Financial Control Board

Et tu, Ricky y José? Versión Español

Et tu, Ricky y José?

*Traducción al Español de la columna de Caribbean Business del 20 de diciembre, 2017.

 

La mayoría de los puertorriqueños conocen de los “casos insulares”, una serie de decisiones del SCOTUS que dicen que el Congreso puede hacer con Puerto Rico como desee dado su estatus de territorio, excepto de privarlos de derechos fundamentales. La más conocida de estas decisiones fue la de 1901 Downes v. Bidwell, la cual está ahora en el centro de la teoría legal usada por la administración Rosselló y la Junta de Supervisión Fiscal para defender PROMESA contra reclamaciones de acreedores y la Utier que el nombramiento de los miembros de la Junta viola el Appointments Clause de la Constitución Federal.

 

Todas las partes envueltas en la litigación del Appointments Clause concurren en un punto:  El único issue en la litigación es si, como los demandantes reclaman, el presidente debió haber tenido mano libre para nombrar los miembros de la Junta sujeto a la confirmación del Senado, o si los incumbentes, que fueron en realidad escogidos por 4 miembros del Congreso debieran permanecer en sus posiciones y no tener que ir al Senado para su confirmación. Ni Aurelius ni la  Utier quieren revocar PROMESA o cambiar algunas de sus secciones excepto como se nombran los miembros de la Junta y aún en esta área solo sugieren cirugía menor.

 

La decisión de  Downes v. Bidwell no es simplemente una decisión del SCOTUS de principios del siglo pasado, es el pináculo de un momento en la historia legal de los U.S. que nos provee una imagen perfecta del pasado de nuestra nación enraizada en el racismo y el colonialismo. Pongámoslo en su contexto histórico, Downes, fue escrito por la misma Corte que sostuvo la segregación racial in Plessy v. Ferguson. El caso dice que “if the conquered are a fierce, savage, and restless people, [Congress] may […] govern them with a tighter rein, so as to curb their ‘impetuosity, and to keep them under subjection.’”  [1]La decisión le da al Congreso el derecho a crear tales organizaciones “it may deem best,” [2]y “to deprive such territory of representative government if it is considered just to do so, and to change such local governments at discretion.”[3]

 

Además, al citar Downes como precedente para apoyar la Junta como “buena ley”, el Gobierno de Puerto Rico está aceptando que la ciudadanía de U.S. de los nacidos en Puerto Rico no está protegida por la Constitución, y se les ve fundamentalmente como ciudadanos de segunda clase.  La decisión de Downes dice que la 14ava Enmienda contiene una “limitation to persons born or naturalized in the United States which is not extended to persons born in any place,” con los Puertorriqueños excluidos de la protección de la protección de la 14ava Amendment por esta limitación.

 

Downes ha sido citado por el Gobernador Rosselló y su administración, al igual que por la Junta, en su oposición al reto constitucional de Aurelius y la Utier al nombramiento de la Junta.

 

Yo puedo entender porque la Junta cita a Downes en su argumento legal ya que sus miembros harán cualquier cosa para justificar su continuada existencia. Pero lo que me deprime es ver al Gobierno Ricardo Rosselló, a quien siempre había considerado el portaestandarte del movimiento Estadista, invocar la decisión judicial más despreciable en la historia del estatus de Puerto Rico.

 

Para colmo de males, tenemos que forzosamente concluir que el Presidente de la Junta, el Sr. José Carrión III, supuesto proponente de la estadidad, haya aceptado el usar a Downes esa moción. Al hacerlo, Carrión da su apoyo a una doctrina legal racista que reclama que los Puertorriqueños son inferiores y ciudadanos de segunda clase para apoyar su nombramiento a la Junta. Vergüenza debería darle.

 

Como abogado practicante en el Tribunal Federal y estadistas el invocar a Downes  es preocupante; sin embargo, lo que lo hace más difícil de aceptar es que es innecesario invocar los casos insulares para oponer el desafío de Aurelius/Utier.  Aurelius no menciona estos casos en brief. El Gobernador Rosselló pudo haber rechazado Downes y argumentado que Puerto Rico es un territorio incorporado, al cual no le aplica Downes, como decidió el Juez Gelpí en Consejo de Salud de Playa de Ponce v. Rullan. De esta manera, Puerto Rico podía continuar argumentando la legitimidad de la Junta pero sin el discrimen inherente que permite la decisión de Downes. Así que el Gobierno de Puerto Rico está cuestionando su propia autonomía y al hacerlo refuerza la idea de que la Junta debe tener poder sobre todos los Puertorriqueños en vez del gobierno que eligieron.

