Truths and Myths: Scope and Reach of PROMESA - PowerPoint Presentation

Slide1

Truths and Myths:Scope and Reach of PROMESA

P.R.O.M.E.S.A. FORUMAugust 2nd, 2016PANEL 2:Luis Sánchez-Betances, Esq.Zulmarie Urrutia-Vélez, CPA, Esq.Slide2

PROMESA DEVELOPMENT

TimelineThe House passed an amended version of H.R. 5278, which is organized into seven titles.

The Senate approved the measure.

President Obama signed the bill into law.Slide3

What PROMESA is all about?In General

Creates a structure for exercising federal oversight over the fiscal affairs of territories.Establishes an Oversight Board with broad powers of budgetary and financial control over Puerto Rico.Creates procedures for adjusting debts accumulated by the Puerto Rico government and its instrumentalities and potentially for debts of other territories.Expedites approvals of key energy projects and other “critical projects” in Puerto Rico.Slide4

MEMBERS OF THE BOARD7 + ExOfficio

Governor = 8 MembersR

D

1 Cat-F

selected in the President’s sole discretion. [1

st

to be chosen, no advice and consent of the Senate]

1 Ex-Officio

without voting rights, is the governor of Puerto Rico.Slide5

An individual is eligible for appointment as a member of the Oversight Board only if the individual—

has knowledge and expertise in finance, municipal bond markets, management, law, or the organization or operation of business or government; andprior to appointment, an individual is not an officer, elected official, or employee of the territorial government, a candidate for elected office of the territorial government, or a former elected official of the territorial government.MEMBERS OF THE BOARDEligibilitySlide6

An Oversight Board shall terminate upon certification by the Oversight Board that—

Has adequate access to short-term and long-term credit markets at reasonable interest rates to meet the borrowing needs of the territorial government; andFor at least 4 consecutive fiscal years—has developed its Budgets in accordance with *modified accrual accounting standards;

and

BALANCED - the

expenditures made by the territorial

government during

each fiscal year did not exceed the

revenues.

TERMINATION OF THE BOARD

When? – Suspensive Condition, Section 209

*

Modified Accrual Basis of Accounting

is a combination of cash basis and accrual basis.

Revenues

are recognized when they are both measurable and available.

Expenditures

, however, are recorded on a full accrual basis because they are always measurable when they are incurred.Slide7

POWERS OF THE BOARDSection 104

hold hearings and seek testimony; obtain information, including written and electronic documents and data from federal agencies (with the consent of the agency head) and agencies and entities of the government of Puerto Rico;accept, use, and dispose of gifts, bequests, and donations of real and personal property for the purpose of aiding the work of the board; All gifts, bequests or devises and the identities of the donors shall be publicly disclosed by the Oversight Board within 30 days of receipt.issue subpoenas, requiring the attendance and testimony of witnesses and the production of evidence of any nature relating to any matter under investigation by the Oversight Board;request administrative support services from the U.S. General Services Administration (GSA

);

enter

into

contracts;

enforce

any laws of Puerto Rico prohibiting public sector employees from participating in a labor strike or

lockout;

initiate

civil actions to carry out its responsibilities

;

investigate how Puerto Rico government bonds were sold to small

investors.

obtain

creditor information on the nature and aggregate amount of claims held by each creditor or organized group of creditors from those creditors seeking to participate in voluntary negotiations regarding debt

restructuring.

Certify voluntary debt restructuring agreements entered with bondholders. Upon review of such an agreement, the Oversight Board must certify that the agreement provides for a sustainable level of debt and is in conformance with the territory or territorial instrumentality’s certified Fiscal Plan. The act would grandfather in voluntary agreements executed before its enactment.PREEXISTING VOLUNTARY AGREEMENTS executed before May 18, 2016 with holders of a majority in amount of Bond Claims that are to be affected by such agreement to restructure such Bond Claims, shall be deemed to be in conformance with the requirements of this subsection.ELECTRONIC REPORTING.—The Oversight Board may, in consultation with the Governor, ensure the prompt and efficient payment and administration of taxes through the adoption of electronic reporting, payment and auditing technologies.Slide8

POWERS OF THE BOARDGifts, Bequests and Devises – Section 104 (e)

The Board may accept, use, and dispose of gifts, bequests, or devises of services or property, both real and personal, for the purpose of aiding or facilitating the work of the Board.

Money

and proceeds from sales of other

property received

as gifts, bequests, or devises

shall be deposited in

such account

as the Oversight Board may establish and shall be

available for

disbursement upon order of the Chair, consistent with

the Board’s

bylaws, or rules and procedures

.

