In closing argument, fiscal board stresses that POA doesn’t cut public pensions
By The Star Staff
The Financial Oversight and Management Board for Puerto Rico provided closing arguments on Monday in hearings seeking to confirm the plan of adjustment (POA) that would restructure some $33 billion in commonwealth debt, emphasizing that the latest version of the debt deal doesn’t cut government employee pension benefits to authorize new bond issuances.
The oversight board late Sunday filed yet another version of the eighth amended POA. Before Monday’s hearing, the oversight board filed a motion seeking to change the Government Development Plan Debt Recovery Authority’s votes to reject the plan, to votes accepting it. Judge Laura Taylor Swain, who is overseeing the case, granted the motion.
The Fiscal Agency and Financial Advisory Authority (AAFAF), meanwhile, filed a motion over the weekend complaining that the oversight board added three laws to the list of laws it wishes to preempt, a move that, the AAFAF said, will allow the board to hinder pension benefits for future retirees.
In a statement, the oversight board described the proposed POA as a “historic opportunity” for Puerto Rico to reduce the commonwealth’s outstanding debt by almost 80%, from $33 billion to $7 billion. The POA includes a base contribution to a pension reserve trust of a minimum $175 million a year. If in any given year the certified fiscal plan as of the effective date of the POA projects a primary budget surplus exceeding $1.75 billion, the base contribution to the pension reserve trust would rise to 50% of that projected surplus. In addition, the government would contribute to the pension reserve trust for 10 years, compared to eight years as contemplated under a previous plan.
Judge Swain, however, noted that there are potentially non-dischargeable claims that the plan currently treats as unsecured claims. Swain said Monday that she is not sure what claims will be determined as non-dischargeable as she hasn’t made a final decision.
Oversight board attorney Martin Bienenstock, of the law firm Proskauer Rose, said the plan would still be feasible even if there is a ruling that all $400 million of the relevant claims are non-dischargeable. The judge was referring to eminent domain claims that opponents of the POA say are not getting just compensation under the plan. Those individuals, including Finca Matilde, claim the plan violates the Takings Clause.
Speaking in support of the plan, Brian Rosen of Proskauer Rose provided background in the case, noting that the court had already scheduled time to consider disclosure statement approval back in March 2020 when the case was then halted due to the coronavirus pandemic.
Rosen said the suspension of the case led to further mediation that garnered more creditors in support of the plan, which resulted in a revised version last February.
Rosen argued that the settlements embedded in the POA are acceptable and reasonable taking into account the complexity of litigation and the adverse effects that would occur if they weren’t approved. Meanwhile, the POA met the requirements of a best interest evaluation conducted by McKinsey & Co., an adviser to the oversight board.
Michael Mervis, another lawyer with Proskauer Rose, addressed an objection from retail bondholder Peter Hein. He noted that Hein has argued that the plan should not be viewed on an aggregate basis to determine whether it is fair and equitable for creditors. Instead, Hein argues that it should be determined whether treatment is fair individually on a class-by-class basis.
The oversight believes the collective test of fairness is the appropriate standard for approval, Mervis said. Further, he said the general obligation (GO) bondholder class Hein is focused on has overwhelmingly accepted the terms of the POA.
Hein has argued that GO debt should be paid even before the government’s operating costs, Rosen noted, but that would mean paying the debt first before paying teachers or firefighters.
Rosen rejected Hein’s argument that the fiscal plan budget includes non-essential spending, such as advertising fees, that don’t have to be paid before bondholders. Rosen said that if advertising for tourism is cut, the economy will suffer.
Bienenstock then proceeded to discuss that the plan satisfies fair and equitable standards, noting that the pension classes are the most benefited when compared to other creditors. Creditors overall are getting the same recoveries they would get outside the bankruptcy case.
The AAFAF, which was represented by Peter Friedman, a lawyer with O’Melveny & Myers, spoke in favor of the plan even though his client maintains that pension cuts are unacceptable.
Robert Gordon, a lawyer with Jenner & Block, which represents the Official Committee of Retirees, said the protection of pensions is supported by sound financial policies. Previous versions of the plan called for an 8.5% cut to pensions higher than $1,500 per month.
Unsecured creditors committee (UCC) representative Luc Despins, a lawyer with Paul Hastings, said the UCC fully supports the plan. Voters in the class by a majority supported the plan even though not everyone voted. He said no one in the UCC’s class is challenging plan treatment or arguing that the plan doesn’t meet the best interests of creditors test.
Opponents of the plan were slated to provide closing arguments at press time.