 

Más aún, la moción del Gobierno apoya la ridícula idea de que la Junta es meramente una entidad “territorial”-y no federal. Como todos nosotros en Puerto Rico sabemos, esto es risible.  La realidad es que la Junta tiene poderes extensos sobre el Gobierno de Puerto Rico que ninguna agencia local tiene; de hecho, ni el Gobernadores ni la Legislatura pueden “exercise any control, supervision, oversight, or review over the Oversight Board or its activities,” [4]as Sec. 108(a)(1) of PROMESA states. Puerto Rico carece de medios de que la Junta le rinda cuentas de sus decisiones.

 

Peor aún, si la Juez Swain decidiera a favor de la Junta y el Gobierno de Puerto Rico, este con podría luego cuestionar Downes case y los casos insulares nacidos de la era del racismo y el discrimen.

 

¿Por qué? La doctrina de “judicial estoppel,” que indica que si una parte argumenta un punto y recibe tratamiento favorable de la Corte sobre ese issue, está impedida de subsiguientemente argumentar lo contrario. ¿Como podría Puerto Rico luego cuestionar esta doctrina racista si cita su caso principal con aprobación?

 

¿Es la consecuencia no deseada de que el Gobernador Rosselló ayude a  José Carrión III ha deshecho más de 50 años de lucha por la igualdad y la estadidad para proteger la Junta y por razones que no son ni necesarias? to protect the Board, and for reasons that are not even necessary.

 

Y todo por la quiebra de Título III del ELA. ¿Es en los ojos de la Junta y del Gobernador Rosselló es mejor tener 100 años más de colonialismo y discrimen para colonialismo y discrimen que pagar las deudas de la isla. Este es el “unkindest cut of all.” ¿Et tu, Ricky y José?

 

[1] “Si los conquistados son un pueblo feroz, salvaje e inquieto, [el Congreso] puede […] gobernarlos con una rienda más fuerte, para frenar su ‘impetuosidad y mantenerlos bajo sujeción'”.

[2] “Puede considerar mejor”

[3] “Privar a ese territorio del gobierno representativo si se considera que lo hace, y cambiar a discreción a los gobiernos locales”.

[4] “Ejercer cualquier control, supervisión, supervisión o revisión sobre la Junta de Supervisión o sus actividades”

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The Oversight Board’s Chrysler Playbook

 

 

The second in a series on Puerto Rico’s pensions

 

On May 3, 2017, the Financial Oversight and Management Board filed the Commonwealth of Puerto Rico’s Title III petition. In the nearly four months since the filing, we have seen the Board develop a legal strategy that relies on elevating pensions over secured bondholders and invalidating contractual liens such as those held by pension obligation bondholders of ERS.   Each of these steps eerily echoes the legal strategy of used by the Obama Administration during the Chrysler Bankruptcy. But what does an automaker’s Chapter 11 bankruptcy have to do with Puerto Rico’s supposed insolvency you may ask? More than you would imagine, and it’s not confined simply to the court room, either, as we explore.

 

First, let’s discuss what happened in the Chrysler Bankruptcy.

 

The Chrysler Bankruptcy

 

By December of 2008, Chrysler, after years of decline, was in dire straits. It was bloated, inefficient and burdened by labor contracts and pension costs. The timing – during the midst of the Global Financial Crisis – could not have been worse. This confluence led Chrysler, along with General Motors, to then start pleading for greater federal financial assistance (i.e. – a bailout; sound familiar?), arguing that liquidation would mean the loss of thousands of good (meaning union) jobs.

 

In December of 2008, the U.S. House of Representatives voted to bailout Chrysler, but the U.S. Senate voted it down. Then-President Bush proceeded to extend credit but when the credit ran out, then-President Obama intervened, forcing out Chrysler CEO Robert Nardelli and announcing that the federal government would provide additional funds to support Chrysler contingent on the completion of a merger with Fiat within 30 days.

 

After examining the restructuring plans, the Obama administration decided they were insufficient, thereby forcing Chrysler to file for bankruptcy in April of 2009. Within two months, Chrysler emerged as “The Chrysler Group,” owned by the United Auto Workers (55%), Fiat (20%), the US Government (8%) and Canada (2%). See, The Auto Bailout and the Rule of Law, by Todd Zywicki.

In the years leading to its bankruptcy, Chrysler had been unable to obtain financing and resorted to issuing secured debt to finance its operations. At the time of the filing, Chrysler owed around $6.9 billion in secured debt, but also $10 billion to an unsecured pension plan.

 

In a bankruptcy, secured debt has the first priority of payment and unsecured creditors get the rest in a pro rata basis. This general principal applies to all Bankruptcy Chapters and hence to Title III. Also, in a Chapter 11, the debtor prepares a Bankruptcy plan pursuant to 11 U.S.C. § 1123 in which it classifies the claims in order of priority and the debtors whose claims are impaired, have a right to vote on the plan. This is the same procedure of a Chapter 9 and hence, of Title III in PROMESA.

