeopardizing retirement savings of retirees in his state, the U.S. and Puerto Rico. They are also pursuing a dangerous precedent for municipal bond investors and property rights across America.

       In a letter to Board Chairman Jose Carrion, Sen. Cotton states that PROMESA requires the island’s Fiscal Plan to 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.

       “The Oversight Board previously claimed that Congress, in using the word ‘respect,’ actually gave the Board ‘flexibility’ to decide which legal obligations to meet which, in my book, is the exact opposite of what the word ‘respect’ means,” says the Republican lawmaker.

        Quoting stateside media reports, Cotton adds that retail individual investors in mutual funds stand to lose $5.4 billion as a result of the fiscal Board’s “bizarre interpretation” of PROMESA.

        Moreover, the senator asks Carrion whether the Board anticipated that its decisions would hurt the appeal of municipal and sovereign investment markets, and whether the Board’s opinion is that servicing of Puerto Rico’s lawful debt is a non-essential expense.

         He further says that he expects “more detailed” answers than in the chairman’s previous letter, in which Carrion responded to an April letter sent by Cotton and Sen. Thom Tillis. The Senator’s letter in April also raised flags over the Board’s compliance with PROMESA. According to the Arkansas Senator, Carrion’s answers at that time were “vague and unresponsive.”

         “The Board’s decision to subordinate lawful priorities of bondholders has jeopardized the retirement savings of Arkansas. In addition, this decision creates a dangerous precedent that property and investor rights are open to interpretation in a fiscal crisis, which could only destabilize the municipal bond market,” reads Cotton’s most recent letter.

The Senator’s letter to the Puerto Rico Federal Oversight Board closed with the following:

Given the stakes, I have some additional questions I’d like to ask and for you to answer:

1. Did the Board anticipate that its interpretation of PROMESA would hurt the appeal of municipal and sovereign investment products and thus potentially raise the cost of public borrowing for all states and municipalities?

I’d also point out that your letter didn’t address why the Fiscal Plan fails to distinguish between essential expenses and non-essential ones.

2. Is it the opinion of the Board that the servicing of Puerto Rico’s lawful debt is a non-essential expense? Please explain.

Once again, I request that the Board promptly address these questions with a much more detailed response than your letter of April 25.

Finally, I am asking Mick Mulvaney director of the U.S. Office of Management and Budget, to provide my office with a list of all federal transfer payments to Puerto Rico and an analyses of the per capita cost to U.S. taxpayers as compared to other states and territories.

I look forward to your prompt response,

Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.