All gifts

, bequests

or devises

and the identities of the donors shall be publicly disclosed by the Oversight Board within 30 days of receipt.Notwithstanding any ethics provision governing employees of the covered territory, all members and staff of the Board:SEC. 109(a) – Shall be subject to Federal conflict of interest requirements (18 USC 208).SEC. 109(b) – Shall

be subject to

disclosure of their financial

interests

pursuant to section 102

of the Ethics in Government Act of 1978 (5 U.S.C. App.).Slide9

RESPONSIBILITIES OF THE BOARDApproval of Fiscal Plans – for not less than 5 fiscal years, Section 201(b)

(A) provide for estimates of revenues/expenditures;(B) ensure the funding of essential public services;(C) provide adequate funding for pension systems;(D) provide for the elimination of structural deficits;(E) provide for a debt burden that is sustainable;

(F) improve fiscal governance, accountability, and

internal controls;

(G) enable the achievement of fiscal targets;

(H) create independent forecasts of revenue for the

period covered by the Fiscal Plan;

(I) include a debt sustainability analysis;

(J) provide for capital expenditures and investments

necessary to promote economic growth;

(K) adopt appropriate recommendations submitted by the Board;

(L) include additional information as the Board deems necessary;

(M) ensure that assets, funds, or resources of a territorial instrumentality are not loaned to, transferred to, unless permitted; and

(N) respect the relative lawful priorities or lawful liens.

FISCAL PLAN shall provide a method to…

…and:Slide10

FISCAL PLANDevelopment, Review, Approval and Certification (and revisions, if any)

TIME SCHEDULE SPECIFIED IN THE NOTICE TO GOVERNOR

“THE”

Fiscal Plan

Notice of violation

[recommendations for revisions]

Approval

and

Compliance CERTIFICATION

By Governor

By Board

By Board

By Governor

By Board

Compliance CERTIFICATION

delivered to Governor and Legislature

If Governor fails to submit a revised Fiscal Plan in compliance with Section 201(b),

the Board shall develop and submit

to the Governor and Legislature

THE

Fiscal Plan.Slide11

COMPLIANCE WITH FISCAL PLAN

To promote

:

Financial stability

Economic growth

Management responsibility

Service delivery efficiency

[Related to other matters…]Slide12

COMPLIANCE WITH FISCAL PLAN – Section 205

To promote

:

Financial stability

Economic growth

Management responsibility

Service delivery efficiency

[Related to other matters…]

management of financial affairs, including economic forecasting, information technology, placing controls on expenditures for personnel, reforming procurement practices;

structural relationship of departments, agencies, and independent agencies within the territorial government;

modification of existing revenue structures, or the establishment of additional revenue structures;

alternatives for meeting obligations to pay for the pensions of territorial government employees;

modifications or transfers of the types of services that are the responsibility of, and are delivered by the territorial government;

modifications of the types of services that are delivered by entities other than the territorial government under alternative service delivery mechanisms;

the effects of the territory’s laws and court orders on the operations of the territorial government;

the establishment of a personnel system for employees of the territorial government that is based upon employee performance standards;

the improvement of personnel training and proficiency, the adjustment of staffing levels, and the improvement of training and performance of management and supervisory personnel; and

the privatization and commercialization of entities within the territorial government.Slide13

ANNUAL BUDGETDevelopment, Review, Approval (and revisions, if any)

TIME SCHEDULE SPECIFIED IN THE NOTICE TO GOVERNOR AND LEGISLATURE

“THE”

Budget

Review

[for compliance with Fiscal Plan]

Approval

and

SUBMISSION

By Board

By Governor

By Board

By Board

By Board

Compliance CERTIFICATION

delivered to Governor and Legislature

If Governor fails to submit a revised Budget in compliance with Fiscal Plan,

the Board shall develop and submit

to the Governor and Legislature

THE

Budget.

By Governor

Legislature ADOPTED BudgetSlide14

Quarterly reports 15 days after closing: ACTUAL vs BUDGETRevenuesExpenditures

Cash flowsInconsistencies require explanations from GovernorCorrective Actions from Governor – If unexplained or inconsistent with the approved projections.Notification to US House Committee on Natural Resources, andNotification to US Senate Committee on Energy and Natural ResourcesRemedial Actions from the Board – If Governor fails to take corrective action, the Board could take remedial actions designed to address the

inconsistency, including:

reductions

in

non-debt

expenditures,

hiring

freezes

, and

prohibiting

the territorial government or territorial instrumentality from entering into any contract or financial transaction not previously approved by the board.

