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Mayors Evaluate Intervention in Lex Claims Lawsuit

By on March 2, 2017

SAN JUAN – The Popular Democratic Party’s Mayors Association is evaluating whether to intervene in the current federal court battle in which Ad Hoc Group of General-Obligation Bondholders is claiming Puerto Rico Sales Tax Financing Corp. (Cofina) funds should be redirected to them under payment-priority rules.

Mayors Association President Rolando Ortiz said lawyers were evaluating the impact on municipalities from the Lex Claims lawsuit, which federal Judge Francisco Besosa has declined to stay.

“Our lawyers are evaluating the matter,” he said.

Mayors Association President Rolando Ortiz Velázquez (Agustín Criollo Oquendo/CB)

Mayors Association President Rolando Ortiz Velázquez (Agustín Criollo Oquendo/CB)

The battle between the debt classes—$18 billion in general obligations, or GOs, which are bonds guaranteed by the island’s Constitution, and about $17 billion in Cofina debt backed by sales-tax revenue—could have an impact on any debt restructuring. The GO lenders say their constitutionally guaranteed debt should be paid ahead of Cofina, a structure they deem illegal. The government has continued to honor Cofina payments by arguing that sales-tax revenues are not considered government revenues that can be clawed back under the Constitution.

Part of the sales-tax revenues are being diverted to the Municipal Finance Corp., known as Cofim by its Spanish acronym, a public corporation that is authorized to issue bonds and use other financing mechanisms to pay or refinance, directly or indirectly, the debts of the municipalities backed by the municipal portion of the sales & use tax, known as IVU by its Spanish acronym.

According to the Government Development Bank, from the first revenues collected from the municipal sales & use tax, Cofim receives the greater of the computed amount by applying a 0.3% fixed tax rate to the total revenues collected, or a fixed amount that increases annually, known as the Annual Fixed Income. These revenues, which are deposited in Cofim’s Redemption Fund, are used to pay and secure Cofim-issued debt. Municipalities impose a uniform 1% Municipal Sales & Use Tax.

See also: Mayors Association warns of ‘precarious’ outlook with Rosselló’s fiscal plan

In an interview with Caribbean Business, Ortiz, who is also the mayor of Cayey, acknowledged that the case in federal court may hurt already ailing municipal finances. The island’s 78 municipalities already stand to lose about $400 million in government subsidies. He has said towns should stop contributing $500 million to the central government to break even.

Ortiz met last week with La Fortaleza Chief of Staff William Villafañe, who scheduled a meeting in March between GDB officials and the organization to discuss the disbursement of more than $2 billion in loans to mayors to fund capital improvements.

He also said he was going to object to the possibility of an increase in property taxes and instead advocated for municipalities to take over abandoned homes and sell them.

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