Thursday, July 9, 2020

CRIM opts for sale of property back-tax portfolio to pay Act 29 debt

By on May 1, 2020

An aerial view of Puerto Rico.

Unappraised measure submitted to FOMB to cover estimated $191 million owed to central government

SAN JUAN – The Municipal Revenues Collection Center (CRIM by its Spanish acronym) board opted Thursday for the sale of the agency’s portfolio of overdue accounts receivable as “the only viable measure” presented by the Financial Oversight & Management Board (FOMB) that would enable municipalities to cover an estimated $191 million in debt owed the central government as a result of a federal court ruling annulling Act 29, CRIM Chairman Javier Carrasquillo Cruz said Friday.

The Cidra mayor said the measure would involve the sale of the portfolio of back taxes owed to CRIM to a company that would then proceed to make collections on the overdue local property taxes. However, he acknowledged that the sale process could take months and the amount of money that can be generated from the proposed debt sale has yet to be determined.

CRIM Chairman Javier Carrasquillo Cruz

“The CRIM board decided to look at all of the oversight board’s proposals to address the debt issue and voted for the sale of CRIM’s portfolio of back taxes,” he told Caribbean Business, noting that the back-tax portfolio sale would only address the debt owed by the end of current fiscal year 2020, ending June 30.

The measure was only one of the alternatives contained in a repayment plan presented this week by the FOMB that would allow municipalities to reimburse the central government for monthly pension payments of retired public employees on a pay-as-you-go basis (PayGo), and for the Health Insurance Services Administration (ASES by its Spanish acronym), which runs the government health program for the medically indigent. The impending budget crisis that could result from the immediate payment of the debt could bankrupt many towns, Carrasquillo said.

Fiscal board Executive Director Natalie Jaresko (CB file)

During a remotely held press conference Wednesday, FOMB Executive Director Natalie Jaresko said that “some have estimated” that CRIM’s back-tax portfolio could be worth more than $400 million. Still, Carrasquillo said that while the figure was discussed during the meeting of the island’s mayors on the CRIM board, he stressed that it is not an official CRIM projection.

“People have thrown out numbers that we have not been able to validate,” he said. “This [Friday] afternoon I will be meeting with technical personnel from the oversight board who have been working with these proposals, so they can understand the reach of our proposal. I suppose that perhaps today or in the next few days we will get a response [from the oversight board] that could lead to a meeting. We need to reach a solution by May 6, the deadline set by [U.S. District Judge Laura Taylor] Swain in her decision.”

Carrasquillo said the CRIM board only discussed FOMB’s alternatives and ruled out the mayors and Gov. Wanda Vázquez’s proposals to address the debt owed this fiscal year because the oversight board “did not even consider these.”  

“What is left to discuss is whether they will accept our request,” he said. “The reason we are meeting with technical personnel from the oversight board and not Jaresko and other oversight board members is because they said they were not available [on Friday] due to previous engagements. It is urgent for us to continue working on this. So they delegated in the technical personnel, who are very skilled in understanding what we are proposing. We have to solve the situation of this fiscal year, which is what the oversight board is requesting. We agreed to work on solving next year’s situation later on.”

Moreover, Carrasquillo said that during the CRIM board meeting it was determined that the debt owed to the central government is about $191 million and not the $198 million estimated by the FOMB.

 “We have a certification from the [commonwealth] Retirement Board that states the estimated debt for the current fiscal year, which is $168 million. In the case of ASES, we were given the estimate of about $160 million, from which we discount 86 percent for the extra federal funding received this year, which results in about $22 million,” he said. “This is just about fine-tuning the numbers with them [oversight board].”

On April 15, Judge Swain, who oversees Puerto Rico’s bankruptcy-like court proceedings to restructure the island’s debt, annulled the Law to Reduce the Administrative Burdens of Municipalities (Act 29 of 2019), which exempted towns from paying ASES and monthly public pensions under PayGo. The law allowed the commonwealth government to allocate funding to make up for the lost contributions.

In her ruling, Judge Swain concurred with the FOMB’s contention that Act 29 violates several sections of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), which created the oversight board to restructure the commonwealth’s debt. The federal judge stated that the law and related joint resolutions appropriated funding not included in fiscal plans and budgets certified by the oversight board, impairing the board’s task of providing a method for the commonwealth to achieve fiscal responsibility and access to the capital markets.

Judge Swain delayed the effective date of the order nullifying Act 29 until May 6, “subject to extension upon joint petition of the parties,” according to the ruling, which cites as a reason “the additional challenges facing the parties during the Covid-19 public health crisis.”

Caribbean Business left a request for comment on the CRIM board decision with the FOMB. The fiscal panel’s spokesperson, Edward Zayas, was quoted by CyberNews on Thursday as saying that mayors have misinterpreted Judge Swain’s ruling, saying it “does not involve a process of negotiation,” and adding that the judge only expects mayors to decide on the options given by the FOMB. He said such a decision had to be taken by Friday and would go into effect May 6.

Previous attempts

Still, Carrasquillo said that the federal judge did “allow for negotiations to occur so the parties—the central government, the mayors and the oversight board—could reach an agreement.”

“She points that out very well in her ruling. I understand that if an agreement is reached the court should not have any objection to the agreement,” he said. “If we don’t reach an agreement, which should not happen, the oversight board will notify the judge. This would imply that the decision annulling Act 29 goes into effect, which implies that we will have a debt with the central government that must be satisfied immediately.”

Nonetheless, Carrasquillo acknowledged that previous attempts at selling CRIM’s back-tax portfolio have failed. An attempted CRIM back-tax portfolio sale in the late 1990s backfired because the transaction was not completed and the agency had to buy back the debt portfolio, he said, noting that this forced CRIM to take out a loan that municipalities are still paying.

A more recent attempt involving the Fiscal Agency & Financial Advisory Authority (AAFAF by its Spanish acronym) hiring Garnet Capital Advisors, a debt broker, to assess CRIM’s back-tax portfolio ended when the government withdrew the contract due to “an unrelated conflict between the company and the government,” Carrasquillo said.

The CRIM chairman said that while the proposed back-tax portfolio sale was one of the last steps in the FOMB’s plan that is a long-term measure, he believes the oversight board would approve it.

“This is their own proposal and they know this will take time,” he said. “They presented a plan in steps, if one thing does not function, then use this, and so on, and this is one of them. What we said is that the other steps should not be implemented because they could affect municipalities.”

Carrasquillo added: “Now we are restarting the process with AAFAF to identify another company that can do that value assessment, which will undoubtedly take months. The oversight board is aware of that because when they present their alternatives to repay the debt they understood it cannot be done overnight.”

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