As reported by this blog, in May of 2017, Puerto Rico filed for the equivalent of bankruptcy to relieve over $120 billion dollars in debts and pension obligations. Puerto Rico claimed that it was “unable to provide its citizens effective services.” Of course, the ramifications of such a filing are significant and have far-reaching effects. At this time, broader concerns have surfaced about potential overcharging and conflicts of interest in improving the U.S. Territory’s failing infrastructure.
The federally-appointed oversight board is considering making new disclosure requests to the legal and financial professionals involved with Puerto Rico’s restructuring of municipal debt, the largest-ever municipal debt restructuring in the United States. Puerto Rico’s bankruptcy filing is not a typical filing under Chapter 9 or Chapter 11 of Title 11, but is similar. Rather, the island filed pursuant to Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) signed into law by President Obama in 2016.
This is in response to a growing concern as Federal supervisors prepare to scrutinize Puerto Rico’s bankruptcy advisers to examine their actions related to public contracts and those parties who are attempting to use Puerto Rico’s financial dilemma to make large profits.
Lawmakers in Puerto Rico and the U.S. have criticized the exorbitant fees of attorneys and bankers, including the oversight board’s own advisers, when pensioners and creditors are facing potential reductions. The purpose of this initiative is to uncover any undisclosed agreements whereby public officials and any third parties may receive undisclosed funds as compensation (bribes) for the awarding of public contracts. A spokesperson for the oversight board declined any comment on the situation.
To this point, Puerto Rico’s court-supervised bankruptcy has been costly. Professional fees are projected at $1.1 billion over six years or 1.65% of the amount of Puerto Rico’s restructured government debt. The cost of the oversight board alone is expected to cost Puerto Rico taxpayers $430 million through 2023.
The disclosure requests are aimed at the legal and financial advisers of both the oversight board and the Puerto Rico government. Although not yet finalized, the disclosure requests would exceed in scope the rules established in 2017 after a contract awarded to power grid construction company Whitefish Energy Holdings, LLC raised concerns.
Pursuant to a federal rescue package approved in 2016, the oversight board is empowered to review contracts and to issue subpoenas for documents “relating to any matter under investigation.” Its current policy red-flags contracts over $10 million for review.
Prior to this current state of affairs, the oversight board examined potential conflicts of interest requiring its seven volunteer members to submit financial disclosures about their sources of income and business interests to an ethics examiner.
Some Puerto Rico’s bankruptcy attorneys have billed fees of more than $1,000 an hour, though the average hourly rate for the firms’ restructuring professionals his typically closer to $700 hourly, according to documents filed with the bankruptcy court.
One congressional representative, Rep. Rob Bishop, R-Utah, who chairs a congressional committee with jurisdiction over U.S. territories, questioned why there is any necessity for Puerto Rico to retain legal and financial professionals when the oversight board was created with the primary purpose of representing the government’s interests in the bankruptcy.
Oversight board chairman Jose Carrion wrote to Rep. Bishop informing him that he would collaborate with Puerto Rico Governor Rosselló to minimize legal fees while suggesting that some duplicative spending was unavoidable “as long as this structure remains in place.” Oversight board executive director, Natalie Jaresko, said the best way to reduce fees was to end the bankruptcy quickly. However, she acknowledged that it may be a year or longer before any debt adjustment plan is presented for court approval.
The governor has butted heads with the oversight board by defying its mandates to cut pension benefits and eliminate other employee protections. Teams of lawyers have debated and argued whether the board or the governor has the authority to control Puerto Rico’s electric monopoly. Any settlement negotiated by the governor’s team requires the board’s approval.
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