ANNUAL BUDGET

Non-compliance / InconsistenciesSlide15

COMPLIANCE WITH FISCAL PLAN

Section 204 grants the Board the power to review any proposed legislation and all enacted laws passed by the territorial government for consistency with the budget and fiscal plan.

If an enacted law is found to be inconsistent with or will interfere with the enactment of the fiscal plan and budget, then the

Board may take action to prevent the enforcement or application of the law

.Slide16

COMPLIANCE WITH FISCAL PLAN

Requires the Board to maintain a registry of contracts.Grants the Board the power to review all contracts and rules for compliance with the approved Fiscal Plan.

Allows the Board to take any action necessary to ensure that any contract, rule, executive order, or regulation will not adversely affect compliance with the Fiscal Plan.Slide17

COMPLIANCE WITH FISCAL PLAN

Prohibits from taking any action or enacting any law that would permit the transfer of funds or assets outside the normal course of business during the period following enactment of the bill but prior to the appointment of all Oversight Board members.

Any action taken as such, during the interim period between the enactment of the bill and the appointment of all the members of the Board, may be subject to review and reversal by the Board. Slide18

Board is required to review and approve (

5+ votes) debt restructuring agreements, provided that the agreements meet the following requirements:good-faith efforts to reach a consensual restructuring with creditors;the entity has—adopted procedures necessary to deliver timely audited

financial statements

;

and

made

public

a

draft

financial

statements

, and

other

relevant information

sufficient for any interested person to

make an

informed decision with respect to a possible

restructuring.the entity has adopted a Fiscal Plan certified by the Board; andThe entity is unable to make debt payments:No Qualifying Modification under section 601 (creditor collective actions) has been approved; or If Qualifying Modification has been approved, the entity is unable to

make its debt payments

notwithstanding the approved

Qualifying Modification

, in which case, all claims affected by

the Qualifying

Modification shall be subject to a

Debt Adjustment (Title III).

DEBT RESTRUCTURING

Duties of the Board – Section 206 –

ISSUANCE OF

CERTIFICATIONSlide19

Submit annual reports to Congress, the President, the Governor, and the legislature describing:

the progress made in meeting the objectives of this act;assistance provided to the territorial government; andrecommendations that would assist the territorial government in complying with the Fiscal Plan for the year. The Oversight Board would also issue quarterly reports, if feasible, on cash flows available to pay debt service affected by a stay or moratorium

.

REQUIRED REPORTS

Duties of the Board – Section 208Slide20

Submit to the Board

, within 6 months of its establishment, a report documenting all existing tax abatement agreements. Nothing shall be interpreted to limit the power of the territorial government or any territorial instrumentality to execute or modify discretionary tax abatement or similar tax relief agreements.REQUIRED REPORTS ON TAX ABATEMENTS

Duties of the Governor – Section 208Slide21

The Board is required to conduct an analysis of any pension system that

it determines to be materially underfunded. The analysis would be conducted by an independent actuary and would include:a study of the pension plan’s benefit obligations and funding strategy over 30 years; sources of funding to cover future benefit obligations; a review of

existing benefits

and their sustainability;

a

review of the system’s legal structure and operational arrangements; and

any

other studies

deemed

necessary.

UNDERFUNDED PENSION SYSTEMS

Section 211Slide22

ADJUSTMENT OF DEBTSTitle III ~ Bankruptcy provisions

Although not included in the U.S. Bankruptcy Code, the provisions of this title are similar to chapters 9 and 11, two of the operative chapters of the Bankruptcy Code. Chapter 9 of the Bankruptcy Code governs adjustments of municipal debts.Chapter 11 governs reorganization of businesses and, in rare cases, certain individuals. Generally, adjustment

or reorganization is effectuated through a “plan

”:

proposed

by the

debtor,

voted on by creditors, and

confirmed

by the

court.

Title III includes a provision for a “plan” of Adjustment of Debts to be proposed by the debtor, voted on by the creditors, and confirmed by the court.Slide23

ADJUSTMENT OF DEBTSTitle III ~ Bankruptcy provisions

DEBTORTerritory or territorial instrumentality,Has established or requested to establish an Oversight Board, andDesired to effect a plan to adjust it debts.TERRITORIAL POWER TO CONTROL – Title III would not impair or limit the territory’s power to control itself or its instrumentalities, BUTProhibit a territorial law that would bind a creditor to a method of composition of indebtedness unless the creditor consents to

it.

P

reempt

any “unlawful executive orders”

modifying

the rights of debt holders,

or diverting funds from a territorial instrumentality to either the territory or another territorial instrumentality.Slide24

ADJUSTMENT OF DEBTSThe commencement of the case would constitute an order for relief.

