Judge schedules hearing over Puerto Rico sales tax revenue dispute for next week
SAN JUAN – U.S. District Court Judge Laura Taylor Swain has scheduled a hearing in New York on May 9 to evaluate arguments in favor of having the Puerto Rico Supreme Court answer questions on the legality of the Puerto Rico Sales Tax Financing Corp., (Cofina by its Spanish acronym).
The public corporation’s legality is one of the key disputes in the commonwealth government’s Title III bankruptcy process under the Promesa federal law. The discussion is part of an adversary proceeding brought by the Official Committee of Unsecured Creditors of the Commonwealth against Cofina representative Bettina Whyte, the island’s Financial Oversight and Management Board and Cofina.
The committee argues that sales and use tax (IVU by its Spanish acronym) funds that go to Cofina should be considered general fund revenue to operate the commonwealth, and not a separate source.
As the representative of Cofina in the dispute with the general obligation (GO) bondholders, Whyte has said the Puerto Rico Supreme Court, and not a federal court, should decide Cofina’s constitutionality, maintaining that the matter is guided by Puerto Rican, not federal, law. Judge Swain was originally slated to evaluate her request to send the questions at last month’s omnibus hearing, which was canceled.
Whyte wants to ask the island’s top court to interpret Cofina’s enabling law to determine whether the transfer of IVU collections should be deposited in the Dedicated Sales Tax Fund, or Cofina fund, and if the transfer is invalid. She also wants the court to determine whether sales and use tax revenue should be considered “available resources” under the Puerto Rico Constitution, because the Cofina enabling law states that the tax is not part of “available resources” of the general fund, which is used to pay GOs.
The island’s Constitution establishes that when there is not enough money to run the government, any available resources should be used to pay GO debt service first.
Bond insurer Ambac Assurance Corp. has already expressed its intent to intervene in the hearing, as have the committee of unsecured creditors of all Title III debtors, except those of Cofina and the Ad Hoc Group of General Obligation Bondholders.
Cofina was created in 2006 to collect the IVU and issue debt. Those who argue Cofina is illegal say Puerto Rico accepted $16 billion in investor money based on false assurances that the pledged sales tax was transferred to Cofina, and that the tax is actually commonwealth property.
Cofina supporters contend the structure is legal and an exercise of legislative authority. Opponents, namely GO bondholders and the unsecured creditors, among others, say the entity was created to circumvent debt limits and that IVU revenue should revert to the general fund and be used to pay GOs, which are backed by Puerto Rico’s “full faith and credit.”