The agreement that will divide the Sales and Use Tax (SUT) revenues between the Sales Tax Financing Corporation (Cofina, Spanish acronym) and the central government, - and that in turn would serve to modify almost $ 18 billion to be paid through that tax - may not be the best deal in economic terms, but it is the most "reasonable" solution to avoid a years-long legal dispute that could drain the government´s already limited funds.
That is what the Oversight Board, the government, agents who mediated in the SUT dispute and bondholders supporting the agreement stated yesterday before federal District Judge Laura Taylor Swain during the first day of the hearing to certify Cofina adjustment plan under PROMESA Title III.
Paul Rosen - an attorney for the Board - told Swain that neither party was "happy" with the agreement, but said it is a reasonable solution to a complex problem and the pillar for the island´s recovery.
Rosen, who is a partner at Proskauer Rose law firm, also stressed that Cofina adjustment plan was supported by all types of creditors entitled to vote on the agreement, including some 8,000 Cofina bondholders who are residents of Puerto Rico.
Meanwhile, Peter Friedman, a partner at O'Melveny Myers and legal advisor to the Fiscal Agency and Financial Advisory Authority (FAFAA), said the agreement will give an annual injection of more than $ 400 million, which will help provide basic services to the population.
And he stressed that, above all, the agreement saves Puerto Rico from what could be a long and costly litigation to define whether SUT revenues belong to Cofina or the central government.
However, before the Board and FAFAA defended Cofina adjustment plan in court, , citizens and unions pictured a different scenario regarding the deal which is the result of nine months of secret negotiations.
The people´s voice
During the hearing, Swain said that hundreds of people wrote to her regarding the Cofina agreement and that she wants to listen to the people as part of the process.
Lawyers representing those who were part of the negotiations praised the agreement. Miguel David - member of the Citizen Front for Debt Audit - said that more than 30,000 people signed the petition they filed for Swain to reject the Cofina plan.
Swain replied to David that she was also also aware of the demonstrations “outside”, in referring to the organization's petition and the protest organized by unions and hundreds of citizens outside the federal courthouse in Hato Rey.
Swain seemed to suggest that the die is cast for Cofina agreement since regardless of the decision, it will not reconcile concerns over the plan.
On the other hand, Eulalia Centeno Ramos, a retired teacher, said that she has a $1,700 pension –which the Board would reduce- and that as the Cofina deal would not bring enough relief for the government to pay pensions, it would not comply with PROMESA.
Centeno Ramos –whose pension totals the same amount that those lawyers representing the Board, the government and bondholders will bill for a few hours working at the hearing- asked for Swain not to be indifferent to “the pain of the people, injustice, the innocence of our children and the misery of the workers.”
Agreement binding on the government
Unions and some Cofina subordinate creditors join citizens in questioning the agreement. Subordinate creditors allege that they would lose half of the money they lent to Puerto Rico.
Peter D. Dechiara, a lawyer for the Service Employees International Union (SEIU) and the United Auto Workers (UAW) said they object to the deal because it does not act “in the best interest for Puerto Rico.”
For Dechiara the Cofina agreement is based on the premise that debt service to be paid with SUT will increase 4 percent every year, a projection that far exceeds the Board´s own economic growth estimates.
In that sense, Dechiara insisted before Swain that the agreement does not relieve the government of responsibility over Cofina's debt.
The lawyer explained that the agreement between the parties establishes that the central government must cover Cofina's debt service if SUT revenues are not enough to do so. That obligation is included in the Cofina debt restructuring proposal endorsed by the Board.
Although Dechiara could present SEIU and UAW arguments, the Electrical Industry and Irrigation Workers Union (Utier, Spanish acronym) could not.
Although Utier, through its legal advisor Rolando Emmanuelli, was the only objector who brought a study on the economic impact of the Cofina plan conducted by economist José Alameda, the Board prevailed with a motion to prevent incorporating that study as evidence.
Swain concluded that Utier could not be included since it was not a Cofina creditor.
Meanwhile, Gary Eisenberg, an attorney for GMS Group – a firm that claims to have about $ 500 million in Cofina subordinated bonds - seemed to advance his case by stating that several subordinated bondholders who supported the agreement also have "senior" Cofina bonds. As a result, Cofina subordinated bondholders, who will be the more affected by the agreement, would not have been properly represented in the negotiations.
The hearing will continue today.