Financial Control Board




The Chair of the House Natural Resources Committee, in cahoots with Nydia Velázquez, have introduced a bill on May 21, 2020 for the purported purpose of amending PROMESA. With the 2020 November election looming large, it is highly unlikely that the House, much less the Senate, will have the time or the inclination to evaluate such an important legislation, much less approve it, this year. In reality, the Bill is nothing less than an attempt to please the Puertorrican “diaspora” in NYC, without in reality making any meaningful changes. I will attempt to explore this Bill, examining its salient points.


Section 3 of the Bill, quite correctly, prohibits those who issued debt in the past for the territorial government, its corporations or who was a part of the financial entities who purchased or insured the bonds, from serving as Board members, Executive Directors or Staff. It also forces the Board to create an Ethics Board within to consider its compliance with “applicable Federal laws regulating the conduct of the Oversight Board, including conflict of interest, financial disclosure and open government laws.” Problem is, this section does not explain what this Committee may do about said violations. Total waste of time.


Section 3(c)(there are two c’s in section 3), limits the total cost of the contracts entered by the Board for any fiscal year to 5%  of the operating budget. In other words, if the Board has a $60 million budget, it cannot enter into contracts above $3 million, which would immediately eliminate its lawyers, to say nothing of all other experts. You may argue that the Board has spent too much on lawyers and experts but on the other hand, restructuring $72 billion in bond debt, another $45 billion in pension debt and a few other billions in unsecured debt cannot be done on that budget.


Section 3(d)(and another c) requires that each individual Board member or potential Board member do the following before serving:


‘‘(1) has issued a formal statement regarding  that individual’s past and present compliance, and intent of future compliance with all applicable Federal laws regulating the individual’s conduct, including conflict of interest, financial disclosure, and open government laws; and


‘‘(2) has committed in writing to strictly abide by section 208 of title 18, United States Code, and other applicable Federal laws regulating their conduct, including conflict of interest, financial disclosure, and open government laws.


How can an individual certify compliance with past federal laws that did not apply to him? Why does he have to certify compliance with federal laws that apply to him since he has a legal obligation to do so  anyway. This is something that has no value except to make sectors of the “diaspora” feel empowered. There are other ethical requirements which are good ideas that won’t make a real difference if members want to lie, but there is a requirement of an annual ethics report to the President and Congress. Don’t see the use of it either.


Section 4 requires federal appropriations for the Board, which Congress will never approve. Section 5 requires that essential services be fully funded, which is no real change since the Board is the one who determines what this means in the Fiscal Plan and it cannot be reviewed by the District Court until the plan of adjustment, if at all. This section also includes public education, public safety, public health and pensions purportedly as essential services. Are pensions an essential service? Who does paying pensions serve? Not general public for sure.


Section 6 adds a list of other things in which the Fiscal Plan must provide as investment, which is fine, but again, it is determined by the Board and is unreviewable.


Section 213 is new purports to give back the UPR its previous funding but in a dwindling student population, does this make sense?


Section 318 is amended to include important disclosures by professionals employed by Court order, which is a good idea. Problem is that this is required retroactively by section d and this may be problematic.


Section 319 is added requiring disclosures by professionals hired by debtor, which is also a good idea, but 319(a) at the end  requires that the  professional disclose individual connections with debtors, creditors, etc. Problem is, what does connections mean? If I went to high school or played little league as a child with the person, does this count? Further refining is needed. Also, section 319(b) prohibits the claim of privilege in this endeavor, defeating federal and state public policies. Makes more sense to limit it to certain privileges such as deliberative process or maybe business secrets. Or it should be left to the discretion of the Court to decide in a balancing of interests. Another example of this Bill not been thought through but rather one that is to please certain constituents. Also, the disclosures are retroactive to June 30, 2016, when PROMESA was originally enacted.


Section 320 is new and requires that public information be readily available. Being one of the persons that objected to the secrets in the PR bankruptcy, this is a good idea. Section 110 is added requiring the Comptroller General of the United States to report to the President and the House Natural Resources Committee on an audit on the use of federal funds etc. Not a bad idea. Also, a good idea was the repeal of Title V of PROMESA, the Puerto Rico Infrastructure Revitalization which has been totally unproductive to date.


