Puerto Rico’s Fiscal Agent in Cold War

In debt-restructuring times like these, uncertainty keeps cropping up in almost everything related to the Puerto Rico government and its fiscal maneuvers.

Two months ago, the Alejandro García Padilla administration pulled the trigger on the controversial moratorium legislation, paving the way for the island’s summer of discontent, as the commonwealth government stands ready to default on some of its looming debt-service payments. At the time, the government also chose to create a new state fiscal agency from scratch—the Puerto Rico Fiscal Agency & Financial Authority, or AAFAF by its Spanish initials.

The entity takes over as the island’s fiscal agency, financial adviser and information agent, roles that have been played for more than 50 years by the Government Development Bank (GDB). The new fiscal agency has also been charged with leading debt-restructuring efforts by the government of Puerto Rico and its troubled instrumentalities.

Tangled in tough policy gridlocks, including those over the GDB’s future, Gov. García Padilla signed on April 6 the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act, which gave birth to AAFAF. The moratorium law also eased the GDB’s receivership process and is the administration’s fiscal maneuver of last resort in preparing ahead of a looming default.

But a fast-track legislative process led to a faulty bill; for instance, AAFAF has yet to be created—technically speaking. What’s more, Caribbean Business sources say some officials have bold plans for the new entity that would require more money than that which is earmarked for AAFAF. The scenario presents yet another challenge for an administration vowing to keep government spending to its lowest possible level.

The transition process could prove a daunting task, from regulatory aspects to operational expenses and logistics. Meanwhile, the new agency’s proposed $76 million budget for fiscal year 2017, which begins July 1, already faces stiff opposition in the island’s Legislature.

Then there is a long list of questions, from what would be its role when and if a federal fiscal-control board is established on the island, to whether future administrations would back the agency.

Despite the uncertainty clouding AAFAF’s outlook, the new agency rests assured it would play a key role in Puerto Rico’s immediate future, with six months to go before a new governor sets foot in La Fortaleza.

New kid in town

AAFAF’s creation tackles a potential conflict of interest with the GDB, acting as both lender and financial adviser to the central government and its instrumentalities, according to written testimony by AAFAF during a recent public hearing on the commonwealth’s next budget.

At first, the administration’s plans called for establishing AAFAF as a subsidiary of the GDB, aiming for a smoother transition, sources said. And if things at the bank went south, the new agency could be spun off into a separate entity.

In the wee hours of April 5, Senate President Eduardo Bhatia pushed for changes to the bill that sought to isolate AAFAF from the outset, sources added. New language was introduced in the nick of time, and the upper chamber passed the moratorium legislation a few hours after it was introduced by La Fortaleza. The House followed suit a day later, without introducing amendments.

The governor quickly signed the bill into law, along with certain gaffes that have yet to be fixed as of this writing.

The moratorium law calls for a one-man board to run the new agency, comprising its executive director, who will be appointed by the governor with no legislative confirmation. Last month, García Padilla named Secretary of State-designate and Convention Center District Authority Director Víctor Suárez as AAFAF’s chief.

Suárez—who has yet to be confirmed as secretary of State more than six months after his appointment—still lacks director & officer (D&O) insurance for his new role as Puerto Rico’s fiscal agent.

Although the moratorium law includes strong immunity provisions for those taking part in the island’s debt-restructuring efforts, it is strongly recommended that these government officials be insured against potential liability resulting from their work. Sources said it would be difficult to find a company willing to insure commonwealth officials at this point in the game.

Suárez told this newspaper he is still in the process of obtaining his D&O insurance.

What’s more, a reading of the island’s Constitution would render AAFAF invalid because its subject is not expressed in the title, and lawmakers are trying to fix this snafu by amending the moratorium act to this effect. The changes would apply retroactively to April 6.

One such measure, Senate Bill 1673, has yet to come down for a vote in the lower chamber as of this writing. The Senate approved on May 16 the bill, which also seeks changes to AAFAF’s governing structure, including the establishment of a “one-, three- or five-member board” beginning in January 2017, as the next governor deems appropriate.

Another snafu in establishing the agency—no money was immediately assigned for its operations. For the next fiscal year, the administration proposes a $76 million budget for the agency, of which $69 million would go for professional-services contracts, aimed at addressing AAFAF’s funding needs.

For Suárez, although the agency has limited resources, it is already operating and aims for a full transition by July 1, when it receives its budgetary assignment.

But far from rolling out the welcome mat, some lawmakers have expressed concerns about the recommended budget. Popular Democratic Party Rep. Rafael Hernández, who has said he would introduce changes to AAFAF’s funding, is provoking headwinds in the Legislature that are impediments to the agency.

Besides the money being asked for advisers’ contracts, the agency’s recommended budget would also account for the transfer of certain GDB employees to AAFAF, as well as the creation of an internal legal office and a deputy director post, which would be aided by two special assistants, the new fiscal agency stated.

For AAFAF’s chief, the operational budget would cover all expenses related to the transition, including rent if that should be the case. “There will be no new costs,” Suárez said in reference to the agency’s impact on the government’s coffers. He added that human resources and information systems costs would be shared with the GDB through collaboration agreements.

A complicated transition

As the agency takes over as the island’s fiscal agent, several operational costs and regulatory hurdles also lie ahead. It is not only placing piles of records and information in boxes and moving them out of the government bank’s building.