 

In Chrysler, it was done differently. The U.S. Government created and funded a shell company that, through a § 363 sale, bought substantially all of Chrysler’s assets for $2 billion, giving the secured creditors a paltry return of 29 cents on the dollar. FIAT was brought in to manage the new firm and was given a slice of the new company’s stock. New Chrysler (formally: New CarCo Acquisition LLC) then assumed the old company’s debts to the retirees, most dealers, and trade creditors. The unsecured claims of the retirees’ benefits plan were replaced with a new $4.6 billion note as well as 55% of the new company’s stock. Assessing the Chrysler Bankruptcy, by Mark J. Roe and David Skeel at page 5.

 

How the Board is using the Chrysler Playbook in Puerto Rico

 

In Puerto Rico, the Board has told the Court that COFINA, Peaje (HTA), and Altair (ERS) do not have a lien – essentially ripping up binding contracts. The Board has also told GO bondholders that they do not have a priority in payment structure, evidenced by the elevation of pensions over their constitutional-backed debt.

 

At the same time, the Board has allowed the Commonwealth to pay 100% of pensions, which will total $2.5 billion a year, as well as pay all suppliers and tax refunds. The Board will ensure a modest haircut of 10% on these pensions at some point in the future, although the details are vague and applies to only certain pensioners. Even this move by the Board has met resistance from the Rosselló administration, who has rejected any claims that say they will not pay pensions in full.

 

As we can see, the Board is trying to deprive secured creditors of their security so their claims can be deeply cut while at the same time, favoring non-secured pensions to be paid. Exactly like Chrysler.

 

Not wanting to waste time while the Title III proceedings unfold, the Board and the Rosselló administration are getting a jump start through legislative actions.

Together, these seemingly ‘opposing entities’ have jointly pushed through legislation in the Puerto Rico House of Representatives and Senate that codifies pensions as a higher priority payment than constitutionally-prioritized debt, and worse, crystallizes entitlements from the date enactment, instead of upon retirement, which essentially attempts to lock in pensions at current rates and not subject them to a restructuring on a pro-rata basis in Title III without creating claims, a flexibility that the Commonwealth might otherwise have enjoyed. At the same time, they do a farcical face-off about a 10% cut in pensions to give the impression there will be some pain.

 

 

 

 

This action underscores that neither the Board nor the government are just waiting for the courts to act, as was the case in the Chrysler bankruptcy, but rather enacting policies that will lay the groundwork for the outcome they want in court – to give themselves and pensioner’s protection and outright injuring the secured bondholders they owe.

 

The Link between Puerto Rico and Chrysler

 

Judge Arthur González is a member of the Board and without a doubt its intellectual leader. He is on the most important committees, attends Judge Taylor Swain’s hearings (an old colleague of his as they used to be bankruptcy judges in the Southern District of New York together) and most importantly, was the presiding Judge in the Chrysler bankruptcy. Moreover, Judge Gonzalez was president Obama’s choice for the Board – a telling sign.

 

Additionally, the information I have received is that Judge González was adamant on hiring the Board’s law firm of Proskauer Rose, whose principal restructuring lawyer is Martin Bienestock. According to the University of Michigan Law School bio on Mr. Bienestock, he “developed for General Motors the section 363 sale free and clear strategy that the United States Auto Task Force deployed for both Chrysler and General Motors.” As the saying goes, there is no such thing as a coincidence. It is all too true in the case of Puerto Rico.

 

One closing thought, what bewilders me is how the Board and government believe they can pursue a legal strategy that will simply invalidate liens and contracts, and elevate pensions above and beyond adequate funding as directed by Congress in direct contradiction with PROMESA and the Puerto Rico Constitution.

 

In the next installment I will discuss the critics of the Chrysler Bankruptcy in detail, including some that will surprise you.

 

 

 

The Coming Public Pension Fight

The first in a series on Puerto Rico’s Pensions

 

Last week, the Supervisory Board held its 9th Public Meeting in Fajardo, Puerto Rico. A key item on the agenda, “Discussion of Pension Reform,” was over-shadowed by the pending fight over furloughs, but is perhaps one of the most important items discussed.

 

As many know, one of the critical issues before the Supervisory Board is how to address the future of Puerto Rico’s public pension system and a $49 billion actuarial deficit. In fact, this is one of the reasons Speaker Ryan and the Congressional Republicans insisted on having an expert like Andrew Biggs on the Board. His knowledge of pensions ostensibly would help reform Puerto Rico’s public pension system to become a model for cities and states across the country.

 

What PROMESA Says the Board Must Do

 

Section 211(a) of PROMESA requires the Board, if it determines pensions are underfunded, to conduct an analysis prepared by an independent actuary […] to assist the Oversight Board in evaluating the fiscal and economic impact of the pension cash flows.” The Board hired Pension Trustee Advisors, Inc., a Colorado corporation, for this endeavor in February. To date, we have yet to see any documents or plans generated by this company or produced by the Board.

