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Muni Week Review / Preview 6/22/2017

Thursday, Jun 22, 2017

PUERTO RICO UPDATE

Former NY Governor Pataki: Puerto Rico Governor and Federal Oversight Board Acting In “Bad Faith”

More than a year after the Puerto Rico Oversight Management and Economic Stability Act (PROMESA) was passed, it is clear that neither the Oversight Board nor Governor Ricardo Rosselló “is committed to acting in good faith with respect to either the Commonwealth’s legal obligations to bondholders, or transparency about the Commonwealth’s financials,” Governor George Pataki, Senior Advisor to the Ad Hoc Group of Puerto Rico General Obligation Bondholders said in a memo released June 20. “In Fact, it is precisely the actions of both parties over the last several months that have forced Puerto Rico and its three million U.S. citizens into an avoidable bankruptcy.”

Puerto Rico: Separating Fact From Fiction, In The Eleven Page Presentation Governor Pataki Noted The Following:

Together, the Oversight Board and the Commonwealth approved a Fiscal Plan that openly violates PROMESA by elevating all government expenses above all debt service, regardless of lawful priority.

Furthermore, the Oversight Board has made clear that it is unwilling to consider input from creditors about inaccuracies contained in the Fiscal Plan or specific issues with the Fiscal Plan’s unlawfulness.

In fact, by its refusal to engage with creditors in any meaningful way, the Oversight Board forced the Commonwealth and its citizens into a completely preventable bankruptcy.

To this day, the Board and the Commonwealth refuse to provide a satisfactory answer to Members of Congress that have expressed concerns over the Fiscal Plan’s unlawful treatment of priorities, and also refuse to distinguish between essential and non-essential government services. The ridiculous implication is that all non-debt expenditures are “essential.”

He said the Commonwealth’s proposed Fiscal Year 2018 Budget doubles down on the Board’s refusal to abide by PROMESA or Puerto Rico’s Constitution, and highlights the utter lack of seriousness with which it is approaching the Commonwealth’s fiscal situation.

The budget includes year over year public expenditure increases of $575 million; a fact which the Commonwealth attempts to obscure by reclassifying certain expenses as “below the line,” including two large slush funds (the $545 million “reconciliation adjustment,” and the $305 million “budgetary reserve”).

In total, the Fiscal Year 2018 Budget represents a year over year increase of 6.4% in total non-debt related expenditures, completely contradicting claims of fiscal responsibility by the Rosselló government.

The Rosselló administration is refusing to respect payment priorities as required by PROMESA. Instead of using PROMESA as a political shield to enact reform – as Congress expressly intended

Rosselló is in fact using PROMESA as a shield against financial creditors, enabling him to pay off favored political constituencies in a violation of PROMESA.

States pay their debts. Governor Rosselló is asking Congress to grant statehood to Puerto Rico despite his refusal to honor Puerto Rico’s own constitution or lawful commitments to millions of American citizens in Puerto Rico and the mainland who own constitutionally protected bonds as part of a retirement fund.

For its part the Federal Board has “actively obstructed a consensual agreement between the Commonwealth and its creditors, and has pressured the Commonwealth to present a misleading picture of its financial situation,” he said.

The senior advisor blasted the Oversight Board for:

Insisting on projecting a decrease in the Commonwealth’s revenues and a contraction in the island’s GNP, in spite of contradictory information. Puerto Rico’s revenues are up, powered by robust consumer consumption. Both tax collections and nominal GNP are at all-time highs.

Using the misleading projections to argue that the island has the capacity for only $400 million in debt service in the coming year. In fact, before pension payments, the Commonwealth is running a primary surplus of $3 billion for Fiscal Year 2018. It also has $1 billion less in accounts payable – spread over multiple years – than had previously been forecast by the Fiscal Plan.

Documents obtained by the Center for Investigative Journalism show the Commonwealth’s Treasury Single Account (TSA) with much more cash than previously disclosed by either Governor Rosselló or the Oversight Board. As of June 30 (the last day of the current Fiscal Year), the Commonwealth is expected to have a cash position of $1.15 billion, compared to$291 million as forecast in the Fiscal Plan just three months ago. This increases the amount payable for debt service. The Board and the Commonwealth refuse to correct the Fiscal Plan with this information.

“Congress and the Trump administration should insist that the Oversight Board correct these errors in the Fiscal Plan or replace the Board with one that will do so,” Pataki said.

The Board’s non-compliance with PROMESA to date, and its lack of responsiveness to members of Congress who have expressed concern over its non-compliance, are inexcusable,” he concluded.

Puerto Rico Governor Tells Federal Fiscal Oversight Board Its “Lack Of Transparency” Allegations Are “Untrue”

Governor Ricardo Rosselló rejected the Federal Fiscal Management Boards June 16 letter, which appeared to be a reaction to pressure Members of Congress, requesting the government to define “essential services,” demanding “transparency.”

In a reply letter sent by Rosselló he wrote to the Board that its letter is “confusing” and “troublesome,” and that the allegation that the government has not been publicly forthright with respect to Puerto Rico’s financial and economic crisis is simply untrue.

In the government response on the definition of “essential services”, the officials stated that the Certified Fiscal Plan was approved by the Board under the premise of guaranteeing “the funding of essential public services.”

Without providing a definition of “essential services”, the government indicated that the Board’s letter “conveys the impression” that the parties “did not work closely together in determining the necessary level of “essential services” funding.

The Board approved the Governors Fiscal Plan that indicates all government expenses in the Plan are for “essential services.”

Questioned current liquidity estimates indicate considerably more than the $291 million the government previously conveyed. There will be more than $1.1 billion at the end of the Fiscal Year, on June 30. The government said this money will be used to finance government operations in the first half of Fiscal 2018, beginning July 1, 2017. That is when there is a greater need for liquidity due to a lack of the government receiving any sales and use tax revenue until January 2018. A contested Puerto Rico law states sales tax bondholders receive COFINA revenues for the first 6 months of the Fiscal Year or until debt service requirements are satisfied.

      

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