For instance, federal regulations would play an important role in the government’s “to do” list if the fiscal agency were to set up shop offsite. Moreover, concerns remain over how much these plans would cost the government, whether the GDB’s operations would be affected and when the transition process would be completed.

Suárez told Caribbean Business that a decision has yet to be taken on where AAFAF’s headquarters will be located.

Yet sources said that the idea is to rent a building in which to carry out AAFAF’s operations, while bringing a group of current GDB employees onboard.

Some officials, who would hold key roles inside AAFAF, have already met with GDB employees to brief them on the agency’s plans, sources told Caribbean Business. One such official is Leovigildo Gómez, an adviser to the García Padilla administration who has been leading transition efforts for AAFAF, sources said.

The law enables the transfer of GDB employees tasked with such duties related to the commonwealth’s fiscal management, honoring the terms and conditions of employment that are in effect at the time of the transfer, including any acquired rights, privileges, obligations and seniority.

However, most of these employees still carry out important duties for the GDB in its depository-bank role, and moving away could present a new set of challenges for the GDB, which could be forced to scramble for options to meet unexpected staffing needs.

Suárez acknowledged the dual functions carried out by some GDB employees, while talks are underway with the bank’s management over which employees would make the transition. He further noted that AAFAF struck a collaboration agreement with the GDB so bank employees could support some of the new fiscal agency’s operations until it receives money from the general fund to cover its payroll.

One option would be to carry out AAFAF’s operations in the GDB building located in San Juan’s Santurce district, sharing employees as needed, but sources have told this newspaper that some officials tied to the new agency refuse to do so, and instead want to follow up on their plans.

The new fiscal entity also takes over all debt-restructuring-related contracts with external advisers, including those for Millstein & Co., Cleary Gottlieb and Citigroup, some of the stateside firms running point on Puerto Rico’s efforts with its creditors.

Yet these firms remain somewhat jittery about the uncertainty—and legal questions—surrounding AAFAF, and would rather keep their contracts within the GDB’s purview.

Meanwhile, Rep. Hernández, who chairs the House Treasury Committee, does not want to keep paying advisers in advance, and is instead pushing for contingency pay, or paying them with the savings attained from each deal reached. The PDP lawmaker believes no money should be included in the budget for advisers that would no longer provide services to the commonwealth, once a new administration enters La Fortaleza in January.

For its part, the new agency says it is asking for proposals, in a bid to select which firms would continue acting as advisers as the government’s debt-restructuring efforts move ahead.

While the operational transition for AAFAF could run longer than initially expected, the agency would also seek to make its name as the island’s fiscal chief, amid questions over who is leading Puerto Rico’s debt-restructuring work.

Sources added that skepticism looms large over the agency’s capability to carry out the often-knotty tasks of being the island’s fiscal agent.

Who’s in charge moving forward?

Keeping tabs on Puerto Rico’s fiscal matters, across more than 18 different issuers and 72 municipalities, is no small feat. Add to that a government cash crunch, large debt-service payments and efforts to restructure roughly $50 billion of the island’s $70 billion debt, and the feat goes up by a couple of notches.

As of today, who is in charge of the island’s fiscal matters?

In a recent public hearing, GDB President Melba Acosta warned it would be the bank’s last appearance as Puerto Rico’s fiscal agent, which now falls upon AAFAF. From now on, she indicated, the GDB would only address banking matters and issues related to the bank as an institution, which remains under cash-outflow restrictions aimed at ensuring its continuity.

As part of the governor’s fiscal team, AAFAF oversees Puerto Rico’s debt-restructuring process, as well as reviews creditors’ proposals and the signed confidentiality agreements, Suárez told Caribbean Business.

One group that remains curious to know the answer for sure is the island’s creditors. Sources said concerns have recently been raised over AAFAF’s role in current talks and whether Acosta will still lead the island’s broad debt-restructuring efforts.

Sources told this newspaper that Suárez has not participated in recent debt talks, while the GDB chief continues to lead the way for the commonwealth, along with external advisers Millstein & Co. and Cleary Gottlieb.

While the law calls for AAFAF to take over the restructuring work of entities placed under the moratorium legislation, it is unclear who will take care of the commonwealth’s broader restructuring efforts, including dealing with those issuers that have yet to enter into emergency periods.

Meanwhile, as the new fiscal year begins just a few short weeks away, short-term cash needs would prompt yet another round of delaying government payments to suppliers and refunds to taxpayers, according to AAFAF. The new fiscal agency expects to play a key role in implementing these emergency fiscal measures throughout the last six months of the García Padilla administration.

Then there is the Puerto Rico Oversight, Management & Economic Stability Act, or Promesa, which as of this writing was making its way to the U.S. Senate for its consideration after clearing the lower chamber. The bill would establish a seven-member federal fiscal-control board on the island, which would be in charge of administering debt-restructuring tools and other efforts for Puerto Rico.

When asked about AAFAF’s role within a fiscal-control-board scenario, Suárez said the agency is responsible for the island’s long-term fiscal-adjustment plan. The board would vet this plan and ask for further changes if needed before approving it. If no acceptable plan is submitted, the board could implement its own version.

Others believe the AAFAF will have little to say when the control board is in place. As the island’s debt crisis enters a defining moment when more than $1.5 billion in debt payments hit the island July 1, it is yet unclear what AAFAF’s role would be—whether in court, at the control board’s negotiating table or in a dead letter.

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