 

Instead, the government with the support of the Board moved first. Since February, Puerto Rico passed a law to convert the government and its component units into a single employer and although the Board instructed that pensions had to be cut by 10% by fiscal year 2020 in the Fiscal Plan, the Board green-lighted the government to move over $2 billion from the General Fund to the public pension system. At the same time, neither Governor Rosselló nor the Board provided any monies for debt service in FY18. This had the effect of elevating payment of public pensions above secured creditors.

 

Then, on May 21, 2017, the Board filed a Title III bankruptcy petition for the Government Retirement and the Judiciary Retirement Fund. Further, the government passed a measure to transfer $390,480,000 from the Central Government, Judiciary and Teacher’s retirement funds to the General Fund for the payment of pensions, known as RC 188.

 

All of this was done with the Board’s approval, but not without opposition from other stakeholders. On July 27, 2017, Altair Global Credit Opportunities Fund (A), LLC and others filed an adversary proceeding to challenge this action by the Puerto Rican Government. Altair & company claim they have a lien over Government contributions to the retirement fund and that RC188 is null and void; that they hold a secured claim to the full extent of their allowed claim against the ERS; that they hold a secured claim to the full extent of their allowed claim against the Commonwealth and that their lien continues in any Pledged Property transferred to the Commonwealth from the ERS. They also claim that the transfer of the Pledged Property from the ERS to the Commonwealth pursuant to Joint Resolution 188, on its face, constitutes an unconstitutional taking of private property without just compensation within the meaning of the U.S. and P.R. Takings Clauses; and that RC 188 substantially interferes with their contract rights with the ERS in violation of the U.S. and P.R. Contracts Clauses. Finally, they also ask for damages and that PROMESA does not preclude such claim. Since it was filed only recently, we have no idea how Judge Swain will handle it, except that it will be done swiftly.

 

Echoes of the Chrysler-UAW Pension Bailout

 

This strategy by the Board – elevating pensioners over secured bondholders – evokes memories of the Chrysler bankruptcy, which saw the Obama Administration support unsecured UAW pensioners become secured creditors – literally jumping the line ahead of actual secured creditors. The judge in that case was none other than Judge Arthur Gonzalez, the key architect behind the Board’s legal strategy.

 

Neither the Constitution nor PROMESA explicitly do not allow for the payment of public pensions to be put ahead of bondholders, which was the ultimate outcome in the Chrysler case. Now, the PR Supreme Court granted pensioners rights in Bayron Toro v. Serra, 119 D.P.R. 605, 608 (1987), stating that, “Once an employee is retired, when he has complied with all the conditions for his retirement, his pension is not subject to changes or impairments.” However, this precedent is subject to Article VI, Section 8 of the PR Constitution that states:

 

“In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law.”

 

While Section 201(b)(1)(C) of PROMESA states that the Fiscal Plan must provide adequate funding for public pension systems, Section 201(b)(1)(N) requires the Fiscal Plan to respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws.”

 

Moreover, the Committee on Natural Resources Report on PROMESA states the following:

 

“The Committee acknowledges the concern as to the ambiguity of the language regarding the funding of public pension systems. To clarify, Section 201(b)(1)(C) tasks the Oversight Board with ensuring fiscal plans ‘provide adequate funding for public pension systems.’ This language should not be interpreted to reprioritize pension liabilities ahead of the lawful priorities or liens of bondholders as established under the territory’s constitution, laws, or other agreements. While this language seeks to provide an adequate level of funding for pension systems, it does not allow for pensions to be unduly favored over other indebtedness in a restructuring.

 

Realizing that creditors and Congress are onto them, the Board has attempted to mask their strategy.

 

In their latest document, Explanatory Memorandum on Pension Reform,” the Board claims, “expenditures are being reduced throughout the Commonwealth’s budget and holders of government bonds are not likely to be repaid in full. Retirement plan participants, like other unsecured creditors, will have a reduction in the amounts paid to them by the Commonwealth.” Board member Ana Matosantos went further, rejecting Christian Sobrino’s claim that Governor Rosselló will fund 100% of the public pensioner’s benefits, stating “honoring 100% of the obligations is not workable.”

 

The Board has shown its hand, and they will face a stiff test before Judge Swain. Congress was clear that funding pensions was important, but not equal to or above existing constitutional and lawful priorities. To date, the Board and Puerto Rico have decided unsecured pensioners have higher priority.

 

Why is the Board and the government putting payment of pensions before payment of public debt in direct contradiction of both PROMESA and the Puerto Rican Constitution? Why is the Board pursuing this legal strategy?

 

I will explore and hope to explain the reasons for this in my series on public pensions in Puerto Rico.