Title III court to take up requests for exclusion of testimony
By The Star Staff
The Title III bankruptcy court is holding a hearing today to discuss the procedures for the debt plan confirmation hearings slated to start Nov. 8, as well as motions in limine, or requests for the exclusion of evidence.
The seventh debt adjustment plan is moving forward after the Financial Oversight and Management Board accepted the plan’s enabling legislation, which is now Act 53 of 2021. The bill in essence bans cuts to pensions for retirees.
The oversight board, however, has requested preemption of laws, including those that may prevent it from implementing the plan. In a letter to the government published Friday, the board said Act 53-2021 does not implement a freeze or prevent a freezing of future pension benefits for public employees.
“The Oversight Board agrees with your assessment of the Act. As you note, the freeze ‘is an issue separate from Act 53-2021’ as the Act ‘does not implement the freeze or prevent a freeze from occurring,’” the board wrote to the governor.
At today’s hearing, the oversight board will seek to exclude expert testimony put forward by one of the creditors. The testimony from Lizette Martínez contains various calculations and conclusions as to the amount of Act 30-31 revenues. which are excise taxes collected from vehicles and crude oil by the commonwealth, and whether the commonwealth retained those revenues or transferred them to the Highways and Transportation Authority (HTA). According to the board, the testimony is irrelevant. HTA is not part of the debt adjustment plan.
The oversight board also wants to exclude expert testimony from Douglas J. Brickley because it is an opinion that does not meet the requirements for expert testimony under Rule 702 of the Federal Rules of Evidence, according to the board.
Meanwhile, some creditors want to exclude the testimony of Marti P. Murray, which was proposed by the oversight board. Murray’s testimony states that the debt adjustment plan that would restructure some $33 billion in debt is sustainable and does not go against the fiscal plan.
The debt adjustment plan contemplates the issuance of new general obligation bonds in the approximate principal amount of $7.4 billion, consisting of $6.7 billion in current interest bonds (CIBs) and $731 million in capital appreciation bonds (CABs). CIBs are bonds whose interest is payable on a semi-annual basis, with principal due at maturity. In the case of CABs, interest accrues and compounds throughout the bond period, and is payable along with the principal at the bond’s maturity. The CIBs and CABs issued under the plan amortize beginning in fiscal year (FY) 2022.
In addition to the bonds, the debt plan also proposes to issue contingent value instruments, or CVIs, that give a holder the right to receive payments if the commonwealth’s sales and use tax collections exceed certain thresholds. In addition to some $21.9 billion in funded debt claims and $2.75 billion in estimated general unsecured claims, the government has claims relating to legacy pension plans that, as of June 30, 2016, represented an actuarial liability of more than $50 billion.
There are virtually no assets held in reserve to satisfy those liabilities, and as a result, the commonwealth’s pension systems are virtually 100% underfunded and insolvent, and have been for some time, Murray said. The plan calls for a freeze of benefits in defined benefit plans for the Teachers Retirement System and judiciary beneficiaries. Second, it includes an 8.5% reduction in pension benefits for those beneficiaries receiving in excess of $1,500 per month, which was recently raised to $2,000 per month.
Among the conclusions reached by Murray is that the plan will initially result in more expensive pension costs of $38 million in FY 2022 because of increased contributions to Social Security, but then the modifications will result in savings of $36 million to $116 million per year from FY 2023 to 2032, and to over $200 million per year beginning in FY 2037.
He also said the commonwealth is projected to have an annual fiscal surplus after non-contingent debt service through FY 2031, ranging from $319 million to over $900 million.