Title VIII is added for allegedly Territorial Relief, in other words, a non-Court centered way in which the territory can get rid of debt. When you read it, however, you see it is not as terrible as it seems. It only applies to non-secured financial obligations (security or loan, swap, repurchase agreement, guaranty). It does not apply to claims by vendors, service providers, employees, pending tax refunds or credits. In essence, the procedure would relieve the Territory of this debt (small as it would be) once every 7 years, a territorial Shemittah. If you give this power to politicians, do you have any doubt they will use it? Of course, it can only be used for small amounts of money in practical terms, but it is still something ripe for abuse. Also, only a territory whose population has decreased by 10% in a 10-year period or has received major disaster assistance via the Robert T. Stafford Disaster Relief and Emergency Assistance Act during the 5-year period ending on the date of the discharge and that has a per capita debt greater  than $15,000 (as defined by the section). What a coincidence that PR qualifies in all of them. This discharge requires the vote of both over 50% of both houses of the legislature and the signature of the Governor and works similarly to a bankruptcy discharge. According to section 802(c):


Notwithstanding any other provision of Federal, State, or territorial law, the ability of a qualifying territory to obtain a discharge under this title shall not be stayed, avoided, or otherwise limited by operation of any provision of law or by order of a court, an Oversight Board, or an administrative agency in any proceeding.


In other words, only future Congressional law will prohibit this practice, which again, will affect an infinitesimal amount of the Territories debt and will only affect bondholders. Talk about discrimination.


Section 804(a) reverses the general presumption that all transactions have been conducted in a lawful way by stating that:


Any financial obligation is conclusively deemed to be an unsecured financial obligation except to the extent that the holder of that obligation proves that the financial obligation is a secured financial obligation in an action for a declaratory judgment that is filed—

“(1) in—


‘‘(A) an appropriate territorial court of the qualifying territory; or

   (B) a district court of the United States  in the qualifying territory; and


2) not later than 180 days after the date of  a discharge under section 802.


Hence, after the Territory conducts its unilateral discharge of said debt, the affected party has only 180-days to rush to Court and object and can go to federal or territorial court. In addition, section 804(b) changes the burden of proof of the person challenging the unilateral action of the Territorial Government, used in both federal and territorial courts in civil cases, from a preponderance of the evidence (50+1) to clear and convincing evidence (probably between 65-70% probability). Talk about empowering the Government. Moreover, section 804(c) provides:


Notwithstanding title 28 [Federal Court Jurisdiction and Venue statutes], United States Code, a court described in subsection (a)(1) shall have exclusive jurisdiction over an action involving, arising from, or related to the status of a financial obligation as a secured or an unsecured financial obligation under subsection (a), including—


‘‘(1) any action asserting a taking under the fifth article of amendment to the Constitution of the  United States; and

   (2) any action for declaratory judgment.


Therefore, if a party sues to question the discharge and has to include as defendants others who are indispensable parties (legalese, trust me on this), those parties, if sued in territorial court, could not remove the case to federal court. Also, if one party goes to territorial court, can another go to federal court or is it prohibited by this section. Very unclear.


Also, section 804(h) provides the territory with a procedure for avoidance of security interests as if it were a Trustee in a Chapter 7 case. So now we have Title III, a bankruptcy like procedure based on Chapter 9 and this avoidance based on Chapter 7. The  territory has two years after the date of the discharge in 804 to do this and can file in territorial or federal court. Most territorial courts, however, have no idea how bankruptcy law works so filing there may be an enormous headache.

A very  important limitation is contained in Section 806. This Title does not apply to American Samoa, the Commonwealth of the Northern Mariana, Guam or the Virgin Islands. Considering that the United States has only 5 permanently populated territories, this means that Title VIII applies only to Puerto Rico, violating the doctrine of Railway Labor Executives’ Assn. v. Gibbons, 455 U.S. 457 (1982). In that case, Congress passed a bankruptcy law that would benefit only one railroad and the Court decided this violated the provision of the Constitution where Congress could enact “uniform” bankruptcy laws, and this was not uniform. To the argument of Congressional power over interstate commerce, the Court scoffed at the idea that Congress could use one power to defeat limitations of said power. As it is, this section is probably unconstitutional but even if applied to all territories, this bankruptcy like procedures seem to violate the uniformity clause. As some bondholders have told me, PROMESA is likely unconstitutional for the same reason, although until this date, no party has actually filed such challenge. But as Curly in City Slickers said “Day ain’t over yet.”

