The budget that the Oversight Board submitted to the Legislative Assembly for the next fiscal year includes a $175 million package for legal and financial advisory expenses associated with the litigation of the Puerto Rican bankruptcy cases.
This figure is similar to what the city of Detroit, Michigan, spent during its 17-month bankruptcy and debt restructuring process, which totaled $20 billion. In other words, in just one year, Puerto Rican taxpayers will have spent the amount that Detroit invested throughout its whole bankruptcy process.
This $175 million package, to some extent, could represent a relief to public finances. As for the current fiscal year, $257 million was set aside for legal fees and financial advice.
In total, these two years of litigation will have cost some $411 million in attorneys and financial advisors.
This $175 million package for fiscal year 2020 is also equivalent to about 10 percent of the annual revenue on income tax, 13 percent of the Sales and Use Tax (SUT), and a little less than what authorities receive for beer tax in a whole year.
Such a sum would be enough to buy 6,019 Dodge Charger patrols, cover 13,888 pensions for one year and the purchase of 437 pump trucks, among many other government needs.
According to the current fiscal plan, the expectation is that by 2024 the Puerto Rican government bankruptcy will have resulted in $1.5 billion in payments. This includes expenses by the Board, the Fiscal Agency and Financial Advisory Authority (FAFAA), and the Unsecured Creditors Committee (UCC), among other agencies associated with the litigation.
The Board’s operations and advisory services represent 78 percent of these expenses. These estimates, included in the most recent version of the government's fiscal plan, arise from the bills the government received during the bankruptcy process in fiscal years 2018 and 2019, according to the document.
The Board, however, understands that these expenses are not out of the ordinary if the $64 billion debt is considered.
The Board’s estimates show that Puerto Rico spends the equivalent of 1.68 percent of the public debt on legal and financial services associated with PROMESA.
This indicator, says the entity overseeing the island's public finances, is within the range paid in other restructuring processes, such as those in American Airlines, Energy Future Holdings and the city of Detroit.
However, that 1.68 percent would be higher if expenses in FAFAA and other entities financed by Puerto Rican taxpayers were to be added to those of the Board.
Similarly, the indicator does not consider that only five entities that issue debt in Puerto Rico are under the process of territorial bankruptcy in federal judge Laura Taylor Swain's courtroom.
Swain currently determines the validity of the bills submitted by attorneys involved in litigation through the appointment of attorney Brady Williamson, of Godfrey & Kahn, as fee examiner to review the bills.
By early 2018, Williamson found duplicity in legal efforts by attorneys participating in PROMESA cases, an issue that has the potential to raise the fees paid by Puerto Rican taxpayers. Similarly, he warned about too many lawyers attending hearings and that they were asking reimbursements for accommodation and transportation that were more expensive than what is usually charged by service providers, among other issues.
This caused the judge to call the lawyers’ attention and request moderation in the billing of fees. Swain also imposed restrictions. For example, it was established that law firms may only bill up to two attorneys' fees for each meeting or court hearing. Former federal bankruptcy judge Gerardo Carlo recalled that, so far, neither the Board nor FAFAA has questioned the bills of lawyers and financial advisors in court.
Carlo said that the only ones who has objected are the fee examiner and the court, but none of the parties has faced questioning on the matter.
Yesterday, neither FAFAA nor the government's Office of the Chief Financial Officer issued public statements on this allocation.
The Board spokesman Edward Zayas said that budgeted expenses are mostly tied to litigating bankruptcy lawsuits and noted that they are working to complete these court cases as soon as possible.
Zayas said that they will continue to allocate these funds while the government is under PROMESA Title III - that establishes the bankruptcy process for U.S. territories - but that they are working to reduce these expenses as soon as possible.
Carlo explained that it is very difficult to establish whether this level of spending is adequate or excessive given the complexities of the case. He recalled that PROMESA Title III litigation is the largest bankruptcy case in the history of the U.S. municipal bond market and comes from a new statute that is constantly being challenged in court.
He stressed that the entire process is paid for by Puerto Rican taxpayers. Even the mediation process set by the U.S. court is financed by the Board, which in turn gets its funds from Puerto Rican taxpayers.
“There is no way to compare because this is not a normal case. You have a new law and you had a long and difficult litigation and there are conflicts between the government and the Board and the different groups of creditors... it's a huge case,” Carlo said.
The Legislature is currently in the process of analyzing the document that includes this package. The evaluation of the budget sent by the Board started with controversy because it has $570 million less than the one recommended by Governor Ricardo Rosselló Nevares.
By Monday, the Legislature must submit its version of the document to the Board for evaluation. The entity will accept or reject the legislative version by Friday. The governor, meanwhile, will offer his budget message this Sunday.
The Board’s Executive Director, Natalie Jaresko, indicated that the budget can be subject to changes as long as they comply with the fiscal plan.
If the legislative version fails to comply, senators and representatives will have seven days to modify it and submit a new one to the Board. By June 28, the process must be complete with the approval of the budget that will direct the revenues and spending of the General Fund for the fiscal year that begins on July 1.