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Muni Week Review / Preview 9/06/2017

Wednesday, Sep 06, 2017

PUERTO RICO UPDATE

Federal Board Takes Governor to Court Over Employee Furloughs… Bondholders Support Board Lawsuit Against Puerto Rico Governor…

The Federal Board’s first legal action against Governor Rosselló hopefully signals more Board accountability.  The actions of the Federal Board are now under the close scrutiny of bondholders and Congress. In Puerto Rico’s Title III Federal Court directed debt restructuring, bondholders have a powerful role. They have legally challenged the constitutionality of the Federal Board and many of its actions, sued the United States of America as being accountable for the actions of the President Obama appointed Federal Board and in court asserted their constitutional rights pertaining to contract law, the “takings clause” and due process. Bondholders, including Goldman Sachs, mutual funds including Oppenheimer Funds and Franklin Templeton Funds, Hedge Funds and bond insurers have all attacked the Federal Oversight Board’s Certified Fiscal Plan as it does not respect bondholder rights, priority liens and does not differentiate between “essential” and “non-essential” services. The Fiscal Plan treats 100% of the approx. $18 billion in average annual expenses as “essential” violating Puerto Rico and U.S. constitutional laws. However, the merits of the Federal Board’s lawsuit against Governor Rosselló for not complying with the Board ordered government employee furlough program is supported by bondholders. 

As a matter of law under PROMESA a Board ordered government employee furlough program is part of the Commonwealth Fiscal Plan. In March 2017, the Federal Board determined that the Governor’s proposed Fiscal Plan was not compliant with PROMESA as additional safeguards to ensure liquidity and budgetary savings were not realized. The Federal Board amended the Governor’s proposed Fiscal Plan to include (i) furloughs of up to four days for government employees, slashed Christmas bonuses subject to Puerto Rico achieving specific liquidity/budgetary saving targets by June 30, 2017 and (ii) cut pension spending 10% by fiscal 2020. On March 13, 2017, the Federal Board Certified the Governor’s proposed Fiscal Plan as modified by the amendments.

The Federal Board announced on August 4 that the Fiscal Plan’s government employee furlough program must begin September 1 to cover a savings shortfall. Government employee furloughs would be two days per month instead of the four days allowed in the Fiscal Plan. Savings from government right sizing were $218 million short of targeted $880 million in fiscal 2018. The Governor and his executives confronted and challenged the authority of the Federal Board to require two day per month government employee furloughs along with issuing instructions that “no entity of the Executive Branch is authorized to implement a reduction in work schedule to any human resource.” The Governor and his agents state that furlough requirements are not mandatory components of the Commonwealth Fiscal Plan but mere recommendations. For political mileage, the Governor cast aside the Federal Board’s government employee furlough requirements. To appease his political base, the Governor took the stage claiming he would “go to jail” before he would order two days per month government employee furloughs.

The Governor’s defiance defeats the purpose of PROMESA. U.S. Congress enacted PROMESA in 2016 which included a Federal Control Board to establish oversight of the Puerto Rico’s budget and fiscal policies. Poor governance has left the Island with accumulated deficits and structural problems. PROMESA empowers the Federal Board with exclusive authority to certify Fiscal Plans compliant with PROMESA. 

On August 28, 2017, the Federal Board in charge of Puerto Rico’s finances sued Governor Rosselló. The Federal Board has asked the Federal District Court of Puerto Rico to declare that the two day per month government employee furlough program and pension overhaul are mandatory. The Federal Board seeks a court ruling to prohibit the Governor from continuing to refuse to comply with any aspect of the Federal Board Certified Fiscal Plan, which includes the two day per month government employee furlough program and pension overhaul.

PROMESA provided the Governor with ninety days to respond to Federal Board recommendations. The Governor did not contest the furlough requirements well past the 90-day period. When the time to act arrived, the Governor did not comply with the furlough requirements. “Any Fiscal Plan that would achieve fiscal responsibility and access to the capital markets in Puerto Rico may require unpopular and difficult choices,” the Federal Board states. PROMESA does not allow the Governor to determine whether or not to comply with a Federal Board Certified Fiscal Plan. The Governor is obligated to comply with a Federal Board Certified Fiscal Plan.

The Federal Board seeks a judicial declaration that the furlough requirements are mandatory and a binding part of the Commonwealth Fiscal Plan. The governor is legally obligated to enforce and comply with the Federal Board’s order under federal law. PROMESA allows the Federal Board to seek judicial enforcement of its authority. 

Though bondholders are critical of the Federal Oversight Board’s Fiscal Plan, the merits of the Federal Board’s case against the Governor are supported by bondholders. Bondholders have sued to make the United States of America accountable for the actions of the President Obama appointed Federal Board in charge of Puerto Rico’s finances. They have challenged both the constitutionality of the Federal Board and many of its actions. Puerto Rico general obligation bondholder Aurelius Investments LLC and a Puerto Rico electric workers union UTIER have asked the U.S. District Court to Puerto Rico to dismiss all Puerto Rico Title III petitions because the Federal Board’s appointment was from secret lists instead of a public senate confirmation. In Puerto Rico’s Title III debt restructuring, bondholders have a powerful role: with top legal teams they assert their rights pertaining to contract law, the “takings clause” and due process. The actions of the Federal Board are under scrutiny of bondholders and Congress. Bondholders’ arguments are forcefully bringing constitutional and bond indenture rights to the forefront. Bondholders are working to make the Federal Board more accountable. The Court summoned Governor Rosselló to answer the Federal Board’s suit for the court to order the Governor to enforce the Board’s two day per month government employee furlough order by September 28.

If you have any questions or desire updated information contact your GMS Account Executive.

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