Filing with the district court – if no district court, then HawaiiBy the Board, on behalf of Immediate “order of relief” (STAY)In general, once a debtor files for bankruptcy, the bankruptcy court will issue an automatic stay, or an "Order for Relief." An automatic stay protects a debtor from a creditor's attempt to collect on a debt during the bankruptcy process.The court may dismiss a petition, after notice and hearing, to which an objection has been filed. However, such dismissal cannot occur during the first 120 days after the petition has been filed. Federal Rules of Bankruptcy Procedure shall apply

US Chief Justice (Supreme Court) shall designate district court judge for territory debt cases.Slide25

ADJUSTMENT OF DEBTSThe “Plan”

The Board is the only party allowed to file/propose a “Plan of Adjustment”, but only after corresponding CERTIFICATION issued by the Board.The “Plan of Adjustment” can be modified, under certain circumstances.Slide26

ADJUSTMENT OF DEBTSThe “Plan” – CONFIRMATION

IF COMPLIES WITH BANKRUPTCY PROVISIONSDebtor not prohibited by law from taking any action necessary to carry out the plan; Each holder of a priority claim for administrative costs and fees or charges assessed against the estate would receive full payment of the allowed amount of the claim unless the holder had agreed to different treatment;

All

legislative, regulatory, or electoral approval legally necessary to carry out any provision in the plan had been obtained or such provision was expressly conditioned on obtaining such approval;

The

plan was feasible and in the best interests of the creditors;

In considering whether a plan was feasible and in the best interest of creditors, the court would be required to consider whether other remedies available under the constitution and non-bankruptcy laws of the territory would provide greater recovery for creditors.

The

plan was consistent with the applicable Fiscal

Plan

All

amounts owed by the debtor or any person for services or expenses in the case or incident to the plan were reasonable and had been fully disclosed

.Slide27

MISCELLANEOUS PROVISIONS$7.25 Minimum Wage – Section 403

Section 6(g) of Fair Labor Standards Act of 1938 [29 USC 206(g)], as recently amended by PROMESA

Allows

the Governor, with the approval of the Oversight Board,

to set a minimum wage less than the federal minimum wage,

but never less than $4.25

,

for workers who are

under the age of 25

(other jurisdictions, 20), and

initially employed

after enactment of PROMESA,

for a period of 4 years

or until the termination of the Oversight Board.Slide28

R

D

CONGRESSIONAL TASK FORCE

8 Members - Section 409

The eight members of the Task Force are Senator Orrin Hatch (R-Utah), Senator Marco Rubio (R-Florida), Senator Bill Nelson (D-Florida), Senator Robert Menendez (D-New Jersey), Rep. Sean Duffy (D-Wisconsin), Rep. Tom MacArthur (R-New Jersey), Rep. Nydia Velazquez (D-New York), and Pedro

Pierluisi

(D-Puerto Rico).Slide29

The Task Force would be charged with issuing a report by December 31, 2016, that would:

examine the relation of federal laws and economic growth in Puerto Rico;examine economic consequences of a Puerto Rico Department of Health Regulation 346, which relates to natural products, natural supplements, and dietary supplements; andrecommend changes to federal laws to spur sustainable, long-term economic growth;recommend changes to federal law and programs that would reduce child poverty; andinclude additional information as deemed necessary.

The Task Force would also provide Congress with a status update during the first half of September 2016

.

The Task Force would be encouraged to reflect the shared views of all eight members to the greatest extent

practicable.

The

Task Force would consult with the Puerto Rico

Legislative Assembly

, the Puerto Rico Department of Economic

Development and

Commerce, and the private sector of Puerto

Rico.

The

Task Force would terminate once its report was issued.

CONGRESSIONAL TASK FORCE

Section 409

No similar provision was included in H.R. 4900.Slide30

GAO is required to report on the territorial public debt and other fiscal data.

The initial report would be due within a year of enactment and later reports would be issued at least every 2 years.the historical levels of each territory’s public debt, current amount and composition of each territory’s public debt, and future projections of each territory’s public debt;the historical levels of each territory’s revenue, current amount and composition of each territory’s revenue, and future projections of each territory’s

revenue;

the

drivers and composition of each territory’s

public debt;

the

effect of Federal laws, mandates, rules, and

regulations on

each territory’s public debt;

and

the

ability of each territory to repay it’s public debt.

REPORT ON TERRITORIAL DEBT

Section 411 – By Government Accountability Office (GAO)