• The San Juan Daily Star

Preemption of local laws among subjects on Day 5 of POA hearings

By The Star Staff

Today’s fifth round of hearings on the debt adjustment plan that will restructure some $33 billion in central government debt will center on arguments related to the preemption of dozens of local laws, on the rejection of the commonwealth’s obligation to accrue pension benefits and on the Takings Clause of the U.S. Constitution.

The Financial Oversight and Management Board must turn in by noon a motion in support of rulings on Act 53, the law enabling the debt adjustment plan, also called the plan of adjustment (POA).

Regarding the preemption, the oversight board is seeking to preempt close to 100 different laws that would annul previous debt obligations to enforce the debt adjustment plan. Peter Hein, a retail bondholder, brought attention in a previous hearing to the irony that the oversight board wants to preempt the Constitution to annul old general obligation (GO) debt, but still use it to issue new debt.

On the issue of pensions, the oversight board wants to preempt laws that require the government to accrue pension benefits. The board has agreed not to cut current pensions.

Regarding the Takings Clause, which states that property can’t be taken by the government without just compensation, creditors opposing the plan have argued that The Takings Clause bars the release of the commonwealth of Puerto Rico from claims of nonconsenting GO and Public Building Authority bondholders who do not receive full compensation for their property. The commonwealth debt is being cut by almost 80%.

“GO and PBA bondholders have constitutionally protected property interests,” the creditors said. “The priority and security interests under Puerto Rico’s Constitution and statutes constitute property rights. Even simply bondholders’ ‘contract rights’ are ‘a form of property’ for purposes of the Taking Clause. The Fifth Amendment commands that property not be taken without making just compensation. Valid contracts are property, whether the obligor be a private individual, a municipality, a state or the United States.”

The Fifth Amendment provides a “right to full compensation” that “arises at the time of the taking,” they said.

On Friday, several witnesses testified to the effect that payments to creditors agreed upon by the oversight board in the debt adjustment plan could be paid only if the government continues with required budget cuts and an array of reforms that it has not begun to make. Under the debt deal, debt service will be about $1.13 billion per year.

The Official Committee of Retirees presented a report on the impact that the freezing of pension benefits will have on public employees once they retire, and on the island’s economy. There have also been questions as to whether the new GO bonds that will be exchanged for new bonds will be exempted from federal taxes.

Peter Hein, a retail bondholder, performed a cross examination in an attempt to prove that the debt deal does not comply with requirements that it be feasible.

As part of the debt deal, creditors will receive $7 billion in cash and about $7.4 billion in bonds as part of a bond exchange. They will also have the benefit of a contingent value instrument, or CVI, of which now there are two. One is funded by the sales and use tax (IVU by its Spanish acronym) and the other by rum taxes.

The CVI is a kind of certificate that will be given to the bondholders and that establishes that when the collections of certain taxes such as the IVU or the rum excise duties exceed projections, they will receive a slice of the income.

Proskauer Rose law firm partner Martin Bienenstock asked U.S. District Judge Laura Taylor Swain to admit economist Andrew Wolfe’s report. Economist Anne Krueger and Adam Chepenik, an executive at Ernst & Young and formerly a U.S. Treasury official, also appeared as witnesses on Friday. Juan Santambrogio, an executive at Ernst and Young, and Marti Murray, an executive at The Brattle Group and a restructuring expert, analyzed whether the mediation process that was carried out in light of Title III cases resulted in reasonable settlements.

Also sitting in the witness chair was David Brownstein, a Citi Bank executive and one of the architects behind the plan of adjustment’s financial structure. Making a statement was Jay Herriman, executive of Alvarez & Marsal, another of the firms that advises the oversight board.

Wolfe testified that if Puerto Rico adopts the structural reforms established in the plan of adjustment, there will be revenues of up to $30 billion in five years. Those reforms included modifications to Act 80, the Unjustified Dismissal Act, and modifications to the permitting process and to the tax system, including the repeal of the inventory tax and the modification of the tax rate paid by manufacturing firms.

Freezing of pension benefits would only save about $6 million in 2025, but about $6 billion long term until 2051, Wolfe said.

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