Finally, we come to one of the “diasporas” most cherished ideas, “The Puerto Rico Credit Comprehensive Audit Commission.” In spite of the Kobre & Kim Report on the debt and many (including myself) mentioning that all politicians since 1974 are responsible for the debt, the “diaspora” (and the Puertorrican left) have wanted a Commission would audit the debt to discover who is responsible for it and what debt is illegal. Congresspersons Grijalva and Velázquez heeded their cries with this section. The Commission would be part of the Puerto Rico Government and proceed to:

‘‘(1) order a comprehensive audit of all public debt of Puerto Rico and its instrumentalities, in conformity with the Government Accountability Office’s Generally Accepted Government Auditing Standards (also known as the ‘Yellow Book’); and

‘(2) audit all public debt issued during the period beginning on the first day of fiscal year 1972 and ending on the date of enactment of this section, including—


‘‘(A) a current and complete accounting as to the amount of outstanding indebtedness as of the date of the enactment of this section;

‘‘(B) an analysis of the sustainability of outstanding debts;

‘‘(C) an assessment of how rules, policies, and controls over the use of debt can be improved upon to ensure that in the future Puerto Rico’s debt load is sustainable and issued in a manner that effectively protects the legal and financial interests of the Government of Puerto Rico; and

‘‘(D) an investigation into any irregularities, apparent or alleged, wherein probable cause of malfeasance or misfeasance is found.


The Commission would be comprised of individuals from the unions, cooperativists, economics, finance, accounting, statistics, law, sociology (I am sure a certain professor of sociology in NYC was instrumental in this) professors from a university in PR, a business community representative, preferably small business and a certified translator. They will be appointed by the Governor no later than 360-days after the amendments are approved and if the does not act, the President of the Senate and the Speaker of the House shall jointly appoint them. The Bill requires that there be sufficient funding but does not say who had to fund it or if its members will be compensated. Give the duties and responsibilities they are entrusted with, not many will accept this appointment.


There are several problems with this section. What does probable cause mean? Rule 6 of the Puerto Rico Rules of Criminal Procedure  or Rules 5.1 or 41  of the Federal Rules of Criminal Procedure? Moreover, much of what the Bill requires was done by Kobre & Kim, so why do it again? Also, much as I would love to  put the culprits behind bars, the 5-year statute of limitations of both Puerto Rico and Federal Criminal Codes have long expired. What would a declaration of a Commission of this nature do? What weight would it have? Who will pay for it? How much will it cost? Finally, by the time the persons are appointed, and they have done their duty, the Puerto Rico Title III cases will have been completed or the cases dismissed.


Also, nothing is done in this Bill about the Puerto Rico’s Government’s objections to PROMESA, to wit, the Board’s control over it. It does nothing to weaken it or strengthen it. It provides no funding for PR except to say that the Federal Government will pay the Board’s expenses. It is not, like a local politician dubbed it, “a step in the right direction.”  Why do all this, then? To please the NYC Puertorrican “diaspora,” nothing else. The Bill is not even to get serious consideration given the time constraints. This is not the purpose of  Congress.







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La Gobernadora tiene mucho taller ante sí. Pero sobre los dos asuntos más apremiantes, la Junta y la corrupción, nada ha dicho. Ambos asuntos son de lapidaria importancia, como diría mi apreciado profesor, Don Herminio Brau (QEPD).


El asunto de la Junta es multi-temática. ¿Continuará la Gobernadora la actitud de conflicto y desafío continuo a la Junta o tratará de ser más conciliatoria? ¿Que va a hacer sobre las pensiones, los bonos y la venta de la AEE? Definitivamente la Gobernadora no puede continuar con la política de confrontación abierta con la Junta de la Administración de Rosselló. Muchos de los cambios que propone la Junta son necesarios pero anatema a la clase política, como la reducción de pensiones y los bonos de navidad. Pero la confrontación a nada lleva ya que con excepción de la victoria sobre Zamot, la administración ha perdido todas las demás batallas.


Tampoco puede unirse al esfuerzo de la Junta de destruir a los bonistas de obligación general. Aún si PR gana ese enfrentamiento, el mal sabor que esto dejará sobre los inversores retrasará cualquier regreso al mercado con intereses razonables, uno de los dos requisitos para la salida de la Junta. Hay que mirar al futuro y no a la próxima elección como fue la visión de Rosselló. Un acuerdo similar al de COFINA para los bonistas de obligación general ayudaría mucho a la imagen de la isla ante los inversores internacionales. Esto podría llevar a una confrontación con la Junta pero al fin y al cabo, PR es quien tiene que ejecutar el plan de ajuste y va a ser más difícil para la Juez Swain aprobar el mismo si el Gobierno lo objeta. No imposible, pero definitivamente más difícil.


