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P.R. Oversight Board publishes debt investigation report, labels GDB debt ‘enabler’

The Special Investigation Committee of the Financial Oversight and Management Board for Puerto Rico announced the publication of the Debt Investigation Report prepared by Independent Investigator, Kobre & Kim LLP.

The report, which is just under 600 pages long, includes the results of its investigation into Puerto Rico’s debt and its connection to the current fiscal crisis.

Among other findings, the committee confirmed what has been stated in the past: When the island’s 10-year tax credit phase-out ended in 2006, rather than implementing long-term plans to stimulate the economy, balance the budget and fund public employee retirement systems, Puerto Rico’s government and the now defunct Government Development Bank turned to the debt market for short-term fixes.

Those short-term fixes included among others: the creation of the Sales and Use Tax, a portion of which purportedly secured issuances by the Sales Tax Financing Corp. (known as COFINA for its initials in Spanish; the entry into swap arrangements to generate cash to close budget gaps; an increase in deficit financing; and the issuance of Puerto Rico-related bonds that were purportedly secured by contributions to the Employee Retirement System.

“GDB, in its dual role as fiscal agent and lender, enabled the Puerto Rico-Related Entities [particularly the Public Utilities and the Highways and Transportation Authority] to subsist on appropriations from the General Fund, short-term cash influxes from GDB, and bond proceeds,” the report confirmed.

“This was done instead of holding the Puerto Rico-Related Entities accountable for their debts, ensuring that Issuers of revenue bonds actually collected sufficient revenues to repay those bonds, or demanding fiscal responsibility and independence,” the report concluded.

As Puerto Rico’s government entities amassed “unsustainable levels of debt” the credit ratings agencies raised concerns over their ongoing reliance on Puerto Rico and the GDB. Between 2012 and 2014, the agencies downgraded Puerto Rico’s credit rating to “junk” status. Because there was no access to financial markets, many of the entities sought bankruptcy relief under Title III proceedings allowed under the Puerto Rico Oversight, Management and Economic Stability Act.

The Oversight Board’s Special Investigation Committee also announced it will conduct a public hearing on Sept. 18, in Puerto Rico, to give interested parties an opportunity to hear and be heard regarding the results of the Report.

On Aug, 2, 2017, the Oversight Board announced its intention to conduct an investigation to review the fiscal crisis and its contributors, and examine Puerto Rico’s debt and its issuance, including disclosure and selling practices.

To that end, the Oversight Board named a Special Investigation Committee composed of Members Ana Matosantos, David Skeel and Arthur González, and conducted a competitive process — including a request for proposals — to identify and select an independent firm of the highest caliber to conduct the investigation. Kobre & Kim LLP was hired Sept. 1, 2017.

“The 10-month investigation involved an extensive evaluation of evidence from many sources. We conducted over 100 witness interviews and reviewed voluminous productions of documents in both English and Spanish,” said John Couriel, of Kobre & Kim.

“Confidentiality was a key component of the investigative process, including negotiations with witnesses and the Title III Committees regarding cooperation and sharing of materials, as well as the Title III Court’s approval and enforcement of procedures for the treatment going forward of materials collected as part of the investigation. It was an independent process overseen by the Special Investigation Committee of the Board,” siad Farrington Yates, also of Kobre & Kim.

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