Otro asunto atado a lo anterior es el costo de la representación legal del ELA. Peter Friedman y compañía ha hecho un muy buen trabajo PERO a $1,300 la hora. Es tiempo de examinar los costos de abogados y peritos y decidir si firmas locales no pueden hacer el mismo trabajo por una fracción del costo. Lo mismo se puede decir de los peritos de AAFAF. Esto nos lleva a otro asunto. ¿Quien será el director de AAFAF y cual será la actitud de la agencia hacia la deuda? ¿Quien será el representante ante la Junta y cual será su actitud hacia la Junta? Es tiempo de una revisión completa de ambas agencias y de que hacer. PR aumenta ingresos cada mes por encima de lo predicho por la Junta. PR tiene que comenzar a pagar su deuda, cosa que muchos políticos rehúyen hacer. Mientras más paguemos, mejor opinión tendrán de nosotros en los mercados de inversión, a los cuales tendremos que ir, más pronto de lo que muchos pensamos.


Por último, la corrupción. En escritos anteriores he señalado que el Depto. de Justicia bajo Wanda Vázquez se hizo de la vista larga sobre señalamientos de corrupción. Si de verdad la Gobernadora quiere demostrar que no es una politiquera, tiene que atajar la corrupción en el Gobierno y eso se hace con arrestos y convicciones. Obviamente se comienza con investigaciones pero la verdadera prueba de un compromiso  con combatir la corrupción es arrestando y consiguiendo convicciones de los que roban del erario público. Solo así se le puede demostrar al Pueblo y al Gobierno Federal, que no hacen falta monitores para velar por su dinero. La bola esta en la cancha de la Gobernadora.  Le deseo el mas sincero éxito en esta difícil labor.




During the June 12, 2019 Omnibus Hearing, Martin Bienestock informed Judge Swain that the Board would file the Commonwealth Plan of Adjustment. Since the Plan of Adjustment must be consistent with the Fiscal Plan, and the latter requires cuts to pensions, it is likely Governor Rosselló will oppose it. To this we must add that the Board filed an adversary proceeding against the Commonwealth to invalidate law 29-2019, which exempts municipalities from contributing to the pension funds and medical plans. The adversary proceeding also wants the Commonwealth to comply with the reporting requirements throughout PROMESA. The Governor has promised a vigorous defense.


Although PROMESA is silent on this issue, an opposition by the Commonwealth to its Plan of Adjustment does not abide well for it. In addition, GO bondholders will oppose since it severely cuts its “secured” credits. Moreover, although the Board sued to invalidate certain PBA and GO bonds, it now wants a stay on that litigation in order to process the Plan of Adjustment. Although this stay only benefits the Board, it is likely Judge Swain will grant it. Moreover,  from the glimpse we got from the Board when it announced its settlement with certain GO and PBA creditors, it seems unsecured creditors of the Commonwealth will receive ~ 9% of their claims. Since the Commonwealth is sitting in over $10 billions in deposits which no one has explained, it is a certainty that there will be myriad of complicated and arcane objections to the Plan of Adjustment even before it is voted upon.


We must also consider that the Rosselló Administration is facing close to a dozen investigations by the FBI and the Inspector General. If any of these investigations results in arrests of the administrations close collaborators or key politicians, will this affect the weight of its objections to the Plan of Adjustment? In any event, it seems plausible that the Rosselló administration wishes to postpone any approval of any Plan of Adjustment until after the elections of 2020 so not to receive any negative impact of said plan, including to start paying debt.


Moreover, on July 24, 2019, the First Circuit will hear oral arguments on the issue of Board recommendations being put in the Plan of Adjustment as an order and its implications for the budgets. Judge Swain sided with the Board and although I believe she will be upheld, you never know. If she is reversed, this would create havoc for the Plan of Adjustment. Also, on October 15, 2019, the Supreme Court of the United States will hear arguments on the constitutionality of the Board’s appointments. Normally the granting of the Board’s certiorari would weigh heavily on a reversal but the SCOTUS granted cert on ALL petitions. This means that the SCOTUS could determine that the Board was constitutionally appointed, could affirm the First Circuit decision or could decide the Board was unconstitutionally appointed and all of its actions were null and void. That would mean back to square one.


What does this all mean? That even if the Plan of Adjustment for the Commonwealth is filed this month, its approval would likely not be soon. There are too many imponderables at the present time.